VALLEY NATIONAL GASES INC - 10-Q Quarterly Report

Back to GetFilings.com

==============================================================================
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 DECEMBER 31, 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 February 10, 2005
----- --------------------------------
Common stock, $0.001 par value 9,498,474

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 December 31, 2004 (unaudited) 3

Condensed Consolidated Statements of Operations for the
Three Months Ended December 31, 2003 and 2004 (unaudited) 5

Condensed Consolidated Statements of Operations for the
Six Months Ended December 31, 2003 and 2004 (unaudited) 6

Consolidated Statements of Changes in Stockholders' Equity
for the Periods Ended June 30, 2004 and December 31, 2004 7

Condensed Consolidated Statements of Cash Flows for the Six
Months Ended December 31, 2003 and 2004 (unaudited) 8

Notes to Condensed Consolidated Financial Statements 9

ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 22

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk 31

ITEM 4 Controls and Procedures 31

PART II OTHER INFORMATION

ITEM 6 Exhibits 32

SIGNATURES 33

- 2 -

PART I. FINANCIAL INFORMATION

ITEM I. FINANCIAL STATEMENTS

VALLEY NATIONAL GASES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

A S S E T S
June 30, December 31,
2004 2004
------------- -------------

CURRENT ASSETS:
Cash and cash equivalents $ 549,002 $ 1,379,259
Accounts receivable, net of allowance for
doubtful accounts of $747,309 and
$861,471, respectively 15,043,640 19,282,745
Inventory 9,415,875 10,118,953
Prepaids and other current assets 883,681 1,326,807
Deferred tax assets 2,346,484 2,560,761
Refundable taxes 1,183,324 2,169,778
------------- -------------

Total current assets 29,422,006 36,838,303
------------- -------------

PROPERTY, PLANT AND EQUIPMENT:
Land 2,183,176 1,882,195
Buildings and improvements 18,529,827 19,375,975
Equipment 89,084,662 91,713,223
Transportation equipment 18,058,515 19,041,251
Furniture and fixtures 7,961,202 8,275,750
------------- -------------

Total property, plant and equipment 135,817,382 140,288,394

Accumulated depreciation (53,148,410) (55,108,505)
------------- -------------

Net property, plant and equipment 82,668,972 85,179,889
------------- -------------

OTHER ASSETS:
Non-compete agreements, consulting agreements and customer lists,
net of accumulated amortization of $8,796,725 and $9,418,946,
respectively 2,711,337 2,089,116
Goodwill 40,997,738 40,997,738
Deposits and other assets 1,534,989 1,508,275
------------- -------------

Total other assets 45,244,064 44,595,129
------------- -------------

TOTAL ASSETS $ 157,335,042 $ 166,613,321
============= =============

The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

- 3 -

VALLEY NATIONAL GASES INCORPORATED

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

LIABILITIES AND STOCKHOLDERS' EQUITY June 30, December 31,
2004 2004
------------- -------------

CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,651,934 $ 2,810,735
Bank overdraft 668,046 --
Accounts payable 8,235,193 8,356,325
Accrued compensation and employee benefits 3,734,967 3,430,340
Interest rate derivatives 1,760,338 870,565
Other current liabilities 2,491,451 7,381,900
------------- -------------

Total current liabilities 19,541,929 22,849,865

LONG-TERM DEBT, less current maturities 62,286,040 63,788,357
DEFERRED TAX LIABILITIES 21,977,647 22,229,432
OTHER LONG-TERM LIABILITIES 1,681,696 1,657,575
INTEREST RATE DERIVATIVES 358,105 91,963
------------- -------------

Total liabilities 105,845,417 110,617,192
------------- -------------

MINORITY INTEREST IN VARIABLE INTEREST ENTITIES 5,381,500 4,812,283

COMMITMENTS AND CONTINGENCIES

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 9,499,799
shares, respectively
9,620 9,620
Paid-in-capital 18,905,761 18,831,148
Retained earnings 29,668,686 33,871,189
Accumulated other comprehensive loss (1,184,309) (529,115)
Treasury stock at cost, 155,500 and 120,285 shares, respectively (1,291,633) (998,996)
------------- -------------

Total stockholders' equity 46,108,125 51,183,846
------------- -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 157,335,042 $ 166,613,321
============= =============

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
December 31,
----------------------------
2003 2004
----------- -----------

NET SALES $39,120,013 $43,203,376
COSTS AND EXPENSES
Cost of products sold, excluding depreciation 18,314,303 20,635,179
Operating, distribution and administrative 14,095,322 13,672,585
Depreciation 1,461,286 1,751,240
Amortization of intangibles 427,881 278,559
Loss on disposal of assets 6,166 43,113
----------- -----------
Total costs and expenses 34,304,958 36,380,676
----------- -----------
Income from operations 4,815,055 6,822,700
----------- -----------

Interest expense 1,446,043 1,148,207
OTHER INCOME, NET 52,178 138,364
----------- -----------
EARNINGS BEFORE MINORITY INTEREST 3,421,190 5,812,857
MINORITY INTEREST -- 178,895
----------- -----------
NET EARNINGS BEFORE TAXES 3,421,190 5,633,962
PROVISION FOR INCOME TAXES 1,334,264 2,140,905
----------- -----------
NET EARNINGS $ 2,086,926 $ 3,493,057
=========== ===========

BASIC EARNINGS PER SHARE $ 0.22 $ 0.37
DILUTED EARNINGS PER SHARE $ 0.22 $ 0.36
WEIGHTED AVERAGE SHARES:
Basic 9,356,834 9,492,746
Diluted 9,402,328 9,655,223

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)

Six Months Ended
December 31,
----------------------------
2003 2004
----------- -----------

NET SALES $71,554,545 $79,403,892
COSTS AND EXPENSES
Cost of products sold, excluding depreciation 32,992,764 37,549,164
Operating, distribution and administrative 27,597,293 27,208,373
Depreciation 2,839,260 3,323,367
Amortization of intangibles 898,637 622,277
Loss on disposal of assets 2,625 61,272
----------- -----------
Total costs and expenses 64,330,579 68,764,453
----------- -----------
Income from operations 7,223,966 10,639,439
----------- -----------

Interest expense 2,927,574 2,348,198
OTHER INCOME, NET 130,838 241,136
----------- -----------
EARNINGS BEFORE MINORITY INTEREST 4,427,230 8,532,377
MINORITY INTEREST -- 376,844
----------- -----------
NET EARNINGS BEFORE TAXES 4,427,230 8,155,533
PROVISION FOR INCOME TAXES 1,726,620 3,099,102
----------- -----------
NET EARNINGS $ 2,700,610 $ 5,056,431
=========== ===========

