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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-19343
VSI LIQUIDATION CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 34-1493345
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification Number)
2170 PIEDMONT ROAD NE, ATLANTA, GEORGIA 30324
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (404) 888-2750
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.01 PAR VALUE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) 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. [ ]
As of September 15, 2000: (a) 7,906,617 shares of Common Stock, $.01 par
value, of the registrant were outstanding; (b) 2,072,872 shares of Common Stock
were held by non-affiliates; and (c) the aggregate market value of the Common
Stock held by non-affiliates was $145,000, based on the closing sale price of
$.07 per share on September 15, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Part I: None
Part II: None
Part III: All items - see registrant's definitive proxy statement regarding
the election of directors and which is expected to be filed with the
Securities and Exchange Commission within 120 days after the close of
the fiscal year.
o Item 10: Directors and Executive Officers of the Registrant
o Item 11: Executive Compensation
o Item 12: Security Ownership of Certain Beneficial Owners
and Management
o Item 13: Certain Relationships and Related Transactions
PART I
ITEM 1. BUSINESS
GENERAL
Prior to January 5, 1999, the Company was engaged in the business of
providing specialized industrial cleaning and other services to divisions and
facilities of Fortune 500 companies and other substantial businesses engaged in
heavy industry. Such services generally involved the removal of industrial
grime, deposits, wastes, encrustations or coatings from equipment and
facilities. The Company's principal customers were in the chemical, plastics,
power generation, petroleum refining and primary metals businesses. The
Company's industrial cleaning methods included, in addition to the use of
waterblasting, vacuuming, and other more conventional procedures, the
application of ultra-high pressure ("UHP") waterjetting and cutting methods.
On September 8, 1998, the Company entered into a Second Amended and
Restated Asset Purchase Agreement (the "Purchase Agreement") whereby essentially
all assets of the Company would be sold to, and substantially all liabilities of
the Company would be assumed by, HydroChem Industrial Services, Inc.
("HydroChem"). The purchase price for these assets and liabilities was
approximately $30.0 million, adjusted for increases or decreases in net assets
after June 30, 1998. $4.0 million of the proceeds were placed in escrow to
secure and indemnify HydroChem for any breach of the Company's covenants and for
any environmental liabilities. Escrow funds, to the extent not needed to
indemnify HydroChem, will be released over the three year period following the
closing. $1.0 million will also be released when the Company can provide certain
environmental assurances to HydroChem, expected to be sometime in 2001. This
transaction closed on January 5, 1999, and was effective as of January 1, 1999.
The Company changed its name from Valley Systems, Inc. to VSI Liquidation
Corp. after the closing of this transaction, and does not have and will not have
any business operations in the future other than those associated with the
winding up and dissolution of the Company, including distribution of any escrow
funds released to the Company. After the closing, the Company used approximately
$5.5 million of the proceeds of the sale to redeem the outstanding shares of
Series C Preferred Stock, approximately $380,000 to redeem outstanding employee
stock options and approximately $165,000 to pay retention bonuses to certain
officers and employees. The Company also paid a liquidating dividend of $16.8
million ($2.13 per common share) to common stockholders from the proceeds of the
sale. An additional liquidating dividend of $1.2 million ($.15 per share) was
paid to common stockholders in February 2000.
INSURANCE
Much of the work performed by the Company was pursuant to contracts that
required the Company to indemnify the customer for injury or damage occurring on
the work site. The terms of such indemnity agreements varied, but generally
provided that the Company was required to indemnify the customer for losses
resulting from or incurred in connection with performance by the Company of its
services whether or not the Company was negligent. Liability for such
indemnification claims is generally covered by the Company's insurance policies.
1
Although the Company believes that its insurance coverage is generally
consistent with industry practice, there are exclusions from the Company's
insurance coverage for matters of environmental pollution and other types of
environmental damage claims. An uninsured or partially insured claim, if
successful and of sufficient magnitude, could have a material adverse effect on
the Company or its financial condition.
PROPRIETARY TECHNOLOGY, PATENTS, TRADEMARKS AND EQUIPMENT
All proprietary technology, patents, trademarks and equipment of the
Company were sold as part of the Purchase Agreement discussed above. See "Item 1
- - General".
ENVIRONMENTAL STANDARDS AND GOVERNMENT REGULATIONS
The Company's operations were subject to numerous rules and regulations at
the federal, state and local levels. The Company believes that it was and is in
substantial compliance with the various rules and regulations. The Company has
not experienced any significant regulatory problems.
All of the Company's operations were subject to regulations issued by the
United States Department of Labor under the Occupational Safety and Health Act
("OSHA"). Additionally, some of the Company's operations were subject to the
provisions of the Federal Mine Safety and Health Act of 1977. These regulations
have strict requirements for protecting employees involved with any materials
that are classified as hazardous. Violations of these rules can result in fines.
The Company does not believe that its past operating activities are subject
to the duties pertaining to hazardous waste treatment, storage or disposal
facilities, nor those duties pertaining to hazardous waste generators or
transporters.
