10-K 1 vsi10k63002.txt FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2002 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 0-19343 VSI LIQUIDATION CORP. (Exact name of registrant as specified in its charter) DELAWARE 34-1493345 (State or other jurisdiction of (IRS Employer Identification Number) incorporation or organization) 2170 PIEDMONT ROAD NE, ATLANTA, GEORGIA 30324 (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (404) 888-2750 Securities registered pursuant to Section 12(b) of the Act: NONE Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 PAR VALUE (Title of Class) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of August 29, 2002: (a) 7,906,617 shares of Common Stock, $.01 par value, of the registrant were outstanding; (b) 2,072,872 shares of Common Stock were held by non-affiliates; and (c) the aggregate market value of the Common Stock held by non-affiliates was $124,372, based on the closing sale price of $.06 per share on August 29, 2002. DOCUMENTS INCORPORATED BY REFERENCE Part I: None Part II: None Part III: All items - see registrant's definitive proxy statement regarding the election of directors and which is expected to be filed with the Securities and Exchange Commission within 120 days after the close of the fiscal year. o Item 10: Directors and Executive Officers of the Registrant o Item 11: Executive Compensation o Item 12: Security Ownership of Certain Beneficial Owners and Management o Item 13: Certain Relationships and Related Transactions PART I 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"). This transaction closed on January 5, 1999, and was effective as of January 1, 1999. 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 were released over the three year period following the closing. The remaining escrow balance of $872,000 at June 30, 2002 , 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 2003. 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), $790,000 ($.10 per share) and $950,000 ($.12 per share) were paid to common stockholders in February 2000, 2001 and 2002 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 2 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, 2002, the Company had no employees other than its officers and directors. ITEM 2. PROPERTIES As of August 31, 2002 the Company does not own or lease any property. ITEM 3. LEGAL PROCEEDINGS None. 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 fiscal year ended June 30, 2002. 3 PART II 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 on the non-Nasdaq OTC. HIGH LOW 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 FISCAL 2002: July 1, 2001 - September 30, 2001 0.180 0.180 October 1, 2001 - December 31, 2001 0.230 0.180 January 1, 2002 - March 31, 2002 0.240 0.210 April 1, 2002 - June 30, 2002 0.210 0.100 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. SELECTED FINANCIAL DATA Dollars in thousands, except per share data:

~~2001~~2002 (1) 2001 2000 1999 1998 ~~1997~~ ---------- ----------- ------------ ------------ ------------- Sales $ - $ - $ - $ 13,537 $ 24,431 ~~$ 23,088~~ Gross profit - - - 5,072 9,040 ~~8,559~~ Selling, general and administrative expenses 297 353 225 3,663 7,145 ~~7,268 Litigation settlements and related fees - - - - (752)~~ Interest (income) expense, net (33) (155) (199) 163 593 ~~592~~ Gain on sale of substantially all assets and assumption of substantially all liabilities of the Company - - 22,719 - - Net income (loss) (164) (129) (17) 21,465 1,302 ~~1,451~~ Earnings (loss) per common share: Basic and diluted (0.02) (0.02) (0.00) 2.69 0.12 ~~0.13~~ Total assets 1,775 3,128 4,132 5,958 15,934 ~~14,568~~ Total long-term debt - - - - 7,585 ~~7,235~~ Total stockholders' equity 1,049 2,162 3,082 4,285 5,354 ~~4,437 (1) July 1, 2000 through June 30, 2001~~

(1) July 1, 2001 through June 30, 2002 4 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 - 2002 COMPARED TO 2001 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 - 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. 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.

~~Three~~THREE ~~Months~~MONTHS ~~Ended~~ENDED (InIN ~~thousands~~THOUSANDS, ~~except~~EXCEPT ~~per~~PER ~~share~~SHARE ~~data~~DATA) 9/30/9900 12/31/9900 3/31/0001 6/30/0001 9/30/0001 12/31/0001 3/31/0102 6/30/0102 ------- -------- ------- ------- ------- -------- ------- ------- Sales $ - $ - $ - $ - $ - $ - $ - $ - Gross profit - - - - - - - - Net ~~income~~loss (~~loss~~11) (2014) 5 (299) (815) (1130) (1446) (9948) (540) Earnings per common share - basic and diluted $~~.00~~ $ .00 $ .00 $(.0102) $ .00 $ .00 $ (.0201) $(.01) $ .00

