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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, 1999
[ ] 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 Identification Number)
incorporation or organization)
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. [ X ]
As of September 16, 1999: (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 $259,109, based on the closing sale
price of $0.125 per share on September 16, 1999.
887064v2
DOCUMENTS INCORPORATED BY REFERENCE
Part I: None
Part II: None
Part III: All items - see registrant's definitive proxy statement
which involves the election of directors and which is expected
to be filed with the 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
2
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 2000. 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.
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.
3
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
Conversation 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".
4
Employees
As of August 31, 1999, the Company had no employees other than its
officers and directors.
ITEM 2. PROPERTIES
As of August 31, 1999 the Company does not own or lease any property.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in two related lawsuits - Cardinal
Environmental Services, Inc. v. Quadres Company, et al., Case No. CV 98 02 0749,
Court of Common Pleas, Summit County, Ohio; and Valley Systems of Ohio, Inc. v.
Erie Industrial Maintenance, Inc., et al., Case No. 368885, Court of Common
Pleas, Cuyahoga County, Ohio. These two lawsuits involve the abatement and
demolition of a building in Ohio.
The owner of the building contracted to have the asbestos in the
building abated and the building demolished. The general contractor for the
project hired Eslich Wrecking Company ("Eslich") as its demolition contractor.
Eslich hired Cardinal Environmental Services, Inc. ("Cardinal") as the asbestos
abatement contractor. Cardinal employed Erie Industrial Maintenance, Inc.
("Erie") to provide the labor for the abatement. Erie, in turn, rented high
pressure water removal equipment from the Company's subsidiary, Valley Systems
of Ohio, Inc. ("Valley"). Valley also agreed to provide trained personnel for
Erie to hire to operate the equipment as well as to train Erie employees in the
use of the equipment.
Eslich has charged that Valley made certain representations regarding
abatement speed that were false, that its technique was experimental, that it
negligently performed the abatement, and that it negligently sealed unabated
asbestos materials. Eslich has also made claims against Valley for negligence
and negligent concealment. Eslich claims that it was required to pay a new
abatement contractor in excess of $1.5 million to complete the abatement
process. Eslich seeks recovery of that $1.5 million from Valley, Erie, and/or
Cardinal.
Valley has asserted claims for common law and contractual
indemnification against Erie. However, if Valley is successful in obtaining a
judgment against Erie for indemnification, Erie may not be able to satisfy such
a large judgment. Further, counsel for Erie has indicated that Erie's insurance
company has denied coverage for this action.
The Company vigorously disputes the allegations made against it, and no
provision for any loss resulting from this litigation has been made in the
consolidated financial statements.
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, 1999.
5
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.
High Low
Fiscal 1998:
July 1, 1997 - September 30, 1997 $ 1.750 $ 1.250
October 1, 1997 - December 31, 1997 1.750 0.750
January 1, 1998 - March 31, 1998 1.188 0.875
April 1, 1998 - June 30, 1998 1.500 0.938
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
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:
1999 (1) 1998 1997 1996 1995
---------- ---------- ---------- ---------- -------
Sales $ 13,537 $ 24,431 $ 23,088 $ 21,875 $ 24,231
Gross profit 5,072 9,040 8,559 6,853 8,562
Selling, general and administrative expenses 3,663 7,145 7,268 7,254 7,155
Litigation settlements and related fees - - (752) - -
Interest expense 163 593 592 572 895
Gain on sale of substantially all assets
and assumption of substantially all
liabilities of the Company 22,719 - - - -
Net Income (loss) 21,465 1,302 1,451 (973) 512
Earnings (loss) per common share:
Basic and diluted 2.69 0.12 0.13 (0.16) 0.02
Total assets 5,958 15,934 14,568 15,123 15,704
Total long-term debt - 7,585 7,235 7,021 5,858
Total stockholders' equity 4,285 5,354 4,437 4,031 5,412
- -------------------
(1) July 1, 1998 through January 1, 1999.
6
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 ongoing
litigation (See Item 3., "Legal Proceedings.") and general business and economic
conditions.
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.
Results of Discontinued Operations - 1998 compared to 1997
Sales increased 5.8% in the fiscal year ended June 30, 1998 from the
prior year. Sales of UHP waterjetting services decreased by 2.0% from the prior
year, and amounted to 47% of total sales in 1998, compared to 50% in 1997. The
decrease in UHP sales was due to one large emergency project in 1997 (hurricane
damage to a customer's facility) that was not repeated. Excluding this project,
UHP sales increased by 4%. UHP sales to the hazardous materials abatement
industry grew from $1.2 million in 1997 to $2.2 million in 1998. The Company
expects UHP sales to this industry to continue increasing in Fiscal 1999. Sales
of the Company's other major service lines, vacuum and conventional
waterblasting, each increased by 15% in 1998 over the prior year. Vacuum
services totaled 28% of sales in 1998, compared to 26% in 1997. Waterblasting
services were 19% of total sales this year, compared to 18% in 1997. The revenue
gains in vacuum and waterblasting came from increased sales to existing
accounts, as well as new customers.
