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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 000-29226
VALLEY NATIONAL GASES INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2888240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
200 WEST BEAU STREET, SUITE 200
WASHINGTON, PENNSYLVANIA 15301
(Address of principal executive offices)
(724) 228-3000
(Registrant's telephone number, including area code)
Indicate by checkmark 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 checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act.)
Yes No x
------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at May 13, 2003
----- ---------------------------
Common stock, $0.001 par value 9,356,834
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Valley National Gases Incorporated
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets as of June 30, 2002
and March 31, 2003 (unaudited) 3
Condensed Consolidated Statements of Operations for the
Three Months Ended March 31, 2002 and 2003 (unaudited) 5
Condensed Consolidated Statements of Operations for the
Nine Months Ended March 31, 2002 and 2003 (unaudited) 6
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended March 31, 2002 and 2003 (unaudited) 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 21
ITEM 4 Controls and Procedures 21
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
CERTIFICATIONS 24
- 2 -
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
A S S E T S
June 30, March 31,
2002 2003
------------ ------------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents $ 1,216,668 $ 1,458,997
Accounts receivable, net of allowance for doubtful accounts of
$684,898 and $684,846, respectively 15,983,161 18,610,390
Inventory 15,660,118 13,417,789
Prepaids and other 2,042,407 1,378,645
------------ ------------
Total current assets 34,902,354 34,865,821
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 90,000 55,000
Buildings and improvements 6,026,404 6,281,745
Equipment 82,274,545 86,388,135
Transportation equipment 13,843,310 14,340,091
Furniture and fixtures 6,771,212 7,234,469
------------ ------------
Total property, plant and equipment 109,005,471 114,299,440
Accumulated depreciation (41,160,064) (44,616,253)
------------ ------------
Net property, plant and equipment 67,845,407 69,683,187
------------ ------------
OTHER ASSETS:
Non-compete agreements and consulting agreements, net of
amortization of
$10,203,926 and $12,046,795, respectively 6,218,415 4,965,547
Goodwill 40,429,733 41,205,642
Deposits and other assets 1,622,305 1,263,754
------------ ------------
Total other assets 48,270,453 47,434,943
------------ ------------
TOTAL ASSETS $151,018,214 $151,983,951
============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 3 -
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------ June 30, March 31,
2002 2003
------------- --------------
(Unaudited)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,319,077 $6,020,495
Accounts payable, trade 7,821,065 6,468,567
Accrued compensation and employee benefits 3,087,484 3,154,418
Other current liabilities 3,558,832 6,954,210
------------- --------------
Total current liabilities 20,786,458 22,597,690
LONG-TERM DEBT, less current maturities 74,659,090 71,606,619
DEFERRED TAX LIABILITY 14,673,541 14,394,272
OTHER LONG-TERM LIABILITIES 4,265,500 3,912,433
------------- --------------
Total liabilities 114,384,589 112,511,014
------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares
Issued, 9,620,084 shares, outstanding 9,347,584 and 9,347,820
shares, respectively
9,620 9,620
Paid-in-capital 19,269,338 19,221,378
Retained earnings 21,752,457 25,418,343
Accumulated other comprehensive loss (2,134,362) (2,989,843)
Treasury stock at cost, 272,500 and 263,250 shares, respectively
(2,263,428) (2,186,561)
------------- --------------
Total stockholders' equity 36,633,625 39,472,937
------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $151,018,214 $151,983,951
============= ==============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 4 -
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
-------------------------------
2002 2003
------------- --------------
NET SALES $41,141,892 $45,818,882
COST OF PRODUCTS SOLD, excluding depreciation and amortization 19,549,659 22,359,343
------------- --------------
Gross profit 21,592,233 23,459,539
------------- --------------
EXPENSES:
Operating and administrative 14,243,669 16,082,461
Depreciation 1,434,722 1,441,700
Amortization of intangibles 682,582 604,093
------------- --------------
Total expenses 16,360,973 18,128,254
------------- --------------
Income from operations 5,231,260 5,331,285
INTEREST EXPENSE 1,339,486 1,616,484
OTHER INCOME, NET 101,592 862
------------- --------------
EARNINGS BEFORE INCOME TAXES 3,993,366 3,715,663
PROVISION FOR INCOME TAXES 1,657,247 1,541,999
------------- --------------
NET EARNINGS $2,336,119 $2,173,664
============= ==============
BASIC EARNINGS PER SHARE $ 0.25 $ 0.23
DILUTED EARNINGS PER SHARE $ 0.25 $ 0.23
WEIGHTED AVERAGE SHARES:
Basic 9,347,584 9,348,303
Diluted 9,409,958 9,383,813
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 5 -
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended
March 31,
-------------------------------
2002 2003
--------------- --------------
NET SALES $109,767,912 $117,947,274
COST OF PRODUCTS SOLD, excluding depreciation and amortization 51,129,134 56,091,354
-------------- ---------------
Gross profit 58,638,778 61,855,920
-------------- ---------------
EXPENSES:
Operating and administrative 41,899,353 44,840,386
Depreciation 3,770,001 4,013,000
Amortization of intangibles 1,981,609 1,892,868
-------------- ---------------
Total expenses 47,650,963 50,746,254
-------------- ---------------
Income from operations 10,987,815 11,109,666
INTEREST EXPENSE 4,470,039 4,960,501
OTHER INCOME, NET 278,839 116,239
-------------- ---------------
EARNINGS BEFORE INCOME TAXES 6,796,615 6,265,404
PROVISION FOR INCOME TAXES 2,820,595 2,600,143
-------------- ---------------
NET EARNINGS $3,976,020 $3,665,261
============== ===============
BASIC EARNINGS PER SHARE $ 0.43 $ 0.39
DILUTED EARNINGS PER SHARE 0.42 0.39
WEIGHTED AVERAGE SHARES:
Basic 9,347,584 9,347,820
Diluted 9,403,301 9,393,317
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 6 -
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
------------------------------------
2002 2003
------------- -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 10,565,567 $ 10,412,130