BASIC EARNINGS PER SHARE $ 0.29 $ 0.53
DILUTED EARNINGS PER SHARE $ 0.29 $ 0.53
WEIGHTED AVERAGE SHARES:
Basic 9,356,834 9,489,221
Diluted 9,394,222 9,631,073

The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

- 6 -

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

For the periods ended June 30, 2004 and December 31, 2004

Accumulated
Common Stock Treasury Stock Other Total
------------ -------------- Paid-in- Comprehensive Comprehensive Retained Stockholders'
Shares Amount Shares Amount Capital Loss Income Earnings Equity
--------- ------ -------- ----------- ----------- ----------- ---------- ----------- -----------

BALANCE,
June 30, 2003 9,620,084 9,620 263,250 (2,186,561) 19,221,378 (2,890,059) (519,327) 21,988,827 36,143,205
Net income -- -- -- -- -- -- 7,679,859 7,679,859 7,679,859

Exercise of stock
options -- -- (107,750) 894,928 (315,617) -- -- -- 579,311
Unrealized gains on
derivatives
designated and
qualified as cash
flow hedges, net
of tax provision
of $1,071,568 -- -- -- -- -- 1,620,535 1,620,535 -- 1,620,535
Reclassification of
unrealized gains
on derivatives,
net of tax
provision of
$56,810 -- -- -- -- -- 85,215 85,215 -- 85,215
--------- ------ -------- ----------- ----------- ----------- ---------- ----------- -----------
BALANCE, June 30,
2004 9,620,084 9,620 155,500 (1,291,633) 18,905,761 (1,184,309) 9,385,609 $29,668,686 $46,108,125
========= ====== ======== =========== =========== =========== ========== =========== ===========
Net income -- -- -- -- -- -- 5,056,431 5,056,431 5,056,431
Dividend paid -- -- -- -- -- -- -- (853,928) (853,928)
Exercise of stock
options -- -- (35,215) 292,637 (74,613) -- -- -- 218,024
Unrealized gains on
derivatives
designated and
qualified as cash
flow hedges, net
of tax provision
of $404,139 -- -- -- -- -- 612,587 612,587 -- 612,587
Reclassification of
unrealized gains
on derivatives,
net of tax
provision of
$28,405 -- -- -- -- -- 42,607 42,607 -- 42,607
--------- ------ -------- ----------- ----------- ----------- ---------- ----------- -----------

BALANCE,
December 31,
2004 9,620,084 $9,620 120,285 $ (998,996) $18,831,148 $ (529,115) $5,711,625 $33,871,189 $51,183,846
========= ====== ======== =========== =========== =========== ========== =========== ===========

The accompanying notes are an integral part of these consolidated
financial statements.

- 7 -

VALLEY NATIONAL GASES INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

Six Months Ended
December 31,
-----------------------------------
2003 2004
------------ ------------

Net cash provided by operating activities $ 5,788,990 $ 7,011,247
------------ ------------

Cash flows from investing activities:
Proceeds from disposal of assets 22,699 47,420
Purchases of property and equipment (4,095,919) (5,783,471)
------------ ------------

Net cash used in investing activities (4,073,220) (5,736,051)
------------ ------------

Cash flows from financing activities:
Proceeds from borrowings 23,899,315 30,800,455
Principal payments on loans (26,675,544) (29,139,337)
Repayment of bank overdraft -- (668,046)
Dividend paid -- (1,656,035)
Exercise of stock options -- 218,024
------------ ------------

Net cash used in financing activities (2,776,229) (444,939)
------------ ------------

Net change in cash and cash equivalents (1,060,459) 830,257

Cash and cash equivalents, beginning of period 1,782,713 549,002
------------ ------------

Cash and cash equivalents, end of period $ 722,254 $ 1,379,259
============ ============

The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.

- 8 -

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.

As of December 31, 2004, the Company changed its income statement
presentation to a one-step format which breaks at income from operations.

2. ORGANIZATION

Valley 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 six months of fiscal 2005.

- 9 -

Trade Receivables

Valley makes estimates of the collectability of its trade receivables on a
monthly basis. 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.

The roll-forward of the allowance for doubtful accounts as of December 31 is
as follows:

2003 2004
----------- -----------

Beginning of the year $ 814,846 $ 747,309
Charges 325,044 413,349
Deductions (358,857) (299,187)
----------- -----------
December 31 $ 781,033 $ 861,471
=========== ===========

INVENTORY

Inventory is carried at the lower of cost or market. Valley estimates
reserves for product loss and obsolete inventory on a quarterly basis. Inventory
amounts are removed from inventory on a first in first out basis.

The components of inventory are as follows:

June 30, December 31,
2004 2004
----------- -----------
(Unaudited)

Hard goods $ 7,530,414 $ 8,464,773
Gases 2,239,543 2,536,424
Reserves (354,082) (882,244)
----------- -----------
$ 9,415,875 $10,118,953
=========== ===========

Cost of Products Sold, excluding depreciation

Cost of products sold principally consists of direct material costs and
freight-in for bulk gas purchases and hardgoods (welding supplies and equipment,
safety products and industrial tools and supplies).

Operating, Distribution and Administrative Expenses

Operating, distribution and administrative expenses consist of labor and
overhead associated with the purchasing, marketing and distribution of the
Company's products, as well as costs associated with a variety of administrative
functions such as legal, treasury, accounting and tax, and facility-related
expenses.

Depreciation

The Company recognizes depreciation expense on all its property, plant and
equipment in the consolidated statement of earnings line item "Depreciation".

Shipping and Handling Fees and Distribution Costs

The Company recognizes delivery and freight charges to customers as elements
of net sales. Costs of third-party freight are recognized as cost of products
sold. The majority of the costs associated with the distribution of the
Company's products, which include direct labor and overhead associated with
filling, warehousing and delivery by Company vehicles, is reflected in
operating, distribution and administrative expenses and amounted to $10,590,000
and $9,970,000 for the six months ended December 31, 2004 and 2003,
respectively. The Company conducts multiple operations out of the same
facilities and does not allocate facility-related expenses to each operational
function. Accordingly, there is no facility-related expense in the distribution
costs disclosed above.

- 10 -

Depreciation expense associated with the Company's delivery fleet amounted to
$728,000 and $480,000 for the six months ended December 31, 2004 and 2003,
respectively, and is included in depreciation expense.

Third party freight costs relating to the delivery of products to customers
totaled $286,416 and $352,789 for the six months ended December 2004 and 2003,
respectively, and were classified as operating, distribution and administrative
expenses.

