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 September 30, 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 October 01, 1998:
Common Stock, $.01 par value: 7,906,617
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PART 1 -- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Valley Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
September
30, 1998 June 30,
ASSETS (unaudited) 1998
----------- -----------
Current assets:
Cash $ 48,916 $ 207,492
Accounts receivable 7,163,059 5,740,394
Prepaid supplies 550,833 522,992
Prepaid expenses 265,064 155,439
----------- -----------
Total current assets 8,027,872 6,626,317
Property and equipment 9,794,261 8,896,650
Intangible assets 376,750 411,000
----------- -----------
Total assets $18,198,883 $15,933,967
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 722,304 $ 726,054
Accrued expenses 1,756,807 1,610,470
Current portion of long-term debt 845,425 659,257
----------- -----------
Total current liabilities 3,324,536 2,995,781
Long-term debt 8,589,720 7,584,593
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value;
authorized 2,000,000 shares, issued
and outstanding 55,000 shares 5,500 5,500
Common stock, $.01 par value;
authorized 12,000,000 shares,
issued and outstanding 8,512,073 shares 85,121 85,121
Paid-in capital 26,786,040 26,786,040
Accumulated deficit (19,909,026) (20,840,060)
Treasury stock, at cost, 605,456 shares (683,008) (683,008)
----------- -----------
6,284,627 5,353,593
----------- -----------
Total liabilities and stockholders' equity $18,198,883 $15,933,967
=========== ===========
See notes to consolidated financial statements.
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Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(Unaudited)
Three months ended
September 30
--------------------------
1998 1997
----------- -----------
Sales $ 7,597,337 $ 5,855,953
Cost of sales 4,643,927 3,656,139
----------- -----------
Gross profit 2,953,410 2,199,814
Selling, general, and
administrative expenses 1,785,594 1,741,102
Interest expense 140,532 154,219
----------- -----------
Income before income taxes 1,027,284 304,493
Income taxes - -
----------- -----------
Net income $ 1,027,284 $ 304,493
=========== ===========
Net income per common share:
Basic and diluted $ .12 $ .03
=========== ===========
Weighted average shares
used in computation 7,906,617 7,906,617
=========== ===========
See notes to consolidated financial statements.
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Valley Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
Three months
ended September 30
--------------------------
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 1,027,284 $ 304,493
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 720,122 710,698
(Gain) loss on disposition of
property and equipment (600) 4,311
(Increase) decrease in assets:
Accounts receivable (1,422,665) 266,288
Prepaid supplies (27,841) 129
Prepaid expenses (109,625) (161,575)
Increase (decrease) in liabilities:
Accounts payable (3,750) (301,682)
Accrued expenses 146,337 (228,751)
----------- -----------
Cash provided by operating activities 329,262 593,911
----------- -----------
Cash flows from investing activities:
Additions to property and equipment (1,583,483) (724,984)
Proceeds from dispositions of property
and equipment 600 35,737
----------- -----------
Cash used by investing activities (1,582,883) (689,247)
----------- -----------
Cash flows from financing activities:
Net borrowings (payments) under revolving
line of credit 179,618 (162,540)
Additional long-term borrowings 1,088,403 400,000
Payments of long-term debt (76,726) (112,968)
Payment of dividends (96,250) (96,250)
----------- -----------
Cash provided by financing activities 1,095,045 28,242
----------- -----------
Decrease in cash (158,576) (67,094)
Cash at beginning of year 207,492 200,093
----------- -----------
Cash at end of period $ 48,916 $ 132,999
=========== ===========
See notes to consolidated financial statements.
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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 25,
1998 for the years ended June 30, 1998.
The financial statements for the periods ended September 30, 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. 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.
3. 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 effect on the Company's
operations, cash flows or financial position.
4. INCOME PER COMMON SHARE:
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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
RESULTS OF OPERATIONS:
Three months ended September 30, 1998 as compared to the three months ended
September 30, 1997:
Sales in the three months ended September 30, 1998 increased by $1.7 million, or
30%, from the comparable period in 1997. The increase was partially attributable
to the vacuum and waterblast contract with FirstEnergy Corp that was awarded to
the Company in May 1998. Revenues from this contract began in late June 1998.
The sales increase also resulted from the Company's work in New York abating
lead paint on the exterior of masonry buildings.
The FirstEnergy Corp. work had a significant effect on the mix of revenues in
the three primary service lines of the Company. Vacuum and waterblasting sales
increased by 31% and 35%, respectively, from 1997. Ultra-high pressure sales
decreased by 7% in 1998 and represented 40% of total sales for the quarter, as
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opposed to 49% in 1997. Despite this drop in what has historically been the
Company's most profitable service line, the Company's gross margin in 1998
increased to 39% of sales from 38% in 1997. Increased labor costs in 1998
resulting from the higher volumes of vacuum and waterblast sales were more than
offset by lower repair and maintenance costs overall.
