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 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 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. Additional liquidating dividends of approximately $1.2 million ($.15 per share) and $790,000 ($.10 per share) were paid to common stockholders in February 2000 and 2001, respectively.
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.
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 Conservation 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".
Employees
As of August 31, 2001, the Company had no employees other than its officers and directors.
ITEM 2.
ITEM 2. PROPERTIES
As of August 31, 2001 the Company does not own or lease any property.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4.
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, 2001.
Part II
ITEM 5.
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 2000: ------ ------ July 1, 1999 - September 30, 1999 $0.250 $0.063 October 1, 1999 - December 31, 1999 0.500 0.130 January 1, 2000 - March 31, 2000 0.500 0.130 April 1, 2000 - June 30, 2000 0.130 0.130 Fiscal 2001: July 1, 2000 - September 30, 2000 0.375 0.063 October 1, 2000 - December 31, 2000 0.250 0.141 January 1, 2001 - March 31, 2001 0.156 0.141 April 1, 2001 - June 30, 2001 0.203 0.156
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.
ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands, except per share data:
ITEM 7.
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 unasserted claims not covered by insurance and general business and economic conditions.
Results of Discontinued Operations - 2001 compared to 2000
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 - 2000 compared to 1999
The results of operations for the year ended June 30, 2000 are not comparable to those for the year ended June 30, 1999. 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.
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.
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. Additional liquidating cash dividends of approximately $1.2 million ($.15 per share) and $790,000 ($.10 per share) were paid to stockholders of record on the close of business on January 31, 2000 and 2001, 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.
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, $1.4 million of the remaining escrowed funds of approximately $2.4 million (including earnings on escrowed funds to date) will be released on or about January 2002, the third anniversary of the closing date. 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 possible in the year 2002. The balance of the escrow fund, including earnings on the escrow account, will also be released on the third anniversary of the closing date. 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 the fiscal year ended June 30, 2001 the Company had approximately $215,000 in cash in addition to approximately $2.4 million held in the 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 7A.
ITEM 7A. 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 8.
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
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.
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.
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.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is expected to be set forth under the caption "Certain Relationships and Related Transactions" of the registrant's definitive proxy statement, and incorporated herein by reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements Filed
VSI Liquidation Corp. and Subsidiary: Reports of Independent Accountants. Consolidated Balance Sheets at June 30, 2001 and 2000. Consolidated Statements of Discontinued Operations for the years ended June 30, 2001, 2000 and 1999. Consolidated Statements of Stockholders' Equity for the years ended June 30, 2001, 2000 and 1999. Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999. 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)
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
--------------------- * 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.
(b) Reports on Form 8-K
None.
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 27, 2001 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/ Ed Strickland President and Chief September 27, 2001 -------------------- Executive Officer Ed Strickland
/s/ Allen O. Kinzer Director September 27, 2001 -------------------- Allen O. Kinzer
/s/ Joe M. Young Director and Acting September 27, 2001 -------------------- Financial Officer Joe M. Young
VSI LIQUIDATION CORP. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page Number ------
REPORTS OF INDEPENDENT ACCOUNTANTS 10-11
CONSOLIDATED BALANCE SHEETS - June 30, 2001 and 2000 12
CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS - Years ended June 30, 2001, 2000 and 1999 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years ended June 30, 2001, 2000 and 1999 14
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended June 30, 2001, 2000 and 1999 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16-19
All schedules are omitted because they are not required under the instructions, are inapplicable, or the information is included elsewhere in the financial statements.
Report of Independent Accountants
To the Board of Directors and Stockholders VSI Liquidation Corp.
We have audited the accompanying consolidated balance sheets of VSI Liquidation Corp. and subsidiary (a Delaware corporation) as of June 30, 2001 and 2000, and the related consolidated statements of discontinued operations, stockholders' equity, and cash flows for the years then ended. 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 in accordance with U.S. generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VSI Liquidation and subsidiary as of June 30, 2001 and 2000, and the results of its discontinued operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.
