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 December 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 December 31, 1999, 7,906,617 shares of the Registrant's Common Stock,
$.01 par value, were outstanding.
<PAGE>
PART 1 - - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
VSI LIQUIDATION CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, 1999
(UNAUDITED) JUNE 30, 1999
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 1,779,784 $ 1,765,382
Cash in escrow account 330,011 410,807
Accounts receivable, net 226,637 425,175
Prepaid expenses and deposits 367,912 356,651
--------------------- ---------------------
Total current assets 2,704,344 2,958,015
Cash in escrow account 3,154,229 3,000,000
===================== =====================
Total assets $ 5,858,573 5,958,015
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 80,847 $ 70,145
Accrued expenses 268,793 323,215
Income tax payable - 159,000
Deferred income taxes 182,923 64,474
--------------------- ---------------------
Total current liabilities 532,563 616,834
Deferred income taxes 1,056,526 1,056,526
--------------------- ---------------------
Total liabilities 1,589,089 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 416,926 432,097
--------------------- ---------------------
4,269,484 4,284,655
--------------------- ---------------------
Total liabilities and stockholders' equity $ 5,858,573 5,958,015
===================== =====================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
VSI LIQUIDATION CORP.
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS
(UNAUDITED)
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31 DECEMBER 31
----------------------------------- -----------------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
----------------- ----------------- ----------------- -----------------
Sales $ - $ 5,939,539 $ - $ 13,536,876
Cost of sales - 3,820,903 - 8,464,830
----------------- ----------------- ----------------- -----------------
Gross profit from operations - 2,118,636 - 5,072,046
Selling, general and administrative expenses 49,650 1,503,138 135,088 3,288,732
Interest (income) expense, net (56,414) 163,091 (110,917) 303,623
----------------- ----------------- ----------------- -----------------
Income (loss) before income taxes 6,764 452,407 (24,171) 1,479,691
Income tax benefit 2,000 (5,985,000) (9,000) (5,985,000)
================= ================= ================= =================
Net income (loss) $ 4,764 $ 6,437,407 $ (15,171) $ 7,464,691
================= ================= ================= =================
Net earnings (loss) per common share:
Basic $ 0.00 $ 0.80 $ 0.00 $ 0.92
================= ================= ================= =================
Diluted $ 0.00 $ 0.80 $ 0.00 $ 0.92
================= ================= ================= =================
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
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VSI LIQUIDATION CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED DECEMBER 31
-------------------------------------
<S> <C> <C>
1999 1998
------------------ -----------------
Cash flows from operating activities:
Net income (loss) $ (15,171) $ 7,464,691
Adjustments to reconcile net income to net cash flows from
operating activities:
Depreciation and amortization - 1,476,569
Gain on disposition of property and equipment - (31,625)
Deferred income taxes 118,449 (5,985,000)
Deferred expenses of asset sale - (1,132,091)
Escrow account (73,433) -
(Increase) decrease in assets:
Accounts receivable 198,538 687,370
Prepaid supplies - (103,356)
Prepaid expenses (11,261) (3,911)
Increase (decrease) in liabilities:
Accounts payable 10,702 22,029
Accrued expenses (54,422) 538,866
Income tax payable (159,000)
------------------ -----------------
Cash provided by operating activities 14,402 2,933,542
------------------ -----------------
Cash flows from investing activities:
Additions to property and equipment - (1,635,104)
Proceeds from disposition of property and equipment - 31,625
------------------ -----------------
Cash used by investing activities - (1,603,479)
------------------ -----------------
Cash flows from financing activities:
Net payments (borrowings) on revolving line of credit - (505,669)
Payments of long-term debt - (520,336)
Payments of preferred stock dividends - (288,750)
------------------ -----------------
Cash provided by financing activities - (1,314,755)
------------------ -----------------
Increase (decrease) in cash 14,402 15,308
Cash at beginning of period 1,765,382 207,492
================== =================
Cash at end of period $ 1,779,784 $
222,800
================== =================
Cash paid for:
Interest $ - $ 307,410
================== =================
Non-cash investing activities:
Property and equipment acquired with capital leases $ - $ 870,705
================== =================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
VSI LIQUIDATION
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 December 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 discontinued operations for any
interim period are not necessarily indicative of the results of the
Company's discontinued operations for a full fiscal year.
2. INCOME TAXES:
The provision for income taxes for the six months ended December 31, 1998
varies from the customary relationship with pre-tax income due to the
reversal of a valuation allowance for deferred tax assets, resulting
primarily from net operating loss carryforwards, which were able to be
utilized due to the sale of assets to HydroChem Industrial Services, Inc.
