##### 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 March 31, 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. 000-29226 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  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  þ          No  o Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of
the Exchange Act.) Yes  o          No  þ Indicate the number of shares outstanding of each of the issuers classes of common stock, as of
the latest practicable date. Class
    
    Outstanding at May 10, 2005Common stock, $0.001 par value
    
    9,574,999




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VALLEY NATIONAL GASES INCORPORATED TABLE OF CONTENTS  
 PagePART I
    
    FINANCIAL INFORMATIONItem 1
    
    Financial StatementsCondensed Consolidated Balance Sheets as of June 30, 2004 and March 31, 2005 (unaudited)
    
    
    3Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2004 and 2005 (unaudited)
    
    
    5Condensed Consolidated Statements of Operations for the Nine Months Ended March 31, 2004 and 2005 (unaudited)
    
    
    6Consolidated
Statements of Changes in Stockholders Equity for the Periods
Ended June 30, 2004 andMarch 31, 2005 (unaudited)
    
    
    7Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 31, 2004 and 2005 (unaudited)
    
    
    8Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    9Item 2
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    22Item 3
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    33Item 4
    
    Controls and Procedures
    
    
    34PART II
    
    OTHER INFORMATIONItem 6
    
    Exhibits
    
    
    34Signatures
    
    
    
    
    35EXHIBIT 10.46EXHIBIT 10.47EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2EX-99.1
  -2-




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##### Table of Contents



PART I. FINANCIAL INFORMATION 
 ITEM I. FINANCIAL STATEMENTS 
 VALLEY NATIONAL GASES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) A S S E T SJune 30,
    
    
    March 31,2004
    
    
    2005CURRENT ASSETS:Cash and cash equivalents
    
    $
    549,002
    
    
    $
    728,720Accounts receivable, net of allowance for
doubtful accounts of $747,309 and
$872,822, respectively
    
    
    15,043,640
    
    
    
    20,455,945Inventory
    
    
    9,415,875
    
    
    
    9,107,803Prepaids and other current assets
    
    
    883,681
    
    
    
    1,509,666Deferred tax assets
    
    
    2,346,484
    
    
    
    2,019,241Refundable taxes
    
    
    1,183,324
    
    
    
    Total current assets
    
    
    29,422,006
    
    
    
    33,821,375PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    2,183,176
    
    
    
    1,882,195Buildings and improvements
    
    
    18,529,827
    
    
    
    19,659,255Equipment
    
    
    89,084,662
    
    
    
    92,446,947Transportation equipment
    
    
    18,058,515
    
    
    
    19,138,172Furniture and fixtures
    
    
    7,961,202
    
    
    
    8,458,026Total property, plant and equipment
    
    
    135,817,382
    
    
    
    141,584,595Accumulated depreciation
    
    
    (53,148,410
    )
    
    
    (56,130,623
    )Net property, plant and equipment
    
    
    82,668,972
    
    
    
    85,453,972OTHER ASSETS:Non-compete agreements, consulting agreements and
customer lists, net of accumulated amortization of
$8,796,725 and $9,661,921, respectively
    
    
    2,711,337
    
    
    
    1,846,141Goodwill
    
    
    40,997,738
    
    
    
    40,997,738Deposits and other assets
    
    
    1,534,989
    
    
    
    1,498,342Total other assets
    
    
    45,244,064
    
    
    
    44,342,221TOTAL ASSETS
    
    $
    157,335,042
    
    
    $
    163,617,568
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. -3-




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VALLEY NATIONAL GASES INCORPORATED CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited) LIABILITIES AND STOCKHOLDERS EQUITY
    
    June 30,
    
    
    March 31,2004
    
    
    2005CURRENT LIABILITIES:Current maturities of long-term debt
    
    $
    2,651,934
    
    
    $
    2,851,628Bank overdraft
    
    
    668,046
    
    
    
    Accounts payable
    
    
    8,235,193
    
    
    
