##### 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, 2006
 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
(State or other jurisdiction of 
incorporation or organization)
    
    23-2888240
(I.R.S. Employer Identification No.)
 200 West Beau Street, Suite 200
Washington, Pennsylvania 15301
 (724) 228-3000
  þ o
  o o þ
  o þ
  Class
    
    Outstanding at November 9, 2006Common stock, $0.001 par value
    
    9,680,159




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##### 



TABLE OF CONTENTS
 PagePART I FINANCIAL INFORMATIONItem 1Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2006
and September 30, 2006 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2005 and 2006 (unaudited)
    
    
    5Consolidated Statement of Changes in Stockholders Equity
for the Three Months Ended September 30, 2006 (unaudited)
    
    
    6Condensed Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2005 and 2006 (unaudited)
    
    
    7Notes to Unaudited Condensed Consolidated Financial
Statements
    
    
    8Item 2Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    25Item 3Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4Controls and Procedures
    
    
    34PART II OTHER INFORMATIONItem 6Exhibits
    
    
    34Signatures
    
    
    35EX-31.1EX-31.2EX-32.1EX-32.2
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PART I. FINANCIAL INFORMATION
 
 ITEM I. FINANCIAL STATEMENTS
 VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2006
    
    
    2006(unaudited)ASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    1,601,458
    
    
    $
    1,646,767Accounts receivable, net of allowance for
doubtful accounts of $1,006,754 and
$1,065,594, respectively
    
    
    20,809,098
    
    
    
    22,806,516Inventory
    
    
    12,910,680
    
    
    
    14,341,301Prepaids and other
    
    
    1,705,700
    
    
    
    1,579,474Current deferred tax asset
    
    
    2,466,329
    
    
    
    2,689,946Refundable taxes
    
    
    296,843
    
    
    
    204,283Total current assets
    
    
    39,790,108
    
    
    
    43,268,287PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    2,184,191
    
    
    
    2,184,191Buildings and improvements
    
    
    23,581,309
    
    
    
    23,992,277Equipment
    
    
    118,795,861
    
    
    
    120,801,738Transportation equipment
    
    
    21,545,468
    
    
    
    22,183,964Furniture and fixtures
    
    
    9,613,891
    
    
    
    9,823,715Total property, plant and equipment
    
    
    175,720,720
    
    
    
    178,985,885Accumulated depreciation
    
    
    (63,854,868
    )
    
    
    (65,773,402
    )Net property, plant and equipment
    
    
    111,865,852
    
    
    
    113,212,483OTHER ASSETS:Intangible assets, net of accumulated amortization of
$8,152,506 and $8,392,581, respectively
    
    
    5,023,597
    
    
    
    5,438,522Goodwill
    
    
    54,197,285
    
    
    
    55,654,998Deposits and other assets
    
    
    531,770
    
    
    
    426,751Total other assets
    
    
    59,752,652
    
    
    
    61,520,271TOTAL ASSETS
    
    $
    211,408,612
    
    
    $
    218,001,041
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VALLEY NATIONAL GASES INCORPORATED
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    September 30,2006
    
    
    2006(unaudited)LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term debt
    
    $
    3,861,915
    
    
    $
    3,838,975Accounts payable
    
    
    12,522,911
    
    
    
    14,219,706Accrued compensation and employee benefits
    
    
    4,967,701
    
    
    
    3,164,552Other current liabilities
    
    
    5,690,648
    
    
    
    5,513,570Total current liabilities
    
    
    27,043,175
    
    
    
    26,736,803LONG-TERM DEBT, less current maturities
    
    
    66,679,000
    
    
    
    69,145,650DEFERRED TAX LIABILITY
    
    
    34,042,445
    
    
    
    34,785,802OTHER LONG-TERM LIABILITIES
    
    
    2,861,058
    
    
    
    3,133,521Total liabilities
    
    
    130,625,678
    
    
    
    133,801,776MINORITY INTEREST IN VARIABLE INTEREST ENTITIES
    
    
    5,171,333
    
    
    
    5,141,558COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares;Issued, 9,661,724 and 9,678,934 shares,
respectively, Outstanding, 9,661,724 and
9,678,934 shares, respectively
    
    
    9,662
    
    
    
    9,679Paid-in-capital
    
    
    19,867,665
    
    
    
    20,175,259Retained earnings
    
    
    55,434,415
    
    
    
    58,684,058Accumulated other comprehensive income
    
    
    299,859
    
    
    
    188,711Total stockholders equity
    
    
    75,611,601
    
    
    
    79,057,707TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    211,408,612
    
    
    $
    218,001,041
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VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
  Three Months EndedSeptember 30,2005
    
    
    2006NET SALES
    
    $
    41,663,231
    
    
    $
    50,610,741COSTS AND EXPENSESCost of products sold, excluding depreciation
    
    
    19,915,605
    
    
    
    24,975,240Operating, distribution and administrative
    
    
    15,473,538
    
    
    
