SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended March 31, 2002 |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from_______to_______ |
Commission File No. 1-12942
incorporation or organization) Identification No.) |
Bloomfield Hills, MI 48304-2263 |
For information regarding this filing, contact:
Peggy Toth, VP Investor Relations / Corporate Communications
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No ______
There were 33,415,780 shares of Common Stock, par value $.01 per share, outstanding at March 31, 2002, excluding 400,250 treasury shares.
Item 1. FINANCIAL STATEMENTS
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
2002 (Unaudited) | 2001 (Audited) | |
CURRENT ASSETS | ||
Cash | $ 2,785,000 | $ 4,719,000 |
Trade accounts receivable: | ||
Billed | 11,550,000 | 25,555,000 |
Unbilled | - | 5,674,000 |
Purchased receivables | 33,410,000 | 27,012,000 |
Notes receivable and advances | 238,000 | 167,000 |
Notes receivable - related party | 563,000 | - |
Inventory | 292,000 | 307,000 |
Accumulated costs of uncompleted programs | 2,489,000 | 2,822,000 |
Deferred tax asset | 5,115,000 | 1,574,000 |
Refundable federal income tax | 3,597,000 | 5,625,000 |
Other current assets | 1,307,000 | 1,239,000 |
Total Current Assets | 61,346,000 | 74,694,000 |
PURCHASED RECEIVABLES | 5,896,000 | 4,779,000 |
LONG-TERM PORTION OF NOTES RECEIVABLE - Related Parties | 341,000 | 1,065,000 |
PROPERTY,PLANT AND EQUIPMENT (NET) | 13,714,000 | 15,858,000 |
PROPERTY HELD FOR SALE | 608,000 | 3,310,000 |
DEFERRED TAX ASSET | - | 6,002,000 |
INVESTMENT IN AVAILABLE-FOR-SALE SECURITIES | 181,000 | 1,885,000 |
INVESTMENTS | 576,000 | 624,000 |
GOODWILL-NET | 641,000 | 855,000 |
Total Assets | $83,303,000 | $109,072,000 |
========= | =========== |
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
2002 (Unaudited) | 2001 (Audited) | |
CURRENT LIABILITIES | ||
Current portion of long-term debt | $ 4,754,000 | $ 7,102,000 |
Notes payable - Related party | 697,000 | 1,644,000 |
Trade accounts payable | 24,520,000 | 21,714,000 |
Notes payable to bank | 35,209,000 | 51,068,000 |
Accrued liabilities | 3,619,000 | 2,742,000 |
Advances from customers for uncompleted projects | 2,545,000 | 7,682,000 |
Total Current Liabilities | 71,344,000 | 91,952,000 |
LONG-TERM LIABILITIES | ||
Notes payable - Related parties | 12,119,000 | 11,993,000 |
Total Long-Term Liabilities | 12,119,000 | 11,993,000 |
Preferred stock - $1.00 par value per share, 2,000,000 shares authorized, no shares issued | - | - |
Common stock - $.01 par value per share, 60,000,000 shares authorized, 33,816,000 shares issued at March 31, 2002 and September 30, 2001 | 338,000 | 338,000 |
Treasury stock, (at cost) 400,000 shares at March 31, 2002, and September 30, 2001 | (1,856,000) | (1,856,000) |
Additional paid-in capital | 9,057,000 | 9,057,000 |
Accumulated Other Comprehensive Income | (336,000) | (1,473,000) |
Retained Earnings | (7,363,000) | (939,000) |
Total Stockholders' Equity | (160,000) | 5,127,000 |
Total Liabilities and Stockholders' Equity | $83,303,000 | $109,072,000 |
=========== | =========== |
See Notes to Consolidated Financial Statements
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
2002 (Unaudited) | 2001 (Unaudited) | |
REVENUE | $23,774,000 | $32,885,000 |
EXPENSES | ||
Cost of revenue | 9,304,000 | 15,562,000 |
Operating expenses | 15,231,000 | 22,584,000 |
Total Expenses | 24,535,000 | 38,146,000 |
OPERATING INCOME (LOSS) | (761,000) | (5,261,000) |
OTHER EXPENSES | ||
Interest income and other income and expense | 89,000 | 324,000 |
Interest expense | (723,000) | (806,000) |
Loss on Sale of Building | (118,000) |
|
Loss on Sale of Stock | (2,300,000) |
|
Total Other Expenses | (3,052,000) | (482,000) |
INCOME (LOSS) - Before income taxes | (3,813,000) | (5,743,000) |
PROVISION FOR (BENEFIT FROM) INCOME TAXES | 93,000 | (2,195,000) |