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. 5 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, all of the remaining escrowed funds of approximately $872,000 (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 2003. 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, 2002 the Company had approximately $312,000 in cash in addition to approximately $872,000 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. We currently expect that the Company will be dissolved in 2003. 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. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III 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. 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. 6 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. 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. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) (1) FINANCIAL STATEMENTS FILED VSI Liquidation Corp. and Subsidiary: Report of Independent Accountants. Consolidated Balance Sheets at June 30, 2002 and 2001. Consolidated Statements of Discontinued Operations for the years ended June 30, 2002, 2001 and 2000. Consolidated Statements of Stockholders' Equity for the years ended June 30, 2002, 2001 and 2000. Consolidated Statements of Cash Flows for the years ended June 30, 2002, 2001 and 2000. 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 Company. 99.1* Certification Pursuant To 18 U.S.C. Section 1350, As Adopted Pursuant To Section 906 Of The Sarbanes-Oxley Act Of 2002. __________________ * Filed herewith. + 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. 7 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 25, 2002 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\ Allen O. Kinzer Director September 25, 2002 -------------------- Allen O. Kinzer \s\ Joe M. Young Director September 25, 2002 ----------------- Joe M. Young 8 CERTIFICATIONS I, Ed Strickland, certify that: 1. I have reviewed this annual report on Form 10-K of VSI Liquidation Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 25, 2002 /s/ ED STRICKLAND ------------------------------------ Chief Executive Officer I, Joe M. Young, certify that: 1. I have reviewed this annual report on Form 10-K of VSI Liquidation Corp.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: September 25, 2002 /s/ JOE M. YOUNG ------------------------------------ Acting Financial Officer EXPLANATORY NOTE REGARDING CERTIFICATIONS: Representations 4, 5 and 6 of the Certifications as set forth in Form 10-K have been omitted, consistent with the Final Provisions of SEC Exchange Act Release No. 34-46427, because this Annual Report on Form 10-K covers a period ending before the Effective Date of Rules 13a-14 and 15d-14. 9 VSI LIQUIDATION CORP. AND SUBSIDIARY INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Number ------ REPORT OF INDEPENDENT ACCOUNTANTS......................................... 12 CONSOLIDATED BALANCE SHEETS - June 30, 2002 and 2001...................... 13 CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS - Years ended June 30, 2002, 2001 and 2000............................................ 14 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years ended June 30, 2002, 2001 and 2000........................................... 15 CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended June 30, 2002, 2001 and 2000.................................................. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS............................... 16-17 All schedules are omitted because they are not required under the instructions, are inapplicable, or the information is included elsewhere in the financial statements. 10 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders VSI Liquidation Corp. We have audited the accompanying consolidated balance sheet of VSI Liquidation Corp. (a Delaware corporation) and subsidiary as of June 30, 2002 and 2001, and the related consolidated statements of discontinued operations, stockholders' equity, and cash flows for each of the three years ended June 30, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated 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 consolidated 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 each of the years in the period ending June 30, 2002 in conformity with U.S. generally accepted accounting principles. /s/ Hall, Kistler & Company LLP Hall, Kistler & Company LLP Canton, Ohio September 13, 2002 11 CONSOLIDATED BALANCE SHEETS June 30, 2002 and 2001

