-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UegkmYOs3qAAzoxgNutslnVAWrwq5YJM7rp2VSJFOJ7TEoDjjlEB3P3vIqkok6R6 Gdd4cfgGOvEGL1RBPMOzzQ== 0000354611-99-000010.txt : 19990517 0000354611-99-000010.hdr.sgml : 19990517 ACCESSION NUMBER: 0000354611-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VSI HOLDINGS INC CENTRAL INDEX KEY: 0000354611 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 222135522 STATE OF INCORPORATION: TX FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12942 FILM NUMBER: 99622760 BUSINESS ADDRESS: STREET 1: 2100 NORTH WOODWARD AVE 201 W CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48304 BUSINESS PHONE: 2486440500 MAIL ADDRESS: STREET 1: 2100 NORTH WOODWARD AVE 201 W CITY: BLOOMFIELD HILLS STATE: MI ZIP: 48304 FORMER COMPANY: FORMER CONFORMED NAME: BANKERS NOTE INC DATE OF NAME CHANGE: 19920703 10-Q 1 UNITED STATES 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, 1999 _______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from_______to_______ Commission File No. 1-12942 VSI HOLDINGS, INC. (Exact name of Registrant as specified in its charter) Georgia 22-2135522 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2100 North Woodward Avenue 201 West Bloomfield Hills, MI 48304-2263 (Address of principal executive offices) (248) 644-0500 Registrant's telephone number, including area code For information regarding this filing, contact: Peggy Toth Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes__X___ No______ There were 32,658,157 shares of Common Stock, par value $.01 per share, outstanding at March 31, 1999. The Company held an additional 7,962,855 shares as treasury stock. PART 1. FINANCIAL INFORMATION Item 1. Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31 September 30 1999 1998 (Unaudited) (Audited) ASSETS CURRENT ASSETS Cash $ 1,288,000 $ 463,000 Cash in escrow 2,254,000 1,797,000 Trade accounts receivable: Billed 24,007,000 36,081,000 Unbilled 21,365,000 13,485,000 Notes receivable and advances: Related party 24,000 319,000 Other 301,000 800,000 Inventory 436,000 409,000 Accumulated costs of uncompleted programs 4,793,000 3,220,000 Deferred tax asset 140,000 1,336,000 Other current assets 2,265,000 1,158,000 __________ __________ Total Current Assets 56,873,000 59,068,000 LONG-TERM PORTION OF NOTES RECEIVABLE - Related Parties 777,000 804,000 PROPERTY, PLANT AND EQUIPMENT 23,038,000 24,182,000 DEFERRED TAX ASSET 194,000 194,000 INVESTMENTS 9,955,000 1,021,000 GOODWILL-NET 4,136,000 4,286,000 __________ __________ Total Assets $94,973,000 $89,555,000 =========== =========== VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET March 31 September 30 1999 1998 (Unaudited) (Audited) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Current portion of long term debt $ 505,000 $ 461,000 Trade accounts payable 14,589,000 11,926,000 Notes payable to related parties 1,118,000 - Notes payable to bank 28,863,000 25,139,000 Accrued liabilities 2,319,000 3,817,000 Federal income tax payable - 4,562,000 Advances from customers for uncompleted projects 5,707,000 4,042,000 __________ __________ Total Current Liabilities 53,101,000 49,947,000 LONG-TERM LIABILITIES Notes payable - Related parties 11,572,000 11,494,000 Long-term debt - Other 5,713,000 6,012,000 Redeemable Common Stock - 1,960,000 __________ __________ Total Long-Term Liabilities 17,285,000 19,466,000 STOCKHOLDERS' EQUITY Preferred stock - $1.00 par value $ - $ - per share, 2,000,000 shares authorized, no shares issued Common stock - $.01 par value 406,000 407,000 per share, 60,000,000 shares authorized, 40,621,000 shares issued at March 31, 1999 and 40,741,000 at September 30, 1998 Additional paid-in capital 9,307,000 8,208,000 Stock Subscriptions Receivable - (25,000) Accumulated Other Comprehensive Income Translation Account (16,000) (23,000) Unrealized Gain on Securities, Net of Tax of $392,000 760,000 - Retained Earnings 18,170,000 15,218,000 Treasury stock, (at cost) - (4,040,000) (3,643,000) 7,963,000 shares at March 31, 1999, 7,888,000 shares at September 30, 1998 __________ __________ Total Stockholders' Equity 24,587,000 20,142,000 Total Liabilities and $94,973,000 $89,555,000 Stockholders' Equity =========== =========== See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Three Months Ended March 31 March 31 1999 1998 (Unaudited) (Unaudited) REVENUE $40,513,000 $40,480,000 EXPENSES Cost of revenue 21,264,000 21,048,000 Operating expenses 16,110,000 14,743,000 __________ __________ Total Expenses 37,374,000 35,791,000 OPERATING INCOME 3,139,000 4,689,000 OTHER EXPENSES Interest and other income (expense) (67,000) 218,000 Interest expense (703,000) (488,000) __________ __________ Total Other Expenses (770,000) (270,000) INCOME - Before income taxes 2,369,000 4,419,000 PROVISION FOR INCOME TAXES 925,000 1,503,000 __________ __________ INCOME FROM CONTINUING OPERATIONS $ 1,444,000 $ 2,916,000 =========== =========== Discontinued