<DOCUMENT>
<TYPE>10-K/A
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<FILENAME>k64724e10-ka.txt
<DESCRIPTION>AMENDMENT #1 TO ANNUAL REPORT DATED 09/30/00
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<PAGE>   1

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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                            ------------------------

                                  FORM 10-K/A
                               (AMENDMENT NO. 1)
[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

                        COMMISSION FILE NUMBER: 1-12942

                               VSI HOLDINGS, INC.
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<Table>
<S>                                            <C>
                   GEORGIA                                       22-2135522
       (STATE OR OTHER JURISDICTION OF                        (I.R.S. EMPLOYER
        INCORPORATION OR ORGANIZATION)                      IDENTIFICATION NO.)
</Table>

                             41000 WOODWARD AVENUE
                     BLOOMFIELD HILLS, MICHIGAN 48304-2263
              (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

       REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (248) 644-0500

          SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
             COMMON STOCK, $.01 PAR VALUE; AMERICAN STOCK EXCHANGE

        SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE

     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.
                  DOCUMENTS INCORPORATED BY REFERENCE -- NONE

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                                    PART I.

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
"turnkey" 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

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     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 Web site 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 motorsports, Ford Motor
Company chose us to set up a Web site and "virtual" connection to fans of its
race vehicles and drivers. The subscription-funded site

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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
healthcare 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
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     - 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 salespeople 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 salesperson 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 salespeople 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

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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 workstations, 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

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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 salespeople, 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
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     - 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.

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     Our comprehensive set of tools and services for building analytical
solutions includes:

     - 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

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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 suggest 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 online 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.

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     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.

                                        10
<PAGE>   12

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.

                                    PART II

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:

<Table>
<Caption>
                      FISCAL QUARTERS                           HIGH      LOW
                      ---------------                           ----      ---
<S>                                                             <C>      <C>
First Quarter, 1999.........................................    $6.00    $3.19
Second Quarter, 1999........................................     7.25     4.75
Third Quarter, 1999.........................................     5.88     4.13
Fourth Quarter, 1999........................................     4.69     3.13

First Quarter, 2000.........................................    $4.44    $3.00
Second Quarter, 2000........................................     4.00     2.75
Third Quarter, 2000.........................................     3.38     2.50
Fourth Quarter, 2000........................................     3.81     2.13
</Table>

     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

                                        11
<PAGE>   13

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.

BALANCE SHEET DATA

<Table>
<Caption>
                                                               AS OF
                                      --------------------------------------------------------
                                      SEP. 30     SEP. 30     SEP. 30     SEP. 30     SEP. 30
                                        2000        1999        1998        1997        1996
                                      --------    --------    --------    --------    --------
                                                           (IN THOUSANDS)
<S>                                   <C>         <C>         <C>         <C>         <C>
Working Capital.....................  $ 10,231    $  9,074    $  9,121    ($ 1,969)   $  9,105
Total Assets........................   116,129      98,302      89,555      77,069      66,856
Long-Term Debt......................    19,429      19,296      17,506       5,281       1,900
Redeemable Common Stock.............         0           0       1,960           0           0
Total Liabilities...................    88,578      75,983      69,413      65,402      36,784
Stockholders' Equity................    27,551      22,319      20,142      11,667      28,072
See footnotes below.................         1           1           1       2 & 3           2
</Table>

<Table>
<Caption>
OPERATING DATA
<S>                                   <C>         <C>         <C>         <C>         <C>
<Caption>
                                                             YEAR ENDED
                                      --------------------------------------------------------
                                      SEP. 30     SEP. 30     SEP. 30     SEP. 30     SEP. 30
                                        2000        1999        1998        1997        1996
                                      --------    --------    --------    --------    --------
                                                  (IN THOUSANDS, EXCEPT PER SHARE)
<S>                                   <C>         <C>         <C>         <C>         <C>
Net Sales...........................  $187,255    $143,360    $163,158    $130,526    $128,213
Income (Loss) from Continuing
  Operations........................     5,550        (498)      9,211       9,658       9,141
Income (Loss) from Continuing
  Operations Per Share..............      0.17       (0.02)       0.28        0.20        0.18
Number of Shares....................    33,070      32,816      32,851      32,784      32,767
See footnotes below.................     1 & 5       1 & 5           1       2 & 4       2 & 4
</Table>

     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 BKNT 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.

                                        12
<PAGE>   14

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.

FINANCIAL CONDITION

     The Company's total assets increased to $116,129,000 at September 30, 2000
from $98,302,000 at September 30, 1999. This increase in total assets was due
primarily to a 46.7% increase in the Company's net trade account receivables.
Those receivables increased $23,064,000 to $72,432,000 at September 30, 2000
from $49,368,000 at September 30, 1999.

     The increase in the Company's net trade account receivables reflected a
$14,087,000, or 35.4%, increase in billed trade account receivables and an
$8,977,000, or 94.0%, increase in unbilled trade account receivables. The
increase in billed trade account receivables was primarily attributable to a
$44,000,000 increase in sales over the prior period, a large portion of which
occurred in the fourth quarter of fiscal 2000 as a result of the completion of
several large projects for a significant customer. The increase in unbilled
trade account receivables was primarily attributable to two large projects for a
significant customer.

