<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 March 31, 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 (216)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 April 30, 1996:
Common Stock, $.01 par value: 8,406,617
Page 1
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PART 1 -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
<TABLE>
<CAPTION>
Valley Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
March
31, 1996 June 30,
ASSETS (unaudited) 1995
<S> <C> <C>
Current assets:
Cash .................................... $ 40,070 $ 228,530
Accounts receivable ..................... 3,697,188 4,026,406
Prepaid supplies ........................ 425,566 459,589
Prepaid expenses ........................ 268,540 212,509
Total current assets ............... 4,431,364 4,927,034
Property and equipment ....................... 9,242,521 9,954,981
Intangible assets ............................ 719,250 822,000
Total assets ....................... $ 14,393,135 $ 15,704,015
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable ........................ $ 417,508 $ 537,832
Accrued expenses ........................ 3,252,680 3,195,014
Current portion of long-term debt ....... 627,685 701,701
Total current liabilities .......... 4,297,873 4,434,547
Long-term debt ............................... 5,923,194 5,857,536
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 7,500
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 26,784,040
Accumulated deficit .................... (22,704,593) (21,464,729)
4,172,068 5,411,932
Total liabilities and stockholders'
equity ....................................... $ 14,393,135 $ 15,704,015
</TABLE>
See notes to consolidated financial statements.
Page 2
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<TABLE>
<CAPTION>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended Nine months ended
March 31 March 31
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Sales ................. $ 4,589,663 $ 5,871,547 $ 16,088,313 $ 18,349,145
Cost of sales ......... 3,626,233 3,868,015 11,145,137 11,889,584
Gross profit ..... 963,430 2,003,532 4,943,176 6,459,561
Selling, general, and
administrative expenses 1,954,306 1,742,070 5,473,390 5,481,186
expenses
Interest expense ...... 132,540 206,362 420,900 717,685
Income (loss) before
income taxes .......... (1,123,416) 55,100 (951,114) 260,690
Income taxes .......... -- -- -- --
Net income (loss) .. $ (1,123,416) $ 55,100 $ (951,114) $ 260,690
Net income (loss) per
share: Primary ........ $ (.13) $ .01 $ (.11) $ .03
Weighted average
shares used in
computation ........... 8,512,073 8,532,073 8,512,073 8,532,073
</TABLE>
See notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
<CAPTION>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
March 31
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) .................................. $ (951,114) $ 260,690
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization ...................... 2,646,833 2,436,246
(Gain) loss on disposition of property and
equipment ......................................... (10,183) 3,589
(Increase) decrease in assets:
Accounts receivable ................................ 329,218 55,194
Prepaid supplies ................................... 34,023 (42,277)
Prepaid expenses ................................... (56,031) (121,466)
Increase (decrease) in liabilities:
Accounts payable ................................... (120,324) (127,357)
Accrued expenses ................................... (959,570) (539,122)
Cash provided by operating activities ............ 912,852 1,925,497
Cash flows from investing activities:
Additions to property and equipment .............. (1,854,403) (1,212,268)
Proceeds from dispositions of property
and equipment ................................... 32,963 287,723
Cash used by investing activities ............ (1,821,440) (924,545)
Cash flows from financing activities:
Decrease in notes payable ........................ (4,020,000)
Additional long-term borrowings .................. 1,565,350
Payments of long-term debt ....................... (556,472) (3,649,934)
Payments of dividends ............................ (288,750) (223,091)
Proceeds from sale of preferred stock ............ 5,470,012
Cash provided (used) by financing activities .. 720,128 (2,423,013)
Decrease in cash ................................... (188,460) (1,422,061)
Cash at beginning of year .......................... 228,530 1,449,111
Cash at end of period .............................. $ 40,070 $ 27,050
</TABLE>
Non-cash activities:
$1.0 million of notes payable to two former officers and directors were
written off in 1996 because it was determined that the Company never owed such
amounts. See Note 2.
See notes to consolidated financial statements.
Page 4
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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 25, 1995
for the years ended June 30, 1995. The financial statements for the periods
ended March 31, 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 and one of its directors for breach
of employment agreement, fraudulent misrepresentations, common law conversion,
defamation, civil conspiracy, abuse of process, breach of contract, and unjust
enrichment. All of these counterclaims were dismissed in March 1996, except
for the claims of breach of contract and unjust enrichment against the
Company. During the quarter ended December 31, 1995 the Company determined
that amounts contributed to it by two former officers and directors that
previously were 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 former 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, an
equal amount has been reserved. If it ultimately is 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.