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 138,636 218,470
Purchases of property and equipment (6,122,809) (4,802,968)
Business acquisitions, net of cash acquired (5,478,966) (1,054,112)
------------- -------------
Net cash used by investing activities (11,463,139) (5,638,610)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 46,497,245 38,442,686
Principal payments on loans (45,287,133) (43,002,783)
Redemption of stock options -- 28,906
------------- -------------
Net cash provided by financing activities 1,210,112 (4,531,191)
------------- -------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 312,540 242,329
CASH AND CASH EQUIVALENTS, beginning of period 542,720 1,216,668
------------- -------------
CASH AND CASH EQUIVALENTS, end of period $855,260 $ 1,458,997
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 4,536,431 $ 4,936,938
============= =============
Cash payments for income taxes $ 212,038 $ --
============= =============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 7 -
VALLEY NATIONAL GASES INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
----------------------
The condensed consolidated financial statements of Valley National Gases
Incorporated (the Company) presented herein are unaudited. Certain information
and footnote disclosures normally prepared in accordance with generally accepted
accounting principles have been either condensed or omitted pursuant to the
rules and regulations of the Securities and Exchange Commission. Although the
Company believes that all adjustments, consisting of only normal recurring
adjustments, necessary for a fair presentation have been made, interim periods
are not necessarily indicative of the financial results of operations for a full
year. As such, these financial statements should be read in conjunction with the
financial statements and notes thereto included or incorporated by reference in
the Company's audited financial statements for the period ending June 30, 2002.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventory are as follows:
June 30, March 31,
2002 2003
------------ ------------
(Unaudited)
Hard goods $13,559,775 $10,850,736
Gases 2,100,343 2,567,053
----------- -----------
$15,660,118 $13,417,789
=========== ===========
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is provided on the
straight-line basis over the estimated useful lives of the related assets.
3. ACQUISITIONS:
-------------
The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
During the nine months ended March 31, 2003, the Company acquired
substantially all of the assets of Gerber's Propane, Inc., a propane distributor
having approximately $2.0 million in combined annualized sales. This transaction
was financed through the Company's credit facility.
- 8 -
In connection with this acquisition, the Company has made a preliminary
allocation of the total purchase price to the fair value of assets acquired,
cash paid and liabilities assumed as follows:
Nine Months Ended
March 31, 2003
-----------------
(Unaudited)
Cash paid $1,054,112
Notes issued to sellers 855,000
Notes payable and capital leases assumed 54,045
Non-compete agreements 300,000
----------
Total purchase price allocated to assets acquired $2,263,157
==========
As part of this acquisition, the Company recorded $709,000 for goodwill and
$300,000 for non-compete agreements having a term and amortization period of 3
years. The noncash items of the purchase price, which includes notes issued to
sellers in the amount of $855,000, notes payable and capital leases assumed in
the amount of $54,045 and non-competes in the amount of $300,000 were excluded
from the unaudited condensed consolidated statements of cash flows. This
preliminary allocation may change as the verification of certain assets is
completed in accordance with the purchase agreement.
Pro forma results of operations for periods presented would not differ
materially from historical results.
4. LONG-TERM DEBT:
---------------
Long-term debt consists of the following:
June 30, March 31,
2002 2003
------------- -----------
(Unaudited)
Revolving note, interest at LIBOR plus 2.75% payable monthly through June 2005.
Secured by the assets of the Company. $57,952,885 $58,629,240
Term note, interest at LIBOR plus 2.75% and payable monthly through June 2005.
Secured by the assets of the Company. 15,000,000 12,750,000
Note payable, interest at 6.6% payable annually through October 2003. Secured by
certain assets of the Company. 1,366,149 683,074
Individuals and corporations, mortgages and notes, interest at 3.75% to 10.0%,
payable at various dates through 2010. 6,752,665 5,644,336
------------ -----------
81,071,699 77,706,650
Original issue discount (93,532) (79,536)
Current maturities (6,319,077) (6,020,495)
----------- -----------
Total long-term debt $74,659,090 $71,606,619
=========== ===========
Prime rate was 4.25% and LIBOR was 1.31% at March 31, 2003.
On June 28, 2002, the Company entered into an amendment to the second
amended and restated credit facility with Bank One, as agent. The amendment
facility decreased the maximum revolving note borrowings from $100.0 million to
$75.0 million, including a letter of credit sublimit of $15.0 million. The
- 9 -
term note has a balance of $12.8 million. The scheduled maturity date of both
the term and revolving note is June 28, 2005. The Company pays a fee for the
unused portion of the revolving loan. The revolving loan is used primarily to
fund acquisitions. The Company is not required to make principal payments on
outstanding balances of the revolving loan as long as certain covenants are
satisfied. Interest is charged on both the term loan and the revolving loan at
either the lender's prime rate or various LIBOR rates, at the Company's
discretion, plus an applicable spread. The weighted average interest rate for
substantially all of the borrowings under the credit facility was 4.1% as of
March 31, 2003, excluding the impact of the Company's interest rate swap
agreements. See Note 7. As of March 31, 2003, availability under the revolving
loan was approximately $13.4 million, with outstanding borrowings of
approximately $58.6 million and outstanding letters of credit of approximately
$3.0 million. The credit facility is secured by all of the Company's assets. On
October 28, 2002, the Company amended its credit facility. Certain financial
covenants were amended in order for the Company to remain in compliance with
such financial covenants as of September 30, 2002.
