SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
Commission file number 0-19343
VSI Liquidation Corp.
(Exact name of Registrant as specified in its charter)
Delaware 34-1493345
(State of incorporation) (I.R.S. Employer Identification No.)
2170 Piedmont Road, N.E.
Atlanta, Georgia 30324
(404) 888-2750
(Address and telephone number of
principal executive offices)
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No____
As of September 30, 1999, 7,906,617 shares of the Registrant's Common
Stock, $.01 par value, were outstanding.
985632v1
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PART 1 - - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VSI Liquidation Corp.
Consolidated Balance Sheets
September 30, 1999
(unaudited) June 30, 1999
---------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,812,791 $ 1,765,382
Cash in escrow account 441,338 410,807
Accounts receivable, net 239,916 425,175
Prepaid expenses and deposits 355,102 356,651
---------------------- ---------------------
Total current assets 2,849,147 2,958,015
Cash in escrow account 3,000,000 3,000,000
--------------------- ---------------------
Total assets $ 5,849,147 $ 5,958,015
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 34,856 $ 70,145
Accrued expenses 312,122 323,215
Income tax payable 116,449 159,000
Deferred income taxes 64,474 64,474
---------------------- ---------------------
Total current liabilities 527,901 616,834
Deferred income taxes 1,056,526 1,056,526
---------------------- ---------------------
Total liabilities 1,584,427 1,673,360
---------------------- ---------------------
Stockholders' equity:
Common stock, $.01 par value; authorized
12,000,000 shares, issued and outstanding
7,906,617 shares 79,066 79,066
Paid-in capital 3,773,492 3,773,492
Retained earnings 412,162 432,097
---------------------- ---------------------
4,264,720 4,284,655
---------------------- ---------------------
Total liabilities and stockholders' equity $ 5,849,147 $ 5,958,015
====================== =====================
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See notes to consolidated financial statements.
2
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VSI Liquidation Corp.
Consolidated Statements of Discontinued Operations
(unaudited)
Three months ended
September 30
-----------------------------------
1999 1998
----------------- -----------------
Sales $ - $ 7,597,337
Cost of sales - 4,643,927
----------------- -----------------
Gross profit from operations - 2,953,410
Selling, general and administrative
expenses 85,438 1,785,594
Interest (income) expense, net (54,503) 140,532
----------------- -----------------
Income before income taxes (30,935) 1,027,284
Income taxes (11,000) -
---------------- -----------------
Net income (loss) $ (19,935) $ 1,027,284
================= =================
Net earnings (loss) per common share:
Basic $ 0.00 $ 0.12
================= =================
Diluted $ 0.00 $ 0.12
================= =================
Weighted average shares used in
computation - basic and diluted 7,906,617 7,906,617
================= =================
See notes to consolidated financial statements.
3
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<CAPTION>
VSI Liquidation Corp.
Consolidated Statements of Cash Flows
(Unaudited)
Three months ended September 30
-------------------------------------
1999 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (19,935) $ 1,027,284
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization - 720,122
Gain on disposition of property and equipment - (600)
(Increase) decrease in assets:
Accounts receivable 185,259 (1,422,665)
Prepaid supplies - (27,841)
Prepaid expenses 1,549 (109,625)
Escrow account (30,531) -
Increase (decrease) in liabilities:
Accounts payable (35,289) (3,750)
Accrued expenses (11,093) 146,337
Income tax payable (42,551) -
-------------- ------------------
Cash provided by operating activities 47,409 329,262
-------------- ------------------
Cash flows from investing activities:
Additions to property and equipment - (1,583,483)
Proceeds from disposition of property and equipment - 600
-------------- ------------------
Cash used by investing activities - (1,582,883)
-------------- ------------------
Cash flows from financing activities:
Net payments (borrowings) on revolving line of credit - 179,618
Additional borrowings of long-term debt - 1,088,403
Payments of long-term debt - (76,726)
Payments of preferred stock dividends - (96,250)
-------------- ------------------
Cash provided by financing activities - 1,095,045
-------------- ------------------
Increase (decrease) in cash 47,409 (158,576)
Cash at beginning of period 1,765,382 207,492
-------------- ------------------
Cash at end of period $ 1,812,791 $ 48,916
============== ==================
Cash paid for:
Interest $ - $ 140,532
============== ==================
</TABLE>
See notes to consolidated financial statements.