As there was no significant shift in sales between the various service
lines in 1998, gross margin as a percentage of sales was 37%, the same as in
1997. As announced in May 1998, the Company was selected to be the primary
supplier of vacuum and waterblasting services to FirstEnergy Corp. This
three-year contract was expected to add approximately $3 million of additional
revenues annually to these service lines.
Selling, general and administrative expenses decreased by 2% in 1998
from 1997, and represented 29% of sales in 1998 compared to 31% in the prior
year. Lower insurance expenses due to better loss experience helped cause this
decrease, as well as lower occupancy costs resulting from the purchase of the
Company's headquarters facility. Interest expense remained constant from 1997 to
1998, and amounted to 2% of sales in 1998 and 3% in the prior year.
7
All of the above factors resulted in net income of $1.3 million in 1998
(5.3% of sales), or $.12 per common share, basic and diluted. This is an
increase of 86% from the comparable 1997 income from operations of $700,000
(3.0% of sales), or $.04 per common share, before gain on settlement of
litigation. Net income in 1997 was improved by a one-time gain on settlement of
litigation of $752,000, or $.09 per share.
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)
9/30/97 12/31/97 3/31/98 6/30/98 9/30/98 12/31/98 3/31/99 6/30/99
------- -------- ------- ------- ------- -------- ------- -------
Sales $ 5,856 $ 6,058 $ 5,865 $ 6,652 $ 7,597 $ 5,940 $ - $ -
Gross profit 2,200 2,117 2,210 2,513 2,953 2,119 - -
Net income 304 131 344 523 1,027 6,437 13,661 340
Earnings per common share -
basic and diluted $ .03 $ .00 $ .03 $ .06 $ .12 $ .80 $ 1.73 $ .04
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.
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. 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.
8
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 $2.4 million will be
released on or about the first, second, and third anniversaries of the closing
date in amounts of approximately $400,000 in January 2000, and $1 million in
each of January 2001 and 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, expected to be in the year
2000. 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. In addition, if the Company does not
prevail in the ongoing litigation, any escrowed funds released to the Company
may be required to be utilized to pay a judgment against the Company which
payment will reduce the amount available to be distributed as a liquidation cash
dividend to stockholders. See Item 3., "Legal Proceedings".
As of the fiscal year ended June 30, 1999, the Company had
approximately $1.7 million in cash in addition to approximately $3.4 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.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written
using two digits rather than four digits to define the applicable year. This
could result in a system failure or miscalculations if a computer program
recognizes a date of "00" as the year 1900 instead of 2000. The Company has
assessed the Year 2000 issue with regard to third parties with which the Company
has material relationships.
The Company has identified third parties with which it has material
relationships with respect to the Year 2000 issue. These parties are primarily
large financial, telecommunication and information processing entities. All such
third parties have reported to the Company that they are on schedule with their
projects to remediate Year 2000 issues, and that they anticipate being Year 2000
compliant on a timely basis. The Company intends to continue to monitor the
progress of these third parties and will develop contingency plans during Fiscal
2000 in the event one or more of these third parties fail to remediate their
Year 2000 issues in such a way as to materially affect the winding up operations
of the Company. At this time, the Company believes the risk of such third party
failures having a material impact on the Company's winding up operations is
remote.
ITEM 7A. QUANTITIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 Escrow Agreement entered into by 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.
9
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.
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 "Executive Compensation" 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
Valley Systems, Inc. and Subsidiaries:
Report of Independent Accountants.
Consolidated Balance Sheets at June 30, 1999 and 1998.
Consolidated Statements of Discontinued Operations for the
years ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Stockholders' Equity for the
years ended June 30, 1999, 1998 and 1997.
Consolidated Statements of Cash Flows for the years ended
June 30, 1999, 1998 and 1997.
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.)
10
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.
Reports on Form 8-K filed during the three months ended June 30, 1999
None.