     The amounts associated with those two projects were not billed due to
delays in the receipt of necessary invoicing information from the customer.
Currently, as an accommodation to that customer and to facilitate the customer's
internal bill processing and payment functions, no project for that customer is
billed to that customer until that customer has issued to the Company such
invoicing information as the customer reasonably deems appropriate. In an effort
to reduce the unbilled accounts receivable associated with delays by the
customer in issuing such invoicing information, the customer and the Company are
developing an invoicing process that would apply to approximately 25% of the
work performed for that customer and would provide in advance the invoicing
information desired by the customer with respect to the projects covered
thereby. It is expected that this invoicing process will result in more
expeditious billing with respect to all projects covered by it and will reduce
the amount of unbilled trade account receivables associated with that customer.
It is also expected that the amount of unbilled trade account receivables will
decrease during the remainder of the year as a result of several large jobs
being completed and subsequently billed upon receipt of appropriate invoicing
information from the customer.

     The Company's total current liabilities increased $12,462,000, or 22.0%, to
$69,149,000 at September 30, 2000 from $56,687,000 at September 30, 1999. This
increase was primarily attributable to a $6,788,000 increase in notes payable to
bank, a $5,027,000 increase in trade accounts payable, a $3,420,000 increase in
notes payable to related parties, and a $5,600,000 decrease in advances from
customers for uncompleted projects.

     The increases in notes payable to bank and trade accounts payable were
primarily attributable to the increase in the Company's unbilled trade account
receivables, which the Company essentially finances with its own capital
resources until such time as it can bill its customers for the work performed in
connection with such receivables. The increase in notes payable to related
parties reflect unsecured borrowings aggregating

                                        13
<PAGE>   15

$3,420,000 on a demand basis from the Company's controlling stockholder and an
affiliate of that stockholder. (See Note 5 to the Company's consolidated
financial statements.) Such borrowings were used to fund the Company's then
existing short-term capital requirements.

     With respect to the decrease in advances from customers for uncompleted
projects, approximately $3,800,000 was attributable to the transfer from the
Company to a customer of responsibility for disbursing monies collected from the
customer's automobile dealers to fund magazines and special events for buyers of
cars manufactured by that customer. The decrease in advances from customers for
uncompleted projects associated with the transfer of the undisbursed funds to
the customer for future disbursement was accompanied by a corresponding decrease
in cash. The balance of the decrease in advances from customers for uncompleted
projects was attributable to the completion of a number of projects.

     Primarily as a result of the Company's return to profitability in the
fiscal year ended September 30, 2000, total stockholders' equity increased to
$27,551,000 at September 30, 2000 from $22,319,000 at September 30, 1999. This
increase of $5,232,000, or 23.4%, reflects a $5,550,000 increase in retained
earnings, a $1,125,000 decrease in accumulated comprehensive income, a
$1,128,000 increase in common stock, and a $321,000 increase in treasury stock.

OPERATING RESULTS

MARKETING SERVICES SEGMENT:

     The Company's marketing services segment is comprised of Visual Services,
Inc., Vispac, Inc., PSG International, Inc., and eCity Studios, Inc., which
provide marketing services under single or multiple phase contractual
arrangements with customers for projects generally ranging from 3 months to 24
months in duration. Following execution of a written contract obligating the
customer to pay for services rendered, revenue is recognized on completion of
each project phase or otherwise as the services are rendered, in each case as
specified in the agreement with the customer. Such revenue is recognized at the
estimated realizable amount attributable under the agreement with the customer
to the completed project phase or the service rendered, as applicable. Revenue
for services attributable to customer changes to project specifications is
recognized when the customer has executed a written change order and the
services contemplated by the change order have been rendered or the applicable
project phase has been completed, whichever occurs later. Unbilled trade
accounts receivable result from revenue recognized for completed project phases
in advance of customer billings. (See Note 2 to the Company's consolidated
financial statements.)

  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 to 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, which consisted primarily of increases in personnel 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.

                                        14
<PAGE>   16

  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:

     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.

  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 was 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
                                        15
<PAGE>   17

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 exhibits 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.

  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.

                                        16
<PAGE>   18

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.

     As of September 30, 2000, we had invested an aggregate of $4.5 million in
Oz Entertainment Company ("OEC") and K.C. Investors, L.P. (as a limited
partner), which plan to develop a theme park in Kansas based on the story "The
Wizard of Oz." With respect to this investment, we recognized losses totaling
$530,000 in fiscal year 1999, and recognized additional losses totaling $658,000
in fiscal year 2000. We expect to see continued losses until the opening of the
park, which is currently scheduled for 2004. The park is planned to be
constructed on 9,000 acres of land currently owned by the federal government. It
is necessary to receive title to the land before construction can begin. In
order to receive title to the land, approval must be received from two
governmental authorities. It is anticipated that the first authority will vote
to approve the project in fall, 2001. The second authority will not consider the
matter until the first authority approves the project. If the two approvals are
not timely received, the rights to construct a park using the "Oz" theme on that
land may expire before construction could begin. The success of the park as an
investment is dependent upon, among other things, receipt of title to the land,
certain infrastructure improvements being completed by or paid for by
governmental agencies, the availability of financing arranged through
governmental agencies, and the availability of additional public or private
financing. If the park does not open, the entire investment, currently valued at
$3,312,000, is at risk. Although projections provided and prepared by the
management of OEC forecasts that the park will be profitable upon opening, there
can be no assurance that the park will be opened or that such result will be
achieved. See Item 13 for a discussion of related party investments in OEC and
K.C. Investors, L.P.

