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, 2004
[ ] 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 (IRS Employer
incorporation 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of August 31, 2004: (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 $103,643, based on the closing sale price of
$0.05 per share on August 31, 2004.
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
o Item 14: Principal Accounting Fees and Services
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"). This transaction closed on January 5, 1999, and was effective as
of January 1, 1999. 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 were released over the five year
period following the closing. The remaining escrow balance of $703,000 at June
30, 2004 , to the extent not needed to indemnify HydroChem, will also be
released when the Company can provide certain environmental assurances to
HydroChem, expected to be sometime in 2006.
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. Additional liquidating dividends of approximately $1.2 million ($.15 per
share), $790,000 ($.10 per share) and $950,000 ($.12 per share) were paid to
common stockholders in February 2000, 2001 and 2002 respectively.
2
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.
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, 2004, the Company had no employees other than its officers
and directors.
ITEM 2. PROPERTIES
As of August 31, 2004 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 fiscal year ended June 30, 2004.
3
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 table sets forth the high
and low sale prices for the periods indicated on the non-Nasdaq OTC.
HIGH LOW
---- ---
FISCAL 2003:
July 1, 2002 - September 30, 2002 $0.080 $0.060
October 1, 2002 - December 31, 2002 0.090 0.070
January 1, 2003 - March 31, 2003 0.080 0.070
April 1, 2003 - June 30, 2003 0.070 0.070
FISCAL 2004:
July 1, 2003 - September 30, 2003 $0.070 $0.070
October 1, 2003 - December 31, 2003 0.080 0.060
January 1, 2004 - March 31, 2004 0.080 0.050
April 1, 2004 - June 30, 2004 0.050 0.050
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:
2004 (1) 2003 2002 2001 2000
---------- ---------- ---------- ---------- ----------
Sales $ - $ - $ - $ - $ -
Gross profit - - - - -
Selling, general and
administrative expenses 71 445 297 353 225
Interest (income) expense, net (4) (7) (33) (155) (199)
Net loss (44) (273) (164) (129) (17)
Earnings (loss) per common share:
Basic and diluted (0.01) (0.03) (0.02) (0.02) (0.00)
Total assets 1,260 1,340 1,775 3,128 4,132
Total long-term debt - - - - -
Total stockholders' equity 732 776 1,049 2,162 3,082
(1) July 1, 2003 through June 30, 2004
4
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 - 2004 COMPARED TO 2003
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.
Selling, general and administrative expenses in 2004 were less than 2003
due to a lower level of activity winding down the business, and lower levels of
expenditures for insurance and environmental remediation. The Company expects
that it will continue to operate at this lower level of operating expenses in
2005, unless it incurs unexpected remediation claims.
RESULTS OF DISCONTINUED OPERATIONS - 2003 COMPARED TO 2002
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)
9/30/02 12/31/02 3/31/03 6/30/03 9/30/03 12/31/03 3/31/04 6/30/04
--------- --------- --------- --------- --------- --------- --------- --------
Sales $ - $ - $ - $ - $ - $ - $ - $ -
Gross profit - - - - - - - -
Net loss (39) (55) (126) (53) (9) (8) (17) (10)
Earnings per common share -
basic and diluted $ (.00) $ (.01) $ (.02) $ (.00) $ (.00) $ (.00) $ (.00) $ (.01)
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.
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
5
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. Additional liquidating cash dividends of
approximately $1.2 million ($.15 per share), $790,000 ($.10 per share) and
$950,000 ($.12 per share) were paid to stockholders of record on the close of
business on January 31, 2000, 2001 and 2002 respectively. 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.
The Company expects that, subject to any claims which may be made by
HydroChem, all of the remaining escrowed funds of approximately $703,000
(including earnings on escrowed funds to date) will be 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
2006. 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, 2004 the Company had approximately
$497,000 in cash in addition to approximately $703,000 held in the 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. We currently expect
that the Company will be dissolved in 2006.
SCHEDULED CONTRACTUAL OBLIGATIONS
The Company does not have material contractual obligations, except for its
environmental obligations under the Purchase Agreement. The Company has accrued
an estimate of $220,000 for these obligations, and expects that most of this
amount will be paid out within the fiscal years ending June 30, 2005 and 2006.
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.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our Chief Executive
Officer (CEO) and our Acting Chief Financial Officer (CFO) have evaluated the
effectiveness of our disclosure controls and procedures as of June 30, 2004 (the
Evaluation Date).
6
The Company's management, including the CEO and CFO, does not expect that
its Disclosure Controls will prevent all error and all fraud. A control system,
no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control system, no evaluation
of controls can provide absolute assurance that all control issues and instances
of fraud, if any, within the Company have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdown can occur because of simple error or mistake. The
design of any system of controls also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions.
