##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2005
 o
    
    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. 000-15191
 Valley National Gases Incorporated
  Pennsylvania
    
    23-2888240(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 200 West Beau Street, Suite 200
Washington, Pennsylvania 15301
 (724) 228-3000
  þ o
  o þ
  o þ
  Class
    
    Outstanding at November 9, 2005Common stock, $0.001 par value
    
    9,588,806




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TABLE OF CONTENTS
  
 PagePART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2005
and September 30, 2005 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2004 and 2005 (unaudited)
    
    
    5Consolidated Statements of Changes in Stockholders Equity
for the Periods Ended June 30, 2005 and September 30, 2005
(unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2004 and 2005 (unaudited)
    
    
    7Notes to Unaudited Condensed Consolidated Financial
Statements
    
    
    8Item 2
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    21Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    29Item 4
    
    Controls and Procedures
    
    
    30PART II
    
    OTHER INFORMATIONItem 6
    
    Exhibits
    
    
    31Signatures
    
    
    32Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
  - 2 -




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2005
    
    
    2005(unaudited)A S S E T SCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,322,397
    
    
    $
    2,044,543Accounts receivable, net of allowance for doubtful
accounts of $672,822 and $764,337, respectively
    
    
    16,956,510
    
    
    
    18,250,614Inventory
    
    
    9,868,974
    
    
    
    11,039,993Prepaids and other
    
    
    1,036,410
    
    
    
    1,390,239Current deferred tax asset
    
    
    1,774,379
    
    
    
    1,706,405Prepaid and refundable taxes
    
    
    1,471,519
    
    
    
    877,187Total current assets
    
    
    32,430,189
    
    
    
    35,308,981PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    2,099,915
    
    
    
    2,172,416Buildings and improvements
    
    
    21,416,658
    
    
    
    22,286,131Equipment
    
    
    100,332,506
    
    
    
    101,124,152Transportation equipment
    
    
    19,249,082
    
    
    
    19,991,936Furniture and fixtures
    
    
    8,756,310
    
    
    
    8,921,211Total property, plant and equipment
    
    
    151,854,471
    
    
    
    154,495,846Accumulated depreciation
    
    
    (57,737,096
    )
    
    
    (59,345,330
    )Net property, plant and equipment
    
    
    94,117,375
    
    
    
    95,150,516OTHER ASSETS:Intangible assets, net of accumulated amortization of
$7,329,315 and $7,568,173, respectively
    
    
    2,607,058
    
    
    
    2,368,200Goodwill
    
    
    45,482,910
    
    
    
    45,482,910Deposits and other assets
    
    
    448,429
    
    
    
    579,901Total other assets
    
    
    48,538,397
    
    
    
    48,431,011TOTAL ASSETS
    
    $
    175,085,961
    
    
    $
    178,890,508
  - 3 -




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VALLEY NATIONAL GASES INCORPORATED
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2005
    
    
    2005(unaudited)LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt
    
    $
    3,674,444
    
    
    $
    3,402,301Bank overdraft
    
    
    
    
    
    
    198,215Accounts payable
    
    
    8,679,057
    
    
    
    11,823,344Accrued compensation and employee benefits
    
    
    4,181,792
    
    
    
    2,536,065Interest rate derivatives
    
    
    196,741
    
    
    
    Other current liabilities
    
    
    4,840,217
    
    
    
    4,884,476Total current liabilities
    
    
    21,572,251
    
    
    
    22,844,401LONG-TERM DEBT, less current maturities
    
    
    60,925,763
    
    
    
    60,961,528DEFERRED TAX LIABILITY
    
    
    26,935,848
    
    
    
    27,294,558OTHER LONG-TERM LIABILITIES
    
    
    670,615
    
    
    
    711,246Total liabilities
    
    
    110,104,477
    
    
    
    111,811,733MINORITY INTEREST IN VARIABLE INTEREST ENTITIES
    
    
    5,118,999
    
    
    
    4,913,645COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS 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,
9,574,999 and 9,578,549 shares,
respectively
    
    
    9,620
    
    
    
    9,620Paid-in-capital
    
    
    19,160,327
    
    
    
    19,202,125Retained earnings
    
    
    41,185,428
    
    
    
    43,221,245Accumulated other comprehensive (loss) income
    
    
    (118,806
    )
    
    
    76,759Treasury stock at cost, 45,085 and 41,535
shares, respectively
    
    
    (374,084
    )
    
    
    (344,619
    )Total stockholders equity
    
    
    59,862,485
    
    
    
    62,165,130TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    175,085,961
    
    
    $
    178,890,508
  - 4 -




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VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 Three Months EndedSeptember 30,2004
    
    
    2005NET SALES
    
    $
    36,200,516
    
    
    $
    41,663,231COSTS AND EXPENSESCost of products sold, excluding depreciation
    
    
    16,913,985
    
    
    
