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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, 1996
[ ] 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 34-1493345
(State or other jurisdiction of (IRS Employer Identification Number)
incorporation or organization)
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 August 30, 1996: (a) 8,512,073 shares of Common Stock, $.01 par
value, of the registrant were outstanding; (b) 2,692,390 shares of Common Stock
were held by non-affiliates; and (c) the aggregate market value of the Common
Stock held by non-affiliates was $2,692,390, based on the closing sale price of
$1.00 per share on August 30, 1996.
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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 by 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 and
encrustations 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 water blasting, 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, as well as 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
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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)
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. The Company's equipment is operated by teams of
two or more persons. 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.
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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 water cleaning 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
the 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
------------------
1996 1995 1994
---- ---- ----
Dollars (in thousands):
UHP ............................... $ 9,882 $ 9,329 $ 7,554
Vacuum ............................ 6,788 8,450 12,400
Water Blasting .................... 3,958 4,763 5,562
Other ............................. 1,247 1,689 1,978
------- ------- -------
Total ..................... $21,875 $24,231 $27,494
======= ======= =======
Percentage:
UHP ............................... 45.2% 38.5% 27.5%
Vacuum ............................ 31.0% 34.9% 45.1%
Water Blasting .................... 18.1% 19.6% 20.2%
Other ............................. 5.7% 7.0% 7.2%
----- ----- -----
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, 1996, the Company had sales to
approximately 400 different customers. Various plants of E.I. Dupont (which make
independent purchasing decisions) made up 14% of Fiscal 1996 net sales. Another
customer, Alcoa Alumina, made up 10% of Fiscal 1996 net sales. Four other
customers each accounted for 5% of Fiscal 1996 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
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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
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 otherwise upon less than
two weeks advance notice. Accordingly, the Company does not have any 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
45 days. The Company's average days sales outstanding in Fiscal 1996 were 70.
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.
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Competition
The market for industrial cleaning services is very 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; however, there are a few large national and
regional competitors that have significantly greater resources than the Company.
In recent years there has been a significant concentration of resources in the
industrial cleaning industry. In July 1993, Rust International Inc. ("Rust")
acquired EnClean, Inc., which had been one of the Company's major competitors.
Rust, an engineering, construction and environmental cleanup firm, is controlled
by WMX Technologies, Inc. Other significant competitors include Allwaste Inc.,
C.H. Heist Corp., and Hydro-Chem Industrial Services.
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 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".
The Company relies heavily on repeat customers, and uses both the
written and verbal referrals of its satisfied customers to help generate new
customers and branch locations for its sales growth. 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 Company believes that its relationships with
its customers have been good.
Proprietary Technology, Patents, Trademarks and Equipment
The Company holds three patents 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. 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. These patents expire in 2004 and 2005. The patent being
licensed to the Company terminates in 2000. In connection with the purchase of
the above technologies and patents, the Company also received from the sellers
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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 patents
pending.
Most of the technology and the equipment used in providing conventional
cleaning services is readily available in the industry. The UHP waterjetting
services provided by the Company are dependent upon the Company's proprietary
technologies, and self-designed equipment, tools and accessories. This
technology includes not only the techniques used by its service personnel in
physically providing services, but is inherent in the design of the component
parts of the equipment used by the Company in providing those 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
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 logo have been registered as service marks with
the United States Patent and Trademark Office. Final registration approval was
granted on June 25, 1991.
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.
9
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 waste water into sewer systems. These
rules can vary widely by locale. The Company has developed systems which 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,
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
which 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 August 31, 1996, the Company employed 355 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.
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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 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
In addition to ordinary routine litigation incidental to its business,
the Company is involved in the litigation set forth below:
In October 1992, after learning of certain alleged improprieties with
respect to the books and records of the Company, its Audit Committee, with the
consent of the Board of Directors, retained outside counsel to review the
allegations. As a result of the findings of this review, the Company filed suit
on September 2, 1993, with an Amended Complaint being filed on December 6, 1993,
and a Second Amended and Revised Complaint being filed on October 3, 1994, and a
First Consolidated Complaint being filed on April 10, 1996 in the United States
District Court for the Northern District of Ohio, Eastern Division, against
certain of its former officers and directors, as well as other parties. The suit
asserts various claims, including common law fraud, common law conversion,
breach of fiduciary duty, breach of contract, professional malpractice, and
contribution and indemnity, against various of the defendants.
