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UNITED STATES
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 SEPTEMBER 30, 2004
[ ] 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 November 10, 2004
----- --------------------------------
Common stock, $0.001 par value 9,488,049
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Valley National Gases Incorporated
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2004
and September 30, 2004 (unaudited) 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2003 and 2004 (unaudited) 5
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2003 and 2004 (unaudited) 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 24
ITEM 4 Controls and Procedures 24
PART II OTHER INFORMATION
ITEM 6 Exhibits 25
SIGNATURES 26
- 2 -
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2004 * 2004
------------ -------------
(Unaudited)
A S S E T S
CURRENT ASSETS:
Cash and cash equivalents $ 549,002 $ 1,309,460
Accounts receivable, net of allowance for
doubtful accounts of $747,309 and
$875,521, respectively 15,043,640 15,441,948
Inventory 9,415,875 10,046,294
Prepaids and other current assets 883,681 1,259,750
Deferred tax assets 2,346,484 2,799,764
Refundable taxes 1,183,324 1,209,519
------------ ------------
Total current assets 29,422,006 32,066,735
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 2,183,176 1,882,195
Buildings and improvements 18,529,827 18,707,492
Equipment 89,084,662 91,008,568
Transportation equipment 18,058,515 18,583,700
Furniture and fixtures 7,961,202 8,067,159
------------ ------------
Total property, plant and equipment 135,817,382 138,249,114
Accumulated depreciation (53,148,410) (53,975,555)
------------ ------------
Net property, plant and equipment 82,668,972 84,273,559
============ ============
OTHER ASSETS:
Non-compete agreements, consulting agreements and customer lists,
net of accumulated amortization of $8,796,725 and $9,140,415,
respectively 2,711,337 2,367,647
Goodwill 40,997,738 40,997,738
Deposits and other assets 1,534,989 1,520,734
------------ -------------
Total other assets 45,244,064 44,886,119
------------ -------------
TOTAL ASSETS $157,335,042 $ 161,226,413
============ =============
* Amounts have been derived from audited financial statements.
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 3 -
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, September 30,
2004 * 2004
------------ ------------
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,651,934 $ 2,600,388
Bank overdraft 668,046 -
Accounts payable 8,235,193 9,719,420
Accrued compensation and employee benefits 3,734,967 3,394,006
Interest rate derivatives 1,760,338 1,486,841
Other current liabilities 2,491,451 4,986,054
------------ ------------
Total current liabilities 19,541,929 22,186,709
LONG-TERM DEBT, less current maturities 62,286,040 62,771,050
DEFERRED TAX LIABILITIES 21,977,647 22,548,825
OTHER LONG-TERM LIABILITIES 1,681,696 1,649,077
INTEREST RATE DERIVATIVES 358,105 287,142
------------ ------------
Total liabilities 105,845,417 109,442,803
------------ ------------
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN VARIABLE INTEREST ENTITIES
5,381,500 4,631,352
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $.01 per share - Authorized, 5,000,000 shares,
none Issued or Outstanding - -
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares;
Issued, 9,620,084 shares, Outstanding, 9,464,584 and 9,488,049
shares, respectively 9,620 9,620
Paid-in-capital 18,905,761 18,855,571
Retained earnings 29,668,686 30,378,134
Accumulated other comprehensive loss (1,184,309) (994,428)
Treasury stock at cost, 155,500 and 132,035 shares, respectively
(1,291,633) (1,096,639)
------------ ------------
Total stockholders' equity 46,108,125 47,152,258
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $157,335,042 $161,226,413
============ ============
* Amounts have been derived from audited financial statements.
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
September 31,
--------------------------
2003 2004
----------- -----------
NET SALES $32,434,532 $36,200,516
COST OF PRODUCTS SOLD, excluding depreciation and amortization 14,678,461 16,913,985
----------- -----------
Gross profit 17,756,071 19,286,531
----------- -----------
EXPENSES:
Operating and administrative 13,501,971 13,410,321
Depreciation 1,377,974 1,572,155
Amortization of intangibles 470,756 343,690
----------- -----------
Total expenses 15,350,701 15,326,166
----------- -----------
Income from operations 2,405,370 3,960,365
----------- -----------
INTEREST EXPENSE 1,481,531 1,199,991
OTHER INCOME, NET 82,201 84,613
----------- -----------
EARNINGS BEFORE MINORITY INTEREST 1,006,040 2,844,987
MINORITY INTEREST - 323,416
----------- -----------
NET EARNINGS BEFORE TAXES 1,006,040 2,521,571
PROVISION FOR INCOME TAXES 392,356 958,197
----------- -----------
NET EARNINGS $ 613,684 $ 1,563,374
=========== ===========
BASIC EARNINGS PER SHARE $ 0.07 $ 0.16
DILUTED EARNINGS PER SHARE $ 0.07 $ 0.16
WEIGHTED AVERAGE SHARES:
Basic 9,356,834 9,485,696
Diluted 9,387,864 9,600,299
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 5 -
VALLEY NATIONAL GASES INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
September 30,
----------------------------
2003 2004
------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 1,930,271 $ 3,872,362
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 7,550 23,800
Purchases of property and equipment (1,051,567) (3,045,926)
------------ ------------
Net cash used in investing activities (1,044,017) (3,022,126)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 10,400,000 14,709,525
Principal payments on loans (11,423,962) (14,944,107)
Redemption of stock options - 144,804
------------ ------------
Net cash used in financing activities (1,023,962) (89,778)
------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (137,708) 760,458
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,782,713 549,002
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,645,005 $ 1,309,460
============ ============
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
- 6 -
VALLEY NATIONAL GASES INCORPORATED
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying condensed consolidated financial statements include the
accounts of Valley National Gases Incorporated and entities required to be
consolidated pursuant to Financial Accounting Standards Board Interpretation No.
46R, "Consolidation of Variable Interest Entities," ("FIN 46R") effective March
31, 2004. The term "Valley" as used throughout this document is used to indicate
Valley National Gases Incorporated. The term "the Company" as used throughout
this document is used to indicate Valley as well as entities required to be
consolidated under FIN 46R. Effective with this adoption, the Company has two
reportable segments: Valley and Variable Interests Entities.