4
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VSI Liquidation Corp.
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION:
Reference is made to the annual report on Form 10-K filed September
28, 1999 for the fiscal year ended June 30, 1999.
The financial statements for the periods ended September 30, 1999 and
1998 are unaudited and include all adjustments which, in the opinion of
management, are necessary for a fair statement of the results of
operations for the periods then ended. All such adjustments are of a
normal recurring nature. The results of the Company's discontinued
operations for any interim period are not necessarily indicative of the
results of the Company's operations for a full fiscal year.
2. INCOME TAXES:
The provision for income taxes for the three months ended September 30,
1998 varies from the customary relationship with pre-tax income due to
utilization of net operating loss carryforwards.
3. CONTINGENCIES:
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, cash flows or financial position.
4. INCOME PER COMMON SHARE:
Basic earnings per common share are computed by dividing net income
less preferred stock dividend requirements (none for the three months
ended September 30, 1999 and $96,250 for the three months ended
September 30, 1998) for the period by the weighted average number of
shares of common stock outstanding for the period. Diluted earnings per
common share do not vary from basic earnings per share for any of the
periods presented because there were no dilutive potential shares of
common stock outstanding. The dilutive effect of outstanding potential
shares of common stock is computed using the treasury stock method.
5. 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 $29.8 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 of the escrow funds will be released if and when the
Company provides certain environmental assurances to HydroChem,
currently expected to be during 2000. This transaction closed on
January 5, 1999, and was effective as of January 1, 1999.
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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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD LOOKING STATEMENTS:
Forward-looking statements in this Form 10-Q 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, and general business and economic conditions.
RESULTS OF OPERATIONS:
Three months ended September 30, 1999 as compared to the three months ended
September 30, 1998:
The results of operations for the three months ended September 30, 1999 are not
comparable to those for the three months ended September 30, 1998. As discussed
in the notes to the financial statements, effective January 1, 1999
substantially all assets of the Company were sold to, and substantially all
liabilities were assumed by, HydroChem. Operations for the quarter ended
September 30, 1999 consisted only of 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.
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 $29.8 million in cash, of which $25.8 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.
6
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Of the $25.8 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.
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, currently 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 liquidating cash dividend to
stockholders. See Item 3., "Legal Proceedings."
As of September 30, 1999 the Company had approximately $1.8 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.
7
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
PART II - - OTHER INFORMATION
Item 1. 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.
8
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Item 2. Changes in Securities And Use of Proceeds: Not Applicable
Item 3. Defaults Upon Senior Securities: Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders: None
Item 5. Other Information: None
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit
Number Description
- ------ -----------
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.)
27* Financial Data Schedule
- -----------------
* Filed herewith.
(b) Reports on Form 8-K.
None
9
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VSI LIQUIDATION CORP.
Date: November 15, 1999 By: /s/ Joe M. Young
-------------------------------------
Joe M. Young
Director and Acting Financial Officer
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL DATA INFORMATION EXTRACTED FROM THE
COMPANY'S UNAUDITED FINANCIAL STATEMENTS CONTAINED IN ITS REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873571
<NAME> VSI Liquidation Corp.
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> SEP-30-1999
<CASH> 1,812,791
<SECURITIES> 0
<RECEIVABLES> 439,916
<ALLOWANCES> 200,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,849,147
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,849,147
<CURRENT-LIABILITIES> 527,901
<BONDS> 0
0
0
<COMMON> 79,066
<OTHER-SE> 4,185,654
<TOTAL-LIABILITY-AND-EQUITY> 5,849,147
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (19,935)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,935)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