Operations Loss from Discontinued Operations - - $ (352,000) Net of Income Tax Benefit of $182,000 for the three months ended March 31,1998 NET INCOME $ 1,444,000 $ 2,564,000 =========== =========== OTHER COMPREHENSIVE INCOME Foreign Currency Translation Adjustment (16,000) - Unrealized gain on Securities, Net 760,000 - of Tax of $392,000 __________ __________ TOTAL OTHER COMPREHENSIVE INCOME $ 744,000 $ - COMPREHENSIVE INCOME $ 2,188,000 $ 2,564,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - Continued Three Months Ended March 31 March 31 1999 1998 (Unaudited) (Unaudited) EARNINGS PER SHARE: Basic: Income from Continuing Operations $ 0.04 $ 0.09 Loss from Discontinued Operations - (0.01) _________ __________ Net Income $ 0.04 $ 0.08 ========= ========== Fully Diluted: Income from Continuing Operations $ 0.04 $ 0.09 Loss from Discontinued Operations - (0.01) _________ __________ Net Income $ 0.04 $ 0.08 ========= ========== Weighted Average Shares Basic 32,916,000 32,835,000 Dilutive 33,602,000 33,438,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME Six Months Ended March 31 March 31 1999 1998 (Unaudited) (Unaudited) REVENUE $75,850,000 $66,625,000 EXPENSES Cost of revenue 38,335,000 32,694,000 Operating expenses 31,587,000 26,239,000 __________ __________ Total Expenses 69,922,000 58,933,000 OPERATING INCOME 5,928,000 7,692,000 OTHER EXPENSES Interest and other income (expense) 113,000 462,000 Interest expense (1,307,000) (737,000) __________ ___________ Total Other Expenses (1,194,000) (275,000) INCOME - Before income taxes 4,734,000 7,417,000 PROVISION FOR INCOME TAXES 1,780,000 2,522,000 __________ __________ INCOME FROM CONTINUING OPERATIONS $ 2,954,000 $ 4,895,000 =========== =========== Discontinued Operations Loss from Discontinued Operations - - $ (364,000) Net of Income Tax Benefit of $188,000 for the six months ended March 31,1999 NET INCOME $ 2,954,000 $ 4,531,000 =========== =========== OTHER COMPREHENSIVE INCOME Foreign Currency Translation Adjustment (16,000) - Unrealized gain on Securities, Net 760,000 - of Tax of $392,000 __________ __________ TOTAL OTHER COMPREHENSIVE INCOME $ 744,000 $ - COMPREHENSIVE INCOME $ 3,698,000 $ 4,531,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME - Continued Six Months Ended March 31 March 31 1999 1998 (Unaudited) (Unaudited) EARNINGS PER SHARE: Basic: Income from Continuing Operations $ 0.09 $ 0.15 Loss from Discontinued Operations - (0.01) _________ _________ Net Income $ 0.09 $ 0.14 ========= ========= Fully Diluted: Income from Continuing Operations $ 0.09 $ 0.15 Loss from Discontinued Operations - (0.01) _________ _________ Net Income $ 0.09 $ 0.14 ========= ========= Weighted Average Shares Basic 32,823,000 32,734,000 Dilutive 33,492,000 33,312,000 See Notes to Consolidated Financial Statements VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended March 31 March 31 1999 1998 (Unaudited) (Unaudited) Cash Flows from Operating Activities Net Income $ 2,954,000 $ 4,531,000 Adjustments to reconcile net income to Net cash from operating activities: Depreciation and amortization 3,086,000 1,808,000 Equity in losses of unconsolidated investee 61,000 54,000 Deferred income taxes 1,196,000 - (Increase) decrease in assets: Trade accounts receivable 4,194,000 (8,003,000) Inventory (27,000) 145,000 Other Current Assets (1,107,000) 2,430,000 Accumulated costs of uncompleted programs (1,573,000) (6,689,000) Increase (decrease) in liabilities: Trade accounts payable 703,000 18,125,000 Accrued liabilities (5,378,000) (525,000) Advances from customers for uncompleted projects 1,208,000 1,239,000 __________ __________ Net cash provided by (used in) operating activities 5,317,000 13,115,000 Cash Flows from Investing Activities Changes notes receivable 499,000 (120,000) Changes notes receivable Related 322,000 9,011,000 Changes property and equipment (1,792,000) (5,771,000) Investment in unconsolidated investments (7,843,000) - Acquisition of PSG International - (2,525,000) __________ __________ Net cash provided by (used in) investing activities (8,814,000) 595,000 VSI HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS - Continued Cash Flows from Financing Activities Changes Long Term Debt (255,000) (90,000) Change to related party debt 1,196,000 647,000 Net borrowings Notes Payable 3,724,000 (3,199,000) Proceeds from exercise of stock options 23,000 3,000 Proceeds from issuance of stock 24,000 117,000 Payment for redemption of stock (397,000) - Distributions to shareholders - (11,195,000) __________ __________ Net cash provided by (used in) financing activities 4,315,000 (13,717,000) Effect of Exchange Rate Changes on Cash 7,000 - Net Increase (Decrease)in Cash 825,000 (7,000) Cash - Beginning of Period 463,000 235,000 __________ __________ Cash - End of Period $1,288,000 $ 228,000 ========== ========== 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. Examples include provisions for bad debts and the length of product life cycles and buildings' lives. Actual results may differ from these estimates. