<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 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, 1996
Commission file number: 0-19343
VALLEY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
State of incorporation: Delaware FEIN: 34-1493345
11580 Lafayette Drive NW, Canal Fulton, Ohio 44614 (330) 854-4526
(Address and telephone number of principal executive offices)
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
Number of shares outstanding at
October 30, 1996:
Common Stock, $.01 par value: 8,346,617
<PAGE>
PART 1 -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
Valley Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
<CAPTION>
September
30, 1996 June 30,
(unaudited) 1996
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash ....................................... $ 156,853 $ 86,099
Accounts receivable ........................ 5,073,515 4,684,719
Prepaid supplies ........................... 451,168 443,446
Prepaid expenses ........................... 274,340 193,587
------------ ------------
Total current assets ................ 5,955,876 5,407,851
Property and equipment ........................ 8,405,627 9,029,694
Intangible assets ............................. 650,750 685,000
------------ ------------
Total assets ........................ $ 15,012,253 $ 15,122,545
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 667,079 $ 756,672
Accrued expenses ........................... 2,393,266 2,583,966
Current portion of long-term debt .......... 800,404 729,506
------------ ------------
Total current liabilities ........... 3,860,749 4,070,144
Long-term debt ................................ 6,913,643 7,021,200
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; authorized
2,000,000 shares, issued and outstanding
55,000 at March 31, 1996 and 75,000
at June 30, 1995.......................... 5,500 5,500
Common stock, $.01 par value; authorized
12,000,000 shares, issued and outstanding
8,512,073................................. 85,121 85,121
Paid-in capital ............................ 26,786,040 26,786,040
Accumulated deficit ........................ (22,476,478) (22,726,822)
Treasury stock, at cost, 145,456 shares at
September 30, 1996 and 105,456 at June
30, 1996 ................................. (162,322) (118,638)
------------ ------------
4,237,861 4,031,201
------------ ------------
Total liabilities and stockholders'
equity ............................ $ 15,012,253 $ 15,122,545
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three months ended September 30
-------------------------------
1996 1995
----------- -----------
<S> <C> <C>
Sales .................................. $ 6,275,404 $ 5,887,841
Cost of sales .......................... 3,908,488 3,841,718
----------- -----------
Gross profit ...................... 2,366,916 2,046,123
Selling, general, and
administrative expenses............... 1,955,486 1,763,824
Interest expense ....................... 161,086 150,990
----------- -----------
Income before income taxes.............. 250,344 131,309
Income taxes ........................... 0 0
----------- -----------
Net income ........................ $ 250,344 $ 131,309
=========== ===========
Net income per share:
Primary ........................... $ .03 $ .02
=========== ===========
Weighted average shares
used in computation .................. 8,391,616 8,512,073
=========== ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
<TABLE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Three months ended
September 30
----------------------
1996 1995
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................... $ 250,344 $ 131,309
Adjustments to reconcile net income to
net cash flows from operating activities:
Depreciation and amortization .................... 834,535 881,008
Gain on disposition of property and equipment .... (1,020) (46,912)
(Increase) decrease in assets:
Accounts receivable .......................... (388,796) (214,771)
Prepaid supplies ............................. (7,722) 54,617
Prepaid expenses ............................. (80,753) (219,792)
Increase (decrease) in liabilities:
Accounts payable ............................. (89,593) 171,189
Accrued expenses ............................. (190,700) (46,193)
--------- ---------
Cash provided by operating activities ... 326,295 710,455
--------- ---------
Cash flows from investing activities:
Additions to property and equipment ................. (181,698) (425,188)
Proceeds from dispositions of property and equipment 6,500 49,587
--------- ---------
Cash used by investing activities ....... (175,198) (375,601)
--------- ---------
Cash flows from financing activities:
Additional long-term borrowings ..................... 162,699
Payments of long-term debt .......................... (199,358) (432,802)
Purchase of treasury shares ......................... (43,684)
Payment of dividends ................................ (96,250)
--------- ---------
Cash used by financing activities ....... (80,343) (529,052)
--------- ---------
Increase (decrease) in cash ............................ 70,754 (194,198)
Cash at beginning of year .............................. 86,099 228,530
--------- ---------
Cash at end of period .................................. $ 156,853 $ 34,332
========= =========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Valley Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. BASIS OF PRESENTATION:
Reference is made to the annual report on Form 10-K dated September 24,
1995 for the years ended June 30, 1996.
The financial statements for the periods ended September 30, 1996 and 1995
are unaudited and include all adjustments which, in the opinion of
management, are necessary for a fair statement of the results of operations
for the periods then ended. All such adjustments are of a normal recurring
nature. The results of the Company's operations for any interim period are
not necessarily indicative of the results of the Company's operations for a
full fiscal year.
2. CONTINGENCIES:
The Company filed a lawsuit in September 1993 against certain of its former
directors and officers, as well as other parties. Some of the defendants
asserted counterclaims against the Company for breach of contract and
unjust enrichment. This lawsuit is scheduled to go to trial in December,
1996.
