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 December 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 (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 December 31, 1996:
Common Stock, $.01 par value: 8,336,617
<PAGE>
PART 1 -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Valley Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December
31, 1996 June 30,
ASSETS (unaudited) 1996
------ ------------ ------------
<S> <C> <C>
Current assets:
Cash ...................................... $ 89,456 $ 86,099
Accounts receivable ....................... 4,050,778 4,684,719
Prepaid supplies .......................... 441,485 443,446
Prepaid expenses .......................... 179,186 193,587
------------ ------------
Total current assets ................. 4,760,905 5,407,851
Property and equipment ......................... 8,240,699 9,029,694
Intangible assets .............................. 616,500 685,000
------------ ------------
Total assets ......................... $ 13,618,104 $ 15,122,545
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable .......................... $ 599,865 $ 756,672
Accrued expenses .......................... 1,405,374 2,583,966
Current portion of long-term debt ......... 446,336 729,506
------------ ------------
Total current liabilities ............ 2,451,575 4,070,144
Long-term debt ................................. 6,525,970 7,021,200
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; authorized
2,000,000 shares, issued and outstanding
55,000 .................................. 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 ....................... (22,039,405) (22,726,822)
Treasury stock, at cost, 175,456 shares at
December 31, 1996 and 105,456 at June
30, 1996 ............................... (196,697) (118,638)
------------ ------------
4,640,559 4,031,201
------------ ------------
Total liabilities and stockholders' equity $ 13,618,104 $ 15,122,545
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
December 31 December 31
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales ................ $ 5,132,772 $ 5,610,809 $ 11,408,176 $ 11,498,650
Cost of sales ........ 3,405,343 3,677,186 7,313,831 7,518,904
----------- ----------- ------------ ------------
Gross profit .... 1,727,429 1,933,623 4,094,345 3,979,746
Selling, general, and
administrative expenses 1,897,490 1,755,260 3,852,976 3,519,084
Interest expense ..... 145,102 137,370 306,188 288,360
Gain on settlement of
litigation ........ (752,236) (752,236)
----------- ----------- ------------ ------------
Income from operations
before income taxes . 437,073 40,993 687,417 172,302
Income taxes .........
----------- ----------- ------------ ------------
Net income ...... $ 437,073 $ 40,993 $ 687,417 $ 172,302
=========== =========== ============ ============
Net income per share:
Primary ......... $ .05 $ .00 $ .08 $ .02
=========== =========== ============ ============
Weighted average
shares ............ 8,347,704 8,512,073 8,369,116 8,512,073
=========== =========== ============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
December 31
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................... $ 687,417 $ 172,302
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization ............... 1,660,410 1,759,570
Gain on disposition of property and equipment (14,502) (12,923)
(Increase) decrease in assets:
Accounts receivable ................... 633,941 50,683
Prepaid supplies ...................... 1,961 51,846
Prepaid expenses ...................... 14,401 (119,318)
Increase (decrease) in liabilities:
Accounts payable ...................... (156,807) 69,725
Accrued expenses ...................... (1,178,592) (408,938)
---------- ----------
Cash provided by operating activities 1,648,229 1,562,947
---------- ----------
Cash flows from investing activities:
Additions to property and equipment ............ (886,627) (1,359,008)
Proceeds from dispositions of property and
equipment 98,214 18,463
---------- ----------
Cash used by investing activities .... (788,413) (1,340,545)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt ..................... (778,400) (209,291)
Purchase of treasury shares .................... (78,059)
Payment of dividends ........................... (192,500)
---------- ----------
Cash used by financing activities .... (856,459) (401,791)
---------- ----------
Increase (decrease) in cash ....................... 3,357 (179,389)
Cash at beginning of year ......................... 86,099 228,530
---------- ----------
Cash at end of period ............................. $ 89,456 $ 49,141
========== ==========
</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,
1996 for the years ended June 30, 1996.
The financial statements for the periods ended December 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. This lawsuit was settled
in December, 1996.
During the fiscal year ended June 30, 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 were 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 was
contested by the former officers and directors in the lawsuit described
above, an equal amount was reserved. As a result of the settlement of this
lawsuit, the reserve was eliminated in the quarter ended December 31, 1996,
resulting in a gain of $752,000 after related expenses of the litigation.
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 $288,750 on the Company's Series C Preferred Stock are in
arrears at December 31, 1996.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three months ended December 31, 1996 as compared to the three months ended
December 31, 1995:
Sales for the three months ended December 31, 1996 decreased 8.5% from the same
period in 1995. Sales in the UHP service line were flat between the periods, all
of the decrease came in the vacuum and conventional waterblasting service lines.
Gross margin declined slightly, going from 34.5% in 1995 to 33.7% in 1996. This
is primarily due to fixed costs being spread over lower revenues. Selling,
general and administrative costs increased 8.1% in 1996. Increased levels of
sales and marketing costs accounted for most of this increase.
Net income for the quarter ended December 31, 1996 totaled $437,000, or $.05 per
share. This includes a gain of $752,000, or $.09 per share resulting from the
settlement of litigation in the period.
Six months ended December 31, 1996 as compared to the three months ended
December 31, 1995:
Sales for the six months ended December 31, 1996 decreased .8% from the same
period in 1995. Sales in the UHP service line increased 8%, and accounted for
47% of the total in 1996, compared to 43% in the prior year. This growth helped
improve the gross margin percentage in the first six months of the current
fiscal year to 35.9%, up from 34.6% in the same period in 1995.