The condensed consolidated financial statements of 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 normal recurring adjustments and adjustments required
upon adoption of FIN 46R, 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 consolidated financial
statements for the period ending June 30, 2004.
2. ORGANIZATION
Valley National Gases Incorporated, a Pennsylvania corporation, produces,
packages and resells industrial gases, specialty gases and propane; and resells
welding hard goods and equipment. Valley's gas operations consist primarily of
packaging and mixing industrial, medical and specialty gases, such as oxygen,
nitrogen and argon, in pressurized cylinders and transporting these cylinders to
customers from one of Valley's 64 distribution or retail locations. In addition,
Valley distributes propane to industrial and residential customers. Welding
equipment and supplies sales includes welding machines, wire, fluxes and
electrodes, as well as a wide variety of supporting equipment. Since Valley was
founded, it has completed 70 acquisitions of smaller independent local
companies. Valley, through its consolidated subsidiaries has been in operation
since 1958 and currently operates in 11 states.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America.
Certain of these accounting principles are more critical than others in gaining
an understanding of the basis upon which the Company's financial statements have
been prepared. A comprehensive review of these policies is contained in Valley's
2004 Annual Report on Form 10-K filed on September 29, 2004. There have been no
significant changes in these policies or the application thereof during the
first three months of fiscal 2005.
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method. Valley estimates reserves for product loss and obsolete
inventory on a quarterly basis.
- 7 -
The components of inventory are as follows:
June 30, September 30,
2004 2004
----------- -------------
(Unaudited)
Hard goods $ 7,300,461 $ 8,174,893
Gases 2,115,414 1,871,401
----------- -----------
$ 9,415,875 $10,046,294
=========== ===========
ACCOUNTING FOR STOCK-BASED COMPENSATION
Valley has a stock-based compensation plan. Valley accounts for this plan
under the recognition and measurement provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees". Under these provisions, stock-based
employee compensation cost is not reflected in net income for any year, as all
options granted under the plan had an exercise price equal to or greater than
the market value of the underlying common stock on the grant date.
The Company continues to account for stock option grants under the old
method and have not elected to expense these options. If Valley had elected to
recognize compensation cost for these stock options based on the fair value
method set forth in SFAS No. 123, "Accounting for Stock Based Compensation"
Valley's net income and earnings per share would have been the pro forma amounts
indicated below:
Three Months Ended
September 30,
-----------------------
2003 2004
---------- ----------
Net income
As reported $ 613,684 $1,563,374
Deduct: Total stock-based employee compensation
expense based on the fair value method for all
awards, net of related tax effects 21,713 21,539
---------- ----------
Pro forma 591,971 1,541,835
Earnings per share assuming dilution
As reported $ 0.07 $ 0.16
Pro forma $ 0.06 $ 0.16
COMPREHENSIVE INCOME
Comprehensive income includes net income and unrealized gains and losses
on derivatives designated and qualified as cash flow hedges. The components of
comprehensive income consist of the following for the three months ending
September 30:
Three Months Ended
September 30,
-----------------------
2003 2004
---------- ----------
Net earnings $ 613,684 $1,563,374
Unrealized gains on derivatives,
net of tax 444,058 189,881
---------- ----------
Comprehensive income $1,057,742 $1,753,255
========== ==========
NEW ACCOUNTING STANDARDS
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 but is not
the primary beneficiary.
In December 2003, the FASB issued FIN 46R to further clarify the standard
which
- 8 -
was adopted by the Company as of March 31, 2004. Accordingly, management
concluded that the related party lease agreement entities were required to be
consolidated with Valley's financial statements pursuant to the common control
provisions under FIN 46R (see Note 7).
SUPPLEMENTAL CASH FLOW INFORMATION
For the Three Months
Ended September 30,
----------------------------
2003 2004
------------ ------------
Cash paid for certain items -
Cash payments for interest $ 1,490,455 $ 992,863
Cash payments for income taxes - 26,195
Non-cash financing activity -
Dividend payable - 853,924
Adjustment of seller notes (82,080) -
Non-cash investing activity -
Fixed asset purchases 451,163 270,122
4. GOODWILL AND INTANGIBLE ASSETS:
On July 1, 2001, Valley adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," under which goodwill and other intangible assets with
indefinite lives are not amortized. Each year, Valley evaluates the intangible
assets for impairment with any resulting impairment reflected as an operating
expense. Valley's intangibles, other than goodwill, are its noncompete
agreements, consulting agreements and customer lists, which Valley has assigned
definite lives equal to the terms of the agreements. As of June 30, 2004 and
September 30, 2004, Valley's noncompete agreements, consulting agreements and
customer lists are summarized as follows:
Accumulated
Gross Accumulated Gross Amount as Amortization as Weighted
Amount Amortization as of of Average
as of of September 30, September 30, Amortization
June 30, 2004 June 30, 2004 2004 2004 Period (years)
------------- --------------- --------------- --------------- --------------
Non-competition
agreements $ 10,811,651 $ 8,528,931 $ 10,811,651 $ 8,854,471 9.3
Consulting
agreements 357,411 228,244 357,411 240,744 3.0
Customer lists 339,000 39,550 339,000 45,200 15.0
------------ --------------- --------------- ---------------
Total $ 11,508,062 $ 8,796,725 $ 11,508,062 $ 9,140,415
============ =============== =============== ===============
Amortization expense for the three months ended September 30, 2004 totaled
$343,690. Estimated amortization expense for the remainder of fiscal 2005 as of
September 30, 2004 and the next five fiscal years is summarized as follows:
Fiscal year Ending
June 30,
- ------------------
Remainder of 2005 $ 772,815
2006 $ 588,568
2007 $ 351,068
2008 $ 309,818
2009 $ 117,437
2010 $ 54,067
- 9 -
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 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.
Three Months Ended
September 30,
-----------------------
2003 2004
---------- -----------
Net earnings available for common stock $ 613,684 $ 1,563,374
========== ===========
Basic earnings per common share:
Weighted average common shares 9,356,834 9,485,696
========== ===========
Basic earnings per common share $ 0.07 $ 0.16
========== ===========
Diluted earnings per common share:
Weighted average common shares 9,356,834 9,485,696
Shares issuable from assumed conversion
of common stock equivalents 30,850 114,603
---------- -----------
Weighted average common and common
equivalent shares 9,387,684 9,600,299
========== ===========
Diluted earnings per common share $ 0.07 $ 0.16
========== ===========
Options to purchase 1,500 and 391,200 shares of common stock were
outstanding during the three months ended September 30, 2004 and 2003,
respectively, 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.