    8,822,209Accrued compensation and employee benefits
    
    
    3,734,967
    
    
    
    4,476,275Interest rate derivatives
    
    
    1,760,338
    
    
    
    499,284Other current liabilities
    
    
    2,491,451
    
    
    
    4,939,644Total current liabilities
    
    
    19,541,929
    
    
    
    21,589,040LONG-TERM DEBT, less current maturities
    
    
    62,286,040
    
    
    
    54,011,366DEFERRED TAX LIABILITIES
    
    
    21,977,647
    
    
    
    23,692,401OTHER LONG-TERM LIABILITIES
    
    
    1,681,696
    
    
    
    1,473,755INTEREST RATE DERIVATIVES
    
    
    358,105
    
    
    
    10,599Total liabilities
    
    
    105,845,417
    
    
    
    100,777,161COMMITMENTS AND CONTINGENCIESMINORITY INTEREST IN VARIABLE INTEREST ENTITIES
    
    
    5,381,500
    
    
    
    5,020,561STOCKHOLDERS 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 9,565,499 shares,
respectively
    
    
    9,620
    
    
    
    9,620Paid-in-capital
    
    
    18,905,761
    
    
    
    19,134,734Retained earnings
    
    
    29,668,686
    
    
    
    39,410,968Accumulated other comprehensive loss
    
    
    (1,184,309
    )
    
    
    (282,447
    )Treasury stock at cost, 155,500 and 54,585
shares, respectively
    
    (1,291,633
    )
    
    (453,029
    )Total stockholders equity
    
    
    46,108,125
    
    
    
    57,819,846TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    157,335,042
    
    
    $
    163,617,568
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. -4-




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##### Table of Contents



VALLEY NATIONAL GASES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Three Months EndedMarch 31,2004
    
    
    2005NET SALES
    
    $
    47,926,376
    
    
    $
    50,488,243COSTS AND EXPENSESCost of products sold, excluding depreciation
    
    
    22,924,164
    
    
    
    23,310,094Operating, distribution and administrative
    
    
    15,549,074
    
    
    
    15,162,963Depreciation
    
    
    1,444,944
    
    
    
    1,633,167Amortization of intangibles
    
    
    398,378
    
    
    
    243,003Loss on disposal of assets
    
    
    53,550
    
    
    
    59,038Total costs and expenses
    
    
    40,370,110
    
    
    
    40,408,265INCOME FROM OPERATIONS
    
    
    7,556,266
    
    
    
    10,079,978INTEREST EXPENSE
    
    
    1,437,822
    
    
    
    1,004,423OTHER INCOME, NET
    
    54,507
    
    
    99,918EARNINGS BEFORE MINORITY INTEREST
    
    
    6,172,951
    
    
    
    9,175,473MINORITY INTEREST
    
    
    
    
    
    
    337,697NET EARNINGS BEFORE TAXES
    
    
    6,172,951
    
    
    
    8,837,776PROVISION FOR INCOME TAXES
    
    
    2,407,451
    
    
    
    3,297,998NET EARNINGS
    
    $
    3,765,500
    
    
    $
    5,539,778BASIC EARNINGS PER SHARE
    
    $
    0.40
    
    
    $
    0.58DILUTED EARNINGS PER SHARE
    
    $
    0.40
    
    
    $
    0.57WEIGHTED AVERAGE SHARES:Basic
    
    
    9,378,400
    
    
    
    9,492,746Diluted
    
    
    9,462,985
    
    
    
    9,674,975
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. -5-




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##### Table of Contents



VALLEY NATIONAL GASES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) Nine Months EndedMarch 31,2004
    
    
    2005NET SALES
    
    $
    119,480,921
    
    
    $
    129,892,135COSTS AND EXPENSESCost of products sold, excluding depreciation
    
    
    55,916,928
    
    
    
    60,859,258Operating, distribution and administrative
    
    
    43,146,367
    
    
    
    42,373,432Depreciation
    
    
    4,284,204
    
    
    