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 the three months and six
months ended December 31, 1999 and $96,250 for the three months and
$192,500 for the six months ended December 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.
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
5
<PAGE>
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 $95,000 in the financial statements for potential future
liabilities to HydroChem to be paid from the escrow account. In May, 1999
certain accounts receivable liabilities totaling approximately $600,000
were paid to HydroChem from the escrow account. Escrow funds, to the extent
not needed to indemnify HydroChem, will be released over the three years
following the closing. $16.8 million of the purchase price has been
released to date. $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 2001. This transaction closed on January 5,
1999, and was effective as of January 1, 1999.
The Company changed its name from Valley Systems, Inc. to VSI Liquidation
Corp. after the closing of this transaction, and 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 and six months ended December 31, 1999 as compared to the three
months and six months ended December 31, 1998:
The results of operations for the three months and six months ended December 31,
1999 are not comparable to those for the three months and six months ended
December 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
three months and six months ended December 31, 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.
6
<PAGE>
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.
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 has declared a subsequent liquidating
cash dividend of $1.2 million ($.15 per share) to be paid to stockholders of
record at the close of business on January 31, 2000 on or about February 11,
2000. The Company now has no further assets to distribute for this fiscal year
and expects to have no additional assets in the future other than cash received
from the escrow account referenced above and cash remaining after payment of all
remaining expenses to wind up and dissolve the Company, if any.
In May, 1999 certain accounts receivable totaling approximately $600,000 that
were sold to HydroChem under the Purchase Agreement and guaranteed by the
Company were returned by HydroChem to the Company and were paid for out of funds
in escrow.
The Company expects that, subject to any claims which may be made by HydroChem,
the remaining escrowed funds of approximately $3.5 million (including earnings
on escrowed funds to date) will be released on or about the first and second
anniversaries of the closing date in amounts of approximately $330,000 in
February 2000 and $1 million in January 2001. $330,000 of the escrowed funds
will be released as part of the subsequent liquidating cash dividend to be paid
to stockholders of record at the close of business on January 31, 2000. Up to an
additional $1 million may be released at such time as the Company delivers to
HydroChem a certificate regarding certain environmental remediation matters,
which is currently expected to be in the year 2001. The balance of the escrow
fund remaining, if any, including earnings on the escrow account, will be
released on the third anniversary of the closing date in January 2002. There can
be no guarantee, however, that these funds, or any portion thereof, will be
released to the Company. As escrowed funds, if any, are released to the Company,
they will be utilized to pay any unanticipated unpaid expenses, with the
remainder to be distributed as a liquidating cash dividend to stockholders as
soon as is practicable.
As of December 31, 1999 the Company had approximately $1.8 million in cash in
addition to approximately $3.5 million held in the escrow account.
7
<PAGE>
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 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.
8
<PAGE>
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.
In January 2000, Valley and Erie signed a Release and Settlement Agreement
that provides that each party releases and discharges the other from any and all
claims with respect to this matter; provided however, that Erie agrees to pay
Valley an amount up to approximately $27,000, plus accrued interest from the
date of any settlement or judgment, in the event Erie recovers any monies by
settlement and/or judgment from any claim or lawsuit related to the Geon
Building located in Independence, Ohio. A Notice of Voluntary Dismissal is
expected to be filed in 2000.
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 DESCRIPTION
NUMBER
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.
On December 14, 1999, the Company filed a Current Report on Form 8-K regarding
the termination of PricewaterhouseCoopers LLP as the Company's auditors.
Effective November 11, 1999, the accounting firm of Hall, Kistler & Company LLP
replaces PricewaterhouseCoopers LLP as independent auditors for the Company.
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: February 14, 2000 By: /s/ Joe M. Young
-------------------------------------
Joe M. Young
Director and Acting Financial Officer
<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 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> 6-Mos
<FISCAL-YEAR-END> Jun-30-2000
<PERIOD-END> Dec-31-1999
<CASH> 1,779,784
<SECURITIES> 0
<RECEIVABLES> 376,637
<ALLOWANCES> 150,000
<INVENTORY> 0
<CURRENT-ASSETS> 2,704,344
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,858,573
<CURRENT-LIABILITIES> 532,563
<BONDS> 0
0
0
<COMMON> 79,066
<OTHER-SE> 4,190,418
<TOTAL-LIABILITY-AND-EQUITY> 5,858,573
<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> (15,171)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,171)
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