     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

                                        17
<PAGE>   19

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

                                        18
<PAGE>   20

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 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) 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
timely complete construction of the park, and to operate it profitably once the
park opens; (11) uncertainties relating to business and economic conditions;
(12) management's ability to maintain proper contract and employee staffing
levels; (13) the value of investments of the Company;

                                        19
<PAGE>   21

(14) our ability to timely bill and collect trade accounts receivables; (15)
cutbacks in client budgets, project deferrals and cancellations; and (16) our
ability to manage our growth and profitability.

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.

                                    PART III

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.

                                        20
<PAGE>   22

     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.

                                        21
<PAGE>   23

     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:

<Table>
<Caption>
                                                                                          LONG TERM
                                                                                         COMPENSATION
                                                      ANNUAL COMPENSATION                   AWARDS
                                          --------------------------------------------   ------------
                  (A)                     (B)       (C)          (D)          (E)            (F)
                  ---                     ----   ----------   ---------   ------------   ------------
                                                                          OTHER ANNUAL    RESTRICTED
                                                                          COMPENSATION   STOCK AWARDS
NAME AND PRINCIPAL POSITION               YEAR   SALARY ($)   BONUS ($)       ($)            ($)
---------------------------               ----   ----------   ---------   ------------   ------------
<S>                                       <C>    <C>          <C>         <C>            <C>
Steve Toth Jr...........................  2000    312,000         0              0
CEO                                       1999    312,000         0          1,920
                                          1998    642,000         0            950
Thomas W. Marquis Treasurer,............  2000    170,000         0              0
Secretary                                 1999    150,000         0          1,800
                                          1998    150,000         0            885
Steve Schultz...........................  2000    220,000         0              0
Exec V P -- Sales                         1999    206,660         0          1,920
                                          1998    206,660         0            950         $566,234
Terry Davis.............................  2000    300,000         0              0
Exec V P                                  1999    300,000         0          1,920
                                          1998    300,000         0            950
</Table>

     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.

                                        22
<PAGE>   24

     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.

                              [PERFORMANCE GRAPH]

<Table>
<Caption>
----------------------------------------------------------------------------------------------------------------
CHART POINTS                         09/30/95     09/30/96     09/30/97     09/30/98     09/30/99     09/30/00
----------------------------------------------------------------------------------------------------------------
<S>                                <C>          <C>          <C>          <C>          <C>          <C>
 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
</Table>

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:

<Table>
<Caption>
                      NAME AND ADDRESS                          SHARES OWNED    % OWNERSHIP
                      ----------------                          ------------    -----------
<S>                                                             <C>             <C>
Steve Toth, Jr. and family members(1).......................     27,905,755       84.10%
  41000 Woodward Avenue
  Bloomfield Hills, Michigan 48304
Martin S. Suchik(2).........................................        504,025        1.52%
  1778 Ellsworth Industrial Blvd.
  Atlanta, Georgia 30318
Thomas W. Marquis(3)........................................        514,431        1.55%
  41000 Woodward Avenue
  Bloomfield Hills, Michigan 48304
</Table>

                                        23
<PAGE>   25

<Table>
<Caption>
                      NAME AND ADDRESS                          SHARES OWNED    % OWNERSHIP
                      ----------------                          ------------    -----------
<S>                                                             <C>             <C>
Steve Schultz...............................................         97,192         .29%
  41000 Woodward Avenue
  Bloomfield Hills, Michigan 48304
Terry Davis.................................................        918,906        2.77%
  41000 Woodward Avenue
  Bloomfield Hills, Michigan 48304
Harold Poling(4)............................................        309,600        0.93%
  290 Town Center Drive, Suite 322
  Dearborn, Michigan 48126
Ralph Armijo(4).............................................          2,100         .01%
  6399 South Fiddler Green Circle
  Greenwood Village, Colorado 80111
Robert F. Sui (4)...........................................          4,600         .01%
  39577 Woodward Avenue
  Bloomfield Hills, Michigan 48304
William James(4)............................................          7,100         .02%
  38710 Woodward Avenue
  Bloomfield Hills, Michigan 48304
All directors and officers as a group (9 persons) (1-4).....     30,263,709       90.57%
</Table>

---------------
(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.

                                        24
<PAGE>   26

     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.

                      VSI HOLDINGS, INC. AND SUBSIDIARIES

                         CONSOLIDATED FINANCIAL REPORT
                               SEPTEMBER 30, 2000

                                    CONTENTS

<Table>
<S>                                                             <C>
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
</Table>

                                        25
<PAGE>   27

                          INDEPENDENT AUDITOR'S REPORT

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.