11
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 28, 1999 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, 1999
- --------------------
Allen O. Kinzer
\s\ Joe M. Young Director September 28, 1999
- -----------------
Joe M. Young
12
VSI LIQUIDATION CORP. AND SUBSIDIARY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
REPORT OF INDEPENDENT ACCOUNTANTS 14
CONSOLIDATED BALANCE SHEETS - June 30, 1999 and 1998 15
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS
- Years ended June 30, 1999, 1998 and 1997 16
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- Years ended June 30, 1999, 1998 and 1997 17
CONSOLIDATED STATEMENTS OF CASH FLOWS
- Years ended June 30, 1999, 1998 and 1997 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19-25
All schedules are omitted because they are not required under the instructions,
are inapplicable, or the information is included elsewhere in the financial
statements.
13
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders of
VSI Liquidation Corp.:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of discontinued operations, changes in stockholders'
equity and cash flows present fairly, in all material respects, the financial
position of VSI Liquidation Corp. and Subsidiary (the "Company") at June 30,
1999 and 1998, and the results of their discontinued operations and their cash
flows for each of the three years in the period ended June 30,1999, in
conformity with generally accepted accounting principles. 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
generally accepted auditing standards 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 the opinion expressed
above.
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
September 23, 1999
Cleveland, Ohio
14
VSI LIQUIDATION CORP. AND SUBSIDIARY
Consolidated Balance Sheets
June 30, 1999 and 1998
1999 1998
--------------------- ------------------
ASSETS
Current assets:
Cash $ 1,765,382 $ 207,492
Cash in escrow account 410,807 -
Accounts receivable, net 425,175 5,740,394
Prepaid supplies - 522,992
Prepaid expenses and deposits 356,651 155,439
--------------------- ------------------
Total current assets 2,958,015 6,626,317
Cash in escrow account 3,000,000 -
Property and equipment, net - 8,896,650
Intangible assets - 411,000
--------------------- ------------------
Total assets $ 5,958,015 $ 15,933,967
===================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,145 $ 726,054
Accrued expenses 323,215 1,610,470
Income taxes payable 159,000 -
Deferred income taxes 64,474 -
Current portion of long-term debt - 659,257
--------------------- ------------------
Total current liabilities 616,834 2,995,781
Deferred income taxes 1,056,526 -
Long-term debt - 7,584,593
--------------------- ------------------
Total liabilities 1,673,360 10,580,374
--------------------- ------------------
Commitments and contingencies - -
Stockholders' equity:
Preferred stock, $.10 par value; authorized
2,000,000 shares, issued and outstanding
55,000 shares at June 30, 1998 - 5,500
Common stock, $.01 par value; authorized
12,000,000 shares, issued and outstanding
8,512,073 shares 79,066 85,121
Paid-in capital 3,773,492 26,786,040
Retained earnings 432,097 (20,840,060)
Treasury stock, at cost, 605,456 shares at
June 30, 1998 - (683,008)
--------------------- ------------------
4,284,655 5,353,593
--------------------- ------------------
Total liabilities and stockholders' equity $ 5,958,015 $ 15,933,967
===================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
15
VSI LIQUIDATION CORP. AND SUBSIDIARY
Consolidated Statements of Discontinued Operations
for the years ended June 30, 1999, 1998 and 1997
1999 1998 1997
---------------------- -------------------- ---------------------------
Sales $ 13,536,876 $ 24,431,385 $ 23,088,298
Cost of sales 8,464,830 15,391,490 14,529,554
---------------------- -------------------- ------------------
Gross profit 5,072,046 9,039,895 8,558,744
Selling, general and administrative expenses 3,662,704 7,144,739 7,267,973
Interest expense, net 163,264 593,127 592,024
Gain on settlement of litigation - - 752,236
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 23,964,657 1,302,029 1,450,983
Income taxes 2,500,000 - -
---------------------- -------------------- ------------------
Net income $ 21,464,657 $ 1,302,029 $ 1,450,983
====================== ==================== ==================
Earnings per share:
Net earnings per common share - basic
$ 2.69 $ .12 $ .13
====================== ==================== ==================
Net earnings per common share -
assuming dilution $ 2.69 $ .12 $ .13
====================== ==================== ==================
Weighted average shares used in
computation - basic and diluted 7,906,617 7,906,617 8,203,069
====================== ==================== ==================
The accompanying notes are an integral part of these consolidated financial
statements.
16
VSI LIQUIDATION CORP. AND SUBSIDIARY
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1999, 1998 and 1997
Retained
Preferred Common Paid-In (Deficit) Treasury
Stock (1) Stock (2) Capital Earnings Stock Total
---------- -------------- ----------------- ----------------- --------------- ----------------
Balance, July 1, 1996 $ 5,500 $ 85,121 $ 26,786,040 $(22,726,822) $(118,638) $ 4,031,201
Purchase of treasury
stock (564,370) (564,370)
Net income 1,450,983 1,450,983
Series C preferred
dividends (481,250) (481,250)
--------- ------------ ----------------- ----------------- --------------- ---------------
Balance, June 30, 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
========= ============ ================= ================= =============== ===============
(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.