    16,880,966Depreciation
    
    
    1,792,381
    
    
    
    2,035,477Amortization of intangibles
    
    
    238,857
    
    
    
    240,053Loss (gain) on disposal of assets
    
    
    (37,458
    )
    
    
    8,057Total costs and expenses
    
    
    37,382,923
    
    
    
    44,139,793INCOME FROM OPERATIONS
    
    
    4,280,308
    
    
    
    6,470,948INTEREST EXPENSE
    
    
    890,956
    
    
    
    1,146,409OTHER INCOME, NET
    
    
    205,194
    
    
    
    179,287EARNINGS BEFORE MINORITY INTEREST
    
    
    3,594,546
    
    
    
    5,503,826MINORITY INTEREST
    
    
    257,141
    
    
    
    157,765NET EARNINGS BEFORE TAXES
    
    
    3,337,405
    
    
    
    5,346,061PROVISION FOR INCOME TAXES
    
    
    1,301,588
    
    
    
    2,096,418NET EARNINGS
    
    $
    2,035,817
    
    
    $
    3,249,643BASIC EARNINGS PER SHARE
    
    $
    0.21
    
    
    $
    0.34DILUTED EARNINGS PER SHARE
    
    $
    0.21
    
    
    $
    0.33WEIGHTED AVERAGE SHARES:Basic
    
    
    9,576,481
    
    
    
    9,667,463Diluted
    
    
    9,720,982
    
    
    
    9,841,228
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VALLEY NATIONAL GASES INCORPORATED
 
 CONSOLIDATED STATEMENT 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, 2006
    
    
    9,661,724
    
    
    $
    9,662
    
    
    
    
    
    
    
    
    
    
    $
    19,867,665
    
    
    $
    299,859
    
    
    $
    55,434,415
    
    
    $
    75,611,601
    
    
    $
    Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,249,643
    
    
    
    3,249,643
    
    
    
    3,249,643Exercise of stock options
    
    
    17,210
    
    
    
    17
    
    
    
    
    
    
    
    
    
    
    
    113,196
    
    
    
    
    
    
    
    
    
    
    
    113,213
    
    
    
    Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158,327
    
    
    
    
    
    
    
    
    
    
    
    158,327
    
    
    
    Non-cash stock compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    36,071
    
    
    
    
    
    
    
    
    
    
    
    36,071
    
    
    
    Unrealized loss on derivatives
designated and qualified as cash flow
hedges, net of tax provision of $74,099
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (111,148
    )
    
    
    
    
    
    
    (111,148
    )
    
    
    (111,148
    )BALANCE, September 30, 2006
(unaudited)
    
    
    9,678,934
    
    
    $
    9,679
    
    
    
    
    
    
    
    
    
    
    $
    20,175,259
    
    
    $
    188,711
    
    
    $
    58,684,058
    
    
    $
    79,057,707
    
    
    $
    3,138,495
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VALLEY NATIONAL GASES INCORPORATED
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
  Three Months EndedSeptember 30,2005
    
    
    2006NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    $
    3,774,687
    
    
    $
    2,702,457CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from disposal of assets
    
    
    77,654
    
    
    
    5,461Purchases of property and equipment
    
    
    (2,648,755
    )
    
    
    (1,909,012
    )Business acquisitions, net of cash acquired
    
    
    
    
    
    
    (3,031,304
    )Net cash used by investing activities
    
    
    (2,571,101
    )
    
    
    (4,934,855
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    13,799,959
    
    
    
    20,006,593Principal payments on borrowings
    
    
    (14,036,337
    )
    
    
    (17,812,885
    )Proceeds from bank overdraft
    
    
    198,215
    
    
    
    Proceeds from exercise of stock options
    
    
    19,218
    
    
    
    113,213Tax benefit from exercise of stock options
    
    
    
    
    
    
    158,327Variable interest entity distribution
    
    
    (462,495
    )
    
    
    (187,541
    )Net cash (used) provided by financing activities
    
    
    (481,440
    )
    
    
    2,277,707NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    722,146
    
    
    
    45,309CASH AND CASH EQUIVALENTS, beginning of period
    
    $
    1,322,397
    
    
    $
    1,601,458CASH AND CASH EQUIVALENTS, end of period
    
    $
    2,044,543
    
    
    $
    1,646,767
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VALLEY NATIONAL GASES INCORPORATED
 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 BASIS OF PRESENTATION:
   ORGANIZATION
  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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2005
    
    
    2006Balance, June 30
    
    $
    672,822
    
    
    $
    1,006,754Write-off of doubtful accounts
    
    
    (111,012
    )
    
    
    (54,782
    )Provision for doubtful accounts
    
    
    202,527
    
    
    
    113,622Balance, September 30
    
    $
    764,337
    
    
    $
    1,065,594
    June 30,
    
    
    September 30,2006
    
    
    2006(Unaudited)Hard goods
    
    $
    10,913,055
    
    
    $
    11,758,425Gases
    
    
    2,345,903
    
    
    