On or about December 21, 1995, defendants Eugene Valentine, Cynthia
Valentine, Michelle Valentine and General Maintenance, Inc. filed, in the
Company's lawsuit, an answer to the Second Amended and Revised Complaint and a
counterclaim against the Company as well as against Joe M. Young who is a member
of the Company's Board of Directors and of the Board's Audit Committee, but who
has not been brought in as a party to this litigation to date. The counterclaim
asserts claims against the Company and Mr. Young based upon breach of employment
agreement, fraudulent misrepresentations, common law conversion, breach of
contract, unjust enrichment, libel, abuse of process and civil conspiracy. The
counterclaim seeks compensatory and punitive damages, and an award of interest,
attorneys' fees, costs and disbursements. The Company filed a motion to dismiss
all counts alleged against the Company and Mr. Young. On March 19, 1996 the
Federal District Court granted the Company's motion to dismiss and dismissed all
claims asserted by the defendants except for the claims of breach of contract
and unjust enrichment.
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On September 21, 1993, Rollins Investment Fund, the Company's majority
stockholder, filed a lawsuit in the United States District Court, Northern
District of Ohio, Eastern Division, against Eugene R. Valentine and Nicholas J.
Pace. This suit asserts claims against the defendants based upon the federal
securities laws, common law fraud and breach of contract.
Formal discovery in both cases is nearly complete, and is expected to
conclude in the next month. A trial date of December 2, 1996 has been scheduled
for these cases.
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, 1996.
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 1995:
July 1, 1994 - September 30, 1994 ............... 2 1/4 1 1/2
October 1, 1994 - December 31, 1994 ............. 2 1/8 1 1/4
January 1, 1995 - March 31, 1995 ................ 2 1/8 1 1/8
April 1, 1995 - June 30, 1995 ................... 1 1/2 7/8
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
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 loan agreement with its majority
stockholder.
Based on information furnished by certain brokerage firms which are
record holders of the Company's Common Stock, the Company has in excess of 800
beneficial owners of its Common Stock.
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ITEM 6. SELECTED FINANCIAL DATA
Dollars in thousands, except per share data:
1996 1995 1994 1993 (1) 1992 (1)
---- ---- ---- -------- --------
Sales .......................$ 21,875 $ 24,231 $ 27,494 $ 29,098 $ 26,221
Gross Profit ................ 6,853 8,562 6,291 4,093 3,639
Selling, general and
administrative expenses ... 7,254 7,155 8,830 10,708 5,331
Litigation settlements
and related fees .......... 1,351 3,803 500
Restructuring charges ....... 3,548 2,999
Interest expense ............ 572 895 1506 1118 440
Net income (loss) .......... (973) 512 (8,539) (14,535) (2,090)
Income (loss) per share .... (.11) .06 (1.31) (2.91) (.62)
Total assets ................ 15,123 15,704 19,740 27,323 30,305
Total long term debt ........ 7,021 5,858 10,194 9,596 6,112
Total stockholders' equity .. 4,031 5,412 (251) 4,260 11,093
(1) The years ended June 30, 1993 and 1992 have 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.
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
The Company's sales have decreased in each of the last three fiscal
years. The decrease is primarily in the vacuum and waterblasting service lines,
which dropped by $4.7 million from Fiscal 1994 to Fiscal 1995, or 26%, and by
$2.5 million from Fiscal 1995 to Fiscal 1996, or 19%. The Company also exited
several minor service lines during the period.
Competition in vacuum and waterblasting services has increased in the
last several years. There has been consolidation in the industry and several
competitors, which are significantly larger than the Company, have lowered rates
to gain market share, especially in the Gulf Coast region. In addition, the
Company's customers in this region are largely in the petroleum refining
industry, which has postponed and canceled a significant amount of plant
maintenance in the past year, due to cost pressures and high demand. The Company
has generally chosen not to compete on price and has emphasized its UHP service
line, where it has a clear technological advantage. UHP sales have increased in
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each of the past three years and made up 45% of total sales in Fiscal 1996,
compared to 38% in Fiscal 1995 and 27% in Fiscal 1994. The UHP service line is
also the Company's most profitable.
The Company plans to continue emphasizing UHP 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 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.