In the event the Company performed a cleaning operation involving the
disposal of a waste that would be defined as hazardous under the Resource
Conservation and Recovery Act ("RCRA"), the Company could also be classified as
a "generator" of hazardous waste, and therefore responsible for manifesting and
transporting all such waste to permitted treatment, storage or disposal
facilities in accordance with RCRA. As a generator, the Company could be
potentially liable under the Comprehensive Environmental Response, Compensation
and Liability Act of 1980 ("CERCLA"), also known as the Superfund Act. To the
Company's knowledge, none of the sites at which the Company performed services
have been designated as Superfund sites. Moreover, to the Company's knowledge,
it has not sent any hazardous substances or wastes to any site that has been
designated as a Superfund site. Many states have implemented environmental
guidelines similar in nature to RCRA and CERCLA.
The Company believes that it was and is in substantial compliance with all
federal, state and local laws and regulations governing its business. To date,
the Company has not been subject to any significant fines, penalties or other
liabilities under such laws and regulations. However, no assurance can be given
that future changes in such law, and regulations, or interpretations thereof,
will not have an adverse impact on the Company's financial position.
The Company's general liability insurance is subject to a pollution
exclusion endorsement. Such exclusion is generally found in the majority of
general liability policies. The Company does not maintain environmental
impairment liability insurance. Thus a claim for damages against the Company
that involves pollution or environmental impairment will not be covered by
insurance, and, depending on the size of the claim, could have a material
adverse effect upon the financial position of the Company. See "Item 1 -
Business-Insurance".
EMPLOYEES
As of August 31, 2000, the Company had no employees other than its officers
and directors.
ITEM 2. PROPERTIES
As of August 31, 2000 the Company does not own or lease any property.
ITEM 3. LEGAL PROCEEDINGS
None.
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 the year ended June 30, 2000.
2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock traded on the Nasdaq SmallCap Market of the
Nasdaq Stock Market under the symbol VALE until January 5, 1999. At that time
the Company was delisted from the Nasdaq Stock Market due to the sale of
substantially all assets to HydroChem. The following tables sets forth the high
and low sale prices for the periods indicated.
HIGH LOW
---- ---
FISCAL 1999:
- ------------
July 1, 1998 - September 30, 1998 $ 2.688 $ 0.938
October 1, 1998 - December 31, 1998 2.438 1.625
January 1, 1999 - March 31, 1999 2.250 0.250
April 1, 1999 - June 30, 1999 0.500 0.063
FISCAL 2000:
- ------------
July 1, 1999 - September 30, 1999 0.250 0.063
October 1, 1999 - December 31, 1999 0.500 0.130
January 1, 2000 - March 31, 2000 0.500 0.130
April 1, 2000 - June 30, 2000 0.130 0.130
Based on information furnished by certain brokerage firms that are record
holders of the Company's Common Stock, the Company has in excess of 800
beneficial owners of its Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands, except per share data:
2000 (1) 1999 1998 1997 1996
------------ ------------ ------------ ------------ ------------
Sales $ - $ 13,537 $ 24,431 $ 23,088 $ 21,875
Gross profit - 5,072 9,040 8,559 6,853
Selling, general and
administrative expenses 225 3,663 7,145 7,268 7,254
Litigation settlements and related fees - - - (752) -
Interest (income) expense, net (199) 163 593 592 572
Gain on sale of substantially all assets
and assumption of substantially all
liabilities of the Company - 22,719 - - -
Net income (loss) (17) 21,465 1,302 1,451 (973)
Earnings (loss) per common share:
Basic and diluted - 2.69 0.12 0.13 (0.16)
Total assets 4,132 5,958 15,934 14,568 15,123
Total long-term debt - - 7,585 7,235 7,021
Total stockholders' equity 3,082 4,285 5,354 4,437 4,031
(1) July 1, 1999 through June 30, 2000
3
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Report.
FORWARD LOOKING STATEMENTS:
Forward-looking statements in this Form 10-K are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to certain risks and uncertainties that
could cause actual results to differ materially from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. Potential risks and uncertainties
include, but are not limited to, the possibility that HydroChem will
successfully assert claims against funds held in the escrow account, the
possibility that the costs of winding up the Company's affairs could exceed the
Company's projections, the Company's potential liability pursuant to unasserted
claims not covered by insurance and general business and economic conditions.
RESULTS OF DISCONTINUED OPERATIONS - 2000 COMPARED TO 1999
The results of operations for the year ended June 30, 2000 are not
comparable to those for the year ended June 30, 1999. As discussed in the notes
to the consolidated financial statements and in "Item 1 - General," effective
January 1, 1999 substantially all assets of the Company were sold to, and
substantially all liabilities were assumed by, HydroChem. Operations since that
date have consisted only of the sale itself, distribution of the proceeds of the
sale, and other transactions winding down the operations of the Company. The
Company will not have any business operations in the future other than those
associated with the winding up and dissolution of the Company, including
distribution of any escrow funds released to the Company.