    3,092,250Reserves
    
    
    (348,278
    )
    
    
    (509,374
    )$
    12,910,680
    
    
    $
    14,341,301
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For the Three Months EndedSeptember 30,2005
    
    2006Non-cash financing activity and investing activity __Fixed asset purchases in accounts payable
    
    
    216,963
    
    
    
    270,134
   ACQUISITIONS:
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Cash and cash equivalents
    
    $
    125Accounts receivable
    
    
    229Inventory
    
    
    385Current assets
    
    
    4Fixed assets including cylinders, bulk
tanks and other equipment
    
    
    1,216Non-compete agreements
    
    
    250Customer relationships
    
    
    405Goodwill
    
    
    1,458Accounts payable
    
    
    (23
    )Accrued compensation
    
    
    (10
    )Other liabilities
    
    
    (67
    )Deferred income taxes
    
    
    (566
    )Non-compete agreement
    
    
    (250
    )Net assets acquired
    
    
    3,156Cash acquired
    
    
    (125
    )Total purchase price
    
    $
    3,031
   Three Months EndedSeptember 30,2006
    
    2005Net sales
    
    $
    51,071,000
    
    
    $
    42,339,00Net earnings before income taxes
    
    
    5,347,000
    
    
    
    3,447,000Pro forma net earnings
    
    
    3,250,000
    
    
    
    2,102,000Pro forma diluted earnings per share
    
    $
    0.33
    
    
    $
    0.22
 GOODWILL AND INTANGIBLE ASSETS:
  - 13 -




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AccumulatedGross
    
    
    Accumulated
    
    
    
    
    
    
    Amortization
    
    
    WeightedAmount
    
    
    Amortization
    
    
    
    
    
    
    as of
    
    
    Averageas of
    
    
    as of
    
    
    Gross Amount as of
    
    
    September 30,
    
    
    AmortizationJune 30,
    
    
    June 30,
    
    
    September 30, 2006
    
    
    2006
    
    
    Period2006
    
    
    2006
    
    
    (unaudited)
    
    
    (unaudited)
    
    
    (years)Non-competition
agreements
    
    $
    8,816,980
    
    
    $
    7,791,134
    
    
    $
    9,066,980
    
    
    $
    7,907,501
    
    
    
    7.1Consulting
agreements
    
    
    150,000
    
    
    
    120,833
    
    
    
    150,000
    
    
    
    133,333
    
    
    
    3.0Customer
relationships
    
    
    4,209,123
    
    
    
    240,539
    
    
    
    4,614,123
    
    
    
    351,747
    
    
    
    15.0Total
    
    $
    13,176,103
    
    
    $
    8,152,506
    
    
    $
    13,831,103
    
    
    $
    8,392,581
  Fiscal year EndingJune 30,Remainder of 2007
    
    $
    576,1132008
    
    $
    733,8452009
    
    $
    358,4642010
    
    $
    228,5932011
    
    $
    215,4822012
    
    $
    197,127
  Balance as of June 30, 2006
    
    $
    54,197,285Goodwill acquired
    
    
    1,457,713Balance as of September 30, 2006
    
    $
    55,654,998
 EARNINGS PER SHARE
  Three Months EndedSeptember 30,2005
    
    
    2006Net earnings available for common stock
    
    $
    2,035,817
    
    
    $
    3,249,643Basic earnings per common share:Weighted average common shares
    
    
    9,576,481
    
    
    
    9,667,463Basic earnings per common share
    
    $
    0.21
    
    
    $
    0.34Diluted earnings per common share:Weighted average common shares
    
    
    9,576,481
    
    
    
    9,667,463
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Three Months EndedSeptember 30,2005
    
    
    2006Shares issuable from assumed conversion
of common stock equivalents
    
    
    144,501
    
    
    
    173,765Weighted average common and common
equivalent shares
    
    
    9,720,982
    
    
    
    9,841,228Diluted earnings per common share
    
    $
    0.21
    
    
    $
    0.33
  LEASE OBLIGATIONS
    Fiscal yearending
    
    
    
    
    
    
    
    
    
    
    
    
    
    Elimination
    
    
    FinalJune 30,
    
    Real Estate
    
    
    Equipment
    
    
    Subtotal
    
    
    (1)
    
    
    TotalRemainder of 2007
    
    $
    3,377,562
    
    
    $
    43,025
    
    
    $
    3,420,587
    
    
    $
    2,004,908
    
    
    $
    1,415,6792008
    
    
    4,495,227
    
    
    
    
    
    
    
    4,495,227
    
    
    
    2,615,843
    
    
    
    1,879,3842009
    
    
    4,648,064
    
    
    
    
    
    
    
    4,648,064
    
    
    
    2,704,782
    
    
    
    1,943,2822010
    
    
    4,806,099
    
    
    
    
    
    
    
    4,806,099
    
    
    
    2,796,744
    
    
    
    2,009,3552011
    
    
    4,969,506
    
    
    
    
    
    
    