5. EARNINGS PER SHARE
------------------
Basic earnings per share were computed based on the weighted average number
of common shares issued and outstanding during the relevant periods. Diluted
earnings per common share were computed based on the weighted average number of
common shares issued and outstanding plus additional shares assumed to be
outstanding to reflect the dilutive effect of common stock equivalents using the
treasury stock method.
Options to purchase 311,200 and 241,000 shares of common stock were
outstanding during the quarter and nine months ended March 31, 2003 and 189,500
for the quarter and nine months ended March 31, 2002, but were not included in
the computation of diluted earnings per common share as the options' exercise
price was greater than the average market price of the common stock for the
respective periods.
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------ ------------------------
2002 2003 2002 2003
---------- ---------- ---------- ----------
Net earnings available for common stock $2,336,119 $2,173,664 $3,976,020 $3,665,261
========== ========== ========== ==========
Basic earnings per common share:
Weighted average common shares 9,347,584 9,348,303 9,347,584 9,347,820
========== ========== ========== ==========
Basic earnings per common share $ 0.25 $ 0.23 $ 0.43 $ 0.39
========== ========== ========== ==========
Diluted earnings per common share:
Weighted average common shares 9,347,584 9,348,303 9,347,584 9,347,820
Shares issuable from assumed conversion of common
stock equivalents 62,374 35,510 55,717 45,497
---------- ---------- ---------- ----------
Weighted average common and common equivalent shares 9,409,958 9,383,813 9,403,301 9,393,317
========== ========== ========== ==========
Diluted earnings per common share $ 0.25 $ 0.23 $ 0.42 $ 0.39
========== ========== ========== ==========
- 10 -
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123) in October 1995. This statement establishes a fair value based method
of financial accounting and related reporting standards for stock-based employee
compensation plans. SFAS No. 123 became effective for fiscal year 1997 and
provides for adoption in the income statement or through footnote disclosure
only. The Company has continued to account for the 1997 Plan under APB No. 25,
"Accounting for Stock Issued to Employees", as permitted by SFAS No. 123.
Had compensation cost of the 1997 Plan been determined based on the fair
value at the grant dates for awards consistent with the method of SFAS No. 123,
the Company's net income and earnings per share would have been the pro forma
amounts indicated below:
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------------
2002 2003 2002 2003
---------- ---------- ----------- ----------
Net income
As reported $2,336,119 $2,173,664 $3,976,020 $3,665,261
Pro forma 2,324,792 2,157,484 3,935,508 3,617,063
Earnings per share assuming dilution
As reported $ 0.25 $ 0.23 $ 0.42 $ 0.39
Pro forma $ 0.25 $ 0.23 $ 0.42 $ 0.39
6. COMPREHENSIVE INCOME
--------------------
The components of comprehensive income, net of tax, were as follows:
Nine Months Ended
March 31,
-----------------------
2002 2003
----------- ----------
Net earnings $3,976,020 $3,665,261
Unrealized losses on derivatives, net of tax (539,640) (855,481)
---------- ----------
Comprehensive income (loss) $3,436,380 $2,809,780
---------- ----------
Accumulated other comprehensive loss presented in the accompanying
unaudited condensed consolidated balance sheets consists of the accumulated
other net unrealized loss on derivatives designated as cash flow hedges.
7. DERIVATIVES AND HEDGING ACTIVITIES
----------------------------------
In accordance with the provisions of SFAS No. 133, as amended, the Company
recognizes all derivatives on the balance sheet at fair value. On the date the
derivative instrument is entered into, the Company generally designates the
derivative as a hedge of the variability of cash flows to be paid related to a
recognized liability (cash flow hedge). Changes in the fair value of a
derivative that is designated as and meets all the required criteria for a cash
flow hedge are recorded in accumulated other comprehensive income and
reclassified into earnings as the underlying hedged item affects earnings.
Changes in the fair value of a derivative that is not designated as a hedge are
recorded immediately in earnings. At March 31, 2003 and 2002 the Company had
interest rate swap agreements outstanding that effectively convert a notional
amount of $60.0 million from floating rates to fixed rates. The agreements
outstanding at March 31, 2003 mature at various times between September 2003 and
January 2006. The Company would have paid $5,276,045 and $2,916,292 to settle
its interest rate swap agreements at March 31, 2003 and
- 11 -
2002, respectively, which represents the fair value of these agreements. The
carrying value equals the fair value for these contracts at March 31, 2003 and
2002. Fair value was estimated based on the mark-to market value of the
contracts which closely approximates the amount the Company could receive or pay
to terminate the agreements at quarter end.
The March 2003 quarter results include an increase in interest expense of
$14,634 and the nine month results include a decrease of $23,962, to record
changes in the fair market value of the Company's interest rate swap agreements,
compared to a decrease of interest expense in the prior year quarter and nine
months of $173,328 and $129,935, respectively.
Based upon interest rates at March 31, 2003, the Company expects to
recognize into earnings in the next 12 months net current liabilities of
$264,742 related to outstanding derivative instruments and net losses of
$185,852 recorded in accumulated other comprehensive loss, related to the
classification of unrealized losses on derivatives that were not designated as
cash flow hedges upon the adoption of SFAS No. 133.
