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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, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-19343
Valley Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
34-1493345
(IRS Employer Identification Number)
11580 Lafayette Drive NW, Canal Fulton, Ohio 44614
(Address of principal executive offices)
Registrant's telephone number, including area code: (330) 854-4526
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. [ X ]
As of September 2, 1997: (a) 7,906,617 shares of Common Stock, $.01 par
value, of the registrant were outstanding; (b) 2,082,872 shares of Common Stock
were held by non-affiliates; and (c) the aggregate market value of the Common
Stock held by non-affiliates was $3,124,308, based on the closing sale price of
$1.50 per share on September 2, 1997.
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DOCUMENTS INCORPORATED BY REFERENCE
Part I: None
Part II: None
Part III: All items - see registrant's definitive proxy statement which
involves the election of directors and which will be filed with
the Commission within 120 days after the close of the fiscal year.
Item 10: Directors and Executive Officers of the Registrant
Item 11: Executive Compensation
Item 12: Security Ownership of Certain Beneficial Owners and
Management
Item 13: Certain Relationships and Related Transactions
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PART I
ITEM 1. BUSINESS:
General:
The Company is 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 involve the removal of industrial grime, deposits, wastes,
encrustations or coatings from equipment and facilities. The Company's principal
customers are in the chemical, plastics, power generation, petroleum refining
and primary metals businesses. The Company's industrial cleaning methods
include, in addition to the use of waterblasting, vacuuming, and other more
conventional procedures, the application of ultra-high pressure ("UHP")
waterjetting and cutting methods.
Industrial Cleaning Services:
Until 1984 the only technologies used by the Company in providing
commercial and industrial cleaning services were vacuum (wet and dry) and
conventional water blast cleaning techniques. These conventional methods of
service are still provided by the Company. The market applications for the
Company's conventional method services in industrial cleaning are many and
varied, and include removing materials and deposits from items such as heat
exchangers, boilers, condensers, building surfaces, vats, slabs and molds. The
Company also provides sewer cleaning, pipe inspection and other services for its
customers. See "Item 1 - Business-Company Operations". Such other services are
essentially incidental to the Company's business and are not deemed material to
its future operations. See Item 1-Business-Company Operations-Revenue by Service
Line".
Industrial vacuuming removes industrial waste and debris, and retrieves
salvageable materials, using truck mounted equipment to vacuum up the designated
waste. Most of the Company's vacuum equipment can be used in either a wet or dry
medium, but the Company also uses equipment that only has a wet application. The
Company uses both commercially available equipment and internally designed and
fabricated equipment in the performance of industrial vacuum cleaning
activities. The Company's vacuum equipment can be used to clean underground
lines, pipes, storm drains and sewers, as well as to meet the demands of other
cleaning applications. In performing its conventional vacuum cleaning services,
the vacuumed material is either transported by the Company for disposal on-site
at the customer's location, or is transferred by the Company on-site into
barrels, bins or other storage vessels supplied by the customer, for disposal by
the customer.
In 1984, to overcome the limitations of conventional technologies, the
Company began providing UHP waterjetting services. Although pressurized water
cleaning equipment for use in industrial cleaning, construction, mining and
other applications is commercially available, the UHP equipment used by the
Company is designed and fabricated by the Company. The Company has been able to
enhance and modify its UHP equipment since its first introduction. In 1991, the
Company purchased certain patents and know-how related to equipment designs, UHP
waterjet guns and other technologies. See "Item 1-Business-Proprietary
Technology, Patents Trademarks and Equipment".
Benefits from the application of UHP technology include (1) the use of
a very low volume of water, (2) the uniform cleaning of a material from a
surface, (3) the minimization of surface damage or degradation, (4) the decrease
of environmental and health/safety impacts through the reduction or absence of
dust, fumes, sand, solvents or chemicals and other by-products requiring
disposal, (5) the reduced volume of residue or waste product (including water)
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clean-up, (6) the elimination of many safety hazards associated with
conventional methods and the need for "hot work" permits (i.e., UHP waterjetting
is a non-spark generating activity), and (7) the elimination of airborne
contaminants, reducing preparatory activities (covering surrounding areas) and
clean-up times, which yields increased productivity.
With the addition of an abrasive material into the water stream, the
Company's UHP equipment can also cut virtually any material. This technique is
used where heat or open flames would damage the material being cut or create a
safety hazard. Most of the UHP cutting services involve gas pipelines, storage
tanks and regenerator heads in the refining industry.
Advantages of UHP technology could become more pronounced in the future
as the result of certain actions taken by environmental regulatory agencies
which are expected to restrict the use of conventional cleaning methods. In
1989, the Occupational Safety and Health Administration ("OSHA") promulgated
regulations which significantly reduce allowable exposure levels to crystalline
silica for employees of United States companies, which inhibits the use of
sandblasting in industrial cleaning and facilities maintenance applications.
Sandblasting is not favored by many of the Company's customers because of the
dispersion of particulates into the air, its effect on machinery and equipment,
and the necessity of transporting and disposing of the sand waste thereafter.
Additionally, the institution of increasingly stringent environmental
regulations governing the generation and disposal of all forms of industrial
waste, both hazardous and non-hazardous, will impose significant additional
costs on most conventional industrial cleaning services. The inherent cost
advantages afforded by the absence of particulate and other residue by-products
should enhance the future market demand for UHP services such as those provided
by the Company. See "Item 1-Business-Environmental Standards and Government
Regulations".
Service Procedures:
Generally, the Company performs its services at customer facilities
using truck-mounted equipment. Teams of two or more persons operate the
Company's equipment. The Company's employees extend pipe and/or hose, as well as
additional equipment, from the truck into the customer's tank, container, paint
stack, boiler or other area to be cleaned.
The Company has also installed stationary, electrically powered UHP and
conventional waterblast units at some customer facilities. These permanent
installations, utilized where repetitive day-to-day cleaning is required, have
enhanced the Company's service capabilities while reducing customer down time
and overall cleaning cost.
In connection with the use of vacuuming and other conventional
technologies, the waste material is conveyed into the equipment's own holding
tank, or a Company or customer-owned and controlled roll-off container, for
transportation by the customer to a proper customer-designated disposal
location, generally on-site at the customer's facility.
In providing UHP waterjetting services, the Company's cleaning system
either (1) captures all water, waste and residue produced, which permits
pre-treating of such materials in accordance with local requirements prior to
discharge into the available sewer system, or (2) allows direct untreated sewer
discharge of such resultant waste material. Whether or not such waste material
is pre-treated depends upon the nature of the materials to be removed in the
cleaning process (as disclosed to the Company by the customer), the nature of
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any cleaning additives and other materials used by the Company itself, and local
regulations.