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the accompanying balance sheets and 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 notes thereto included in the Registrant's Annual Report on Form 10-K for the year ended September 30, 1998. The interim results for the six months ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ended September 30, 1999. 3. Certain reclassifications have been made to the March 31, 1998 financial statements to conform to the classifications used at March 31, 1999. 4. The Company evaluates the carrying value of goodwill 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 goodwill applies. 5. The Company adopted SFAS number 130, "Reporting Comprehensive Income", as of October 1, 1998. 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 foreign currency translation adjustments and unrealized gains on available-for- sale securities, 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 under the new standard. The adoption of SFAS number 130 had no effect on the Company's net income or stockholders equity. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS BUSINESS DESCRIPTION: VSI Holdings, Inc. (the "Company") is a full service supplier to businesses; providing imaginative and integrated applications of technology and systems encompassing marketing initiatives, communications, education and training, and entertainment. The Company consists of these wholly-owned subsidiaries in the Marketing Services and Entertainment business sectors under the following trade names - Visual Services, Inc., a broad-based provider of educational curriculums and product training; interactive technology-based Distance Learning Systems; product launches; Web site development, internet, intranet, and extranet solutions; direct-response and site-based marketing; change process and cultural change consulting: Vispac, Inc., integrated logistics and call center operations; and Performance Systems Group; in-field consulting and change process sustainment services: and Advanced Animations, Inc., a manufacturer of product simulators, animatronic figures and displays for theme parks, casinos, and retail. The Company is attempting to position itself to take advantage of opportunities created by changes in technology. One of the Company's practices has been its usage of a wide variety of technologies, without overdependence on any one technology. This allows the Company to meet client needs with whatever technology is most appropriate. The Company has negotiated the rights to design worldwide touring and permanent exhibitions based on the series of Grossology- themed books authored by science teacher Sylvia Branzei. The Company fully expects that Grossology will expand worldwide as it appeals to a variety of venues including science centers, children's museums, theme parks, malls and zoos. Revenues are expected to begin in the next fiscal year. This fiscal year, the initial exhibition design and construction will require capital investment of approximately $1,000,000, and will increase in future years based on the number of exhibits built. The Company serves its global customers from its Bloomfield Hills, Michigan headquarters and offices in California, Vermont, and Canada. The Company employs more than 1,025 professionals. The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, consisting of Advanced Animations, Inc., Vispac, Inc., Visual Services, Inc., and PSG International, Inc. Inter-company balances and transactions have been eliminated in consolidation. Discontinued Operations. In June 1998, the Company decided to sell the subsidiaries constituting the retail sector. Subsequently, it was sold to Martin S. Suchik and certain of his affiliated entities in exchange for a surrender of 143,750 shares of the Company. As a result, the Company no longer has any involvement in the retailing of women's apparel. The Company recognized a post-tax loss on discontinued operations of $428,000, and a net gain on the sale of $271,000, for the year ended September 30, 1998. The Company does not expect any other operating losses from this activity. Stock and Stock Options Granted In the current fiscal year, the Company issued options for 100,000 shares of the Company's common stock. One-half of the options are exercisable two years from the date of the grant, with the remaining options exercisable three years from the date of the grant. The options have an exercise price ranging from $5.75 to $8.20 and expire five years from the date of grant. In March, one of the Company's significant clients sold approximately a 35% interest in itself to a third party. The Company does not expect that this will have a material impact on its revenues with this client. