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 March 31, 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 March 31, 1999, 7,906,617 shares of the Registrant's Common
Stock, $.01 par value, were outstanding.
840396v1
<PAGE>
PART 1 - - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
VSI Liquidation Corp.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
<S> <C> <C>
March 31, 1999
(unaudited) June 30, 1998
---------------------- ---------------------
ASSETS
------
Current assets:
Cash $ 2,989,861 $ 207,492
Cash in escrow account 1,000,000 -
Accounts receivable - 5,740,394
Prepaid supplies - 522,992
Prepaid expenses 80,375 155,439
---------------------- ---------------------
Total current assets 4,070,236 6,626,317
Cash in escrow account, net 3,042,029 -
Property and equipment - 8,896,650
Intangible assets - 411,000
---------------------- ---------------------
Total assets $ 7,112,265 $ 15,933,967
====================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable $ - $ 726,054
Accrued expenses 1,051,893 1,610,470
Income tax payable 2,115,000 -
Current portion of long-term debt - 659,257
---------------------- ---------------------
Total current liabilities 3,166,893 2,995,781
Long-term debt - 7,584,593
Stockholders' equity:
Preferred stock, $.10 par value; authorized 2,000,000 shares,
issued and outstanding zero shares at March 31, 1999 and 55,000
shares at June 30, 1998 - 5,500
Common stock, $.01 par value; authorized
12,000,000 shares, issued and outstanding
7,906,617 shares at March 31, 1999 and
8,512,073 shares at June 30, 1998 79,066 85,121
Paid-in capital 3,773,492 26,786,040
Retained earnings 92,814 (20,840,060)
Treasury stock, at cost, zero shares at March 31,
1999 and 605,456 shares at June 30, 1998 - (683,008)
---------------------- ---------------------
3,945,372 5,353,593
---------------------- ---------------------
Total liabilities and stockholders' equity $ 7,112,265 $ 15,933,967
====================== =====================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
VSI Liquidation Corp.
Consolidated Statements of Income
(unaudited)
<TABLE>
<CAPTION>
<S> <C> <C>
Three months ended Nine months ended
March 31 March 31
----------------------------------- ------------------------------------
1999 1998 1999 1998
----------------- ----------------- ------------------ -----------------
Sales - $ 5,865,344 $ 13,536,876 $ 17,779,300
Cost of sales - 3,655,422 8,464,830 11,253,032
----------------- ----------------- ----------------- -----------------
Gross profit from operations - 2,209,922 5,072,046 6,526,268
Selling, general and administrative
expenses 55,589 1,730,768 3,344,321 5,302,567
Interest (income) expense, net (74,619) 135,364 229,004 444,615
Gain on sale of substantially all assets, and
assumption of substantially all liabilities of
the Company by, HydroChem Industrial
Services, Inc. 21,741,653 - 21,741,653 -
---------------- --------------- ---------------- ---------------
Income before income taxes 21,760,683 343,790 23,240,374 779,086
Income taxes 8,100,000 - 2,115,000 444,615 -
----------------- ----------------- ------------------ -----------------
Net income $ 13,660,683 $ 343,790 $ 21,125,374 $ 779,086
================= ================= ================== =================
Net earnings per common share:
Basic $ 1.73 $ 0.03 $ 2.65 $ 0.06
================= ================= ================== =================
Diluted $ 1.73 $ 0.03 $ 2.65 $ 0.06
================= ================= ================== =================
Weighted average shares used in
computation - basic and diluted 7,906,617 7,906,617 7,906,617 7,906,617
================= ================= ================== =================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
VSI Liquidation Corp.