    19,915,605Operating, distribution and administrative
    
    
    13,410,321
    
    
    
    15,473,538Depreciation
    
    
    1,572,155
    
    
    
    1,792,381Amortization of intangibles
    
    
    343,690
    
    
    
    238,857Loss (gain) on disposal of assets
    
    
    18,159
    
    
    
    (37,458
    )Total costs and expenses
    
    
    32,258,310
    
    
    
    37,382,923INCOME FROM OPERATIONS
    
    
    3,942,206
    
    
    
    4,280,308INTEREST EXPENSE
    
    
    1,199,991
    
    
    
    890,956OTHER INCOME, NET
    
    
    102,772
    
    
    
    205,194EARNINGS BEFORE MINORITY INTEREST
    
    
    2,844,987
    
    
    
    3,594,546MINORITY INTEREST
    
    
    323,416
    
    
    
    257,141NET EARNINGS BEFORE TAXES
    
    
    2,521,571
    
    
    
    3,337,405PROVISION FOR INCOME TAXES
    
    
    958,197
    
    
    
    1,301,588NET EARNINGS
    
    $
    1,563,374
    
    
    $
    2,035,817BASIC EARNINGS PER SHARE
    
    $
    0.16
    
    
    $
    0.21DILUTED EARNINGS PER SHARE
    
    $
    0.16
    
    
    $
    0.21WEIGHTED AVERAGE SHARES:Basic
    
    
    9,485,696
    
    
    
    9,576,481Diluted
    
    
    9,600,299
    
    
    
    9,720,982
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VALLEY NATIONAL GASES INCORPORATED
 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
  AccumulatedOther
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Treasury Stock
    
    
    Paid-in-
    
    
    Comprehensive
    
    
    Retained
    
    
    Stockholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Income (Loss)
    
    
    Earnings
    
    
    Equity
    
    
    IncomeBALANCE, June 30, 2004
    
    
    9,620,084
    
    
    
    9,620
    
    
    
    155,500
    
    
    
    (1,291,633
    )
    
    
    18,905,761
    
    
    
    (1,184,309
    )
    
    
    29,668,686
    
    
    
    46,108,125
    
    
    
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,370,670
    
    
    
    12,370,670
    
    
    $
    12,370,670Dividend paid, per share $0.09
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (853,928
    )
    
    
    (853,928
    )
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (110,415
    )
    
    
    917,549
    
    
    
    (142,575
    )
    
    
    
    
    
    
    
    
    
    
    774,974
    
    
    
    Tax benefit from exercise of stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,141
    
    
    
    
    
    
    
    
    
    
    
    397,141
    
    
    
    Unrealized gains on derivatives designated and
qualified as cash flow hedges, net of tax provision
of $665,159
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    997,739
    
    
    
    
    
    
    
    997,739
    
    
    
    997,739Reclassification of unrealized gains on
derivatives, net of tax provision of $45,176
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,764
    
    
    
    
    
    
    
    67,764
    
    
    
    67,764BALANCE, June 30, 2005
    
    
    9,620,084
    
    
    
    9,620
    
    
    
    45,085
    
    
    
    (374,084
    )
    
    
    19,160,327
    
    
    
    (118,806
    )
    
    $
    41,185,428
    
    
    $
    59,862,485
    
    
    
    13,436,173Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,035,817
    
    
    
    2,035,817
    
    
    $
    2,035,817Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (3,550
    )
    
    
    29,465
    
    
    
    (10,247
    )
    
    
    
    
    
    
    
    
    
    
    19,218
    
    
    
    Non-cash stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    52,045
    
    
    
    
    
    
    
    
    
    
    
    52,045
    
    
    
    Unrealized gains on derivatives designated and
qualified as cash flow hedges, net of tax provision
of $129,870
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194,805
    
    
    
    
    
    
    
    194,805
    
    
    
    194,805Reclassification of unrealized gains on
derivatives, net of tax provision of $507
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    760
    
    
    
    
    
    
    
    760
    
    
    
    760BALANCE, September 30, 2005 (unaudited)
    
    
    9,620,084
    
    
    $
    9,620
    
    
    
    41,535
    
    
    $
    (344,619
    )
    
    $
    19,202,125
    
    
    $
    76,759
    
    
    $
    43,221,245
    
    
    $
    62,165,130
    
    
    $
    2,231,382
 The accompanying notes are an integral part of these consolidated financial statements .
 - 6 -




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VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 Three Months EndedSeptember 30,2004
    
    
    2005NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    $
    4,927,061
    
    
    $
    3,774,687CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from disposal of assets
    
    
    23,800
    
    
    
    77,654Purchases of property and equipment
    
    
    (3,045,926
    )
    
    
    (2,648,755
    )Net cash used by investing activities
    
    
    (3,022,126
    )
    