6. COMMITMENTS AND CONTINGENCIES
Some industrial gases and propane are flammable, explosive products.
Serious personal injury and property damage can occur in connection with their
transportation, storage, production or use. Valley and its subsidiaries, in the
ordinary course of business, are threatened with and are subject to claims and
are named as defendants in various lawsuits typical of those filed against
employers, commercial property owners, welding equipment and supply
distributors, manufacturers of specialty gases and distributors of specialty
gases and propane which, among other items, seek actual and punitive damages for
product liability, personal injury and property damage. In some cases, claimants
seek attorney fees in addition to actual and punitive damages. Valley always
incurs costs in the handling of claims. Management and employees time is taken
up and frequently there are out-of-pocket expenses which are not recoverable or
reimbursed by insurance. Valley maintains liability and other insurance coverage
against such claims in such amounts and deductibles as Valley believes are
reasonable and prudent. However, there can be no assurance that such insurance
will be adequate to protect Valley from material expenses related to such
liability and claims or that such levels of insurance will continue to be
available in the future at economical prices. Management is of the opinion that
the resolution of these claims and lawsuits will not have a material adverse
effect on the results of operations, financial condition or cash flows of
Valley.
Valley entered into a put/call option agreement in May 1998 with an
independent distributor for the purchase of its business. The put option became
exercisable in May 2002 and ends in May 2005. The call option becomes
exercisable upon expiration of the put option and ends in May 2008. The total
purchase price of this acquisition is currently estimated to be $10 million
based upon the purchase price calculation stipulated in the agreement, which
includes $1 million previously paid for this option which is recorded in the
consolidated balance sheet at September 30, 2004 as a long term asset.
Management believes that the
- 10 -
carrying value of the option is not impaired, based upon its estimate of the
market value of such independent distributor. Management estimates it is more
likely than not that the option will be exercised. Management will continue to
assess the valuation of the long-term asset as facts and circumstances change,
or at least on an annual basis. Valley could incur a loss when the put option is
exercised if the market value of the option at inception is greater than the
market value of the option at the date of purchase. Management believes that a
material loss is unlikely to occur based upon the historical performance of the
independent distributor. In addition, Valley believes that if and when the
option is exercised, it will have adequate capital resources available to fund
this acquisition and that it will continue to be in compliance with its debt
covenant requirements. Valley concluded that the put/call agreement meets the
scope exception requirements of FIN 46R for an entity deemed to be a business
and therefore was not consolidated at March 31, 2004 upon adoption of the new
standard.
Valley leases buildings and equipment and rents cylinders from related
parties, including the sole shareholder prior to Valley's initial public
offering and corporations owned by such sole shareholder and former officers of
Valley. Valley concluded that the related party lease agreement entities
("Variable Interest Entities") were required to be consolidated, as of March 31,
2004, pursuant to common control provisions under FIN 46R (see Note 7). These
lease agreements have various maturity dates through April 2013.
In September 1991, in connection with the purchase by Valley of certain
assets of Praxair, Inc. (Praxair), Valley, 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 Valley's reorganization. Pursuant to this agreement, if at any
time during the term of the agreement Valley wishes to accept a third party
offer to purchase all or a material part of the assets of Valley, or Mr. West
and his affiliates wish to accept an offer to purchase shares of capital stock
of Valley (the Capital Stock) owned by them in a transaction that would result
in Mr. West and his affiliates collectively owning less than 51% of Valley'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 Valley, 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 Valley's issued and outstanding
shares of Common Stock, (b) Valley wishes to sell all or a material part of its
assets, or (c) Valley 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 Valley'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.
7. VARIABLE INTEREST ENTITIES
Valley leases buildings and equipment and rents cylinders under operating
leases from related parties, collectively referred to as "Variable Interest
Entities", primarily including West Rentals, Inc., GEW Real Estate LLC, Real
Equip-Lease LLC and Acetylene Products Corporation. The primary activity of
these entities is to
- 11 -
purchase, develop, sell and/or lease real estate. Valley has historically
entered into these leases to preserve its capital to support its growth through
acquisition strategy. Valley's Chairman, who is the beneficial owner of 75% of
Valley's common stock, beneficially owns greater than 50% of each of these
entities. These arrangements are supported by a master lease agreement, as well
as certain individual lease agreements, that do not contain a bargain purchase
option, fixed renewal option or residual value guarantee. Valley has no equity
interest in any of the entities included in the Variable Interest Entities.
Additionally, the creditors and beneficial interest holders of the entities have
no recourse to the general credit of Valley.
Based upon current interpretation of FIN 46R, in situations where no
contractual residual value guarantees exist, a related party lease is presumed
to contain an implied residual value guarantee. Therefore, as a result of the
implied residual value guarantee, Valley is considered the primary beneficiary,
and management concluded that these entities collectively represent a variable
interest entity under the provisions of FIN 46R. Accordingly, Valley has
consolidated the historical balance sheet of the entities as of March 31, 2004,
the date of adoption of the consolidation provision of FIN 46R. All intercompany
balances have been eliminated in consolidation.