RESULTS OF DISCONTINUED OPERATIONS - 1999 COMPARED TO 1998
The results of operations for the year ended June 30, 1999 are not
comparable to those for the year ended June 30, 1998. As discussed in the notes
to the consolidated financial statements and in "Item 1 - General," effective
January 1, 1999 substantially all assets of the Company were sold to, and
substantially all liabilities were assumed by, HydroChem. Operations since that
date have consisted only of the sale itself, distribution of the proceeds of the
sale, and other transactions winding down the operations of the Company. The
Company will not have any business operations in the future other than those
associated with the winding up and dissolution of the Company, including
distribution of any escrow funds released to the Company.
QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table presents certain unaudited consolidated quarterly
operating information for the Company and includes all adjustments considered
necessary for a fair presentation of such information for the interim periods.
THREE MONTHS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
9/30/98 12/31/98 3/31/99 6/30/99 9/30/99 12/31/99 3/31/00 6/30/00
------- -------- ------- ------- ------- -------- ------- -------
Sales $ 7,597 $ 5,940 $ - $ - $ - $ - $ - $ -
Gross profit 2,953 2,119 - - - - - -
Net income (loss) 1,027 6,437 13,661 340 (20) 5 (2) (81)
Earnings per common share -
basic and diluted $ .12 $ .80 $ 1.73 $ .04 $ .00 $ .00 $ .00 $ (.01)
Net income for the quarter ended December 31, 1998 includes an income tax
benefit of $5,985,000 resulting from reversal of a valuation allowance. Net
income for the quarter ended March 31, 1999 was a result of the gain on the sale
of substantially all assets to HydroChem. Net income for the quarter ended June
30, 1999 was primarily a result of an adjustment to the purchase price, an
increase in the reserve for uncollectible accounts due to the return of accounts
receivable pursuant to the Purchase Agreement and interest income earned.
LIQUIDITY AND CAPITAL RESOURCES
On January 5, 1999, the Company completed the sale of substantially all of
its operating assets and the operating assets of its wholly-owned subsidiary,
Valley Systems of Ohio, Inc. ("VSO"), to HydroChem, pursuant to the Purchase
Agreement, for approximately $30.0 million in cash, of which $26.0 million was
payable immediately and $4 million was deposited into an escrow account to
secure certain indemnification and other rights under the Purchase Agreement,
and the assumption of the Company's and VSO's bank debt and certain other
liabilities.
4
Of the $26.0 million received at closing, after payment or making
reasonable provision for the payment of all known and anticipated liabilities
and obligations of the Company, payment of approximately $5.5 million to
repurchase all of the 55,000 shares of the Company's outstanding Series C
Preferred Stock held by Rollins Holding Company, Inc., payment of approximately
$380,000 to redeem outstanding employee stock options and payment of
approximately $165,000 as a retention bonus to certain officers and employees,
approximately $16.8 million of the sale proceeds remained and were available for
distribution to stockholders pursuant to the Plan of Liquidation and Dissolution
adopted by the Company.
On January 29, 1999, an initial liquidating cash dividend of approximately
$16.8 million ($2.13 per share) was mailed to stockholders of record at the
close of business on January 22, 1999. An additional liquidating cash dividend
of approximately $1.2 million (.15 per share) was paid to stockholders of record
on the close of business on January 31, 2000. The Company now has no further
assets to distribute and expects to have no additional assets in the future
other than cash received from the escrow account referenced above and cash
remaining after payment of all remaining expenses to wind up and dissolve the
Company, if any.
In May, 1999 certain accounts receivable totaling approximately $600,000
that were sold to HydroChem under the Purchase Agreement and guaranteed by the
Company were returned by HydroChem to the Company and were paid for out of funds
in escrow.
The Company expects that, subject to any claims which may be made by
HydroChem, the remaining escrowed funds of approximately $3.2 million (including
earning on escrowed funds to date) will be released on or about the second and
third anniversaries of the closing date in amounts of approximately $1 million
in January 2001 and $1.2 million in 2002, with up to an additional $1 million
being released at such time as the Company delivers to HydroChem a certificate
regarding certain environmental remediation matters, which is currently expected
to be possible in the year 2001. The balance of the escrow fund, including
earnings on the escrow account, will also be released on the third anniversary
of the closing date. There can be no guarantee, however, that these funds, or
any portion thereof, will be released to the Company. As escrowed funds, if any,
are released to the Company, they will be utilized to pay any unanticipated
unpaid expenses, with the remainder to be distributed as a liquidating cash
dividend to stockholders as soon as is practicable.
As of the fiscal year ended June 30, 2000 the Company had approximately
$376,000 in cash in addition to approximately $3.2 million held in an escrow
account.
The Company will not engage in any further business activities and the only
remaining activities will be those associated with the winding up and
dissolution of the Company. The Company believes that the remaining cash on hand
and in escrow will be sufficient to meet its liabilities and obligations until
the Company is dissolved in accordance with Delaware law.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk is interest rate risk. The Company
currently minimizes such risk by investing its temporary cash in money market
funds and, pursuant to the Escrow Agreement entered into by and among Bank One
Texas, N.A. and the Company, the escrowed funds are invested in United States
Treasury Bills having a maturity of 90 days or less, repurchase obligations
secured by such United States Treasury Bills and demand deposits with the escrow
agent. The Company does not engage in derivative transactions, and no financial
instrument transactions are entered into for hedging purposes. As a result, the
Company believes that it has no material interest rate risk to manage.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The required financial statements of the Registrant are set forth
immediately following the signature page to this Form 10-K. See "Item 14 -
Exhibits, Financial Statements, Schedules and Reports on Form 8-K", for index to
the financial statements.