                                          PLANTE & MORAN, LLP

Ann Arbor, Michigan
December 22, 2000

                                        26
<PAGE>   28

                      VSI HOLDINGS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

<Table>
<Caption>
                                                                     SEPTEMBER 30
                                                              ---------------------------
                                                                  2000           1999
                                                              ------------    -----------
<S>                                                           <C>             <C>
ASSETS
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
                                                              ============    ===========
                          LIABILITIES AND STOCKHOLDERS' EQUITY
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
                                                              ============    ===========
</Table>

   See Accompanying Summary of Accounting Policies and Notes to Consolidated
                              Financial Statements
                                        27
<PAGE>   29

                      VSI HOLDINGS, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENT OF OPERATIONS

<Table>
<Caption>
                                                                 YEAR ENDED SEPTEMBER 30
                                                       --------------------------------------------
                                                           2000            1999            1998
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
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
                                                       ============    ============    ============
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
                                                       ============    ============    ============
</Table>

     See Accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements

                                        28
<PAGE>   30

                      VSI HOLDINGS, INC. AND SUBSIDIARIES
           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<Table>
<Caption>
                                         COMMON STOCK                ACCUMULATED OTHER COMPREHENSIVE INCOME
                                         ------------                --------------------------------------

                                                             ADDITIONAL                                    STOCK
                                                               PAID-IN      RETAINED      TREASURY     SUBSCRIPTIONS
                                       SHARES      AMOUNT      CAPITAL      EARNINGS        STOCK       RECEIVABLE
                                     ----------   --------   -----------   -----------   -----------   -------------
<S>                                  <C>          <C>        <C>           <C>           <C>           <C>
BALANCE -- October 1, 1997.........  40,371,000   $404,000   $ 7,917,000   $ 6,253,000   $(2,907,000)    $     --
Net income.........................          --         --            --     9,054,000            --           --
Exercise of stock options (Note
  12)..............................      64,000         --        45,000            --            --           --
Issuance of stock options (Note
  12)..............................          --         --        83,000            --            --           --
Acquisition of stock for
  treasury.........................          --         --            --            --      (736,000)          --
Distributions to stockholders......          --         --            --       (89,000)           --           --
Foreign currency translation
  adjustments......................          --         --            --            --            --           --
Stock issued in acquisition (Note
  1)...............................     280,000      3,000            --            --            --           --
Issuance of stock..................      26,000         --       163,000            --            --      (25,000)
                                     ----------   --------   -----------   -----------   -----------     --------
BALANCE -- September 30, 1998......  40,741,000    407,000     8,208,000    15,218,000    (3,643,000)     (25,000)
Net loss...........................          --         --            --      (498,000)           --           --
Exercise of stock options (Note
  12)..............................       2,000         --         1,000            --            --           --
Issuance of restricted stock (Note
  11)..............................     154,000      2,000       985,000            --            --           --
Acquisition of stock for
  treasury.........................          --         --            --            --      (798,000)          --
Foreign currency translation
  adjustments......................          --         --            --            --            --           --
Issuance of stock..................      87,000      1,000       417,000            --            --           --
Retirement of treasury stock.......  (8,024,000)   (80,000)   (2,826,000)           --     2,906,000           --
Repayment of stock subscriptions...          --         --            --            --            --       25,000
Tax benefit of stock options
  exercised........................          --         --        92,000            --            --           --
Issuance of stock options (Note
  12)..............................          --         --        72,000            --            --           --
Unrealized gain on investments.....          --         --            --            --            --           --
                                     ----------   --------   -----------   -----------   -----------     --------
BALANCE -- September 30, 1999......  32,960,000    330,000     6,949,000    14,720,000    (1,535,000)          --
Net income.........................          --         --            --     5,550,000            --           --
Exercise of stock options (Note
  12)..............................     440,000      4,000        70,000            --            --           --
Issuance of restricted stock (Note
  11)..............................     175,000      2,000     1,037,000            --            --           --
Acquisition of stock for
  treasury.........................          --         --            --            --      (321,000)          --
Foreign currency translation
  adjustments......................          --         --            --            --            --           --
Issuance of stock..................       5,000         --        15,000            --            --           --
Unrealized loss on investments.....          --         --            --            --            --           --
                                     ----------   --------   -----------   -----------   -----------     --------
BALANCE -- September 30, 2000......  33,580,000   $336,000   $ 8,071,000   $20,270,000   $(1,856,000)    $     --
                                     ==========   ========   ===========   ===========   ===========     ========