NET LOSS | $(3,906 ,000) | $ (3,548,000) |
============ | =========== | |
OTHER COMPREHENSIVE LOSS | ||
Foreign Currency Translation Adjustment | 2,000 | (105,000) |
Unrealized gain (loss) on Securities, Net of tax expense (benefit) of $789,000 and $(854,000) for the three months ended March 31, 2002 and 2001, respectively | 1,285,000 | (1,092,000) |
TOTAL OTHER COMPREHENSIVE LOSS | $ 1,287,000 | $ (1,197,000) |
COMPREHENSIVE INCOME (LOSS) | $(2,619,000) | $ (4,745,000) |
See Notes to Consolidated Financial Statements
VSI HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME - Continued
2002 (Unaudited) | 2001 (Unaudited) | |
EARNINGS (LOSS) PER SHARE: | ||
Basic: | $ (.12) | $ (0.11) |
|
| |
Fully Diluted: | $ (.12) | $ (0.11) |
|
| |
Weighted Average Shares Basic | 33,393,000 | 33,393,000 |
Dilutive | 33,393,000 | 33,393,000 |
See Notes to Consolidated Financial Statements
2002 (Unaudited) | 2001 (Unaudited) | |
REVENUE | $47,055,000 | $76,957,000 |
EXPENSES | ||
Cost of revenue | 21,347,000 | 32,128,000 |
Operating expenses | 29,745,000 | 46,562,000 |
Total Expenses | 51,092,000 | 78,690,000 |
OPERATING INCOME (LOSS) | (4,037,000) | (1,733,000) |
OTHER EXPENSES | ||
Interest income and other income and expense | 137,000 | (3,000) |
Interest expense | (1,228,000) | (1,770,000) |
Loss on Sale of Building | (118,000) |
|
Loss on Sale of Stock | (2,300,000) |
|
Total Other Expenses | (3,509,000) | (1,773,000) |
INCOME (LOSS) - Before income taxes | (7,546,000) | (3,506,000) |
PROVISION (BENEFIT FROM) FOR INCOME TAXES | (1,122,000) | (1,396,000) |
NET (LOSS) | $ (6,424,000) | $ (2,110,000) |
============ | =========== | |
OTHER COMPREHENSIVE INCOME | ||
Foreign Currency Translation Adjustment | (8,000) | (106,000) |
Unrealized gain (loss) on Securities, Net of tax expense (benefit) of $717,000 and $(1,067,000) for the six months ended March 31, 2002 and 2001, respectively | 1,145,000 | (3,835,000) |
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | $ 1,137,000 | $ (3,941,000) |
COMPREHENSIVE INCOME (LOSS) | $ (5,287,000) | $ (6,051,000) |
2001 (Unaudited) | 2000 (Unaudited) | |
EARNINGS (LOSS) PER SHARE: | ||
Basic: | $(0.19) | $ (0.06) |
|
| |
Fully Diluted: | $(0.19) | $ (0.06) |
|
| |
Weighted Average Shares Basic | 33,234,000 | 33,234,000 |
Dilutive | 33,234,000 | 33,234,000 |
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENT OF CASH FLOWS
2002 (Unaudited) | 2001 (Unaudited) | |
Cash Flows from Operating Activities | ||
Net Income (Loss) | $(6,424,000) | $(2,110,000) |
Adjustments to reconcile net income (loss) to Net cash from operating activities: | ||
Depreciation and amortization | 2,072,000 | 2,651,000 |
Equity in losses of unconsolidated investee | - | 507,000 |
Deferred income taxes | (1,328,000) | (3,019,000) |
Loss on Assets Available & Investments | 2,418,000 | - |
Refundable Federal Income Tax | 5,100,000 | - |
(Increase) decrease in assets: | (68,000) | |
Inventory | 15,000 | 57,000 |
Trade accounts receivable | 12,164,000 | 20,526,000 |
Other Current Assets | - | (3,645,000) |
Accumulated costs of uncompleted programs | 333,000 | (2,537,000) |
Increase (decrease) in liabilities: | ||
Trade accounts payable | 2,806,000 | (13,499,000) |
Accrued liabilities | 877,000 | (1,202,000) |
Advances from customers for uncompleted projects | (5,137,000) | 178,000 |
Net cash provided by (used in) operating activities | 12,828,000 | 980,000 |
Cash Flows from Investing Activities | ||
Changes notes receivable | 167,000 | (233,000) |
Changes notes receivable Related Party | (77,000) | (298,000) |
Changes property and equipment | 286,000 | (1,445,000) |
Investment in unconsolidated investments | 64,000 | (556,000) |
Proceeds from Sale Of Investments & Assets Avail for Sale | 3,834,000 | - |
Net cash provided by (used in) investing activities | 4,274,000 | (2,522,000) |
Cash Flows from Financing Activities | ||