Company Operations:
The Company's sales from its primary service lines in dollar amounts
and by percentage were as follows:
Year ended June 30
1997 1996 1995
-------- -------- --------
Dollars (in thousands):
UHP $ 11,629 $ 9,882 $ 9,329
Vacuum 5,947 6,788 8,450
Waterblasting 4,135 3,958 4,763
Other 1,377 1,247 1,689
-------- -------- --------
Total $ 23,088 $ 21,875 $ 24,231
======== ======== ========
Percentage:
UHP 50.4% 45.2% 38.5%
Vacuum 25.8% 31.0% 34.9%
Waterblasting 17.9% 18.1% 19.6%
Other 5.9% 5.7% 7.0%
-------- -------- --------
Total 100.0% 100.0% 100.0%
======== ======== ========
The Company does not depend upon any one customer for sales of its
services. During the fiscal year ended June 30, 1997, the Company had sales to
approximately 400 different customers. Various plants of E.I. DuPont (which make
independent purchasing decisions) made up 13% of Fiscal 1997 net sales. Four
other customers each accounted for 6% of Fiscal 1997 net sales.
The Company does not depend upon a limited number of suppliers for the
conduct of its business. The loss of any one of its suppliers would not have a
material adverse effect on the Company's business.
The Company currently services clients through a number of branch
offices and customer site facilities located throughout the United States and
Puerto Rico. The branch office locations are facilities at which the Company
houses equipment and maintains an administrative staff. Each location is
equipped to perform minor equipment maintenance. The Company has mechanics,
machinists and facilities to perform major equipment maintenance at its
headquarters facility. The customer-site facilities are trailers and equipment
at customer locations used by the Company to service that customer and the
surrounding area.
While the Company has some long-term commitments from customers for the
provision of services, most frequently orders for services are received on a
job-by-job basis. In certain instances the Company maintains equipment at the
locations of customers which have issued "blanket orders" to the Company for the
provision of services over an extended period. Such blanket orders do not
obligate the customer to purchase a specified dollar amount of services. Blanket
orders permit the Company to be contacted to perform services when needed. Such
blanket orders, in combination with the location of the Company's equipment,
allows the Company to expedite its response to a particular customer's needs and
to obtain a potential competitive advantage. The Company provides its services
primarily at prescribed rates or based upon competitive bidding and in some
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cases through direct negotiation with the customer. Due to the nature of its
business, there are relatively few pre-scheduled or contracted service calls.
Most services are performed on an emergency basis or upon less than two weeks
advance notice. Accordingly, the Company does not have any significant backlog
of service orders. Management of the Company does not consider backlog size to
be an important indicator of future performance.
The Company's management knows of no significant seasonal influences
related to the provision of its services.
The Company does not provide a separate guaranty or warranty to
customers for the services it provides. Due to the size and type of customers
serviced, the Company does not generally experience significant delays or other
problems in collecting its accounts receivable. Standard payment terms average
60 days. The Company's average days sales outstanding in Fiscal 1997 were 77.
Insurance:
Much of the work performed by the Company is pursuant to contracts that
require the Company to indemnify the customer for injury or damage occurring on
the work site. The terms of such indemnity agreements vary, but generally they
provide that the Company is 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 has been 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.
Competition:
The market for industrial cleaning services is fragmented. There are
many competitors, no one of which is believed to hold a substantial market
share. The Company competes with a number of companies in substantially all of
the regions in which it operates. Many of these competitors are local operations
servicing a limited geographic area. There are, however, a few large national
and regional competitors that have significantly greater resources than the
Company. In recent years there has been a trend toward consolidation in the
industrial cleaning industry. In 1997 Allwaste Inc., one of the Company's
national competitors, was acquired by Phillips Environmental Ltd, a Canadian
service company. Other significant national competitors include C.H. Heist
Corp., Hydro-Chem Industrial Services, and Rust International, an engineering,
construction and environmental cleanup firm controlled by WMX Technologies, Inc.
The Company's principal competitive advantages are the quality of the
equipment that it uses, its ability to provide quick response times to customer
needs, its safety record, its reputation for competent and professional
performance, and the training and mobility of its service force. Another
important competitive advantage is the Company's UHP proprietary technology and
equipment. See "Item 1 - Business - Proprietary Technology, Patents, Trademarks
and Equipment".
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The Company relies heavily on repeat customers, and uses both the
written and verbal referrals of its satisfied customers to help generate new
customers. Many of the Company's customers or prospective customers have a
qualification procedure for becoming an approved bidder or vendor based upon the
satisfaction of particular performance and safety standards set by the customer.
Such customers often maintain a list of vendors meeting such standards and award
contracts for individual jobs only to such vendors. The Company continuously
monitors and attempts to improve the quality of service it provides, and this
process is intended to help the Company maintain standards of performance which
are acceptable to its customers. The headquarters and Canton, Ohio facilities of
the Company received certification to the International Standard of ISO 9002 in
July 1997. The Company is among the first within its industry to receive
registration to ISO 9002. The Company believes that its relationships with its
customers have been good.
Proprietary Technology, Patents, Trademarks and Equipment:
The Company holds four patents expiring in 2004, 2005, and 2013 with
respect to tooling and equipment used in connection with its pressurized water
technology. The Company also is the licensee under an exclusive patent license,
granted by the University of Missouri, involving a certain waterjet cleaning
tool and deposit removal process. The patent being licensed to the Company
terminates in 2000. In June 1991, the Company purchased two of these patents,
the patent license, certain UHP tools, equipment, know-how, and technology and
documentation related to those tools and equipment, a trademark for the term
"Water Laser", and all new related inventions hereinafter developed by the
sellers of the technology. The patents, license, and know-how relate to UHP
technology applicable to industrial cleaning. The acquisition provides the
Company with the potential power to foreclose third parties from the use of such
patent technology. In connection with the purchase of the above technologies and
patents, the Company also received from the sellers an agreement not to engage
in any business involving the development, testing, manufacturing or use of any
technology, tools, equipment, designs or patents which use water or UHP water as
any part of its operation.
The Company has developed a great deal of proprietary technology and
know-how which it uses in connection with its provision of industrial cleaning
services to customers. The Company continues to develop new and proprietary
technology related to its UHP technology and other services, and has additional
patents pending.
Most of the technology and the equipment used in providing conventional
vacuum and waterblasting services are readily available in the industry. The UHP
waterjetting services provided by the Company result from the Company's
proprietary technologies, as well as its self-designed and constructed
equipment, tools and accessories. These technologies include not only the
techniques used by its service personnel in physically providing services, but
also the design of the component parts of the equipment used by the Company in
providing the services. Although certain basic pieces of equipment are readily
available (e.g., diesel and electrical motors, vehicular chassis, etc.), the
design of other components assembled into the Company's UHP waterjetting
equipment is proprietary to the Company. Such components are fabricated in the
Company's machine shops and assembled into finished pieces of equipment at the
Company's headquarters facility.
All of the Company's employees sign confidentiality agreements which
obligate them to protect the Company's proprietary technology and know-how from
unauthorized use and disclosure, and otherwise to treat such information as
confidential. Management of the Company believes that with respect to certain of
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its know-how and design improvements, even if such processes or products were
patentable, any patent protection which could be obtained would not be as
beneficial to the Company as the continued maintenance of such proprietary
information as confidential material whenever possible.