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
The information required by this item is expected to be set forth under the
captions "Election of Directors" and "Executive Compensation" of the
registrant's definitive proxy statement, and incorporated herein by reference.
5
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is expected to be set forth under the
caption "Executive Compensation" of the registrant's definitive proxy statement,
and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is expected to be set forth under the
caption "Beneficial Ownership of Voting Securities" of the registrant's
definitive proxy statement, and incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is expected to be set forth under the
caption "Certain Relationships and Related Transactions" of the registrant's
definitive proxy statement, and incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS FILED
VSI Liquidation Corp. and Subsidiary:
Reports of Independent Accountants.
Consolidated Balance Sheets at June 30, 2000 and 1999.
Consolidated Statements of Discontinued Operations for the
years ended June 30, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years
ended June 30, 2000, 1999 and 1998.
Notes to Consolidated Financial Statements.
(2) EXHIBITS
NO. DESCRIPTION OF EXHIBIT
- --- ----------------------
2.1 Second Amended and Restated Asset Purchase Agreement, dated as of
September 8, 1998, among the Company, Valley Systems of Ohio, Inc. and
HydroChem Industrial Services, Inc. (Incorporated herein by reference
to Appendix A of the Registrant's Definitive Information Statement
filed with the Securities and Exchange Commission on December 15,
1998)
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1 filed on June
11, 1991, and incorporated therein by reference)
3.2 Certification of Amendment of Certificate of Incorporation of the
Company (filed as Exhibit 3.2 to the Company's Form 10-K dated
September 25, 1995, and incorporated herein by reference)
3.3 Certificate of Correction of Certificate of Amendment of Certificate
of Incorporation of the Company (incorporated by reference to Exhibit
3.3 to the Form 10-Q for the quarter ended December 31, 1998)
3.4 Certificate of Elimination of Series A Preferred Stock and Series B
Preference Stock of the Company (incorporated by reference to Exhibit
3.4 to the Form 10-Q for the quarter ended December 31, 1998)
3.5 Certificate of Amendment of Certificate of Incorporation of the
Company (incorporated by reference to Exhibit 3.5 to the Form 10-Q for
the quarter ended December 31, 1998)
3.6 Bylaws of the Company, as amended, (filed as Exhibit 3.3 to the
Company's Form 10-K dated September 25, 1995 and incorporated herein
by reference)
10.1 Plan of Liquidation and Dissolution (Incorporated herein by reference
to Appendix C of the Registrant's Definitive Information Statement
filed with the Securities and Exchange Commission on December 15,
1998)
10.2+ Purchase Order dated June 11, 1998 between Ohio Edison/Pennsylvania
Power Company and the Registrant (Incorporated by reference to Exhibit
10.25 to the Form 10-K/A for the fiscal year June 30, 1998)
21.1* Subsidiaries of the Registrant
27.1* Financial Data Schedule
________________________________________
* Filed herewith.
+ The Company has applied for confidential treatment of portions of this
Agreement. Accordingly, portions thereof have been omitted and filed separately
with the Securities and Exchange Commission.
(b) REPORTS ON FORM 8-K
None.
6
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VSI LIQUIDATION CORP.
September 27, 2000 By: \s\ Ed Strickland
--------------------------------
Ed Strickland, President
and Chief Executive Officer
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.
SIGNATURE TITLE DATE
\s\ Allen O. Kinzer Director September 28, 2000
----------------------
Allen O. Kinzer
\s\ Joe M. Young Director September 27, 2000
---------------------
Joe M. Young
7
VSI LIQUIDATION CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
REPORTS OF INDEPENDENT ACCOUNTANTS 9-10
CONSOLIDATED BALANCE SHEETS - June 30, 2000 and 1999 11
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS - Years
ended June 30, 2000, 1999 and 1998 12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY - Years ended June 30, 2000, 1999 and 1998 13
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Years ended June 30, 2000, 1999 and 1998 14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15
All schedules are omitted because they are not required under the instructions,
are inapplicable, or the information is included elsewhere in the financial
statements.
8
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
VSI Liquidation Corp.
We have audited the consolidated balance sheet of VSI Liquidation Corp. and
subsidiary (a Delaware corporation) as of June 30, 2000, and the related
consolidated statements of discontinued operations, stockholders' equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 audit provides a reasonable basis for our opinion.