The Company has classified cost of deliveries by its employees and vehicles
as operating, distribution and administrative expense which amounted to
$7,617,000 and $7,001,000 for the six months ended December 2004 and 2003,
respectively.

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 APB Opinion
No. 25, 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 Six Months Ended
December 31, December 31,
------------------------------- -------------------------------
2003 2004 2003 2004
----------- ----------- ----------- -----------

Net income
As reported $ 2,086,926 $ 3,493,057 $ 2,700,610 $ 5,056,431
Deduct: Total stock-based
employee compensation
expense based on the fair
value method for all
awards, net of related
tax effects (21,713) (21,134) (43,427) (42,672)
----------- ----------- ----------- -----------
Pro forma 2,065,213 3,471,923 2,657,183 5,013,759
Earnings per share assuming
Dilution
As reported $ 0.22 $ 0.36 $ 0.29 $ 0.53
Pro forma $ 0.22 $ 0.36 $ 0.28 $ 0.52

Income Taxes

Income taxes are accounted for in accordance with the provisions of SFAS No,
109, "Accounting for Income Taxes", under which deferred tax assets or
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the estimated tax rate at
the date of reversal. These differences are classified as current or non-current
based upon the classification of the related asset or liability. For temporary
differences that are not related to an asset or liability, classification is
based upon the expected reversal date of the temporary difference. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. No valuation allowances were required for the
deferred tax assets as of December 31, 2004 and June 30, 2004. The Company
estimates and records additional tax expense based on uncertain tax positions
taken by the Company within statutory limitations. This estimate is adjusted
when tax audits are completed or when the statute of limitations expires on
those recorded tax positions.

- 11 -

New Accounting Standards

In January 2003, the Financial Accounts Standards Board (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 entities that lease property to Valley were
required to be consolidated with Valley's financial statements pursuant to the
common control provisions under FIN 46R (see Note 8).

In December 2004, the FASB issued Financial Accounting Standard (FAS) No.
123R, "Share Based Payments," that require companies to expense the value of
employee stock options. Valley will be required to record this expense beginning
in the first quarter of fiscal year 2006.

In November 2004, the FASB issued FAS No. 151, "Inventory Costs," that
requires that items such as idle facility expense, excessive spoilage, double
freight and handling costs be recognized as current period charges. In addition,
it requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. This
Standard will be effective in fiscal years beginning after June 2006. The
Company does not anticipate any significant charge or expense from the
application of this Standard.

In December 2004, the FASB issued staff position No. 109-1 providing
guidance on accounting for the tax deduction provided for in the American Jobs
Creation Act of 2004. The staff position calls for the tax deduction to be
accounted for as a special deduction which the Company intends to comply with in
accordance with FASB Statement No. 109, "Accounting for Income Taxes."

In February 2005, the FASB issued Emerging Issues Task Force (EITF) No.
04-10 "Determining Whether to Aggregate Segments That Do Not Meet the
Quantitative Thresholds." This statement clarifies the aggregation criteria of
operating segments as defined in FASB No. 131. The effective date of this
statement is not yet determined, but likely to occur in 2005. The Company
believes its current segment reporting complies with EITF No. 04-10 and
anticipates no significant changes upon adoption.

Supplemental Cash Flow Information

For the Six Months Ended December 31,
-------------------------------------
2003 2004
---- ----

Non-cash financing activity__
Adjustment of seller notes and fixed assets (82,080) --
Non-cash investing activity__
Fixed asset purchases in accounts payable 222,522 159,505

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, consist of noncompete agreements,
consulting agreements and customer lists for which Valley has assigned definite
lives equal to the terms of the agreements. As of June 30, 2004 and December 31,
2004, Valley's noncompete agreements, consulting agreements and customer lists
are summarized as follows:

- 12 -

Accumulated
Gross Amount Amortization Weighted
Gross Accumulated as of as of Average
Amount Amortization as December 31, December 31, Amortization
as of of 2004 2004 Period
June 30, 2004 June 30, 2004 (unaudited) (unaudited) (years)
------------- ------------- ------------ ------------- ------------

Non-competition agreements $10,811,651 $ 8,528,931 $10,811,651 $ 9,114,852 9.3
Consulting agreements 357,411 228,244 357,411 253,244 3.0
Customer lists 339,000 39,550 339,000 50,850 15.0
----------- ----------- ----------- -----------
Total $11,508,062 $ 8,796,725 $11,508,062 $ 9,418,946
=========== =========== =========== ===========

Amortization expense for the six months ended December 31, 2004 totaled
$622,277. Estimated amortization expense for the remainder of fiscal 2005 as of
December 31, 2004 and the next five fiscal years is summarized as follows:

Fiscal year Ending June 30,
---------------------------
Remainder of 2005 $ 485,951
2006 $ 588,568
2007 $ 351,068
2008 $ 309,818
2009 $ 117,437
2010 $ 54,067

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 Six Months Ended
December 31, December 31,
---------------------------- ----------------------------
2003 2004 2003 2004
---------- ---------- ---------- ----------

Net earnings available for common stock $2,086,926 $3,493,057 $2,700,610 $5,056,431
========== ========== ========== ==========

Basic earnings per common share:
Weighted average common shares 9,356,834 9,492,746 9,356,834 9,489,221
========== ========== ========== ==========

Basic earnings per common share $ 0.22 $ 0.37 $ 0.29 $ 0.53
========== ========== ========== ==========

Diluted earnings per common share:
Weighted average common shares 9,356,834 9,492,746 9,356,834 9,489,221

Shares issuable from assumed
conversion of common stock equivalents 162,477 45,494 37,388 141,852
---------- ---------- ---------- ----------

Weighted average common and common
equivalent shares 9,402,328 9,655,223 9,394,222 9,631,073
========== ========== ========== ==========

Diluted earnings per common share $ 0.22 $ 0.36 $ 0.29 $ 0.53
========== ========== ========== ==========

All options to purchase shares of common stock during the three and six
months ended December 31, 2004 were included in the computation of diluted
earnings per common share as the options' exercise price was less than the
average market price of the common stock for the respective periods. For the
three and six months ended December 31, 2003, 321,000 options were not included
in the computation.

- 13 -

6. LEASE OBLIGATIONS

Valley leases real estate at several locations for use as branch stores and
warehouses. Certain equipment is also leased. All of the leases, which are with
related and unrelated parties, are classified as operating leases. The lease
terms expire at various dates through April 2013, with options to renew for
periods of three to five years.