The Company's name and logos have been registered as service marks with
the United States Patent and Trademark Office.
The Company does not operate under any licenses or franchises granted
by third parties, other than the University of Missouri patent license. The
Company has not granted any right to others in connection with sale or use of
its own technology.
Environmental Standards and Government Regulations:
The Company's operations are subject to numerous rules and regulations
at the federal, state and local levels. The Company believes that it 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 are 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 are 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 current 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 performs a cleaning operation involving the
disposal of a waste that would be defined as hazardous under 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 performs 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.
On the local level, rules and regulations exist and are being
promulgated to govern the discharge of wastewater into sewer systems. These
rules can vary widely by locale. The Company has developed systems that permit
it to comply with these regulations, when applicable. Future changes in such
rules and regulations could have a significant impact on the Company in that
additional capital expenditures might be required. However, the more intensified
regulation also serves to foreclose potential new entrants with little or no
experience in industrial cleaning services, as well as those lacking adequate
capital.
The Company believes that it has obtained the permits and licenses
required to perform its business and believes that it 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,
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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
operations.
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, may have a material adverse
effect upon the business and operations of the Company. See "Item 1 -
Business-Insurance".
Employees:
As of September 1, 1997, the Company employed 350 full time employees.
Due to the nature of the services provided (i.e., primarily on a job-by-job
basis), the number of Company employees is subject to fluctuation. No employees
are currently covered by collective bargaining agreements. The Company believes
that its relations with its employees are good.
ITEM 2. PROPERTIES:
The Company's headquarters facility in Canal Fulton, Ohio is comprised
of two buildings: a 15,962 square foot office, equipment warehouse and machine
shop facility which is leased from a former Chairman and CEO and his wife, and
an 8,750 square foot office, machine shop, and service dispatch facility which
is owned by the Company.
The headquarters facility lease is for a term ending on October 31,
1997, and is renewable for one three-year term at the Company's option (subject
to negotiation of the monthly lease payments). The Company has an option to
purchase this facility for a fixed amount anytime during the lease term.
The Company leases the other facilities used in its business under
short-term leases, generally one to three years. Management does not anticipate
any material problems in negotiating extensions of these existing arrangements.
If necessary, management believes that it would be able to obtain adequate
alternate facilities on terms acceptable to the Company.
ITEM 3. 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:
No matters were submitted to a vote of security holders during the
fourth quarter of the year ended June 30, 1997.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS:
The Company's Common Stock trades on the Nasdaq National Market tier of
the Nasdaq Stock Market under the symbol: VALE. The following table sets forth
the high and low sale prices for the periods indicated.
High Low
---- ---
Fiscal 1996:
July 1, 1995 - September 30, 1995 3 5/8 15/16
October 1, 1995 - December 31, 1995 2 3/8 1
January 1, 1996 - March 31, 1996 1 5/16 1
April 1, 1996 - June 30, 1996 1 9/16 7/8
Fiscal 1997:
July 1, 1996 - September 30, 1996 1 3/16 11/16
October 1, 1996 - December 31, 1996 1 7/16 15/16
January 1, 1997 - March 31, 1997 1 9/16 15/16
April 1, 1997 - June 30, 1997 1 11/16 7/8
No dividends have been declared on the Common Stock since the inception
of the Company, and the Company does not anticipate paying any cash dividend in
the foreseeable future. In addition, the Company is restricted from paying
dividends on its Common Stock under its credit agreement with its majority
stockholder.
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:
1997 1996 1995 1994 1993(1)
-------- -------- -------- -------- --------
Sales $23,088 $21,875 $24,231 $27,494 $29,098
Gross profit 8,559 6,853 8,562 6,291 4,093
Selling, general and
administrative expenses 7,268 7,254 7,155 8,830 10,708
Litigation settlements and
related fees (752) 1,351 3,803
Restructuring charges 3,548 2,999
Interest expense 592 572 895 1,506 1,118
Net income (loss) 1,451 (973) 512 (8,539) (14,535)
Income (loss) per common
share (2) .13 (.16) .02 (1.31) (2.91)
Total assets 14,568 15,123 15,704 19,740 27,323
Total long-term debt 7,235 7,021 5,858 10,194 9,596
Total stockholders' equity 4,437 4,031 5,412 (251) 4,260
(1) The year ended June 30, 1993 has been restated to reflect the combined
operations with BMW Industrial Services, Inc., which was acquired in Fiscal
1993 and has been accounted for as a pooling of interests.
(2) Income (loss) per common share in 1996 and 1995 have been restated from
amounts previously reported to include the effects of the preferred stock
dividend requirements.
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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.
Results of Operations - 1997 compared to 1996:
Sales increased 5.5% in the fiscal year ended June 30, 1997 from 1996.
A shift in sales from vacuum services to UHP waterjetting services continued
from the prior year. UHP sales increased 18% in 1997 from 1996, and represented
50% of total sales. In 1996, UHP services represented 45% of total sales. Sales
of vacuum services decreased by 12% and went from 31% of total sales in 1996 to
26% in 1997. Sales of waterblasting services, the Company's other major service
line, increased 5% in 1997 from 1996 and represented 18% of total sales in both
years.
The shift in sales from vacuum services to UHP waterjetting services
was expected. Competition in the vacuum services area has increased steadily in
recent years. There has been consolidation in the industry and some competitors,
including some larger than the Company, have lowered rates to gain market share.
The Company has generally chosen not to compete on price and has emphasized its
UHP waterjetting service line, where management believes it has a clear
technological advantage.
Sales of UHP waterjetting services were also aided in 1997 by new
applications for the Company's technology in the hazardous materials abatement
industry. The Company had sales of $1.2 million in this area in 1997, compared
to less than $400,000 in 1996. The Company expects sales of UHP waterjetting
services to this industry to continue to increase in Fiscal 1998.
The Company's gross margin in 1997 increased to 37% of sales, from 31%
in the prior year. Increased sales of the UHP waterjetting service line caused
part of this improvement. Lower equipment repair costs resulting from increased
emphasis on preventive maintenance also contributed. Lower equipment
depreciation costs spread over higher revenues also helped to increase the gross
margin percentage.
Selling, general and administrative expenses increased by .2% in 1997
over the prior year, and represented 31% of sales in 1997 and 33% in 1996.
Interest expense increased 4% in 1997 from 1996, and represented 3% of sales in
both years.
Net income in 1997 was increased by a one-time gain on settlement of
litigation of $752,000, or $.09 per common share.
Results of Operations - 1996 compared to 1995:
The Company's sales decreased by 10% in 1996 from the prior year. The
decrease was primarily in sales of vacuum and waterblasting services. Together,
these services decreased by 19% in 1996, and represented 49% of total sales. In
1995 these service lines accounted for 55% of total sales. The Company also
exited several minor service lines during the year.