In our opinion, the June 30, 2000 financial statements referred to above present
fairly, in all material respects, the financial position of VSI Liquidation and
subsidiary as of June 30, 2000, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
Hall, Kistler & Company LLP
Canton, Ohio
September 15, 2000
9
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
VSI Liquidation Corp.:
In our opinion, the consolidated balance sheet as of June 30, 1999 and the
related consolidated statements of discontinued operations, changes in
stockholders' equity and cash flows for each of the two years in the period
ended June 30, 1999 (appearing on pages 14 through 17 of the VSI Liquidation
Corp. and subsidiary consolidated financial statements which has been included
in this Form 10-K) present fairly, in all material respects, the financial
position, results of operations and cash flows of VSI Liquidation Corp. and
subsidiary at June 30, 1999 and for each of the two years in the period ended
June 30, 1999, in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion. We have not audited the
consolidated financial statements of VSI Liquidation Corp. and subsidiary for
any period subsequent to June 30, 1999.
As more fully described in Note 2 to the consolidated financial statements, the
Company sold substantially all of its net operating assets on January 1, 1999.
PricewaterhouseCoopers LLP
Cleveland, Ohio
September 23, 1999
10
CONSOLIDATED BALANCE SHEETS
June 30, 2000 and 1999
2000 1999
----------------- -----------------
ASSETS
Current assets:
Cash $ 376,752 $ 1,765,382
Cash in escrow account 1,000,000 410,807
Accounts receivable, net 123,268 425,175
Prepaid expenses and deposits 404,775 356,651
----------------- -----------------
Total current assets 1,904,795 2,958,015
Cash in escrow account 2,227,112 3,000,000
----------------- -----------------
Total assets $ 4,131,907 $ 5,958,015
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 131,677 $ 393,360
Income taxes payable - 159,000
Deferred income taxes - 64,474
----------------- -----------------
Total current liabilities 131,677 616,834
Deferred income taxes 918,521 1,056,526
----------------- -----------------
Total liabilities 1,050,198 1,673,360
----------------- -----------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.10 par value; authorized
2,000,000 shares, none issued and outstanding - -
Common stock, $.01 par value; authorized 12,000,000
shares, issued and outstanding 7,906,617 shares 79,066 79,066
Paid-in capital 2,587,500 3,773,492
Retained earnings 415,143 432,097
----------------- -----------------
3,081,709 4,284,655
----------------- -----------------
Total liabilities and stockholders' equity $ 4,131,907 $ 5,958,015
================= =================
The accompanying notes are an integral part of these
consolidated financial statements.
11
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS
for the years ended June 30, 2000,1999 and 1998
2000 1999 1998
----------------- ------------------- --------------------
Sales $ - $ 13,536,876 $ 24,431,385
Cost of sales - 8,464,830 15,391,490
----------------- ------------------- --------------------
Gross profit - 5,072,046 9,039,895
Selling, general and
administrative expenses 224,708 3,662,704 7,144,739
Interest (income) expense, net (198,754) 163,264 593,127
Gain on sale of substantially all assets
to, and assumption of substantially all
liabilities of the Company by,
HydroChem Industrial Services, Inc. - 22,718,579 -
----------------- ------------------- --------------------
Income from discontinued operations
before income taxes (25,954) 23,964,657 1,302,029
Income taxes (benefit) (9,000) 2,500,000 -
----------------- ------------------- --------------------
Net income (loss) $ (16,954) $ 21,464,657 $ 1,302,029
================= =================== ====================
Earnings per share:
Net earnings per common share - basic $ 0.00 $ 2.69 $ .12
================= =================== ====================
Net earnings per common share -
assuming dilution $ 0.00 $ 2.69 $ .12
================= =================== ====================
Weighted average shares used in
computation - basic and diluted 7,906,617 7,906,617 7,906,617
================= =================== ====================
The accompanying notes are an integral part of these
consolidated financial statements.
12
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 2000, 1999 and 1998
Retained
Preferred Common Paid-In (Deficit) Treasury
Stock (1) Stock (2) Capital Earnings Stock Total
------------ ------------ --------------- --------------- ------------- --------------
Balance, July 1, 1997 $ 5,500 $ 85,121 $ 26,786,040 $ (21,757,089) $ (683,008) $ 4,436,564
Net income 1,302,029 1,302,029
Series C preferred
dividends (385,000) (385,000)
------------ ------------ --------------- --------------- ------------- --------------
Balance, June 30, 1998 5,500 85,121 26,786,040 (20,840,060) (683,008) 5,353,593
Net income 21,464,657 21,464,657
Series C preferred
dividends (192,500) (192,500)
Retirement of treasury
stock (6,055) (676,953) 683,008 -
Redemption of Series C
Preferred Stock (5,500) (5,494,500) (5,500,000)
Distribution of $2.13
per share to common
stockholders (16,841,095) (16,841,095)
------------ ------------ --------------- --------------- ------------- --------------
Balance, June 30, 1999 - 79,066 3,773,492 432,097 - 4,284,655
Net loss
(16,954) (16,954)
Distribution of $.15
per share to common
stockholders (1,185,992) (1,185,992)
------------ ------------ --------------- --------------- ------------- --------------
Balance, June 30, 2000 $ - $ 79,066 $ 2,587,500 $ 415,143 $ - $ 3,081,709
============ ============ =============== =============== ============= ==============
(1) Share amounts are equivalent to ten times dollar amounts
(2) Share amounts are equivalent to one hundred times dollar amounts
The accompanying notes are an integral part of these
consolidated financial statements.
