<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 December 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 January 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
December
31, 1997 June 30,
ASSETS (unaudited) 1997
------ ------------ ------------
Current assets:
Cash ...................................... $ 116,192 $ 200,093
Accounts receivable ....................... 5,883,074 5,638,350
Prepaid supplies .......................... 460,576 469,839
Prepaid expenses .......................... 234,306 160,772
------------ ------------
Total current assets ................. 6,694,148 6,469,054
Property and equipment ......................... 7,794,087 7,551,004
Intangible assets .............................. 479,500 548,000
------------ ------------
Total assets ......................... $ 14,967,735 $ 14,568,058
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable .......................... $ 744,787 $ 971,611
Accrued expenses .......................... 1,346,970 1,428,834
Current portion of long-term debt ......... 363,863 495,929
------------ ------------
Total current liabilities ............ 2,455,620 2,896,374
Long-term debt ................................. 7,832,755 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 ....................... (21,514,293) (21,757,089)
Treasury stock, at cost, 175,456 shares at
December 31, 1996 and 105,456 at June
30, 1996 ............................... (683,008) (683,008)
------------ ------------
4,679,360 4,436,564
------------ ------------
Total liabilities and stockholders' equity $ 14,967,735 $ 14,568,058
============ ============
See notes to consolidated financial statements.
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Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended Six months ended
December 31 December 31
------------------------ --------------------------
1997 1996 1997 1996
----------- ----------- ------------ ------------
Sales ................. $ 6,058,003 $ 5,132,772 $ 11,913,956 $ 11,408,176
Cost of sales ......... 3,941,471 3,405,343 7,597,610 7,313,831
----------- ----------- ------------ ------------
Gross profit ...... 2,116,532 1,727,429 4,316,346 4,094,345
Selling, general, and
administrative
expenses ............. 1,830,697 1,897,490 3,571,799 3,852,976
Interest expense ...... 155,032 145,102 309,251 306,188
----------- ----------- ------------ ------------
Income (loss) from
operations before gain
on settlement of
litigation and income
taxes ................ 130,803 (315,163) 435,296 (64,819)
Gain on settlement of
litigation ........... - 752,236 - 752,236
----------- ----------- ------------ ------------
Income from operations
before income taxes .. 130,803 437,073 435,296 687,417
Income taxes .......... - - - -
----------- ----------- ------------ ------------
Net income ....... $ 130,803 $ 437,073 $ 435,296 $ 687,417
=========== =========== ============ ============
Earnings per share:
Net earnings per
common share ....... $ .00 $ .04 $ .03 $ .06
=========== =========== ============ ============
Net earnings per
common share --
assuming dilution .. $ .00 $ .04 $ .03 $ .06
=========== =========== ============ ============
Weighted average
shares ............. 7,906,617 8,347,704 7,906,617 8,369,116
=========== =========== ============ ============
See notes to consolidated financial statements.
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Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Six months ended
December 31
-------------------------
1997 1996
---------- ----------
Cash flows from operating activities:
Net income ..................................... $ 435,296 $ 687,417
Adjustments to reconcile net income to net cash
flows from operating activities:
Depreciation and amortization ............... 1,395,582 1,660,410
Gain on disposition of property and equipment (12,688) (14,502)
(Increase) decrease in assets:
Accounts receivable ................... (244,724) 633,941
Prepaid supplies ...................... 9,263 1,961
Prepaid expenses ...................... (73,534) 14,401
Increase (decrease) in liabilities:
Accounts payable ...................... (226,824) (156,807)
Accrued expenses ...................... (81,864) (1,178,592)
---------- ----------
Cash provided by operating activities ...... 1,200,507 1,648,229
---------- ----------
Cash flows from investing activities:
Additions to property and equipment ............ (1,610,213) (886,627)
Proceeds from dispositions of property and
equipment .................................... 52,736 98,214
---------- ----------
Cash used by investing activities ........... (1,557,477) (788,413)
---------- ----------
Cash flows from financing activities:
Net borrowings (payments) under revolving line
of credit .................................... 97,678 (390,387)
Additional borrowings of long-term debt ........ 578,517 -
Payments of long-term debt ..................... (210,626) (388,013)
Purchase of treasury shares .................... - (78,059)
Payment of dividends ........................... (192,500) -
---------- ----------
Cash provided (used) by financing activities 273,069 (856,459)
---------- ----------
(Decrease) increase in cash ....................... (83,901) 3,357
Cash at beginning of year ......................... 200,093 86,099
---------- ----------
Cash at end of period ............................. $ 116,192 $ 89,456
========== ==========
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 years ended June 30, 1997.