Page 5
<PAGE>
4.PREFERRED STOCK:
In July 1995 the Company accepted 20,000 shares of Series B Preferred Stock as
part of a settlement of litigation. These shares were convertible into Common
Stock on a one to one basis, and have been considered a common stock
equivalent in the past for computing earnings per share. The shares were then
retired, and are not considered in the 1996 calculation.
5.SUBSEQUENT EVENT:
In April 1996, the Company purchased 105,456 shares of its Common Stock for
$527,280. This purchase was part of a settlement of litigation negotiated in
1993.
Item 2. Management's discussion and analysis of financial
condition and results of operations
RESULTS OF OPERATIONS:
Three months ended March 31, 1996 as compared to the three months ended
March 31, 1995
Sales decreased 22% in the third quarter of 1996 compared to the third
quarter of 1995. This drop is largely due to major plant maintenance being
postponed or canceled by the Company's customers, which are largely in the
petroleum refining, chemical, steel and power generation industries. There was
no significant change in the product mix between the two periods. Cost of sales
increased from 66% of sales in 1995 to 79% in 1996. The increase is primarily
caused by equipment and other fixed expenses being spread over less revenue. The
Company has significantly increased its branch management and marketing staff in
1996. This caused the 12% increase in selling, general and administrative
expenses from the prior year.
Nine months ended March 31, 1996 as compared to the nine months ended
March 31, 1995
Sales for the first nine months of the Company's fiscal year ending June
30, 1996 decreased 12.0% from the prior year. This drop is partially caused by
closure of unprofitable locations, as well as a general trend by the Company's
customers to operate their plants for longer periods between major maintenance
outages. UHP sales were 43% of the total in 1996, compared to 38% in 1995.
Despite this improvement, cost of sales increased from 65% of sales in 1995 to
69% in the current year. This increase is primarily due to fixed costs being
spread over lower revenues. Administrative and interest expenses decreased by 5%
in 1996 from the prior year, and represent 34% of sales. These expenses totaled
30% of sales in 1995.
Page 6
<PAGE>
FINANCIAL CONDITION:
Working capital decreased by $360,000 from June 30, 1995 to March 31, 1996. This
drop is entirely due to a reserve of $1.0 million established for amounts due
from former officers and directors, which they are contesting, that were paid by
cancellation of amounts previously shown as long-term debt to the former
officers and directors. See Note 2 to Consolidated Financial Statements. The
reserve is included in current liabilities at March 31, 1996. Cash provided from
operating activities in the nine months ended March 31, 1996 totaled $900,000, a
decrease of $1 million from the comparable period in the prior year. This drop
is caused by the change in net income between the periods. At March 31,1996 the
Company had $2.2 million available on its bank line of credit, which expires in
June 1998. The Company does not expect to require any additional financing for
operations or capital expenditures in 1996.
Page 7
<PAGE>
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
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 in
the next several months. A trial date of August 26, 1996 has been scheduled for
this case.
Page 8
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a) Reports on Form 8-K: None
b) Exhibit 27.1 - Financial Data Schedule (for SEC use only)
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: April 30, 1996 By: \ s \ Ed Strickland
Ed Strickland
President and Chief Executive Officer
Date: April 30, 1996 By: \ s \ Dennis D. Sheets
Dennis D. Sheets
Chief Financial Officer
Page 9
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 40,070
<SECURITIES> 0
<RECEIVABLES> 3,897,188
<ALLOWANCES> 200,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,431,364
<PP&E> 21,166,125
<DEPRECIATION> 11,923,604
<TOTAL-ASSETS> 14,393,135
<CURRENT-LIABILITIES> 4,297,873
<BONDS> 0
0
5,500
<COMMON> 85,121
<OTHER-SE> 4,081,447
<TOTAL-LIABILITY-AND-EQUITY> 14,393,135
<SALES> 16,088,313
<TOTAL-REVENUES> 16,088,313
<CGS> 0
<TOTAL-COSTS> 11,145,137
<OTHER-EXPENSES> 5,473,390
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 420,900
<INCOME-PRETAX> (951,114)
<INCOME-TAX> 0
<INCOME-CONTINUING> (951,114)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (951,114)
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