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS Revenues were $40,513,000 for the three months ended March 31, 1999, compared to $40,480,000 for the same period last year. Revenues were $75,850,000 for the six months ended March 31, 1999, compared to $66,625,000 for the same period last year. This increase of 14% is partially attributable to first time business with an automotive client and to expanded Internet and E-Commerce business with existing clients. Revenue growth was negatively impacted due to some program cancellations, reductions, and schedule slippage. Operating Expense. The Company's operating expenses have grown from $14,743,000 for the three months ended March 31, 1998 to $16,110,000 in the three months ended March 31, 1999. The Company's operating expenses have grown from $26,239,000 for the six months ended March 31, 1998 to $31,587,000 in the six months ended March 31, 1999. This 20% increase is mainly attributable to personnel costs to support an anticipated growth in sales. An additional contributor to the increased expense levels were the wage escalations for computer-industry and other professionals and Michigan's extremely tight and competitive contract labor supply. Net income for the three months ended March 31, 1999 was $1,444,000 compared to $2,916,000 for the same period last year. Net income for the six months ended March 31, 1999 was $2,954,000 compared to $4,531,000 for the same period last year. This decrease is attributable to the following factors: (1) the wage escalations for computer-industry and other professionals; (2) Michigan's extremely tight and competitive contract labor supply; (3) start up costs associated with new projects in the Internet and E-Commerce areas; (4) growth in fixed costs due to facility and equipment acquisitions in the prior year; (5) growth in the number of employees to handle an anticipated growth in sales. Personnel Expenses. The Company has recently made some changes in its personnel structure, to employ fewer people and to utilize less contract labor. The impact of these changes will occur in future quarters. The annualized reduction is estimated to be approximately $1,800,000. The Company competes in very competitive and volatile markets. The Marketing Services sector is subject to intense competition, as well as delays in project fulfillment due to matters beyond its control, such as delayed product launches, strikes at clients, and other factors. The Entertainment sector's sales represent discretionary spending on the part of its customers, and their customers. Some projects, which in aggregate are significant, have been postponed from this spring to later quarters. If these projects end up being deferred from this fiscal year to next fiscal year, it could have a material adverse effect on operating results. Such factors make it very difficult to project full year financial results. The Company's future operating results will depend in part on management's ability to manage any future growth and control expenses. The Company intends to pursue the continued growth of its business, however, there can be no assurance that such growth will be achieved. A decline in revenues, without a corresponding and timely reduction in staffing and other expenses, or a staffing increase that is not accompanied by a corresponding increase in revenues, could have a material adverse effect on the Company's operating results. Liquidity and Capital Resources The Company has various bank lines of credit totaling $45,000,000, of which $15,000,000 matures on June 30, 1999, and the remainder in February and November of 2000. At March 31, 1999, the Company had borrowed $28,863,000 (including outstanding checks, less cash balances) against these lines. Interest on these lines is primarily based on LIBOR (London Inter-Bank Offered Rate) plus 1.5%. The Company has had a long-term relationship with its current bank. Through the years, it has provided financing and lines of credit for the Company. There can, however, be no assurances that the lines of credit will be renewed when they mature. If the Company is unable to renew the line of credit, other sources of financing would be sought, primarily a line of credit from another banking institution. Since the Company is a net borrower of funds, minimal cash balances are kept on hand. At any point in time, the Company may have more money in checks outstanding than the cash balance. When checks are presented for payment, the bank notifies the Company, which borrows on its lines of credit to cover the checks. The Company believes that cash flows from operations, along with bank borrowings, will be sufficient to finance the Company's activities in 1999. On a long-term basis, increased financing may be necessary to fund any large project awarded to the Company, or any acquisitions the Company may make. The Company has no current plans to conduct an offering of its shares to the public in fiscal year 1999. Accounts Receivable decreased $4,194,000 during the first six months. Business historically reaches a peak at new vehicle model year introduction, which occurs at the end of the Company's fiscal year. These balances are collected in the first quarter of the following year. During the six months ended March 31,1999, $4,500,000 was paid in federal income taxes. This amount was for the year ended September 30, 1998 and is the first full year of federal income tax paid by the Company compared to prior years where these subsidiaries were taxed as subchapter S Corporations, and Federal Income Taxes were paid by the individual shareholders. 