Certain lease agreements contain rent escalation clauses that have not been
significant. For the three and six months ended December 31, 2004 and 2003,
contingent rentals were not significant. Valley's lease arrangements do not
include any step rent provisions, capital improvement funding or significant
lease concessions. Leasehold improvements are depreciated over the life of the
lease or the useful life of the asset, whichever is shorter, which is consistent
with the lease term used to recognize rent expense.

The Company renewed certain lease arrangements during the first six months
of fiscal year 2005. Minimum future rental payments under non-cancelable
operating leases, including consideration of expected renewals at estimated
payment amounts based on average increases over the last three years, for the
remainder of fiscal year 2005 and each of the next five fiscal years are as
follows:

Fiscal year
ending Elimination Final
June 30, Real Estate Equipment Subtotal (1) Total
- ----------- ----------- ----------- ----------- ----------- -----------

Remainder
of 2005 $ 1,712,717 $ 25,350 $ 1,738,067 $ 993,163 $ 744,904
2006 3,391,560 26,100 3,417,660 2,012,110 1,405,550
2007 3,476,349 26,100 3,502,449 2,062,413 1,440,036
2008 3,563,258 -- 3,563,258 2,113,973 1,449,285
2009 3,652,339 -- 3,652,339 2,166,822 1,485,517
2010 3,743,648 -- 3,743,648 2,220,993 1,522,655
----------- ----------- ----------- ----------- -----------
Totals $19,539,871 $ 77,550 $19,617,421 $11,569,474 $ 8,047,946
=========== =========== =========== =========== ===========

(1) Reflects the elimination of intercompany rent as a result of FIN 46R,
"Consolidation of Variable Interest Entities" at March 31, 2004.

7. 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 an option agreement in May 1998 with an independent
distributor for the purchase of its business. The agreement provides the
distributor the option to sell its business to Valley commencing in May 2002 and
ending in May 2005 and provides Valley the option to purchase the business from
the distributor commencing in June 2005 and ending in May 2008. Valley estimates
the purchase price for the distributor's business at $10 million based upon the
purchase price calculation stipulated in the agreement. Of this purchase price,

- 14 -

Valley paid $1 million for the option when the agreement was signed, and has
recorded this payment in its consolidated balance sheet at December 31, 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 the independent
distributor. Management believes that the purchase price formula per the
agreement has resulted in a purchase price that approximates fair value when the
agreement was executed as well as over the term of the agreement. As a result,
no fair market value adjustments have been required. Management estimates it is
more likely than not that the put or the call option will be exercised.
Management will continue to assess the valuation of this long-term asset as
facts and circumstances change, or at least on an interim basis. Valley could
incur a loss if the market value of the put option declines or if it is
determined that the acquisition will not be completed. 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 8). 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.

8. VARIABLE INTEREST ENTITIES

Valley leases buildings and equipment and rents cylinders under operating
leases from related parties, collectively referred to as "Variable Interest
Entities."

- 15 -

These entities include West Rentals, Inc., GEW Real Estate LLC, Real Equip-Lease
LLC and Acetylene Products Corporation. The primary activity of these entities
is to purchase, develop, sell and/or lease real estate. Valley has historically
entered into these leases with these related parties to preserve its capital to
support its strategy of growing through acquisitions. 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
of the related party lease agreements, 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.

The Variable Interest Entities' debt, in the amount of $6.5 million at
December 31, 2004, consists primarily of asset-backed mortgages for real estate.
The assets that are collateral for the variable interest entity's obligations
are classified as land and buildings and improvements upon adoption of FIN 46R
beginning March 31, 2004. The carrying value of these assets totaled $5,512,000
as of December 31, 2004. This debt has various interest rates ranging from 3.5%
to 6.0% and various maturities from 2005 to 2016. Certain mortgages are
personally guaranteed by the Chairman of Valley.

- 16 -

The following table shows the consolidating balance sheet of the Company at
December 31, 2004:

A S S E T S As of December 31, 2004
----------- -----------------------
Variable
Interest
Valley Entities
Segment Segment Eliminations Company
------------- ------------- ------------- -------------

CURRENT ASSETS:
Cash and cash equivalents $ 961,649 $ 417,610 -- $ 1,379,259
Accounts receivable, net of
allowance for doubtful accounts
of $861,471 19,035,949 1,978,024 $ (1,731,228) 19,282,745
Inventory 10,118,953 -- -- 10,118,953
Prepaids and other current assets 1,316,807 10,000 -- 1,326,807
Deferred tax assets 2,560,761 -- -- 2,560,761
Refundable taxes 2,169,778 -- -- 2,169,778
------------- ------------- ------------- -------------

Total current assets 36,163,897 2,405,634 (1,731,228) 36,838,303
------------- ------------- ------------- -------------

PROPERTY, PLANT AND EQUIPMENT:
Land 55,000 1,827,195 -- 1,882,195
Buildings and improvements 7,211,927 12,164,048 -- 19,375,975
Equipment 91,165,571 547,652 -- 91,713,223
Transportation equipment 18,868,002 173,249 -- 19,041,251
Furniture and fixtures 8,119,642 156,108 -- 8,275,750
------------- ------------- ------------- -------------

Total property, plant and
equipment 125,420,142 14,868,252 -- 140,288,394

Accumulated depreciation (51,506,028) (3,602,477) -- (55,108,505)
------------- ------------- ------------- -------------

Net property, plant and
equipment 73,914,114 11,265,775 -- 85,179,889
------------- ------------- ------------- -------------

OTHER ASSETS:
Non-compete agreements, consulting
agreements and customer lists, net of
accumulated amortization of $9,418,946 2,089,116 -- -- 2,089,116
Goodwill 40,997,738 -- -- 40,997,738
Deposits and other assets 1,496,817 11,458 -- 1,508,275
------------- ------------- ------------- -------------

Total other assets 44,583,671 11,458 -- 44,595,129
------------- ------------- ------------- -------------

TOTAL ASSETS $ 154,661,682 $ 13,682,867 $ (1,731,228) $ 166,613,321
============= ============= ============= =============

- 17 -

LIABILITIES AND STOCKHOLDERS' EQUITY As of December 31, 2004
------------------------------------ -----------------------
Variable
Interest
Valley Entities
Segment Segment Eliminations Company
------------- ------------- ------------- -------------

CURRENT LIABILITIES:
Current maturities of long-term
Debt $ 853,969 $ 1,956,766 -- $ 2,810,735
Accounts payable 8,080,632 275,693 -- 8,356,325
Accrued compensation and employee
Benefits 3,430,340 -- -- 3,430,340
Interest rate derivatives 870,565 -- -- 870,565
Other current liabilities 6,970,339 411,561 -- 7,381,900
------------- ------------- ------------- -------------