2002 2001 ~~2000~~ ----------------- ----------------- ASSETS ~~Current assets:~~ Cash $ ~~215~~312,~~310~~412 $ ~~376~~215,~~752~~310 Cash in escrow account 871,514 2,372,849 ~~1,000,000 Accounts receivable, net - 123,268~~ Prepaid expenses and deposits ~~539~~591,~~775~~114 ~~404~~539,775 ----------------- ----------------- Total ~~current~~ assets ~~3,127,934~~$ 1,~~904~~775,~~795~~040 ~~Cash in escrow account - 2,227,112 ----------------- ----------------- Total assets~~ $ 3,127,934 ~~$ 4,131,907~~ ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY ~~Current liabilities:~~ Accounts payable and accrued expenses $ ~~163~~168,~~597~~941 $ ~~131~~163,~~677~~597 ~~Income taxes payable - -~~ Deferred income taxes 556,845 802,072 ~~84,000~~ ----------------- ----------------- Total ~~current~~ liabilities ~~965~~725,~~669~~786 ~~215,677 Deferred income taxes - 834,521 ----------------- ----------------- Total liabilities~~ 965,669 ~~1,050,198~~ ----------------- ----------------- ~~Commitments and contingencies - -~~ Stockholders' equity: Preferred stock, $.10 par value; authorized 2,000,000 shares, none issued and outstanding - - Common stock, $.01 par value; authorized 12,000,000 shares, issued and outstanding 7,906,617 shares 79,066 79,066 Paid-in capital 848,044 1,796,838 ~~2,587,500~~ Retained earnings 122,144 286,361 ~~415,143~~ ----------------- ----------------- 1,049,254 2,162,265 ~~3,081,709~~ ----------------- ----------------- Total liabilities and stockholders' equity $ 31,~~127~~775,~~934~~040 $ 43,~~131~~127,~~907~~934 ================= =================

The accompanying notes are an integral part of these consolidated financial statements. VSI LIQUIDATION CORP. AND SUBSIDIARY 12 CONSOLIDATED STATEMENTS OF DISCONTINUED OPERATIONS for the years ended June 30, 2002, 2001 and 2000

2002 2001 2000 ~~1999~~ ----------------- ----------------- ------------------ Sales $ - $ - $ ~~13,536,876~~- Cost of sales - - ~~8,464,830~~- ----------------- ----------------- ------------------ Gross profit - - ~~5,072,046~~- Selling, general and administrative expenses 297,387 352,515 224,708 ~~3,662,704~~ Interest (income) ~~expense~~, net (33,170) (154,733) (198,754) ~~163,264 Gain on sale of substantially all assets to, and assumption of substantially all liabilities of the Company by, HydroChem Industrial Services, Inc.~~ - - ~~22,718,579~~ ----------------- ----------------- ------------------ ~~Income~~Loss ~~(loss)~~ from discontinued operations before income taxes (264,217) (197,782) (25,954) ~~23,964,657~~ Income ~~taxes~~tax (benefit (100,000) (69,000) (9,000) ~~2,500,000~~ ----------------- ----------------- ------------------ Net ~~income~~loss $ (~~loss~~164,217) $ (128,782) $ (16,954) ~~$ 21,464,657~~ ================= ================= ================== Earnings per share: Net earnings per common share - basic $ (0.02) $ (0.0002) $ 20.6900 ================= ================= ================== Net earnings per common share - assuming dilution $ (0.02) $ (0.0002) $ 20.6900 ================= ================= ================== Weighted average shares used in computation - basic and diluted 7,906,617 7,906,617 7,906,617 ================= ================= ==================

The accompanying notes are an integral part of these consolidated financial statements. VSI LIQUIDATION CORP. AND SUBSIDIARY 13 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY for the years ended June 30, 2002, 2001 and 2000