Changes Long Term Debt | (2,348,000) | ` |
Change to related party debt | (821,000) | (1,513,000) |
Net borrowings Notes Payable | (15,859,000) | 4,536,000 |
Proceeds from issuance of stock | - | 88,000 |
Net cash provided by (used in) financing activities | (19,028,000) | 2,828,000 |
Effect of Exchange Rate Changes on Cash | (8,000) | (106,000) |
Net Change in Cash | (1,934,000) | 1,180,000 |
Cash - Beginning of Period | 4,719,000 | 905,000 |
Cash - End of Period | $2,785,000 | $2,085,000 |
========= | ========= |
See Notes to Consolidated Financial Statements
VSI Holdings, Inc.
and Subsidiaries
Notes to Consolidated Financial Statements
1. The consolidated financial statements included herein have been prepared by the Company without audit pursuant to the rules of the Securities and Exchange Commission. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses. Actual results may differ from these estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations.
In the opinion of management, the accompanying consolidated balance sheet and consolidated statements of income and cash flows include all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the results for the interim period, in conformity with generally accepted accounting principles.
2. The interim financial information presented herein should be read in conjunction with Management's Discussion and Analysis and financial statements and related notes included in the Registrant's Annual Report on Form 10-K for the year ended September 30, 2001. Results for interim periods should not be considered indicative of the results that may be expected for the year ended September 30, 2002.
3. Certain amounts for prior periods were reclassified to conform with present period presentation.
4. We evaluate the carrying value of long-lived assets for potential impairment on an ongoing basis. Such evaluations consider management's plans for future operations, recent operating results, undiscounted annual cash flows and other economic factors related to the operation to which the asset applies.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere in this report and the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2001. The following discussion contains certain forward-looking statements relating to our anticipated future financial conditions and operating results and our current business plans. In the future, our financial condition and operating results could differ materially from those discussed herein and our current business plans could be altered in response to market conditions and other factors beyond our control. Important factors that could cause or contribute to such difference or changes include those discussed elsewhere in this report and the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2001 (see the disclosures under "Cautionary Statement for the Purpose of the "Safe Harbor" Provisions of the Private Securities Litigation Reform Act of 1995").
BUSINESS DESCRIPTION:
VSI Holdings, Inc. (the "Company", "we", "our", or "us") presently consists of subsidiaries in the marketing services and entertainment/edutainment business sectors, operating under the following trade names:
Visual Services, Inc., a broad-based provider of educational curriculums and product training; interactive technology-based distance learning systems; product launches; Web site development, internet, intranet, and extranet solutions; direct-response and site-based marketing; change process and cultural change consulting;
Vispac, Inc., an integrated logistics and call center operation;
Performance Systems Group, a provider of in-field consulting and change process sustainment services;
eCity Studios, Inc., a web site development company; and
Advanced Animations, Inc., a manufacturer of product simulators, animatronic figures and displays for theme parks, casinos, museums, and retail.