After increasing from 23% of sales in Fiscal 1994 to 35% in Fiscal
1995, the Company's gross margin percentage dropped to 31% of sales in Fiscal
1996. 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 Fiscal 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
Fiscal 1996 from the prior year. Due to lower revenues, these expenses amounted
to 33% of sales in Fiscal 1996, compared to 29% in Fiscal 1995. In Fiscal 1994
these expenses were 32% of sales.
Interest expense has dropped significantly over the past three years.
It totaled $1.5 million in Fiscal 1994, $894,000 in Fiscal 1995, and $572,000 in
Fiscal 1996. This decrease is due to refinancing under more favorable terms,
conversion of debt to equity, and positive cash flow from operations that was
used to pay down debt.
The Company charged operations $1.4 million in Fiscal 1994 for costs
and expenses incurred to settle litigation, and $3.5 million for restructuring
charges for costs associated with closing branches and exiting several
unprofitable service lines. No such costs were incurred in Fiscal 1995 and 1996.
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)
9/30/94 12/31/94 3/31/95 6/30/95 9/30/95 12/31/95 3/31/96 6/30/96
------- -------- ------- ------- ------- -------- ------- -------
Sales $6,656 $5,822 $5,871 $5,882 $5,888 $5,611 $4,590 $5,786
Gross profit 2,268 2,188 2,004 2,102 2,046 1,934 963 1,910
Net income
(loss) 94 111 55 252 131 41 (1,123) (22)
Income (loss)
per share $ .01 $ .01 $ .01 $ .03 $ .02 $ .00 $ (.13) $ .00
Liquidity and Capital Resources
Working capital increased from $500,000 at June 30, 1995 to $1.3
million at June 30, 1996. Cash generated from operations totaled $504,000 in
Fiscal 1996, compared to $2.85 million in Fiscal 1995. In Fiscal 1994,
operations used $1.4 million of cash.
14
Additions to property and equipment were $2.5 million in Fiscal 1996,
compared to $1.3 million in Fiscal 1995 and $700,000 in Fiscal 1994. All 1996
additions were financed through operations and borrowings from the Company's
revolving line of credit, which expires in July, 1998. The Company anticipates
spending less on additions to property and equipment in Fiscal 1997 than in
Fiscal 1996.
The Company did not pay the quarterly dividend, which totaled $96,000,
on the Series C Preferred Stock for the quarter ended June 30, 1996. The
Company's Board of Directors has decided not to pay this dividend, which is
cumulative, until the Company's earnings have improved sufficiently. The Company
expects to have adequate cash flows from operations to meet all obligations in
Fiscal 1997, as well as to provide for all necessary capital expenditures.
Accounting Standards
The Company adopted Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes", as of July 1, 1993. The new standard did not have
a material effect on the consolidated financial statements.
During Fiscal 1996, the Company adopted the provisions of Statement of
Financial Accounting Standards ("SFAS") No.121 - "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of". The adoption
of SFAS No. 121 had no significant effect on the consolidated financial
statements.
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123 - "Accounting for Stock-Based Compensation" effective for transactions
entered into after December 15, 1996. This standard provides new accounting
treatment for stock-based compensation programs, but it provides companies the
option of continuing the previous accounting method and providing footnote
disclosure of the impact of the new treatment. Management intends to adopt the
disclosure only provisions in Fiscal 1997. Management does not believe the
adoption of this standard will have a significant impact on the consolidated
financial statements of the Company.
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.
15
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.
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, 1996 and 1995.
Consolidated Statements of Income for years ended June 30, 1996,
1995 and 1994.
Consolidated Statements of Stockholders' Equity for the years
ended June 30, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
16
(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)
10.7 Securities Purchase 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)
17
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 between the
Registrant and 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)
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.
(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.
18
(12) Hereby incorporated by reference to with the filing of the Registrant's
Form 8-K dated June 29, 1994.
(13) This is a compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K.
(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) Included as an exhibit in this Form 10-K.
Reports on Form 8-K filed during the three months ended June 30, 1996
None.
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 24, 1996
\s\ Dennis D. Sheets Vice President, Chief Financial September 24, 1996
Officer, Treasurer and Secretary
\s\ Allen O. Kinzer Director September 24, 1996
\s\ Joe M. Young Director September 24, 1996
19
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Number
REPORT OF INDEPENDENT ACCOUNTANTS 20
CONSOLIDATED BALANCE SHEETS - June 30, 1996 and 1995 21
CONSOLIDATED STATEMENTS OF INCOME - Years ended June
30, 1996, 1995 and 1994 22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years
ended June 30, 1996, 1995 and 1994 23
CONSOLIDATED STATEMENTS OF CASH FLOWS - Years ended
June 30, 1996, 1995 and 1994 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25-33
All schedules are omitted because they are not required under the
instructions, are inapplicable, or the information is included elsewhere
in the financial statements.