8. ADOPTION OF NEW ACCOUNTING STANDARDS
------------------------------------
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002. The Company adopted this standard at January
1, 2003. Subsequent to adoption, this standard may affect the periods in which
costs are recognized for workforce reductions or facility closures, although the
ultimate amount of costs recognized would be the same.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN 45"). This interpretation
changes the accounting recognition and disclosure requirements for certain
guarantees issued on behalf of other parties which represent either a contingent
or a non-contingent obligation for the guarantor to make payments or to perform
specified activities. Effective January 1, 2003, FIN 45 mandates the separate
fair value recognition of guarantees entered into on or after that date. As of
March 31, 2003, the Company had no guarantees as defined in FIN 45.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" (SFAS No. 148), which amended SFAS No. 123 to allow multiple methods
of reporting the accounting transition for companies electing to adopt the
recognition provisions of SFAS 123 for fair valuing stock-based compensation. As
permitted by the accounting standards, the Company has elected to continue the
use of the intrinsic value method of accounting for stock-based compensation
under APB Opinion No. 25. The Company has adopted the disclosure provisions of
SFAS No. 148.
In January 2003, the FASB issued Interpretation No.46, "Consolidation of
Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is
one where the contractual or ownership interests in an entity change with
changes in the entity's net asset value. This interpretation requires the
consolidation of a VIE by the primary beneficiary, and also requires disclosure
about VIEs where an enterprise has a significant variable interest
- 12 -
but is not the primary beneficiary. FIN 46 is effective immediately for VIEs
created after January 31, 2003, and is effective in the first fiscal year or
interim period after June 15, 2003 for VIEs existing prior to February 1, 2003.
The required disclosure provisions of FIN 46 have been adopted. The Company
currently does not expect significant impact upon the adoption of the
recognition provisions of FIN 46 in fiscal year 2004.
9. INTANGIBLE ASSETS
-----------------
On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," under which goodwill and other intangible assets with
indefinite lives are not amortized. Such intangibles were evaluated for
impairment as of July 1, 2001 and no impairment existed. In addition, each year,
the Company will evaluate the intangible assets for impairment with any
resulting impairment reflected as an operating expense. The Company's only
intangibles, other than goodwill, are its noncompete agreements and consulting
agreements, which the Company currently believes have finite lives. As of March
31, 2003, the Company's noncompete agreements and consulting agreements are
summarized as follows:
Weighted
Balance at Average
Original Accumulated March 31, Amortization
Cost Amortization 2002 Period (years)
----------- ------------ ---------- --------------
Non-competition
Agreements $15,848,570 $10,983,352 $4,865,218 4.7
Consulting
Agreements 1,163,771 1,063,442 100,329 4.4
Amortization expense for the nine months ended March 31, 2003 totaled
$1,892,868. Estimated amortization expense for the remainder of fiscal 2003 and
the next five fiscal years is summarized as follows:
Fiscal year Ending
June 30,
------------------
Remainder of 2003 $ 563,415
2004 $1,894,189
2005 $1,185,571
2006 $ 515,968
2007 $ 299,302
2008 $ 287,218
The changes in the carrying amount of goodwill for the nine months ended
March 31, 2003, are as follows:
Balance as of June 30, 2002 $40,429,733
Goodwill acquired during the current
fiscal year 775,909
-----------
Balance as of March 31, 2003 $41,205,642
-----------
10. CONTINGENCIES, COMMITMENTS AND OTHER
------------------------------------
Some industrial gases and propane are flammable, explosive products.
Serious personal injury and property damage can occur in connection with its
transportation, storage, production or use. The Company, in the ordinary course
of business, is threatened with or is named as a defendant in various lawsuits
which, among other items, seek actual and punitive damages for
- 13 -
product liability, personal injury and property damage. The Company maintains
liability insurance policies with insurers in such amounts and with such
coverages and deductibles as the Company believes is reasonable and prudent.
However, there can be no assurance that such insurance will be adequate to
protect the Company from material expenses related to such personal injury or
property damage or that such levels of insurance will continue to be available
in the future at economical prices. Management is of the opinion that there are
no known claims or known contingent claims that are likely to have a material
adverse effect on the results of operations, financial condition or cash flows
of the Company.
During the quarter ended March 31, 2003, the Company recorded nonrecurring
charges of approximately $0.6 million relating to its initiatives to reduce its
cost structure, improve customer service and to eliminate assets that were not
providing an acceptable return. The Company expects to conclude these
initiatives by September 30, 2003, and to record additional nonrecurring
charges during the quarters ended June 30 and September 30, 2003. These charges
are expected to have a significant effect on earnings when recorded. While the
Company currently complies with its covenants under its credit facility, the
Company believes that the incurrence of these charges may cause it to breach
certain of its financial covenants. The Company is having discussions with its
banks to amend its credit facility so that the incurrence of these charges will
not result in the Company's breach of financial covenants. While the Company
believes that the required amendments can be obtained without having a material
effect on its financing costs or its ability to obtain capital in the future,
it can provide no assurance of this, nor can it provide assurance that it will
be able to amend the credit facility, at all or on terms acceptable to the
Company.
The Company has previously entered into a put/call option agreement with an
independent distributor for the purchase of its business. This put became
exercisable in May 2002 and ends in May 2005. The call becomes exercisable
beginning in May 2005 and ending in May 2008. The total purchase price of this
acquisition, which varies based upon the target's financial statements, is
currently estimated to be approximately $8.0 million. The Company believes that
it will have adequate capital resources available to fund this acquisition at
such time that the option is exercised.
In September 1991, in connection with the purchase by the Company of
certain assets of Praxair, Inc. (Praxair), the Company, Gary E. West and certain
of his affiliates entered into a Right of First Refusal Agreement with Praxair.
