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Previous: INTERNATIONAL GAME TECHNOLOGY, DEF 14A, 2001-01-12 |
Next: DYNAMIC I-T INC, S-8 POS, 2001-01-12 |
[x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended September 30, 2000
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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Indicate by check mark whether Registrant 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 (or for such shorter period that Registrant was required to file such reports), and has been subject to such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [ ]
The aggregate market value of the voting stock held by non-affiliates of the Registrant (3,149,643 shares), as of December 1, 2000, was approximately $9,055,224 (at closing price of $2.875).
The Registrant had 33,179,825 shares of Common Stock, $.01
par value, outstanding on December 1, 2000, excluding 400,250
treasury shares.
Item 1. Business.
VSI Holdings helps corporations improve their performance.
That deceptively simple statement is the easiest description of what we do because it covers the vast array of services we offer.
Over the past two decades the explosion of new media and information sources has greatly complicated the marketing process. In the not-too-distant past a company could hire an advertising agency, develop an advertising plan, and make strategic media buys, and have a reasonable assumption that their message would get through to their potential customers.
In today's media marketplace a consumer has a choice of hundreds of cable television channels, digital broadcasting, satellite television (and radio), and the ever-increasing choices on the internet. This has forced many companies to re-evaluate their marketing strategies, not just in terms of what external avenues to use to reach customers, but also to find ways to coordinate their efforts within their organization so that their messages are consistent, effective and impactful.
VSI Holdings (hereinafter referred to as the "company", "we", "us", "our") helps companies do just that.We employ approximately 1,000 individuals in all operations, none of which are covered by an employment contract, nor are represented by a union. To date, we believe we have been successful in our efforts to recruit and retain qualified employees, but there is no assurance that we will continue to be as successful in the future. We believe relations with our employees are good.
We operate our business through two separate business segments: Marketing Services segment and Entertainment / Edutainment segment. See Note 13 of Notes to Consolidated Financial Statements for detailed segment information.
Marketing Services Segment (Visual Services, Inc., Vispac, Inc. PSG International Inc., eCity Studios, Inc.)
INTEGRATED MARKETING SOLUTIONS
Our products and services encompass a vast range of capabilities
that can be customized and assembled to meet the specific needs
of a client. Several examples of this integrated approach from
the past year are listed below.
General Motors Auto Show in Motion - In less than 90 days, we orchestrated a large product experience, aimed at non-GM-owning households. The traveling event, held within a one million square-foot site, featured six test tracks with the opportunity to drive up to 130 GM cars and trucks, along with selected competitive vehicles, in a neutral environment. From internet registration to interactive product information displays that allowed participants to choose the information they wanted, consumers were met at every turn with convenient technology and entertaining product experiences. We produced the event on a "turn-key" basis, providing GM with:
· Development and management of competitive customer
databases
· Mailed invitations to consumers
· Event registration over the internet and other methods
· Product information presentations and displays
· Site management
· Travel and logistics
· Consumer research
In the first nine months of 2000, the event logged more than 115,000 test drives in 5 markets with more than 37,000 participants. More than 94 percent of the participants said they were likely to consider a GM product for their next vehicle purchase or lease, and 95 percent said they would likely visit a GM dealership the next time they were in the market for a new vehicle.
Ford Blue Oval Certified - In the past year Ford Motor Company changed its pricing structure with dealers by requiring dealers to meet a long list of customer satisfaction criteria in order to qualify for a price discount from the company. We communicated this program to dealers in a series of regional meetings. In addition, we created and continue to manage a website designed to keep dealers informed of their status and performance in the program.
Chevrolet Silverado Heavy Duty Launch - Chevrolet selected us to launch their new line of Heavy Duty Silverado pickups to its internal audience of dealerships and sales consultants. We produced a series of informational "ride-and-drive" meetings where dealership personnel not only learn about the trucks, but drive them in a trackside environment. We prepared the curriculum, conducted the events and handled all travel and logistics, as well as producing a software which matched the right truck for a buyer's specific needs.
Visteon Mobile Communications Center - Visteon is the newly
independent automotive supplier spun off from Ford Motor Company.
As part of our strategy to help Visteon take its message to Wall
Street and customers, we created a "Mobile Communications
Center", a high-tech, high-touch mobile venue to create awareness
and communicate Visteon capabilities. The unit includes:
· Tractor-trailer and generator
· Trailer that expands to allow a 22 x 40-foot presentation
area
· 33" Plasma display screen with looping welcome video
· Card-scan registration with bar code to track visitors
for follow-up
· "Safety buck" which emulates front-end vehicle
crash to showcase Visteon systems at work
· A "technoscope" that uses two and three dimensional
animation and video to explore Visteon technologies "under
the skin" of a vehicle
· "Vistelink" touch-screen computer monitor that
combines video, audio, graphics and animation to allow participants
to interactively "discover" more than 50 separate Visteon
technologies and systems
The Mobile Communications Center debuted in June, 2000 to various Wall Street audiences in conjunction with Visteon's debut as an independent, publicly-traded company. Since then, the unit has made numerous appearances at manufacturing sites and other venues in the U.S. and Mexico, and is scheduled for additional sites well into 2001.
Ford Motor Company E-Commerce
We are the manager of the Ford iCollection Web site. The development
and operation of this online store is one of a suite of services
we have developed to address internet marketing needs for our
clients. The iCollection offers consumers a convenient and secure
online retail store to purchase Ford, Lincoln, Mercury and Mustang
apparel, vehicle accessories and product literature. In addition
to these Ford consumer stores, we also manage Rotunda Online,
an exclusive iCollection internet retailer for dealers that offer
equipment and materials.
Team Ford Racing
Seeking to capitalize on the growing interest in motor sports,
Ford Motor Company chose us to set up a website and "virtual"
connection to fans of its race vehicles and drivers. The subscription-funded
site offers exclusive information and updates for members, along
with special opportunities to purchase souvenirs and racing paraphernalia.
We developed the internet site and continue to manage it.
Bristol-Myers Squibb
We handle over 900,000 phone calls a year with Bristol-Myers Squibb
customers requesting more information on pharmaceutical products.
Our specially trained phone operators provide interface with consumers,
answering questions, sending literature within the 48 hours required
by law and making referrals to health care professionals at Bristol-Myers
Squibb. We also help maintain Bristol-Myers Squibb's consumer
database by making daily information transfers to their database
vendor.
Ford XL2000: The Next Generation
Sometimes an organization must go beyond information or skill-based
training and change its collective attitude and build a new culture.
We help Ford effect this process by developing and executing sessions
that force participants to re-examine fundamental beliefs and
conduct. We have begun pilot implementation of the follow-up to
the Excellence in Leadership (XL2000) training and culture change
initiative for Ford Motor Company managers and dealership management
teams. The "next generation" will build on the XL2000
learning initiatives to enable participants to achieve new, higher
levels of customer care and understanding. The three-and-a-half
day curriculum was developed by our instructional design team
and is conducted by professional trainers. The course is held
at the XL Center in Allen Park, Michigan, a 42,000 square foot
conference center with a training capacity of 150 participants,
which we designed and built. After the course is attended by the
participant, we have satellite broadcasts on a regular basis which
aim to sustain the changes people initiate at the XL Center. Since
its inception in 1995, more than 18,000 Ford, Lincoln, Mercury
and Jaguar dealers and managers, as well as Ford Motor Company
representatives, have participated.
OUR PRODUCTS AND SERVICES
Our specific products and services can be divided into four broad
categories:
Education and Training (within the Marketing Services segment)- We help companies improve the performance of their people, offering training, from the traditional classroom to satellites and the internet.
Back-End Services (within the Marketing Services segment)- We help companies develop and enhance ongoing dialogue with their customers, and help deliver e-commerce and other fulfillment services.
Marketing Services (within the Marketing Services segment)- Using a variety of traditional and high-technology solutions, we help companies market and sell their products and develop and maintain relationships with their customers.
Edutainment/Entertainment (within the Entertainment / Edutainment segment)- We make science and technology come alive for the public with animatronic (animated / robotic) characters and display properties that make learning an entertaining experience. We also make displays that are fun and entertaining for amusement parks and other general audience venues.
Education and Training
People are the key to success in any organization, and corporations
realize they won't be successful unless their people have the
training to make them effective.
As a full-service provider of training solutions, we work closely
with clients to:
· Identify specific needs
· Set objectives based on real-world applications
· Develop curriculum
· Produce courses
· Conduct the actual training
· Evaluate results
· Modify where appropriate
Our instructional designers and writers are involved during this entire process, ensuring that clearly-defined objectives are set and met.
We also develop and execute certification programs that aim
to maximize training effectiveness in an organization. These programs:
· Set clearly-defined expectations of students (representing
a variety of job titles)
· Ensure that the training material improves on-the-job
performance
· Develop tests that measure learning retention
· Execute the testing process
· Tabulate and report results
· Reward students
· Develop and maintain a participant database
We develop and execute a variety of training through traditional
and high-tech media.
Types of Training
Product Information - Before sales people can sell a product, they must know features and benefits and how to effectively present those attributes to prospects. Our product information training translates what is often highly technical information into practical benefits that a sales person can readily understand and use with customers. Above all, our product training focuses on the real world environment of the sales consultants and their customers.
Skills Training - Product training concentrates on the "what" part of the sales equation. Our skills training concentrates on the "how" - how the product information is presented. We offer sales people the opportunity to improve their selling, presenting and negotiating skills. We also help supervisors improve their management skills.
In-Dealership Consulting - We also do extensive in-dealership work, helping automotive retailers improve their operations by assisting with organizational issues and processes, and by working directly with dealership managers and employees. This consulting includes one-on-one sessions with the dealer principal, small-group sessions with managers, as well as direct training of dealership staff.
Process, Cultural and Behavior Change - Sometimes an organization
must go beyond information or skill-based training and change
its collective attitude and build a new culture. We help the organization
effect this process by developing and executing sessions that
force participants to re-examine fundamental beliefs and conduct.
Our XL2000 session, described previously, is a perfect example.
Training Media
Internet - The growth of the internet is impacting how people learn. We see the internet being used increasingly for education and training. We are developing interactive web-based training courses that literally deliver the information to the employee's workstation.
Interactive Distance Learning (IDL) - We are a developer of curriculum for this satellite-based teaching medium. IDL connects an instructor to a remote classroom through a live signal transmitted over satellite. While the teachers cannot see their students, they can talk with them, and the students not only talk with the instructors, but also see them (as well as visual instructional materials -- graphics, charts, videos, etc.). IDL has proven to be a highly cost-effective way to train large groups of people spread over a wide area. For example, employees at an automobile dealership can take a course at their desks or work stations, instead of having to drive 200-300 miles for a training session. VSI Holdings not only develops the courses, but also trains and manages subject matter experts who can deliver this kind of training.
CD-ROM - Computer disc technology is also helping to make interactive training more accessible to organizations and corporations. We develop training that individuals can take at their own work stations at their own time. This makes the training extremely flexible in terms of scheduling for the individual and the organization.
Classroom Training - Live, instructor-led classroom training remains an effective way to teach, especially when the material is complicated, and when discussion and small-group exercises are important. Our instructional designers and writers develop these courses, and our instructors deliver the actual sessions.
Learning Centers/Seminars - We also develop and execute these live training "events" that may spread over the course of several hours or several days. These training sessions may be held in a remote hotel or conference center, or in our own "Vision Center", a 38,000 square foot training center with theater, break-out rooms, cafeteria and showroom/display area, or in our XL2000 Center (previously mentioned).
Ride-and-Drive - In training a sales consultant in how to sell a particular vehicle, there is no substitute for getting that person behind the wheel of the vehicle. A ride-and-drive event does just that, for hundreds of sales people. They get a chance to drive the vehicles on a controlled track with various simulations (hills, braking, obstacle courses, acceleration, wet-pavement, etc.).
Video - "Seeing is believing." That's why video remains such an important role in training. While "stand alone" video is still used effectively to train various audiences, the trend is to incorporate video into other media - Web, CD-ROM, IDL, classroom, etc. We produce more than 120 training videos a year.
Print - Printed material remains an important support element for virtually every kind of training. Instructor and participant manuals, meeting leader guides, product documentation, reference materials, brochures, flyers - all serve to reinforce the training message, and all are developed and produced by us.
Marketing Services
Marketing and selling products has never been easy. Today, with
the explosion of the internet leading to an increasingly complicated
media marketplace, the competition seems to focus as much on gaining
"share of mind" with customers, as it does with actual
share of market.
Our marketing services encompasses a broad range of disciplines, including writing, art direction, print and graphic production to effectively support a variety of marketing efforts:
Communications Services - We create plans for standardizing and synchronizing product messages. We develop core materials and apply them across the board to everything from launch events to public relations.
New Product Launch Events - These events can be targeted to consumers and/or key internal audiences, such as suppliers, field personnel and retailers. We conduct the events in a variety of ways - satellite/videoconference broadcasts, seminars, ride-and-drive events, demonstrations, clinics, point of sale materials and displays, shows/meetings, or combinations of these media.
Shows/Meetings - Business theater continues to be an effective
way to reach large corporate audiences. Our event producers make
use of a variety of media and technologies to stage entertaining
and often elaborate theatrical productions to reach key audiences
with various messages. We handle all elements of the show production,
including:
· Overall planning
· Theme development and conceptualization
· Creative (writing, multi-media production)
· Show production and execution
· Logistics
· Travel
Ride-and-Drive Events - While most ride-and-drive events concentrate on training sales people, we have also used the concept to introduce consumers to cars and trucks, as described above.
Customer Relationship Management - We help establish and maintain
relationships with consumers through a variety of interactive
tools, including:
· Internet applications
· Personalized direct mail
· In-bound call center applications (consumers call a toll-free
number for information)
Experience-Based Marketing - We help companies meet customers
where they are. We develop and execute experiential events that
allow customers to see, touch, feel and use products and services.