    4,969,506
    
    
    
    2,891,834
    
    
    
    2,077,672Thereafter
    
    
    5,138,469
    
    
    
    
    
    
    
    5,138,469
    
    
    
    2,990,156
    
    
    
    2,148,313Totals
    
    $
    27,434,927
    
    
    $
    43,025
    
    
    $
    27,477,952
    
    
    $
    16,004,267
    
    
    $
    11,473,685
 
 (1)
    
    Reflects the elimination of intercompany rent as a result of FIN 46R, Consolidation of
Variable Interest Entities. STOCK OPTIONS
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WeightedAverageNumber of
    
    
    Range of
    
    
    ExerciseShares
    
    
    Exercise Price
    
    
    PriceOutstanding, June 30, 2006
    
    
    277,735
    
    
    $
    3.125
    
    
    
    
    
    
    $
    21.280
    
    
    $
    9.39Granted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    17,210
    
    
    $
    3.750
    
    
    
    
    
    
    $
    8.00
    
    
    $
    6.58Cancelled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, September 30, 2006
    
    
    260,525
    
    
    $
    3.125
    
    
    
    
    
    
    $
    21.280
    
    
    $
    9.58
 WeightedAverageNumber of
    
    ExerciseShares
    
    PriceOptions Exercisable at:September 30, 2006
    
    
    145,525
    
    
    $
    7.07
  As of September 30, 2006Stock Options Outstanding
    
    
    Stock Options ExercisableWeightedShares
    
    
    Average
    
    
    Weighted
    
    
    SharesUnderlying
    
    
    Remaining
    
    
    Average
    
    
    UnderlyingExercise
    
    
    Options
    
    
    Contractual
    
    
    Exercise
    
    
    OptionsPrice
    
    
    Outstanding
    
    
    Life
    
    
    Price
    
    
    Outstanding$
    
    
    3.125
    
    
    
    12,500
    
    
    
    3.3
    
    
    $
    3.125
    
    
    
    12,5003.750
    
    
    
    10,000
    
    
    
    4.3
    
    
    
    3.750
    
    
    
    10,0005.625
    
    
    
    5,025
    
    
    
    2.3
    
    
    
    5.625
    
    
    
    5,0256.850
    
    
    
    17,000
    
    
    
    5.3
    
    
    
    6.850
    
    
    
    17,0008.000
    
    
    
    151,000
    
    
    
    6.1
    
    
    
    8.000
    
    
    
    101,00016.000
    
    
    
    60,000
    
    
    
    8.3
    
    
    
    
    
    
    
    21.280
    
    
    
    5,000
    
    
    
    9.3
    
    
    
    
    
    
    
    $
    
    
    9.579
    
    
    
    260,525
    
    
    
    6.3
    
    
    $
    7.073
    
    
    
    145,525
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COMMITMENTS AND CONTINGENCIES
    VARIABLE INTEREST ENTITIES
  - 17 -




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As of September 30, 2006(unaudited)VariableInterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    794,482
    
    
    $
    852,285
    
    
    $
    
    
    
    $
    1,646,767Accounts receivable, net of
allowance for doubtful accounts
of $1,065,594
    
    
    22,661,927
    
    
    
    294,170
    
    
    
    (149,581
    )
    
    
    22,806,516Inventory
    
    
    14,341,301
    
    
    
    
    
    
    
    
    
    
    
    14,341,301Prepaids and other
    
    
    1,566,909
    
    
    
    12,565
    
    
    
    
    
    
    
    1,579,474Current deferred tax asset
    
    
    2,689,946
    
    
    
    
    
    
    
    
    
    
    
    2,689,946Refundable taxes
    
    
    204,283
    
    
    
    
    
    
    
    
    
    
    
    204,283Total current assets
    
    
    42,258,848
    
    
    
    1,159,020
    
    
    
    (149,581
    )
    
    
    43,268,287PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    175,000
    
    
    
    2,009,191
    
    
    
    
    
    
    
    2,184,191Buildings and improvements
    
    
    9,428,487
    
    
    
    14,563,790
    
    
    
    
    
    
    
    23,992,277Equipment
    
    
    119,399,821
    
    
    
    1,401,917
    
    
    
    
    
    
    
    120,801,738Transportation equipment
    
    
    22,010,715
    
    
    
    173,249
    
    
    
    
    
    
    
    22,183,964Furniture and fixtures
    
    
    9,635,735
    
    
    
    187,980
    
    
    
    
    
    
    
    9,823,715Total property, plant and
equipment
    
    
    160,649,758
    
    
    
    18,336,127
    
    
    
    
    
    
    
    178,985,885Accumulated depreciation
    
    
    (60,435,392
    )
    
    
    (5,338,010
    )
    
    
    
    
    
    
    (65,773,402
    )Net property, plant and
equipment
    
    
    100,214,366
    
    
    
    12,998,117
    
    
    
    
    
    
    
    113,212,483OTHER ASSETS:Intangible assets, net of
accumulated amortization of $8,392,581
    