In March 1997, the parties to such agreement entered into an Amended and
Restated Right of First Refusal Agreement (the Right of First Refusal Agreement)
in connection with the Company's reorganization. Pursuant to this agreement, if
at any time during the term of the agreement the Company wishes to accept a
third party offer to purchase all or a material part of the assets of the
Company, or Mr. West and his affiliates wish to accept an offer to purchase
shares of capital stock of the Company (the Capital Stock) owned by them in a
transaction that would result in Mr. West and his affiliates collectively owning
less than 51% of the Company's issued and outstanding shares of Capital Stock on
a fully diluted basis or owning less than 51% of the combined voting power of
all outstanding voting securities of the Company, Praxair will have a right of
first refusal to match the offer. In addition, in the absence of a third party
offer, if (a) Mr. West and his affiliates wish to sell shares of Common Stock
which would result in their owning collectively less than 51% or more of the
Company's issued and outstanding shares of Common Stock, (b) the Company wishes
to sell all or a material part of its assets, or (c) the Company wishes to issue
additional shares or options or securities exercisable or convertible into
shares of Common Stock, pursuant to employee stock options, a public offering,
private placement, merger, share exchange or otherwise, which in the aggregate
on a fully diluted basis would result in Mr. West and his affiliates
collectively owning less than 51% of all the issued outstanding shares of Common
Stock, then Praxair will have the right to purchase from Mr. West and his
affiliates up to all of the issued and outstanding shares of Common Stock held
by them (but not less than 51% of all of the issued and outstanding shares of
the Company's Common Stock on a fully diluted basis) at the then prevailing
market price. If Praxair does purchase shares of Capital Stock from Mr. West and
his affiliates as described in this paragraph, then Mr. West and his affiliates
will be bound by certain non-compete provisions, as described in the Right of
First Refusal Agreement, for a period of three years from such purchase.
- 14 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto
included in item 1 herein.
OVERVIEW
The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in 11 states in
the eastern United States. The Company's net sales have grown, primarily as a
result of acquisitions, at a compound annual rate of approximately 16.0% per
year since the Company started business in 1958, increasing from $190,000 in
that year to $152.7 million for the last twelve months. In fiscal 2002, gases
accounted for approximately 43.0% of net sales, welding equipment and supplies
accounted for approximately 41.0% of net sales, and cylinder and tank rental
accounted for approximately 16.0% of net sales. The Company is a Pennsylvania
corporation.
The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 53 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions will
have, a dilutive effect upon the Company's income from operations and income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins and real
sales growth, occur over a period ranging from two to eight quarters, depending
upon the complexity of integrating each acquisition into the Company's existing
operations. The consideration for most acquisitions includes a combination of a
cash payment at closing, seller financing and payments under covenants not to
compete and other contingent purchase considerations. In most cases, operating
cash flow of an acquired business is positive in a relatively short period of
time. For many acquisitions, the Company believes that projections of future
cash flows justify payment of amounts in excess of the book or market value of
the assets acquired, resulting in goodwill being recorded.
The Company's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months,
occurring in the Company's second and third fiscal quarters. Seasonality of
total sales has increased as propane sales as a percentage of total sales have
increased.
Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a
quarter-to-quarter basis. The Company believes that changes in these expenses as
a percentage of sales should be evaluated over the long term rather than on a
quarter-to-quarter basis due to the moderate seasonality of sales mentioned
above and the generally fixed nature of these expenses.
Historically, the Company's gross profit margins as a percentage of sales
have been higher on the sale of gases than on the sale of welding equipment and
supplies ("hard goods"). As a result of recent acquisitions of some distributors
with a higher proportion of hard goods to gas sales, the Company's average gross
profit as a percentage of sales has decreased in comparison to prior years.
Future acquisitions may affect this pattern depending upon the product mix of
the acquired businesses.
- 15 -
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 2003 and 2002
Net sales increased 11.4%, or $4.7 million, to $45.8 million for the three
months ended March 31, 2003 from $41.1 million for the three months ended March
31, 2002. Acquisitions made since the prior year quarter contributed $0.9
million of increase in net sales for the three months ended March 31, 2003,
while same store sales increased $3.8 million or 9.2% for such three month
period. Propane sales increased $6.4 million on a same store basis, reflecting
$2.4 million in price inflation and $4.0 million increase due to increase in the
volume of propane sold. Same store bulk propane gallons sold were up 33.0%
for the quarter reflecting the effect of heating degree-days being up 22.0% in
comparison to the prior year and the growth in the Company's customer base. Hard
good sales were off $2.0 million from the prior year quarter on a same store
basis, reflecting the effect of the softness in the economy during the quarter.
Gases and cylinder revenue represented 71.0% of net sales for the three months
ended March 31, 2003, with hard goods representing 29.0%. In comparison, gases
and cylinder revenue represented 62.8% of net sales for the three months ended
March 31, 2002, with hard goods representing 37.2%.
Gross profit, which excludes depreciation and amortization, increased 8.6%,
or $1.9 million, to $23.5 million, for the three months ended March 31, 2003
compared to $21.6 for the three months ended March 31, 2002. Acquisitions made
since the prior year quarter contributed $0.4 million of increase in gross
profit while same store gross profit increased $1.5 million. Gross profit as a
percentage of net sales was 51.2% for the three months ended March 31, 2003,
compared to 52.5% for the three months ended March 31, 2002, reflecting,
primarily, an increase in the proportion of propane sales.