- 12 -
The following table shows the consolidating balance sheet of the Company
at September 30, 2004:
ASSETS
As of September 30, 2004
--------------------------------
Variable
Interest
Valley Entities
Segment Segment Eliminations Company
-------------- -------------- -------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 953,719 $ 355,741 - $ 1,309,460
Accounts receivable, net of
allowance for doubtful accounts
of $875,521 15,163,222 1,520,929 (1,242,203) 15,441,948
Inventory 10,046,294 - - 10,046,294
Prepaids and other current assets 1,249,750 10,000 - 1,259,750
Deferred tax assets 2,799,764 - - 2,799,764
Refundable taxes 1,209,519 - - 1,209,519
-------------- -------------- -------------- --------------
Total current assets 31,422,268 1,886,670 (1,242,203) 32,066,735
-------------- -------------- -------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land 55,000 1,827,195 - 1,882,195
Buildings and improvements 6,664,172 12,043,320 - 18,707,492
Equipment 90,394,221 614,347 - 91,008,568
Transportation equipment 18,438,151 145,549 - 18,583,700
Furniture and fixtures 7,933,496 133,663 - 8,067,159
-------------- -------------- -------------- --------------
Total property, plant and
equipment 123,485,040 14,764,074 - 138,249,114
Accumulated depreciation (50,445,117) (3,530,438) - (53,975,555)
-------------- -------------- -------------- --------------
Net property, plant and
equipment 73,039,923 11,233,636 - 84,273,559
-------------- -------------- -------------- --------------
OTHER ASSETS:
Non-compete agreements, consulting
agreements and customer lists, net of
accumulated amortization of
$9,140,415 2,367,647 - - 2,367,647
Goodwill 40,997,738 - - 40,997,778
Deposits and other assets 1,509,276 11,458 - 1,520,734
-------------- -------------- -------------- --------------
Total other assets 44,874,661 11,458 - 44,886,119
-------------- -------------- -------------- --------------
TOTAL ASSETS $ 149,336,852 $ 13,131,764 $ (1,242,203) $ 161,226,413
============== ============== ============== ==============
- 13 -
LIABILITIES AND STOCKHOLDERS' EQUITY
As of September 30, 2004
--------------------------------
Variable
Interest
Valley Entities
Segment Segment Eliminations Company
-------------- -------------- -------------- --------------
CURRENT LIABILITIES:
Current maturities of long-term
debt $ 988,374 $ 1,612,014 - $ 2,600,388
Accounts payable 9,457,819 261,601 - 9,719,420
Accrued compensation and employee
benefits 3,394,006 - - 3,394,006
Interest rate derivatives 1,486,841 - - 1,486,841
Other current liabilities 4,544,021 442,033 - 4,986,054
-------------- -------------- -------------- --------------
Total current
liabilities 19,871,061 2,315,648 - 22,186,709
LONG-TERM DEBT, less current maturities 57,828,489 6,184,764 (1,242,203) 62,771,050
DEFERRED TAX LIABILITIES 22,548,825 - - 22,548,825
OTHER LONG-TERM LIABILITIES 1,649,077 - - 1,649,077
INTEREST RATE DERIVATIVES 287,142 - - 287,142
-------------- -------------- -------------- --------------
Total liabilities 102,184,594 8,500,412 (1,242,203) 109,442,803
-------------- -------------- -------------- --------------
COMMITMENTS AND CONTINGENCIES
COMMON CONTROL INTEREST - - 4,631,352 4,631,352
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $.01
per share -
Authorized, 5,000,000 shares,
none Issued or Outstanding
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares; 9,620 3,800 (3,800) 9,620
Issued, 9,620,084 shares, Outstanding,
9,488,049 shares
Paid-in-capital 18,855,571 335,985 (335,985) 18,855,571
Retained earnings 30,378,134 4,291,567 (4,291,567) 30,378,134
Accumulated other comprehensive loss (994,428) - - (994,428)
Treasury stock at cost, 132,035 shares (1,096,639) - - (1,096,639)
-------------- -------------- -------------- -------------
Total stockholders' equity 47,152,258 4,631,352 (4,631,352) 47,152,258
-------------- -------------- -------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 149,336,852 $ 13,131,764 $ (1,242,203) $ 161,226,413
============== ============== ============== =============
- 14 -
The following table shows the consolidating balance sheet of the Company
at June 30, 2004:
A S S E T S
As of June 30, 2004
--------------------------------
Variable
Interest
Valley Entities
Segment Segment Eliminations Company
-------------- -------------- -------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 105,699 $ 443,303 - $ 549,002
Accounts receivable, net of
allowance for doubtful accounts
of $814,846 and $747,309,
respectively 14,726,848 1,544,471 $ (1,227,679) 15,043,640
Inventory 9,415,875 - - 9,415,875
Prepaids and other current assets 873,681 10,000 - 883,681
Deferred tax assets 2,346,484 - - 2,346,484
Refundable taxes 1,183,324 - - 1,183,324
-------------- -------------- -------------- --------------
Total current assets 28,651,911 1,997,774 (1,227,679) 29,422,006
-------------- -------------- -------------- --------------
PROPERTY, PLANT AND EQUIPMENT:
Land 55,000 2,128,176 - 2,183,176
Buildings and improvements 6,330,221 12,199,606 - 18,529,827
Equipment 88,479,962 604,700 - 89,084,662
Transportation equipment 17,912,966 145,549 - 18,058,515
Furniture and fixtures 7,830,225 130,977 - 7,961,202
-------------- -------------- -------------- --------------
Total property, plant and
equipment 120,608,374 15,209,008 - 135,817,382
Accumulated depreciation (49,360,206) (3,788,204) - (53,148,410)
-------------- -------------- -------------- --------------
Net property, plant and
equipment 71,248,168 11,420,804 - 82,668,972
-------------- -------------- -------------- --------------
OTHER ASSETS:
Non-compete agreements, consulting
agreements and customer lists, net of
accumulated amortization of $12,501,875 and
$8,796,725, respectively 2,711,337 - - 2,711,337
Goodwill 40,997,738 - - 40,997,738
Deposits and other assets 1,523,532 11,457 - 1,534,989
-------------- -------------- -------------- --------------
Total other assets 45,232,607 11,457 - 45,244,064
-------------- -------------- -------------- --------------
TOTAL ASSETS $ 145,132,686 $ 13,430,035 $ (1,227,679) $ 157,335,042
============== ============== ============== ==============
- 15 -
LIABILITIES AND STOCKHOLDERS' EQUITY
As of June 30, 2004
Variable
Interest
Valley Entities
Segment Segment Eliminations Company
------------- ------------- ------------- -------------
CURRENT LIABILITIES:
Current maturities of long-term
debt $ 1,105,622 $ 1,546,312 - $ 2,651,934
Bank overdraft 918,046 - $ (250,000) 668,046
Accounts payable 7,982,973 252,220 - 8,235,193
Accrued compensation and
employee benefits 3,734,967 - - 3,734,967
Interest rate derivatives 1,760,338 - - 1,760,338
Other current liabilities 2,378,582 112,869 - 2,491,451
------------- ------------- ------------- -------------
Total current
liabilities 17,880,528 1,911,401 (250,000) 19,541,929
LONG-TERM DEBT, less current maturities 57,126,585 6,137,134 (977,679) 62,286,040
DEFERRED TAX LIABILITIES 21,977,647 - 21,977,647