Selling, general and administrative expenses increased by $44,000, or 3%, in
1998 from 1997, and amounted to 24% of sales in the current quarter compared to
30% in the prior year. Interest expense decreased 9% in 1998 from 1997, and
amounted to 2% and 3% of sales, respectively.
The Company had net income of $1 million in the quarter ended September 30,
1998, or $.12 per share (basic and diluted). This is an increase of 237% over
the comparable period in 1997, which had net income of $300,000, or $.03 per
share (basic and diluted).
LIQUIDITY AND CAPITAL RESOURCES:
Working capital increased from $3.6 million at June 30, 1998 to $4.7 million at
September 30, 1998. Most of this increase is attributable to higher accounts
receivable resulting from increased sales in the first quarter of fiscal 1999
from the fourth quarter of the year ended June 30, 1998. Cash provided from
operating activities decreased from $594,000 in the quarter ended September 30,
1997 to $329,000 in the comparable period in 1998. Higher net income in 1998 was
more than offset by the increase in accounts receivable. This is entirely due to
increased sales, as the days' sales outstanding has not changed materially from
September 30, 1997 to September 30, 1998.
Additions to property and equipment totaled $1.6 million in 1998, compared to
$700,000 in 1997. The increased capital spending is for new equipment, primarily
vacuum trucks used to perform the FirstEnergy Corp. work. Five-year capital
leases with interest at 8.5% financed $1.1 million of the additions. The
remainder was purchased from working capital.
At September 30, 1998 the Company had $1.6 million of credit available under its
revolving line of credit that expires in July 2000. Capital expenditures for the
remainder of fiscal 1999 will be partially funded with capital leases under
terms similar to those described above, and partially by working capital. The
Company does not anticipate difficulty in obtaining any necessary financing for
these expenditures. The Company expects to have adequate cash flows from
operations to meet all obligations when due.
ASSET PURCHASE AGREEMENT:
As disclosed in the Company's Form 10-K dated September 25, 1998 and a
Preliminary Copy of a Schedule 14c Information Statement filed on October 13,
1998, the Company entered into an Asset Purchase Agreement on September 8, 1998
with HydroChem Industrial Services, Inc. ("HydroChem") pursuant to which
HydroChem plans to purchase substantially all of the Company's assets and assume
substantially all of the Company's outstanding liabilities. This transaction is
expected to close in December 1998.
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
third parties with which the Company has material relationships.
The Company has completed all significant remediation of Year 2000 issues for
its internal financial and operational systems, including both information
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technology ("IT") systems and non-IT systems that include embedded technology
such as microcontrollers. The total cost for this remediation effort was less
than $100,000, and was expensed as incurred.
The Company has identified third parties with which it has material
relationships with respect to the Year 2000 issue. These parties are primarily
large financial, telecommunication and information processing entities. All such
third parties have reported to the Company that they are on schedule with their
projects to remediate Year 2000 issues, and that they anticipate being Year 2000
compliant on a timely basis. The Company intends to continue to monitor the
progress of these third parties and will develop contingency plans during Fiscal
1999 in the event one or more of these third parties fail to remediate their
Year 2000 issues in such a way as to materially affect the operations of the
Company. At this time the Company believes the risk of such third party failures
having a material impact on the Company's operations is remote.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes In Securities And Use Of Proceeds
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission Of Matters To A Vote Of Security Holders
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits And Reports On Form 8-K
(a) Exhibits:
2.1 Asset Purchase Agreement between the Company and HydroChem Industrial
Services, Inc.(filed as Exhibit 2.1 to the Company's Form 10-K dated
September 28, 1998, and incorporated herein by reference)
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3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Registration Statement on Form S-1, and
incorporated herein by reference)
3.2 Certificate of Amendment of Certificate of Incorporation of the Company
(filed as Exhibit 3.2 to the Company's Form 10-K dated September 25,
1995, and incorporated herein by reference)
3.3 Bylaws of the Company, as amended, (filed as Exhibit 3.2 to the
Company's Form 10-K dated September 25, 1995, and incorporated herein
by reference)
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the period.
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: October 29, 1998 By: \s\ Ed Strickland
Ed Strickland
President and Chief Executive Officer
Date: October 29, 1998 By: \s\ Dennis D. Sheets
Dennis D. Sheets
Chief Financial Officer
8
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<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1998
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<ALLOWANCES> 125,000
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<PP&E> 20,473,679
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