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Nine months ended March 31
-----------------------------------
1999 1998
----------------- -----------------
Cash flows from operating activities:
Net income $ 21,125,374 $ 779,086
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization 1,476,569 2,075,851
Gain on disposition of property and equipment (31,625) (45,187)
Gain on sale of substantially all assets to, and assumption of
substantially all liabilities of the Company by,
HydroChem Industrial Services, Inc. (21,741,653) -
(Increase) decrease in assets:
Accounts receivable 687,370 39,855
Prepaid supplies (103,356) (17,004)
Prepaid expenses (3,911) (26,634)
Escrow account (42,029) -
Increase (decrease) in liabilities:
Accounts payable 22,029 (303,987)
Accrued expenses 145,427 (64,582)
Income tax payable 2,115,000 -
----------------- -----------------
Cash provided by operating activities 3,649,195 2,437,398
----------------- -----------------
Cash flows from investing activities:
Additions to property and equipment (1,635,104) (1,799,778)
Proceeds from disposition of property and equipment 31,625 125,403
Proceeds from sale of assets and assumption of liabilities,
net of expenses of sale 27,615,303 -
----------------- -----------------
Cash provided (used) by investing activities 26,011,824 (1,674,375)
----------------- -----------------
Cash flows from financing activities:
Net payments (borrowings) on revolving line of credit (505,669) (386,067)
Additional borrowings of long-term debt - 400,000
Establishment of escrow account, net (3,000,000) -
Payments of long-term debt (520,336) (312,222)
Redemption of Series C preferred stock (5,500,000) -
Payments of preferred stock dividends (288,750) (288,750)
Distribution to common stockholders (16,841,095) -
----------------- -----------------
Cash used by financing activities (26,655,850) (587,039)
----------------- -----------------
Increase in cash 3,005,169 175,984
Less cash sold with assets (222,800) -
Cash at beginning of period 207,492 200,093
----------------- ----------------=
Cash at end of period $ 2,989,861 $ 376,077
================= =================
Cash paid for:
Interest $ 303,623 $ 444,615
================= =================
Non-cash investing activities:
Property and equipment acquired with capital leases $ 870,705 $ 514,517
================= =================
See notes to consolidated financial statements.
</TABLE>
4
<PAGE>
VSI Liquidation
Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended March 31, 1999
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Preferred Common Paid-In Retained Treasury
Stock (1) Stock (2) Capital Earnings Stock Total
------------- ------------ -------------- ---------------- ------------ --------------
Balance July 1, 1998 $ 5,500 $85,121 $ 26,786,040 $ (20,840,060) $(683,008) $ 5,353,593
Net Income 21,125,374 21,125,374
Retirement of treasury stock (6,055) (676,953) 683,008 -
Series C preferred dividends (192,500) (192,500)
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 March 31, 1999 $ - $79,066 $ 3,773,492 $ 92,814 $ - $ 3,945,372
============= ============ ============== ================ ============ ==============
</TABLE>
(1) Share amounts are equivalent to ten times dollar amounts.
(2) Share amounts are equivalent to one hundred times dollar amounts.
See notes to consolidated financial statements.
5
<PAGE>
VSI Liquidation
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION:
Reference is made to the annual report on Form 10-K, as amended, filed
September 28, 1998 for the fiscal year ended June 30, 1998.
The financial statements for the periods ended March 31, 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 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 Company has approximately $17,600,000 of net operating loss
carryforwards for future years, which cannot be utilized to create tax
refunds. Such amounts begin to expire in the year 2005. The Company
utilized all of these net operating loss carryforwards in 1999 as a
result of the sale of substantially all of its assets to HydroChem
Industrial Services, Inc. ("HydroChem"), as detailed in Note 5. At June
30, 1998, the Company had approximately $19,100,000 of net operating
loss carryforwards for future years and had recorded a full valuation
allowance of approximately $7,400,000 against the resulting net
deferred tax assets, as it was not deemed more likely than not that
such net deferred tax assets were realizable. This valuation allowance
was completely reversed in the three months ended December 31, 1998
based on the utilization of approximately $1,500,000 of the loss
carryforwards to offset the six month taxable income and due to the
sale to HydroChem, as discussed in Note 5.