These events can help companies launch products, reach new audiences
or build brand and product awareness with existing customers.
We use a variety of resources and skills to develop these "experiences":
· Point-of-sale displays
· Interactive kiosks
· Touring exhibits
· On-site promotional events
· Product demonstration programs
· Video
· Publications/literature
Internal Campaigns - In addition to providing comprehensive training for company employees, we also develop informational campaigns that reach key support personnel within an organization so that they understand products, services and processes essential to ensure effective sales and operations.
Back-End Services
A great web site, or for that matter a great marketing campaign
is only a start. Business does not operate on image alone. The
need for behind-the-scenes "fulfillment" has always
been important for companies; with the explosion of web-based
communications, that traditional fulfillment role has taken on
even greater significance. We have expanded our long-standing
traditional fulfillment capabilities into highly integrated delivery
solutions. We offer client companies comprehensive support for
material production, fulfillment and distribution. This year we
fulfilled and shipped more than 80,000 package requests per week
and printed more than 100 million impressions.
Our comprehensive back end services include:
· Administrative support
· Online internet ordering and processing
· Database processing
· Complete binding
· High volume black-and-white and color capable printing
· Electronic and press printing
· Just-in-time fulfillment
· Warehousing and distribution
Our fulfillment and distribution services keep our clients in
touch with every aspect of their project, using various communication
resources:
· Client terminal-to-computer tie-ins provide clients direct
links to specific program information and data stored on our servers
· Electronic file transfers to digital print on-demand
center
· Custom-designed data reports
· Toll-free hotlines
· Interactive data systems
Call Center
Our Call Center provides services that support a client's overall
marketing effort. It is not a "boiler room," the kind
of outbound telephone soliciting that annoys customers and gives
telemarketing a bad name. Rather, it is an extension of our clients'
operations. When our specialists communicate with a client's customers,
these specialists are the voice of the brand. More than 90 percent
of all calls to the Call Center are from consumers seeking product
information or purchase assistance.
Examples of One-to-One Marketing Programs at the Call Center:
· Direct sales (sales in response to mail offer, web site
offers and transactions occurring at automotive dealerships)
· Catalog sales and order processing and fulfillment
· Web-based communications
· Vehicle service reminders and recall campaigns
· Owner retention programs
· Lead generation
· Market research
· Automotive retail operations support
The Center is located in Livonia, Michigan in a 45,000 square
foot center with over 400 workstations.
Information Technology
Managing information is an important function for any business,
but it can be a cumbersome task, especially for large organizations.
Our Information Technologies (IT) operations help fulfill this
critical component for many companies. Our IT services allow companies
to focus on core business competencies.
Our comprehensive set of tools and services for building analytical
solutions include:
· 24-hour operation with in-house technical support staff,
disaster recovery and security services
· Open system environment can transfer data from multiple
client environments, accepting various data in various formats
and/or platforms
· Development and management of intranet and internet sites
· Daily communication with clients that uses the internet
to transfer secure information, File Transfer Protocol that allows
various file formats to be exchanged, or connectivity using T-1
lines
· Secure client links to data and servers through the use
of firewalls
· Design of customized programs, databases and reports/query
tools to help clients collect and analyze data
· Development and management of client internet-based ordering
systems for online processing and business-to-business applications
Entertainment/Edutainment
VSI Holdings subsidiary, Advanced Animations, Inc. is a worldwide
supplier of entertaining and educational animatronic (animatronics
uses hydraulic and pneumatic compliant motion technology to create
lifelike creatures with realistic facial and body movements) displays
for the theme park, corporate, museum, casino, and retail industries.
We design and fabricate entertainment products, including animatronics,
touring shows and exhibits, kiosks, sets and scenery, and much
more.
Examples of our work include:
· Universal Studio's Theme Parks (Florida, California,
Japan) T2: 3D Cyborg attraction and the Men In Black attraction
in the Florida park
· Actors from the Atlantis Fountain Show at the Forum Mall
in Las Vegas
· MGM Grand Theatre's "Morgana" The Fire Breathing
Dragon in Las Vegas
· Elvis Presley at Toussaud's Museum in Las Vegas
· The Signature Clock Tower at certain FAO Schwarz retail
stores
We also specialize in event marketing, touring shows, museum exhibitions and other edutainment-based attractions.
We are heavily involved in expanding the edutainment industry - a new form of amusement, which takes the value of education and adds a healthy dose of entertainment to create memorable, interactive learning experiences.
Edutainment-based attractions produced by us include:
Grossology: The (Impolite) Science of the Human Body - an interactive exhibition based on a popular series of books by science teacher Sylvia Branzei. The 5,000-square-foot exhibition promotes scientific discovery of the human body based on the theory that the best way to get kids interested in science is to present it in terms they find most appealing. Grossology premiered January 2000 at ScienceWorld British Columbia and is touring North America on a five-year commitment visiting major museums, science centers, theme parks and other similar venues. Bookings for our two Grossology exhibits cover the next four years.
The Drunk Driving Simulator - a traveling road show with three tours that puts students behind the wheel of an interactive vehicle programmed to simulate driving under the influence of alcohol. The tours travel to high schools throughout the United States and have made more than 3,250 appearances in 200 cities. Nearly one million students have participated with the simulator, and three million people have observed the tour since 1988.
Customers
Both VSI and Vispac receive over 90% of their revenue in the automotive
industry. The various divisions of Ford, General Motors, and Nissan
accounted for 74%, 65%, and 78% of our revenues for fiscal years
2000, 1999, and 1998 respectively. The loss of any of these customers
would have a material adverse effect on us. While these companies
have historically been steady customers, there can be no assurance
that such relationships will continue.
Future revenues are dependent on such factors as new product introductions, the automotive industry's attention to process improvement within the dealerships, the industry's focus on customer satisfaction and global training, and the speed at which our clients embrace electronic commerce as an alternative. Recent developments among our automotive clients suggests that the migration to electronic commerce will be rapid.
In addition, we have a small percentage of our business that is based on long-term contracts with our customers. For the nearly four decades of our core marketing service business, we have needed to constantly develop and sell new programs.
Industry and Competition
The number of suppliers to the automotive industry is dwindling.
Manufacturers are demanding capital investments in systems and
technology from their suppliers. This trend is causing suppliers
to consolidate and streamline their operations. As a turnkey business
communication provider to the automotive industry, management
believes it is well positioned to continue to compete in this
highly competitive environment.
Manufacturers are focusing on their core business processes, which generally involves product development, assembly, distribution, and financing. We expect to continue to benefit from the practice of turning other essential but non-core business processes such as marketing, communication, and training functions over to third party vendors.
As a consolidator of business product training and technique, we believe that the use of on-line and distance learning technology will continue to grow. More and more corporations are using web and distance learning training as an alternative to costly trips to attend or conduct training sessions.
We provide a broad range of services and products that compete primarily with a variety of agencies, incentive and distribution fulfillment and marketing services firms. These firms generally provide a limited range of services that compete only with a portion of our services. Management believes that no single company or small group of companies dominates the marketing services industry.
We are aggressively implementing new technologies to help our clients communicate with consumers and train their employees. We offer web-based solutions, satellite-based training, CD-ROMs and a variety of other methods described in this report. The accelerating rate of change in technology makes it more difficult to predict the future of the technologies our business will need to use in order for us to continue to be successful.
Competition in the Marketing Services segment is intense, and we expect that competition will increase. We compete on the basis of service quality, creativity and price. We compete against many companies, some of which have significantly greater financial resources than we have. There can be no assurance that we will have the financial resources, technical expertise or marketing, distribution and support capabilities to compete in the future. Competitive pressures could reduce the demand for our products and services, cause us to reduce prices, increase expenses or cause delays or cancellations of customer orders, any of which could adversely affect our business and results of operations.
In October 2000, the Marketing Services segment had backlogs of approximately $92 million, all of which is expected to be completed by the coming fiscal year. This is an 8% increase over the approximately $85 million in October 1999. We consider backlog to represent firmly committed business. The firmness of such orders is subject to future events (e.g. cancellation of a purchase order by a client due to strike, budget constraints, or other client internal matters) which may cause the amount of the backlog actually fulfilled to change. The principal markets for our services are the North American operations of automobile manufacturers and their distribution networks, including automotive dealerships. Services are sold directly to the manufacturer and/or dealer. We use a variety of distribution methods to deliver services, including the U.S. Postal Service, commercial freight services, the internet and satellite transmissions.
There are currently no products in development that would require
significant additional financial investment to bring to market.
Materials have historically been widely available from numerous
sources. We have no material patents, trademarks, licenses, franchises,
or concessions. There is no significant seasonality in the Marketing
Services segment. The Marketing Services segment competes primarily
in the automotive industry, where slow payment of invoices is
a standard practice. Bank lines of credit are used to finance
receivables.
The Entertainment / Edutainment Segment: Advanced Animations,
Inc. (AAI)
Advanced Animations' products are sold on a custom, made-to-order basis directly to companies worldwide.
Materials have historically been widely available from numerous sources. We have no material patents, trademarks, franchises or concessions. There is no significant seasonality in the Entertainment / Edutainment segment. We receive payments as work progresses on custom projects, so there are no significant working capital issues. AAI has no customers who constitute more than 10% of consolidated revenue.
In October 2000 the Entertainment / Edutainment segment had backlogs of approximately $2 million, all of which is expected to be completed in the coming fiscal year. This compares to approximately $6 million in October 1999. The firmness of such orders is subject to future events which may cause the amount of the backlog actually fulfilled to change.
Competition in the Entertainment / Edutainment segment is intense, and we expect that competition will increase. We compete on the basis of product quality, creativity and price. There can be no assurance that we will have the financial resources, technical expertise or marketing, distribution and support capabilities to compete in the future. Competitive pressures could reduce the demand for our products and services, cause us to reduce prices, increase expenses or cause delays or cancellations of customer orders, any of which could adversely affect the business and results of operations.
History of Company
As of October 1, 1996, Martin S. Suchik, was the President of
The Banker's Note, Inc. ("TBN"), a public company incorporated
in April 1981. Prior to 1997, Suchik's uncle - Steve Toth, Jr.,
the President and Chief Executive Officer of the Company and its
affiliates ("Toth") held a 33% interest in TBN as the
result of the provision of financing which had started in 1991.
In February 1997, TBN acquired Advanced Animations, Inc. ("AAI"),
a company controlled by Toth, for 7,563,077 shares of TBN stock
and Toth became TBN's controlling shareholder. In April 1997,
the Company reincorporated in Georgia from Texas, changed its
corporate name to "VSI Holdings, Inc." (VSIH) from "The
Banker's Note, Inc.", and placed its retailing business in
an operating subsidiary, BKNT Retail Stores, Inc. ("RSI").
As of July 1 and September 30, 1997, the Company acquired Vispac,
Inc. ("Vispac") for 6,200,000 shares of VSIH stock and
Visual Services, Inc. ("VSI") for a net of 14,285,715
shares of VSIH stock. Both Vispac and VSI were also controlled
by Toth. As of September 30, 1998, we sold subsidiaries constituting
the former retail segment to Mr. Suchik and related entities.
See Item 13 Contingent Liability for Discontinued Operations.
Item 2. Properties.
Our headquarters are located in Bloomfield Hills, Michigan and consists of 103,000 square feet. The current lease continues until February 2003 and has a five-year renewal option. This facility is also the base for subsidiary VSI, which also leases a training facility/office of 38,000 square feet in Rochester Hills, Michigan, a training facility/office of 42,000 square feet in Allen Park, Michigan, a 23,000 square foot storage facility in Livonia, Michigan and a 12,000 square foot sales office in Cypress, California. VSI owns a 45,000 square foot office building in Livonia, Michigan, which houses its dialogue center and has a collateralized mortgage of $2,349,000.
Vispac is based in a 149,000 square foot office/warehouse building in Livonia, Michigan that it leases from a partnership that is owned by a Toth family investment partnership. Vispac owns two warehouse facilities in Livonia, Michigan of 92,000 and 93,000 square feet that collateralize mortgages of $2,553,000 and $2,352,000.
The Entertainment / Edutainment segment is based in a 26,900 square foot office/manufacturing plant in Stockbridge, Vermont. The property is owned by AAI.
We generally consider the productive capacity of each facility operated by each of our industry segments to be adequate and suitable for our requirements. We are currently undertaking an extensive study of our organizational real estate needs with particular focus on the alternatives available for the headquarters' operations after that lease expires in 2003.
Item 3. Legal Proceedings.
The Company is 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 the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2000.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Common Stock trades on the American Stock Exchange under the "VIS" symbol. The table sets forth the trading prices for the Common Stock by quarter as reported for the last two years. The range of prices for the Common Stock, as reported by Reuters Limited, follows:
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Based on past requests for proxy materials, we believe that we
have substantially more beneficial holders of our Common Stock
than the approximately 375 "of record" holders on December
1, 2000. We currently reinvest all earnings rather than paying
cash dividends and, for the foreseeable future, intend to continue
that policy. Our loan agreements prohibit the payment of cash
dividends without prior bank approval. No dividends were declared
in the two year period ended September 30, 2000.
Item 6. Selected Financial Data.
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The Company paid no dividends on its Common Stock during any of the periods presented, and has no current plans to change that policy.
1. September 30, 2000, 1999 and 1998 balance sheet data and operating data exclude BNKT Retail Stores, Inc. accounts.
2. September 30, 1997, and 1996 Balance Sheet data include the accounts of BKNT Retail Stores, Inc. The operating data excludes the operations of BKNT Retail Stores, Inc.
3. See Item 13 Declared Distributions to Stockholders regarding distributions of previously taxed undistributed earnings to the stockholders of acquired subsidiaries. This reduced working capital and stockholders' equity.
4. 1997 and 1996 operating data and earnings per share information are pro forma amounts and have been calculated as if the subsidiaries had been consolidated for both years.
