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, 1998
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, 1998:
Common Stock, $.01 par value: 7,906,617
<PAGE>
PART 1 -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Valley Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
March
31, 1998 June 30,
(unaudited) 1997
------------ ------------
ASSETS
Current assets:
Cash $ 376,077 $ 200,093
Accounts receivable 5,598,495 5,638,350
Prepaid supplies 486,843 469,839
Prepaid expenses 187,406 160,772
------------ ------------
Total current assets 6,648,821 6,469,054
Property and equipment 7,811,982 7,551,004
Inangible assets 445,250 548,000
------------ ------------
Total assets $ 14,906,053 $ 14,568,058
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 667,624 $ 971,611
Accrued expenses 1,364,252 1,428,834
Current portion of long-term debt 325,699 495,929
------------ ------------
Total current liabilities 2,357,575 2,896,374
Long-term debt 7,621,578 7,235,120
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 (21,266,753) (21,757,089)
Treasury stock, at cost, 605,456 shares (683,008) (683,008)
------------ ------------
4,926,900 4,436,564
------------ ------------
Total liabilities and stockholders' equity $ 14,906,053 $ 14,568,058
============ ============
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
---------------------- -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
Sales $5,865,344 $5,320,539 $17,779,300 $16,728,715
Cost of sales 3,655,422 3,182,877 11,253,032 10,496,708
---------- ---------- ----------- -----------
Gross profit 2,209,922 2,137,662 6,526,268 6,232,007
Selling, general,
and administrative
expenses 1,730,768 1,692,683 5,302,567 5,545,659
Interest expense 135,364 139,624 444,615 445,812
---------- ---------- ----------- -----------
Income from
operations before
gain on settlement
of litigation and
income taxes 343,790 305,355 779,086 240,536
Gain on settlement
of litigation 0 0 0 752,236
---------- ---------- ----------- -----------
Income from
operations before
income taxes 343,790 305,355 779,086 992,772
Income taxes 0 0 0 0
---------- ---------- ----------- -----------
Net income $ 343,790 $ 305,355 $ 779,086 $ 992,772
========== ========== =========== ===========
Earnings per share:
Net earnings per
common share $ .03 $ .02 $ .06 $ .08
========== ========== =========== ===========
Net earnings per
common share --
assuming dilution $ .03 $ .02 $ .06 $ .08
========== ========== =========== ===========
Weighted average
shares used in
computation 7,906,617 8,141,450 7,906,617 8,294,336
========== ========== =========== ===========
See notes to consolidated financial statements.
<PAGE>
Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Nine months ended
March 31
------------------------
1998 1997
---------- ----------
Cash flows from operating activities:
Net income $ 779,086 $ 992,772
Adjustments to reconcile net income to net
cash flows from operating activities:
Depreciation and amortization 2,075,851 2,415,069
Gain on disposition of property and equipment (45,187) (22,756)
(Increase) decrease in assets:
Accounts receivable 39,855 104,540
Prepaid supplies (17,004) (41,966)
Prepaid expenses (26,634) 94,493
Increase (decrease) in liabilities:
Accounts payable (303,987) (114,762)
Accrued expenses (64,582) (1,568,253)
---------- ----------
Cash provided by operating activities 2,437,398 1,859,137
---------- ----------
Cash flows from investing activities:
Additions to property and equipment (2,314,295) (1,043,179)
Proceeds from dispositions of property
and equipment 125,403 152,373
---------- ----------
Cash used by investing activities (2,188,892) (890,806)
---------- ----------
Cash flows from financing activities:
Net payments under revolving line of credit (386,067) (22,445)
Additional borrowings of long-term debt 914,517 0
Payments of long-term debt (312,222) (493,679)
Purchase of treasury shares 0 (480,308)
Payment of preferred stock dividends (288,750) 0
---------- ----------
Cash used by financing activities (72,522) (996,432)
---------- ----------
Increase (decrease) in cash 175,984 (28,101)
Cash at beginning of year 200,093 86,099
---------- ----------
Cash at end of period $ 376,077 $ 57,998
========== ==========
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 22,
1997 for the year ended June 30, 1997.
The financial statements for the periods ended March 31, 1998 and 1997 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 is involved in varius litigation arising in the normal course
of business. Management believes that the ultimate resolution of such
litigation will not have a material adverse effect on the Company's results
of operations, financial position, or cash flows.
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. EARNINGS PER COMMON SHARE:
In February 1997 the FASB issued Statement No. 128, "Earnings Per Share"
("FAS No.128"). FAS No. 128 specifies the computation, presentation, and
disclosure requirements for earnings per share ("EPS") for entities with
publicly held common stock or potential common stock. It replaces the
presentations of primary EPS with the presentation of basic EPS, and
replaces fully diluted EPS with diluted EPS. It also requires dual
presentation of basic and diluted UPS on the face of the income statement
for all entities with complex capital structures, and requires a
reconciliation of the basic EPS computation to the diluted EPS calculation.
FAS No. 128 is effective for financial statements for periods ending after
December 15, 1997.