Based upon the Company's Disclosure Controls evaluation, the CEO and CFO
have concluded that, subject to the limitations noted above, the Company's
Disclosure Controls are effective to give reasonable assurance that the
information required to be disclosed by the Company in its periodic reports is
accumulated and communicated to management, including the CEO and CFO, as
appropriate to allow timely decisions regarding disclosure and is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
(b) Changes in internal controls. We maintain a system of internal
accounting controls that are designed to provide reasonable assurance that our
books and records accurately reflect our transactions and that our established
policies and procedures are followed. For the quarter ended June 30, 2004, there
were no significant changes to our internal controls or in other factors that
could significantly affect our internal controls.
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.
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.
7
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.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is expected to be set forth under the
caption "Independent Public Accountants" of the registrant's definitive proxy
statement, and incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(A) (1) FINANCIAL STATEMENTS FILED
VSI Liquidation Corp. and Subsidiary:
Report of Independent Registered Public Accounting Firm.
Consolidated Balance Sheets at June 30, 2004 and 2003.
Consolidated Statements of Discontinued Operations for the years
ended June 30, 2004, 2003 and 2002.
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 2004, 2003 and 2002.
Consolidated Statements of Cash Flows for the years ended June
30, 2004, 2003 and 2002.
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
31.1* Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2* Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1* Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant
To Section 906 of The Sarbanes-Oxley Act of 2002.
_____________________
8
* 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.
9
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 17, 2004 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 17, 2004
--------------------
Allen O. Kinzer
\s\ Donald P. Carson Director and September 17, 2004
--------------------- Acting Chief
Donald P. Carson Financial Officer
10
VSI LIQUIDATION CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ................... 12
CONSOLIDATED BALANCE SHEETS - June 30, 2004 and 2003 ......................13
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS -
Years ended June 30, 2004, 2003 and 2002................................14
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY -
Years ended June 30, 2004, 2003 and 2002 ........................15
CONSOLIDATED STATEMENTS OF CASH FLOWS -
Years ended June 30, 2004, 2003 and 2002................................16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................................17-18
All schedules are omitted because they are not required under the instructions,
are inapplicable, or the information is included
elsewhere in the financial statements.
11
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
VSI Liquidation Corp.
We have audited the accompanying consolidated balance sheets of VSI Liquidation
Corp. (a Delaware corporation) and subsidiary as of June 30, 2004 and 2003, and
the related consolidated statements of discontinued operations, stockholders'
equity, and cash flows for each of the three years ended June 30, 2004. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit 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 financial position of VSI Liquidation and
subsidiary as of June 30, 2004 and 2003, and the results of its discontinued
operations and its cash flows for each of the three years in the period ending
June 30, 2004 in conformity with U.S. generally accepted accounting principles.
Hall, Kistler & Company LLP
Canton, Ohio
September 7, 2004
12
VSI LIQUIDATION CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and 2003
2004 2003
----------------- -----------------
ASSETS
Cash $ 497,264 $ 423,215
Income tax refund receivable 60,000 213,000
Cash in escrow account 703,099 703,957
----------------- -----------------
Total assets $1,260,363 $1,340,172
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses $ 231,411 $ 159,314
Deferred income taxes 296,893 404,845
----------------- -----------------
Total liabilities 528,304 564,159
----------------- -----------------
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 848,044 848,044
Retained earnings (195,051) (151,097)
----------------- -----------------
732,059 776,013
----------------- -----------------
Total liabilities and stockholders' equity $1,260,363 $1,340,172
================= =================
The accompanying notes are an integral part of these consolidated financial statements.
13
VSI LIQUIDATION CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS
for the years ended June 30, 2004, 2003 and 2002
2004 2003 2002
----------------- ----------------- -----------------
Sales $ - $ - $ -
Cost of sales - - -
----------------- ----------------- -----------------
Gross profit - - -
Selling, general and
administrative expenses 71,094 445,099 297,387
Interest income (4,140) (6,858) (33,170)
----------------- ----------------- -----------------
Loss from discontinued operations
before income taxes (66,954) (438,241) (264,217)
Income tax benefit (23,000) (165,000) (100,000)
----------------- ----------------- -----------------
Net loss $ (43,954) $ (273,241) $ (164,217)
================= ================= =================
Earnings per share:
Net earnings per common share - basic $ (0.01) $ (0.03) $ (0.02)
================= ================= =================
Net earnings per common share -
assuming dilution $ (0.01) $ (0.03) $ (0.02)
================= ================= =================
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.