5. The loss from continuing operations in 1999 includes charges to earnings of $421,000 and $2,154,000 related to the impairment of long-lived assets and a reduction in the value of goodwill, respectively. The income from continuing operations in 2000 includes a charge to earnings of $516,000 related to the impairment of long-lived assets. See Notes 2 and 4 of Notes to Consolidated Financial Statements.
Item 7. 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 the Purpose of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995").
Future Accounting Changes - In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101. The staff accounting bulletin summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Any changes that may be required as a result of this bulletin are required to be implemented no later than the last fiscal quarter of the fiscal year beginning October 1, 2000. Management is finalizing its assessment of the impact this bulletin will have, if any, on the Company's financial statements.
OPERATING RESULTS
Marketing Services Segment:
Year Ended September 30, 2000
Revenues from the Marketing Services segment increased 36% to
$182,403,000 for the year ended September 30, 2000 from $134,295,000
last year. This increase was due to various projects, including
those projects mentioned in Item 1. The largest new projects this
year were vehicle launch activities, test drive programs, and
dealership training. During the year, a continuing contract with
annual revenue of approximately $15 million was lost. We do not
expect the see the entire impact of this in the next year, as
it is being phased out. Management will seek to replace the business
or make cost cutting measures as necessary.
Cost of revenue as a percentage of sales increased approximately four percentage points from last year. The large value of the jobs mentioned in the revenue paragraph above had a higher cost of revenue proportion than our other revenues.
Income from Operations from the Marketing Services segment increased from $486,000, to $17,524,000 in the current year. The rate of increase in operating expenses was less than the rate of increase in revenues because we were able to better utilize our core skilled staff. Thus, we were able to experience significant revenue growth without having to increase our staff as much as we would have needed to otherwise. The increase in operating expenses is primarily personnel expense increases.
Year Ended September 30, 1999
Revenues from the Marketing Services segment decreased 14% to
$134,295,000 for the year ended September 30, 1999 from $155,681,000
in the previous year. This decrease was due to approximately $10,000,000
in various projects which were completed and not replaced with
similar work during the fiscal year, and another $11,000,000 was
lost due to project scope reduction and schedule slippage.
Cost of revenue as a percentage of sales decreased approximately
four percentage points from the previous year. The jobs mentioned
in the revenue paragraph above had a higher cost of revenue proportion
than our other revenues, and accounted for the decrease.
Income from Operations from the Marketing Services segment decreased from $14,834,000, to $486,000. Our operating expenses decreased slightly in 1999. The rate of decrease in operating expenses was less than the rate of decrease in revenues. While there was a decrease in operating expenses, this decrease was not sufficient to offset the unexpected decline in revenues. Although sales decreased and personnel reductions were made, management chose to maintain a core skilled staff as we anticipated future sales growth opportunities. Another factor which negatively impacted operating expenses was depreciation expense which rose $800,000 primarily due to a full year's depreciation of a call center building and related equipment, purchased in fiscal year 1998, and its contents. $2,154,000 of Goodwill in PSG was written off because it was considered to be impaired (see Note 2 of Notes to the Consolidated Financial Statements).
Year Ended September 30, 1998
Revenues from the Marketing Services segment increased 26% to
$155,681,000 for the year ended September 30, 1998 from $124,020,000
in 1997. This increase was due in large part to the pilot phase
of a ride and drive program for an automotive manufacturer. VSI
drew from the full range of its in-house capabilities to create,
produce and field the program within a 90-day timeframe. VSI also
completed the launch of a new truck product for an automotive
manufacturer and was immediately awarded the assignment to launch
two new 1999 model year trucks.
Income from Operations from the Marketing Services segment increased 27% for fiscal 1998, to $14,834,000, up from $11,674,000 the year before. The increase is attributable to an increase in sales and the efficient utilization of overhead.
Entertainment / Edutainment Sector:
Year Ended September 30, 2000
Revenues from the Entertainment / Edutainment segment decreased
47% to $4,852,000 for the year from $9,065,000 last year. During
the year we were told by our potential customers that their plans
were on hold. Our Grossology touring exhibits and the Drunk Driving
Simulator, as mentioned in Item 1, were our primary revenue for
the year. The Drunk Driving Simulator program completed in December,
2000. Unless and until another sponsor can be arranged, revenues
for this segment will be approximately $2 million lower than it
otherwise would be.
Income from operations from the Entertainment / Edutainment segment decreased to a loss of $3,240,000 from an operating income of $2,352,000 for the prior year. The decrease was due primarily to the lack of revenue mentioned above. Although revenues decreased, operating expenses rose as we shifted production efforts to the construction of three Grossology touring exhibits. Upon completion of these exhibits, layoffs and other cost cutting measures have been implemented. The market for our products appears to remain soft. While we do not expect to have this kind of loss next year, it is uncertain whether or not this sector will be profitable. It is difficult to anticipate sales and income trends.
Year Ended September 30, 1999
Revenues from the Entertainment / Edutainment segment increased
21% to $9,065,000 for the year ended September 30, 1999 from $7,477,000
for the prior year. The increase was due primarily to new animation
work received from Universal Studios Florida Men in Black exhibit
and for the E.T. Adventure attraction coming to Universal Studios
- Japan.
Income from operations from the Entertainment / Edutainment segment increased 48% to $2,352,000 from $1,584,000 for the prior year. The increase was due primarily to efficiencies achieved from utilization of existing tooling and technologies on repetitive projects. It is difficult to anticipate trends.
Year Ended September 30, 1998
Revenues from the Entertainment / Edutainment segment increased
15% to $7,477,000 for the year ended September 30, 1998 from $6,506,000
for the prior year. The increase was due primarily to new animation
work received from Universal Studios Hollywood for T2:3D "Battle
Across Time" attraction and for the E.T. Adventure attraction
coming to Universal Studios - Japan.
Income from operations from the Entertainment / Edutainment segment increased 58% to $1,584,000 from $1,002,000 for the prior year. The increase was due primarily to efficiencies achieved from utilization of existing tooling and technologies on repetitive projects.
LIQUIDITY AND CAPITAL RESOURCES:
Operating Activities.
Our two market segments have contrasting operating capital needs.
The Marketing Services segment requires considerable operating
capital to support its accounts receivable and maintain its marketing
infrastructure; while billing is periodic with little risk of
non-payment, client payment is typically slow. It also experiences
a relatively steady cash flow; there is a historically increased
need for working capital in the late summer and early autumn as
new vehicle communications services are provided. This results
in greater bank borrowings during that time of year; the lines
of credit are designed to meet any such need we may have. This
year, our increased sales led to significant increases in our
accounts receivable, accounts payable and notes payable balances
at year end. Certain amounts received from clients in advance
had been restricted and held in escrow until costs related to
a specific job are incurred by the Company. During the year ended
September 30, 2000, the escrow arrangement was terminated, resulting
in reduced balances for cash in escrow and advances from clients.
The Entertainment / Edutainment segment requires relatively little capital for operating purposes, because its clients typically pay sizable deposits before projects begin, and make progress payments during project fabrication. Sales represent discretionary spending on the part of its customers and their customers. Because of this, projects are sometimes delayed; conversely several different projects can be awarded in a short period of time. The revenue and earnings of the Entertainment / Edutainment segment are highly variable, and will probably continue to be so.
Generally, all obligations are met out of cash flow generated from operations and borrowings. Based on current business conditions, we expect to meet our current obligations with cash flow generated from operations and borrowings.
Investing Activities.
Capital expenditures for 2000 were approximately $4.1 million
higher than 1999. This is primarily attributed to the construction
of three Grossology touring exhibits in our Entertainment / Edutainment
segment, and to investment in Interactive Voice Response and other
systems for our call center in our Marketing Services segment.
Venture investments include Navidec, Oz Entertainment Company (OEC), and eCollege.com. Navidec (NVDC - Nasdaq) is a developer of web sites and information services. Oz Entertainment Company is developing a theme park, both physically and virtually, based on the Wizard of Oz movie and 40 additional books in the Oz series; the park is scheduled for completion in 2004. eCollege.com is a provider of online learning solutions for colleges and universities, as well as advanced web-based corporate training. We view these strategic investments in equity positions as opportunities to leverage our core competencies to expand our business lines and enter new markets. Bank covenants prohibit us from making significant additional investments in these companies.
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 the year to CarPoint, which is majority-owned by Microsoft. At January 9, 2001, the 431,525 shares, acquired for $2,450,000, had a fair market value of $1,510,000.
During the year, we invested an additional $500,000 in Oz Entertainment Company (OEC), bringing our total investment to $4.5 million, of which $4 million is invested in K.C. Investors, LP (as a limited partner). This partnership was formed as an investment partnership to fund the continuing development of OEC, a corporation in which the partnership holds a majority interest. OEC will develop the Wonderful World Of Oz theme park. We recognized losses of $658,000 and $530,000 for the years ended September 30, 2000, and 1999, respectively, related to this investment. We expect to see continued losses until the opening of the park, currently scheduled for 2004. The park is planned to be constructed on 9,000 acres of land 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 tabled consideration of this until February, 2001. It is anticipated that title will be received during the next year. The success of the park as an investment is dependent upon receiving title to the land, as well as certain infrastructure improvements being completed by or paid by governmental agencies, financing arranged through governmental agencies, as well as additional public or private financing. If the park does not open, the entire investment, currently valued at $3,312,000, is at risk. The projections provided and prepared by the management of K.C. Investors, LP and OEC forecast that the park will be profitable upon opening. See Item 13 for a discussion of related party investments in K.C. Investors, LP and in OEC.
During fiscal year 1999, we invested $3.5 million in convertible preferred stock in a private placement offering of eCollege.com, a company engaged in providing technology and services that enable colleges and universities to offer an online environment for distance and off-campus virtual learning. They currently have contracts with more than 190 education partners. eCollege.com sold 4.5 million shares of its common stock in an initial public offering which took place during our fiscal year 2000. As part of the offering, our investment converted into 468,808 shares of common stock. During the year, we also invested an additional $50,000 to acquire 4,500 shares of eCollege.com. At January 9, 2001 our investment in eCollege.com (ECLG - Nasdaq) had a fair market value of $2,544,000.
Purchase of the Performance Systems Group Inc. In February 1998, we acquired the assets of The Performance Systems Group for approximately $4.5 million, consisting of 280,000 shares of our common stock and $2.6 million in cash. Performance Systems Group provides in-field consulting and change process sustainment services primarily to automobile dealerships in Canada, Australia, and New Zealand. The acquisition was accounted for under the purchase method. See Notes 1 and 2 of Notes to Consolidated Financial Statements.
See the discussion in Item 13 regarding related party notes receivable and payable and advances, and declared distributions to stockholders.
Financing Activities.
At September 30, 2000, we had lines of credit totaling $37,000,000;
interest on these lines were at London Inter-Bank Offered Rate
("LIBOR") plus 1.5%; at September 30, 2000 the interest
rate was 8.12% and the outstanding balances were $35,214,000.
These lines of credit mature in March, 2001 and March, 2002. These
lines of credit have covenants restricting us from borrowing elsewhere,
loaning or guaranteeing a loan of another company without the
prior written consent of the bank; transferring assets except
in the ordinary course of business; and declaring dividends. Other
covenants mandate certain levels of net worth and working capital,
and that the ratio of total liabilities to net worth, debt service
ratio and current ratio do not exceed certain amounts.
We have had a long term relationship with the bank. Through the years, it has provided financing and lines of credit for us. There can, however, be no assurances that the lines of credit will be renewed when they mature. If we are unable to renew these lines of credit, other sources of financing would be sought, primarily a line of credit from another banking institution.
Since we are a net borrower of funds, minimal cash balances are kept on hand. At any point in time, we may have more money in checks outstanding than the cash balance. When checks are presented for payment, the bank notifies us, and we borrow on our lines of credit to cover the checks.
During the year, we borrowed $4.5 million from related parties at a 7.00 interest rate, due on demand. At September 30, 2000, the balance was $3,420,000.
At September 30, 2000, our long-term debt consists of mortgages totaling $7,254,000 and a term note relating to building improvements of $390,000. The mortgages bear interest at fixed rates ranging from 6.30% to 8.17% and at prime (9.50% at September 30, 2000). The mortgages include a balloon payment for any unpaid balances at the end of the term of the notes. The balloon payments are due beginning June, 2004 through October, 2005. No other long-term debt financing for facilities is expected in fiscal year 2001. We anticipate selling one of the warehouses we own in Livonia, Michigan; the sale price is expected to exceed the net book value, and would generate cash in excess of the mortgage balance.
On a long-term basis, increased financing may be necessary to fund any large project awarded to us, or any acquisitions we may make. While there are no current plans to conduct an offering of stock, in the long term, that cannot be ruled out.
During fiscal year 2000, we acquired $321,000 of treasury stock.
Capital Activities.
Employees exercised stock options for 440,000, 2,000 and 64,000
shares in fiscal year 2000, 1999 and 1998 respectively. We granted
stock options at a weighted average price of $3.66, $6.81 and
$6.28 for 168,000, 153,000 and 586,000 in fiscal year 2000, 1999
and 1998 respectively. The options are exercisable two and three
years from the date of grant in two equal parts, and expire five
years after the date of grant.
In December 1997, we implemented a restricted stock plan for 500,000 shares. During 1999, the number of shares authorized for the plan was increased to 1,000,000. Awards of 51,000, 102,298 shares and 462,375 shares were granted under the restricted stock plan during the fiscal years ended September 30, 2000, 1999 and 1998, respectively. The shares vest one, two and three years from the date of grant in three equal parts; in December 2000, 1999 and 1998, we issued 163,000, 175,000 and 154,000 shares respectively.
We do not expect the exercise of stock options, or purchase of shares, by employees and directors to be a material source of capital in fiscal year 2001. We believe that cash flows from operations along with borrowings will be sufficient to finance our activities in 2001. We have no current plans to conduct an offering of our shares to the public in fiscal year 2001.