Competition in vacuum and waterblasting services is increasing. Several
competitors, which are larger and have greater resources than the Company, have
recently reduced rates in an attempt to gain market share, particularly in the
Gulf Coast region. The Company has generally chosen not to compete on price and
has emphasized its UHP waterjetting service line, where management believes it
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has a clear technological advantage. Sales of the UHP waterjetting service line,
which is the Company's most profitable, increased 6% in 1996 from 1995, and
represented 45% of total sales compared to 38% in the prior year.
The Company plans to continue emphasizing UHP waterjetting services,
and is continually developing new applications and tooling for this technology.
One area that seems very promising is removal of some types of hazardous
coatings containing asbestos and lead. UHP waterjetting is a new technology to
the abatement industry, and the Company anticipates significant future revenues
from it. The Company does not plan to become an abatement contractor. Instead,
it will supply equipment and expertise to abatement contractors to increase
their productivity.
The Company's gross margin dropped to 31% of sales in 1996 from 35% in
1995. The drop was primarily caused by changes in the estimated useful lives of
certain equipment, which had the net effect of increasing depreciation expense
in 1996 by $525,000, or 2.4 % of sales. The drop in sales also contributed to
the decreased gross margin percentage due to the effect of spreading fixed costs
(primarily depreciation) over a smaller revenue base.
Selling, general and administrative expenses increased by 1.4% in 1996
from the prior year. Due to lower revenues, these expenses amounted to 33% of
sales in 1996, compared to 29% in 1995. Interest expense decreased by 36% in
1996 from 1995, due to refinancing under more favorable terms, conversion of
debt to equity, and positive cash flows from operations that were used to pay
down debt.
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 Months Ended
(In thousands, except per share data)
9/30/95 12/31/95 3/31/96 6/30/96 9/30/96 12/31/96 3/31/97 6/30/97
------- -------- ------- ------- ------- -------- ------- -------
Sales $5,888 $5,611 $4,590 $5,786 $6,275 $5,133 $5,321 $6,359
Gross profit 2,046 1,934 963 1,910 2,367 1,727 2,138 2,327
Net income
(loss) 131 41 (1,123) (22) 250 437 305 459
Income (loss)
per common
share $ .00 $ (.01) $ (.14) $ (.01) $ .02 $ .04 $ .03 $ .04
A significant drop in revenues for the quarter ended March 31, 1996
caused the net loss in that period. Gross profit as a percentage of sales for
that quarter also dropped significantly because fixed costs, such as equipment
depreciation, were spread over a lower revenue base.
Net income in the quarter ended December 31, 1996 was increased by
$752,000, or $.09 per common share, by a one-time gain on settlement of
litigation.
Quarterly income (loss) per common share above have been restated from
amounts previously reported to include the effects of preferred stock dividend
requirements.
Liquidity and Capital Resources:
Working capital increased from $1.3 million at June 30, 1996 to $3.6
million at June 30, 1997. Most of the 1997 increase was due to cash generated
<PAGE>
13
from operations. Cash generated from operations totaled $2.6 million in 1997,
compared to $600,000 in 1996. The improvement in the Company's results of
operations, going from a loss of $973,000 in 1996 to net income of $1,451,000 in
1997, accounted for most of the improvement in cash generated from operations.
Additions to property and equipment were $1.7 million in 1997, compared
to $2.5 million in 1996. Additions to property and equipment in 1995 were $1.3
million. All 1997 and 1996 additions were financed through operations or
borrowings from the Company's revolving line of credit, which expires in July
2000. The Company anticipates spending more on additions to property and
equipment in Fiscal 1998 than in 1997, but expects that total additions to
property and equipment in 1998 should not exceed depreciation expense in that
year.
Financing activities used $1 million of cash in 1997, compared with
providing $1.7 million in 1996. The Company purchased 500,000 shares of its
common stock in Fiscal 1997 in accordance with a share purchase program
announced in August 1996, for a total cost of $564,000. This expenditure, along
with payment of preferred stock dividends of $385,000, accounted for the 1997
use of cash. The Company does not expect to purchase additional common shares in
Fiscal 1998.
During 1997 the Company negotiated an extension of its credit agreement
with its majority stockholder and its bank line of revolving credit. The
existing arrangements were extended two years, to July 2000. The Company had $1
million of credit available under these agreements on June 30, 1997. The Company
expects to have adequate cash flows from operations to meet all obligations in
Fiscal 1998, as well as to provide for all necessary capital expenditures.
Accounting Standards:
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share"("SFAS No. 128").
SFAS No. 128 modifies the manner in which an entity computes, presents and
discloses its earnings per share. The Company is required to adopt the
provisions of SFAS No. 128 beginning in the quarter ended December 31, 1997.
The adoption of SFAS No. 128 is not expected to have a significant impact on
the Company's computation and presentation of earnings per share.
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 established standards for reporting and display
of comprehensive income and its components. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997 and is not expected to have a
significant impact on the consolidated financial statements of the Company.
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information about
Capital Structure" ("SFAS No. 129") and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). SFAS No. 129 will be effective for the Fiscal
year ending June 30, 1998 and SFAS No. 131 will be effective for the fiscal year
ending June 30, 1999. As the adoption of SFAS No. 129 and SFAS No. 131 require
only additional disclosures, there will be no effect on the Company's
consolidated financial position or results of operations or cash flows.
<PAGE>
14
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 form 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, general business and economic
conditions; the financial strength of the various industries the Company serves,
the competitive pricing environment of the industrial cleaning service industry,
the cost and effectiveness of planned marketing campaigns, and the success of
the Company to continue to develop new applications and markets for its
technology.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:
The required financial statements of the Registrant are set forth
immediately following the signature page to this registration statement. 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 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 set forth under the caption
"Executive Compensation" of the registrant's definitive proxy statement, and
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
The information required by this item is 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 set forth under the caption
"Executive Compensation" of the registrant's definitive proxy statement, and
incorporated herein by reference.
<PAGE>
15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K:
A. (1) Financial Statements Filed:
Valley Systems, Inc. and Subsidiaries:
Report of Independent Accountants.
Consolidated Balance Sheets at June 30, 1997 and 1996.
Consolidated Statements of Income for years ended June 30, 1997, 1996
and 1995.