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, 1996 and 1995, and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended June 30, 1996. 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, 1996 and 1995 and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Akron, Ohio
September 11, 1996
21
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 1996 and 1995
1996 1995
---- ----
ASSETS
Current assets:
Cash ....................................... $ 86,099 $ 228,530
Accounts receivable ........................ 4,684,719 4,026,406
Prepaid supplies ........................... 443,446 459,589
Prepaid expenses ........................... 193,587 212,509
------------ ------------
Total current assets .................... 5,407,851 4,927,034
Property and equipment ......................... 9,029,694 9,954,981
Intangible assets .............................. 685,000 822,000
------------ ------------
Total assets ......................... $ 15,122,545 $ 15,704,015
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................... $ 756,672 $ 537,832
Accrued expenses ........................... 2,583,966 3,195,014
Current portion of long-term debt .......... 729,506 701,701
------------ ------------
Total current liabilities ............... 4,070,144 4,434,547
Long-term debt ................................. 7,021,200 5,857,536
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.10 par value; authorized
2,000,000 shares, issued and outstanding
55,000 at June 30, 1996 and 75,000 at
June 30, 1995............................. 5,500 7,500
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 26,784,040
Accumulated deficit ........................ (22,726,822) (21,464,729)
Treasury stock, at cost, 105,456 shares .... (118,638)
------------ ------------
4,031,201 5,411,932
------------ ------------
Total liabilities and stockholders' equity $ 15,122,545 $ 15,704,015
============ ============
The accompanying notes are an integral part of these financial statements.
22
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Income
for the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Sales ......................... $ 21,874,776 $ 24,230,858 $ 27,493,724
Cost of sales ................. 15,021,953 15,668,561 21,203,153
------------ ------------ ------------
Gross profit ............... 6,852,823 8,562,297 6,290,571
------------ ------------ ------------
Selling, general, and
administrative expenses ...... 7,254,467 7,155,585 8,830,109
Litigation settlements
and related fees ............. 1,351,405
Restructuring charges ......... 3,547,522
Interest expense .............. 571,700 894,583 1,505,514
------------ ------------ ------------
7,826,167 8,050,168 15,234,550
------------ ------------ ------------
(Loss) income before
provision for income taxes . (973,344) 512,129 (8,943,979)
Income tax benefit ......... 405,000
------------ ------------ ------------
Net (loss) income ......... . $ (973,344) $ 512,129 $ (8,538,979)
============ ============ ============
(Loss) income per share ... $ (.11) $ .06 $ (1.31)
============ ============ ============
Weighted average shares used
in per share computation 8,490,111 8,532,073 6,528,032
============ ============ ============
The accompanying notes are an integral part of these financial statements.
23
VALLEY SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
for the years ended June 30, 1996, 1995 and 1994
Retained
Preferred Common Paid-In Earnings Treasury
Stock(1) Stock(2) Capital (Deficit) Stock Total
-------- -------- ------- --------- ----- -----
Balance, June
30, 1993 $2,000 $ 64,521 $17,312,209 $(13,118,538) $ -- $4,260,192
Issuance of
common stock
to settle
litigation 600 119,400 120,000
Sale of
common stock 20,000 3,887,475 3,907,475
Net loss (8,538,979) (8,538,979)
------ ------- ----------- ------------ --------- ----------
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
paid (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
paid (288,749) (288,749)
------ ------- ----------- ------------ --------- ----------
Balance, June
30, 1996 $5,500 $85,121 $26,786,040 $(22,726,822) $(118,638) $4,031,201
====== ======= =========== ============ ========= ==========
(1) Share numbers are equivalent to ten times dollar amounts.
(2) Share numbers are equivalent to one hundred times dollar amounts.
The accompanying notes are an integral part of these financial statements.
24
VALLEY SYSTEMS, INC.