280,000 shares of stock were issued in connection with the purchase of The Performance Systems Group in February 1998. These shares were subject to a put option whereby the holder of the shares could sell the shares back to the Company at a fixed price per share of $7.50 or a total of $2,100,000. This option has been exercised, and payment of this amount was made in March 1999. INVESTMENTS Recent material investments are listed in the next paragraphs. In the summer of 1998, the Company committed to a $4 million investment in a limited partnership (as a limited partner) which will develop the Wonderful World Of Oz theme park. This theme park, located in Kansas, is based on the movie "The Wizard of Oz". In September 1998, the Company invested $400,000. In the first quarter, the Company invested an additional $1.8 million in the theme park. The Company invested the remaining $1.8 million during the second quarter. The Company expects that beginning next fiscal year it will receive revenues for the provision of marketing services and animatronics. In December 1998, the Company invested $3.5 million in convertible preferred stock in a private placement offering of a company engaged in developing Internet-based education for colleges and universities. Through relationships with its educational partners, it develops, manages and markets on-line courses and degree programs. During the second quarter, the Company paid $797,287.50 to exercise its option to acquire 177,175 shares of Navidec, Inc. at $4.50 each. The shares received cannot be sold for one year from the time of purchase. Navidec is traded on the NASDAQ system; as of March 31, 1999, the shares were at $11.00 each. The Company recorded an Unrealized Gain of $760,000 net of taxes of $392,000 for the Quarter ended March 31, 1999. The Company also has options on an additional 254,350 shares at $6.50; this option expires September 30, 1999. Year 2000 (Y2K) Most computer systems were originally designed to utilize a two- character field (or string of data) to reference any given year in the 20th century. If not corrected, many computer systems could fail or produce erroneous results. On January 1, 2000 computer systems may confuse "00" (meant to be 2000) as 1900. A product defined as being Year-2000 compliant will not produce errors in date data related to the year change from December 31, 1999 to January 1, 2000. State of Readiness The Company's plans for preparing and testing its computer systems for Y2K compliance have been approved by its management, and the project is being funded in the normal course of the Company's operations. The Company expects to complete remediation of the Year 2000 issue for all Information Systems by July 1999, although no assurance can be given of the timely completion of this project. The Company estimates that the software remediation phase is more than 90 percent complete at April 30, 1999, and the remaining conversions are on schedule to be completed by spring of 1999. The Company has identified 5 distinct areas for its Year 2000 compliance efforts which involves all areas of the its business: Critical Business Computer Systems: These include computer systems and applications relating to operations such as financial reporting, human resources, sales, purchasing and new business development. Suppliers: The Company is taking steps to determine the status of the Y2K compliance plans of its significant vendors. For instance, surveys have been sent to all significant vendors with whom the Company interacts, requesting that they report their respective level of Y2K compliance. The Company is currently monitoring the progress of those business-critical vendors who are still working towards achieving compliance. End-User Computing: The Company's plans include Y2K compliance of desktop and laptop computers used throughout the Company and replace or repair all non-complaint computers and related software. Application Development: The Company is addressing the compliance regarding all applications development for internal and external clients by modifying or replacing existing applications. Technical Infrastructure: The Company has established a testing facility for testing system infrastructures, internal phone systems, local area networks, electronic data center, e-mail