Retained Preferred Common Paid-In (Deficit) ~~Treasury~~Stock Stock (1) ~~Stock (2)~~ Capital Earnings ~~Stock~~ Total ----------- -~~------------~~ --------------~~----~~ ----------------~~----~~ --------------- ------------------ Balance, July 1, ~~1998~~1999 $ ~~5,500~~- $ 8579,~~121~~066 $ 263,~~786~~773,~~040~~492 $ ~~(20~~432,~~840,060)~~097 $ ~~(683~~4,~~008) $ 5~~284,~~353,593~~655 Net ~~income~~loss ~~21,464,657 21,464,657 Series C preferred dividends~~ (~~192~~16,~~500~~954) (~~192~~16,~~500~~954) ~~Retirement of treasury stock (6,055) (676,953) 683,008 - Redemption of Series C Preferred Stock (5,500) (5,494,500) (5,500,000)~~ Distribution of $2.1315 per share to common stockholders (161,~~841~~185,~~095~~992) (161,~~841~~185,~~095~~992) ----------- -~~------------~~ --------------~~----~~ ----------------~~----~~ --------------- ------------------ Balance, June 30, ~~1999~~2000 - 79,066 32,~~773~~587,~~492~~500 ~~432~~415,~~097~~143 ~~- 4~~3,~~284~~081,~~655~~709 Net loss (16128,~~954~~782) (16128,~~954~~782) Distribution of $.1510 per share to common stockholders (1790,~~185,992~~662) (1790,~~185,992~~662) ----------- -~~------------~~ --------------~~----~~ ----------------~~----~~ --------------- ------------------ Balance, June 30, ~~2000~~2001 - 79,066 21,~~587~~796,~~500~~838 ~~415~~286,~~143~~361 ~~- 3~~2,~~081~~162,~~709~~265 Net loss (~~128~~164,~~782~~217) (~~128~~164,~~782~~217) Distribution of $.1012 per share to common stockholders (~~790~~948,~~662~~794) (~~790~~948,~~662~~794) ----------- -~~------------~~ --------------~~----~~ ----------------~~----~~ --------------- ------------------ Balance, June 30, ~~2001~~2002 $ - $ 79,066 $ 1848,~~796,838~~044 $ ~~286~~122,~~361~~144 $ ~~- $ 2~~1,~~162~~049,~~265~~254 =========== =~~============~~ ==============~~====~~ ================~~====~~ =============== ==================

(1) Per share totals are 100 times dollar amounts. The accompanying notes are an integral part of these consolidated financial statements. VSI LIQUIDATION CORP. AND SUBSIDIARY 14 CONSOLIDATED STATEMENTS OF CASH FLOWS for the years ended June 30, 2002, 2001 and 2000

2002 2001 2000 ~~1999~~ ---------------- ------------------ ------------------ Cash flows from operating activities: Net (loss) income $ (164,217) $ (128,782) $ (16,954) ~~$ 21,464,657~~ Adjustments to reconcile net (loss) income to cash provided by (used in) operating activities: ~~Depreciation~~Deferred ~~and~~income ~~amortization~~taxes ~~- - 1,476,569 Gain on disposition of property and equipment - -~~ (31245,~~625~~227) ~~Gain on sale of assets and assumption of liabilities - -~~ (~~22,718,579) Deferred income taxes (~~116,449) (202,479) ~~1,121,000~~ (Increase) decrease in assets: Accounts receivable - 123,268 301,907 ~~262,195~~ Prepaid expenses and supplies (51,339) (135,000) (48,124) ~~(383,543)~~ Increase (decrease) in liabilities: Accounts payable and accrued expenses 5,344 31,920 (261,683) ~~408,923~~ Income tax payable - - (159,000) ~~159,000~~ ---------------- ------------------ ------------------ Cash provided by (used in) operating activities (455,439) (225,043) (386,333) ~~1,758,597~~ ---------------- ------------------ ------------------ Cash flows from investing activities: ~~Additions~~Change toin property and equipment - - (1,635,104) Proceeds from dispositions of property and equipment - - 31,625 Proceeds from sale of assets and assumption of liabilities, net of expenses of sale and cash sold with assets - - 28,469,429 Establishment of escrow account ~~- - (4~~1,~~000~~501,~~000)~~335 ~~Change in escrow account~~ 854,263 183,695 ~~589,193~~ ---------------- ------------------ ------------------ Cash provided by (used in) investing activities 1,501,335 854,263 183,695 ~~23,455,143~~ ---------------- ------------------ ------------------ Cash flows from financing activities: Net (payments) borrowings from revolving loan - - (505,669) Payments of other long-term debt - - (520,336) Additional borrowings of long-term debt - - - Payments of preferred stock dividends - - (288,750) Redemption of Series C Preferred Stock - - (5,500,000) Distribution to common stockholders (948,794) (790,662) (1,185,992) ~~(16,841,095)~~ ---------------- ------------------ ------------------ Cash used in financing activities (948,794) (790,662) (1,185,992) ~~(23,655,850)~~ ---------------- ------------------ ------------------ (Decrease) increase in cash 97,102 (161,442) (1,388,630) ~~1,557,890~~ Cash at beginning of year 215,310 376,752 1,765,382 ~~207,492~~ ---------------- ------------------ ------------------ Cash at end of year $ 312,412 $ 215,310 $ 376,752 ~~$ 1,765,382~~ ================ ================== ================== Cash paid for: Interest $ - $ - $ ~~303,623~~- Income taxes 135,000 - - ~~1,220,000~~ Non-cash investing activities: Property and equipment acquired with capital leases - - ~~870,705~~-