OTHER LONG-TERM LIABILITIES 1,681,696 - 1,681,696
INTEREST RATE DERIVATIVES 358,105 - 358,105
------------- ------------- ------------- -------------
Total liabilities 99,024,561 8,048,535 (1,227,679) 105,845,417
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES - - - -
MINORITY INTEREST IN VARIABLE INTEREST ENTITIES
- 5,381,500 5,381,500
STOCKHOLDERS' EQUITY:
Preferred stock, par value, $.01 per share --
Authorized, 5,000,000 shares, none Issued or
Outstanding - - - -
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares; - - - -
Issued, 9,620,084 shares, Outstanding,
9,356,834 and 9,464,584 shares,
respectively
9,620 3,800 (3,800) 9,620
Paid-in-capital 18,905,761 335,985 (335,985) 18,905,761
Retained earnings 29,668,686 5,041,715 (5,041,715) 29,668,686
Accumulated other comprehensive
loss (1,184,309) - - (1,184,309)
Treasury stock at cost, 263,250
and 155,500 shares,
respectively (1,291,633) - (1,291,633)
------------- ------------- ------------- -------------
Total stockholders'
equity 46,108,125 5,381,500 - 46,108,125
------------- ------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 145,132,686 $ 13,430,035 $ (1,227,679) $ 157,335,042
============= ============= ============= =============
-16-
The following table shows the consolidating income statement of the
Company for the three months ended September 30, 2004:
As of September 30, 2004
------------------------
Variable
Interest
Valley Entities
Segment Segment Eliminations Company
----------- ----------- --------- -----------
NET SALES $36,200,516 $ 699,851 $(699,851) $36,200,516
COST OF PRODUCTS SOLD, excluding
depreciation and amortization 16,913,985 - - 16,913,985
----------- ----------- --------- -----------
Gross profit 19,286,531 699,851 (699,851) 19,286,531
----------- ----------- --------- -----------
EXPENSES:
Operating and administrative 13,833,704 276,468 (699,851) 13,410,321
Depreciation 1,470,000 102,155 - 1,572,155
Amortization of intangibles 343,690 - - 343,690
----------- ----------- --------- -----------
Total expenses 15,647,394 378,623 (699,851) 15,326,166
----------- ----------- --------- -----------
Income from operations 3,639,137 321,228 - 3,960,365
----------- ----------- --------- -----------
INTEREST EXPENSE 1,150,660 49,331 - 1,199,991
OTHER INCOME, NET 33,094 51,519 - 84,613
----------- ----------- --------- -----------
EARNINGS BEFORE MINORITY INTEREST 2,521,571 323,416 - 2,844,987
MINORITY INTEREST - 323,416 - 323,416
----------- ----------- --------- -----------
NET EARNINGS BEFORE TAXES 2,521,571 - - 2,521,571
PROVISION FOR INCOME TAXES 958,197 - - 958,197
----------- ----------- --------- -----------
NET EARNINGS $ 1,563,374 $ 323,416 - $ 1,563,374
=========== =========== ========= ===========
8. SEGMENT DATA
Effective with the adoption of FIN 46R and the required consolidation of
certain variable interest entities in the third quarter of 2004 (See Note 1),
the Company has two reportable segments: Valley and Variable Interest Entities.
Since these are two separate and distinct businesses, the financial information
for each business is maintained and managed separately. The results of
operations and assets for each of these segments are derived from each business'
financial reporting system. All intercompany activity is eliminated in
consolidation.
The Variable Interest Entities reportable segment, including West Rentals,
Inc., GEW Real Estate LLC, Real Equip-Lease LLC and Acetylene Products
Corporation, primarily purchases, develops, sells and leases real estate.
The Valley reportable segment operates 64 retail and distribution
locations in 11 states. All locations offer the same core products of packaged
gases, welding equipment and supplies. All locations generally sell to customers
in the metal fabrication, construction, general industrial, research and
laboratory, hospital and other medical, commercial, agricultural and residential
industries. Management considers each of the locations to be an operating
segment as defined in Financial Accounting Standards Board (FASB) No. 131,
however, none of these locations individually meet the quantitative thresholds
stated in FASB No. 131 of 10% of revenue (or profits or assets) to be deemed a
reportable segment. Since these operating segments are similar in economic
characteristics, long-term gross margin averages, products sold, types of
customers, methods of distribution and regulatory environment, management
concluded that these operating segments should be aggregated into one reporting
segment.
Identifiable assets by reporting segment are as follows at September 30,
2004 (See Note 7):
Valley $149,336,852
Variable Interest Entities 11,889,561
------------
Total assets $161,226,413
============
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-17-
The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report.
The statements contained in this Quarterly Report on Form 10-Q, including,
but not limited to those contained in Item 2- Management's Discussion and
Analysis of Results of Operations and Financial Condition, along with statements
in other reports filed with the Securities and Exchange Commission (the "SEC"),
external documents and oral presentations, which are not historical facts are
considered "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended. These statements, which may be expressed in a variety
of ways, including the use of forward-looking terminology such as "will,"
"believes," "intends," "expects," "plans," "could" or "may," or the negatives
thereof, other variations thereon or comparable terminology, relate to, among
other things, Valley's ability to identify attractive acquisition targets and to
successfully acquire new businesses and assimilate the operations of those
businesses into its operations, its ability to finance such acquisitions, its
ability to meet its covenant requirements under its credit facility, its ability
to secure alternative sources of supply if needed, its ability to maintain its
supply of propane, its ability to meet increased demand for specialty gas
products, the effect of product liability or other claims on Valley's results of
operations or financial condition, the trend towards and cost impacts of
consolidation in the industry and the industry's general resistance to downturns
in the business cycle. The Company does not undertake any obligation to publicly
update any forward-looking statements.
These forward-looking statements and other forward-looking statements
contained in other public disclosures of Valley which make reference to the
cautionary factors contained in this Form 10-Q are based on assumptions that
involve risks and uncertainties and are subject to change. These risks,
uncertainties and other factors may cause actual results, performance or
achievements to differ materially from anticipated future results, performance
or achievements expressed or implied by such forward looking statements.