<Caption>
                                        ACCUMULATED OTHER COMPREHENSIVE INCOME
                                        --------------------------------------
                                       FOREIGN
                                      CURRENCY     UNREALIZED GAIN       TOTAL
                                     TRANSLATION      (LOSS) ON      STOCKHOLDERS'
                                     ADJUSTMENTS     INVESTMENTS        EQUITY
                                     -----------   ---------------   -------------
<S>                                  <C>           <C>               <C>
BALANCE -- October 1, 1997.........   $     --       $       --       $11,667,000
Net income.........................         --               --         9,054,000
Exercise of stock options (Note
  12)..............................         --               --            45,000
Issuance of stock options (Note
  12)..............................         --               --            83,000
Acquisition of stock for
  treasury.........................         --               --          (736,000)
Distributions to stockholders......         --               --           (89,000)
Foreign currency translation
  adjustments......................    (23,000)              --           (23,000)
Stock issued in acquisition (Note
  1)...............................         --               --             3,000
Issuance of stock..................         --               --           138,000
                                      --------       ----------       -----------
BALANCE -- September 30, 1998......    (23,000)              --        20,142,000
Net loss...........................         --               --          (498,000)
Exercise of stock options (Note
  12)..............................         --               --             1,000
Issuance of restricted stock (Note
  11)..............................         --               --           987,000
Acquisition of stock for
  treasury.........................         --               --          (798,000)
Foreign currency translation
  adjustments......................     24,000               --            24,000
Issuance of stock..................         --               --           418,000
Retirement of treasury stock.......         --               --                --
Repayment of stock subscriptions...         --               --            25,000
Tax benefit of stock options
  exercised........................         --               --            92,000
Issuance of stock options (Note
  12)..............................         --               --            72,000
Unrealized gain on investments.....         --        1,854,000         1,854,000
                                      --------       ----------       -----------
BALANCE -- September 30, 1999......      1,000        1,854,000        22,319,000
Net income.........................         --               --         5,550,000
Exercise of stock options (Note
  12)..............................         --               --            74,000
Issuance of restricted stock (Note
  11)..............................         --               --         1,039,000
Acquisition of stock for
  treasury.........................         --               --          (321,000)
Foreign currency translation
  adjustments......................    (17,000)              --           (17,000)
Issuance of stock..................         --               --            15,000
Unrealized loss on investments.....         --       (1,108,000)       (1,108,000)
                                      --------       ----------       -----------
BALANCE -- September 30, 2000......   $(16,000)      $  746,000       $27,551,000
                                      ========       ==========       ===========
</Table>

     See Accompanying Summary of Accounting Policies and Notes to Consolidated
Financial Statements

                                        29
<PAGE>   31

                      VSI HOLDINGS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS

<Table>
<Caption>
                                                                 YEAR ENDED SEPTEMBER 30
                                                       --------------------------------------------
                                                           2000            1999            1998
                                                       ------------    ------------    ------------
<S>                                                    <C>             <C>             <C>
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
                                                       ============    ============    ============
</Table>

                 See Notes to Consolidated Financial Statements
                                        30
<PAGE>   32

                      VSI HOLDINGS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                          SEPTEMBER 30, 2000 AND 1999

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. provide marketing services under
single or multiple phase contractual arrangements with customers for projects
generally ranging from 3 months to 24 months in duration. Following execution of
a written contract obligating the customer to pay for services rendered, revenue
is recognized on completion of each project phase or otherwise as the services
are rendered, in each case as specified in the agreement with the customer. Such
revenue is recognized at the estimated realizable amount attributable under the
agreement with the customer to the completed project phase or the service
rendered, as applicable. Revenue for services attributable to customer changes
to project specifications is recognized when the customer has executed a written
change order and the services contemplated by the change order have been
rendered or the applicable project phase has been completed, whichever occurs
later. Unbilled trade accounts receivable result from revenue recognized for
completed project phases in advance of customer billings.

     Advanced Animations, Inc. manufactures product simulators, animatronic
figures and displays for theme parks, casinos and retailers under written
display contracts of varying duration. It recognizes revenue on each of those
contracts based on its estimate of the percentage of work under the contract
that has been completed. A percentage of the contract price, determined by the
ratio of incurred costs to total estimated costs, is
                                        31
<PAGE>   33
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     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.

     GOODWILL -- Goodwill represents the excess cost of acquiring PSG
International, Inc. over the fair value of its net assets at the date of
acquisition. The carrying value of goodwill is evaluated annually based on the
projected discounted cash flows of PSG International, Inc. To the extent the
carrying value of goodwill significantly exceeds the projected discounted cash
flows, a write-down of goodwill is recorded. During the year ended September 30,
1999, as a result of a reduction in the estimated future business generated by
PSG International, Inc., goodwill of $2,154,000 relating to the acquisition was
written off because it was considered to have no continuing value. In addition,
the Company reduced the life over which the remaining goodwill was being
amortized from 15 to 6 years. This change in the estimated life of the goodwill
had the effect of decreasing net income for the year ended September 30, 1999 by
$260,000 ($0.01 per share). At September 30, 2000 and 1999, accumulated
amortization amounted to $1,047,000 and $620,000, respectively.

     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.

     RETIREMENT PLAN -- The Company has a voluntary retirement savings plan
designed in accordance with Section 401(k) of the Internal Revenue Code that
covers all eligible employees. Employer contributions are discretionary and
determined annually by management. There was no contribution made for the year
ended September 30, 2000. Employer contributions amounted to $229,000 of the
Company's stock and $212,000 of cash for the years ended September 30, 1999 and
1998, respectively.

                                        32
<PAGE>   34
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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.

     STOCK OPTIONS -- The Company has several stock option plans (see Note 12).
Options granted to nonemployees are accounted for at fair value. Options granted
to employees and directors are accounted for using the intrinsic value method,
under which compensation expense is recorded at the amount by which the market
price of the underlying stock at the grant date exceeds the exercise price of an
option. Under the Company's plans, the exercise price on all options granted
equals or exceeds the fair value of the stock at the grant date. Accordingly, no
compensation cost is recorded as a result of stock option awards to employees
under the plans.