We serve our global customers from our Bloomfield Hills, Michigan headquarters and other offices in Michigan, California, Vermont, and Canada. We have approximately 600 employees.
The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, consisting of Advanced Animations, Inc., Vispac, Inc., Visual Services, Inc., eCity Studios, Inc. and PSG International, Inc. Inter-company balances and transactions have been eliminated in consolidation.
OVERVIEW
During the past twelve months, as a result of the recession and significantly lower marketing expenditures by its largest automotive customers, the Company has experienced a significant downturn in its business. As a result of this downturn, the Company has violated several restrictive covenants under its credit facilities. These events and other factors have raised substantial doubt about the Company's ability to continue as a going concern.
In February, 2002, the Company and its primary lender entered into a forbearance agreement that, among other things, modified our borrowing formula and obligates the Company to seek a sale of its businesses by July 1, 2002. In exchange, the lender has agreed to forbear from exercising its rights and remedies against the Company until not later than July 1, 2002. On April 12, 2002 the Company's primary lender notified the Company that all amounts due the primary lender will be immediately due and owing. On May 17, 2002, the lender has notified the Company that it will not renew the line of credit after July 1, 2002. The lender advised the Company that it proposed to retain certain collateral in partial satisfaction of its secured claims.
In connection with the execution of such forbearance agreement, the Company engaged a financial advisor to assist it in analyzing the viability of its various business units and the possibility of selling some or all of those units. In addition, and as contemplated by such forbearance agreement, the Company has implemented a strategic plan involving the elimination of 400 jobs, the sale of one operating facility, the liquidation of certain of its securities holdings, and the institution of changes in its operational structure that are intended to accelerate billing and cash collection. All of these actions were undertaken with the intent of reducing debt service requirements and operating expenses.
There can be no assurance that the Company will be able to continue as a going concern, or the Company will be able to obtain all financing from alternative sources sufficient to support the Company's activities. Consequently, The Company has begun an orderly liquidation of all its assets.
FINANCIAL CONDITION
Our total assets decreased from $109,072,000 at September 30, 2001 to $83,303,000 at March 31, 2002. This decrease in total assets was due primarily to a 20% decrease in our accounts receivable. Those receivables decreased $12,443,000 from $63,020,000 at September 30, 2001 to $50,577,000 at March 31, 2002.
The decrease in the Company's accounts receivable reflected a $14,005,000, or 55%, decrease in billed trade accounts receivable, a $5,674,000, or 100%, decrease in unbilled trade account receivables, and a $7,515,000, or 24%, increase in purchased receivables. See the Liquidity and Capital Resources section for details. The decrease in billed trade account receivables was primarily attributable to cyclically high billings in September 2001 that were collected in the subsequent quarter. The decrease in trade accounts receivable is attributable to lower revenue associated with the softening economy and lower marketing expenditures by the automotive industry.
Purchased receivables reflects installment payments owed by consumers on automotive extended service contracts purchased by the Company from automotive manufacturers and their dealers. Payments on these contracts are collected over a period of time, not exceeding 18 months. See the Liquidity and Capital Resources section for details.
The change in the Company's total assets also reflects a $333,000 decrease in accumulated costs of uncompleted programs. This item, which represents project start-up costs and activities, decreased as a result of an decrease in the number of projects in the start-up phase.
Refundable Federal Income Tax reflects overpayments and anticipated benefit from current year losses. We anticipate receiving approximately $7.4 million shortly in refunds of income taxes prevously paid. In October, 2001 a refund of $1.3 million was received and in March, 2002 $3.8 million was received.
Investment in Available-for-Sale Securites has decreased by $1,704,000 due to the sale of Real Education stock held as an investment. In addition, the Deferred Tax Asset has declined by $2,461,000 as direct result of that sale. The investment was sold to provide cash flow for working capital.