    
    5,437,323
    
    
    
    1,199
    
    
    
    
    
    
    
    5,438,522Goodwill
    
    
    55,654,998
    
    
    
    
    
    
    
    
    
    
    
    55,654,998Deposits and other assets
    
    
    406,968
    
    
    
    19,783
    
    
    
    
    
    
    
    426,751Total other assets
    
    
    61,499,289
    
    
    
    20,982
    
    
    
    
    
    
    
    61,520,271TOTAL ASSETS
    
    $
    203,972,503
    
    
    $
    14,178,119
    
    
    $
    (149,581
    )
    
    $
    218,001,041
 - 19 -




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##### Table of Contents



As of September 30, 2006(unaudited)VariableInterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyLIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term
debt
    
    $
    629,402
    
    
    $
    3,209,573
    
    
    $
    
    
    
    $
    3,838,975Accounts payable
    
    
    13,878,489
    
    
    
    341,217
    
    
    
    
    
    
    
    14,219,706Accrued compensation and employee
benefits
    
    
    3,164,552
    
    
    
    
    
    
    
    
    
    
    
    3,164,552Other current liabilities
    
    
    5,470,360
    
    
    
    192,791
    
    
    
    (149,581
    )
    
    
    5,513,570Total current
liabilities
    
    
    23,142,803
    
    
    
    3,743,581
    
    
    
    (149,581
    )
    
    
    26,736,803LONG-TERM DEBT, less current maturities
    
    
    63,852,670
    
    
    
    5,292,980
    
    
    
    
    
    
    
    69,145,650DEFERRED TAX LIABILITY
    
    
    34,785,802
    
    
    
    
    
    
    
    
    
    
    
    34,785,802OTHER LONG-TERM LIABILITIES
    
    
    3,133,521
    
    
    
    
    
    
    
    
    
    
    
    3,133,521Total liabilities
    
    
    124,914,796
    
    
    
    9,036,561
    
    
    
    (149,581
    )
    
    
    133,801,776MINORITY INTEREST IN VARIABLE INTEREST
ENTITIES
    
    
    
    
    
    
    
    
    
    
    5,141,558
    
    
    
    5,141,558STOCKHOLDERS EQUITY:Common stock, par value, $.001 per
share-Authorized, 30,000,000 shares;
Issued and outstanding, 9,678,934
shares
    
    
    9,679
    
    
    
    3,800
    
    
    
    (3,800
    )
    
    
    9,679Paid-in-capital
    
    
    20,175,259
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    20,175,259Retained earnings
    
    
    58,684,058
    
    
    
    4,801,773
    
    
    
    (4,801,773
    )
    
    
    58,684,058Accumulated other comprehensive
income
    
    
    188,711
    
    
    
    
    
    
    
    
    
    
    
    188,711Total stockholders
equity
    
    
    79,057,707
    
    
    
    5,141,558
    
    
    
    (5,141,558
    )
    
    
    79,057,707TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    203,972,503
    
    
    $
    14,178,119
    
    
    $
    (149,581
    )
    
    $
    218,001,041
 - 20 -




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##### Table of Contents



As of June 30, 2006VariableInterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyASSETSCURRENT ASSETS:Cash and cash equivalents
    
    $
    558,599
    
    
    $
    1,042,859
    
    
    $
    
    
    
    $
    1,601,458Accounts receivable, net of
allowance for doubtful accounts
of $1,006,754
    
    
    20,676,689
    
    
    
    281,990
    
    
    
    (149,581
    )
    
    
    20,809,098Inventory
    
    
    12,910,680
    
    
    
    
    
    
    
    
    
    
    
    12,910,680Prepaids and other current assets
    
    
    1,695,700
    
    
    
    10,000
    
    
    
    
    
    
    
    1,705,700Current deferred tax asset
    
    
    2,466,329
    
    
    
    
    
    
    
    
    
    
    
    2,466,329Refundable taxes
    
    
    296,843
    
    
    
    
    
    
    
    
    
    
    
    296,843Total current assets
    
    
    38,604,840
    
    
    
    1,334,849
    
    
    
    (149,581
    )
    
    
    39,790,108PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    175,000
    
    
    
    2,009,191
    
    
    
    
    
    
    
    2,184,191Buildings and improvements
    
    
    9,161,331
    
    
    
    14,419,978
    
    
    
    
    
    
    
    23,581,309Equipment
    
    
    117,395,829
    
    
    
    1,400,032
    
    
    
    
    
    
    
    118,795,861Transportation equipment
    
    
    21,372,219
    
    
    
    173,249
    
    
    
    
    
    
    
    21,545,468Furniture and fixtures
    
    
    9,428,384
    
    
    
    185,507
    
    
    
    
    
    
    
    9,613,891Total property, plant and
equipment
    
    
    157,532,763
    
    
    
    18,187,957
    
    
    
    
    
    
    
    175,720,720Accumulated depreciation
    
    
    (58,654,352
    )
    