     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.

     Debt securities that the Company has the positive intent and ability to
hold to maturity are classified as held-to-maturity securities and recorded at
amortized cost in investments. Securities investments not classified as either
held-to-maturity or trading securities are classified as available-for-sale
securities. Available-for-sale securities are recorded at fair value in
investments on the balance sheet, with the change in fair value during the
period excluded from earnings and recorded net of tax as a component of other
comprehensive income.

     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.

     FOREIGN CURRENCY TRANSLATION -- The assets and liabilities denominated in a
foreign currency are translated into U.S. dollars at the current rate of
exchange on the last day of the reporting period, revenue and expenses are
translated at the average monthly exchange rates, and all other equity
transactions are translated using the actual rate on the date of the
transaction.

     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.

                                        33
<PAGE>   35
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     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:

<Table>
<Caption>
                                                                   2000          1999
                                                                ----------    ----------
<S>                                                             <C>           <C>
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
                                                                ==========    ==========
</Table>

     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:

<Table>
<Caption>
                                                                   2000          1999
                                                                ----------    ----------
<S>                                                             <C>           <C>
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 and nonmarketable
     securities.............................................    $4,190,000    $7,764,000
                                                                ==========    ==========
</Table>

     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".

                                        34
<PAGE>   36
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     In addition to the cash invested, the Company has provided web-site
development and promotional services totaling $2,247,000 to the Oz Entertainment
Company. At September 30, 1999, the Company had receivables of approximately
$1,410,000 and accumulated costs on uncompleted programs of approximately
$147,000 relating to KCI and the Oz Entertainment Company. The amounts were
collected subsequent to September 30, 2000 from additional funds invested by CLT
Associates, L.P.

     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:

<Table>
<Caption>
                                                                                  DEPRECIABLE
                                                       2000           1999        LIFE - YEARS
                                                    -----------    -----------    ------------
<S>                                                 <C>            <C>            <C>
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
                                                    ===========    ===========
</Table>

     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.

                                        35
<PAGE>   37
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 5 -- NOTES PAYABLE

     The Company has several lines of credit, as follows:

<Table>
<Caption>
                                                                  2000           1999
                                                               -----------    -----------
<S>                                                            <C>            <C>
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
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
                                                               ===========    ===========
</Table>

     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:

<Table>
<Caption>
                                                                  2000           1999
                                                               -----------    -----------
<S>                                                            <C>            <C>
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...............................................     15,757,000     11,636,000
       Less current portion................................      3,420,000             --
                                                               -----------    -----------
       Long-term portion...................................    $12,337,000    $11,636,000
                                                               ===========    ===========
</Table>

     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.

                                        36
<PAGE>   38
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- LONG-TERM DEBT

     Long-term debt consists of the following:

<Table>
<Caption>
                                                                   2000          1999
                                                                ----------    ----------
<S>                                                             <C>           <C>
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.......................................................     7,644,000     8,176,000
Less current portion........................................       552,000       516,000
                                                                ----------    ----------
Long-term portion...........................................    $7,092,000    $7,660,000
                                                                ==========    ==========
</Table>

     Estimated principal payments due on the long-term debt are as follows:

<Table>
<Caption>
                 YEARS ENDING SEPTEMBER 30                        AMOUNT
                 -------------------------                        ------
<S>                                                             <C>
2001........................................................    $  552,000
2002........................................................       246,000
2003........................................................       229,000
2004........................................................     4,586,000
2005........................................................        93,000
2006 and thereafter.........................................     1,938,000
                                                                ----------
     Total..................................................    $7,644,000
                                                                ==========
</Table>

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.

                                        37
<PAGE>   39
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The minimum lease payments for the remaining years under the above leases
are as follows:

<Table>
<Caption>
       YEARS ENDING SEPTEMBER 30            RELATED PARTY      OTHER          TOTAL
       -------------------------            -------------    ----------    -----------
<S>                                         <C>              <C>           <C>
2001....................................     $  551,000      $4,102,000    $ 4,653,000
2002....................................        623,000       3,791,000      4,414,000
2003....................................        638,000       1,759,000      2,397,000
2004....................................        638,000         121,000        759,000
2005....................................        638,000          30,000        668,000
2006 and thereafter.....................        797,000              --        797,000
                                             ----------      ----------    -----------
       Total............................     $3,885,000      $9,803,000    $13,688,000
                                             ==========      ==========    ===========
</Table>

     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:

<Table>
<Caption>
                 YEARS ENDING SEPTEMBER 30                       AMOUNT
                 -------------------------                      --------
<S>                                                             <C>
2001........................................................    $322,000
2002........................................................      88,000
2003........................................................      25,000
                                                                --------
       Total................................................    $435,000
                                                                ========
</Table>

     Rent expense was as follows for the years ended September 30:

<Table>
<Caption>
                                                2000          1999          1998
                                             ----------    ----------    ----------
<S>                                          <C>           <C>           <C>
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
                                             ==========    ==========    ==========
</Table>

NOTE 8 -- INCOME TAXES

     The following is a summary of the deferred tax assets and liabilities at
September 30, 2000 and 1999:

<Table>
<Caption>
                                                                   2000          1999
                                                                ----------    ----------
<S>                                                             <C>           <C>
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
                                                                ==========    ==========
</Table>

                                        38
<PAGE>   40
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The provision for income taxes consists of the following:

<Table>
<Caption>
                                                                  2000         1999         1998
                                                               ----------    --------    ----------
<S>                                                            <C>           <C>         <C>
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
                                                               ==========    ========    ==========
</Table>

     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:

<Table>
<Caption>
                                                         2000         1999          1998
                                                      ----------    ---------    ----------
<S>                                                   <C>           <C>          <C>
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
                                                      ==========    =========    ==========
</Table>

     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.