Outlook
Although the past few months have been challenging
ones for the stock market, the U.S economy's
continued control of inflationary factors and modest interest
rates, added to low unemployment, argues for a relatively stable
automotive market. Truck sales continue to fuel the auto industry's
growth, with most automotive industry analysts predicting sales
of approximately 15,000,000 to 16,000,000 new vehicles (automobiles
and trucks) in the United States in 2001. While this is lower
than sales in 2000, the market has been relatively consistent
over the past few years. Approximately 90% of our revenues are
directly associated with the automotive industry. We cannot determine
what impact a reduction in automobile sales may have on us.
In the Marketing Services segment, we continue to align ourselves with people, products and processes that recognize and take advantage of how the world goes about conducting business and accessing information. Our ties to the auto industry includes customer contact activities. The emphasis on globalization, combined with budgets needed to reach a worldwide audience, is placing new emphasis on training opportunities on the World Wide Web. Our substantial investments in this area make us poised to take advantage of the opportunities as they arise.
Customer Relationship Management initiatives are placing increasingly critical importance on e-business within the auto industry as clients look for answers and assistance from turnkey solution providers such as us. We help clients identify their customer base, create and execute strategic tactical marketing, distribute and fulfill and ultimately evaluate results to justify the expenditure. As manufacturers continue to outsource, we have an opportunity for growth by providing additional services to these manufacturers, advertisers, and other marketers.
We believe that experiential events are becoming increasingly popular among clients as they continue to realize the impressive long-term results from this area of customer relationship building. We deliver all-inclusive experiential events that encompass the wide array of products and services that we can offer our clients, from internet online registration to product procurement and exit interview research studies.
"CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE
HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995"
Certain statements in Management Discussion and Analysis of
Financial Condition and Results of Operations and certain other
sections of this Annual Report are forward-looking. These may
be identified by the use of forward-looking words or phrases such
as "believe," "expect," "anticipate,"
"should," "planned," "estimated,"
and "potential," among others. These forward-looking
statements are based on our reasonable current expectations. The
Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for such forward-looking statements. In order to
comply with the terms of the safe harbor, we note that a variety
of factors could cause our actual results or experience to differ
materially from the anticipated results or other expectations
expressed in such forward-looking statements. The risks and uncertainties
that may affect the operations, performance, development and our
results include but are not limited to: (1) the complexity and
uncertainty regarding the development and customer acceptance
of new products and services; (2) the loss of market share through
competition; (3) the introduction of competing products or service
technologies by other companies; (4) pricing pressures from competitors
and/or customers; (5) our inability to protect proprietary information
and technology; (6) market acceptance of our touring exhibits
in our Entertainment / Edutainment segment; (7) the loss of key
employees and / or customers; (8) our customers continued reliance
on outsourcing; (9) changes in our capital structure and cost
of capital, and ability to borrow sufficient funds at reasonable
rates (10) inability of the developers of the "Wonderful
World of Oz" theme park to obtain final transfer of the property,
to complete the timely construction of the park, and to operate
it profitably once the park opens; (11) uncertainties relating
to business and economic conditions; (12) management evaluation
of staffing levels.
Item 7A. 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 $194,000, 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 almost 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. 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.
We are also exposed to equity price risk on our investments
in publicly traded companies. Our available-for-sale securities
at September 30, 2000 include our equity positions in Navidec,
Inc. and eCollege.com, which have experienced significant volatility
in their stock prices. 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 $810,000 decrease
in fair value in our available-for-sale securities, based upon
January 9, 2001 closing market prices for Navidec and eCollege.com..
Item 8. Financial Statements and Supplementary Data.
See Consolidated Financial Statements and Notes to Consolidated Financial Statements attached for financial statements and supplementary data.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
Item 10. Directors and Executive Officers of the Registrant.
Steve Toth, Jr., age 76, became President and Chief Executive Officer of the Company in April 1997 and has been a Board member since March 1994. Toth has served as President of subsidiary Visual Services, Inc. since 1962. He also serves as President of subsidiaries Vispac, Inc. and Advanced Animations, Inc.
Martin S. Suchik, age 55, is a director of the Company since 1997. Suchik is the President at the former subsidiary BKNT Retail Stores, Inc., where he has served in that capacity since its 1981 founding. Suchik is the nephew of Toth.
Thomas W. Marquis, age 56, has been the Chief Financial Officer of subsidiary Visual Services, Inc. since 1988. He became Treasurer and Chief Financial and Accounting Officer of the Company in April 1997, became Secretary of the Company in June 1998, and has been a Board member since March 1994. Marquis serves as Senior Vice President, Secretary and Treasurer of subsidiaries Visual Services, Inc., Vispac, Inc. and Advanced Animations, Inc.
Harold A. Poling, age 75, has been a Board member since May, 2000. He was Chairman of the Board and Chief Executive Officer of Ford Motor Company. He retired January 1, 1994. Recently, he was appointed Chairman of Eclipse Aviation Corporation. He is a Director of Shell Oil Company, Flint Ink Corporation, Kellogg Company, Meritor Automotive, Inc. and Thermadyne Holdings Corporation. He is also a board consultant for The LTV Corporation, and is on the Investment Banking Advisory Board of Donaldson, Lufkin & Jenrette.
Ralph Armijo, age 47, has been a Board member since May, 2000.
He has served as the President, Chief Executive Officer and as
a Director of Navidec since its inception in 1993. He serves as
Chairman of the Board of DriveOff.com, Inc., and is a Director
for the Internet Automobile Dealers Marketing Association.
William James, age 66, has been a Board member since May, 2000. He has been President and Chief Executive Officer of James Cable Partners, L.P., a privately held Delaware limited partnership and a provider of cable television in nine states, since its formation in 1988. Prior to that, he was an Executive Vice President with Capital Cities Communications (which became Capital Cities / ABC, Inc.).
Robert Sui, age 47, became a Company director in 1998. He is a Senior Vice President with Merrill Lynch's Private Client Group, where he has served for the last 22 years.
Steve Schultz, age 44, is Executive Vice President of Sales for subsidiary Visual Services, Inc., where he has served since 1994.
Terry Davis, age 61, is Executive Vice President of Strategic Planning for subsidiary Visual Services, Inc., where he has served since 1982.
In the last year, the Board held three meetings, which all directors attended. Toth, Marquis, and Sui comprise the Executive Committee; James, Sui, and Poling comprise the Audit Committee; Poling, Armijo, and Marquis comprise the Compensation Committee. None of the Committees met last year.
Each non-executive officer director receives a $15,000 annual fee, plus a $5,000 meeting fee for meetings in excess of three per year, with no additional payment for membership on or meetings of any committees, except pursuant to the Independent Director Stock Option Plan (see stock ownership table). Except for Toth and Suchik, no officer or director is related to another by blood, marriage or adoption, not more remote than first cousin. In the last year, Forms 4 were filed by Toth (6), and by Suchik (5). All Forms 4 were filed on a timely basis. Except as noted, all directors are believed to have filed this year's annual Forms 5 on a substantially timely basis; James filed several days late, and we have been unable to ascertain whether Suchik has filed his Form 5.
Officers serve at the discretion of the Board of Directors. All Directors are elected at each annual meeting of shareholders.
Item 11. Executive Compensation.
The compensation for the last three years paid the Company's executive officers were:
| Long Term Compensation | |||||
|
|
Awards | ||||
| (a) | (b) | (c) | (d) | (e) | (f) |
| Name and Principal Position | Year | Salary ($) | Bonus ($) | Other Annual Compensation ($) | Restricted Stock Awards ($) |
|
Steve Toth Jr. CEO |
|
312,000 | 0 | 0 | |
|
|
312,000 | 0 | 1,920 | ||
|
|
642,000 | 0 | 950 | ||
| Thomas W. Marquis Treasurer, Secretary |
|
170,000 | 0 | 0 | |
|
|
150,000 | 0 | 1,800 | ||
|
|
150,000 | 0 | 885 | ||
|
Steve Schultz Exec V P - Sales |
|
220,000 | 0 | 0 | |
|
|
206,660 | 0 | 1,920 | ||
|
|
206,660 | 0 | 950 |
|
|
|
Terry Davis Exec V P |
|
300,000 | 0 | 0 | |
|
|
300,000 | 0 | 1,920 | ||
|
|
300,000 | 0 | 950 | ||
None of the executive officers have contractual compensation agreements. The "other" amounts listed are the Company's 401(k) contributions. Other than noted, none of the above officers received long term compensation payouts or awards covered by the table above.
In fiscal year 1998, Steve Schultz was awarded 88,821 shares of restricted stock, of which 29,607 shares were issued in December, 1998 , 1999 and 2000. Officers may participate in the Company's 401(k) and stock option plans. Such stock option plans provide that the price of any common stock issued to officers, directors, employees and their affiliates pursuant to any stock grant or exercise of any stock option shall be no less than the fair market value of the Common Stock on the date of the stock or option grant.
SEC rules require a performance graph comparing, over a five-year
period, the performance of our common stock against a broad market
index and against either a published industry or line-of-business
index or a group of peer issuers or issuers with similar market
capitalization. We chose the Wilshire Small Cap Index as the broad
market index, and the Russell 2000 Index because the companies
covered by that index include many of the companies in the Marketing
Services industry. The performance graph assumes an initial investment
of $100 and reinvestment of all dividends.
| Chart Points | 09/30/95 | 09/30/96 | 09/30/97 | 09/30/98 | 09/30/99 | 09/30/00 |
| VSI Holdings, Inc. | 100.00 | 77.78 | 1,055.56 | 911.11 | 788.89 | 655.56 |
| Wilshire Small Cap | 100.00 | 111.45 | 157.62 | 123.72 | 162.39 | 216.42 |
| Russell 2000 | 100.00 | 111.60 | 146.21 | 117.14 | 137.67 | 167.98 |
[GRAPH]
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Voting rights are held by the owners of the Common Stock, of which each share is entitled to one vote on each matter coming before the shareholders. Only one class of Common Stock is authorized; none of the authorized Preferred Stock has been issued. On December 1, 2000, the Company had 33,179,825 shares of Common Stock (net of 400,250 treasury shares) outstanding. Such shares, and shares issuable under options exercisable within 60 days, were owned by:
| Name and Address | Shares Owned | % Ownership |
|
Steve Toth, Jr. and family members (1) 41000 Woodward Avenue Bloomfield Hills, Michigan 48304 |
27,905,755 | 84.10% |
|
Martin S. Suchik (2) 1778 Ellsworth Industrial Blvd. Atlanta, Georgia 30318 |
504,025 | 1.52% |
|
Thomas W. Marquis (3) 41000 Woodward Avenue Bloomfield Hills, Michigan 48304 |
514,431 | 1.55% |
|
Steve Schultz 41000 Woodward Avenue Bloomfield Hills, Michigan 48304 |
97,192 | .29% |
|
Terry Davis 41000 Woodward Avenue Bloomfield Hills, Michigan 48304 |
|
|
|
Harold Poling (4) 290 Town Center Drive, Suite 322 Dearborn, Michigan 48126 |
309,600 | 0.93% |
|
Ralph Armijo (4) 6399 South Fiddler Green Circle Greenwood Village, Colorado 80111 |
2,100 | .01% |
|
Robert F. Sui (4) 39577 Woodward Avenue Bloomfield Hills, Michigan 48304 |
4,600 | .01% |
|
William James (4) 38710 Woodward Avenue Bloomfield Hills, Michigan 48304 |
|
|
|
All directors and officers as a group (9 persons) (1-4) |
30,263,709 | 90.57% |
(1) Toth is trustee of trusts benefiting him that own 400,000 and 11,826,323 shares. Toth's spouse is the trustee of trusts benefiting Toth's daughter that owns 11,712,199 shares, and of another trust benefiting her that owns 1,010,797 shares. Toth disclaims beneficial interest in the shares held by trusts benefiting his daughter and spouse, but such shares are included with his holdings. CLT, a Michigan partnership affiliated with Toth ("CLT"), holds 2,055,586 shares. 900,850 shares are held by a charitable foundation, of which Toth is executive director.
(2) Suchik owns 422,392 shares, while his IRA owns another 11,113 shares. Suchik is fully vested in two options for 40,000 and 30,520 shares under the 1986 Incentive and Non-Qualified Plans exercisable at $.55 and $.50 per share, respectively; these options expire on January 15, 2001.
(3) Marquis is trustee of a trust benefiting him that owns
261,567 shares. His spouse is trustee of a trust benefiting her
that owns 252,864 shares. Marquis disclaims beneficial ownership
of his spouse's shares.
(4) Poling owns 250,000 shares and was granted 15,000 non-employee
options exercisable at $6.20 per share in November, 1997, and
85,000 non-employee options in November, 1998, with 50,000 exercisable
at $5.75 per share and 35,000 exercisable at $8.20 per share.
James was granted 5,000 non-employee options exercisable at $6.20
per share in December, 1997. Under the Independent Director Stock
Option Plan, Poling, James, Armijo and Sui were granted new 30,000
share options in May, 2000 exercisable for $3.25 per share; such
options vest at the rate of 2,100 shares for each Board meeting
attended, with a minimum of 7,500 annually. Sui's appointment
as a director was confirmed by the shareholders on April 8, 1998
at which time he received a 10,000 share option exercisable for
$6.375 per share; of which 2,500 have vested, and 7,500 have been
canceled. Poling, James, Armijo and Sui are vested in 59,600,
7,100, 2,100 and 4,600 shares respectively.
Item 13. Certain Relationships and Related Transactions.
Steve Toth, Jr. (Toth), President, with his family, directly and indirectly owns 84.10% of the Company as of December 1, 2000.
Loans to and from Toth Family. At September 30, 2000 and September 30, 1999, we had advanced $804,000 and $686,000, respectively, to Toth, which amounts are non-interest bearing and unsecured. In addition, a demand note in the amount of $500,000 which bears interest at 7.00% and is unsecured, was borrowed from Toth, and is outstanding at September 30, 2000. No restrictive covenants were imposed.