Consolidated Statements of Stockholders' Equity for the years ended
June 30, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended June 30,
1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
(2) Exhibits:
No. Description of Exhibit
- --- ----------------------
3.1 Restated Certificate of Incorporation of Registrant. (1)
3.2 Certificate of Amendment of Certificate of Incorporation of Registrant.
(16)
3.3 By-laws of Registrant (as amended). (16)
4.1 Form of Designation of Rights and Preferences of the Series A Preferred
Stock. (1)
4.2 Form of Designation of Rights and Preferences of the Series B Preferred
Stock. (1)
4.3 Certificate of Designation of Rights and Preferences of Series C
Preferred Stock. (15)
4.4 Specimen Certificate of Common Stock. (1)
4.5 Form of Underwriter's Warrant Agreement. (1)
4.6 1991 Stock Option Plan, and Form of Agreement. (1)(13)
4.7 Warrant Grant Agreement dated June 2, 1994 between the Registrant and
Rollins Investment Fund. (14)
10.1 Employment Agreement, dated as of March 13, 1991, between the Registrant
and Eugene R. Valentine. (1)
10.2 Business Development Contract between the Registrant and the Aberlyn
Group, Inc. dated as of October 1, 1990. (1)
10.3 Agreement and Undertaking dated April 29, 1991 by and among the
Registrant, Eugene R. Valentine, Aberlyn Group, Inc., Lawrence Hoffman
and Robert M. Rubin. (1)
10.4 Form of Voting Trust Agreement between Eugene R. Valentine and the
Aberlyn Group, Inc. (1)
10.5 Letter dated March 15, 1991, to Aberlyn Group, Inc., respecting sale of
Common Stock to Consultant in certain events. (1)
10.6 Lease between the Registrant and Eugene R. Valentine and Cynthia J.
Valentine dated as of November 1, 1988 as amended in March 1991. (1)
<PAGE>
16
10.7 Securities urchase Agreement dated December 16, 1991 between Rollins
Investment Fund ("RIF") and the Registrant. (2)
10.8 Stock Purchase Agreement, dated June 12, 1992, among Eugene R. Valentine,
Nicholas J. Pace and Rollins Investment Fund. (3)
10.9 Reorganization Agreement dated July 31, 1992 between Registrant and the
stockholders of BMW Industrial Services, Inc., and exhibits thereto. (4)
10.10 Agreement dated July 31, 1992 between Registrant and Power City
Industrial Services, Inc. (4)
10.11 Loan Agreement from Rollins Investment Fund to Eugene R. Valentine and
Cynthia J. Valentine, dated October 14, 1992. (5)
10.12 Loan Agreement from Eugene R. Valentine to Registrant, dated October 16,
1992. (5)
10.13 Standby and Subordination Agreement from Eugene R. Valentine and Cynthia
J. Valentine to Fifth Third Bank. (5)
10.14 Credit and Security Agreement dated December 30, 1991 by and among the
Fifth Third Bank, the Registrant, Valley Systems of Ohio, Inc. and
Diversified Specialty Enterprises, Inc. (6)
10.15 Lease agreements between Munco Development Company and the Registrant
with respect to leases of office space at Crescent Pointe Building,
Canton, Ohio. (6)
10.16 Amendment No.1, dated as of November 16, 1992, to the Credit and Security
Agreement, dated as of December 31, 1991, by and between Registrant and
the Fifth Third Bank. (7)
10.17 Amendment No. 2, dated as of July 20, 1993, to the Credit and Security
Agreement, dated as of December 30, 1991, by and betwee the Registrant
and the Fifth Third Bank. (8)
10.18 Equipment Lease Agreement and Riders No. 1 & No. 2 by and between the
Registrant and Ally Capital Corporation dated December 18, 1992. (9)
10.19 Letter Agreement dated September 9, 1993 between Ally Capital
Corporation and the Registrant and Subordination and Security
Agreement made as of September 9, 1993 between Ally Capital Corporation
and Rollins Investment Fund. (9)
10.20 Loan and Security Agreement, dated as of June 29, 1994 by and between
Registrant and Rollins Investment Fund. (15)
10.21 Term Note dated June 29, 1994 from Registrant to Rollins Investment Fund.
(15)
10.22 First Amendment to Term Note dated September 2, 1994 by and between
Registrant and Rollins Investment Fund. (15)
10.23 First Amendment to Loan and Security Agreement dated March 28, 1995 by
and between Registrant and Rollins Investment Fund. (16)
10.24 Second Amendment to Loan and Security Agreement dated November 5, 1996
by and between Registrant and Rollins Investment Fund. (18)
16.1 Letter dated July 8, 1993 from Valley Systems, Inc. to Feldman, Radin &
Co., P.C. terminating the auditor's services. (10)
- --------------------------------------------------------------------------------
(1) Hereby incorporated by reference to the filing of the Registrant's
Registration Statement on Form S-1 declared effective by the SEC on June
11, 1991.
<PAGE>
17
(2) Hereby incorporated by reference to the filing of the Schedule 13D of
Rollins Investment Fund, dated December 20, 1991.
(3) Hereby incorporated by reference to the filing of the Schedule 13D of
Rollins Investment Fund, dated June 18, 1992.
(4) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated August 10, 1992.
(5) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated October 30, 1992.
(6) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated November 6, 1992.
(7) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated December 21, 1992.
(8) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated July 30, 1993.
(9) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 24, 1993.
(10) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated July 9, 1993.
(11) Hereby incorporated by reference to the filing of the Registrant's Form
10-Q dated February 11, 1994.
(12) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated June 29, 1994.
(13) This is a compensatory plan or arrangement.
(14) Hereby incorporated by reference to the filing of the Registrant's Form 8-K
dated September 2, 1994.
(15) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 26, 1994.
(16) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 25, 1995.
(17) Hereby incorporated by reference to the filing of the Registrant's Form
10-K dated September 24, 1996.
(18) Included as an exhibit in this Form 10-K.
Reports on Form 8-K filed during the three months ended June 30, 1997:
None.
<PAGE>
18
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.
VALLEY SYSTEMS, INC.
By: \s\ Ed Strickland
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
\s\ Ed Strickland President and Chief
Executive Officer September 22, 1997
\s\ Dennis D. Sheets Vice President, Chief Financial
Officer, Treasurer and Secretary September 22, 1997
\s\ Allen O. Kinzer Director September 22, 1997
\s\ Joe M. Young Director September 22, 1997
<PAGE>
19
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
REPORT OF INDEPENDENT ACCOUNTANTS 20
CONSOLIDATED BALANCE SHEETS - June 30, 1997 and 1996 21
CONSOLIDATED STATEMENTS OF INCOME - Years ended June
30, 1997, 1996 and 1995 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years
ended June 30, 1997, 1996 and 1995 23
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended
June 30, 1997, 1996 and 1995 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25-32
All schedules are omitted because they are not required under the
instructions, are inapplicable, or the information is included elsewhere in the
financial statements.
<PAGE>
20
Report of Independent Accountants
To the Stockholders of
Valley Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Valley Systems,
Inc. and Subsidiaries (the "Company") as of June 30, 1997 and 1996, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1997. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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 consolidated financial position of Valley
Systems, Inc. and Subsidiaries as of June 30, 1997 and 1996 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Akron, Ohio
August 22, 1997
<PAGE>
21
Valley Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 1997 and 1996
1997 1996
------------- -------------
ASSETS
Current assets:
Cash $ 200,093 $ 86,099
Accounts receivable 5,638,350 4,684,719
Prepaid supplies 469,839 443,446
Prepaid expenses 160,772 193,587
------------- -------------
Total current assets 6,469,054 5,407,851
Property and equipment 7,551,004 9,029,694
Intangible assets 548,000 685,000
------------- -------------
Total assets $ 14,568,058 $ 15,122,545
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 971,611 $ 756,672
Accrued expenses 1,428,834 2,583,966
Current portion of long-term debt 495,929 729,506
------------- -------------
Total current liabilities 2,896,374 4,070,144
Long-term debt 7,235,120 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 (21,757,089) (22,726,822)
Treasury stock, at cost, 605,456 shares at
June 30, 1997 and 105,456 at June 30, 1996 (683,008) (118,638)
------------- -------------
4,436,564 4,031,201
------------- -------------
Total liabilities and
stockholders' equity $ 14,568,058 $ 15,122,545
============= =============
The accompanying notes are an integral part of these financial statements.