                                        39
<PAGE>   41
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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:

<Table>
<Caption>
                                2000                      1999                      1998
                       -----------------------   -----------------------   -----------------------
                       UNISSUED   UNRECOGNIZED   UNISSUED   UNRECOGNIZED   UNISSUED   UNRECOGNIZED
                        SHARES    COMPENSATION    SHARES    COMPENSATION    SHARES    COMPENSATION
                       --------   ------------   --------   ------------   --------   ------------
<S>                    <C>        <C>            <C>        <C>            <C>        <C>
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............        --                        --
</Table>

NOTE 12 -- STOCK OPTIONS

     The Company issued options for the Company's common stock in the following
arrangements:

  Mr. Toth's Options

     In 1993, the Company granted its majority stockholder options to purchase
825,000 shares of common stock at $.15625 per share for providing assistance
with financing in accordance with a Plan of Reorganization. The final 425,000 of
options as of September 30, 1999 were exercised during the year ended September
30, 2000.

  Other Options

     During the years ended September 30, 1999 and 1998, the Company issued
stock options for 85,000 and 58,000 common shares, respectively, to certain
consultants of the Company. The exercise prices for the years ended September
30, 1999 and 1998 ranged from $5.75 to $8.20 and $6.20 to $8.20, respectively.
The fair value of the options amounted to $89,000 and $83,000, respectively,
which was charged to expense. Generally, the options are exercisable between two
and three years from the date of issuance. No options have been exercised.
Options for 143,000 shares remain outstanding at September 30, 2000.

                                        40
<PAGE>   42
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company has stock options outstanding or issuable for the benefit of
employees and directors under the following plans:

     1986 INCENTIVE STOCK OPTION PLAN -- Options under this plan were granted to
officers and key employees at prices not less than the market price at date of
grant. Options are generally exercisable one-third annually commencing 12 months
after the date granted and expire at the end of six years. This plan terminated
in March 1996 and no new options will be granted. There were no options
exercised during the years ended September 30, 2000 and 1999. Options for 22,000
shares were exercised during the year ended September 30, 1998. Options for
40,000 shares remain outstanding at September 30, 2000.

     1986 NONQUALIFIED STOCK OPTION PLAN -- Options under this plan were granted
to officers and employees at prices not less than the market price at date of
grant. Options are generally exercisable one-third annually commencing 12 months
after the date granted and expire at the end of 10 years. This plan terminated
in March 1996 and no new options will be granted under the plan. Options for
15,000, 2,090 and 42,290 shares were exercised during the years ended September
30, 2000, 1999 and 1998, respectively. Options for 33,620 shares remain
outstanding at September 30, 2000.

     1997 NONQUALIFIED STOCK OPTION PLAN AND 1997 INCENTIVE STOCK OPTION
PLAN -- These plans were established during 1997 to issue options to officers
and employees at prices not less than the market price at date of grant. Each
plan is authorized to issue options for 500,000 shares of the Company's common
stock. During the year ended September 30, 1999, the Company approved the
addition of 1,000,000 options to the 1997 Incentive Stock Option Plan.
Generally, the options vest over a three-year period with 50 percent vesting
after two years and the remaining vesting after three years from the date of
grant. During the years ended September 30, 2000, 1999 and 1998, 48,000, 67,666,
and 518,000 incentive stock options were granted, respectively. Options for
64,666 and 51,000 were cancelled during the years ended September 30, 2000 and
1999, respectively. No options have been exercised under these plans. Options
for 518,000 shares remain outstanding at September 30, 2000.

     INDEPENDENT DIRECTOR STOCK OPTION PLAN -- Options under this plan are
granted to independent directors who are neither employees nor beneficial owners
of 5 percent or more of the Company's common stock at prices equal to the market
price of the Company's common stock at date of grant. During the years ended
September 30, 2000 and 1998, 120,000 and 10,000 options were granted,
respectively. No options were granted during the year ended September 30, 1999.
During the year ended September 30, 2000, options for 27,500 were cancelled. No
options were exercised during the years ended September 2000, 1999 and 1998.
Options granted are usually exercisable 30 days from date of grant as determined
by vesting schedules in the plan. Options for 122,500 shares remain outstanding
at September 30, 2000.

     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.