    
    (2,571,101
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    14,709,525
    
    
    
    13,799,959Principal payments on borrowings
    
    
    (14,944,107
    )
    
    
    (14,036,337
    )Proceeds (repayment) of bank overdraft
    
    
    (668,046
    )
    
    
    198,215Proceeds from exercise of stock options
    
    
    144,804
    
    
    
    19,218Variable interest entity distribution
    
    
    (386,653
    )
    
    
    (462,495
    )Net cash used by financing activities
    
    
    (1,144,477
    )
    
    
    (481,440
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    760,458
    
    
    
    722,146CASH AND CASH EQUIVALENTS, beginning of period
    
    
    549,002
    
    
    
    1,322,397CASH AND CASH EQUIVALENTS, end of period
    
    $
    1,309,460
    
    
    $
    2,044,543
  - 7 -




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VALLEY NATIONAL GASES INCORPORATED
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 BASIS OF PRESENTATION:
   ORGANIZATION
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     - 8 -




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2004
    
    
    2005Balance, June 30
    
    $
    747,309
    
    
    $
    672,822Write-off of
doubtful accounts
    
    
    (53,023
    )
    
    
    (111,012
    )Provision
for doubtful accounts
    
    
    181,235
    
    
    
    202,527Balance, September 30
    
    $
    875,521
    
    
    $
    764,337
    June 30,
    
    
    September 30,2005
    
    
    2005(Unaudited)Hard goods
    
    $
    8,258,169
    
    
    $
    9,006,957Gases
    
    
    2,010,299
    
    
    
    2,562,685Reserves
    
    
    (399,494
    )
    
    
    (529,649
    )$
    9,868,974
    
    
    $
    11,039,993
          - 9 -




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2005Risk-Free Interest Rate
    
    
    3.8
    %Expected Lives
    
    7 yearsExpected Dividend Yield
    
    
    0.00
    %Expected Volatility
    
    
    23.78
    %
      - 10 -




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##### Table of Contents



For the Three Months EndedSeptember 30,2004
    
    
    2005Cash paid
for certain itemsCash payments for interest
    
    $
    992,863
    
    
    $
    625,481Cash payments for income taxes, net of income tax refunds
    
    
    26,195
    
    
    
    410,949Non-cash financing activityDividend payable
    
    
    853,924
    
    
    
    Non-cash investing activityFixed asset purchases in accounts payable
    
    
    270,122
    
    
    
    216,963
   GOODWILL AND INTANGIBLE ASSETS:
  - 11 -




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AccumulatedGross
    
    
    Accumulated
    
    
    
    
    
    
    Amortization
    
    
    WeightedAmount
    
    
    Amortization
    
    
    Gross Amount as of
    
    
    as of
    
    
    Averageas of
    
    
    as of
    
    
    September 30,
    
    
    September
    
    
    AmortizationJune 30,
    
    
    June 30,
    
    
    2005
    
    
    30, 2005
    
    
    Period2005
    
    
    2005
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (years)Non-competition
agreements
    
    $
    8,443,480
    
    
    $
    7,196,332
    
    
    $
    8,443,480
    
    
    $
    7,404,492
    
    
    
    9.4Consulting
agreements
    
    
    150,000
    
    
    
    70,833
    
    
    
    150,000
    
    
    
    83,333
    
    
    
    3.0Customer lists
    
    
    1,342,893
    
    
    
    62,150
    
    
    
    1,342,893
    
    
    
    80,348
    
    
    
    17.5Total
    
    $
    9,936,373
    
    
    $
    7,329,315
    
    
    $
    9,936,373
    
    
    $
    7,568,173
  Fiscal year EndingJune 30,Remainder of 2006
    
    $
    399,9062007
    
    $
    401,2632008
    
    $
    360,0132009
    
    $
    167,6322010
    
    $
    104,2612011
    
    $
    104,261
    EARNINGS PER SHARE
  - 12 -




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Three Months EndedSeptember 30,2004
    
    
    2005Net earnings available for common stock
    
    $
    1,563,374
    
    
    $
    2,035,817Basic earnings per common share:Weighted average common shares
    
    
    9,485,696
    
    
    
    9,576,481Basic earnings per common share
    
    $
    0.16
    
    
    $
    0.21Diluted earnings per common share:Weighted average common shares
    
    
    9,485,696
    
    
    
    9,576,481Shares issuable from assumed conversion
of common stock equivalents
    
    
    114,603
    
    
    
    144,501Weighted average common and common
equivalent shares
    
    
    9,600,299
    
    
    
    9,720,982Diluted earnings per common share
    
    $
    0.16
    
    
    $
    0.21
  LEASE OBLIGATIONS
    Fiscal yearending
    
    
    
    
    
    
    
    
    
    
    
    
    