13
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2000, 1999 and 1998
2000 1999 1998
---------------- ---------------- ---------------
Cash flows from operating activities:
Net (loss) income $ (16,954) $21,464,657 $1,302,029
Adjustments to reconcile net (loss) income to cash
provided by operating activities:
Depreciation and amortization - 1,476,569 2,758,868
Gain on disposition of property and equipment - (31,625) (66,083)
Gain on sale of assets and assumption of liabilities - (22,718,579) -
Deferred income taxes (202,479) 1,121,000 -
(Increase) decrease in assets:
Accounts receivable 301,907 262,195 (102,044)
Prepaid expenses and supplies (48,124) (383,543) (47,820)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses (261,683) 408,923 (63,921)
Income tax payable (159,000) 159,000 -
----------------- ----------------- ---------------
Cash provided by operating activities (386,333) 1,758,597 3,781,029
----------------- ----------------- ---------------
Cash flows from investing activities:
Additions to property and equipment - (1,635,104) (2,295,049)
Proceeds from dispositions of property and equipment - 31,625 240,092
Proceeds from sale of assets and assumption of
liabilities, net of expenses of sale and cash
sold with assets - 28,469,429 -
Establishment of escrow account - (4,000,000) -
Change in escrow account 183,695 589,193 -
----------------- ----------------- ---------------
Cash provided from (used in) investing activities 183,695 23,455,143 (2,054,957)
----------------- ----------------- ---------------
Cash flows from financing activities:
Net (payments) borrowings from revolving loan - (505,669) (1,467,355)
Payments of other long-term debt - (520,336) (252,394)
Additional borrowings of long-term debt - - 386,076
Payments of preferred stock dividends - (288,750) (385,000)
Redemption of Series C Preferred Stock - (5,500,000) -
Distribution to common stockholders (1,185,992) (16,841,095) -
----------------- ----------------- ---------------
Cash used in financing activities (1,185,992) (23,655,850) (1,718,673)
----------------- ----------------- ---------------
(Decrease) increase in cash (1,388,630) 1,557,890 7,399
Cash at beginning of year 1,765,382 207,492 200,093
----------------- ----------------- ---------------
Cash at end of year $ 376,752 $1,765,382 $207,492
================= ================= ===============
Cash paid for:
Interest $ - $ 303,623 $589,340
Income taxes - 1,220,000 -
Non-cash investing activities:
Property and equipment acquired with capital leases - 870,705 1,846,474
The accompanying notes are an integral part of these
consolidated financial statements.
14
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
The Company was engaged in the business of providing specialized industrial
cleaning and other services to divisions and facilities of Fortune 500 companies
and other substantial businesses engaged in heavy industry. Such services
generally involved the removal of industrial grime, deposits, wastes,
encrustations and coatings from equipment and facilities. The Company's
principal customers were in the chemical, plastics, power generation, petroleum
refining and primary metals businesses. The Company's industrial cleaning
methods included, in addition to the use of waterblasting, vacuuming and other
more conventional procedures, the application of ultra-high pressure ("UHP")
waterjetting methods.
2. SALE OF SUBSTANTIALLY ALL ASSETS AND ASSUMPTION OF SUBSTANTIALLY ALL
LIABILITIES OF THE COMPANY:
On September 8, 1998, the Company entered into a Second Amended and Restated
Asset Purchase Agreement (the "Purchase Agreement") whereby essentially all
assets of the Company would be sold to, and substantially all liabilities of the
Company would be assumed by, HydroChem Industrial Services, Inc. ("HydroChem").
The purchase price for these assets and liabilities was approximately $30.0
million, adjusted for increases or decreases in net assets after June 30, 1998.
This transaction closed on January 5, 1999, and was effective as of January 1,
1999. Costs totaling $1.3 million were incurred by the Company in connection
with the sale. $4.0 million of the proceeds were placed in escrow to secure and
indemnify HydroChem for any breach of the Company's covenants and for any
environmental liabilities. $1.0 million of this escrow has been released since
the transaction closed. The Company has reserved $70,000 in the financial
statements for potential future liabilities to HydroChem to be paid from the
escrow account. Escrow funds, to the extent not needed to indemnify HydroChem,
will be released over the next two years. $1.0 million will also be released
when the Company can provide certain environmental assurances to HydroChem,
expected to be sometime in 2001.
The Company changed its name from Valley Systems, Inc. to VSI Liquidation Corp.
after the closing of this transaction, and will not have any business operations
other than those associated with the winding up and dissolution of the Company,
including distribution of any escrow funds released to the Company. After the
closing, the Company used approximately $5.5 million of the proceeds of the sale
to redeem the outstanding shares of Series C Preferred Stock, approximately
$380,000 to redeem outstanding employee stock options and approximately $165,000
to pay retention bonuses to certain officers and employees. The Company also
paid a liquidating dividend of $16.8 million ($2.13 per common share) to common
stockholders from the proceeds of the sale. An additional liquidating dividend
of $1.2 million ($.15 per common share) was paid in fiscal 2000.