Operating and administrative expenses increased 12.9%, or $1.8 million, to
$16.0 million for the three months ended March 31, 2003. Of this increase, $0.1
million was related to acquired businesses while same store operating expenses
increased $1.7 million, reflecting, primarily, increased operating costs
associated with the higher volume of propane shipments and nonrecurring charges
which increased operating expenses $0.5 million for the quarter. These charges
included conversion of the company owned passenger vehicle program to employee
owned, hiring highly skilled employees, cost to train existing employee
basetheseverance and upgrade of personnel and a provision for potential escheat
taxes due to several states resulting from unclaimed property audits. Operating
and administrative expenses as a percentage of sales were 35.1% for the three
months ended March 31, 2003, as compared to 34.6% for the same quarter in 2002,
reflecting primarily the effect of acquisitions made since the prior year
quarter.
Depreciation and amortization expense decreased $0.1 million for the three
months ended March 31, 2003, compared to the three months ended March 31, 2002,
primarily as a result of certain intangibles becoming fully amortized during the
last twelve months.
Interest expense increased $0.3 million to $1.6 million for the three
months ended March 31, 2003 compared to $1.3 million for the three months ended
March 31, 2002. Reflected in interest expense was an increase of $14,634 for the
three months ended March 31, 2003 and a decrease of $173,328 for the three
months ended March 31, 2002 to record changes in the fair market value of the
Company's interest rate swap agreements under SFAS No. 133.
The Company's effective tax rate for the three months ended March 31, 2003
was 41.5%, the same rate for the three months ended March 31, 2002.
- 16 -
Net earnings decreased 7.0% to $2.2 million for the three months ended
March 31, 2003 compared to $2.3 million for the prior year quarter.
Comparison of Nine Months Ended March 31, 2003 and 2002
Net sales increased 7.5%, or $8.2 million, to $117.9 million for the nine
months ended March 31, 2003 from $109.8 million for the nine months ended March
31, 2002. Acquisitions made during the preceding twelve months contributed $2.9
million of increase in net sales for the nine months ended March 31, 2003, while
same store sales increased $5.2 million or 4.8% for such nine month period.
Propane sales, on a same store basis, increased 43.3% versus the prior year
period, reflecting the effect of heating degree-days being up 26.9%, as well as
growth in customer base. Gases and cylinder revenue represented 64.7% of net
sales for the nine months ended March 31, 2003, with hard goods representing
35.3%. In comparison, gases and cylinder revenue represented 60.0% of net sales
for the nine months ended March 31, 2002, with hard goods representing 40.0%.
Gross profit, which excludes depreciation and amortization, increased 5.5%,
or $3.2 million to $61.9 million, for the nine months ended March 31, 2003
compared to $58.6 million for the nine months ended March 31, 2002. Acquisitions
made during the last twelve months contributed $1.6 million of increase in gross
profit while same store gross profit increased $1.6 million. Gross profit as a
percentage of net sales was 52.4% for the nine months ended March 31, 2003,
compared to 53.4% for the nine months ended March 31, 2002, reflecting,
primarily, an increase in the proportion of propane sales.
Operating and administrative expenses increased 7.0%, or $2.9 million,
to $44.8 million for the nine months ended March 31, 2003. Of this increase,
$1.3 million was related to acquired businesses while same store operating
expenses increased $1.6 million, reflecting, primarily, increased operating
costs associated with the higher volume of propane shipments and nonrecurring
charges which increased operating expenses $0.5 million for the quarter. These
charges included conversion of the company owned passenger vehicle program to
employee owned, severance and upgrade of personnel and a provision for potential
escheat taxes due to several states resulting from unclaimed property audits.
Operating and administrative expenses as a percentage of sales were 38.0% for
the nine months ended March 31, 2003, as compared to 38.2% for the same period
in 2002.
Depreciation and amortization expense increased $0.2 million for the nine
months ended March 31, 2003, compared to the nine months ended March 31, 2002,
primarily as a result of acquisitions completed since the prior year quarter.
Interest expense increased $0.5 million to $5.0 million for the nine months
ended March 31, 2003 compared to $4.5 million for the nine months ended March
31, 2002. Reflected in interest expense was a decrease of $23,962 for the nine
months ended March 31, 2003 compared to $129,935 for the nine months ended March
31, 2002 to record changes in the fair market value of the Company's interest
rate swap agreements under SFAS No. 133. Interest expense for the nine months
ended March 31, 2003 also included a charge of $0.1 million related to an
amendment to the Company's credit facility.
The Company's effective tax rate for the nine months ended March 31, 2003 was
41.5%, the same rate for the nine months ended March 31, 2002.
Net earnings decreased 7.8% to $3.7 million for the nine months ended March
31, 2003 compared to $4.0 million for the nine months ended March 31, 2002.
- 17 -
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, capital expenditures
and debt service with funds provided from operating activities. Acquisitions
have been financed by a combination of seller financing, bank borrowings and
funds generated from operations.
At March 31, 2003, the Company had working capital of approximately $12.3
million. Funds provided by operations for the nine months ended March 31, 2003
were approximately $10.4 million. Funds used for investing activities were
approximately $5.6 million for the nine months ended March 31, 2003, consisting
primarily of capital spending and financing for acquisitions. Funds used for
financing activities for the nine months ended March 31, 2003 were approximately
$4.5 million from net principal payments. The Company's cash balance increased
$0.2 million during the nine months to $1.5 million.