    Elimination
    
    
    FinalJune 30,
    
    Real Estate
    
    
    Equipment
    
    
    Subtotal
    
    
    (1)
    
    
    TotalRemainder of 2006
    
    $
    2,900,717
    
    
    $
    38,025
    
    
    $
    2,938,742
    
    
    $
    1,847,765
    
    
    $
    1,090,9772007
    
    
    3,982,085
    
    
    
    26,100
    
    
    
    4,008,185
    
    
    
    2,499,433
    
    
    
    1,508,7522008
    
    
    4,081,637
    
    
    
    
    
    
    
    4,081,637
    
    
    
    2,561,919
    
    
    
    1,519,7182009
    
    
    4,183,678
    
    
    
    
    
    
    
    4,183,678
    
    
    
    2,625,967
    
    
    
    1,557,7112010
    
    
    4,288,270
    
    
    
    
    
    
    
    4,288,270
    
    
    
    2,691,616
    
    
    
    1,596,6542011
    
    
    4,395,477
    
    
    
    
    
    
    
    4,395,477
    
    
    
    2,758,907
    
    
    
    1,636,570Totals
    
    $
    23,831,864
    
    
    $
    64,125
    
    
    $
    23,895,989
    
    
    $
    14,985,607
    
    
    $
    8,910,382
 
 (1)
    
    Reflects the elimination of intercompany rent as a result of FIN 46R, Consolidation of
Variable Interest Entities. - 13 -




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COMMITMENTS AND CONTINGENCIES
    - 14 -




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VARIABLE INTEREST ENTITIES
    - 15 -




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As of September 30, 2005(unaudited)VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyA S S E T SCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,533,837
    
    
    $
    510,706
    
    
    $
    
    
    
    $
    2,044,543Accounts receivable, net
of allowance for doubtful
accounts of $764,337
    
    
    18,117,586
    
    
    
    133,028
    
    
    
    
    
    
    
    18,250,614Inventory
    
    
    11,039,993
    
    
    
    
    
    
    
    
    
    
    
    11,039,993Prepaids and other
    
    
    1,376,502
    
    
    
    13,737
    
    
    
    
    
    
    
    1,390,239Current deferred tax asset
    
    
    1,706,405
    
    
    
    
    
    
    
    
    
    
    
    1,706,405Refundable taxes
    
    
    877,187
    
    
    
    
    
    
    
    
    
    
    
    877,187Total current assets
    
    
    34,651,510
    
    
    
    657,471
    
    
    
    
    
    
    
    35,308,981PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    150,000
    
    
    
    2,022,416
    
    
    
    
    
    
    
    2,172,416Buildings and improvements
    
    
    8,043,514
    
    
    
    14,242,617
    
    
    
    
    
    
    
    22,286,131Equipment
    
    
    99,889,094
    
    
    
    1,235,058
    
    
    
    
    
    
    
    101,124,152Transportation equipment
    
    
    19,818,687
    
    
    
    173,249
    
    
    
    
    
    
    
    19,991,936Furniture and fixtures
    
    
    8,746,889
    
    
    
    174,322
    
    
    
    
    
    
    
    8,921,211Total property,
plant and equipment
    
    
    136,648,184
    
    
    
    17,847,662
    
    
    
    
    
    
    
    154,495,846Accumulated depreciation
    
    
    (54,568,992
    )
    
    
    (4,776,338
    )
    
    
    
    
    
    
    (59,345,330
    )Net property, plant
and equipment
    
    
    82,079,192
    
    
    
    13,071,324
    
    
    
    
    
    
    
    95,150,516OTHER ASSETS:Intangible assets, net of
accumulated amortization
of $7,568,173
    
    
    2,368,200
    
    
    
    
    
    
    
    
    
    
    
    2,368,200Goodwill
    
    
    45,482,910
    
    
    
    
    
    
    
    
    
    
    
    45,482,910Deposits and other assets
    
    
    564,872
    
    
    
    15,029
    
    
    
    
    
    
    
    579,901Total other assets
    
    
    48,415,982
    
    
    
    15,029
    
    
    
    
    
    
    
    48,431,011TOTAL ASSETS
    
    $
    165,146,684
    
    
    $
    13,743,824
    
    
    $
    
    
    
    $
    178,890,508
 - 16 -




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##### Table of Contents



As of September 30, 2005(unaudited)VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyLIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt
    
    $
    868,622
    
    
    $
    2,533,679
    
    
    $
    
    
    
    $
    3,402,301Bank overdraft
    
    
    
    
    
    
    198,215
    
    
    
    
    
    
    
    198,215Accounts payable
    
    
    11,524,212
    
    
    
    299,132
    
    
    
    
    
    
    
    11,823,344Accrued compensation and employee
benefits
    
    
    2,536,065
    
    
    
    
    
    
    
    
    
    
    
    2,536,065Other current liabilities
    
    
    4,677,077
    
    
    