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 three months
ended March 31, 1999 and $96,250 for the three months ended March 31,
1998; $192,500 for the nine months ended March 31, 1999 and $288,750
for the nine months ended March 31, 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.
6
<PAGE>
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. 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 $1.0 million 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. Costs totaling $1,185,000 were
incurred by the Company in connection with the sale.
The Company changed its name 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 stock holders from the proceeds of the sale.
The following summarizes the assets sold and the liabilities assumed
under the Purchase Agreement:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Balance Amount
12/31/98 Sold Balance 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
=================== ================ ====================
The gain on this transaction is as follows:
Proceeds from sale $29,800,771
Less:
Net basis of assets sold and liabilities assumed 5,873,650
Expenses of sale 1,185,468
Reserve for liabilities resulting from indemnities and
guaranties under the Purchase Agreement 1,000,000
--------------------
Gain on sale $21,741,653
</TABLE>
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS:
Three months ended March 31, 1999 as compared to the three months ended March
31, 1998:
The results of operations for the three months ended March 31, 1999 are not
comparable to those for the three months ended March 31, 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 March 31, 1999 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.
Nine months ended March 31, 1999 as compared to the nine months ended March 31,
1998:
As discussed above, operations for the nine months ended March 31, 1999 are not
comparable to those for the nine months ended March 31, 1998. The Company had
normal operations only through December 31, 1998, as the sale of substantially
all assets and assumption of substantially all liabilities was effective January
1, 1999. 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,
dated as of September 8, 1998, among the Company, VSO and HydroChem 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.
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, through the establishment of an approximately $3.8
million contingency reserve for expenses and income taxes, 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.
8
<PAGE>
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 in the
contingency reserve 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,
the escrowed funds will be released on or about the first, second, and third
anniversaries of the closing date in amounts of approximately $1 million,
respectively, on each such date, 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.
$1 million of the cash in the escrow account is shown as a current asset in the
March 31, 1999 financial statements. The $1 million reserve for liabilities
resulting from indemnities and guarantees under the Purchase Agreement is
included in accrued expenses at March 31, 1999. This reserve consists of
$500,000 for accounts receivable sold to HydroChem and guaranteed by the
Company, $350,000 for potential environmental indemnities, and $150,000 for
expenses over those assumed by HydroChem.
As of March 31, 1999, approximately $3.0 million of the contingency reserve
remained and is available for income taxes and other expenses necessary to wind
up and dissolve the Company.
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 contingency
reserve 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
1999 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.
9
<PAGE>
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 Company will not be able to make the necessary
certification to HydroChem regarding environmental remediation, the possibility
that the costs of winding up the Company's affairs could exceed the Company's
projections and general business and economic conditions.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
PART II - - OTHER INFORMATION
Item 1. Legal Proceedings: None.
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,
and incorporated therein by reference.)
3.2 Certificate 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.)
10
<PAGE>
Exhibit
Number Description
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
11
<PAGE>
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: May 24, 1999 By: /s/ Joe M. Young
___________________________________________
Joe M. Young
Director and Acting Financial Officer
840396
<TABLE> <S> <C>
<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 MARCH 31, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000873571
<NAME> VSI Liquidation Corp.
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,989,861
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,070,236
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 7,112,265
<CURRENT-LIABILITIES> 3,166,893
<BONDS> 0
0
0
<COMMON> 79,066
<OTHER-SE> 3,866,306
<TOTAL-LIABILITY-AND-EQUITY> 7,112,265
<SALES> 13,536,876
<TOTAL-REVENUES> 13,536,876
<CGS> 8,464,830
<TOTAL-COSTS> 8,464,830
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 229,004
<INCOME-PRETAX> 23,240,374
<INCOME-TAX> 2,115,000
<INCOME-CONTINUING> 21,125,374
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,125,374
<EPS-BASIC> 2.65
<EPS-DILUTED> 2.65
</TABLE>