Property,Plant and Equipment and Property Held for Sale was decreased by $2,702,000. due to the sale of the schoolcraft land and building. The related costs and its accumulated depreciation were taken written off. The building was sold to provide cash flow for working capital.
The Company's total current liabilities decreased $20,608,000, or 22%, from $91,952,000 at September 30, 2001 to $71,344,000 at March 31, 2002. This decrease was primarily attributable to a $18,207,000 decrease in notes payable to bank that was partially offset by a $2,806,000 increase in accounts payable, and an decrease of $5,137,000 in advances from customers for uncompleted projects.
The increase in trade accounts payable is primarily associated with the current month's liability for purchases of purchased receivables from automotive manufacturers and their dealers. See the Liquidity and Capital Resources section for details. . Notes payable to bank decreased approximately $16.0 million due primarily to the collection of trade accounts receivable which were used to repay the bank lines of credit.
Total stockholder's equity decreased approximately $5.3 million from $5,127,000 at September 30, 2001 to $(106,000) at March 31, 2002. This decline was attributable to a total comprehensive loss of $6,424,000 for the six months ended March 31, 2002. Comprehensive loss includes our net loss and change in market value of available-for-sale securities.
OPERATING RESULTS
Revenue Recognition Policies. The Company operates in two segments, a marketing services segment and a entertainment /edutainment segment. The marketing services segment provides marketing services and customers relationship management, organizational training and development services primarily to the automotive and pharmaceutical industries. The entertainment /edutainment segment provides entertaining and educational animatronic displays and other entertainment /edutainment products primarily to theme parks, casinos, museums, and retail.
The Company's marketing services segment is comprised of Visual Services, Inc., Vispac, Inc., PSG International, Inc., and eCity Studios, Inc., which provides marketing services under single or multiple phase contractual arrangements with customers for projects generally ranging from 3 months to 24 months in duration. Following execution of a written contract obligating the customer to pay for services rendered, revenue is recognized on completion of each project phase or otherwise as the services are rendered, in each case as specified in the agreement with the customer. Such revenue is recognized at the estimated realizable amount attributable under the agreement with the customer to the completed project phase or the service rendered, as applicable. Revenue for services attributable to customer changes to project specifications is recognized when the customer has executed a written change order and the services contemplated by the change order have been rendered or the applicable project phase has been completed, whichever occurs later. Unbilled trade accounts receivable result from revenue recognized for completed project phases in advance of customer billings.
The Company's entertainment/edutainment segment reflects the activities of Advanced Animations, Inc., which manufactures product simulators, animatronic figures and displays for theme parks, casinos and retailers under written display contracts of varying duration. It recognizes revenue on each of those contracts based on its estimate of the percentage of work under the contract that has been completed. A percentage of the contract price, determined by the ratio of incurred costs to total estimated costs, is included in revenue and the incurred costs are charged against this revenue. Revisions in cost and profit estimates during the course of a contract are reflected in the accounting period in which the facts that require the revision become known. Billings are made in accordance with contract terms. At the time a loss on a contract becomes known, the entire amount of the estimated loss is accrued.
The Company operates in very competitive markets and its sales are derived primarily from the automotive industry. The business areas in which the Company and its customers operate are subject to general economic cycles and industry specific business cycles. Accordingly, any downturn in the economy in general or in the business areas in which the Company and its customers operate could have a negative impact on the Company's results of operations and financial condition. The Company is currently experiencing the negative impact of this economic environment. Such negative impact may be magnified, especially in a given quarter, if negative changes in the economy and in the business cycles of the Company's different operations occur contemporaneously or suddenly and the Company is not able to implement a timely response of sufficient magnitude.
Three Months Ended March 31, 2002 compared to Three Months Ended March 31, 2001
Revenues. Revenues were $23,774,000 for the three months ended March 31, 2002, compared to $32,885,000 for the same period last year. The 28% decline in revenues compared to the same period in the prior fiscal year was primarily attributable to a softening economy and the cancellation and reduction of expenditures by our automotive clients for marketing support and other services, all of which resulted in curtailments and deferrals of existing Company projects and delays in new Company projects.