/s/ Hall, Kistler & Company LLP
Hall, Kistler & Company LLP
Canton, Ohio September 27, 2001
Report of Independent Accountants
To the Stockholders of VSI Liquidation Corp.:
In our opinion, the consolidated statements of discontinued operations, of changes in stockholders' equity and of cash flows for the year ended June 30, 1999 (appearing on pages 13 through 15 of the VSI Liquidation Corp. and Subsidiary consolidated financial statements which have been included in this Form 10-K) present fairly, in all material respects, the results of operations and cash flows of VSI Liquidation Corp. and subsidiary for the year ended June 30, 1999, in conformity with accounting principles generally accepted in the United States of America. 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 audit. We conducted our audit of these statements in accordance with auditing standards generally accepted in the United States of America, 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 audit provides a reasonable basis for our opinion. We have not audited the consolidated financial statements of VSI Liquidation Corp. and subsidiary for any period subsequent to June 30, 1999.
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.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Cleveland, Ohio September 23, 1999
Consolidated Balance Sheets June 30, 2001 and 2000
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Discontinued Operations for the years ended June 30, 2001, 2000 and 1999
The accompanying notes are an integral part of these consolidated financial statements.
Consolidated Statements of Stockholders' Equity for the years ended June 30, 2001, 2000 and 1999
(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.
Consolidated Statements of Cash Flows for the years ended June 30, 2001, 2000 and 1999
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial Statements for the years ended June 30, 2001,2000 and 1999
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. 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. Approximately $2.0 million of this escrow has been released since the transaction closed. $1.0 million of the escrowed funds will be released when the Company can provide certain environmental assurances to HydroChem, expected to be sometime in 2002. The remaining funds in escrow are expected to be released on or about January 2002, the third anniversary of transaction. The Company has reserved $150,000 in the financial statements at June 30, 2001 for potential future liabilities to HydroChem to be paid from the escrow account.
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. Additional liquidating dividends of approximately $1.2 million ($.15 per common share) and $790,000 ($.10 per common share) were paid in fiscal February 2000 and 2001, respectively.
The following summarizes the assets sold and the liabilities assumed under the Purchase Agreement:
Notes to Consolidated Financial Statements for the years ended June 30, 2001,2000 and 1999
The gain on this transaction is as follows:
Revenues earned and expenses incurred by the Company from 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 year ended June 30, 1999 was $232,000. Bad debt recoveries amounted to $100,000 in the year ended June 30, 2000.
Concentrations of Credit Risk Arising From Cash Deposits in Excess of Insured Limits: The Company maintains its cash balances in one financial institution. The balances are insured by the Federal Deposit Insurance Corporation up to $100,000. At June 30, 2001 and 2000, respectively, the Company's uninsured cash balances totaled $115,310 and $276,752.
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.
Notes to Consolidated Financial Statements for the years ended June 30, 2001,2000 and 1999
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) 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.
4. Property and Equipment:
The Company incurred repairs and maintenance costs on property and equipment of approximately $610,000 for the year ended June 30, 1999.
5. Income Taxes:
The income tax provision for the three years ended June 30, 2001 is comprised of the following amounts:
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, 2001 and 2000, the components of the net deferred tax assets and liabilities were as follows:
2001 2000 ---------------- ----------------- Deferred tax liabilities: Escrow account $ 802,072 $ 918,521 ---------------- ----------------- Net deferred tax liabilities $ 802,072 $ 918,521 ================ =================
Notes to Consolidated Financial Statements for the years ended June 30, 2001,2000 and 1999
6. 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.
7. 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 options to purchase 11,900 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: (a) risk-free interest rates of 6.40% to 7.04%; (b) no dividend yield; (c) expected terms of 8 years; and (d) volatility of 95%.
At June 30, 2001, warrants to purchase shares of the Company's common stock were outstanding as follows:
Warrant Price Shares Expiration Date ----- ------ --------------- $ 15.00 100,000 September 2001
8. 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, 2001. 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 was completed in December 1999.