<PAGE>
22
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Income
For the years ended June 30, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Sales $ 23,088,298 $ 21,874,776 $ 24,230,858
Cost of sales 14,529,554 15,021,953 15,668,561
------------ ------------ ------------
Gross profit 8,558,744 6,852,823 8,562,297
Selling, general and
administrative expenses 7,267,973 7,254,467 7,155,585
Interest expense 592,024 571,700 894,583
Gain on settlement of litigation (752,236) - -
------------ ------------ ------------
Income (loss) from operations
before income taxes 1,450,983 (973,344) 512,129
Income taxes - - -
------------ ------------ ------------
Net income (loss) $ 1,450,983 $ (973,344) $ 512,129
============ ============ ============
Net income (loss) per common share $ .13 $ (.16) $ .02
============ ============ ============
Weighted average shares used
in computation 8,203,069 8,490,111 8,532,073
============ ============ ============
The accompanying notes are an integral part of these financial statements.
<PAGE>
23
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
For the years ended June 30, 1997, 1996 and 1995
Preferred Common Paid-In Accumulated Treasury
Stock(1) Stock(2) Capital Deficit Stock Total
-------- ------- ----------- ------------- ---------- ----------
Balance, June
30, 1994 $2,000 $85,121 $21,319,084 $(21,657,517) $ - $ (251,312)
Conversion of
debt to equity 3,000 2,997,000 3,000,000
Sale of
preferred
stock 2,500 2,467,956 2,470,456
Net income 512,129 512,129
Series C
preferred
dividends (319,341) (319,341)
------ ------- ----------- ------------- ---------- ----------
Balance, June
30, 1995 7,500 85,121 26,784,040 (21,464,729) - 5,411,932
Purchase of
treasury stock (118,638) (118,638)
Retirement of
Series B
preferred stock (2,000) 2,000 -
Net loss (973,344) (973,344)
Series C
preferred
dividends (288,749) (288,749)
------ ------- ----------- ------------- ---------- ----------
Balance, June
30, 1996 5,500 85,121 26,786,040 (22,726,822) (118,638) 4,031,201
Purchase of
treasury
stock (564,370) (564,370)
Net income 1,450,983 1,450,983
Series C
preferred
dividends (481,250) (481,250)
------ ------- ----------- ------------- ---------- ----------
Balance, June
30, 1997 $5,500 $85,121 $26,786,040 $(21,757,089) $(683,008) $4,436,564
====== ======= =========== ============= ========== ==========
(1) Share amounts are equivalent to ten times dollar amounts.
(2) Share amounts are equivalent to one hundred times dollar amounts.
The accompanying notes are an integral part of these financial statements.
<PAGE>
24
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended June 30, 1997, 1996 and 1995
1997 1996 1995
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $ 1,450,983 $ (973,344) $ 512,129
Adjustments to reconcile net income
(loss) to cash provided by operating
activities:
Depreciation and amortization 3,138,326 3,516,986 3,229,816
(Gain) loss on disposition of
property and equipment (5,784) (6,865) 1,854
(Increase) decrease in assets:
Accounts receivable (953,631) (658,313) 232,073
Prepaid supplies (26,393) 16,143 (50,641)
Prepaid expenses 32,815 18,922 7,073
Increase (decrease) in liabilities:
Accounts payable 214,939 218,840 (323,516)
Accrued expenses (1,251,382) (1,531,797) (855,037)
------------ ------------ ------------
Cash provided by operating activities 2,599,873 600,572 2,753,751
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (1,665,092) (2,547,375) (1,289,083)
Proceeds from dispositions of
property and equipment 148,240 99,541 684,238
------------ ------------ ------------
Cash used by investing activities (1,516,852) (2,447,834) (604,845)
------------ ------------ ------------
Cash flows from financing activities:
Net borrowings from revolving line
of credit 583,403 2,911,279 3,714,981
Payments of other long-term debt (603,060) (702,810) (9,331,833)
Proceeds from sale of stock - - 2,470,456
Payments of preferred stock dividends (385,000) (385,000) (223,091)
Purchase of treasury stock (564,370) (118,638) -
------------ ------------ ------------
Cash (used) provided by financing
activities (969,027) 1,704,831 (3,369,487)
------------ ------------ ------------
Increase (decrease) in cash 113,994 (142,431) (1,220,581)
Cash at beginning of year 86,099 228,530 1,449,111
------------ ------------ ------------
Cash at end of year $ 200,093 $ 86,099 $ 228,530
============ ============ ============
Cash paid for:
Interest $ 592,024 $ 571,700 $ 834,443
Non-cash financing activities:
Notes payable converted to preferred
stock 3,000,000
Reclassification of payments from
former directors and officers 1,017,000
Preferred stock dividends accrued 96,250 96,250
The accompanying notes are an integral part of these financial statements.
<PAGE>
25
Valley Systems, Inc. and Subsidiaries
Notes to Consolidated Statements
1. Description of Business:
The Company is 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 involve the removal of industrial
grime, deposits, wastes, encrustations and coatings from equipment and
facilities. The Company's principal customers are in the chemical,
plastics, power generation, petroleum refining and primary metals
businesses. The Company's industrial cleaning methods include, in
addition to the use of waterblasting, vacuuming and other more
conventional procedures, the application of ultra-high pressure ("UHP")
waterjetting methods.
2. Summary of Significant Accounting Policies:
Principles of Consolidation: The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries.
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 are recorded as the services are performed.
Accounts Receivable: The Company's customers are located primarily
throughout the United States. The Company monitors potential credit
losses and such losses have been within management's expectations.
Accounts receivable which become uncollectible are written off against
operations at the time they are deemed to be worthless. The total
uncollectible accounts charged to operations for the years ended June 30,
1997, 1996 and 1995 were $51,000, $6,000, and $89,000, respectively. The
allowance for doubtful accounts was $125,000 at June 30, 1997 and 1996.
Prepaid Supplies: Prepaid supplies consist of items to be used in
operations, and are stated at the lower of cost (first in, first out) or
market.
