<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
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 March 31, 1997:
Common Stock, $.01 par value: 7,986,617
<PAGE>
PART 1 -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Valley Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
March
31, 1997 June 30,
(unaudited) 1996
------------ ------------
ASSETS
Current assets:
Cash $ 57,998 $ 86,099
Accounts receivable 4,580,179 4,684,719
Prepaid supplies 485,412 443,446
Prepaid expenses 99,094 193,587
------------ ------------
Total current assets 5,222,683 5,407,851
Property and equipment 7,630,937 9,029,694
Inangible assets 582,250 685,000
------------ ------------
Total assets $ 13,435,870 $ 15,122,545
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 641,910 $ 756,672
Accrued expenses 1,015,713 2,583,966
Current portion of long-term debt 573,373 729,506
------------ ------------
Total current liabilities 2,230,996 4,070,144
Long-term debt 6,661,209 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 (21,734,050) (22,726,822)
Treasury stock, at cost, 525,456 shares at
March 31, 1997 and 105,456 at June 30,
1996 (598,946) (118,638)
------------ ------------
4,543,665 4,031,201
------------ ------------
Total liabilities and stockholders' equity $ 13,435,870 $ 15,122,545
============ ============
See notes to consolidated financial statements.
<PAGE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended Nine months ended
March 31 March 31
1997 1996 1997 1996
Sales $5,320,539 $ 4,589,663 $16,728,715 $16,088,313
Cost of sales 3,182,877 3,626,233 10,496,708 11,145,137
---------- ----------- ----------- -----------
Gross profit 2,137,662 963,430 6,232,007 4,943,176
Selling, general,
and administrative
expenses 1,692,683 1,954,306 5,545,659 5,473,390
Interest expense 139,624 132,540 445,812 420,900
Gain on settlement
of litigation 0 0 (752,236) 0
---------- ----------- ----------- -----------
Income (loss) from
operations before
income taxes 305,355 (1,123,416) 992,772 (951,114)
Income taxes 0 0 0 0
---------- ----------- ----------- -----------
Net income (loss) $ 305,355 $(1,123,416) $ 992,772 $ (951,114)
========== =========== =========== ===========
Net Income (loss)
per share:
Primary $ .04 $ (.13) $ .12 $ (.11)
========== =========== =========== ===========
Weighted average
shares used in
computation 8,141,450 8,512,073 8,294,336 8,512,073
========== =========== =========== ===========
See notes to consolidated financial statements.
<PAGE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine months
ended March 31
------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net income (loss) $ 992,772 $ (951,114)
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 2,415,069 2,646,833
Gain on disposition of property and equipment (22,756) (10,183)
(Increase) decrease in assets:
Accounts receivable 104,540 329,218
Prepaid supplies (41,966) 34,023
Prepaid expenses 94,493 (56,031)
Increase (decrease) in liabilities:
Accounts payable (114,762) (120,324)
Accrued expenses (1,568,253) (959,570)
---------- ----------
Cash provided by operating activities 1,859,137 912,852
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (1,043,179) (1,854,403)
Proceeds from dispositions of property
and equipment 152,373 32,963
---------- ----------
Cash used by investing activities (890,806) (1,821,440)
---------- ----------
Cash flows from financing activities:
Payments of long-term debt (516,124) (556,472)
Additional long-term borrowings 1,565,350
Purchase of treasury shares (480,308)
Payment of preferred stock dividends 0 (288,750)
---------- ----------
Cash (used) provided by financing activities (996,432) 720,128
---------- ----------
Decrease in cash (28,101) (188,460)
Cash at beginning of year 86,099 228,530
---------- ----------
Cash at end of period $ 57,998 $ 40,070
========== ==========
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 March 31, 1997 and 1996 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 $385,000 on the Company's Series C Preferred Stock are in
arrears at March 31, 1997.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1996:
Sales for the three months ended March 31, 1997 increased 16% from the same
period in 1996. Sales in the UHP service line increased 47% in the current
quarter and represented 54% of total sales. In the third fiscal quarter of 1996,
UHP sales were 43% of total sales. Approximately one third of the increase in
UHP sales is attributable to projects in the hazardous materials abatement
industry. This technology is new to the abatement industry, and can lower costs
significantly in some circumstances. The rest of the increase was due to several
significant new customers using more traditional applications of UHP technology.
Sales in the vacuum service line declined by 16%, primarily because of reduced
work in the steel industry. Sales in the Company's other service lines were flat
between 1996 and 1997.
Gross margin as a percentage of sales increased from 21% in 1996 to 40% in
the current quarter. This improvement resulted from three factors. First, the
increase in UHP sales, as that product line tends to be the Company's most
profitable. In addition, the gross margin percentage was helped by spreading
fixed costs, such as equipment depreciation, over a larger revenue base.