Total current
liabilities 20,205,845 2,644,020 -- 22,849,865

LONG-TERM DEBT, less current maturities 59,293,021 6,226,564 (1,731,228) 63,788,357
DEFERRED TAX LIABILITIES 22,229,432 -- -- 22,229,432
OTHER LONG-TERM LIABILITIES 1,657,575 -- -- 1,657,575
INTEREST RATE DERIVATIVES 91,963 -- -- 91,963
------------- ------------- ------------- -------------

Total liabilities $ 103,477,836 8,870,584 (1,731,228) 110,617,192
------------- ------------- ------------- -------------

MINORITY INTEREST IN VARIABLE INTEREST ENTITIES 4,812,283 4,812,283

COMMITMENTS AND CONTINGENCIES -- -- -- --

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,
9,499,799 shares
Paid-in-capital 18,831,148 335,985 (335,985) 18,831,148
Retained earnings 33,871,189 4,472,498 (4,472,498) 33,871,189
Accumulated other comprehensive
Loss (529,115) -- -- (529,115)
Treasury stock at cost, 120,285
Shares (998,996) -- -- (998,996)
------------- ------------- ------------- -------------

Total stockholders'
Equity 51,183,846 4,812,283 (4,812,283) 51,183,846
------------- ------------- ------------- -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 154,661,682 $ 13,682,867 $ (1,731,228) $ 166,613,321
============= ============= ============= =============

- 18 -

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 $747,309 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 $8,796,725 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
============= ============= ============= =============

- 19 -

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
------------- ------------- ------------- -------------

MINORITY INTEREST IN VARIABLE INTEREST ENTITIES -- -- 5,381,500 5,381,500

COMMITMENTS AND CONTINGENCIES --

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 shares 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, 155,500
shares (1,291,633) -- -- (1,291,633)
------------- ------------- ------------- -------------

Total stockholders' equity 46,108,125 5,381,500 (5,381,500) 46,108,125
------------- ------------- ------------- -------------

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$ 145,132,686 $ 13,430,035 $ (1,227,679) $ 157,335,042
============= ============= ============= =============

- 20 -

The following table shows the consolidating income statement of the Company
for the six months ended December 31, 2004:

Variable
Interest
Valley Entities
Segment Segment Eliminations Company
----------- ----------- ------------ -----------

NET SALES $79,403,892 $ 1,024,797 $(1,024,797) $79,403,892
COSTS AND EXPENSES
Cost of products sold, excluding
Depreciation 37,549,164 -- -- 37,549,164
Operating, distribution and
Administrative 27,839,849 393,321 (1,024,797) 27,208,373
Depreciation 3,060,000 263,367 -- 3,323,367
Amortization of intangibles 622,221 56 -- 622,277
Loss on disposal of assets 61,272 -- -- 61,272
----------- ----------- ----------- -----------
Total costs and expenses 69,132,506 656,744 (1,024,797) 68,764,453
----------- ----------- ----------- -----------
INCOME FROM OPERATIONS 10,271,386 368,053 -- 10,639,439
----------- ----------- ----------- -----------
INTEREST EXPENSE 2,241,782 106,416 -- 2,348,198
OTHER INCOME, NET 125,929 115,207 -- 241,136
----------- ----------- ----------- -----------
EARNINGS BEFORE MINORITY INTEREST 8,155,533 376,844 -- 8,532,377
MINORITY INTEREST -- 376,844 -- 376,844
----------- ----------- ----------- -----------
NET EARNINGS BEFORE TAXES 8,155,533 -- -- 8,155,533
PROVISION FOR INCOME TAXES 3,099,102 -- -- 3,099,102
----------- ----------- ----------- -----------
NET EARNINGS $ 5,056,431 -- -- $ 5,056,431
=========== =========== =========== ===========

The following table shows the consolidating income statement of the Company
for the three months ended December 31, 2004:

Variable
Interest
Valley Entities
Segment Segment Eliminations Company
----------- ----------- ------------ -----------

NET SALES $43,203,376 $ 524,947 $ (524,947) $43,203,376
COSTS AND EXPENSES
Cost of products sold, excluding
Depreciation 20,635,179 -- -- 20,635,179
Operating, distribution and
Administrative 14,006,145 191,387 (524,947) 13,672,585
Depreciation 1,590,000 161,240 -- 1,751,240
Amortization of intangibles 278,531 28 -- 278,559
Loss on disposal of assets 43,113 -- -- 43,113
----------- ----------- ----------- -----------
Total costs and expenses 36,532,968 352,655 (524,947) 36,380,676
----------- ----------- ----------- -----------
Income from operations 6,650,408 172,292 -- 6,822,700
----------- ----------- ----------- -----------
INTEREST EXPENSE 1,091,122 57,085 -- 1,148,207
OTHER INCOME, NET 74,676 63,688 -- 138,364
----------- ----------- ----------- -----------
EARNINGS BEFORE MINORITY INTEREST 5,633,962 178,895 -- 5,812,857
MINORITY INTEREST -- 178,895 -- 178,895
----------- ----------- ----------- -----------
NET EARNINGS BEFORE TAXES 5,633,962 -- -- 5,633,962
PROVISION FOR INCOME TAXES 2,140,905 -- -- 2,140,905
----------- ----------- ----------- -----------
NET EARNINGS $ 3,493,057 -- -- $ 3,493,057
=========== =========== =========== ===========

No tables are provided to present the consolidating income statement of the
Company for the three and six month periods ended December 31, 2003, because no
consolidation was required until the adoption of FIN46R at March 31, 2004.

9. SEGMENT DATA

Effective with the adoption of FIN 46R and the required consolidation of
certain variable interest entities in the third quarter of fiscal year 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.

- 21 -

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.

In February 2005, the FASB issued Emerging Issues Task Force (EITF) No.
04-10 "Determining Whether to Aggregate Segments That Do Not Meet the
Quantitative Thresholds." This statement clarifies the aggregation criteria of
operating segments as defined in FASB No. 131. The effective date of this
statement is not yet determined, but likely to occur in 2005. The Company
believes its current segment reporting complies with EITF No. 04-10 and
anticipates no significant changes upon adoption.

Identifiable assets by reporting segment are as follows at December 31, 2004
(See Note 8):

Valley $ 153,961,682
Variable Interest Entities 11,951,639
-------------
Total assets $ 165,913,321
=============

Please refer to Note 8 for revenue and income by reporting segment.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report.

FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q, contains a number of "forward-looking
statements" which express Valley's beliefs or expectations regarding future
events. These statements can be identified by terminology such as "will,"
"believes," "intends," "expects," "plans," "could" or "may," or the negatives
thereof. The forward looking statements include statements about 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, its
ability to implement cost savings and implement price increase initiatives, 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.

- 22 -

These forward-looking statements are based on assumptions that involve risks
and uncertainties and are subject to change, including risks related to Valley's
ability to

o accurately identify attractive acquisition targets and make
accurate predictions regarding the performance of those
business if integrated into Valley's operations,

o successfully negotiate agreements for the acquisition of those
businesses,

o integrate the operations of the acquired businesses as
anticipated,

o 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,

o manage rapid growth,

o effectively compete,

o attract and retain key personnel and

o maintain good relationships with suppliers and locate
alternative suppliers if needed.

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 the forward looking
statements. 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
particularly in regions and industries where Valley's customers operate,
fluctuations in the price of propane and other commodities, monetary or fiscal
policies, changes in laws and regulations affecting Valley's business, inflation
and fluctuations in interest rates.

OVERVIEW

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, increasing
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.

- 23 -

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
Valley concluded that these operating segments should be aggregated into one
reporting segment.

In October 2004, the Financial Accounting Standards Board ratified a
consensus statement by the Emerging Issues Task Force that provides guidance on
segment reporting. In November 2004 the Board announced that it anticipated
issuing a staff position on this issue in March 2005. The effective date for
this statement will likely be for periods ending after March 15, 2005. The
Company believes its current segment reporting described above complies with the
consensus statement and anticipates no significant changes resulting from the
additional guidance to be provided by the staff position.

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 that
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. Although 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. 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
competitive strengths will also allow it to continue to increase sales through
internal growth.

RESULTS OF OPERATIONS

Comparison of Three Months Ended December 31, 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.

Same store sales are those stores that have been operated by the Company for
the full two-year comparison period. The value of sales increase related to
acquisitions is determined by the specific sales of each acquired location. New
stores would be considered in same store sales once Valley has operated them for
the entire comparison period. There was no adjustment for closed stores as none
were closed during the period covered.

Net sales increased 10.4%, or $4.1 million, to $43.2 million for the three
months ended December 31, 2004 from $39.1 million for the three months ended
December 31, 2003. Hard goods sales increased $2.0 million from the same period
in 2003 reflecting the effect of Valley's pricing initiatives and increased
demand. Propane sales increased $1.9 million, reflecting $3.2 million in price
inflation and a $1.3 million decrease in the volume of propane sold. Gases

- 24 -

and cylinder revenue increased $0.2 million as increased revenue from price
increases and increased demand for cylinder gases was partially offset by
reduced sales to other cylinder gas distributors. Gases and cylinder revenue
represented 65.0% of net sales for the three months ended December 31, 2004,
with hard goods representing 35.0%. In comparison, gases and cylinder revenue
represented 66.7% of net sales for the three months ended December 31, 2003,
with hard goods representing 33.3%.

Cost of products sold, excluding depreciation increased by $2.3 million or
12.7% to $20.6 million in the three months ended December 31, 2004 compared to
the three months ended December 31, 2003. As a percentage of sales, cost of
products sold, excluding depreciation increased to 47.8% for the three months
ended December 31, 2004 from 46.8% in the three months ended December 31, 2003.
This increase is primarily due to increased propane costs, partially offset by
the improved pricing resulting from the hardgoods and cylinder gases pricing
initiatives which reduces cost of products sold, excluding depreciation as a
percent of sales.

Operating, distribution and administrative expenses decreased $0.4 million
for the second quarter of fiscal 2005 compared to the second quarter of fiscal
year 2004. Increased professional expenses were offset by decreased personnel
costs resulting from cost reduction initiatives and building rent, including 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, distribution and administrative expenses for the
three months ended December 31, 2003 includes full rent expense with no
reduction in consolidation since FIN 46R was adopted as of March 31, 2004.
Operating, distribution and administrative expenses as a percentage of sales for
the Company were 31.6% for the three months ended December 31, 2004, as compared
to 36.0% for the three months ended December 31, 2003.

Depreciation and amortization expense increased $0.1 million for the three
months ended December 31, 2004, as compared to the three months ended December
31, 2003. This increase is due to the consolidation of the Variable Interest
Entities under FIN 46R for the three months ended December 31, 2004 which were
not consolidated in the prior year period.

Interest expense decreased $0.3 million to $1.1 million for the three months
ended December 31, 2004, as compared to $1.4 million for the three months ended
December 31, 2003, due to lower interest rates resulting from improvement in the
Company's performance and financial ratios. Interest expense for the three
months ended December 31, 2004 includes $0.1 million related to the
consolidation of the Variable Interest Entities, which were not consolidated in
the prior year period.

Other income increased $0.1 million for the three months ended December 31,
2004 as a result of related party entities activity that was consolidated in the
statement of operations for the current three month period but was not
consolidated for the three months ended December 31, 2003, due to the adoption
of FIN46R at March 31, 2004.

Minority interest earnings reflect the elimination of net pre-tax income
earned during the quarter by the variable interest entities. Valley has no
direct 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 December 31,
2004 was 38.0% compared to 39.0% for the three months ended December 31, 2003.
This change was primarily the result of changes in anticipated permanent tax
differences as a percent of estimated annual pre-tax income.

For the reasons stated above, net income increased to $3.5 million for the
three months ended December 31, 2004, as compared to $2.1 million for the three
months ended December 31, 2003. Diluted earnings per share were $0.36 for the
three months ended December 31, 2004, as compared to $0.22 for the three months
ended December 31, 2003. Diluted weighted average shares outstanding for the
three months ended December 31, 2004 were 9,655,223, as compared to 9,402,328
for the three months ended December 31, 2003.

- 25 -

Comparison of Six Months Ended December 31, 2004 and 2003

Net sales increased 11.0%, or $7.8 million, to $79.4 million for the six
months ended December 31, 2004 from $71.6 million for the six months ended
December 31, 2003. Hard goods sales increased $4.2 million from the same period
in 2003, reflecting the effect of Valley's pricing initiatives and increased
demand. Propane sales increased $3.1 million, reflecting $4.3 million in price
inflation and a $1.2 million decrease in the volume of propane sold. Gases and
cylinder revenue increased $0.6 million as increased revenue from price
increases and increased demand for cylinder gases was partially offset by
reduced sales to other cylinder gas distributors. Gases and cylinder revenue
represented 62.6% of net sales for the six months ended December 31, 2004, with
hard goods representing 37.4%. In comparison, gases and cylinder revenue
represented 64.4% of net sales for the six months ended December 30, 2003, with
hard goods representing 35.6%.