17
VSI LIQUIDATION CORP. AND SUBSIDIARY
Consolidated Statements of Cash Flows
for the years ended June 30, 1999, 1998 and 1997
1999 1998 1997
------------------ ---------------- -------------------
Cash flows from operating activities:
Net income $ 21,464,657 $ 1,302,029 $ 1,450,983
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Depreciation and amortization 1,476,569 2,758,868 3,138,326
Gain on disposition of property and equipment (31,625) (66,083) (5,784)
Gain on sale of assets and assumption of liabilities (22,718,579) - -
Deferred income taxes 1,121,000 - -
(Increase) decrease in assets:
Accounts receivable 262,195 (102,044) (953,631)
Prepaid expenses and supplies (383,543) (47,820) 6,422
Increase (decrease) in liabilities:
Accounts payable and accrued expenses 408,923 (63,921) (1,036,443)
Income tax payable 159,000 - -
------------------ ---------------- -------------------
Cash provided by operating activities 1,758,597 3,781,029 2,599,873
------------------ ---------------- -------------------
Cash flows from investing activities:
Additions to property and equipment (1,635,104) (2,295,049) (1,665,092)
Proceeds from dispositions of property and equipment 31,625 240,092 148,240
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 589,193 - -
------------------ ---------------- -------------------
Cash provided from (used in) investing activities 23,455,143 (2,054,957) (1,516,852)
------------------ ---------------- -------------------
Cash flows from financing activities:
Net (payments) borrowings from revolving loan (505,669) (1,467,355) 583,403
Payments of other long-term debt (520,336) (252,394) (603,060)
Additional borrowings of long-term debt - 386,076 -
Payments of preferred stock dividends (288,750) (385,000) (385,000)
Purchase of treasury stock - - (564,370)
Redemption of Series C Preferred Stock (5,500,000) - -
Distribution to common stockholders (16,841,095) - -
------------------ ---------------- -------------------
Cash used in financing activities (23,655,850) (1,718,673) (969,027)
------------------ ---------------- -------------------
Increase in cash 1,557,890 7,399 113,994
Cash at beginning of year 207,492 200,093 86,099
------------------ ---------------- -------------------
Cash at end of year $ 1,765,382 $ 207,492 $ 200,093
================== ================ ===================
Cash paid for:
Interest $ 303,623 $ 589,340 $ 592,024
Income taxes 1,220,000 - -
Non-cash investing activities:
Property and equipment acquired with capital leases - 1,846,474 -
Non-cash financing activities:
Preferred stock dividends accrued - - 96,250
The accompanying notes are an integral part of these consolidated financial
statements.
18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
VSI LIQUIDATION CORP. AND SUBSIDIARY
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.
$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. The Company has reserved $100,000 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 three years. $1.0 million will also be released when the Company
can provide certain environmental assurances to HydroChem, expected to be
sometime in 2000. 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.
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.
19
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
============== ================= ==================
20
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 liabilitis 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 since 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, 1998 and 1997 were $232,000, $14,000, and $51,000,
respectively. The allowance for doubtful accounts was $300,000 at June 30, 1999
and $125,000 at June 30, 1998.
Prepaid Supplies: Prepaid supplies consisted of items to be used in operations,
and are stated at the lower of cost (first in, first out) or market.
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. Accumulated amortization
amounted to $959,000 as of June 30, 1998.
21
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 per year for the years ended June 30, 1998 and 1997) 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 1998 consolidated financial statements
have been reclassified to conform to the 1999 presentation.
4. Property and Equipment:
Property and equipment consisted of the following:
1999 1998
-------- ----------
Land $ - $ 420,683
Building and leasehold improvements - 1,032,752
Automobiles and trucks - 8,600,072
Equipment - 8,637,151
Equipment in progress and parts - 199,538
------- -----------
- 18,890,196
Less accumulated depreciation and amortization - 9,993,546
------- -----------
$ - $ 8,896,650
======= ===========
Included in property and equipment were assets under capital leases of
$3,618,000 with related accumulated depreciation of $1,230,000 as of June 30,
1998.
The Company incurred repairs and maintenance costs on property and equipment of
approximately $610,000, $1,350,000 and $1,450,000 for the years ended June 30,
1999, 1998 and 1997, respectively.