Finally, equipment repair costs declined significantly in 1997 from 1996 due to
greater emphasis on preventive maintenance.
Selling, general and administrative expenses dropped by $262,000, or 13%
during the current quarter when compared with the prior year. These costs
decreased from 43% of sales in 1996 to 32% of sales in 1997. Most of the decline
was in personnel costs. Productivity gains and reorganization of administrative
functions have allowed these reductions.
Net income for the quarter ended March 31, 1997 totaled $305,000, or $.04
per share. This compares to a net loss of $1,123,000, or $.13 per share in the
prior year.
NINE MONTHS ENDED MARCH 31, 1997 AS COMPARED TO THE NINE MONTHS ENDED
MARCH 31, 1996:
Sales in the nine months ended March 31, 1997 increased 4% from the same
period in 1996. There were significant swings by product line, however. The UHP
service line increased sales by 19% in 1997, primarily due to increased
marketing efforts by the Company that were successful in penetrating a new
market, the hazardous materials abatement industry, as well as increasing the
existing customer base. Sales in the vacuum service line decreased by 14% in
1997. This decrease is due to a drop in sales to the steel industry. Sales of
conventional waterblasting and other service lines are flat from 1996 to 1997.
<PAGE>
Gross margin as a percentage of sales increased from 31% last year to 37%
in the current period. This improvement is primarily due to the increase in
sales of the UHP product line, which tends to be the Company's most profitable.
A 21% drop in equipment repair expense in 1997 also contributed to the
improvement in gross margin percentage. Increased emphasis on preventive
maintenance helped to reduce equipment repairs.
Selling, general and administrative expenses increased 1% from 1996 to
1997, and represented 34% and 33% of sales, respectively. Interest costs
increased by 6% in 1997 because of higher levels of borrowings under the
Company's revolving line of credit.
Net income for the first nine months of the fiscal year ending June 30,
1997 totaled $993,000, or $.12 per share. This includes a gain of $752,000 in
the second quarter, or $.09 per share, from settlement of litigation. The
Company had a loss of $951,000 in the first nine months of 1996, or $.11 per
share.
FINANCIAL CONDITION:
Cash provided from operating activities totaled $1,859,000 in the nine
months ended March 31, 1997. This is a significant improvement from the prior
year, when the comparable amount was $913,000. The increase in cash from
operations in 1997 is due to improvement in net income in the period, partially
offset by lower depreciation expense and payment of accrued expenses.
Additions to fixed assets, before proceeds from disposals, totaled
$1,043,000 in 1997 compared to $1,854,000 in 1996. Most of the decrease in
purchases in 1997 is due to the drop in sales of the vacuum service line, which
is the most capital intensive of the Company's service lines.
Subtracting net capital expenditures from cash provided from operations
yields an excess of $968,000 in the first nine months of 1997. The Company used
$480,000 of this excess to purchase 420,000 shares of its common stock in open
market transactions. The remaining excess was used to reduce long-term debt.
Working capital has increased from $1.3 million at June 30, 1996 to $3.0 million
at March 31, 1997. The Company expects to generate enough cash from operations
to meet all obligations and provide for all necessary additions to fixed assets
in the next year.
ACCOUNTING STANDARDS:
The Company will be required to implement Statement of Financial Accounting
Standards "SFAS" No. 128, Earnings Per Share, in the second quarter of 1998. The
Company expects the implementation of SFAS No. 128 will not have a material
impact on its calculation of earnings per share.
The Company will adopt the disclosure-only option of SFAS No. 123,
Accounting for Stock-Based compensation, as of June 30, 1997. The impact of
implementing SFAS No. 123 will not have a material impact on the consolidated
financial statements.
<PAGE>
FORWARD LOOKING STATEMENTS:
Forward-looking statements in this Form 10-Q 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.
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 6. Exhibits and Reports on Form 8-K
a) 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: May 13, 1997 By: \ s \ Ed Strickland
President and Chief
Executive Officer
Date: May 13, 1997 By: \ s \ Dennis D. Sheets
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 57,998
<SECURITIES> 0
<RECEIVABLES> 4,705,179
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 5,222,683
<PP&E> 19,612,558
<DEPRECIATION> 11,981,621
<TOTAL-ASSETS> 13,435,870
<CURRENT-LIABILITIES> 2,230,996
<BONDS> 0
0
5,500
<COMMON> 85,121
<OTHER-SE> 4,453,044
<TOTAL-LIABILITY-AND-EQUITY> 13,435,870
<SALES> 16,728,715
<TOTAL-REVENUES> 16,728,715
<CGS> 10,496,708
<TOTAL-COSTS> 10,496,708
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 445,812
<INCOME-PRETAX> 992,772
<INCOME-TAX> 0
<INCOME-CONTINUING> 992,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 992,772
<EPS-PRIMARY> .12
<EPS-DILUTED> .12
</TABLE>