    
    (5,200,516
    )
    
    
    
    
    
    
    (63,854,868
    )Net property, plant and
equipment
    
    
    98,878,411
    
    
    
    12,987,441
    
    
    
    
    
    
    
    111,865,852OTHER ASSETS:Intangible assets, net of
accumulated amortization of $8,152,506
    
    
    5,022,376
    
    
    
    1,221
    
    
    
    
    
    
    
    5,023,597Goodwill
    
    
    54,197,285
    
    
    
    
    
    
    
    
    
    
    
    54,197,285Deposits and other assets
    
    
    511,987
    
    
    
    19,783
    
    
    
    
    
    
    
    531,770Total other assets
    
    
    59,731,648
    
    
    
    21,004
    
    
    
    
    
    
    
    59,752,652TOTAL ASSETS
    
    $
    197,214,899
    
    
    $
    14,343,294
    
    
    $
    (149,581
    )
    
    $
    211,408,612
 - 21 -




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##### Table of Contents



As of June 30, 2006VariableInterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyLIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIES:Current maturities of long-term
debt
    
    $
    647,832
    
    
    $
    3,214,083
    
    
    $
    
    
    
    $
    3,861,915Accounts payable
    
    
    12,189,031
    
    
    
    333,880
    
    
    
    
    
    
    
    12,522,911Accrued compensation and
employee benefits
    
    
    4,967,701
    
    
    
    
    
    
    
    
    
    
    
    4,967,701Other current liabilities
    
    
    5,690,603
    
    
    
    149,626
    
    
    
    (149,581
    )
    
    
    5,690,648Total current liabilities
    
    
    23,495,167
    
    
    
    3,697,589
    
    
    
    (149,581
    )
    
    
    27,043,175LONG-TERM DEBT, less current maturities
    
    
    61,204,628
    
    
    
    5,474,372
    
    
    
    
    
    
    
    66,679,000DEFERRED TAX LIABILITY
    
    
    34,042,445
    
    
    
    
    
    
    
    
    
    
    
    34,042,445OTHER LONG-TERM LIABILITIES
    
    
    2,861,058
    
    
    
    
    
    
    
    
    
    
    
    2,861,058Total liabilities
    
    
    121,603,298
    
    
    
    9,171,961
    
    
    
    (149,581
    )
    
    
    130,625,678COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN VARIABLE INTEREST
ENTITIES
    
    
    
    
    
    
    
    
    
    
    5,171,333
    
    
    
    5,171,333STOCKHOLDERS EQUITY:Common stock, par value, $.001
Per share-Authorized, 30,000,000 shares;
Issued and outstanding, 9,661,724
shares
    
    
    9,662
    
    
    
    3,800
    
    
    
    (3,800
    )
    
    
    9,662Paid-in-capital
    
    
    19,867,665
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    19,867,665Retained earnings
    
    
    55,434,415
    
    
    
    4,831,548
    
    
    
    (4,831,548
    )
    
    
    55,434,415Accumulated other comprehensive
Income
    
    
    299,859
    
    
    
    
    
    
    
    
    
    
    
    299,859Total stockholders equity
    
    
    75,611,601
    
    
    
    5,171,333
    
    
    
    (5,171,333
    )
    
    
    75,611,601TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    197,214,899
    
    
    $
    14,343,294
    
    
    $
    (149,581
    )
    
    $
    211,408,612
 - 22 -




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##### Table of Contents



VariableInterestValley
    
    
    Entities
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    50,610,741
    
    
    $
    646,796
    
    
    $
    (646,796
    )
    
    $
    50,610,741COSTS AND EXPENSESCost of products sold, excluding
depreciation
    
    
    24,975,240
    
    
    
    
    
    
    
    
    
    
    
    24,975,240Operating, distribution and
administrative
    
    
    17,191,107
    
    
    
    336,655
    
    
    
    (646,796
    )
    
    
    16,880,966Depreciation
    
    
    1,897,983
    
    
    
    137,494
    
    
    
    
    
    
    
    2,035,477Amortization of intangibles
    
    
    240,053
    
    
    
    
    
    
    
    
    
    
    
    240,053Gain on disposal of assets
    
    
    8,057
    
    
    
    
    
    
    
    
    
    
    
    8,057Total costs and expenses
    
    
    44,312,440
    
    
    
    474,149
    
    
    
    (646,796
    )
    
    
    44,139,793INCOME FROM OPERATIONS
    
    
    6,298,301
    
    
    
    172,647
    
    
    
    
    
    
    
    6,470,948INTEREST EXPENSE
    
    
    1,020,500
    
    
    
    125,909
    
    
    
    
    
    
    
    1,146,409OTHER INCOME, NET
    
    
    68,260
    
    
    
    111,027
    
    
    
    
    
    
    
    179,287EARNINGS BEFORE MINORITY INTEREST
    
    
    5,346,061
    
    
    
    157,765
    
    
    
    
    
    
    