Cost of products sold, excluding depreciation increased $4.6 million or
13.8% to $37.6 million for the six months ended December 31, 2004 from $33.0
million for the six months ended December 31, 2003. Cost of products sold,
excluding depreciation for both hardgoods and cylinder gases decreased as a
percent of sales resulting from pricing improvement initiatives implemented by
the Company over the last several quarters. This improvement was offset by
increased propane cost which as a percent of net sales totaled 58.0% for the six
months ended December 31, 2004 compared to 53.4% for the six months ended
December 31, 2003. As a percentage of sales, cost of products sold, excluding
depreciation increased to 47.3% for the six months ended December 31, 2004 from
46.1% in the six months ended December 31, 2003.

Operating, distribution and administrative expenses decreased $0.4 million
for the six months ended December 31, 2004 compared to the six months ended
December 31, 2003. Operating, distribution and administrative expenses within
the Valley segment increased $0.2 million due to increased professional and
legal services, fuel costs and other expenses partially offset by decreased
personnel costs and building rent. This increase in the Valley segment was
offset by a reduction of $0.6 million in expense, as a result of consolidating
entities owned by a related party that leases property to Valley under FIN 46R,
Variable Interest Entities. Operating, distribution and administrative expenses
for the six months ended December 31, 2003 includes full rent expense with no
reduction in consolidation since FIN 46R was adopted as of March 31, 2004.
Operating, distribution and administrative expenses as a percentage of sales for
the Company were 34.3% for the six months ended December 31, 2004, as compared
to 38.6% for the six months ended December 31, 2003.

Depreciation and amortization expense increased $0.2 million for the six
months ended December 31, 2004, as compared to the six months ended December 31,
2003. This increase is due to the consolidation of the Variable Interest
Entities' for the six months ended December 31, 2004 which was not consolidated
for the six months ended December 31, 2003.

Interest expense decreased $0.6 million to $2.3 million for the six months
ended December 31, 2004, as compared to $2.9 million for the six months ended
December 31, 2003, due to outstanding debt balances and lower interest rates due
to improvement in the Company's performance and financial ratios. Interest
expense includes $0.1 million related to the Variable Interest Entities'
consolidation for the six months ended December 31, 2004, which was not
consolidated in the six months ended December 31, 2003.

Other income increased $0.1 million for the six months ended December 31,
2004 as a result of related party entities activity that was consolidated in the
statement of operations for the current six month period but was not
consolidated for the six months ended December 31, 2003, due to the adoption of
FIN46R at March 31, 2004.

Minority interest earnings eliminate the net pre-tax income earned during
the six months by the Variable Interest Entities' since Valley has no direct
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 six months ended December 31, 2004
was 38.0% compared to 39.0% for the six months ended December 31, 2003. This
change was primarily the result of changes in anticipated permanent tax
differences as a percent of estimated annual pre-tax income.

- 26 -

For the reasons stated above, net income increased to $5.1 million for the
six months ended December 31, 2004, as compared to $2.7 million for the six
months ended December 31, 2003. Diluted earnings per share were $0.53 for the
six months ended December 31, 2004, as compared to $0.29 for the six months
ended December 31, 2003. Diluted weighted average shares outstanding for the six
months ended December 31, 2004 were 9,631,073, as compared to 9,394,222 for the
six months ended December 31, 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 December 31, 2004, the Company had working capital of approximately $14.0
million, as compared to $9.9 million as of June 30, 2004, reflecting primarily
an increase in accounts receivable and available cash. Funds provided by
operations for the six months ended December 31, 2004 were approximately $7.0
million, as compared to $5.8 million for the six months ended December 31, 2003.
This increase of $1.2 million is attributable to the $2.4 million increase in
net income offset by increased income taxes paid of $2.2 million and positive
cash flow from other operating assets and liabilities. Funds used for investing
activities were approximately $5.7 million for the six months ended December 31,
2004 consisting primarily of capital spending, as compared to $4.1 million for
six months ended December 31, 2003. Valley anticipates capital expenditures of
approximately $7.0 million for fiscal year June 30, 2005. Funds used for
financing activities for the six months ended December 31, 2004 were
approximately $0.4 million as net borrowings of $1.0 million plus $0.2 million
provided by the exercise of stock options were more than offset by the payment
of dividends by Valley of $0.9 million and by the Variable Interest Entities of
$0.8 million. The Company's cash balance increased $0.8 million during the six
months ended December 31, 2004 to $1.4 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 2.61% as of December 31, 2004. As of December 31,
2004, availability under the revolving loan was approximately $15.6 million,
with outstanding borrowings of approximately $58.0 million and outstanding
letters of credit of approximately $1.4 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 December 31,
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. The assets that
are collateral for the variable interest entity's obligations are classified as
land and buildings and improvements upon adoption of FIN 46R beginning March 31,
2004. The carrying value of these assets totaled $5,512,000 as of December 31,
2004. This debt has various interest rates ranging from 3.5% to 6.0% and various
maturities from 2005 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

- 27 -

and maturities through 2010. The outstanding balance of these notes as of
December 31, 2004 was $2.2 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.

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 Entities Company
--------------------------- ----------- ---------- -----------

Remainder of 2005 $ 471,863 $1,632,282 $ 2,104,145
2006 $ 760,596 $ 642,008 $ 1,402,604
2007 $ 546,554 $ 610,526 $ 1,157,080
2008 $ 189,580 $ 627,090 $ 816,670
2009 $58,084,665 $ 646,999 $58,731,664
2010 $ 66,987 $ 591,039 $ 658,026
Thereafter $ 26,746 $1,702,157 $ 1,728,903
----------- ---------- -----------
Total $60,146,991 $6,452,101 $66,599,092
=========== ========== ===========

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 December 31, 2004, Valley
had $50.0 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 2.4% at December 31, 2004. In January 2005, the Company entered into swap
agreements for notional value of $25 million effective July 2005 and January
2006.

Valley entered into an option agreement in May 1998 with an independent
distributor for the purchase of its business. The agreement provides the
distributor the option to sell its business to Valley commencing in May 2002 and
ending in May 2005 and provides Valley the option to purchase the business from
the distributor commencing in June 2005 and ending in May 2008. Valley estimates
the purchase price for the distributor's business at $10 million based upon the
purchase price calculation stipulated in the agreement. Of this purchase price,
Valley paid $1 million for the option when the agreement was signed, and has
recorded this payment in its consolidated balance sheet at December 31, 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 the independent
distributor. Management believes that the purchase price formula per the
agreement has resulted in a purchase price that approximates fair value when the
agreement was executed as well as over the term of the agreement. As a result,
no fair market value adjustments have been required. Management estimates it is
more likely than not that the put or the call option will be exercised.
Management will continue to assess the valuation of this long-term asset as
facts and circumstances change, or at least on an interim basis. Valley could
incur a loss if the market value of the put option declines or if it is
determined that the acquisition will not be completed. 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.