    207,399
    
    
    
    
    
    
    
    4,884,476Total current
liabilities
    
    
    19,605,976
    
    
    
    3,238,425
    
    
    
    
    
    
    
    22,844,401LONG-TERM DEBT, less current maturities
    
    
    55,369,774
    
    
    
    5,591,754
    
    
    
    
    
    
    
    60,961,528DEFERRED TAX LIABILITY
    
    
    27,294,558
    
    
    
    
    
    
    
    
    
    
    
    27,294,558OTHER LONG-TERM LIABILITIES
    
    
    711,246
    
    
    
    
    
    
    
    
    
    
    
    711,246Total liabilities
    
    
    102,981,554
    
    
    
    8,830,179
    
    
    
    
    
    
    
    111,811,733MINORITY INTEREST IN VARIABLE INTEREST
ENTITIES
    
    
    
    
    
    
    
    
    
    
    4,913,645
    
    
    
    4,913,645COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, par value, $.01 per
shareAuthorized, 5,000,000 shares,
none Issued or OutstandingCommon stock, par value, $.001 per
shareAuthorized, 30,000,000 shares;
Issued, 9,620,084 shares,
Outstanding, 9,578,549 shares
    
    
    9,620
    
    
    
    3,800
    
    
    
    (3,800
    )
    
    
    9,620Paid-in-capital
    
    
    19,202,125
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    19,202,125Retained earnings
    
    
    43,221,245
    
    
    
    4,573,860
    
    
    
    (4,573,860
    )
    
    
    43,221,245Accumulated other comprehensive income
(loss)
    
    
    76,759
    
    
    
    
    
    
    
    
    
    
    
    76,759Treasury stock at cost, 41,535 shares
    
    
    (344,619
    )
    
    
    
    
    
    
    
    
    
    
    (344,619
    )Total stockholders equity
    
    
    62,165,130
    
    
    
    4,913,645
    
    
    
    (4,913,645
    )
    
    
    62,165,130TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    165,146,684
    
    
    $
    13,743,824
    
    
    
    
    
    
    $
    178,890,508
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##### Table of Contents



As of June 30, 2005VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyA S S E T SCURRENT ASSETS:Cash and cash equivalents
    
    $
    548,925
    
    
    $
    773,472
    
    
    $
    
    
    
    $
    1,322,397Accounts receivable, net
of allowance for doubtful
accounts of $672,822
    
    
    16,825,355
    
    
    
    248,851
    
    
    
    (117,696
    )
    
    
    16,956,510Inventory
    
    
    9,868,974
    
    
    
    
    
    
    
    
    
    
    
    9,868,974Prepaids and other
    
    
    1,026,410
    
    
    
    10,000
    
    
    
    
    
    
    
    1,036,410Current deferred tax asset
    
    
    1,774,379
    
    
    
    
    
    
    
    
    
    
    
    1,774,379Refundable taxes
    
    
    1,471,519
    
    
    
    
    
    
    
    
    
    
    
    1,471,519Total current assets
    
    
    31,515,562
    
    
    
    1,032,323
    
    
    
    (117,696
    )
    
    
    32,430,189PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    75,000
    
    
    
    2,024,915
    
    
    
    
    
    
    
    2,099,915Buildings and improvements
    
    
    7,512,593
    
    
    
    13,904,065
    
    
    
    
    
    
    
    21,416,658Equipment
    
    
    99,138,620
    
    
    
    1,193,886
    
    
    
    
    
    
    
    100,332,506Transportation equipment
    
    
    19,075,833
    
    
    
    173,249
    
    
    
    
    
    
    
    19,249,082Furniture and fixtures
    
    
    8,581,988
    
    
    
    174,322
    
    
    
    
    
    
    
    8,756,310Total property,
plant and equipment
    
    
    134,384,034
    
    
    
    17,470,437
    
    
    
    
    
    
    
    151,854,471Accumulated depreciation
    
    
    (53,073,285
    )
    
    
    (4,663,811
    )
    
    
    
    
    
    
    (57,737,096
    )Net property, plant
and equipment
    
    
    81,310,749
    
    
    
    12,806,626
    
    
    
    
    
    
    
    94,117,375OTHER ASSETS:Intangible assets, net of
accumulated amortization
of $7,329,315
    
    
    2,607,058
    
    
    
    
    
    
    
    
    
    
    
    2,607,058Goodwill
    
    
    45,482,910
    
    
    
    
    
    
    
    
    
    
    
    45,482,910Deposits and other assets
    
    
    434,687
    
    
    
    13,742
    
    
    
    
    
    
    
    448,429Total other assets
    
    
    48,524,655
    
    
    
    13,742
    
    
    
    
    
    
    
    48,538,397TOTAL ASSETS
    
    $
    161,350,966
    
    
    $
    13,852,691
    
    
    $
    (117,696
    )
    