Note Payable to CLT Associates, L.P. (CLT). CLT is a partnership which is controlled by Toth. During the year, we borrowed $4 million from CLT at 7.00%. The note is unsecured, and imposes no restrictive covenants. The balance at September 30, 2000 was $2,920,000.
CLT Stock Option. The 1993 reorganization plan of the former Retail segment provided that Toth be issued stock options for 1,600,000 shares. Toth assigned an 825,000 share option to CLT, which exercised the last 425,000 shares in November, 1999 at $.15625 per share.
CLT has invested $7.63 million in Oz Entertainment Corporation and KC Investors, LP. These are the organizations which are developing the Wonderful World of Oz theme park which is scheduled to open in 2004. Our investment, combined with CLT totaled was $12.13 million at September 30, 2000. Together, these investments account for direct and indirect ownership of approximately 30% of Oz Entertainment Corporation. See Note 3 of Notes to Consolidated Financial Statements.
Declared Distributions to Stockholders. Prior to their acquisition, in February, July and September 1997, the income of each subsidiary (Advanced Animations, Inc., Vispac, Inc. and Visual Services, Inc.) was taxed to their respective stockholders and members. A portion of such income was distributed to pay such taxes. At September 30, 1997, we had declared, and owed, distributions of $20,659,000 to such stockholders and members. Such distributions relate not only to income earned by such subsidiaries from October 1, 1996 until their acquisition, but also include income previously retained by such subsidiaries as necessary working capital. $11,494,000 of the $20,659,000 was converted into a subordinated note payable from us to these former Stockholders, bearing interest at 7.00 %, due December,2002, and subordinated to all bank debt. $7,553,000 of this subordinated note belongs to Toth. Interest of $529,000 owing to Toth was paid during the fiscal year.
Lease of Real Estate. Toth directly and indirectly owns the
entire interest in a partnership (CLT) that owns the building
in which Vispac is based. The lease is for $551,000 per year until
November, 2001 and $638,000 thereafter until it expires in September
2006. The rental charges do not exceed those ordinarily and customarily
paid in the community.
Contingent liability for discontinued operations. We are the guarantor
of several store leases being used by the BKNT Retail Stores,
Inc. At September 30, 2000 the lease obligations amounted to $435,000.
This amount will reduce to $113,000 in the fiscal year ending
2001; $25,000 in the fiscal year ending 2002. This contingent
liability is offset by the pledging of 216,250 Company shares
by Martin Suchik.
| Report Letter | 1 |
| Consolidated Financial Statements | |
| Balance Sheet | 2 |
| Statement of Operations | 3-4 |
| Statement of Changes in Stockholders' Equity | 5 |
| Statement of Cash Flows | 6 |
| Notes to Consolidated Financial Statements | 7-29 |
To the Board of Directors and Stockholders
VSI Holdings, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of VSI Holdings, Inc. and subsidiaries as of September 30, 2000 and 1999 and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each year in the three-year period ended September 30, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of VSI Holdings, Inc. and subsidiaries at September 30, 2000 and 1999 and the consolidated results of their operations and their cash flows for each year in the three-year period ended September 30, 2000, in conformity with generally accepted accounting principles.
Ann Arbor, Michigan
December 22, 2000
| VSI Holdings, Inc. and Subsidiaries | |
|
|
|
|
|||
|
2000 |
1999 |
||
|
|
|||
| Current Assets | |||
Cash |
$905,000 | $552,000 | |
Cash in escrow |
- | 2,930,000 | |
Trade accounts receivable (net of allowance of $526,000 and $0 at September 30, 2000 and 1999, respectively): |
|||
Billed |
53,907,000 | 39,820,000 | |
Unbilled |
18,525,000 | 9,548,000 | |
Notes receivable and advances |
201,000 | 92,000 | |
Inventory |
438,000 | 410,000 | |
Accumulated costs of uncompleted programs |
3,744,000 | 4,883,000 | |
Deferred tax asset (Note 8) |
899,000 | 207,000 | |
Prepaid federal income tax |
- | 1,451,000 | |
Investment in available-for-sale securities (Note 3) |
- | 5,259,000 | |
Other current assets |
761,000 | 609,000 | |
Total current assets |
79,380,000 |
65,761,000 |
|
| Notes Receivable - Officers | 921,000 | 777,000 | |
| Property, Plant and Equipment - Net (Note 4) | 22,394,000 | 21,575,000 | |
| Deferred Tax Asset (Note 8) | 830,000 | 715,000 | |
| Goodwill | 1,283,000 | 1,710,000 | |
| Investment in Available-for-Sale Securities (Note 3) |
7,131,000 |
- |
|
| Investments (Note 3) | 4,190,000 | 7,764,000 | |
Total assets |
$116,129,000 |
$98,302,000 |
|
|
========= |
========= |
||
|
|
|||
| Current Liabilities | |||
Current portion of long-term debt (Note 6) |
$552,000 | $516,000 | |
Notes payable related party (Note 5) |
3,420,000 |
- |
|
Trade accounts payable |
23,479,000 | 18,452,000 | |
Notes payable to bank (Note 5) |
35,214,000 | 28,426,000 | |
Accrued liabilities |
3,970,000 | 3,318,000 | |
Federal income tax payable |
2,139,000 | - | |
Advances from customers for uncompleted projects |
375,000 | 5,975,000 | |
Total current liabilities |
69,149,000 | 56,687,000 | |
| Notes Payable - Related parties (Note 5) | 12,337,000 | 11,636,000 | |
| Long-term Debt - Net of current portion (Note 6) | 7,092,000 | 7,660,000 | |
| Stockholders' Equity (Note 12) | |||
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, 33,580,000 shares issued in 2000 and 32,960,000 shares issued in 1999 |
336,000 |
330,000 |
|
Additional paid-in capital |
8,071,000 | 6,949,000 | |
Retained earnings |
20,270,000 | 14,720,000 | |
Accumulated other comprehensive income |
730,000 | 1,855,000 | |
Treasury stock, at cost - 400,000 shares in 2000 and 300,000 shares in 1999 |
(1,856,000) | (1,535,000) | |
Stock subscription receivable |
- | - | |
Total stockholders' equity |
27,551,000 |
22,319,000 |
|
Total liabilities and stockholders' equity |
$116,129,000 | $98,302,000 | |
|
========= |
========= |
||
| See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements |
|
| VSI Holdings, Inc. and Subsidiaries | |
|
|
|
|
|||
|
2000 |
1999 |
1998 |
|
| Revenue | $187,255,000 | $143,360,000 | $163,158,000 |
| Expenses | |||
Cost of revenue |
82,471,000 | 57,105,000 | 71,861,000 |
Operating expenses |
90,737,000 | 82,901,000 | 74,810,000 |
Total expenses |
173,208,000 | 140,006,000 | 146,671,000 |
| Operating Income | 14,047,000 | 3,354,000 | 16,487,000 |
| Other Income (Expenses) | |||
Equity in losses of unconsolidated investee (Note 3) |
(1,515,000) | (400,000) | - |
| Interest and other income (expense) | 69,000 | (516,000) | (37,000) |
| Gain (loss) on sale of assets |
168,000 |
- |
(32,000) |
| Interest expense | (3,708,000) | (3,005,000) | (2,320,000) |
Total other expenses |
(4,986,000) | (3,921,000) | (2,389,000) |
| Income (Loss) - Before income taxes | 9,061,000 | (567,000) | 14,098,000 |
| Provision for (Benefit from) Income Taxes (Note 8) | 3,511,000 | (69,000) | 4,887,000 |
| Income (Loss) from continuing operations | 5,550,000 | (498,000) | 9,211,000 |
| Discontinued Operations (Note 14) | |||
Loss from discontinued operations - Net of income tax benefit of $220,000 |
- |
- |
(428,000) |
Gain on disposal of subsidiary - Net of income tax of $140,000 |
- |
- |
271,000 |
| Total discontinued operations | - | - | (157,000) |
| Net Income (Loss) | 5,550,000 | (498,000) | 9,054,000 |
| Other Comprehensive Income (Expense) - Net of tax | |||
| Foreign currency translation adjustment | (17,000) | 24,000 | (23,000) |
| Unrealized gain (loss) on securities (Note 3) | (1,108,000) | 1,854,000 | - |
| Total other comprehensive income (expense) | (1,125,000) | 1,878,000 | (23,000) |
| Comprehensive Income | $4,425,000 | $1,380,000 | $9,031,000 |
|
========== |
========== |
========== |
|
| See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements |
|
| VSI Holdings, Inc. and Subsidiaries | |
|
Consolidated Statement of Operations (Continued) |
|
|
|
|||
|
2000 |
1999 |
1998 |
|
| Earnings Per Share | |||
| Basic: | |||
Income (loss) from continuing operations |
$ 0.17 |
$ (0.02) |
$ 0.28 |
Loss from discontinued operations |
- |
- |
(0.01) |
Gain on disposal of subsidiary |
- |
- |
0.01 |
| Basic net income (loss) per share |
$ 0.17 |
$ (0.02) |
$ 0.28 |
|
========= |
========= |
========= |
|
| Fully diluted: | |||
Income (loss) from continuing operations |
$ 0.17 |
$ (0.02) |
$ 0.27 |
Loss from discontinued operations |
- |
- |
(0.01) |
Gain on disposal of subsidiary |
- |
- |
0.01 |
| Fully diluted net income (loss) per share |
$ 0.17 |
$ (0.02) |
$ 0.27 |
|
========= |
========= |
========= |
|
| Weighted Average Shares Outstanding | |||
Basic |
33,070,000 |
32,816,000 |
32,851,000 |
Effect of stock options |
262,000 |
- |
682,000 |
| Fully diluted |
33,332,000 |
32,816,000 |
33,533,000 |
|
========= |
========= |
========= |
|
| See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements |
|
| VSI Holdings, Inc. and Subsidiaries | |
|
Consolidated Statement of Changes in Stockholders' Equity |
|
|
|
Comprehensive Income |
||||||||
|
|
|
Paid-in Capital |
Earnings |
Stock |
Subscriptions Receivable |
|
|
Stockholders' Equity |
|
| Balance - October 1, 1997 |
40,371,000 |
404,000 |
7,917,000 |
6,253,000 |
(2,907,000) |
- |
- |
- |
11,667,000 |
| Net income |
- |
- |
- |
9,054,000 |
- |
- |
- |
- |
9,054,000 |
| Exercise of stock options (Note 12) |
64,000 |
- |
45,000 |
- |
- |
- |
- |
- |
45,000 |
| Issuance of stock options (Note 12) |
- |
- |
83,000 |
- |
- |
- |
- |
- |
83,000 |
| Acquisition of stock for treasury |
- |
- |
- |
- |
(736,000) |
- |
- |
- |
(736,000) |
| Distributions to stockholders |
- |
- |
- |
(89,000) |
- |
- |
- |
- |
(89,000) |
| Foreign currency translation adjustments |
- |
- |
- |
- |
- |
- |
(23,000) |
- |
(23,000) |
| Stock issued in acquisition (Note 1) |
280,000 |
3,000 |
- |
- |
- |
- |
- |
- |
3,000 |
| Issuance of stock |
26,000 |
- |
163,000 |
- |
- |
(25,000) |
- |
- |
138,000 |
| . | |||||||||
| Balance - September 30, 1998 | 40,741,000 | 407,000 | 8,208,000 |
15,218,000 |
(3,643,000) |
(25,000) |
(23,000) |
- |
20,142,000 |
| Net loss |
- |
- |
- |
(498,000) |
- |
- |
- |
- |
(498,000) |
| Exercise of stock options (Note 12) |
2,000 |
- |
1,000 |
- |
- |
- |
- |
- |
1,000 |
| Issuance of restricted stock (Note 11) |
154,000 |
2,000 |
985,000 |
- |
- |
- |
- |
- |
987,000 |
| Acquisition of stock for treasury |
- |
- |
- |
- |
(798,000) |
- |
- |
- |
(798,000) |
| Foreign currency translation adjustments |
- |
- |
- |
- |
- |
- |
24,000 |
- |
24,000 |
| Issuance of stock |
87,000 |
1,000 |
417,000 |
- |
- |
- |
- |
- |
418,000 |
| Retirement of treasury stock |
(8,024,000) |
(80,000) |
(2,826,000) |
- |
2,906,000 |
- |
- |
- |
- |
| Repayment of stock subscriptions |
- |
- |
- |
- |
- |
25,000 |
- |
- |
25,000 |
| Tax benefit of stock options exercised |
- |
- |
92,000 |
- |
- |
- |
- |
- |
92,000 |
| Issuance of stock options (Note 12) |
- |
- |
72,000 |
- |
- |
- |
- |
- |
72,000 |
| Unrealized gain on investments |
- |
- |
- |
- |
- |
- |
- |
1,854,000 |
1,854,000 |
| Balance - September 30, 1999 |
32,960,000 |
$330,000 |
$6,949,000 |
$14,720,000 |
$(1,535,000) |
$- |
$1,000 |
$1,854,000 |
$22,319,000 |
| Net income |
- |
- |
- |
5,550,000 |
- |
- |
- |
- |
5,550,000 |
| Exercise of stock options (Note 12) |
440,000 |
4,000 |
70,000 |
- |
- |
- |
- |
- |
74,000 |
| Issuance of restricted stock (Note 11) |
175,000 |
2,000 |
1,037,000 |
- |
- |
- |
- |
- |
1,039,000 |
| Acquisition of stock for treasury |
- |
- |
- |
- |
(321,000) |
- |
- |
- |
(321,000) |
| Foreign currency translation adjustments |
- |
- |
- |
- |
- |
- |
(17,000) |
- |
(17,000) |
| Issuance of stock |
5,000 |
- |
15,000 |
- |
- |
- |
- |
- |
15,000 |
| Unrealized loss on investments |
- |
- |
- |
- |
- |
- |
- |
(1,108,000) |
(1,108,000) |
| Balance - September 30, 2000 | 33,580,000 | $336,000 | $8,071,000 | $20,270,000 | $(1,856,000) |
$- |
$(16,000) |
$746,000 |
$27,551,000 |
|
======== |
====== |
======== |
========= |
========= |
========= |
========= |
======== |
========= |
|
| See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements |
|
| VSI Holdings, Inc. and Subsidiaries | |
|
Consolidated Statement of Cash Flows |
|
|
|
|||
|
2000 |
1999 |
1998 |
|
| Cash Flows from Operating Activities | |||
| Net income (loss) |
$5,550,000 |
$ (498,000) |
$9,054,000 |
| Adjustments to reconcile net income (loss) to net cash from operating activities: | |||
| Depreciation and amortization |
5,817,000 |
5,669,000 |
4,865,000 |
| Write-off of goodwill |
- |
2,154,000 |
- |
| Bad Debt expense |
526,000 |
- |
- |
| Equity in losses of unconsolidated investee |
1,515,000 |
400,000 |
295,000 |
| Noncash retirement plan contribution |
- |
229,000 |
- |
| Noncash proceeds from sale of subsidiary |
- |
- |
(736,000) |
| Deferred income taxes |
(237,000) |
(347,000) |
244,000 |
| (Gain) Loss on sale of property, plant and equipment |
(168,000) |
- |
32,000 |
| Issuance of stock options |
- |
72,000 |