The accompanying notes are an integral part of these consolidated financial statements. VSI LIQUIDATION CORP. AND SUBSIDIARY 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended June 30, 2002, 2001 and 2000 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. Escrow funds were released over the three year period following the closing. The remaining escrow balance of $872,000 at June 30, 2002, 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 2003. 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), $790,000 ($.10 per common share) and $950,000 ($.12 per share) were paid in fiscal February 2000, 2001 and 2002 respectively. 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. 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, 2002 and 2001, respectively, the Company's uninsured cash balances totaled $212,412 and $115,310. 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. VSI LIQUIDATION CORP. AND SUBSIDIARY 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the years ended June 30, 2002, 2001 and 2000 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 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. 4. INCOME TAXES: The income tax provision for the three years ended June 30, 2002 is comprised of the following amounts:

~~Balance~~2002 ~~Amount~~2001 ~~Balance~~2000 ~~12/31/1998 Sold After Sale~~ ------------------ ------------------ ------------------ ~~Cash~~Current $ ~~222~~400,~~800~~000 $ ~~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~~(500,~~132,091 - 1,132,091 Deferred income taxes 5,985,~~000) ~~- 5~~(69,~~985,~~000) ~~Property and equipment, net~~ (9,~~994,390~~000) ~~9,994,390~~ - ~~Intangible assets 342,500 342,500~~ - ----------------- ------------------ ------------------ Total ~~assets~~Provision 23$ (100,~~515,503~~000) 16$ (69,~~317,636~~000) 7$ (9,~~197,867~~000) ~~-----------------~~================== ~~-----------------~~================== ~~------------------~~================= ~~Accounts~~Statutory ~~payable~~Rate ~~748,083~~(34)% ~~748,083~~(34)% -(34)% ~~Accrued~~State ~~expenses~~and ~~2,053,086~~local 1taxes,~~607,353~~ ~~445,733~~net ~~Long-term~~of ~~debt~~federal ~~8,088,550~~benefit ~~8,088,550~~(4) -(1) ~~-----------------~~(1) ~~-----------------~~Operating ~~------------------~~loss ~~Total~~utilized ~~liabilities~~- ~~10,889,719~~- ~~10,443,986~~- ~~445,733~~ ------------------ ------------------ ------------------ ~~Net~~Effective ~~assets~~rate $(38)% ~~12,625,784~~(35)% $(35)% ~~5,873,650 $ 6,752,134~~ ================== ================== ==================

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, 2002 and 2001, the components of the net deferred tax assets and liabilities were as follows: 2002 2001 ----------------- ---------------- Deferred tax liabilities: Escrow account $ 556,845 $ 802,072 ----------------- ---------------- Net deferred tax liabilities $ 556,845 $ 802,072 ================= ================ 5. 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, 2002. 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. 6. FINANCIAL STATEMENT PRESENTATION The 2002 financial statements are presented on an unclassified basis due to the working capital distinction being irrelevant. 2000 and 2001 financial statements have been reclassified to conform to the 2002 presentation. VSI LIQUIDATION CORP. AND SUBSIDIARY 17 1512771

Proceeds from sale $ 29,960,308 Less: Net basis of assets sold and liabilities assumed 5,873,650 Expenses of sale 1,268,079 Reserve for liabilities resulting from indemnities and guaranties under the Purchase Agreement 100,000 ------------------ Gain on sale $ 22,718,579 ==================

2001 2000 1999 ------------------ ------------------ ----------------- Current $ (69,000) $ (9,000) $ 1,379,000 Deferred - - 1,121,000 ------------------ ------------------ ----------------- Total Provision $ (69,000) $ (9,000) $ 2,500,000 ================== ================== ================= Statutory Rate (34)% (34)% 34% State and local taxes, net of federal benefit (1) (1) 5 Operating loss utilized - - (29) ------------------ ------------------ ----------------- Effective rate (35)% (35)% 10% ================== ================== =================

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