22
5. Accrued Expenses:
Accrued expenses consist of the following:
1999 1998
-------- ---------
Accrued payroll and compensation $ - $ 927,000
Accrued preferred stock dividends - 96,250
Other accrued liabilities 323,215 587,220
--------- ----------
$ 323,215 $1,610,470
========= ==========
6. Long-Term Debt:
Long-term debt was comprised of the following:
1999 1998
--------- -------------
Capitalized leases (A) $ - $ 2,114,640
Revolving loan - bank (C) - 5,742,543
Mortgage loan - bank (D) - 386,667
--------- -----------
- 8,243,850
Less: current portion of long-term debt - 659,257
--------- -----------
$ - $ 7,584,593
========= ===========
A. Capitalized leases were due in monthly installments ranging from $4,000 to
$15,000 and bear interest of 8.5%.
B. The Company has an $8 million loan agreement with its majority stockholder,
which expires in July 2000. This facility may be utilized by borrowings at .5%
over the prime rate (payable quarterly) or, at the Company's option, by having
the stockholder provide bank letters of credit which the Company can utilize as
collateral for other obligations. The Company reimburses the stockholder for the
actual cost of the letters of credit. This loan agreement is collateralized by
essentially all assets of the Company. At June 30, 1999, there are no loans
outstanding under this facility, and the stockholder has issued $800,000 in bank
letters of credit that were still outstanding.
C. This obligation represented borrowings under a $7,500,000 revolving loan
agreement with a bank. The loan had interest at 1.7% below the prime rate (6.80%
at June 30, 1998), payable monthly, and was collateralized by a bank letter of
credit provided by the Company's majority shareholder under the loan agreement
described in B. above. This loan agreement was assumed by HydroChem as part of
the sale of substantially all assets of the Company in January 1999.
D. Mortgage loan payable in monthly installments of $2,778 plus interest on the
outstanding balance at the prime rate (8.5% at June 30, 1998), due September
2007. This mortgage was assumed by HydroChem as part of the sale of
substantially all assets of the Company in January 1999.
23
7. Income Taxes:
The income tax provision for the three years ended June 30, 1999 is comprised of
the following amounts:
1999 1998 1997
----------- ------ ------
Current $ 1,379,000 $ 0 $ 0
Deferred 1,121,000 0 0
----------- ------ ------
Total provision $ 2,500,000 $ 0 $ 0
Statutory rate 34% 34% 34%
State and local taxes, net of federal benefit 52 5 5
Operating loss utilized (29) (39) (39)
----------- ------ ------
Effective rate 10% 0% 0%
====== ======
24
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, 1999 and 1998, the components
of the net deferred tax assets and liabilities were as follows:
1999 1998
--------------- -------------
Deferred tax assets:
Allowance for doubtful accounts $ 117,000 $ 50,000
Vacation accrual - 144,000
Net operating loss carryforwards - 7,654,878
Other - 164,912
-------------- -------------
117,000 8,013,790
Deferred tax liabilities:
Basis difference in fixed assets - (596,930)
Escrow account (1,200,598) -
Other (37,402) -
-------------- -------------
(1,238,000) (596,930)
-------------- -------------
Net deferred tax (liabilities) assets (1,121,000) 7,416,860
Valuation allowance - (7,416,860)
-------------- -------------
Net deferred taxes recognized $ (1,121,000) $ -
============== =============
8. Litigation:
In addition to the matters discussed below, 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.
A. The Company filed a lawsuit in September 1993 against certain of its former
directors and officers, as well as other parties. This lawsuit was settled in
December 1996.
B. During the fiscal year ended June 30, 1996, the Company determined that
amounts contributed to it by two former officers and directors that were
previously classified as loans to the Company were not loans. Instead, such
contributions were determined to be repayments by the former officers and
directors of amounts owed by those officers and directors to the Company at the
time the contributions were made. Because the former officers and directors in
the lawsuit described above contested this determination, an equal amount was
reserved. As a result of the settlement of this lawsuit, the reserve was
eliminated in the quarter ended December 31, 1996, resulting in a gain of
$752,000 after related expenses of the litigation.
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.
25
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, 1998 and 1997, respectively, options to purchase 11,900, 46,700 and
24,000 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 and 1997: (a) risk-free
interest rates of 6.40% to 7.04%; (b) no dividend yield in either year; (c)
expected terms of 8 years; and (d) volatility of 95%.
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 and reduced to
$1,306,346 ($.11 per common share, assuming dilution) for the year ended June
30, 1997.
At June 30, 1999, warrants to purchase shares of the Company's common stock were
outstanding as follows:
Warrant
Price Shares Expiration Date
--------- --------- ---------------
$ 3.09 2,314,000 May 2000
$ 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, 1999. 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 is expected to be completed in December 1999.