Important risk factors that may affect Valley's ability to achieve the results
expressed in the forward-looking statements include, but are not limited to, the
risks discussed in Exhibit 99.1 included in the Company's Form 10-K for the year
ended June 30, 2004 and Valley's ability to (i) accurately identify attractive
acquisition targets and make accurate predictions regarding the performance of
those business if integrated into Valley'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, maintaining compliance with covenants, negotiating seller financing,
or securing other 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, Valley'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 Valley's products, changes in the economy, monetary
or fiscal policies, changes in laws and regulations affecting Valley's business,
inflation and fluctuations in interest rates.
Valley wishes to caution each reader of this Form 10-Q to consider the
factors described below and certain other factors discussed herein and in other
past reports including, but not limited to, prior year Annual Reports and Form
10-K and Form 10-Q reports filed with the SEC. The factors discussed herein may
not be exhaustive. Therefore, the factors discussed herein should be read
together with other reports and documents that are filed by Valley with the SEC
from time to time, which may supplement, modify, supersede or update the factors
listed in this document.
OVERVIEW
Valley National Gases, Incorporated, a Pennsylvania corporation, referred
to as Valley, is a leading packager and distributor of cylinder and bulk
industrial, medical and specialty gases, welding equipment and supplies, propane
and fire protection equipment in 11 states in the eastern United States.
Valley's net sales have grown, primarily as a result of acquisitions since
Valley started business in 1958, increasing
-18-
to $154.5 million in fiscal 2004. In fiscal 2004, gases accounted for
approximately 49.2% of net sales, welding equipment and supplies (generally
referred to in the industry as "hard goods") accounted for approximately 35.0%
of net sales, while cylinder rental, tank rental, delivery charges and
compliance charges accounted for approximately 15.8% of net sales.
Valley's gas operations consist primarily of packaging and mixing
industrial, medical and specialty gases, such as oxygen, nitrogen and argon, in
pressurized cylinders and transporting these cylinders to customers from one of
Valley's 64 distribution or retail locations. Valley also distributes propane to
industrial and residential customers. Most customers pay a rental fee for use of
company cylinders. Valley owns approximately 500,000 cylinders, which require
minimal maintenance and have useful lives that Valley expects will average 30
years or longer depending upon the style. Valley selectively participates in the
small bulk gas market through the supply of gases in cryogenic transports and
the storage of gases in supplier provided cryogenic and propane tanks that are
also rented to customers. Valley owns approximately 32,000 bulk propane tanks
and 406 bulk cryogenic tanks, which have useful lives generally less than those
of cylinders. In connection with the distribution of gases, Valley sells welding
equipment and supplies, including welding machines, wire, fluxes and electrodes
and a wide variety of supporting equipment.
Effective with the adoption of Financial Accounting Standards Board (FASB)
Interpretation No. 46, "Consolidation of Variable Interest Entities", referred
to as FIN 46R, in the third quarter of 2004 and the required consolidation of
certain variable interest entities, Valley has two reportable segments: Valley
and Variable Interest Entities (as defined below). Since these are two separate
and distinct businesses, the financial information for each business is
maintained and managed separately. The results of operations and assets for each
of these segments are derived from each business' respective financial reporting
system. See Note 1 to the financial statements. All inter-company activity is
eliminated in consolidation.
The Variable Interest Entities' reportable segment, including West
Rentals, Inc., GEW Real Estate LLC, Real Equip-Lease LLC and Acetylene Products
Corporation, primarily purchases, develops, sells and leases real estate.
The Valley reportable segment operates 64 retail and distribution
locations in 11 states. All locations offer the same core products of packaged
gases, welding equipment and supplies. All locations generally sell to customers
in the metal fabrication, construction, general industrial, research and
laboratory, hospital and other medical, commercial, agricultural and residential
industries. Valley considers each of the locations to be an operating segment as
defined in Financial Accounting Standards Board (FASB) No. 131, however, none of
these locations individually meet the quantitative thresholds stated in FASB No.
131 of 10% of revenue (or profits or assets). Since these operating segments are
similar in economic characteristics, long-term gross margin averages, products
sold, types of customers, methods of distribution and regulatory environment
that these operating segments should be aggregated into one reporting segment.
Valley's current business strategy is to grow sales through the selective
acquisition of other independent distributors and, to a lesser degree, through
internally generated growth. Valley believes earnings growth will occur through
additional sales and from the implementation of policies and procedures which
more effectively administer, control and monitor customer pricing. Earnings
growth is also expected to occur through cost leveraging of operations and the
proper implementation of certain key operating procedures and staffing based
upon "best practices" standards. Though Valley has historically grown its
business through acquiring independent distributors, Valley has intentionally
limited its acquisitions in 2003 and 2004 in order to more effectively implement
its improvement initiatives. However, management believes that, over the long
term, attractive acquisition candidates will continue to present themselves as a
result of the consolidation trend in the industries in which Valley participates
and that Valley will be able to generate growth and operational synergies by
successfully integrating acquired operations into its base business, generating
growth and operational synergies. Valley expects that acquisitions will be
financed primarily with internally generated funds and to a much lesser extent
through borrowings under Valley's existing credit facility and seller financing.
While highly focused on acquisitions, price attainment and cost leveraging,
management believes that Valley's
-19-
competitive strengths will allow it to continue to increase sales through
internal growth.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 2004 and 2003
The following discussion of the results of operations and financial
condition of the Company should be read in conjunction with the financial
statements included in response to Part 1, Item 1 of this report.
Net sales increased 11.6%, or $3.8 million, to $36.2 million for the three
months ended September 30, 2004 from $32.4 million for the three months ended
September 30, 2003. Propane sales increased $1.2 million, reflecting $1.1
million in price inflation and a $0.1 million increase in the volume of propane
sold. Hard goods sales increased $2.1 million from the same period in 2003 on a
same store basis, reflecting the effect of Valley's pricing initiatives and
increased demand. Gases and cylinder revenue increased $0.4 million which
represented 59.7% of net sales for the three months ended September 30, 2004,
with hard goods representing 40.3%. In comparison, gases and cylinder revenue
represented 61.5% of net sales for the three months ended September 30, 2003,
with hard goods representing 38.5%.