    $
    175,085,961
 - 18 -




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##### Table of Contents



As of June 30, 2005VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyLIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of
long-term debt
    
    $
    1,434,427
    
    
    $
    2,240,017
    
    
    $
    
    
    
    $
    3,674,444Accounts payable
    
    
    8,390,239
    
    
    
    288,818
    
    
    
    
    
    
    
    8,679,057Accrued compensation and
employee benefits
    
    
    4,181,792
    
    
    
    
    
    
    
    
    
    
    
    4,181,792Interest rate derivatives
    
    
    196,741
    
    
    
    
    
    
    
    
    
    
    
    196,741Other current liabilities
    
    
    4,846,043
    
    
    
    111,870
    
    
    
    (117,696
    )
    
    
    4,840,217Total current liabilities
    
    
    19,049,242
    
    
    
    2,640,705
    
    
    
    (117,696
    )
    
    
    21,572,251LONG-TERM DEBT, less current
maturities
    
    
    54,832,776
    
    
    
    6,092,987
    
    
    
    
    
    
    
    60,925,763DEFERRED TAX LIABILITY
    
    
    26,935,848
    
    
    
    
    
    
    
    
    
    
    
    26,935,848OTHER LONG-TERM LIABILITIES
    
    
    670,615
    
    
    
    
    
    
    
    
    
    
    
    670,615Total liabilities
    
    
    101,488,481
    
    
    
    8,733,692
    
    
    
    (117,696
    )
    
    
    110,104,477MINORITY INTEREST IN VARIABLE
INTEREST ENTITIES
    
    
    
    
    
    
    
    
    
    
    5,118,999
    
    
    
    5,118,999COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Preferred stock, par value,
$.01 per shareAuthorized, 5,000,000 shares,
none Issued or OutstandingCommon stock, par value, $.001
Per share-Authorized, 30,000,000 shares;
Issued, 9,620,084 shares,
Outstanding, 9,574,999 shares
    
    
    9,620
    
    
    
    3,800
    
    
    
    (3,800
    )
    
    
    9,620Paid-in-capital
    
    
    19,160,327
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    19,160,327Retained earnings
    
    
    41,185,428
    
    
    
    4,779,214
    
    
    
    (4,779,214
    )
    
    
    41,185,428Accumulated other
comprehensive income (loss)
    
    
    (118,806
    )
    
    
    
    
    
    
    
    
    
    
    (118,806
    )Treasury stock at cost, 45,085
shares
    
    
    (374,084
    )
    
    
    
    
    
    
    
    
    
    
    (374,084
    )Total stockholders equity
    
    
    59,862,485
    
    
    
    5,118,999
    
    
    
    (5,118,999
    )
    
    
    59,862,485TOTAL LIABILITIES AND
STOCKHOLDERS EQUITY
    
    $
    161,350,966
    
    
    $
    13,852,691
    
    
    $
    (117,696
    )
    
    $
    175,085,961
 - 19 -




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##### Table of Contents



VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    41,663,231
    
    
    $
    586,994
    
    
    $
    (586,994
    )
    
    $
    41,663,231COSTS AND EXPENSESCost of products sold,
excluding depreciation
    
    
    19,915,605
    
    
    
    
    
    
    
    
    
    
    
    19,915,605Operating, distribution and
administrative
    
    
    15,838,952
    
    
    
    221,580
    
    
    
    (586,994
    )
    
    
    15,473,538Depreciation
    
    
    1,653,400
    
    
    
    138,981
    
    
    
    
    
    
    
    1,792,381Amortization of intangibles
    
    
    238,857
    
    
    
    
    
    
    
    
    
    
    
    238,857Gain on disposal of assets
    
    
    (8,775
    )
    
    
    (28,683
    )
    
    
    
    
    
    
    (37,458
    )Total costs and expenses
    
    
    37,638,039
    
    
    
    331,878
    
    
    
    (586,994
    )
    
    
    37,382,923INCOME FROM OPERATIONS
    
    
    4,025,192
    
    
    
    255,116
    
    
    
    
    
    
    
    4,280,308INTEREST EXPENSE
    
    
    817,022
    
    
    
    73,934
    
    
    
    
    
    
    
    890,956OTHER INCOME, NET
    
    
    129,235
    
    
    
    75,959
    
    
    
    
    
    
    
    205,194EARNINGS BEFORE MINORITY INTEREST
    
    
    3,337,405
    
    
    
    257,141
    
    
    
    
    
    
    
    3,594,546MINORITY INTEREST
    
    
    
    
    
    
    257,141
    
    
    
    
    
    
    
    257,141NET EARNINGS BEFORE TAXES
    
    
    3,337,405
    
    
    
    
    
    
    
    
    
    
    