     Information regarding these fixed-price option plans for the years ended
September 30, 2000, 1999 and 1998 are as follows:

                                        41
<PAGE>   43
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<Table>
<Caption>
                                          2000                     1999                     1998
                                ------------------------   ---------------------   -----------------------
                                                WEIGHTED                WEIGHTED                  WEIGHTED
                                                AVERAGE                 AVERAGE                   AVERAGE
                                                EXERCISE                EXERCISE                  EXERCISE
                                   SHARES        PRICE       SHARES      PRICE        SHARES       PRICE
                                -------------   --------   ----------   --------   ------------   --------
<S>                             <C>             <C>        <C>          <C>        <C>            <C>
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                $.15625 to
                                                                $8.70                     $8.70
Option price range for
  exercised shares............     $.15625 to                    $.50              $.50 to $.75
                                         $.50
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
</Table>

     The following table summarizes information about fixed price stock options
outstanding at September 30, 2000:

<Table>
<Caption>
                            OPTIONS OUTSTANDING                       OPTIONS EXERCISABLE
                -------------------------------------------   -----------------------------------
                                      WEIGHTED
                                       AVERAGE
  RANGE OF            NUMBER          REMAINING    WEIGHTED         NUMBER            WEIGHTED
  EXERCISE        OUTSTANDING AT     CONTRACTUAL   AVERAGE      EXERCISABLE AT        AVERAGE
   PRICES       SEPTEMBER 30, 2000      LIFE       EXERCISE   SEPTEMBER 30, 2000   EXERCISE PRICE
-------------   ------------------   -----------   --------   ------------------   --------------
<S>             <C>                  <C>           <C>        <C>                  <C>
$ .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
                     =======                                       =======
</Table>

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.

                                        42
<PAGE>   44
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Summarized financial information by each of the Company's two industry
segments for the three-year period ended September 30, 2000 is as follows:

<Table>
<Caption>
                                                   2000            1999            1998
                                               ------------    ------------    ------------
<S>                                            <C>             <C>             <C>
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
                                               ============    ============    ============
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
                                               ============    ============    ============
</Table>

     The following companies are considered major customers of the marketing
service sector and comprise 10 percent or greater of the Company's net sales:

<Table>
<Caption>
                                                                2000    1999    1998
                                                                ----    ----    ----
<S>                                                             <C>     <C>     <C>
Customer A..................................................     39%     32%     25%
Customer B..................................................     32      23      44
Customer C..................................................      3      10       9
                                                                 --      --      --
  Total.....................................................     74%     65%     78%
                                                                 ==      ==      ==
</Table>

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 Mr. Martin Suchik, a former officer in VSI Holdings, Inc., in
exchange for stock in VSI Holdings, Inc. The Company completed the sale on
September 30, 1998. The VSI Holdings, Inc. stock exchanged had a total value of
$736,000 on the date the sale was completed.

                                        43
<PAGE>   45
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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.

<Table>
<Caption>
                                                                          FISCAL YEAR 2000
                                                      --------------------------------------------------------
                                                      4TH QUARTER    3RD QUARTER    2ND QUARTER    1ST QUARTER
                                                      -----------    -----------    -----------    -----------
                                                             (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                                                   <C>            <C>            <C>            <C>
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
</Table>

<Table>
<Caption>
                                                                          FISCAL YEAR 1999
                                                      --------------------------------------------------------
                                                      4TH QUARTER    3RD QUARTER    2ND QUARTER    1ST QUARTER
                                                      -----------    -----------    -----------    -----------
                                                             (IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
<S>                                                   <C>            <C>            <C>            <C>
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
</Table>

---------------
(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

                                        44
<PAGE>   46
                      VSI HOLDINGS, INC. AND SUBSIDIARIES

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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.

     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.:

<Table>
<Caption>
                                                                  2000           1999
                                                               -----------    -----------
<S>                                                            <C>            <C>
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)
</Table>

     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.

                                        45
<PAGE>   47

                                    PART IV

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 with the initial filing of this report

<Table>
<C>      <S>
  *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.
</Table>

                                        46
<PAGE>   48
<Table>
<C>      <S>
  *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.
</Table>

(b) REPORTS ON FORM 8-K: NONE

                                        47
<PAGE>   49

                                   SIGNATURES

     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.
                                          VSI Holdings, Inc.
                                          (Registrant)

                                          By: /s/    STEVE TOTH, JR.
                                            ------------------------------------
                                                      Steve Toth, Jr.,
                                                       President and
                                                  Chief Executive Officer
Date: August 27, 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.

<Table>
<C>                                                    <S>                                 <C>

                /s/ STEVE TOTH, JR.                    Director, President and Chief       August 27, 2001
---------------------------------------------------      Executive Officer
                  Steve Toth, Jr.

               /s/ MARTIN S. SUCHIK                    Director                            August 27, 2001
---------------------------------------------------
                 Martin S. Suchik

               /s/ THOMAS W. MARQUIS                   Director, Treasurer, Secretary,     August 27, 2001
---------------------------------------------------      Chief Accounting Officer, and
                 Thomas W. Marquis                       Principal Financial Officer

                  /s/ ROBERT SUI                       Director                            August 27, 2001
---------------------------------------------------
                    Robert Sui

                 /s/ HAROLD POLING                     Director                            August 27, 2001
---------------------------------------------------
                   Harold Poling

                 /s/ RALPH ARMIJO                      Director                            August 27, 2001
---------------------------------------------------
                   Ralph Armijo

                                                       Director                            August 27, 2001
---------------------------------------------------
                   William James
</Table>

                                        48

</TEXT>
</DOCUMENT>