Cost of Revenue. Cost of Revenue decreased from $15,562,000 in the prior year to $9,304,000. As a percentage of revenue, it decreased from 47% to 39%. This is primarily attributable to the loss of discounts and efficiencies associated with lower revenue.
Operating Expense. Our operating expenses have decreased to $15,231,000 for the three months ended March 31, 2002 from $22,584,000 in the three months ended March 31, 2001. This decrease of 33% is mainly attributable to the following factors: (1) fewer professional expenses and other costs incurred in the current period relative to the same period in the prior year; (2) wage reductions ranging from 2% to 8% of salaries; (3) fewer employees as a result of layoffs; and (4) decreased dependence on contract labor, resulting in lower labor costs.
Net Loss. Primarily as a result of the foregoing, the Company had a net loss of $3,906,000 during the three months ended March 31, 2002 as compared to net loss of $3,548,000 for the same period in the prior fiscal year. The Company had a total comprehensive loss of $2,619,000 during the three months ended March 31, 2002 as compared to a total comprehensive loss of $4,745,000 for the same period in the prior fiscal year. Of such other comprehensive income, $1,145,000 was attributable to sale of Ecollege security, net of tax expense for the purpose of cash flow to reduce debt.
Six Months Ended March 31, 2002 compared to Six Months Ended March 31, 2001
Revenues. Revenues were $47,055,000 for the six months ended March 31, 2002, compared to $76,957,000 for the same period in the prior fiscal year. As indicated above the decline reflects the impact of lower marketing expenditures by automotive clients resulting in project work deferral to offset completed work.
Operating Expense. Operating expenses decreased to $29,745,000 for the six months ended March 31, 2002 from $46,562,000 in the six months ended March 31, 2001. This decrease of 36% was primarily attributable to: (1) fewer professional expenses and other costs incurred in the current period relative to the same period in the prior year; (2) wage reductions ranging from 2% to 8% of salaries; (3) fewer employees as a result of layoffs; and (4) decreased dependence on contract labor, resulting in lower labor costs.
Net Loss. Primarily as a result of the foregoing, the Company had a net loss of $6,424,000 during the six months ended March 31, 2002 as compared to net loss of $2,110,00 for the same period in the prior fiscal year. The Company also had other comprehensive income of $1,145,000 during the six months ended March 31, 2002 as compared to other comprehensive loss of $3,835,000 for the same period in the prior fiscal year. Of such other comprehensive income, $1,145,000 was attributable to sale of Ecollege security, net of tax expense for the purpose of cash flow to provide working capital. As a result, the Company had a comprehensive income of $1,137,000 for the six months ended March 31, 2002 as compared to comprehensive loss of $6,051,000 for the same period in the prior fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, we had three lines of credit totaling $56,000,000; interest on these lines were at London Inter-Bank Offered Rate ("LIBOR") plus 1.50% to 2.75%; at March 31, 2002 the interest rate was 3.38% and the outstanding balances were $35,209,000. These lines of credit mature in June and July, 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. At March 31, 2002, and at May 17, 2002, the Company was not in compliance with the latter covenants. As a result, all long-term bank debt has been classified as a current liability.
In February, 2002 the Company and its primary lender entered into a forbearance agreement that, among other things, modified our borrowing formula and obligates the Company to seek a sale of its business by July 1, 2002. In exchange, the lender has agreed to forbear from exercising its rights and remedies against the Company until not later than July 1, 2002. On April 12, 2002 the Company's primary lender notified the Company that all amounts due the primary lender will be immediately due and owing. On May 17, 2002, the Lender advised the Company that it proposed to retain certain collateral in partial satisfaction of its secured claims. The lender has also notified the Company that it will not renew the line of credit after July 1, 2002.