83,000 |
| Write-off of assets |
516,000 |
421,000 |
- |
| Changes in operating assets: | |||
| Trade accounts receivable |
(24,090,000) |
198,000 |
(12,881,000) |
| Inventory |
(28,000) |
(1,000) |
381,000 |
| Accumulated costs of uncompleted programs |
1,139,000 |
(1,663,000) |
(555,000) |
| Other current assets |
(152,000) |
556,000 |
2,361,000 |
| Prepaid/accrued federal income tax |
3,590,000 |
(5,921,000) |
4,562,000 |
| Trade accounts payable |
5,027,000 |
6,526,000 |
2,000,000 |
| Accrued liabilities |
1,691,000 |
488,000 |
1,607,000 |
| Advances from customers for uncompleted projects |
(2,670,000) |
800,000 |
1,177,000 |
|
Net cash provided by (used in) operating activities |
(1,974,000) |
9,083,000 |
12,489,000 |
| Cash Flows from Investing Activities | |||
| Additions to property, plant and equipment |
(7,165,000) |
(3,061,000) |
(13,506,000) |
| Proceeds from sale of property, plant and equipment |
608,000 |
- |
2,000 |
| Additions to notes receivable and advances |
(253,000) |
(146,000) |
(1,138,000) |
| Payments on notes receivable and advances |
- |
1,200,000 |
9,708,000 |
| Investments in affiliates |
- |
- |
(2,925,000) |
| Investment in available-for-sale securities |
(50,000) |
(2,450,000) |
- |
| Purchase of other investments |
(941,000) |
(7,150,000) |
(307,000) |
|
Net cash used in investing activities |
(7,801,000) |
(11,607,000) |
(8,166,000) |
| Cash Flows from Financing Activities | |||
| Principal payments on long-term debt |
(532,000) |
(918,000) |
(164,000) |
| Proceeds from long-term debt |
- |
2,621,000 |
3,580,000 |
| Principal payments on related party debt |
(1,080,000) |
(18,000) |
- |
| Proceeds from related party debt |
5,201,000 |
160,000 |
11,055,000 |
| Net borrowings on notes payable |
6,788,000 |
3,287,000 |
1,994,000 |
| Proceeds from issuance of stock |
89,000 |
190,000 |
211,000 |
| Distributions to stockholders |
- |
- |
(20,748,000) |
| Acquisition of treasury stock |
(321,000) |
(798,000) |
- |
| Proceeds from payment of stock subscription |
- |
25,000 |
- |
| Redemption of common stock |
- |
(1,960,000) |
- |
|
Net cash provided by (used in) financing activities |
10,145,000 |
2,589,000 |
(4,072,000) |
| Effect of Exchange Rate Changes on Cash |
(17,000) |
24,000 |
(23,000) |
| Net Increase in Cash |
353,000 |
89,000 |
228,000 |
| Cash - Beginning of year |
552,000 |
463,000 |
235,000 |
| Cash - End of year |
$905,000 |
$552,000 |
$463,000 |
|
========= |
========= |
========= |
|
| See Accompanying Summary of Accounting Policies and Notes to Consolidated Financial Statements |
|
| VSI Holdings, Inc. and Subsidiaries | |
|
Notes to Consolidated Financial
Statements |
|
| Note 1 - | Organization of the Company and Basis of Presentation |
|
The accompanying consolidated financial statements include the accounts of VSI Holdings, Inc. (the "Company"), its wholly owned subsidiaries, consisting of Advanced Animations, Inc., Vispac, Inc., Visual Services, Inc., PSG International, Inc. and its majority owned subsidiary, eCity Studios, Inc. Intercompany balances and transactions have been eliminated in consolidation. Advanced Animations, Inc. designs and manufactures product simulators and animatronic displays. Customers are primarily from the retail and entertainment industry throughout the world. Vispac, Inc. provides administrative and promotional services, warehousing and packaging operations and call center operations predominantly for North American automobile manufacturers. Visual Services, Inc. is a broad-based provider of educational curriculums and product training, interactive technology-based Distance Learning Systems, product launches, web site development, direct response and site-based marketing, and change process and cultural change consulting. Customers are primarily North American automobile manufacturers. During the year ended September 30, 2000, the Company, in connection with Oz Entertainment Co. (see Note 3), formed eCity Studios, Inc., a Corporation in which VSI Holdings, Inc. acquired a 70% interest in the stock. eCityStudios, Inc. has been included in the consolidated financial statements. eCity Studios, Inc. provides web-site development consulting to customers throughout North America. PSG International, Inc. provides curriculum development and product training to automobile manufacturers at the dealership level throughout Canada, Australia, New Zealand and Taiwan. PSG International, Inc. was formed during the year ended September 30, 1998 when the Company completed the purchase of the assets of an unrelated company. The total purchase price was $4,543,625 and resulted in goodwill of $4,484,000. The Company issued 280,000 shares of common stock valued at $7.00 per share, with the balance of $2,583,625 paid in cash. As part of the PSG International, Inc. purchase agreement, the shares issued to the seller were subject to a "put option" in which the seller had the option to sell the shares back to the Company in April 1999 for $2,100,000 ($7.50 per share). During the year ended September 30, 1999, the "put option" was exercised and the shares were subsequently retired to treasury stock. |
|
|
|
| Note 2 - | Significant Accounting Policies |
|
Revenue Recognition - Visual Services, Inc., Vispac, Inc., PSG International, Inc., and eCity Studios, Inc. recognize revenue over the period of the contract as individually identifiable phases of contracts are completed. Amounts recognized are accumulated in unbilled accounts receivable until billed in accordance with contract terms. Advanced Animations, Inc. records revenue on display contracts of varying duration on the basis of the Company's estimates of the percentage of completion of individual contracts. A percentage of the contract price, determined by the ratio of incurred costs to total estimated costs, is included in revenue and the incurred costs are charged against this revenue. Revisions in cost and profit estimates during the course of the work 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. Cash in Escrow - Certain amounts received from clients in advance had been restricted and held in escrow until costs related to a specific job are incurred by the Company. During the year ended September 30, 2000, the escrow arrangement was terminated. Inventory - Inventory, which consists of raw materials and supplies, is recorded at the lower of cost, determined on the specific unit basis, or market. Accumulated Costs of Uncompleted Programs - Accumulated costs of uncompleted programs consist of costs accumulated on various service-related contracts of Visual Services, Inc. The accumulated costs are included as a current asset, as they consist of ongoing job costs, which will be recorded as cost of revenue against the appropriate revenue recognized within the next fiscal year. At September 30, 2000 and 1999, indirect contract costs amounting to $733,000 and $720,000, respectively, were capitalized and included in accumulated costs. Property, Plant and Equipment - Property, plant and equipment are recorded at cost. Depreciation is computed using accelerated and straight-line methods over the estimated useful lives of the assets. Amortization of leasehold improvements is computed on the straight-line method over the estimated useful lives of the assets or the lease term. Costs of maintenance and repairs are charged to expense when incurred. Production costs, representing the direct materials, labor, overhead costs and interest associated with self-constructed assets, are capitalized during construction. Once completed and placed in service, the assets are reclassified to equipment and depreciated over the appropriate depreciable lives. Note 2 - Significant Accounting Policies (Continued) Total amortization expense amounted to $427,000, $422,000 and $198,000 for the years ended September 30, 2000, 1999 and 1998, respectively. Income Taxes - Deferred tax assets and liabilities are recognized based on the difference between financial statement carrying amounts and income tax bases of assets and liabilities using currently enacted income tax rates. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the year in deferred tax assets and liabilities.
Earnings per Share - Earnings per share is computed using the weighted average number of shares outstanding. Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year, without regard to stock options and restricted stock awards outstanding. In the computation of fully diluted earnings per share, the treasury stock method of determining weighted average shares is required, which assumes the exercise of existing stock options and awards and the repurchase of shares with the proceeds, if such a computation has a dilutive effect. Note 2 - Significant Accounting Policies (Continued) Impairment of Long-Lived Assets - The Company reviews long-lived assets for impairment when circumstances indicate the carrying amount of an asset may not be recoverable. An impairment is recognized when the sum of undiscounted estimated future cash flows expected to result from the use of the asset is less than the carrying value. Investments - The Company's securities investments that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings.
The Company's investment in nonmarketable securities is stated at cost. Investment in Partnerships - Investments in partnerships are accounted for using the equity method. Comprehensive Income - Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Certain changes in assets and liabilities, however, such as unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments, are reported as a direct adjustment to the equity section of the balance sheet. Such items, along with net income, are considered components of comprehensive income . Note 2 - Significant Accounting Policies (Continued) Use of Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. For example, the Company recognizes certain revenue using the percentage of completion method, which requires the use of significant estimates. Actual results could differ from those estimates. Future Accounting Changes - In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101. The staff accounting bulletin summarizes certain of the staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. Any changes that may be required as a result of this bulletin are required to be implemented no later than the last fiscal quarter of the fiscal year beginning October 1, 2000. Management is finalizing its assessment of the impact this bulletin will have, if any, on the Company's financial statements. Reclassifications - The Company has made certain reclassifications to the statement of operations. These reclassifications had no impact on net income, earnings per share or stockholders' equity. |
| Note 3 - | Investments |
| The available-for-sale securities consist of the following: |
|
2000 |
1999 |
|
| 431,525 shares of Navidec, Inc. common stock (representing a less than 5 percent ownership interest). |
$ 3,344,000 |
$ 5,259,000 |
| 473,308 shares of eCollege.com common stock (representing a less than 5 percent ownership interest). |
3,787,000 |
- |
| Total investment in available-for-sale securities |
$ 7,131,000 |
$ 5,259,000 |
|
========= |
======== |
|
|
| Note 3 - | Investments (Continued) |
|
During the year ended September 30, 2000, upon a public offering by eCollege.com, the Company converted its nonmarketable investment in eCollege.com into 468,808 shares of common stock. Upon the public offering, the Company purchased an additional 4,500 shares of common stock. Unrealized gains on the available-for-sale securities are included as a separate component of stockholders' equity, net of any related tax effect. At September 30, 2000 and 1999, gross unrealized holding gains on available-for-sale securities amounted to $1,131,000, and $2,809,000, respectively. As of December 22, 2000, the market value of the available-for-sale securities was approximately $2,737,000, and the gross unrealized holding loss was approximately $3,273,000. The Company's investment in partnerships and nonmarketable securities consists of the following: |
|
|
2000 |
1999 |
|
| KC Investors, L.P. |
$ 2,812,000 |
$ 3,470,000 |
| Corporate Eagle Five, L.L.C. |
540,000 |
762,000 |
| Visual Learning Systems, L.L.C. |
(124,000) |
32,000 |
| Performance Planning, L.L.C. |
462,000 |
- |
| Total investment in partnerships |
3,690,000 |
4,264,000 |
| Nonmarketable equity securities |
500,000 |
3,500,000 |
|
Total investment in partnership |
$ 4,190,000 |
$ 7,764,000 |
|
and nonmarketable securities |
========= |
======== |
|
The investment in partnerships consists of several partnership
investments that have been accounted for under the equity method.
The investment in KC Investors, L.P. (KCI) represents an approximate
15 percent interest in the partnership. KCI was formed as an
investment partnership to fund the continuing development of
the Oz Entertainment Company, a corporation in which KCI holds
a majority interest. The Oz Entertainment Company is a development
stage company engaged in the early stages of development of a
theme park and resort in Kansas based on the 1939 MGM film, "The
Wizard of Oz".