On June 28, 2002, the Company entered into an amendment to the second
amended and restated credit agreement with Bank One, as agent. This agreement
decreased the maximum revolving note borrowings to $75.0 million, from the
previous maximum borrowings level of $100.0 million, and extended the maturity
of the revolving note to June 28, 2005. The agreement permits the Company, on an
annual basis, to request that the maturity be extended one year. No significant
changes were made to the interest rate and the covenant requirements when
compared to the original agreement. The weighted average interest rate for
substantially all of the borrowings under the credit facility was 4.1% as of
March 31, 2003, excluding the impact of the Company's interest rate swap
agreements. See Note 7. As of March 31, 2003, availability under the revolving
loan was approximately $13.4 million, with outstanding borrowings of
approximately $58.6 million and outstanding letters of credit of approximately
$3.0 million. The credit facility is secured by all of the Company's assets. The
revolving loan is used primarily to fund acquisitions. The Company is not
required to make principal payments on outstanding balances of the revolving
loan as long as certain covenants are satisfied. Interest is charged on both the
term loan and the revolving loan at either the lender's prime rate or various
LIBOR rates, at the Company's discretion, plus an applicable spread.
The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum fixed
charge coverage, maximum funded debt to EBITDA, and minimum net worth. On
October 28, 2002, the Company amended its credit facility. Certain financial
covenants were amended in order for the Company to remain in compliance with
such financial covenants as of September 30, 2002.
The Company is obligated under various promissory notes related to the
financing of acquisitions that have various rates of interest, ranging from
3.75% to 10.0% per annum, and maturities through 2010. The outstanding balance
of these notes as of March 31, 2003 was $5.6 million. Some of these notes are
secured by assets related to the applicable acquisition, some are unsecured, and
some are backed by bank letters of credit issued under the Company's credit
facility.
The Company enters into contractual agreements in the ordinary course of
business to hedge its exposure to interest rate risks. Counterparties to these
agreements are major financial institutions. Management believes the risk of
incurring losses related to credit risk is remote and any losses would be
immaterial.
Interest rate swap agreements are used to reduce interest rate risks and
costs inherent in the Company's debt portfolio. The Company enters into these
agreements to change the fixed/variable interest rate mix of the debt
- 18 -
portfolio in order to maintain the percentage of fixed and variable debt within
certain parameters set by management. Accordingly, the Company enters into
agreements to effectively convert variable-rate debt to fixed-rate debt.
As of March 31, 2003, the Company had $60.0 million in notional amounts
outstanding under interest rate swap agreements. These swaps have an average pay
rate of 6.1% versus a receive rate of 1.3%.
During the quarter ended March 31, 2003, the Company recorded nonrecurring
charges of approximately $0.6 million relating to its initiatives to reduce its
cost structure, improve customer service and to eliminate assets that were not
providing an acceptable return. The Company expects to conclude these
initiatives by September 30, 2003, and to record additional nonrecurring
charges during the quarters ended June 30 and September 30, 2003. These charges
are expected to have a significant effect on earnings when recorded. While the
Company currently complies with its covenants under its credit facility, the
Company believes that the incurrence of these charges may cause it to breach
certain of its financial covenants. The Company is having discussions with its
banks to amend its credit facility so that the incurrence of these charges will
not result in the Company's breach of financial covenants. While the Company
believes that the required amendments can be obtained without having a material
effect on its financing costs or its ability to obtain capital in the future,
it can provide no assurance of this, nor can it provide assurance that it will
be able to amend the credit facility, at all or on terms acceptable to the
Company.
The Company has previously entered into a put/call option agreement with an
independent distributor for the purchase of its business. This put became
exercisable in May 2002 and ends in May 2005. The call becomes exercisable
beginning in May 2005 and ending in May 2008. The total purchase price of this
acquisition, which varies based upon the target's financial statements, is
currently estimated to be approximately $8.0 million. The Company believes that
it will have adequate capital resources available to fund this acquisition at
such time that the option is exercised.
The Company believes that cash generated from operations, borrowing
availability under its credit facility and the ability to obtain financing with
sellers of businesses will be sufficient to satisfy the Company's requirements
for operating funds, capital expenditures and future acquisitions for at least
the next twelve months. The Company has no plans at this time to issue
additional shares of common stock.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires management to make judgments, assumptions and estimates that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Note 2 to the consolidated financial statements describes
the significant accounting policies and methods used in the preparation of the
consolidated financial statements. Estimates are used for, but not limited to,
determining the net carrying value of trade receivables, inventories, goodwill,
other intangible assets and employee health care benefit reserves. Actual
results could differ from these estimates. The following critical accounting
policies are impacted significantly by judgments, assumptions and estimates used
in the preparation of the consolidated financial statements.
Trade Receivables
The Company must make estimates of the collectability of its trade
receivables. Management has established an allowance for doubtful accounts to
adjust the carrying value of trade receivables to fair value based on an
estimate of the amount of trade receivables that are deemed uncollectible. The
allowance for doubtful accounts is determined based on historical experience,
economic trends and management's knowledge of significant accounts.
Inventories
The Company's inventories are stated at the lower of cost or market. The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the
estimated market value based upon its physical condition as well as assumptions
about future demand and market conditions. If actual demand or market conditions
in the future are less favorable than those estimated, additional inventory
write-downs may be required.
Goodwill and Other Intangible Assets
The Company adopted SFAS 142, Goodwill and Other Intangible Assets, as of
July 1, 2001. SFAS 142 requires goodwill and intangible assets with indefinite
- 19 -
useful lives not to be amortized, but instead be tested for impairment at least
annually. The Company has elected to perform its annual tests for indications of
goodwill impairment as of June 30th of each year. The annual impairment test
used by the Company includes a discounted cash flow analysis as well as other
tests of the market value of the Company's stock. The discounted cash flow
analysis requires the use of significant estimates, assumptions and judgments.
Examples include, (i) projections on Company operating performance, (ii)
assumptions as to the Company's cost of capital, and (iii) assumptions as to the
availability of capital in the future.