Consolidated Statements of Cash Flows
for the years ended June 30, 1996, 1995 and 1994
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net (loss) income.................. $ (973,344) $ 512,129 $(8,538,979)
Adjustments to reconcile net (loss)
income to cash provided (used)
by operating activities:
Depreciation and amortization.... 3,516,986 3,229,816 4,155,529
(Gain) loss on disposition of
property and equipment......... (6,865) 1,854 211,403
Restructuring charges............ 3,547,522
Settlement of shareholder
litigation..................... 120,000
(Increase) decrease in assets:
Accounts receivable............ (658,313) 232,073 811,051
Prepaid supplies............... 16,143 (50,641) 73,975
Prepaid expenses............... 18,922 7,073 (54,807)
Increase (decrease) in liabilities:
Accounts payable............... 218,840 (323,516) (1,245,515)
Accrued expenses............... (1,628,048) (758,787) (477,497)
---------- ----------- -----------
Cash provided (used) by
operating activities....... 504,321 2,850,001 (1,397,318)
---------- ----------- -----------
Cash flows from investing activities:
Additions to property and equipment (2,547,375) (1,289,083) (693,733)
Proceeds from dispositions of
property and equipment........... 99,541 684,238 138,241
---------- ----------- -----------
Cash used by investing
activities.................. (2,447,834) (604,845) (555,492)
---------- ----------- -----------
Cash flows from financing activities:
Payments of long-term debt......... (702,810) (9,331,833) (5,944,667)
Proceeds from long-term debt....... 2,911,279 3,714,981 4,596,576
Proceeds from sale of stock........ 2,470,456 3,907,475
Payments of dividends.............. (288,749) (319,341)
Purchase of treasury stock (118,638)
---------- ----------- -----------
Cash provided (used) by
financing activities........ 1,801,082 (3,465,737) 2,559,384
---------- ----------- -----------
(Decrease) increase in cash............. (142,431) (1,220,581) 606,574
Cash at beginning of year............... 228,530 1,449,111 842,537
---------- ----------- -----------
Cash at end of year..................... $ 86,099 $ 228,530 $ 1,449,111
========== =========== ===========
Cash paid (received) for:
Interest $ 571,700 $ 834,443 $ 1,489,842
Taxes (405,000)
Non-cash financing activities:
Equipment under capital lease
obligation 101,405
Notes payable converted to
preferred stock 3,000,000
Reclassification of payments
from former directors and
officers (Notes 5, 6.D and 9) 1,017,000
The accompanying notes are an integral part of these financial statements.
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 and encrustations 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.
Accounts Receivable: The Company's customers are located 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, 1996, 1995 and 1994 were
$6,000, $89,000 and $22,000, respectively. The allowance for doubtful
accounts was $125,000 at June 30, 1996 and $200,000 at June 30, 1995.
Prepaid Supplies: Prepaid supplies consist of items to be used in
operations, and are stated at the lower of cost 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 method.
During the fourth quarter of fiscal 1994, management approved a
restructuring plan to close certain branches with geographic locations
inconsistent with the Company's concentration of business and to exit
certain lines of business with poor operating margins. As a result of
this restructuring plan, management identified certain fixed assets which
had an impairment in value. As such, these assets were written down to
management's estimate of net realizable value resulting in a
restructuring charge of $3,547,522 (see Note 3).
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.
26
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
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.
Accumulated amortization amounted to $685,000 and $548,000 as of June 30,
1996 and 1995, respectively.
(Loss) Income Per Share: (Loss) income per share is based on the weighted
average number of common shares and common share equivalents outstanding
during the period. Common share equivalents include dilutive stock
options and warrants using the Treasury Stock method which have not been
included in computing the (loss) income per share for the three years in
the period ended June 30, 1996 since such inclusion would be either
anti-dilutive or immaterial.
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, 1996 approximated its carrying values.
New Accounting Pronouncements: During 1996, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No.121
- "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of". The adoption of SFAS No. 121 had no
significant effect on the consolidated financial statements.
27
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123 - "Accounting for Stock-Based Compensation" effective for
transactions entered into after December 15, 1996. This standard provides
new accounting treatment for stock-based compensation programs, but it
provides companies the option of continuing the previous accounting
method and providing footnote disclosure of the impact of the new
treatment. Management intends to adopt the disclosure only provisions in
1997. Management does not believe the adoption of this standard will have
a significant impact on the consolidated financial statements of the
Company.
Reclassifications: Certain amounts in the 1995 consolidated financial
statements have been reclassified to conform to the 1996 presentation.