The financial statements for the periods ended December 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 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 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 o basic and diluted EPS 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 December 31, 1997
have been calculated according to the guidelines of FAS No.128 and earnings
per common share of common stock for the periods ended December 31, 1996
have been restated to conform with FAS No. 128. Earnings per common share
for the periods ended December 31, 1996 have also been restated from the
amounts previously reported to include the effect of the preferred stock
dividend requirement.
<PAGE>
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 common 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
Three months ended December 31, 1997 as compared to the three months ended
December 31, 1996:
Sales in the three months ended December 31, 1997 increased by $925,000, or 18%,
from the comparable period in 1996. Sales of ultra-high pressure ("UHP")
waterjetting services increased 17% in the current quarter, totaling $2.7
million, and represented 45% of total sales. In 1996, UHP services amounted to
41% of total sales for the quarter.
Gross margin as a percentage of revenue for the quarter increased from 33.7% in
1996 to 34.9% in 1997. This improvement is primarily due to the increase in
sales in the UHP service line, which is the Company's most profitable. Selling,
general and administrative expenses decreased by 3.5% in 1997 from the prior
year, and represented 30% of sales in the current quarter. In 1996 these costs
amounted to 37% of sales. Most of the decrease in these expenses is attributable
to efficiencies realized by reorganization in the corporate staff. Interest
expense increased 7% in the quarter, but amounted to 2.6% of sales in 1997 as
compared to 2.8% in 1996.
The Company had net income from operations of $131,000 in the three months ended
December 31, 1997, as compared to a loss from operations of $315,000 in 1996.
1996 net income was increased by a one-time gain of $752,000 on settlement of
litigation.
Six months ended December 31, 1997 as compared to the six months ended
December 31, 1996:
Sales in the six month period ended December 31, 1997 increased 4% over the
comparable period in 1996. There were no significant shifts in sales of the
various service lines. UHP sales represented 47% of total sales in both years.
Due to the unchanged mix of sales, gross margin as a percentage of sales was 36%
in both years. Selling, general and administrative expenses decreased by 7% in
1997 from the comparable period in 1996 due to the corporate staff
reorganization. Interest expense did not change materially between the periods
and totaled 2.6% of sales in 1997 and 2.7% in 1996.
<PAGE>
The Company had income from operations of $435,000 in the six months ended
December 31, 1997, as compared to a loss from operations oof $65,000 in 1996.
1996 net income was increased by a one-time gain of $752,000 on settlement of
litigation.
FINANCIAL CONDITION:
The Company's financial position at December 31, 1997 has not changed materially
from June 30, 1997. Working capital increased by $666,000 during the six months
and totaled $4.2 million at the end of the period. The Company purchased $1.6
million of additions to property and equipment in 1997, as compared to $900,000
in the same period in 1996. $625,000 of the current additions are for the
purchase of the Company's headquarters facility as well as a regional facility
in Houston. The remainder of the additions are for equipment. At December 31,
1997 the Company had $200,000 available under its long-term revolving line of
credit, which expires in July 2000.
FORWARD LOOKING STATEMENTS:
Forward looking statements in this Form 10-Q are made pursuant to the safe
harbor provisions ofthe 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 from those projected. Readers
are cautioned not to place undue reliance on these forward-looking statments,
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 servies, the
competitive pricing environment of the industrial cleaning service industry, the
cost and effectiveness ofplanned 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 4. Submission of Matters to a Vote of Security Holders:
The annual meeting of stockholders of the Company was held on November 3, 1997.
Matters voted upon at the meeting were as follows:
For the election of directors:
Allen O. Kinzer: For: 7,392,946 Withheld: 3,800
Joe M. Young: For: 7,382,408 Withheld: 14,338
On the ratification of the appointment of Coopers & Lybrand LLP as
independent auditors for the fiscal year ending June 30, 1998:
For: 7,390,521 Against: 3,600 Abstained: 2,625
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: February 10, 1998 By: \s\ Ed Strickland
President and Chief Executive Officer
Date: February 10, 1998 By: \s\ Dennis D. Sheets
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 116,192
<SECURITIES> 0
<RECEIVABLES> 6,008,074
<ALLOWANCES> 125,000
<INVENTORY> 0
<CURRENT-ASSETS> 6,694,148
<PP&E> 19,729,789
<DEPRECIATION> 12,075,802
<TOTAL-ASSETS> 14,967,735
<CURRENT-LIABILITIES> 2,455,620
<BONDS> 0
0
5,500
<COMMON> 85,121
<OTHER-SE> 4,588,739
<TOTAL-LIABILITY-AND-EQUITY> 14,967,735
<SALES> 11,913,956
<TOTAL-REVENUES> 11,913,956
<CGS> 7,597,610
<TOTAL-COSTS> 7,597,610
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 309,251
<INCOME-PRETAX> 435,296
<INCOME-TAX> 0
<INCOME-CONTINUING> 435,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 435,296
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