Property and Equipment: Property and equipment are stated at cost. The
Company uses the straight-line method of depreciation for financial
reporting purposes. For income tax purposes, depreciation is computed by
either the accelerated or modified cost recovery methods. The estimated
useful lives for financial reporting purposes are as follows:
Building and leasehold improvements 3 to 15 years
Automobiles and trucks 3 to 7 years
Equipment 3 to 7 years
The cost and related accumulated depreciation of assets retired, sold or
otherwise disposed of are removed from the accounts and any gain or loss
is reflected in the current years' results of operations.
Effective July 1, 1995, the Company revised its estimates of the useful
lives of certain machinery and equipment. This change was brought about
by a review of machinery and equipment by branch management to better
reflect the estimated periods during which such assets will remain in
service. The change had the effect of increasing depreciation expense and
decreasing net income by approximately $525,000 ($.06 per share) for the
year ended June 30, 1996.
<PAGE>
26
Income Taxes: Deferred income taxes are provided to reflect the tax
effects of temporary differences between financial and tax reporting,
principally related to depreciation.
Intangible Assets: Intangible assets include the cost of certain patents,
technology, trademarks, and a non-compete agreement. These items are
being amortized to operations on a straight-line basis over 10 years, the
period in which the economic benefits are estimated to be realized.
Accumulated amortization amounted to $822,000 and $685,000 as of June 30,
1997 and 1996, respectively.
Income (Loss) Per Common Share: Income (loss) per common share is based
on the weighted average number of common shares and common share
equivalents outstanding during the period after consideration of the
preferred stock dividend requirements of $385,000 in 1997 and 1996 and
$319,341 in 1995. Common share equivalents include dilutive stock options
and warrants using the Treasury Stock method. These items have not been
included in computing income (loss) per common share for the three years
in the period ended June 30, 1997 since such inclusion would be either
anti-dilutive or immaterial. Income (loss) per common share in 1996 and
1995 have been restated from amounts previously reported to include the
effects of the preferred stock dividend requirements.
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.
Fair Value of Financial Instruments: The carrying values of accounts
receivable and short-term borrowings represent reasonable estimates of
the fair values of these instruments due to their short maturities. The
fair value of long-term debt is estimated by discounting the future cash
flows using rates currently available to the Company for debt with
similar terms and remaining maturities. The estimated fair values of the
long-term debt at June 30, 1997 approximated its carrying values.
New Accounting Pronouncements: During 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No.
128, "Earnings Per Share" ("SFAS No. 128"). SFAS No. 128 modifies the
manner in which an entity computes, presents and discloses its earnings
per share. The Company is required to adopt the provisions of SFAS No.
128 beginning in the quarter ended December 31, 1997. The adoption of
SFAS No.128 is not expected to have a significant impact on the Company's
computation and presentation of earnings per share.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
("SFAS No. 130"). SFAS No. 130 established standards for reporting and
display of comprehensive income and its components. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997 and is not
expected to have a significant impact on the consolidated financial
statements of the Company.
<PAGE>
27
During 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129, "Disclosure of Information
about Capital Structure" ("SFAS No. 129") and Statement of Financial
Accounting Standards No.131, "Disclosures about Segments of an Enterprise
and Related Information" ("SFAS No. 131"). SFAS No. 129 will be effective
for the fiscal year ending June 30, 1998 and SFAS No. 131 will be
effective for the fiscal year ending June 30, 1999. As the adoption
of SFAS No. 129 and SFAS No. 131 require only additional disclosures,
there will be no effect on the Company's consolidated financial position
or results of operations or cash flows.
Reclassifications: Certain amounts in the 1996 consolidated financial
statements have been reclassified to conform to the 1997 presentation.
3. Property and Equipment:
Property and equipment consist of the following:
1997 1996
----------- -----------
Land $ 184,759 $ 182,907
Building and leasehold improvements 580,000 580,000
Automobiles and trucks 9,753,233 11,071,390
Equipment 7,470,264 7,029,931
Equipment in progress and parts 339,293 221,016
----------- -----------
18,327,549 19,085,244
Less accumulated depreciation
and amortization 10,776,545 10,055,550
----------- -----------
$ 7,551,004 $ 9,029,694
=========== ===========
Included in property and equipment are assets under capital leases of
$2,151,000 and $3,277,000 with related accumulated depreciation of
$1,481,000 and $1,743,000 as of June 30, 1997 and 1996, respectively.
The Company incurred repairs and maintenance costs on property and
equipment of approximately $1,450,000, $1,850,000 and $2,150,000 for the
years ended June 30, 1997, 1996 and 1995, respectively.
4. Accrued Expenses:
Accrued expenses consist of the following:
1997 1996
----------- -----------
Accrued salaries and bonus $ 819,000 $ 706,000
Accrued payroll taxes, workers
compensation insurance and other
employee benefits 172,000 357,000
Accrued professional fees 41,000 161,000
Accrued preferred stock dividends 96,250 -
Reserve for disputed amounts
receivable (see Note 8) - 1,113,000
Other accrued liabilities 300,584 246,966
----------- -----------
$ 1,428,834 $ 2,583,966
=========== ===========
<PAGE>
28
5. Long-Term Debt:
Long-term debt is comprised of the following:
1997 1996
----------- -----------
Capitalized leases (A) $ 521,151 $ 1,124,211
Revolving loan - bank (C) 7,209,898 6,626,495
----------- -----------
7,731,049 7,750,706
Less: current portion of long-term debt 495,929 729,506
----------- -----------
$ 7,235,120 $ 7,021,200
=========== ===========
A. Capitalized leases are due in monthly installments ranging from
$2,000 to $26,000 and bear interest of 16.4%.
B. The Company has a loan agreement with its majority stockholder, which
expires in 2000 and provides a total credit facility to the Company
Company as follows:
Through July 1999: $9,000,000
August 1999 through July 2000: $8,000,000
This facility may be utilized by borrowings at .5% over the prime
rate (payable quarterly) or, at the Company's option, by having the
stockholder provide bank letters of credit which the Company can
utilize as collateral for other obligations. The Company reimburses
the stockholder for the actual cost of the letters of credit. This
loan agreement is collateralized by essentially all assets of the
Company. At June 30, 1997, there are no loans outstanding under this
facility, and the stockholder has issued $8,280,000 in bank letters
of credit, leaving $720,000 of the facility available to the Company.
C. This obligation represents borrowings under a $7,500,000 revolving
loan agreement with a bank. The loan bears interest at 1.7% below the
prime rate (6.80% at June 30, 1997), payable monthly, and is
collateralized by a bank letter of credit provided by the Company's
majority shareholder under the loan agreement described in B. above.
This revolving loan agreement decreases to $6,500,000 in July 1999
and expires July 2000.