3. RESTRUCTURING CHARGES:
During the quarter ended June 30, 1994, the Company implemented a
restructuring plan designed to reduce costs and return the Company to
profitability and increase stockholder value by scaling back certain
operations and discontinuing certain lines of business that had not met
profitability expectations. Restructuring costs, which are shown as a
separate item in the accompanying consolidated statements of income,
represent the costs of branch closures, lease termination costs,
severance pay, loss on disposal of assets, the impairment of fixed assets
and other costs related to the restructuring of operations.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
1996 1995
---- ----
Land $ 182,907 $ 95,100
Building and leasehold improvements 580,000 580,000
Automobiles and trucks 11,071,390 9,811,508
Equipment 6,885,718 8,690,036
Office equipment 144,213 160,050
Equipment in progress and parts 221,016 91,611
----------- -----------
19,085,244 19,428,305
Less accumulated depreciation and
amortization 10,055,550 9,473,324
----------- -----------
$ 9,029,694 $ 9,954,981
=========== ===========
Included in property and equipment are assets under capital leases of
$3,277,000 and $3,573,000 with related accumulated depreciation of
$1,743,000 and $1,405,000 as of June 30, 1996 and 1995, respectively.
The Company incurred repairs and maintenance costs on the aforementioned
property and equipment of approximately $1,850,000, $2,150,000 and
$2,600,000 for the years ended June 30, 1996, 1995 and 1994,
respectively.
28
5. ACCRUED EXPENSES:
Accrued expenses consist of the following :
1996 1995
---- ----
Accrued salaries and bonus $ 706,000 $ 786,000
Accrued payroll taxes and workers'
compensation insurance 247,000 562,000
Accrued professional fees 161,000 500,000
Reserve for disputed amounts
receivable (see Notes 6.D and 9.B) 1,113,000 --
Other accrued liabilities 356,966 1,347,014
---------- ----------
$2,583,966 $3,195,014
========== ==========
6. LONG-TERM DEBT:
Long-term debt is comprised of the following:
1996 1995
---- ----
Capitalized leases (A) $1,124,211 $1,762,544
Installment loans -- 64,476
Notes payable - shareholder (B) -- --
Revolving loan - bank (C) 6,626,495 3,714,981
Other (D) -- 1,017,236
---------- ----------
7,750,706 6,559,237
Less: current portion of long-term debt 729,506 701,701
---------- ----------
$7,021,200 $5,857,536
========== ==========
A. Capitalized leases are due in monthly installments ranging from
$2,000 to $26,000 and bear interest from 9.9% to 16.4%.
B. The Company has a loan agreement with its majority shareholder,
which expires in 1998 and provides a total credit facility to the
Company as follows:
Through June 1997 $9,000,000
July 1997 to July 1998 $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 shareholder provide bank letters of credit which the Company
can utilize as collateral for other obligations. The Company
reimburses the shareholder for the actual cost of the letters of
credit. This loan agreement is collateralized by essentially all
assets of the Company. At June 30, 1996, there are no loans
outstanding under this facility, and the shareholder has issued
$8,280,000 in bank letters of credit, leaving $720,000 of the
facility available to the Company.
29
6. LONG-TERM DEBT, CONTINUED:
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, 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 June 1997 and expires
June 1998.
D. This amount relates to payments made to the Company by former
officers and directors that was classified as an obligation at
June 30, 1995. During 1996, the Company determined that these
amounts were actually repayments by the former officers and
directors of amounts owned the Company by these officers and
directors at the time the payments were made (see Notes 5 and
9.B).
The aggregate maturities on the aforementioned debt are as follows:
Year Ended June 30
1997 $ 729,506
1998 6,995,978
1999 25,222
$ 7,750,706
7. INCOME TAXES:
The income tax provision (benefit) for the three years ended June 30,
1996 is comprised of the following amounts:
1996 1995 1994
---- ---- ----
Current:
Federal $ -0- $ -0- $ (405,000)
====== ======= ==========
Statutory rate (34)% (34)% (34)%
Operating loss not utilizable 34 34 29
------ ------- ----------
Effective rate - % - % (5)%
====== ======= ==========
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, 1996 and
1995, the components of the net deferred tax assets were as follows:
30
7. INCOME TAXES, CONTINUED:
1996 1995
---- ----
Deferred tax assets:
Allowance for doubtful accounts $ 50,000 $ 80,000
Vacation accrual 132,000 104,500
Litigation reserve 50,000 181,871
Sales tax reserve 55,000 280,000
Asset impairment reserve 954,773 1,063,337
Net operating loss carryforwards 9,919,383 8,341,427
Other 70,395 168,792
------------ ------------
11,231,551 10,219,927
------------ ------------
Deferred tax liabilities:
Basis difference in fixed assets (792,832) (662,053)
Valuation allowance (10,438,719) (9,557,874)
------------ ------------
(11,231,551) (10,219,927)
------------ ------------
Net deferred tax asset $ -0- $ -0-
============ ============
The Company has approximately $24,800,000 of net operating loss
carryforwards for future years, which cannot be utilized to create tax
refunds. Such amounts begin to expire in the year 2008.
