10-Q 1 vsi10q93003.txt FORM 10-Q 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, 2003 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.) 2801 Buford Highway Ste. 470 Atlanta, GA 30329 (404) 486-4620 (Address and telephone number of principal executive offices) (Former name, former address and former fiscal year, if changed since last report) 2170 Piedmont Road, N.E. Atlanta, Georgia 30324 (404) 888-2750 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____ Indicated by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No[X] As of September 30, 2003, 7,906,617 shares of the Registrant's Common Stock, $.01 par value, were outstanding. PART 1 - - FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 2

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 3

SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 4 VSI LIQUIDATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION: Reference is made to the annual report on Form 10-K filed September 23, 2003 for the fiscal year ended June 30, 2003. The financial statements for the periods ended September 30, 2003 and 2002 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 PER COMMON SHARE: Basic earnings per common share are computed by dividing net income for the period by the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share do not vary from basic earnings per share for any of the periods presented because there were no dilutive potential shares of common stock outstanding. The dilutive effect of outstanding potential shares of common stock is computed using the treasury stock method. 3. SALE OF SUBSTANTIALLY ALL ASSETS AND ASSUMPTION OF SUBSTANTIALLY ALL LIABILITIES OF THE COMPANY: On September 8, 1998, the Company entered into a Second Amended and Restated Asset Purchase Agreement (the "Purchase Agreement") whereby essentially all assets of the Company would be sold to, and substantially all liabilities of the Company would be assumed by, HydroChem Industrial Services, Inc. ("HydroChem"). The purchase price for these assets and liabilities was approximately $30.0 million, adjusted for increases or decreases in net assets after June 30, 1998. This transaction closed on January 5, 1999, and was effective as of January 1, 1999. Costs totaling $1.3 million were incurred by the Company in connection with the sale. $4.0 million of the proceeds were placed in escrow to secure and indemnify HydroChem for any breach of the Company's covenants and for any environmental liabilities. Escrow funds were released over the three year period following the closing. The remaining escrow balance of $704,000 at September 30, 2003, to the extent not needed to indemnify HydroChem, will also be released when the Company can provide certain environmental assurances to HydroChem, expected to be sometime in 2005. 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 5 certain officers and employees. The Company also paid a liquidating dividend of $16.8 million ($2.13 per common share) to common stockholders from the proceeds of the sale. Additional liquidating dividends of approximately $1.2 million ($.15 per common share), $790,000 ($.10 per common share) and $950,000 ($.12 per share) were paid in fiscal February 2000, 2001 and 2002 respectively. 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 and general business and economic conditions. RESULTS OF OPERATIONS: Three months ended September 30, 2003 as compared to the three months ended September 30, 2002: 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 quarters ended September 30, 2002 and September 30, 2001 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. Selling, general and administrative expenses in 2003 were less than 2002 due to a lower level of activity winding up the business, and lower levels of expenditures for insurance and environmental remediation. 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 6 redeem outstanding employee stock options and payment of approximately $165,000 as a retention bonus to certain officers and employees, approximately $16.8 million of the sale proceeds remained and were available for distribution to stockholders pursuant to the Plan of Liquidation and Dissolution adopted by the Company. On January 29, 1999, an initial liquidating cash dividend of approximately $16.8 million ($2.13 per share) was mailed to stockholders of record at the close of business on January 22, 1999. Additional liquidating cash dividends of approximately $1.2 million ($.15 per share), $790,000 ($.10 per share) and $950,000 ($.12 per share) were paid to stockholders of record on the close of business on January 31, 2000, 2001 and 2002, respectively. The Company now has no further assets to distribute and expects to have no additional assets in the future other than cash received from the escrow account referenced above and cash remaining after payment of all remaining expenses to wind up and dissolve the Company, if any. The Company expects that, subject to any claims which may be made by HydroChem, the remaining escrowed funds of approximately $704,000 (including earnings on escrowed funds to date) will be released at such time as the Company delivers to HydroChem a certificate regarding certain environmental remediation matters, which is currently expected to be possible in the year 2005. 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 September 30, 2003 the Company had approximately $395,000 in cash in addition to approximately $704,000 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. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's primary market risk is interest rate risk. The Company currently minimizes such risk by investing its temporary cash in money market funds and, pursuant to the Escrow Agreement entered into by and among Bank One Texas, N.A. and the Company, the escrowed funds are invested in United States Treasury Bills having a maturity of 90 days or less, repurchase obligations secured by such United States Treasury Bills and demand deposits with the escrow agent. The Company does not engage in derivative transactions, and no financial instrument transactions are entered into for hedging purposes. As a result, the Company believes that it has no material interest rate risk to manage. ITEM 4. CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures Our Chief Executive Officer and our Acting Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the quarter covered by this quarterly report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required 7 information will be disclosed on a timely basis in our reports filed under the Exchange Act. The Company's management, including the CEO and CFO, does not expect that its Disclosure Controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control system, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdown can occur because of simple error or mistake. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based upon the Company's Disclosure Controls evaluation, the CEO and CFO have concluded that, subject to the limitations noted above, the Company's Disclosure Controls are effective to give reasonable assurance that the information required to be disclosed by the Company in its periodic reports is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding disclosure and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. (b) Changes in internal controls We maintain a system of internal accounting controls that are designed to provide reasonable assurance that our books and records accurately reflect our transactions and that our established policies and procedures are followed. For the quarter ended September 30, 2003, there were no significant changes to our internal controls or in other factors that could significantly affect our internal controls. PART II - - OTHER INFORMATION Item 1. Legal Proceedings: Not Applicable 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 8 (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.) 31.1* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2* Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1* Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. ----------------- * Filed herewith. (b) Reports on Form 8-K. None 9 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 12, 2003 By: /s/ Dennis D. Sheets -------------------------------------- Dennis D. Sheets Acting Financial Officer 10 1690361

VSI LIQUIDATION CORP 10-Q