CLT Associates, L.P. (CLT), a partnership controlled by the majority stockholder of the Company, owns an additional 6 percent interest in KC Investors, L.P. and a direct interest in preferred stock of the Oz Entertainment Company. The investment in nonmarketable securities at September 30, 2000 consists of 1,342 shares of senior preferred stock in Oz Entertainment Company, a corporation in which KCI (a partnership investment of the Company) holds a majority interest. The investment in nonmarketable securities at September 30, 1999 consisted of 100,014 shares of convertible preferred stock in eCollege.com. |
| Note 4 - | Property, Plant and Equipment |
| Property, plant and equipment consist of the following: |
|
2000 |
1999 |
Depreciable Life - Years |
|
| Land and land improvements | $1,286,000 | $1,286,000 | - |
| Building | 8,171,000 | 8,171,000 | 18-39 |
| Furniture, fixtures and equipment | 38,547,000 | 35,539,000 | 5-10 |
| Leasehold improvements | 3,810,000 | 3,808,000 | 18-39 |
| Production costs | - | 1,250,000 | - |
| Vehicles | 960,000 | 2,113,000 | 5 |
|
Total |
52,774,000 | 52,167,000 | |
| Less accumulated depreciation and amortization |
30,380,000 |
30,592,000 |
|
|
Net carrying amount |
$22,394,000 | $21,575,000 | |
|
========= |
========= |
|
|
| Note 4 - | Property, Plant and Equipment (Continued) |
|
Depreciation expense amounted to $5,390,000, $5,668,000 and $4,666,000 for the years ended September 30, 2000, 1999 and 1998, respectively. During the year ended September 30, 2000, a touring exhibit was deemed to be impaired and written down to fair value. Fair value was determined by estimating future cash inflows from the exhibit. The Company estimated that there would be no future net cash flows and recorded an impairment loss of $516,000 (included in operating expenses) for the year ended September 30, 2000. During the year ended September 30, 1999, several customized trailers with electronic equipment, along with specialized tents used for specific jobs, were deemed to be impaired and written down to their fair value. Fair value, which was determined by estimating the future cash inflows of such assets, exceeded their carrying value by $421,000. An impairment loss of that amount (included in operating expenses) has been charged to operations for the year ended September 30, 1999. |
| Note 5 - | Notes Payable |
| The Company has several lines of credit, as follows: |
|
2000 |
1999 |
||
| Bank line of credit permitting borrowings up to $32,000,000 at .50 percent below the bank's prime rate (9.50 percent at September 30, 2000). Borrowings equal to or greater than $500,000 can be made for fixed periods of time at a fixed rate equal to LIBOR plus 1.50 percent (LIBOR at September 30, 2000 was 6.62 percent). Collateralized by all assets of the Company and expiring in March 2001. | $24,434,000 | $22,413,000 | |
| Bank line of credit permitting borrowings up to $5,000,000 at .50 percent below the bank's prime rate (9.50 percent at September 30, 2000). Borrowings equal to or greater than $500,000 can be made for fixed periods of time at a fixed rate equal to LIBOR plus 1.50 percent (LIBOR at September 30, 2000 was 6.62 percent). Collateralized by all assets of the Company and expiring in March 2002 | 4,900,000 | 3,750,000 | |
|
|
|||
| Note 5 - | Notes Payable (Continued) | ||
| Checks written but not yet presented to the bank. Upon presentation to the bank, additional borrowings will be made on the line of credit. The Company policy is to reflect these checks as additional amounts payable to the bank | 5,880,000 | 2,263,000 | |
|
Total notes payable to bank |
$35,214,000 | $28,426,000 | |
| ========= | ========= | ||
|
The loan agreements contain certain covenants requiring that, among other things, the Company maintain certain levels of net worth and working capital and that the ratio of total liabilities to net worth, debt service ratio and current ratio do not exceed certain amounts. Notes payable to related parties consists of the following: |
|
2000 |
1999 |
||
| Notes payable to stockholders of VSI Holdings, Inc., unsecured, bearing interest at 7.00 percent and due December 31, 2002. The notes are subordinated to all bank debt. |
$12,337,000 |
$11,636,000 |
|
| Note payable to a partnership in which the Company's controlling stockholder owns 100 percent through direct and indirect ownership. The unsecured note is due on demand and bears interest at 7.00 percent. |
2,920,000 |
- |
|
| Note payable to a stockholder, unsecured, bearing interest at 7.00 percent and due on demand. |
500,000 |
- |
|
|
Total Less current portion Long-term portion |
15,757,000 3,420,000 $12,337,000 |
11,636,000 - $11,636,000 |
|
|
========== |
========== |
||
| The weighted-average interest rate on short-term notes payable was 8.70 percent and 6.90 percent as of September 30, 2000 and 1999, respectively. | |||
| Note 6 - | Long-term Debt |
| Long-term debt consists of the following: |
|
2000 |
1999 |
||
| Mortgage payable to bank, bearing interest at the bank's prime rate (9.50 percent at September 30, 2000), due in monthly installments of $21,765 including interest, with a final principal payment due on September 1, 2004. The mortgage is collateralized by the related land and building with a net book value of $2,768,000 at September 30, 2000 |
2,352,000 |
2,400,000 |
|
| Mortgage payable to bank, bearing interest at 6.30 percent, due in monthly installments of $18,199 including interest, with a final principal payment due on October 8, 2005. The mortgage is collateralized by the related land and building with a net book value of $3,355,000 at September 30, 2000 |
2,349,000 |
2,415,000 |
|
| Term loan payable to bank, bearing interest at 6.52 percent, due in monthly installments of $33,724 including interest with the final payment due October 8, 2001. The loan is collateralized by all assets of the Company |
390,000 |
756,000 |
|
| Mortgage payable to bank, bearing interest at 8.17 percent, due in monthly installments of $22,201 including interest, with a final principal payment due on June 4, 2004. The mortgage is collateralized by the related land and building with a net book value of $691,000 at September 30, 1999 |
2,553,000 |
2,605,000 |
|
|
Total Less current portion Long-term portion |
7,644,000 552,000 $7,092,000 |
8,176,000 516,000 $7,660,000 |
|
|
======== |
======== |
||
|
|
| Note 6 - | Long-term Debt (Continued) |
| Estimated principal payments due on the long-term debt are as follows: | |
|
|
Amount |
|
|
$552,000 |
|
|
246,000 |
|
|
229,000 |
|
|
4,586,000 |
|
|
93,000 |
|
|
1,938,000 |
|
Total |
$7,644,000 |
|
======== |
| Note 7 - | Commitments and Contingencies |
|
Lease Commitments - The Company utilizes operating leases for equipment, warehouses and operating facilities. For most locations, the Company pays taxes, insurance and maintenance costs. Lease terms generally range from one to six years with renewal options for additional three- to five-year periods. The Company leases one of its primary operating facilities from a partnership, of which the Company's controlling stockholder owns 100 percent through direct and indirect ownership. The minimum lease payments for the remaining years under the above leases are as follows: |
|
|
Related Party |
Other |
Total |
|
|
$551,000 |
$4,102,000 |
$4,653,000 |
|
|
623,000 | 3,791,000 | 4,414,000 |
|
|
638,000 | 1,759,000 | 2,397,000 |
|
|
638,000 | 121,000 | 759,000 |
|
|
638,000 | 30,000 | 668,000 |
|
|
797,000 | - | 797,000 |
|
Total |
$3,885,000 | $9,803,000 | $13,688,000 |
|
======== |
======== |
========= |
|
|
| Note 7 - | Commitments and Contingencies (Continued) |
| The Company remains the guarantor of the operating leases of BKNT Retail Stores, Inc. (see Note 14). The sole stockholder of BKNT Retail Stores, Inc. has pledged 216,750 shares of VSI Holdings, Inc. as collateral relating to the lease commitments. The minimum lease payments for the remaining years under these leases are as follows: | |
| Years Ending September 30 |
Amount |
| 2001 | 322,000 |
| 2002 | 88,000 |
| 2003 | 25,000 |
|
Total |
$435,000 |
| ======== |
| Rent expense was as follows for the years ended September 30: |
|
2000 |
1999 |
1998 |
|
| Related party |
$551,000 |
$551,000 |
$551,000 |
| Other |
3,133,000 |
3,169,000 |
4,176,000 |
|
Total |
$3,684,000 |
$3,720,000 |
$4,727,000 |
|
======== |
======== |
======== |
| Note 8 - | Income Taxes |
| The following is a summary of the deferred tax assets and liabilities at September 30, 2000 and 1999: |
|
2000 |
1999 |
|
| Deferred tax assets: | ||
| Depreciation and amortization |
$1,050,000 |
$991,000 |
| Net operating loss carryforwards |
- |
36,000 |
| Accrued expenses not deductible for tax purposes |
900,000 |
670,000 |
| Losses from partnership investments - Equity method |
405,000 |
180,000 |
|
Total deferred tax assets |
2,355,000 |
1,877,000 |
| Deferred tax liabilities - Unrealized gain from investments |
(385,000) |
(955,000) |
|
Net deferred tax asset before valuation allowance |
1,970,000 |
922,000 |
| Valuation allowance |
(241,000) |
- |
|
Net deferred tax asset |
$ 1,729,000 |
$ 922,000 |
|
======= |
======== |
| The provision for income taxes consists of the following: |
|
2000 |
1999 |
1998 |
|
| Current | $3,748,000 | $278,000 | $ 4,643,000 |
| Deferred | (237,000) | (347,000) | 244,000 |
|
Total provision for (benefit from) income taxes |
$3,511,000 | $(69,000) | $4,887,000 |
|
======= |
======== |
======= |
|
|
| Note 8 - | Income Taxes (Continued) |
| A reconciliation of taxes on income from continuing operations based on the statutory federal income tax rate to the provision for income taxes is as follows: | |
|
2000 |
1999 |
1998 |
|
| Tax computed at statutory federal income tax rate | $3,080,000 | $(193,000) | $4,793,000 |
| Nondeductible expenses | 196,000 | 164,000 | 92,000 |
| Change in valuation allowance |
241,000 |
- |
- |
| Adjustments to prior year taxes and other |
(6,000) |
(40,000) |
2,000 |
|
Total provision for (benefit from) income taxes |
$ 3,511,000 |
$(69,000) |
$4,887,000 |
|
======== |
======== |
======= |
A valuation allowance has been established due to the uncertainty
of the Company being able to realize certain losses from partnerships
for tax purposes.
| Note 9 - | Cash Flows |
|
Cash paid during the years ended September 30, 2000, 1999 and 1998 for interest amounted to $3,589,000, $3,013,000 and $2,123,000, respectively. Cash paid for income taxes in those years was $158,000, $6,199,000 and $6,000, respectively. The Company had the following noncash transactions: · During 2000, the Company received 1,342 shares of senior preferred stock in Oz Entertainment Company in exchange for a reduction of an accounts receivable due from Oz Entertainment Company of $500,000. · During the years ended September 30, 2000 and 1999, the Company issued 174,713 and 154,126 shares of stock under its restricted stock compensation plan, respectively (see Note 11). As a result, the Company reduced the accrual for stock compensation and recorded additional stock and paid-in capital totaling $1,039,000 and $987,000, respectively. · During 1998, the Company purchased PSG International,
Inc. As part of the purchase price, the Company issued 280,000
shares of common stock with a value at the date of purchase of
$1,960,000 (see Note 1). · During 1998, the Company received 144,000 shares of its own common stock valued at $736,000 as proceeds on the sale of the discontinued operations. |
| Note 10 - | Self-insurance Plan |
| The Company is substantially self-insured for employee medical and dental claims. The policy year of the plan is October 1 to September 30. The Company has purchased stop-loss insurance for individual claims that exceed $75,000 annually. The Company has estimated the amount of incurred but not reported claims (IBNR) based on historical claims reported after year end and has recorded an accrual to the extent that the estimated IBNR exceeds any pre-funded amounts. |
| Note 11 - | Stock Compensation |
| In December 1997, the Board of Directors approved a restricted stock compensation plan for certain key employees. Under the plan, key employees are allocated the right to receive stock, subject to forfeiture if employment terminates prior to the end of prescribed periods ranging from one to three years. During the years ended September 30, 2000, 1999 and 1998, the Company awarded key employees the right to receive shares. The market value of these shares will be recognized and charged as compensation expense as earned over the future service period. The following is a summary of the activity in the restricted stock compensation plan: |
|
|
|
|
||||
|
Unissued Shares |
Unrecognized Compensation |
Unissued Shares |
Unrecognized Compensation |
Unissued Shares | Unrecognized Compensation | |
| Share rights outstanding: | ||||||
| Balance - Beginning of year |
381,525 |
$663,000 |
462,375 |
$ 1,604,000 |
- |
$ - |
| Rights awarded during year |
51,000 |
149,000 |
102,298 |
463,000 |
462,375 |
2,961,000 |
| Rights forfeited during year |
(26,805) |
(161,000) |
(29,022) |
(188,000) |
- |
- |
| Shares issued during year |
(174,713) |
- |
(154,126) |
- |
- |
- |
| Compensation recognized |
- |
(468,000) |
- |
(1,216,000) |
- |
(1,357,000) |
| Balance - End of year |
231,007 |
$183,000 |
381,525 |
$663,000 |
462,375 |
1,604,000 |
|
======= |
======== |
====== |
======== |
====== |
======== |
|
| Vested, unissued shares - End of year |
- |
- |
||||
|
|
| Note 12 - | Stock Options |
|
The Company issued options for the Company's common stock in the following arrangements:
Other Options The Company has stock options outstanding or issuable for the benefit of employees and directors under the following plans:
Note 12 - Stock Options (Continued)
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation. Accordingly, no compensation cost has been recognized for the stock option plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant date, the Company's income from continuing operations for 2000, 1999 and 1998 would have been reduced by $386,000 ($.01 per share), $236,000 ($.01 per share), and $100,000 (no effect on earnings per share), respectively. |