    3,337,405PROVISION FOR INCOME TAXES
    
    
    1,301,588
    
    
    
    
    
    
    
    
    
    
    
    1,301,588NET EARNINGS
    
    $
    2,035,817
    
    
    $
    
    
    
    $
    
    
    
    $
    2,035,817
  VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    36,200,516
    
    
    $
    699,851
    
    
    $
    (699,851
    )
    
    $
    36,200,516COSTS AND EXPENSESCost of products sold,
excluding depreciation
    
    
    16,913,985
    
    
    
    
    
    
    
    
    
    
    
    16,913,985Operating, distribution and
administrative
    
    
    13,833,704
    
    
    
    276,468
    
    
    
    (699,851
    )
    
    
    13,410,321Depreciation
    
    
    1,470,000
    
    
    
    102,155
    
    
    
    
    
    
    
    1,572,155Amortization of intangibles
    
    
    343,690
    
    
    
    
    
    
    
    
    
    
    
    343,690Loss on disposal of assets
    
    
    18,159
    
    
    
    
    
    
    
    
    
    
    
    18,159Total costs and expenses
    
    
    32,579,538
    
    
    
    378,623
    
    
    
    (699,851
    )
    
    
    32,258,310INCOME FROM OPERATIONS
    
    
    3,620,978
    
    
    
    321,228
    
    
    
    
    
    
    
    3,942,206INTEREST EXPENSE
    
    
    1,150,660
    
    
    
    49,331
    
    
    
    
    
    
    
    1,199,991OTHER INCOME, NET
    
    
    51,253
    
    
    
    51,519
    
    
    
    
    
    
    
    102,772EARNINGS BEFORE MINORITY INTEREST
    
    
    2,521,571
    
    
    
    323,416
    
    
    
    
    
    
    
    2,844,987MINORITY INTEREST
    
    
    
    
    
    
    323,416
    
    
    
    
    
    
    
    323,416NET EARNINGS BEFORE TAXES
    
    
    2,521,571
    
    
    
    
    
    
    
    
    
    
    
    2,521,571PROVISION FOR INCOME TAXES
    
    
    958,197
    
    
    
    
    
    
    
    
    
    
    
    958,197NET EARNINGS
    
    $
    1,563,374
    
    
    $
    
    
    
    $
    
    
    
    $
    1,563,374
 SEGMENT DATA
   - 20 -




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##### Table of Contents



June 30,
    
    
    September 30,2005
    
    
    2005Valley
    
    $
    161,350,966
    
    
    $
    165,146,684Variable Interest Entities
    
    
    13,734,995
    
    
    
    13,743,824Total assets
    
    $
    175,085,961
    
    
    $
    178,890,508
  SUBSEQUENT EVENTS
   
 Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  ForwardLooking Statements
   - 21 -




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- 22 -




---



##### Table of Contents



TRADE RECEIVABLES
  - 23 -




---



##### Table of Contents



INVENTORIES
  GOODWILL AND OTHER INTANGIBLE ASSETS
  EMPLOYEE HEALTH CARE BENEFITS RESERVES
  VALUATION
OF LONGLIVED ASSETS
  - 24 -




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##### Table of Contents



INCOME TAXES
  VARIABLE INTEREST ENTITIES
    Three Months EndedSeptember 30,2005
    
    2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold, excluding
depreciation
    
    
    47.8
    
    
    
    46.8Operating, distribution and administrative
    
    
    37.1
    
    
    
    37.0Depreciation
    
    
    4.3
    
    
    
    4.3Amortization of intangibles
    
    
    0.5
    
    
    
    1.0Total costs and expenses
    
    
    89.7
    
    
    
    89.1Income from operations
    
    
    10.3
    
    
    
    10.9Interest expense
    
    
    2.2
    
    
    
    3.3Other income, net
    
    
    0.5
    
    
    
    0.3Earnings before minority interest
    
    
    8.6
    
    
    
    7.9Minority interest
    
    
    0.6
    
    
    
    0.9Net earnings before taxes
    
    
    8.0
    
    
    
    7.0Provision for income taxes
    
    
    3.1
    
    
    
    2.6Net earnings
    
    
    4.9
    %
    
    
    4.4
    %
  Comparison of Three Months Ended September 30, 2005 and 2004
  - 25 -




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- 26 -




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##### Table of Contents



Payments Due By Period (In Thousands)Less Than
    
    
    1-3
    
    
    4-5
    
    
    More ThanContractual Obligations
    
    Total
    
    
    9 Months
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-Term Debt Including
Current Maturities
    
    $
    64,364
    
    
    $
    3,001
    
    
    $
    57,791
    
    
    $
    1,401
    
    
    $
    2,171Estimated Interest Payments
    
    
    16,951
    
    
    
    2,376
    
    
    
    8,823
    
    
    
    5,624
    
    
    