    5,503,826MINORITY INTEREST
    
    
    
    
    
    
    157,765
    
    
    
    
    
    
    
    157,765NET EARNINGS BEFORE TAXES
    
    
    5,346,061
    
    
    
    
    
    
    
    
    
    
    
    5,346,061PROVISION FOR INCOME TAXES
    
    
    2,096,418
    
    
    
    
    
    
    
    
    
    
    
    2,096,418NET EARNINGS
    
    $
    3,249,643
    
    
    $
    
    
    
    $
    
    
    
    $
    3,249,643
  VariableInterestValley
    
    
    Entities
    
    
    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
 - 23 -




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##### Table of Contents



SUMMARY BY BUSINESS SEGMENT
   (See Note 1),
   - 24 -




---



##### Table of Contents



Three Months Ended September 30, 2006(In Thousands)Hard
    
    
    PackagedGoods
    
    
    Gases
    
    
    Propane
    
    
    VIEs
    
    
    Unallocated
    
    
    Eliminations
    
    
    CombinedSales
    
    $
    22,123
    
    
    $
    19,318
    
    
    $
    9,170
    
    
    $
    647
    
    
    $
    
    
    
    $
    (647
    )
    
    $
    50,611Cost of products sold
    
    
    14,951
    
    
    
    4,707
    
    
    
    5,317
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    24,975Gross profit
    
    
    7,172
    
    
    
    14,611
    
    
    
    3,853
    
    
    
    647
    
    
    
    
    
    
    
    (647
    )
    
    
    25,636Operating,
distribution, and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337
    
    
    
    17,191
    
    
    
    (647
    )
    
    
    16,881Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    1,898
    
    
    
    
    
    
    
    2,035Amortization expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    240
    
    
    
    
    
    
    
    240Loss on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    126
    
    
    
    1,020
    
    
    
    
    
    
    
    1,146Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110
    
    
    
    68
    
    
    
    
    
    
    
    178Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    158
    
    
    
    
    
    
    
    
    
    
    
    158Net earnings before
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,346
 Three Months Ended September 30, 2005 (1)(In Thousands)Hard
    
    
    PackagedGoods
    
    
    Gases
    
    
    Propane
    
    
    VIEs
    
    
    Unallocated
    
    
    Eliminations
    
    
    CombinedSales
    
    $
    17,764
    
    
    $
    15,510
    
    
    $
    8,389
    
    
    $
    587
    
    
    $
    
    
    
    $
    (587
    )
    
    $
    41,663Cost of products sold
    
    
    11,490
    
    
    
    3,559
    
    
    
    4,867
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    19,916Gross profit
    
    
    6,274
    
    
    
    11,951
    
    
    
    3,522
    
    
    
    587
    
    
    
    
    
    
    
    (587
    )
    
    
    21,747Operating,
distribution, and
administrative
expenses
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    222
    
    
    
    15,839
    
    
    
    (587
    )
    
    
    15,474Depreciation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    139
    
    
    
    1,653
    
    
    
    
    
    
    
    1,792Amortization expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    239
    
    
    
    
    
    
    
    239Gain on sale of assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    (9
    )
    
    
    
    
    
    
    (38
    )Interest expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    74
    
    
    
    817
    
    
    
    
    
    
    
    891Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76
    
    
    
    129
    
    
    
    
    
    
    
    205Minority interest
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    257
    
    
    
    
    
    
    
    
    
    
    
    257Net earnings before
taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,337
 
 (1)
    
    September 30, 2005 was adjusted to conform to our current segment reporting requirements. 
 Item 2.
    
    Managements Discussion and Analysis of
Financial Condition and Results of Operations
    - 25 -




---



##### Table of Contents



- 26 -




---



##### Table of Contents



TRADE RECEIVABLES
  - 27 -




---



##### Table of Contents



INVENTORIES
  GOODWILL AND OTHER INTANGIBLE ASSETS
  EMPLOYEE HEALTH CARE BENEFITS RESERVES
  VALUATION OF LONG-LIVED ASSETS
  INCOME TAXES
  - 28 -




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##### Table of Contents



Three Months EndedSeptember 30,2006
    
    2005Net Sales
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold, excluding depreciation
    
    
    49.4
    
    
    
    47.8Operating, distribution and administrative
    
    
    33.4
    
    
    
    37.1Depreciation
    
    
    4.0
    
    
    
    4.3Amortization of intangibles
    
    
    0.5
    
    
    
    0.5Total costs and expenses
    
    
    87.3
    
    
    
    89.7Income from operations
    
    
    12.7
    
    
    
    10.3Interest expense
    
    
    2.3
    
    
    
    2.2Other income, net
    
    
    0.4
    
    
    
    0.5Earnings before minority interest
    
    
    10.8
    
    
    
    8.6Minority interest
    
    
    0.3
    
    
    
    0.6Net earnings before taxes
    
    
    10.5
    
    
    
    8.0Provision for income taxes
    
    
    4.1
    
    
    