|
|
| Note 12 - | Stock Options (Continued) |
| Information regarding these fixed-price option plans for the years ended September 30, 2000, 1999 and 1998 are as follows: |
|
|
|
|
||||
|
Shares |
Weighted |
Shares |
Weighted |
Shares |
Weighted Average Exercise Price |
|
| Options outstanding - Beginning of year |
1,221,286 |
$3.91 |
1,121,710 |
$3.64 |
600,000 |
$0.38 |
| Canceled |
(92,166) |
5.92 |
(51,000) |
7.19 |
- |
- |
| Granted |
168,000 |
3.66 |
152,666 |
6.81 |
586,000 |
6.28 |
| Exercised |
(440,000) |
0.17 |
(2,090) |
0.50 |
(64,290) |
0.71 |
| Options outstanding - End of year |
857,120 |
5.57 |
1,221,286 |
3.91 |
1,121,710 |
3.64 |
| Option price range - End of year |
$.50 to $8.70 |
$.15625 to $8.70 |
$.15625 to $8.70 |
|||
| Option price range for exercised shares |
$.15625 to $.50 |
$.50 |
$.50 to $.75 |
|||
| Options available for future grants - End of year |
1,249,000 |
1,417,000 |
570,000 |
|||
| Weighted average fair value of options granted during the year |
$0.57 |
$1.22 |
$1.13 |
|||
| The following table summarizes information about fixed price stock options outstanding at September 30, 2000: | |
|
|
|
||||
|
Range of |
Number |
Weighted |
Weighted |
Number |
Weighted |
|
$ .50 to .55 |
73,620 |
1 year |
.53 |
73,620 |
.53 |
|
3.25 to 4.00 |
149,000 |
5 years |
3.40 |
8,400 |
3.25 |
|
5.20 to 6.70 |
521,000 |
2 years |
6.28 |
247,500 |
6.38 |
|
7.90 to 8.70 |
113,500 |
2 years |
8.42 |
63,000 |
8.60 |
|
.50 to 8.70 |
857,120 |
5.57 |
392,520 |
5.57 |
|
|
======= |
====== |
||||
|
|
| Note 13 - | Segment Information and Major Customers |
|
The Company's operations are classified into two major business segments: marketing services and entertainment. The marketing services segment performs administrative and data management services, creates, prints and prepares promotional materials and performs other marketing services. In addition, the marketing services segment provides product and leadership training and creates and produces video training products, industrial theater and meetings. The entertainment segment designs and manufactures animated displays for the retail and entertainment industry throughout the world. In addition, the entertainment segment operates and administers touring animated educational displays. The Company had sales from foreign activities of $5,422,000, $5,269,000 and $5,375,000 for the years ended September 30, 2000, 1999 and 1998, respectively. Summarized financial information by each of the Company's two industry segments for the three-year period ended September 30, 2000 is as follows: |
|
2000 |
1999 |
1998 |
|
| Revenue: | |||
| Marketing services sector |
$182,403,000 |
$134,295,000 |
$155,681,000 |
| Entertainment sector |
4,852,000 |
9,065,000 |
7,477,000 |
|
Consolidated total |
$187,255,000 |
$143,360,000 |
$163,158,000 |
|
========== |
========== |
========== |
|
| Income (loss) from operations: | |||
| Marketing services sector |
$17,524,000 |
$486,000 |
$14,834,000 |
| Entertainment sector |
(3,240,000) |
2,352,000 |
1,584,000 |
| Equity in earnings of unconsolidated investee |
(1,515,000) |
(400,000) |
- |
| Interest expense |
(3,708,000) |
(3,005,000) |
(2,320,000) |
|
Consolidated income (loss) from operations before income taxes |
$9,061,000 |
$(567,000) |
$14,098,000 |
|
======== |
========= |
========= |
|
|
| Note 13 - | Segment Information and Major Customers (Continued) |
|
2000 |
1999 |
1998 |
|
| Identifiable assets: | |||
| Marketing services sector |
$110,952,000 |
$91,175,000 |
$83,848,000 |
| Entertainment sector |
5,177,000 |
7,127,000 |
5,707,000 |
|
Consolidated total |
$116,129,000 |
$98,302,000 |
$89,555,000 |
|
========= |
========= |
========= |
|
| Depreciation and amortization: | |||
| Marketing services sector |
$4,173,000 |
$7,408,000 |
$4,564,000 |
| Entertainment sector |
1,644,000 |
415,000 |
301,000 |
|
Consolidated total |
$5,817,000 |
$7,823,000 |
$4,865,000 |
|
======== |
======== |
======== |
|
| Capital expenditures: | |||
| Marketing services sector |
$4,658,000 |
$2,736,000 |
$11,848,000 |
| Entertainment sector |
2,507,000 |
325,000 |
1,658,000 |
|
Consolidated total |
$7,165,000 |
$3,061,000 |
$13,506,000 |
|
======== |
========= |
======== |
| The following companies are considered major customers of the marketing service sector and comprise 10 percent or greater of the Company's net sales: | |
| 2000 | 1999 | 1998 | |
| Customer A | 39% | 32% | 25% |
| Customer B | 32 | 23 | 44 |
| Customer C | 3 | 10 | 9 |
|
Total |
74% | 65% | 78% |
| === | === | === |
| Note 14 - | Discontinued Operations |
|
On June 30, 1998, the Company adopted a formal plan to sell
the stock of its wholly owned subsidiaries, BKNT Retail Stores,
Inc., J.D. Dash, Inc. and BKNT, Inc. to Note 14 - Discontinued Operations (Continued) Operating results of BKNT Retail Stores, Inc., J.D. Dash, Inc. and BKNT, Inc. for the nine months ended June 30, 1998 are shown separately as discontinued operations in the accompanying statement of operations. Net sales of BKNT Retail Stores, Inc., J.D. Dash, Inc. and BKNT, Inc. for the year ended September 30, 1998 was approximately $12,190,000 and has not been included in net sales in the accompanying statement of operations. |
| Note 15 - | Quarterly Results (unaudited) |
| The Company believes that the following information reflects all normal recurring adjustments necessary for a fair presentation of the information for the periods presented. The following tables contain selected unaudited consolidated statements of income for each quarter for fiscal 2000 and 1999. The operating results for any quarter are not necessarily indicative of results for any future period. |
|
|
||||
|
|
|
|
|
|
|
|
||||
| Revenue |
$58,830 |
$45,636 |
$44,689 |
$38,100 |
| Operating Income |
4,766 |
5,022 |
3,897 |
2,130 |
| Net Income (Loss) |
1,048 |
2,195 |
1,451 |
856 |
| Net Income per common share: | ||||
| Basic |
0.03 |
0.07 |
0.04 |
0.03 |
| Fully diluted |
0.03 |
0.07 |
0.04 |
0.03 |
| Weighted average shares outstanding (a): | ||||
| Basic |
33,172 |
33,198 |
33,261 |
32,761 |
| Fully diluted |
33,383 |
33,397 |
33,430 |
32,972 |
|
|
| Note 15 - | Quarterly Results (unaudited) (Continued) |
|
|
||||
|
|
|
|
|
|
|
|
||||
| Revenue |
$39,071 |
$28,439 |
$40,513 |
$35,337 |
| Operating Income (Loss) |
173 |
(2,747) |
3,139 |
2,789 |
| Net Income (Loss) |
(1,125) |
(2,327) |
1,444 |
1,510 |
| Net Income (loss) per common share: | ||||
| Basic |
(0.03) |
(0.07) |
0.04 |
0.05 |
| Fully diluted |
(0.03) |
(0.07) |
0.04 |
0.05 |
| Weighted average shares outstanding (a): | ||||
| Basic |
32,631 |
32,623 |
32,916 |
32,822 |
| Fully diluted |
32,631 |
32,623 |
33,602 |
33,448 |
| (a) Earnings per common share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per common share information may not equal the annual earnings per common share. | |
| Note 16 - | Fair Values of Financial Instruments |
|
A summary of the fair values of financial instruments, as well as the methods and significant assumptions used to estimate fair values, is as follows: Short-term Financial Instruments - The fair value of
short-term financial instruments, including cash, trade accounts
receivable and payable, accrued liabilities and advances from
customers, approximate the carrying amounts in the accompanying
consolidated financial statements due to the short maturity of
such instruments. Marketable Securities - The carrying amount of investments in available-for-sale securities is equal to their fair values based on quoted market prices. Note 16 - Fair Values of Financial Instruments (Continued) Investments - Investments consist of investments in a privately held corporation and partnership interests. There is no market for the Company's investment in the privately held corporation or its investment in partnerships. It was impracticable to estimate the fair values of those investments. The following is a summary of combined pertinent information about the investment in Oz Entertainment Company and the Company's investment in K.C. Investors, L.P.: |
|
2000 |
1999 |
|
| Total assets |
$26,017,000 |
$23,718,000 |
| Total equity |
11,085,000 |
15,660,000 |
| Total revenue |
- |
- |
| Net loss |
(6,189,000) |
(4,993,000) |
|
Notes Receivable and Advances, Notes Payable to Bank and Long-term Debt - The fair values approximate the carrying amounts since the note rates approximate rates currently available to the Company for notes with similar terms and maturities. Notes Payable to Related Parties - The estimated fair value of the note payable to related parties at September 30, 2000 and 1999 was approximately $15,064,000 and $11,636,000, respectively. The estimated fair value was determined using rates currently available to the Company. |
|
| Note 17 |
Litigation As of September 30, 2000 the Company has pending litigation with a former employee and stockholder who is seeking damages for wrongful discharge and denial of the fair value for Company stock options. Management feels the case is without merit and plans to vigorously defend the lawsuit. At this time, the case is in preliminary stages and the outcome is not determinable, although management believes the outcome will not have a material effect on the Company's financial position. |
|
|
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K.
(a) Financial Statements, Financial Statement Schedules and Exhibits.
1. Consolidated Financial Statements of VSI Holdings, Inc. and subsidiaries and Independent Auditors' Report are filed herewith as a separate section of this report.
2. All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission have been omitted because such schedules are not required under the related instructions or are inapplicable or because the information required is included in the Consolidated Financial Statements or notes thereon.
3. Exhibits: * signifies exhibit incorporated herein by reference
+ signifies exhibit filed herewith
* 3.1 Articles of Incorporation of the Registrant dated April 21, 1997, together with Articles of Merger of Registrant and The Banker's Note, Inc. dated April 21, 1997, filed as Exhibit.3.1 to form 10-K for fiscal year ended September 30,1997.
* 3.2 By-Laws of the Registrant, amended and effective on September 12, 1997, filed as Exhibit.3.2 to form 10-K for fiscal year ended September 30,1997.
* 4.1 VSI Holdings, Inc. 1997 Incentive Stock Option Plan as approved at the Annual Shareholders' Meeting held on April 21, 1997, filed as Exhibit.4.1 to form 10-K for fiscal year ended September 30,1997.
* 4.2 VSI Holdings, Inc. 1997 Non-Qualified Stock Option Plan as approved at the Annual Shareholders' Meeting held on April 21, 1997, filed as Exhibit.4.2 to form 10-K for fiscal year ended September 30, 1997.
* 4.3 The Banker's Note, Inc. Independent Director Stock Option Plan as approved at the Annual Shareholders' Meeting held on June 23, 1989, filed as Exhibit.4.3 to form 10-K for fiscal year ended September 30, 1997.
* 4.4 The Banker's Note, Inc. 1986 Incentive Stock Option Plan as approved at the Annual Shareholders' Meeting held on June 16, 1986, filed as Exhibit 4.1 to Form 10-K for fiscal year ended September 30, 1996.
* 4.5 The Banker's Note, Inc. 1986 Non-Qualified Stock Option Plan as approved at the Annual Shareholders' Meeting held on June 16, 1986, filed as Exhibit 4.2 to Form 10-K for fiscal year ended September 30, 1996.
* 4.6 VSI Holdings, Inc. Restricted Stock Plan December 1, 1997 as approved at the annual shareholders meeting held on April 8, 1998, filed as Exhibit 4.6 to Form 10-K for fiscal year ended September 30, 1998.
* 4.7 VSI Holdings, Inc. Employee Stock Purchase Plan October 7, 1997 as approved at the annual shareholders meeting held on April 8, 1998, filed as Exhibit 4.7 to Form 10-K for fiscal year ended September 30, 1998..
* 4.8 Advanced Animations, Inc. Agreement and Plan of Merger dated February 7, 1997, filed as Exhibit 4.8 to Form 10-K for fiscal year ended September 30, 1998.
* 4.9 VISPAC, Inc. Agreement and Plan of Merger dated June 13, 1997, filed as Exhibit 4.9 to Form 10-K for fiscal year ended September 30, 1998.
* 4.10 Visual Services, Inc. Agreement and Plan of Merger dated September 24, 1997, filed as Exhibit 4.10 to Form 10-K for fiscal year ended September 30, 1998.
+ 21.1 List of Subsidiaries of the Registrant.
+ 23.1 Consent of Plante & Moran LLP, Independent Auditors.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
By: /s/ Steve Toth, Jr.
Steve Toth, Jr.,
President and
Chief Executive Officer
Date: January 12, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Steve Toth, Jr. Director, President and
January 12, 2001 Chief Executive Officer
Steve Toth, Jr.
/s/ Martin S. Suchik Director
January 12, 2001
Martin S. Suchik
/s/ Thomas W. Marquis Director, Treasurer, Secretary
January 12, 2001
Thomas W. Marquis Chief Accounting Officer,
and Principal Financial Officer
/s/ Robert Sui Director
January 12, 2001
Robert Sui
January 12, 2001
Harold Poling
January 12, 2001
Ralph Armijo
January 12, 2001
William James
Exhibit 21.1
LIST OF SUBSIDIARIES OF VSI HOLDINGS, INC.
Visual Services, Inc., a wholly owned Georgia corporation
Vispac, Inc., a wholly owned Georgia corporation
Advanced Animations, Inc., a wholly owned Georgia corporation
PSG International, Inc., a wholly owned Georgia corporation
Exhibit 23.1
We consent to the inclusion in this Annual Report on Form 10-K of our independent auditor's report dated December 22, 2000 on the financial statements of VSI Holdings, Inc. for the year ended September 30, 2000.
PLANTE & MORAN, LLP
Ann Arbor, Michigan
January 11, 2001
SIGNATURE AUTHORIZATION FOR ELECTRONIC FILING
(Regulation S-T, Sec. 232.302)
In connection with the Annual Report on Form 10-K of VSI Holdings, Inc. for the year ended September 30, 2000, we hereby authenticate, acknowledge or otherwise authorize the use of the Plante & Moran, LLP signature in typed form on our independent auditor's report dated December 22, 2000 and on the Consent of Independent Auditors dated January 11, 2001.
PLANTE & MORAN, LLP
Ann Arbor, Michigan
January 11, 2001
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