The following summarizes the assets sold and the liabilities assumed under the
Purchase Agreement:
Balance Amount Balance
12/31/98 Sold After Sale
-------- ---- ----------
Cash $ 222,800 $ 222,800 $ -
Accounts receivable 5,053.024 5,053,024 -
Prepaid supplies 626,348 626,348 -
Prepaid expenses 159,350 78,574 80,776
Deferred expenses of asset sale 1,132,091 - 1,132,091
Deferred income taxes 5,985,000 - 5,985,000
Property and equipment, net 9,994,390 9,994,390 -
Intangible assets 342,500 342,500 -
------------ ------------ -----------
Total assets 23,515,503 16,317,636 7,197,867
------------ ------------ -----------
Accounts payable 748,083 748,083 -
Accrued expenses 2,053,086 1,607,353 445,733
Long-term debt 8,088,550 8,088,550 -
------------ ------------ -----------
Total liabilities 10,889,719 10,443,986 445,733
------------ ------------ -----------
Net assets $ 12,625,784 $ 5,873,650 $ 6,752,134
============ ============ ===========
15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The gain on this transaction is as follows:
Proceeds from sale $ 29,960,308
Less:
Net basis of assets sold and liabilities assumed 5,873,650
Expenses of sale 1,268,079
Reserve for liabilities resulting from indemnities
and guaranties under the Purchase Agreement 100,000
------------
Gain on sale $ 22,718,579
============
Revenues earned and expenses incurred by the Company from the sale on January 1,
1999 to June 30, 1999 include $87,000 of interest income earned on cash in the
escrow account and $394,000 of selling, general and administrative expenses.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiary. All material
intercompany transactions have been eliminated in the accompanying consolidated
financial statements.
REVENUE RECOGNITION: Sales and the related cost of sales for services provided
were recorded as the services were performed.
CASH IN ESCROW ACCOUNT: Cash in escrow includes highly liquid investments with a
maturity of three months or less when purchased. Carrying values of such
investments approximate fair value due to the short-term nature of these
instruments.
ACCOUNTS RECEIVABLE: The Company's customers were located primarily throughout
the United States. The Company monitored potential credit losses and such losses
have been within management's expectations. Accounts receivable which become
uncollectible are written off against operations at the time they are deemed to
be worthless. The total uncollectible accounts charged to operations for the
years ended June 30, 1999 and 1998 were $232,000 and $14,000 respectively. Bad
debt recoveries amounted to $100,000 in the year ended June 30, 2000. The
allowance for doubtful accounts was zero at June 30, 2000 and $300,000 at June
30, 1999.
CONCENTRATIONS OF CREDIT RISK ARISING FROM CASH DEPOSITS IN EXCESS OF INSURED
LIMITS: The Company maintains its cash balances in one financial institution.
The balances are insured by the Federal Deposit Insurance Corporation up to
$100,000. At June 30, 2000 and 1999, respectively, the Company's uninsured cash
balances totaled $276,752 and $1,665,382.
PROPERTY AND EQUIPMENT: Property and equipment was stated at cost. The Company
used the straight-line method of depreciation for financial reporting purposes.
For income tax purposes, depreciation was computed by either the accelerated or
modified cost recovery methods. The estimated useful lives for financial
reporting purposes were as follows:
Building and leasehold improvements 7 to 20 years
Automobiles and trucks 3 to 7 years
Equipment 3 to 7 years
The cost and related accumulated depreciation of assets retired, sold or
otherwise disposed of were removed from the accounts and any gain or loss was
reflected in the current years' results of operations.
INCOME TAXES: Deferred income taxes are provided to reflect the tax effects of
temporary differences between financial and tax reporting, principally related
to depreciation.
INTANGIBLE ASSETS: Intangible assets included the cost of certain patents,
technology, trademarks, and a non-compete agreement. These items were amortized
to operations on a straight-line basis over 10 years, the period in which the
economic benefits were estimated to be realized.
16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER COMMON SHARE: Earnings per share of common stock have been
calculated according to the guidelines of Financial Accounting Standards No.
128, "Earnings Per Share."
Basic earnings per common share are computed by dividing net income less
preferred stock dividend requirements ($192,500 for the year ended June 30, 1999
and $385,000 for the year ended June 30, 1998) for the period by the weighted
average number of shares of common stock outstanding for the period. Diluted
earnings per common share do not vary from basic earnings per share for any of
the periods presented because there were no dilutive potential shares of common
stock outstanding. The dilutive effect of outstanding potential shares of common
stock was computed using the treasury stock method.
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 amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the dates of the financial statements
and the reported amounts of revenues and expenses during the reporting periods.
Actual results may differ from those estimates.
BUSINESS SEGMENT INFORMATION: Management has determined that the Company
consists of a single operating segment, therefore, there are no disclosure
requirements under Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information."
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying values of accounts receivable
and short-term borrowings represent reasonable estimates of the fair values of
these instruments due to their short maturities. The fair value of long-term
debt is estimated by discounting the future cash flows using rates currently
available to the Company for debt with similar terms and remaining maturities.