- 28 -

The following table represents the Company's contractual obligations at
December 31, 2004:

PAYMENTS DUE BY PERIOD (IN THOUSANDS)
---------------------------------------------------------------------------
LESS THAN 1-3 4-5 MORE THAN
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS 5 YEARS
- ----------------------- -------- -------- -------- -------- --------

Long-Term Debt $ 66,589 $ 2,094 $ 3,376 $ 59,390 $ 1,729
Estimated Interest
Payments 9,478 942 5,199 3,197 140
Interest Rate Swap
Payments 6,503 1,705 4,798 -- --
Interest Rate Swap
Receipts (2,340) (660) (1,680) -- --
Capital Lease
Obligation 10 10 -- -- --
Operating Leases 8,872 744 4,090 2,692 1,346
Purchase Obligations 1,410 1,410 -- -- --
-------- -------- -------- -------- --------
Total Obligations $ 90,522 $ 6,245 $ 15,783 $ 65,279 $ 3,215
======== ======== ======== ======== ========

The table above provides information about the company's contractual
obligations at December 31, 2004. Certain of these obligations are sensitive to
changes in interest rates including interest rate swaps and debt obligations.
For debt obligations, the table provides contractually obligated payment
amounts, including estimated interest, by period due. For interest rate swaps,
payments and receipts are calculated based upon notional amounts at weighted
average rates by expected (contractual) maturity dates. 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. In January 2005, the Company entered into swap agreements for notional
value of $25 million effective July 2005 and January 2006.

Purchase obligations represent the total value of open purchase orders,
consisting primarily of inventory and capital expenditures, as of the period
ending date.

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 six months of fiscal 2005. The Company has increased the disclosure of the
following policies:

TRADE RECEIVABLES

Valley makes estimates of the collectability of its trade receivables on a
monthly basis. 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.

INVENTORY

Inventory is carried at the lower of cost or market. Valley estimates
reserves for product loss and obsolete inventory on a quarterly basis. Inventory
amounts are removed from inventory on a first-in, first-out basis.

Income Taxes

Income taxes are accounted for in accordance with the provisions of SFAS No,
109, "Accounting for Income Taxes", under which deferred tax assets or
liabilities are

- 29 -

computed based on the difference between the financial statement and income tax
bases of assets and liabilities using the estimated tax rate at the date of
reversal. These differences are classified as current or non-current based upon
the classification of the related asset or liability. For temporary differences
that are not related to an asset or liability, classification is based upon the
expected reversal date of the temporary difference. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The Company estimates and records additional tax
expense based on uncertain tax positions taken by the Company within statutory
limitations. This estimate is adjusted when tax audits are completed or when the
statute of limitations expires on those recorded tax positions.

New Accounting Standards

In January 2003, the Financial Accounts Standards Board (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 entities that lease property to Valley were
required to be consolidated with Valley's financial statements pursuant to the
common control provisions under FIN 46R (see Note 8).

In December 2004, the FASB issued Financial Accounting Standard (FAS) No.
123R, "Share Based Payments" that requires companies to expense the value of
employee stock options. Valley will be required to begin record this expense
beginning in the first quarter of fiscal year 2006.

In November 2004, the FASB issued FAS No. 151, "Inventory Costs", that
requires that items such as idle facility expense, excessive spoilage, double
freight and handling costs be recognized as current period charges. In addition,
it requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
Standard will be effective in fiscal years beginning after June 2006. The
Company does not anticipate any significant charge or expense from its
application.

In December 2004, the FASB issued staff position No. 109-1 providing
guidance on accounting for the tax deduction provided for in the American Jobs
Creation Act of 2004. The staff position calls for the tax deduction to be
accounted for as a special deduction which the Company intends to comply with in
accordance with FASB statement No. 109 "Accounting for Income Taxes."

In February 2005, the FASB issued Emerging Issues Task Force (EITF) No.
04-10 "Determining Whether to Aggregate Segments That Do Not Meet the
Quantitative Thresholds." This statement clarifies the aggregation criteria of
operating segments as defined in FASB No. 131. The effective date of this
statement is not yet determined, but likely to occur in 2005. The Company
believes its current segment reporting complies with EITF No. 04-10 and
anticipates no significant changes upon adoption.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information about Valley'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.

- 30 -

BALANCE OF THERE FAIR
2005 2006 2007 2008 2009 AFTER TOTAL VALUE
-------- -------- -------- -------- -------- -------- ----- -----
(IN THOUSANDS)

Liabilities
Long term debt - Valley
Fixed rate $ 470 $ 762 $ 547 $ 190 $ 134 $ 94 $ 2,197 $ 2,058
Average interest rate 4.43% 5.33% 6.29% 6.28% 4.65% 4.78%
Variable rate -- -- -- -- $ 57,950 -- $ 57,950 $ 57,950
Average interest rate -- -- -- -- 2.61% --
Long term debt -
Variable Interest
Entities mortgage debt
Fixed rate $ 1,632 $ 642 $ 611 $ 627 $ 647 $ 2,293 $ 6,452 $ 5,864
Average interest rate 4.25% 4.18% 3.07% 3.01% 3.05% 3.09%
Interest rate swaps
Variable to fixed $ 30,000 $ 25,000 -- -- $ 25,000 -- $ (963)
Average pay rate 6.2% 6.2% -- -- 6.5% --
Average receive rate 2.4% 2.4% -- -- 2.4% --
Commitments
Operating leases $ 1,738 $ 3,418 $ 3,502 $ 3,563 $ 3,652 $ 7,487
Intercompany
elimination (1) 993 2,012 2,062 2,114 2,167 4,442
-------- -------- -------- -------- -------- --------
Company total $ 745 $ 1,406 $ 1,440 $ 1,449 $ 1,485 $ 3,045

(1) Reflects the elimination of intercompany rent as a result of FIN 46R,
"Consolidation of Variable Interest Entities" at March 31, 2004.

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.

- 31 -

PART II. OTHER INFORMATION

ITEM 6. EXHIBIT INDEX

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

- 32 -

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

February 18, 2005 /s/ James P. Hart
--------------------
James P. Hart
Acting Chief Financial Officer and
Duly Authorized Officer

- 33 -