Gross profit, which excludes depreciation and amortization, increased
8.6%, or $1.5 million, to $19.3 million, for the three months ended September
30, 2004 compared to $17.8 million for the three months ended September 30,
2003. Gross profit as a percentage of net sales was 53.3% for the three months
ended September 30, 2004, compared to 54.7% for the three months ended September
30, 2003. The change in gross profit is the result of improved pricing in
hardgoods, industrial gases and cylinder rent which was more than offset by
reduced propane margin as a percent of sales.
Operating and administrative expenses decreased $0.1 million for the
quarter compared to the first quarter of 2003. Operating expense within the
Valley segment increased $0.4 million due to increased professional and legal
services and other expenses partially offset by decreased personnel costs and
building rent. This increase in the Valley segement was offset by a reduction of
$0.5 million in rent expense, as a result of consolidating entities owned by a
related party that leases property to Valley under FIN 46R, Variable Interest
Entities. Operating and administrative expenses for the three months ended
September 30, 2003 includes full rent expense with no reduction in consolidation
since FIN 46R was adopted as of March 31, 2004. Operating and administrative
expenses as a percentage of sales for the Company were 37.0% for the three
months ended September 30, 2004, as compared to 41.6% for the three months ended
September 30, 2003.
Depreciation and amortization expense increased $0.2 million for the three
months ended September 30, 2004, as compared to the three months ended September
30, 2003. The increase is partially due to the consolidation of the Variable
Interest Entities' contribution of $0.1 million in depreciation expense for the
three months ended September 30, 2004 which was not consolidated for the three
months ended September 30, 2003 since FIN 46R was adopted as of March 31, 2004.
Interest expense decreased $0.3 million to $1.2 million for the three
months ended September 30, 2004, as compared to $1.5 million for the three
months ended September 30, 2003, as a result of reduced outstanding debt
balances and lower interest rates due to improvement in the Company's
performance and financial ratios. Included in interest expense was a decrease of
$16,992 and $31,379 for the three months ended September 30, 2004 and September
30, 2003, respectively, to record changes in the fair market value of Valley's
interest rate swap agreements under SFAS No. 133. Interest expense includes $0.1
million related to the Variable Interest Entities' consolidation for the three
months ended September 30, 2004, which was not consolidated in the three months
ended September 30, 2003, since FIN 46R was adopted as of March 31, 2004.
Other income remained consistent as compared to the same three month
period in 2003.
Minority interest earnings reflect the elimination of net pre-tax income
earned during the quarter by the Variable Interest Entities' since Valley has no
direct
-20-
ownership interest in these entities. The amount eliminated is primarily the
reduction in rent expense and other income noted above, partially offset by
expenses incurred by the entities.
The Company's effective tax rate for the three months ended September 30,
2004 was 38.0% compared to 39.0% for the three months ended September 30, 2003.
This change was primarily the result of changes in estimates for federal and
state accrued taxes.
For the reasons stated above, net income increased to $1.6 million for the
three months ended September 30, 2004, as compared to $0.6 million for the three
months ended September 30, 2003. Diluted earnings per share were $0.16 for the
three months ended September 30, 2004, as compared to $0.07 for the three months
ended September 30, 2003. Diluted weighted average shares outstanding for the
three months ended September 30, 2004 were 9,600,299, as compared to 9,387,864
for the three months ended September 30, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Historically, Valley 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 September 30, 2004, the Company had working capital of approximately
$9.9 million, as compared to $11.1 million as of September 30, 2003, reflecting
primarily an increase in accounts payable levels and the declaration of a
dividend in September 2004 of $0.9 million and paid in October 2004. Funds
provided by operations for the three months ended September 30, 2004 were
approximately $3.9 million, as compared to $1.9 million for the three months
ended September 30, 2003. This increase of $2.0 million is primarily
attributable to the $0.9 million increase of net income and an increase in
accounts payable of $2.2 million. Funds used for investing activities were
approximately $3.0 million for the three months ended September 30, 2004
consisting primarily of capital spending, as compared to $1.0 million for three
months ended September 30, 2003. Valley anticipates capital expenditures of
approximately $7.0 million for fiscal year June 30, 2005. Funds used for
financing activities for the three months ended September 30, 2004 were
approximately $0.9 million from net payments of debt, compared to $1.0 million
for the three months ended September 30, 2003. The Company's cash balance
increased $0.8 million during the three months ended September 30, 2004 to $1.3
million.
On April 30, 2004, Valley entered into an amended credit agreement
establishing a $75 million revolving note with a maturity of five years,
replacing the previous revolving and term notes described in Note 5 of the
Financial Statements. Covenant requirements under the amended agreement are not
significantly different from those under the previous agreement.
The weighted average interest rate for substantially all of the borrowings
under the credit facility was 2.97% as of September 30, 2004. As of September
30, 2004, availability under the revolving loan was approximately $17.2 million,
with outstanding borrowings of approximately $56.3 million and outstanding
letters of credit of approximately $1.5 million. The credit facility is secured
by all of Valley's assets. The revolving loan is used primarily to fund
acquisitions. Valley 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 the revolving loan at either the lender's prime rate or
various LIBOR rates, at Valley's discretion, plus an applicable spread.
The loan agreement for the credit facility, as amended, contains various
financial covenants applicable to Valley, including covenants requiring minimum
fixed charge coverage and maximum funded debt to EBITDA. As of September 30,
2004, Valley was in compliance with these covenants and believes that it will
continue to be in compliance through at least the next twelve months.
The Variable Interest Entities' debt, in the amount of $6.5 million,
consists primarily of asset-backed mortgages for real estate. This debt has
various interest
-21-
rates ranging from 3.5% to 7.0% and various maturities from 2004 to 2016.
Certain mortgages are personally guaranteed by the Chairman of Valley.
Valley 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 September 30, 2004 was $2.6 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 Valley's credit facility.
Valley 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 not be
significant.
Interest rate swap agreements are used to reduce interest rate risks and
costs inherent in Valley's debt portfolio. Valley enters into these agreements
to change the variable/ fixed interest rate mix of the debt portfolio in order
to maintain the percentage of fixed and variable debt within certain parameters
set by management. Accordingly, Valley enters into agreements to effectively
convert variable-rate debt to fixed-rate debt. As of September 30, 2004, Valley
had $55.0 million in notional amounts outstanding under interest rate swap
agreements. These swaps have an average pay rate of 6.2% versus a receive rate
of 1.8% at September 30, 2004.