8. 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,
1996 are as follows:
Capital Operating
------- ---------
Year:
1997 $ 728,239 $ 117,600
1998 538,968 65,600
1999 25,542 --
---------- ----------
Total minimum lease payments 1,292,749 $ 183,200
==========
Less amount representing interest 168,538
----------
Total present value of capital
obligation (Note 6) 1,124,211
Less current portion 603,011
----------
Long-term obligation under
capital leases $ 521,200
==========
Operating lease expenses amounted to $364,000, $546,000 and $1,266,000
for the years ended June 30, 1996, 1995 and 1994, respectively.
31
9. LITIGATION:
A. In October 1992, the Company was informed that the Securities and
Exchange Commission ("SEC") authorized its staff to investigate
whether there have been violations of Federal securities laws. The
Company cooperated fully in this investigation. In July 1995, the
Company executed an Offer of Settlement to the SEC whereby it
consents to the entry of an administrative order which, among other
things, requires the Company to cease and desist violating certain
provisions of the Securities Exchange Act of 1934, and certain
rules promulgated thereunder. No monetary penalties or damages were
paid by the Company to settle this matter.
B. The Company filed a lawsuit in September 1993 against certain of
its former directors and officers, as well as other parties. Some
of the defendants have asserted counterclaims against the Company
and one of its directors for breach of employment agreement,
fraudulent misrepresentations, common law conversion, defamation,
civil conspiracy, abuse of process, breach of contract, and unjust
enrichment. All of these counterclaims were dismissed in March
1996, except for the claims of breach of contract and unjust
enrichment against the Company. These counterclaims both relate to
contributions made to the Company by two former officers and
directors, which are discussed below.
During 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 have been 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 is being contested by the former
officers and directors, an equal amount has been reserved. If it is
ultimately determined that the contributions were properly
characterized as loans to the Company, the amounts owed by the
former officers and directors to the Company will be treated as
dividends paid to the former officers and directors in 1989, 1990
and 1991 (see Notes 5 and 6.D).
In connection with the above litigation matters, the Company charged
operations $1,200,000 for legal and professional fees and expenses in
1994.
10. MAJOR CUSTOMERS:
For the year ended June 30, 1996, one customer accounted for 14% of the
Company's sales, one customer accounted for 10%, and four other customers
each accounted for 5% of sales.
For the year ended June 30, 1995, one customer accounted for 10% of the
Company's sales. Four other customers each accounted for 5% to 10% of
sales, for a total of 27%.
For the year ended June 30, 1994, one customer accounted for 7%, one
customer for 6% and one customer for 5% of the Company's sales.
32
11. 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 shareholder, who 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. At June 30, 1996, $96,250 of dividends are in arrears.
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.
12. 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, 1996 were as follows:
Shares
Option Price Total Exercisable Expiration Date
------------ ----- ----------- ---------------
$3.00 34,780 34,780 January 2001
$1.50 57,300 57,300 October 2002
$1.50 226,200 45,240 October 2004
318,280 137,320
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.
C. At June 30, 1996, 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
13. Employee Benefit Plan:
In 1991, the Company adopted a 401(k) plan. 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, 1996.
33
14. FOURTH QUARTER ADJUSTMENTS:
The Company reported a loss of $3,524,531 before income taxes for the
nine months ended March 31, 1994, and a loss of $8,538,979 before income
taxes for the full year ended June 30, 1994.
The following are adjustments made during the fourth quarter ended June
30, 1994:
1. The Company recognized certain restructuring costs during the fourth
quarter (See Note 3).
2. The Company recognized significant expenses related to certain
litigation during the fourth quarter (See Note 9).