14
VSI LIQUIDATION CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended June 30, 2004, 2003 and 2002
Retained
Preferred Common Paid-In (Deficit)
Stock Stock (1) Capital Earnings Total
-------------- -------------- -------------- -------------- --------------
Balance, July 1, 2001 $ - $ 79,066 $ 1,796,838 $ 286,361 $ 2,162,265
Net loss (164,217) (164,217)
Distribution of $.12 per
share to common
stockholders (948,794) (948,794)
-------------- -------------- -------------- -------------- --------------
Balance, June 30, 2002 - 79,066 848,044 122,144 1,049,254
Net loss (273,241) (273,241)
-------------- -------------- -------------- -------------- --------------
Balance, June 30, 2003 - 79,066 848,044 (151,097) 776,013
Net loss (43,954) (43,954)
-------------- -------------- -------------- -------------- --------------
Balance, June 30, 2004 $ - $ 79,066 $ 848,044 $ (195,051) $ 732,059
============== ============== ============== ============== ==============
(1) Per share totals are 100 times dollar amounts.
The accompanying notes are an integral part of these consolidated financial statements.
15
VSI LIQUIDATION CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended June 30, 2004, 2003 and 2002
2004 2003 2002
---------------- ---------------- -----------------
Cash flows from operating activities:
Net loss $ (43,954) $ (273,241) $ (164,217)
Adjustments to reconcile net loss to cash
provided by (used in) operating activities:
Deferred income taxes (107,952) (152,000) (245,227)
(Increase) decrease in assets:
Income tax refund receivable 153,000 (213,000) -
Prepaid expenses and supplies - 591,114 (51,339)
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 72,097 (9,627) 5,344
---------------- ---------------- -----------------
Cash provided by (used in) operating activities 73,191 (56,754) (455,439)
---------------- ---------------- -----------------
Cash flows from investing activities:
Change in escrow account 858 167,557 1,501,335
---------------- ---------------- -----------------
Cash provided by (used in) investing activities 858 167,557 1,501,335
---------------- ---------------- -----------------
Cash flows from financing activities:
Distribution to common stockholders - - (948,794)
---------------- ---------------- -----------------
Cash used in financing activities - - (948,794)
---------------- ---------------- -----------------
(Decrease) increase in cash 74,049 110,803 97,102
Cash at beginning of year 423,215 312,412 215,310
---------------- ---------------- -----------------
Cash at end of year $ 497,264 $ 423,215 $ 312,412
================ ================ =================
Cash paid for:
Interest $ - $ - $ -
Income taxes - - 135,000
Non-cash investing activities:
Property and equipment acquired with capital leases - - -
The accompanying notes are an integral part of these consolidated financial statements.
16
VSI LIQUIDATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended June 30, 2004, 2003 and 2002
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. Escrow funds were released over the three year period
following the closing. The remaining escrow balance of $703,000 at June 30,
2004, to the extent not needed to indemnify HydroChem, will also be released
when the Company can provide certain environmental assurances to HydroChem,
expected to be sometime in 2006.
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. Additional liquidating dividends of
approximately $1.2 million ($.15 per common share), $790,000 ($.10 per common
share) and $950,000 ($.12 per share) were paid in fiscal February 2000, 2001 and
2002 respectively.
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
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, 2004 and 2003, respectively, the Company's uninsured cash
balances totaled $397,264 and $323,215.
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.
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
17
VSI LIQUIDATION CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the years ended June 30, 2004, 2003 and 2002
dividing net income 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.
4. INCOME TAXES:
The income tax provision for the three years ended June 30, 2004 is comprised of
the following amounts:
2004 2003 2002
------------- ------------- ------------
Current $ (23,000) $ (165,000) $ 400,000
Deferred - - (500,000)
------------- ------------- ------------
Total Provision $ (23,000) $ (165,000) $ (100,000)
============= ============= ============
Statutory Rate (34)% (34)% (34)%
State and local taxes, net of federal benefit - (4) (4)
------------- ------------- ------------
Effective rate (34)% (38)% (38)%
============= ============= ============
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, 2004 and 2003, the components
of the net deferred tax assets and liabilities were as follows:
2004 2003
------------- -------------
Deferred tax liabilities:
Escrow account $ 296,893 $ 404,845
------------- -------------
Net deferred tax liabilities $ 296,893 $ 404,845
============= =============
5. 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, 2003. 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.
6. FINANCIAL STATEMENT PRESENTATION
The 2004 financial statements are presented on an unclassified basis due to the
working capital distinction being irrelevant.
18