The estimated fair values of the long-term debt at June 30, 1998 approximated
its carrying values.
RECLASSIFICATIONS: Certain amounts in the 1999 consolidated financial statements
have been reclassified to conform to the 2000 presentation.
4. PROPERTY AND EQUIPMENT:
The Company incurred repairs and maintenance costs on property and equipment of
approximately $610,000 and $1,350,000 for the years ended June 30, 1999 and
1998, respectively.
5. INCOME TAXES:
The income tax provision for the three years ended June 30, 2000 is comprised of
the following amounts:
2000 1999 1998
------------ ------------ ------------
Current $ (9,000) $ 1,379,000 $ -
Deferred - 1,121,000 -
------------ ------------ ------------
Total Provision $ (9,000) $ 2,500,000 $ -
============ ============ ============
Statutory Rate (34)% 34% 34%
State and local taxes,
net of federal benefit (1) 5 5
Operating loss utilized - (29) (39)
------------ ------------ ------------
Effective rate (35)% 10% 0%
============ ============ ============
Deferred federal income taxes reflect the impact for financial statement
reporting purposes of temporary differences between the financial statement and
tax basis of assets and liabilities. At June 30, 2000 and 1999, the components
of the net deferred tax assets and liabilities were as follows:
17
2000 1999
------------- ------------
Deferred tax asssets:
Allowance for doubtful accounts $ 117,000
Vacation accrual -
Net operating loss carryforwards -
Other ------------- ------------
- 117,000
------------- ------------
Deferred tax liabilities:
Basis difference in fixed assets -
Escrow account (1,200,598)
Other (37,402)
------------- ------------
- (1,238,000)
------------- ------------
Net deferred tax (liabilities) assets - (1,121,000)
Valuation allowance - -
------------- ------------
Net deferred taxes recognized $ - $(1,121,000)
============= ============
8. LITIGATION:
The Company is involved in various litigation arising in the ordinary course of
business. Management believes that the ultimate resolution of such litigation
will not have a material effect on the Company's operations, financial position
or cash flows.
9. STOCKHOLDERS' EQUITY:
In September 1994, the Company issued 55,000 shares of Series C Preferred Stock
to its majority stockholder, which then transferred them to an affiliate. Each
share of the Series C Preferred Stock was entitled to a cumulative annual
dividend of $7.00, payable quarterly. The proceeds from the sale of the
preferred shares totaled $5.5 million; $3.0 million in the conversion of debt
for equity and $2.5 million of cash. In the event the Company is merged or
consolidated such that the majority shareholder no longer holds a controlling
interest in the surviving or resulting entity, the preferred stock must be
redeemed and retired for $5.5 million plus any accrued and unpaid cumulative
dividends. In accordance with this provision, the preferred shares were redeemed
and retired after the sale of substantially all of the Company's assets to
HydroChem in January 1999.
10. STOCK OPTIONS AND WARRANTS:
A. In 1991, the Company adopted a stock option plan. Up to 400,000 shares of
common stock could be issued under the plan. Due to the sale of
substantially all assets of the Company, all outstanding options on January
1, 1999 were redeemed by the Company using a market value of $2.50 per
share. The difference between the market price and the option price was
paid to the option holder in cash, with a total cost of approximately
$380,000. No further options will be issued under the plan.
B. In October 1994, the Company issued stock options to its directors to
purchase a total of 50,000 shares of its common stock at $1.50 per share.
These options are not part of the stock option plan above, and were
redeemed at the same time and under the same terms as those options that
were part of the plan, with a total cost of $50,000.
C. In 1999 and 1998, respectively, options to purchase 11,900, and 46,700
shares of common stock were forfeited.
D. The Company has elected to adopt the "disclosure-only" provisions of
Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation" ("SFAS No. 123"), with no compensation cost recognized for
options granted at or above market value. For SFAS No. 123, the fair value
of each option granted was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions for 1998:
(a) risk-free interest rates of 6.40% to 7.04%; (b) no dividend yield; (c)
expected terms of 8 years; and (d) volatility of 95%.
18
If the Company had elected to recognize the compensation cost of its stock
option plan based on the fair value of the awards under that plan in accordance
with SFAS No. 123, net income would have increased to $1,383,952 ($.13 per
common share, assuming dilution) for the year ended June 30, 1998.
At June 30, 2000, warrants to purchase shares of the Company's common stock were
outstanding as follows:
WARRANT
PRICE SHARES EXPIRATION DATE
----- ------ ---------------
$ 15.00 100,000 September 2001
11. EMPLOYEE BENEFIT PLAN:
In 1991, the Company adopted a 401(k) plan that covers substantially all
employees. The plan is a discretionary plan in that the Company may or may not
make contributions to the plan. The Company did not contribute to the plan
during the three years ended June 30, 2000. Effective January 1, 1999, the
Company terminated this plan as a result of the sale of substantially all of the
Company's assets to HydroChem. On April 20, 1999 the Company filed an
application for termination of the plan with the Internal Revenue Service.
Termination was completed in December 1999.
19