During the prior year, we signed a $25,000,000 credit line. In February 2002 the line was increased by $1,000,000 (included in the totals above), which was designed for our extended service contract business for an automobile manufacturer and its dealership affiliates. We purchase and administer the loans used for consumers to purchase extended service contracts on their automobiles. This business started during the prior year and at March 31, 2002, we had borrowed $26,000,000 to fund the purchase of purchased receivables. In order to continue this business, it will be necessary to increase our line of credit for this activity. This line of credit carries similar covenants to our other lines of credit. As of March 31, 2002, and May 21, 2002, we were in default on those covenants. There can be no assurances that this lender will not accelerate the loan, or that this lender will increase the line of credit to allow us to continue in this business, and this would materially adversely affect the Company. If we are unable to increase this line of credit, or effect a securitization in a suitable time frame, we may have to discontinue this business.
Since we are a net borrower of funds, minimal cash balances are kept on hand. As a result, at any point in time, we may have more money in checks outstanding than the cash balance. When checks are presented for payment, the bank notifies us. We often borrow on our lines of credit to cover the checks.
There can be no assurance that the Company will be able to continue as a going concern or that the Company will be able to obtain financing from alternative sources sufficient to support the Company's activities. Consequently, the Company has begun an orderly liquidation of all its assets.
Stock and Stock Options Granted
This year, no shares of restricted stock were granted to employees. During the first quarter, 37,000 shares vested, the rights to which had been granted in prior years. The shares vest in three equal installments, one, two, and three years from the date of grant. We do not expect the exercise of stock options, or purchase of shares, by employees to be a material source of capital in fiscal year 2002.
INVESTMENTS
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. 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 fiscal year 2000, we also invested an additional $50,000 to acquire 4,500 shares of eCollege.com. At March 7, 2002 we sold all of our investment in eCollege.com (NASDAQ - ECLG) at a loss.
Prior to the current fiscal year, we exercised options to purchase 431,525 shares of Navidec, Inc. (NASDAQ - NVDC) for $2,450,000. Navidec is a developer of web sites and web based complete automotive purchase transaction and information services for prospective customers. In 2000, Navidec's primary product, referred to as Drive off.com, was sold to CarPoint in exchange for an equity interest in CarPoint. Subsequently, Navidec recognized an impairment of its equity investment in CarPoint, which is majority-owned by Microsoft (NASDAQ - MSFT). As a result of Navidec's performance, and condition, and believing their stock price decline to be other-than-temporary, we recognized an impairment on our investment last fiscal year. This impairment increased our net loss before income taxes during the fiscal year ended September 30, 2001 by $2,006,000, and left us with an investment balance in Navidec of $444,000. At February 4, 2002, these shares had a market value of $181,000.
"CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995"
Certain statements in Management Discussion and Analysis of Financial Condition and Results of Operations and certain other sections of this Report are forward-looking. These may be identified by the use of forward-looking words or phrases such as "believe," "expect," "anticipate," "should," "planned," "estimated," "goal," and "potential," among others. These forward-looking statements are based on our reasonable current expectations. The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for such forward-looking statements. In order to comply with the terms of the safe harbor, we note that a variety of factors could cause our actual results or experience to differ materially from the anticipated results or other expectations expressed in such forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and our results include but are not limited to: (1) the complexity and uncertainty regarding the development and customer acceptance of new products and services; (2) the loss of market share through competition; (3) the introduction of competing products or service technologies by other companies; (4) pricing pressures from competitors and/or customers; (5) our inability to protect proprietary information and technology; (6)usage of advance funded services; (7) the loss of key employees and / or customers; (8) our customers continued reliance on out sourcing; (9) changes in our capital structure and cost of capital, and ability to borrow sufficient funds at reasonable rates (10) uncertainties relating to business and economic conditions; (11) management's ability to maintain proper contract and employee staffing levels; (12) value of investments of the Company; (13) our ability to convert unbilled trade accounts receivables into billed trade accounts receivables; (14) cutbacks in client budgets, project deferrals and cancellations; (15) our ability to manage our growth and profitability; and (16) timely refund of taxes previously paid.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Interest Rate Risk. Our earnings are affected by changes in short-term interest rates as a result of our revolving credit agreements, which bear interest at a floating rate. We do not use derivative or other financial instruments to mitigate the interest rate risk or for trading purposes. Risk can be estimated by measuring the impact of a near-term adverse movement of 100 basis points in short-term market interest rates. If short-term market interest rates average 100 basis points more in the next 12 months, the adverse impact on our results of operations would be approximately $252,000 net of income tax benefit. We do not anticipate any material near-term future earnings or cash flow expenses from changes in interest rates related to our long-term debt obligations as all of our long-term debt obligations have fixed rates.