Employee Health Care Benefits Payable
The Company has self-funded health care benefit programs in place whereby a
third party administrator settles and pays incurred claims on an on-going basis.
The Company estimates the level of outstanding claims, at any point in time,
based upon historical payment patterns, knowledge of individual claims and
estimates of health care costs. The Company has stop-loss insurance coverage in
place to limit the extent of individual claims.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company generally has experienced higher sales activity during its
second and third quarters as a result of seasonal sales of propane, with
corresponding lower sales for the first and fourth quarters. As a result, income
from operations and net income typically are higher for the second and third
quarters than for the first and fourth quarters of the fiscal year. The timing
of acquisitions may also have an appreciable effect on quarter to quarter
earnings.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally low rates of inflation in the
economy and the Company's historical ability to pass purchase price increases to
its customers in the form of sales price increases. While inflation has not had,
and the Company does not expect that it will have, a material impact upon
operating results, there is no assurance that the Company's business will not be
affected by inflation in the future.
CAUTIONARY STATEMENTS
This report includes statements that are forward-looking as that term is
defined by the Private Securities Litigation and Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases,
including statements regarding our intent, belief or current expectations. These
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties that may cause actual results to differ
materially from the results discussed in these statements. The Company intends
that such forward-looking statements be afforded the protections provided by the
safe harbor created by the Private Securities Litigation and Reform Act of 1995.
Important risk factors that may affect the Company's ability to achieve the
results expressed in the forward-looking statements include, but are not limited
to, the Company's ability to (i)accurately identify attractive acquisition
targets and make accurate predictions regarding the performance of those
businesses if integrated into the Company's operations, (ii) successfully
negotiate agreements for the acquisition of those businesses, (iii) integrate
the operations of the acquired businesses as anticipated, (iv) secure financing
necessary to make acquisitions, including maintaining and/or expanding its line
of credit, negotiating seller financing, or securing other
- 20 -
financing methods, (v) manage rapid growth, (vi) effectively compete, (vii)
attract and retain key personnel and (viii) maintain good relationships with
suppliers and locate alternative suppliers if needed. In addition, the Company's
ability to achieve the results expressed by the forward-looking statements may
be affected by litigation or other claims arising out of accidents involving the
Company's products, changes in the economy, monetary or fiscal policies, changes
in laws and regulations affecting the Company's business, inflation and
fluctuations in interest rates. Other risks and uncertainties are detailed from
time to time in our filings with the Securities and Exchange Commission. We do
not intend to update any of the forward-looking statements after the date of
this Form 10-Q to conform them to actual results.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on the one month LIBOR rate in effect at the reporting
date. No assumptions have been made for future changes in the one month LIBOR
rate.
EXPECTED MATURITY DATE
FOR PERIODS ENDING JUNE 30,
---------------------------------------------------- ----------------------------------
THERE FAIR
2003 2004 2005 2006 2007 AFTER TOTAL VALUE
------- -------- -------- ------- ------ -------- ------ -------
(IN THOUSANDS)
Liabilities
Long term debt
Fixed rate............ $ 3,319 $2,190 $801 $751 $547 $417 $8,025 $7,249
Average interest
rate . . . . . . 3.78% 4.47% 5.78% 6.38% 6.28% 4.86%
Variable rate......... $ 3,000 $3,000 $66,953 -- -- -- $72,953 $72,953
Average interest
rate................. 4.59% 4.59% 4.59% -- -- --
Interest rate swaps fixed
to variable $60,000 $55,000 $25,000 -- -- -- $(3,874)
Average pay rate....... 5.45% 5.45% 5.25% -- -- --
Average receive
rate................. 1.84% 1.84% 1.84% -- -- --
No material change to the information set forth in the above table has
occurred since June 30, 2002. There was no change to the composition of the
Company's fixed and variable rate long-term debt or interest rate swaps during
the nine months ended March 31, 2003. As of March 31, 2003, the Company's
average pay rate for these swaps was 6.1% compared to its average receive rate
of 1.3%.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management,
including our Chief Executive Officer, Michael L. Tyler, and our Chief Financial
Officer, Robert D. Scherich, we evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as defined in
- 21 -
Rule 13a-14(c) under the Exchange Act) as of a date (the "Evaluation Date")
within 90 days prior to the filing date of this report. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the Evaluation Date, our disclosure controls and procedures were
effective in timely alerting them to the material information relating to us
required to be included in our periodic SEC filings.
(b) Changes in Internal Controls
There were no significant changes made in our internal controls during the
period covered by this report or, to our knowledge, in other factors that could
significantly affect these controls subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
99.1 Certification of Michael L. Tyler pursuant to 18 U.S.C. (s) 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
99.2 Certification of Robert D. Scherich pursuant to 18 U.S.C. (s)
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
(b) Reports on Form 8-K
The Company filed a Form 8-K on March 7, 2003 reporting under Item 4
Changes in Registrant's Accountant.
The Company filed a Form 8-K on March 28, 2003 reporting under Item 4
Changes in Registrant's Accountant.
- 22 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY NATIONAL GASES INCORPORATED
May 15th, 2003 /s/ Robert D. Scherich
-----------------------------------
Robert D. Scherich
Chief Financial Officer
- 23 -
CERTIFICATIONS
I, Michael L. Tyler, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valley National Gases
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15th, 2003
/s/ Michael L. Tyler
-------------------------------------
President and Chief Executive Officer
- 24 -
I, Robert D. Scherich, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Valley National Gases
Incorporated;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operation and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 15th, 2003
/s/ Robert D. Scherich
------------------------
Chief Financial Officer
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