Valley entered into a put/call option agreement in May 1998 with an
independent distributor for the purchase of its business. The put option became
exercisable in May 2002 and ends in May 2005. The call option becomes
exercisable upon expiration of the put option and ends in May 2008. The total
purchase price of this acquisition is currently estimated to be $10 million
based upon the purchase price calculation stipulated in the agreement, which
includes $1 million previously paid for this option which is recorded in the
consolidated balance sheet at September 30, 2004 as a long-term asset.
Management believes that the carrying value of the option is not impaired, based
upon its estimate of the market value of such independent distributor.
Management estimates it is more likely than not that the option will be
exercised. Management will continue to assess the valuation of the long-term
asset as facts and circumstances change, or at least on an annual basis. Valley
could incur a loss when the put option is exercised if the market value of the
option at inception is greater than the market value of the option at the date
of purchase. Management believes that a material loss is unlikely to occur based
upon the historical performance of the independent distributor. In addition,
Valley believes that if and when the option is exercised, it will have adequate
capital resources available to fund this acquisition and that it will continue
to be in compliance with its debt covenant requirements. Valley concluded that
the put/call agreement meets the scope exception requirements of FIN 46R for an
entity deemed to be a business and therefore was not consolidated at March 31,
2004 upon adoption of the new standard.
Valley 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 Valley's requirements for
operating funds, capital expenditures and future acquisitions for at least the
next twelve months. Valley has no plans at this time to issue additional shares
of common stock although it may consider issuing additional shares in the future
as an acquisition currency if a large acquisition opportunity were to develop in
the future.
The schedule of maturities by segment of the Company's debt for the next
five years and thereafter is as follows:
Variable
Interest
Fiscal year ending June 30, Valley Interest Company
- --------------------------- ----------- ----------- -----------
Remainder of 2005 $ 790,283 $ 1,395,119 $ 2,185,402
2006 $ 762,056 $ 823,812 $ 1,585,868
2007 $ 546,551 $ 806,333 $ 1,352,884
2008 $ 189,580 $ 790,334 $ 979,914
2009 $56,434,665 $ 692,194 $57,126,859
2010 $ 66,987 $ 633,825 $ 700,812
Thereafter $ 26,746 $ 1,412,958 $ 1,439,704
----------- ----------- -----------
Total $58,816,868 $ 6,554,575 $65,371,443
=========== =========== ===========
- 22 -
CRITICAL ACCOUNTING POLICIES
The Company's financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America.
Certain of these accounting principles are more critical than others in gaining
an understanding of the basis upon which the Company's financial statements have
been prepared. A comprehensive review of these policies is contained in Valley's
2004 Annual Report on Form 10-K filed on September 29, 2004. There have been no
significant changes in these policies or the application thereof during the
first three months of fiscal 2005.
NEW ACCOUNTING STANDARDS
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 but is not
the primary beneficiary.
In December 2003, the FASB issued FIN 46R to further clarify the standard
which was adopted by the Company as of March 31, 2004. Accordingly, management
concluded that the related party lease agreement entities were required to be
consolidated with Valley's financial statements pursuant to the common control
provisions under FIN 46R (see Note 7).
FORWARD LOOKING STATEMENTS AND RISK FACTORS
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 Valley's ability to grow sales and earnings, cost
leverage its operations, reduce operating expenses, increase product margins,
identify attractive acquisition targets and to successfully acquire new
businesses and assimilate the operations of those businesses into its
operations, its ability to finance such acquisitions, its ability to meet its
covenant requirements under its credit facility and its anticipated capital
spending during fiscal year 2005. Valley 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.
All forward-looking statements are based upon current expectations
regarding important factors. Accordingly, actual results may differ materially
from those expressed in the forward-looking statements and the making of such
statements should not be regarded as a representation by Valley or any other
person that the results expressed will be achieved. Important risk factors that
may affect Valley's ability to achieve the results expressed in the
forward-looking statements include, but are not limited to, the risks discussed
in Exhibit 99.1 to Valley's 10-K for the fiscal year ended June 30, 2004 and
Valley's ability to (i) accurately identify attractive acquisition targets and
make accurate predictions regarding the performance of those businesses if
integrated into Valley'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,
maintaining compliance with covenants, negotiating seller financing, or securing
other 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, Valley'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
Valley's products, changes in the economy, monetary or fiscal policies, changes
in laws and regulations affecting Valley's business, inflation and fluctuations
in interest rates.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There were no significant changes to the composition of the Company's
fixed and variable rate long-term debt or interest rate swaps during the three
months ended September 30, 2004 as compared to that as reported in the Company's
annual report as of June 30, 2004. As of September 30, 2004, the Company's
average pay rate for these swaps was 6.2% compared to its average receive rate
of 1.8%.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer, William A. Indelicato, and
its acting Chief Financial Officer, James P. Hart, the Company evaluated the
effectiveness of the design and operation of its disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")) as of the end of the period covered by
this report. Based upon that evaluation, the Chief Executive Officer and acting
Chief Financial Officer concluded that, as of the end of the period covered by
this report, the Company's disclosure controls and procedures were adequately
designed to ensure that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
applicable rules and forms.
(b) Changes in Internal Controls
During the fiscal quarter covered by this report, there have not been any
significant changes in the Company's internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) that have materially
affected or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 6. EXHIBIT INDEX
3.1 Articles of Amendment (1)
3.2 Bylaws (1)
4.1 Form of Certificate for Common Stock (1)
10.46 Incentive Stock Option Agreement under 1997 Stock Option
Plan, As Amended
10.47 Non-Qualified Stock Option Agreement under 1997 Stock
Option Plan, As Amended
31.1 Certification of the Chief Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Acting Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Acting Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference to Valley's Registration
Statement on Form S-1, Reg. No. 333-19973
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed by the undersigned thereunto
duly authorized.
VALLEY NATIONAL GASES INCORPORATED
November 12, 2004 /s/ James P. Hart
--------------------
James P. Hart
Acting Chief Financial
Officer and
Duly Authorized Officer
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