The aggregate maturities on the aforementioned debt are as follows:
Year Ended June 30
1998 $ 495,930
1999 25,222
2000 709,897
2001 6,500,000
<PAGE>
29
6. Income Taxes:
The income tax provision for the three years ended June 30, 1997 is
comprised of the following amounts:
1997 1996 1995
----- ----- -----
Current:
Federal $ - $ - $ -
===== ===== =====
Statutory rate 34 % (34)% 34 %
Operating loss utilized (34) (34)
Operating loss not utilizable 34
----- ----- -----
Effective rate - % - % - %
===== ===== =====
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, 1997 and
1996, the components of the net deferred tax assets and liabilities were
as follows:
1997 1996
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 50,000 $ 50,000
Vacation accrual 140,000 132,000
Litigation reserve - 50,000
Sales tax reserve - 55,000
Net operating loss carryforwards 8,026,232 9,919,383
Other 123,253 70,395
----------- -----------
8,339,485 10,276,788
Deferred tax liabilities:
Basis difference in fixed assets (549,523) (792,832)
----------- -----------
Net deferred tax assets 7,789,962 9,483,946
Valuation allowance (7,789,962) (9,483,946)
----------- -----------
Net deferred taxes recognized $ - $ -
=========== ===========
The Company has approximately $20,100,000 of net operating loss
carryforwards for future years, which cannot be utilized to create tax
refunds. Such amounts begin to expire in the year 2005.
7. Commitments:
The Company has various capital and operating leases in effect for
equipment, vehicles and facilities with initial terms ranging from one
month to five years with renewal options generally being available.
Minimum commitments under all capital and operating leases at June 30,
1997 are as follows:
<PAGE>
30
Capital Operating
----------- -----------
1998 $ 538,969 $ 103,100
1999 25,542 39,600
2000 - 39,600
2001 - 23,100
----------- -----------
Total minimum lease payments 564,511 205,400
===========
Less amount representing interest 43,360
-----------
Total present value of capital
obligation 521,151
Less current portion 495,929
-----------
Long-term obligation under
capital leases $ 25,222
===========
Operating lease expense amounted to $441,000, $364,000 and $546,000 for
the years ended June 30, 1997, 1996 and 1995, respectively.
8. Litigation:
In addition to the matters discussed below, the Company is involved in
various litigation arising in the ordinary course of business. Management
believes that the ultimate resolution of such litigation will not have a
material effect on the Company's operations or financial position.
A. 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.
B. 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 the former officers and directors in the
lawsuit described above contested this determination, 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.
9. Major Customers:
The following table shows the percentage of total sales made to major
customers for each fiscal year:
1997 1996 1995
---- ---- ----
Customer A 13% 14% 10%
Customer B 6% 10% 9%
Customer C 6% 5% 6%
Customer D 6% 5% 5%
Customer E 6% * *
Customer F * 5% 7%
Customer G * 5% 6%
* Customer was less than 5% of total sales for the fiscal year.
<PAGE>
31
10. Stockholders' Equity:
A. At June 30, 1995, there were 20,000 shares of Series B Preferred
Stock outstanding. These shares were transferred to the Company in
1996 as part of a settlement of litigation, and were then retired.
B. In September 1994, the Company issued 55,000 shares of Series C
Preferred Stock to its majority stockholder, which then transferred
them to an affiliate. Each share of the Series C Preferred Stock is
entitled to a cumulative annual dividend of $7.00, payable
quarterly. The proceeds from the sale of the preferred shares
totaled $5.5 million; $3.0 million in the conversion of debt for
equity and $2.5 million of cash. The cash proceeds from the
transaction were used to retire additional debt and to provide
working capital.
11. Stock Options and Warrants:
A. In 1991, the Company adopted a stock option plan. Up to 400,000
shares of common stock may be issued under the plan. Outstanding
options on June 30, 1997 were as follows:
Shares
-----------------------
Option Price Total Exercisable Expiration Date
------------ -------- ----------- ---------------
$3.00 10,000 10,000 2001
$1.50 22,080 23,700 2001
$1.50 46,000 46,000 2002
$1.50 218,200 87,280 2004
$1.50 62,700 - 2006
$1.50 35,000 - 2007
-------- --------
393,980 166,980
======== ========
B. In October 1994, the Company issued stock options to its directors
to purchase a total of 50,000 shares of its common stock at $1.50
per share. These options can be exercised up to 10,000 shares on or
after each of the first five anniversary dates, and expire in
October 2004. These options are not part of the stock option plan
above. The Company also issued options under the plan to certain
employees to purchase a total of 246,200 shares of common stock at
$1.50 per share. These options can be exercised up to 20% of the
shares on or after each of the first five anniversary dates and
expire in 2004.
C. On July 5, 1996, the Company modified options issued under the plan
to purchase 34,780 shares of common stock at an original exercise
price of $3.00 per share by repricing the options to $1.50 per
share. There was no compensation expense recognized related to this
modification. The Company also issued options under the plan to
certain employees to purchase a total of 64,700 shares of common
stock at $1.50 per share. These options can be exercised up to 20%
of the shares on or after each of the first five anniversary dates
and expire in 2006.
D. In 1997 the Company issued options under the plan to certain
employees to purchase a total of 35,000 shares of common stock at
$1.50 per share. These options can be exercised up to 20% of the
shares on or after each of the first five anniversary dates and
expire in 2007.
<PAGE>
32
E. In 1997, 1996 and 1995, respectively, options to purchase 24,000,
18,300 and 28,000 shares of common stock were forfeited.
F. The Company has elected to adopt the "disclosure-only" provisions
of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock Based Compensation" ("SFAS No. 123"), with no
compensation cost recognized for options granted at or above market
value. For SFAS No. 123, the fair value of each option granted was
estimated on the date of grant using the Black-Scholes option
pricing model with the following assumptions for 1997: (a)
risk-free interest rates of 6.40% to 7.04%; (b) no dividend yield
in either year; (c) expected terms of 8 years; and (d) volatility
of 95%.
If the Company had elected to recognize the compensation cost of
its stock option plan based on the fair value of the awards under
that plan in accordance with SFAS No. 123, net income would have
been reduced to $1,306,346 ($.11 per common share) for the year
ended June 30, 1997.
G. At June 30, 1997, warrants to purchase shares of the Company's
common stock were outstanding as follows:
Warrant
Price Shares Expiration Date
-------- ---------- ---------------
$ 3.25 10,000 June 1998
$ 3.09 2,314,000 May 2000
$15.00 100,000 September 2001
12. 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, 1997.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 200,093
<SECURITIES> 0
<RECEIVABLES> 5,763,350
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,469,054
<PP&E> 18,327,549
<DEPRECIATION> 10,776,545
<TOTAL-ASSETS> 14,568,058
<CURRENT-LIABILITIES> 2,896,374
<BONDS> 0
0
5,000
<COMMON> 85,121
<OTHER-SE> 4,345,943
<TOTAL-LIABILITY-AND-EQUITY> 14,568,058
<SALES> 23,088,298
<TOTAL-REVENUES> 23,088,298
<CGS> 14,529,554
<TOTAL-COSTS> 14,529,554
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 51,000
<INTEREST-EXPENSE> 592,024
<INCOME-PRETAX> 1,450,983
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,450,983
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,450,983
<EPS-PRIMARY> .13
<EPS-DILUTED> .13
</TABLE>