Earnings per share of common stock for the periods ended March 31, 1998
have been calculated according to the guidelines of FAS No. 128. Earnings
per share of common stock for the periods ended March 31, 1997 have been
restated to conform with FAS No. 128, including the effect of the preferred
stock dividend requirement.
Basic earnings per common share are computed by dividing net income less
preferred stock dividend requirements ($96,250 per quarter for all periods
presented) for the period by the weighted average number of shares of
common stock outstanding for the period. Diluted earnings per common share
do not vary from basic earnings per share for any of the periods presented
because there were no dilutive potential shares of common stock
outstanding. The dilutive effect of outstanding potential shares of common
stock is computed using the treasury stock method.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
RESULTS OF OPERATIONS:
THREE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 1997:
Sales in the three months ended March 31,1998 increased by $545,000, or 10%,
from the comparable period in 1997. Sales of the Company's ultra-high pressure
("UHP") waterjetting services decreased 6% in the current quarter, totaling $2.7
million, and represented 46% of total sales. In 1997, UHP services amounted to
54% of total sales for the quarter. The decrease was due to several large jobs
in 1997 that were not repeated in 1998. Sales of vacuum services in 1998
increased by $498,000, or 40%, from 1997. This increase is largely due to
increased volume in the steel industry, from both new and existing customers.
Gross profit as a percentage of revenue for the quarter decreased from 40% in
1997 to 38% in 1998. The drop was due to lower sales in the UHP service line,
which is the Company's most profitable. In dollars, gross profit increased 3% in
1998 from 1997. Selling, general and administrative expenses increased by 2% in
1998 from the prior year, and represented 30% of sales in the current quarter.
In 1997 these costs amounted to 32% of sales. Interest expense decreased 3% in
the quarter, and amounted to 2% of sales in 1998 as compared to 3% in 1997.
The Company had income from operations of $344,000 in the three months ended
March 31, 1998, or 6% of sales. This is an improvement of 13% over the same
period in 1997, when income from operations totaled $305,000.
NINE MONTHS ENDED MARCH 31, 1998 AS COMPARED TO THE NINE MONTHS ENDED
MARCH 31, 1997:
Sales in the nine month period ended March 31, 1998 increased 6% over the
comparable period in 1997. There were no significant shifts in sales for the
various service lines. UHP sales represented 47% of total sales in 1998 and 49%
in 1997.
Due to the unchanged mix of sales, gross margin as a percentage of sales was 37%
in both years. Selling, general and administrative expenses decreased by 4% in
1998 from the comparable period in 1997 due to a reorganization of the corporate
staff. Interest expense did not change materially between the periods and
totaled 3% of sales in both years.
The Company had income from operations of $779,000 in the nine months ended
March 31, 1998, as compared to $241,000 in 1997. Income from operations totaled
4% of sales in 1998, compared to 1% in 1997, and in dollars increased 224%.
1997 net income was increased by a one-time gain of $752,000 on settlement of
litigation.
<PAGE>
FINANCIAL CONDITION:
The Company's financial position at March 31, 1998 has not changed materially
from June 30, 1997. Working capital increased by $718,000 during the nine
months, and totaled $4.3 million at the end of the period. The Company purchased
$2.3 million of additions to property and equipment in 1998, as compared to $1.0
million in the same period in 1997. $650,000 of the current additions are for
the purchase of the Company's headquarters facility in Ohio, as well as a
regional facility in Houston. The remainder of the additions are for equipment.
At March 31, 1998 the Company had $676,000 available under its long-term
revolving line of credit, which expires in July 2000.
YEAR 2000 ISSUE:
The Year 2000 issue is the result of computer programs being written using two
digits rather than four digits to define the applicable year. This could result
in a system failure or miscalculations if a computer program recognizes a date
of "00" as the year 1900 instead of 2000. The Company has assessed the Year 2000
Issue with regard to its internal financial and operational systems as well as
its external financial vendors and determined that the costs to complete the
related compliance will not materially affect future financial results. The
company anticipates its Year 2000 Issues to be completed and tested by December
31, 1998.
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.
<PAGE>
PART II -- OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits: None
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: April 29, 1997 By: \ s \ Ed Strickland
President and Chief
Executive Officer
Date: April 29, 1997 By: \ s \ Dennis D. Sheets
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 376,077
<SECURITIES> 0
<RECEIVABLES> 5,723,495
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,648,821
<PP&E> 19,972,979
<DEPRECIATION> 12,496,997
<TOTAL-ASSETS> 14,906,053
<CURRENT-LIABILITIES> 2,357,575
<BONDS> 0
0
5,500
<COMMON> 85,121
<OTHER-SE> 4,836,279
<TOTAL-LIABILITY-AND-EQUITY> 14,906,053
<SALES> 17,779,300
<TOTAL-REVENUES> 17,779,300
<CGS> 11,253,032
<TOTAL-COSTS> 11,253,032
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 444,615
<INCOME-PRETAX> 779,086
<INCOME-TAX> 0
<INCOME-CONTINUING> 779,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 779,086
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