Foreign Currency Risk. Although we conduct business in foreign countries, principally Canada and Australia, foreign currency translation gains and losses are not material to our consolidated financial position, results of operation or cash flows. Accordingly, we are not currently subject to material foreign currency exchange rate risks from the effects that exchange rate movements of foreign currencies would have on our future costs or on future cash flows we would receive from our foreign investment. To date, we have not entered into any foreign currency forward exchange contracts or other derivative financial instruments for trading purposes or to hedge the effects of adverse fluctuations in foreign currency exchange rates.
Investment Risk for Privately Held Companies. We invest in equity instruments of privately-held companies in the internet information technology areas for business and strategic purposes. These investments are included in long-term assets, and are accounted for under the cost method or the equity method. For these non-quoted investments, our policy is to regularly review the assumptions underlying the operating performance and cash flow forecasts in assessing the carrying values. We identify and record impairment losses on these investments when events and circumstances indicate that such assets are permanently impaired. To date, no such impairment has been recorded.
Investment Risk for Publicly Traded Companies. We are also exposed to equity price risk on our investments in publicly traded companies. Our available-for-sale securities include our equity position in Navidec, Inc. which has experienced significant volatility in their stock prices since going public. We do not attempt to reduce or eliminate our market exposure on this security. A 20% adverse change in equity price would result in an approximate $36,000decrease in fair value in our available-for-sale securities, based upon May 17, 2002 closing market prices for Navidec.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is periodically involved in routine proceedings. Except as described in the following paragraph, there are no legal matters, existing, pending, or threatened, which management presently believes could result in a material loss to the Company.
On September 21, 2001, the Company filed a class action lawsuit, on its own behalf and on behalf of a plaintiff class consisting of the Company's approximately 1,600 shareholders and optionholders, against SPX Corporation and its directors alleging that such corporation had failed to perform its obligations under an agreement and plan of merger between the Company and such corporation. The Company's suit asks that the court either require SPX Corporation to complete the proposed merger with the Company or award the Company and the plaintiff class damages. In late December 2001, the defendants in this action filed an answer denying the Company's allegations and a counterclaim alleging breach of contract and seeking recovery of damages and a termination fee of approximately $9,000,000. As this matter is in a very preliminary stage and its outcome is not presently determinable, the Company has not recorded any contingent receivable or liability related to its outcome.
Item 3. Defaults upon Senior Securities
See Part I, Item 2. Management Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources, and the disclosures contained therein as to defaults under the Company's credit facilities, which discloses are incorporated by reference herein.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
3. Exhibits: * signifies exhibit incorporated herein by reference
* 3.1 Articles of Incorporation of the Registrant dated April 21, 1997, together with Articles of Merger of Registrant and The Bankers 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 Bankers 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 Bankers 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 Bankers 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.
* 10.1 Loan agreement dated July 12, 2001 between Visual Services, Inc. and Bank One, Michigan, filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2001.
* 10.2 Loan Guaranty dated July 12, 2001 between VSI Holdings, Inc. and Bank One, Michigan, filed as Exhibit 10.1 to Form 10-Q for the fiscal quarter ended December 31, 2001.
b. Reports on Form 8-K
Current Report on Form 8-K dated February 25, 2002 disclosing a press release regarding the Company's 2002 first quarter results.
On January 31, 2002 the Company filed a current report on Form 8-K dated January 30, 2002, disclosing the courts timetable for process and trail extented 90 days.
On January 17, 2002 the Company filed a current report on Form 8-K dated January 16, 2002, disclosing the court sets time-table for process and hearing of SPX Corporation lawsuit.
SIGNATURES
Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
VSI Holdings, Inc. Registrant | |
May 22, 2002 |
/S/Steve Toth, Jr. |
May 22, 2002 |
/S/Thomas W. Marquis |