During 1996, the Company determined that amounts contributed to it by two
former officers and directors that were previously classified as loans to
the Company were not loans. Instead, such contributions have been
determined to be repayments by the former officers and directors of amounts
owed by those officers and directors to the Company at the time the
contributions were made. Because this determination is being contested by
the former officers and directors in the lawsuit described above, an equal
amount has been reserved. If it is ultimately determined that the
contributions were properly characterized as loans to the Company, the
amounts owed by the former officers and directors to the Company will be
treated as dividends paid to the former officers and directors in 1989,
1990, and 1991.
3. INCOME TAXES:
The provisions for income taxes for the periods presented vary from the
customary relationship with pre-tax income due to utilization of net
operating loss carryforwards.
4. STOCKHOLDERS' EQUITY:
Dividends of $182,500 on the Company's Series C Preferred Stock are in
arrears at September 30,1996.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
RESULTS OF OPERATIONS:
Three months ended September 30, 1996 as compared to the three months ended
September 30, 1995:
The Company's sales for the three months ended September 30, 1996 increased 6.6%
from the same period in 1995. The increase is primarily attributable to the
Company's ultra high pressure water jet service line, which had a sales increase
of 15% over last year, and accounted for 49% of total sales in 1996. This
increase, in the Company's most profitable service line, helped increase gross
margin in 1996 to 37.7% of sales, compared to 34.8% in the same period last
year.
Selling, general and administrative expenses increased 10.9% in the three months
ended September 30, 1996 compared to the same period a year earlier. As a
percentage of sales, these expenses increased from 30.0% in 1995 to 31.2% this
year. This increase is largely due to increased marketing expenses and additions
to the sales staff.
FINANCIAL CONDITION:
The Company's financial condition at September 30, 1996 has not changed
significantly from that at June 30, 1996. Operations in the three months in 1996
generated cash of $326,000, compared to $710,000 in 1995. Additions to property
and equipment were $182,000 in 1996, compared to $425,000 in 1995.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
In addition to ordinary routine litigation incidental to its business, the
Company is involved in the litigation set forth below:
In October 1992, after learning of certain alleged improprieties with respect to
the books and records of the Company, its Audit Committee, with the consent of
the Board of Directors, retained outside counsel to review the allegations. As a
result of the findings of this review, the Company filed suit on September 2,
1993, with an Amended Complaint being filed on December 6, 1993, and a Second
Amended and Revised Complaint being filed on October 3, 1994, and a First
Consolidated Complaint being filed on April 10, 1996 in the United States
District Court for the Northern District of Ohio, Eastern Division, against
certain of its former officers and directors, as well as other parties. The suit
asserts various claims, including violation of federal securities laws,
violation of Ohio securities laws, common law fraud, common law conversion,
breach of fiduciary duty, breach of contract, professional malpractice, and
contribution and indemnity, against various of the defendants.
On or about December 21, 1995, defendants Eugene Valentine, Cynthia Valentine,
Michelle Valentine and General Maintenance, Inc. filed, in the Company's
lawsuit, and answer to the Second Amended and Revised Complaint and a
counterclaim against the Company as well as against Joe M. Young who is a member
<PAGE>
of the Company's Board of Directors and of the Board's Audit Committee, but who
has not been brought in as a party to this litigation to date. The counterclaim
asserts claims against the Company and Mr. Young based upon breach of employment
agreement, fraudulent misrepresentations, common law conversion, breach of
contract, unjust enrichment, libel, abuse of process and civil conspiracy. The
counterclaim seeks compensatory and punitive damages, and an award of interest,
attorneys' fees, costs and disbursements. The Company filed a motion to dismiss
all counts alleged against the Company and Mr. Young. On March 19, 1996 the
Federal District Court granted the Company's motion to dismiss and dismissed all
claims asserted by the defendants except for the claims of breach of contract
and unjust enrichment.
On September 21, 1993, Rollins Investment Fund, the Company's majority
stockholder, filed a lawsuit in the United States District Court, Northern
District of Ohio, Eastern Division, against Eugene R. Valentine and Nicholas J.
Pace. This suit asserts claims against the defendants based upon the federal
securities laws, common law fraud and breach of contract.
Formal discovery in both cases is now in process and is expected to conclude
shortly. A trial date of December 4, 1996 has been scheduled for these cases.
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: None
b) Reports on Form 8-K: The Company filed a Current Report on Form 8-K dated
August 8, 1996, including Items 5 and 7, in connection with a press release
issued on that day regarding a share purchase program.
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.
Valley Systems, Inc.
Date: October 30, 1996 By: \s\ Ed Strickland
President and Chief Executive Officer
Date: October 30, 1996 By: \s\ Dennis D. Sheets
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> SEP-30-1996
<CASH> 156,853
<SECURITIES> 0
<RECEIVABLES> 5,198,515
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,955,876
<PP&E> 19,247,134
<DEPRECIATION> 10,841,507
<TOTAL-ASSETS> 15,012,253
<CURRENT-LIABILITIES> 3,860,749
<BONDS> 0
0
5,500
<COMMON> 85,121
<OTHER-SE> 4,147,240
<TOTAL-LIABILITY-AND-EQUITY> 15,012,253
<SALES> 6,275,404
<TOTAL-REVENUES> 6,275,404
<CGS> 3,908,488
<TOTAL-COSTS> 3,908,488
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 161,086
<INCOME-PRETAX> 250,344
<INCOME-TAX> 0
<INCOME-CONTINUING> 250,344
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 250,344
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