systems and web hosting. Components are tested in the lab following Y2K compliance certification with suppliers. This should be the last step in Y2K verification. Y2K Programming Timing Plan Date Present Status Critical Business Computer Systems 7/99 80% Suppliers 2/99 100% End-User computing 1/99 100% Application Development 5/99 85% Technical Infrastructure 6/99 80% Y2K Costs The Company estimates that it will spend about $400,000 during the current fiscal year for its Y2K compliance efforts. This estimate is as of April 30, 1999, and excludes the time that may be spent by management and administrative staff in guiding and assisting the information technology effort described above. All Y2K related costs are expected to be funded through operating cash flows. The cost of the project is based on the Company's estimates. Y2K Risks The most reasonably likely worst case scenario for the Company with respect to the Y2K problem is the failure of a third parties such as: energy, computer and component hardware, as well as other potential product or service suppliers failing to provide products and/or services. The failure to correct a material Year 2000 problem could result in an interruption in, or a failure of, certain normal business activities or operations. Such failures could materially and adversely affect the Company's result of operations, liquidity and financial condition. Due to the general uncertainty inherent in the Year 2000 problem, resulting in part from the uncertainty of the Year 2000 readiness of third- party suppliers and customers, the Company is unable to determine at this time whether the consequences of Year 2000 failures will have a material impact on the Company's result of operations, liquidity or financial condition. The Year 2000 Project is expected to reduce the Company's level of uncertainty about the Year 2000 problem, and in particular, about the Year 2000 compliance and readiness of its material third parties. The Company believes, but can not assure that with the completion of the Project as scheduled, the possibility of significant interruptions of normal operations should be reduced. Readers are cautioned that forward-looking statements contained in the Year 2000 update should be read in conjunction with the Company's disclosures under the heading: "CAUTIONARY STATEMENT FOR THE PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995". Y2K Contingency Plan: Currently, the Company does not anticipate the need for a contingency plan. If necessary, a decision to create and implement a contingency plan is expected to be made by summer 1999. "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," and "potential," among others. These forward- looking statements are based on the Company's 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, the Company notes that a variety of factors could cause the Company's 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 results of the Company include but are not limited to: (1) the complexity and uncertainty regarding the development of new products and services; (2) the loss of market share through competition; (3) the introduction of competing products or service technologies by other companies; (4) pricing pressures from competitors and/or customers; (5) the Company's inability to protect proprietary information and technology; (6) the Company's and its significant third parties inability to complete the implementation of its Year 2000 plans timely; (7) the loss of key employees. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION Item 1. 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 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders The Company's shareholders approved the election of the Board of Directors at the Annual Meeting of Shareholders held on April 20, 1999. In addition, the shareholders approved amendments to the 1997 Restricted Stock Plan, the 1997 Incentive Stock Option Plan, and the 1997 Employee Stock Purchase Plan. Voting was as follows: Item For Against Abstained A. Directors Steve Toth, Jr. 31,331,613 0 3,000 Martin S. Suchik 31,331,613 0 3,000 Thomas W. Marquis 31,331,613 0 3,000 Terry Sparks 31,331,613 0 3,000 Jerry L. Barton 31,331,613 0 3,000 Dr. Kenneth L. Bernhardt 31,331,613 0 3,000 Robert F. Sui 31,331,613 0 3,000 B. 1997 Incentive Stock Option Plan 31,297,527 14,718 22,368 C. 1997 Restricted Stock Plan 31,295,471 14,774 24,368 D. 1997 Employee Stock Purchase Plan 31,302,927 7,218 24,468 Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K Exhibits None Reports on Form 8-K None Pursuant to the requirement of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. VSI Holdings, Inc. Registrant May 14, 1999 /S/Steve Toth, Jr. Steve Toth, Jr., Director, President and Chief Executive Officer May 14, 1999 /S/Thomas W. Marquis Thomas W. Marquis, Director, Treasurer, Chief Accounting and Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----