    128Interest Rate Swap Payments
    
    
    4,501
    
    
    
    1,688
    
    
    
    2,813
    
    
    
    
    
    
    
    Interest Rate Swap Receipts
    
    
    (3,330
    )
    
    
    (1,249
    )
    
    
    (2,081
    )
    
    
    
    
    
    
    Operating Leases, Net of
Intercompany Eliminations
    
    
    8,910
    
    
    
    1,091
    
    
    
    4,586
    
    
    
    3,233
    
    
    
    Purchase Obligations
    
    
    1,284
    
    
    
    1,284
    
    
    
    
    
    
    
    
    
    
    
    Total Obligations
    
    $
    92,680
    
    
    $
    8,191
    
    
    $
    71,932
    
    
    $
    10,258
    
    
    $
    2,299
     - 27 -




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##### Table of Contents



VariableInterestFiscal year ending June 30,
    
    Valley
    
    
    Entities
    
    
    CompanyRemainder of 2006
    
    $
    652,548
    
    
    $
    2,348,260
    
    
    $
    3,000,8082007
    
    $
    661,160
    
    
    $
    745,379
    
    
    $
    1,406,5392008
    
    $
    250,013
    
    
    $
    765,441
    
    
    $
    1,015,4542009
    
    $
    54,580,942
    
    
    $
    788,148
    
    
    $
    55,369,0902010
    
    $
    61,709
    
    
    $
    704,906
    
    
    $
    766,6152011
    
    $
    32,024
    
    
    $
    602,852
    
    
    $
    634,876Thereafter
    
    $
    
    
    
    $
    2,170,447
    
    
    $
    2,170,447Total
    
    $
    56,238,396
    
    
    $
    8,125,433
    
    
    $
    64,363,829
    - 28 -




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##### Table of Contents



New Accounting Standards
     
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
  - 29 -




---



##### Table of Contents



Balance of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    There
    
    
    
    
    
    
    Fair2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    After
    
    
    Total
    
    
    Value(In Thousands)LiabilitiesLong term debt  ValleyFixed rate
    
    $
    652
    
    
    $
    661
    
    
    $
    250
    
    
    $
    163
    
    
    $
    62
    
    
    $
    32
    
    
    $
    1,820
    
    
    $
    1,647Average interest rate
    
    
    7.40
    %
    
    
    6.80
    %
    
    
    6.85
    %
    
    
    5.46
    %
    
    
    5.34
    %
    
    
    4.90
    %
    
    
    
    
    
    
    Variable rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    54,418
    
    
    
    
    
    
    
    
    
    
    $
    54,418
    
    
    $
    54,418Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.88
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Long term debt -
Variable Interest
Entities mortgage debtFixed rate
    
    $
    2,348
    
    
    $
    745
    
    
    $
    766
    
    
    $
    788
    
    
    $
    705
    
    
    $
    2,773
    
    
    $
    8,125
    
    
    $
    6,871Average interest rate
    
    
    4.65
    %
    
    
    5.45
    %
    
    
    4.43
    %
    
    
    4.47
    %
    
    
    4.50
    %
    
    
    4.35
    %
    
    
    Interest rate swapsVariable to fixed
    
    $
    45,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    128Average pay rate
    
    
    5.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average receive rate
    
    
    3.7
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    CommitmentsOperating leases
    
    $
    2,939
    
    
    $
    4,008
    
    
    $
    4,082
    
    
    $
    4,184
    
    
    $
    4,288
    
    
    $
    4,395
    
    
    $
    23,896Intercompany
elimination (1)
    
    
    (1,848
    )
    
    
    (2,499
    )
    
    
    (2,562
    )
    
    
    (2,626
    )
    
    
    (2,692
    )
    
    
    (2,759
    )
    
    
    (14,986
    )Company total
    
    $
    1,091
    
    
    $
    1,509
    
    
    $
    1,520
    
    
    $
    1,558
    
    
    $
    1,596
    
    
    $
    1,636
    
    
    $
    8,910
 
 (1)
    
    Reflects the elimination of intercompany rent as a result of FIN 46R,
Consolidation of Variable Interest Entities at September 30, 2005.  
 Item 4. Controls and Procedures
     - 30 -




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##### Table of Contents



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 200231.2
    
    Certification of the Chief Financial Officer Pursuant to Section
302 of the SarbanesOxley Act of 200232.1
    
    Certification of the Chief Executive Officer Pursuant to Section
906 of the SarbanesOxley Act of 200232.2
    
    Certification of the Chief Financial Officer Pursuant to Section
906 of the SarbanesOxley Act of 2002
 - 31 -




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##### Table of Contents



SIGNATURES
  VALLEY NATIONAL GASES INCORPORATEDNovember
14, 2005
    
    /s/ James P. HartJames P. HartChief Financial Officer and
Duly Authorized Officer
 - 32 -