The improvement in gross margin was offset by a 9.5% increase in selling,
general and administrative expenses, which amounted to 33.8% of sales in 1996,
compared to only 30.6% in the prior year. Most of the increase in these costs is
due to larger expenditures for sales and marketing.
Net income for the first half of the fiscal year ending June 30, 1997 totaled
$687,000, or $.08 per share. This includes a gain of $752,000, or $.09 per share
resulting from the settlement of litigation in the period. Income for the same
period in 1995 totaled $172,000, or $.02 per share.
FINANCIAL CONDITION:
Working capital has increased from $1.3 million at June 30, 1996 to $2.3 million
at December 31, 1996. Most of the increase is due to the settlement of
litigation in the second quarter of the current fiscal year.
Operations generated $1.6 million of cash in 1996 compared to $1.5 million in
1995, an increase of 5.5%. Net purchases and construction of equipment totaled
$788,000 in 1996, compared to $1,340,000 in the prior year. After capital
expenditures, net cash provided from operations in the first half of fiscal 1997
totaled $860,000. Most of this excess was used to reduce long term debt.
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings:
As previously reported, the Company initiated litigation in 1993 against certain
former officers and directors in the United States District Court for the
Northern District of Ohio, Eastern Division. This litigation was resolved on
terms favorable to the Company in December 1996, after the trial had commenced.
All claims between the Company and the former officers and directors have now
been resolved.
Item 4. Submission of Matters to a Vote of Security Holders:
The annual meeting of stockholders of the Company was held on November 4, 1996.
Matters voted upon at the meeting were as follows:
For the election of directors:
Allen O. Kinzer: For: 7,719,595 Withheld: 11,848
Joe M. Young: For: 7,611,377 Withheld: 120,066
Onthe ratification of the appointment of Coopers & Lybrand LLP as
independent auditors for the fiscal year ending June l , 1997:
For: 7,596,569 Against: 116,603 Abstained: 18,271
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: 10.23 - Second Amendment to Loan and Security Agreement dated
November 5, 1996 by and between Registrant and Rollins Investment Fund.
b) Reports on Form 8-K: None
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: February 7, 1997 By: \s\ Ed Strickland
President and Chief Executive Officer
Date: February 7, 1997 By: \s\ Dennis D. Sheets
Chief Financial Officer
SECOND AMENDMENT TO LOAN AND SECURITY AGREEMENT
This Second Amendment to Loan and Security Agreement is made and
entered into as of the 5th day of November, 1996 by and among VALLEY SYSTEMS,
INC., a Delaware corporation, VALLEY SYSTEMS OF OHIO, INC., an Ohio corporation,
and BMW INDUSTRIAL SERVICES, INC., a Utah corporation (collectively, "Valley"),
and ROLLINS INVESTMENT FUND, a Georgia general partnership ("RIF").
W I T N E S S E T H:
WHEREAS, Valley and RIF entered into that certain Loan and Security
Agreement dated as of June 29, 1994 and amended as of March 28, 1995 (the "Loan
Agreement") pursuant to which RIF agreed to lend up to $9,000,000 to Valley
pursuant to the terms and conditions set forth in the Loan Agreement:
WHEREAS, capitalized terms used herein and not otherwise defined shall
have the meaning ascribed to such terms in the Loan Agreement;
WHEREAS, the parties desire to amend the Loan Agreement to change the
expiration date of the Facility.
NOW, THEREFORE, for and in consideration of the premises, the mutual
promises hereinafter contained, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. The first line of Section 2.1(e) of the Loan Agreement is amended
by deleting the words "June 1, 1998" and inserting "July 31, 2000"
in lieu thereof.
2. The tenth line of Section 2.2(d) of the Loan Agreement is amended
by deleting the words "July 1, 1997" and inserting "July 31, 1999"
in lieu thereof, and the eleventh and twelfth lines of this
section are amended by deleting the words "July 1, 1998" and
inserting "July 31, 2000" in lieu thereof.
3. This Second Amendment may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original and
all of which together shall constitute one and the same
instrument.
4. The Loan Agreement, as amended hereby, remains in full force and
effect in all other respects.
IN WITNESS WHEREOF, RIF and Valley have caused this Second Amendment to
be executed by their duly authorized officers as of the date first above
written.
VALLEY:
VALLEY SYSTEMS, INC.
BY: /s/ Dennis D. Sheets
Vice President
VALLEY SYSTEMS OF OHIO, INC.
BY: /s/ Dennis D. Sheets
Vice President
BMW INDUSTRIAL SERVICES, INC.
BY: /s/ Dennis D. Sheets
Vice President
RIF:
ROLLINS INVESTMENT FUND
BY: /s/ Joe M. Young
General Manager
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 89,456
<SECURITIES> 0
<RECEIVABLES> 4,175,778
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 4,760,905
<PP&E> 19,606,777
<DEPRECIATION> 11,366,078
<TOTAL-ASSETS> 13,618,104
<CURRENT-LIABILITIES> 2,451,575
<BONDS> 0
0
5,500
<COMMON> 85,121
<OTHER-SE> 4,549,938
<TOTAL-LIABILITY-AND-EQUITY> 13,618,104
<SALES> 11,408,176
<TOTAL-REVENUES> 11,108,176
<CGS> 7,313,831
<TOTAL-COSTS> 7,313,831
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 306,188
<INCOME-PRETAX> 687,417
<INCOME-TAX> 0
<INCOME-CONTINUING> 687,417
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 687,417
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