    3.1Net earnings
    
    
    6.4
    %
    
    
    4.9
    %
 Comparison of Three Months Ended September 30, 2006 and 2005
  - 29 -




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- 30 -




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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
    
    $
    72,985
    
    
    $
    3,526
    
    
    $
    65,561
    
    
    $
    1,611
    
    
    $
    2,287Estimated Interest
Payments
    
    
    17,445
    
    
    
    4,645
    
    
    
    12,379
    
    
    
    324
    
    
    
    97Interest Rate Swap
Payments
    
    
    1,550
    
    
    
    750
    
    
    
    800
    
    
    
    
    
    
    
    Interest Rate Swap
Receipts
    
    
    (2,093
    )
    
    
    (1,013
    )
    
    
    (1,080
    )
    
    
    
    
    
    
    Operating Leases, Net
of Intercompany
Eliminations
    
    
    11,474
    
    
    
    1,416
    
    
    
    3,823
    
    
    
    4,087
    
    
    
    2,148Purchase Obligations
    
    
    2,025
    
    
    
    1,519
    
    
    
    506
    
    
    
    
    
    
    
    Total Obligations
    
    $
    103,386
    
    
    $
    10,843
    
    
    $
    81,989
    
    
    $
    6,022
    
    
    $
    4,532
      - 31 -




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##### Table of Contents



VariableInterestFiscal year ending June 30,
    
    Valley
    
    
    Entities
    
    
    CompanyRemainder of 2007
    
    $
    525,018
    
    
    $
    3,000,585
    
    
    $
    3,525,6032008
    
    $
    420,106
    
    
    $
    847,987
    
    
    $
    1,268,0932009
    
    $
    63,411,301
    
    
    $
    881,453
    
    
    $
    64,292,7542010
    
    $
    93,623
    
    
    $
    825,508
    
    
    $
    919,1312011
    
    $
    32,024
    
    
    $
    659,604
    
    
    $
    691,6282012
    
    $
    
    
    
    $
    517,215
    
    
    $
    517,215Thereafter
    
    $
    
    
    
    $
    1,770,201
    
    
    $
    1,770,201Total
    
    $
    64,482,072
    
    
    $
    8,502,553
    
    
    $
    72,984,625
        - 32 -




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk
  Balance of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    There
    
    
    
    
    
    
    Fair2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    After
    
    
    Total
    
    
    Value(In Thousands)LiabilitiesLong term debt  ValleyFixed rate
    
    $
    525
    
    
    $
    420
    
    
    $
    236
    
    
    $
    94
    
    
    $
    32
    
    
    $
    
    
    
    $
    1,307
    
    
    $
    1,158Average interest rate
    
    
    5.84
    %
    
    
    4.80
    %
    
    
    3.16
    %
    
    
    4.76
    %
    
    
    5.96
    %Variable rate
    
    
    
    
    
    
    
    
    
    
    63,175
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    63,175
    
    
    $
    63,175Average interest rate
    
    
    
    
    
    
    
    
    
    
    6.37
    %Long term debt  Variable
Interest Entities mortgage
debtFixed rate
    
    $
    3,001
    
    
    $
    848
    
    
    $
    881
    
    
    $
    826
    
    
    $
    660
    
    
    $
    2,287
    
    
    $
    8,503
    
    
    $
    6,938Average interest rate
    
    
    6.41
    %
    
    
    7.05
    %
    
    
    6.36
    %
    
    
    6.39
    %
    
    
    6.28
    %
    
    
    5.97
    %Interest rate swapsVariable to fixed
    
    $
    
    
    
    $
    
    
    
    $
    25,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    315Average pay rate
    
    
    
    
    
    
    
    
    
    
    4.0
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Average receive rate
    
    
    
    
    
    
    
    
    
    
    5.4
    %
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Commitments
Operating leases
    
    $
    3,421
    
    
    $
    4,495
    
    
    $
    4,648
    
    
    $
    4,806
    
    
    $
    4,970
    
    
    $
    5,138
    
    
    $
    27,478Intercompany elimination (1)
    
    
    (2,005
    )
    
    
    (2,616
    )
    
    
    (2,704
    )
    
    
    (2,797
    )
    
    
    (2,892
    )
    
    
    (2,990
    )
    
    
    (16,004
    )Company total
    
    $
    1,416
    
    
    $
    1,879
    
    
    $
    1,944
    
    
    $
    2,009
    
    
    $
    2,078
    
    
    $
    2,148
    
    
    $
    11,474
 
 (1)
    
    Reflects the elimination of intercompany rent as a result of FIN 46R,
Consolidation of Variable Interest Entities at September 30, 2006. - 33 -




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##### Table of Contents



Item 4. Controls and Procedures
     
 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
 - 34 -




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SIGNATURES
  VALLEY NATIONAL GASES INCORPORATEDNovember 10, 2006
    
    /s/ James P. HartJames P. HartChief Financial Officer and
Duly Authorized Officer
 
 - 35 -