    4,956,534Amortization of intangibles
    
    
    1,297,015
    
    
    
    865,280Loss on disposal of assets
    
    
    56,175
    
    
    
    120,310Total costs and expenses
    
    
    104,700,689
    
    
    
    109,174,814INCOME FROM OPERATIONS
    
    
    14,780,232
    
    
    
    20,717,321INTEREST EXPENSE
    
    
    4,365,396
    
    
    
    3,352,621OTHER INCOME, NET
    
    185,345
    
    
    341,055EARNINGS BEFORE MINORITY INTEREST
    
    
    10,600,181
    
    
    
    17,705,755MINORITY INTEREST
    
    
    
    
    
    
    712,445NET EARNINGS BEFORE TAXES
    
    
    10,600,181
    
    
    
    16,993,310PROVISION FOR INCOME TAXES
    
    
    4,134,071
    
    
    
    6,397,100NET EARNINGS
    
    $
    6,466,110
    
    
    $
    10,596,210BASIC EARNINGS PER SHARE
    
    $
    0.69
    
    
    $
    1.12DILUTED EARNINGS PER SHARE
    
    $
    0.69
    
    
    $
    1.10WEIGHTED AVERAGE SHARES:Basic
    
    
    9,363,970
    
    
    
    9,489,221Diluted
    
    
    9,415,413
    
    
    
    9,652,974
 The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements. -6-




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VALLEY NATIONAL GASES INCORPORATED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(unaudited) For the periods ended June 30, 2004 and March 31, 2005 AccumulatedOther
    
    
    
    
    
    
    TotalCommon Stock
    
    
    Treasury Stock
    
    
    Paid-in-
    
    
    Comprehensive
    
    
    Retained
    
    
    Stockholders
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Loss
    
    
    Earnings
    
    
    Equity
    
    
    IncomeBALANCE, June 30, 2003
    
    
    9,620,084
    
    
    $
    9,620
    
    
    
    263,250
    
    
    $
    (2,186,561
    )
    
    $
    19,221,378
    
    
    $
    (2,890,059
    )
    
    $
    21,988,827
    
    
    $
    36,143,205Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,679,859
    
    
    
    7,679,859
    
    
    $
    7,679,859Exercise 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
    
    
    
    1,620,535Reclassification of unrealized
gains on derivatives, net of tax provision of $56,810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    85,215
    
    
    
    
    
    
    
    85,215
    
    
    
    85,215BALANCE, 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
    
    
    $
    9,385,609Net earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,596,210
    
    
    
    10,596,210
    
    
    $
    10,596,210Dividend paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (853,928
    )
    
    
    (853,928
    )
    
    
    Exercise of stock options
    
    
    
    
    
    
    
    
    
    
    (100,915
    )
    
    
    838,604
    
    
    
    (137,330
    )
    
    
    
    
    
    
    
    
    
    
    701,274
    
    
    
    Tax benefit from exercise of stock
options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    366,303
    
    
    
    
    
    
    
    
    
    
    
    366,303
    
    
    
    Unrealized gains on derivatives
designated and qualified as cash
flow hedges, net of tax provision
of $565,674
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    848,511
    
    
    
    
    
    
    
    848,511
    
    
    
    848,511Reclassification of unrealized
gains on derivatives, net of
tax provision of $35,567
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    53,351
    
    
    
    
    
    
    
    53,351
    
    
    
    53,351BALANCE, March 31, 2005
    
    
    9,620,084
    
    
    $
    9,620
    
    
    
    54,585
    
    
    $
    (453,029
    )
    
    $
    19,134,734
    
    
    $
    (282,447
    )
    
    $
    39,410,968
    
    
    $
    57,819,846
    
    
    $
    11,498,072
 The accompanying notes
are an integral part of these unaudited consolidated financial statements. -7-




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VALLEY NATIONAL GASES INCORPORATED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Nine Months EndedMarch 31,2004
    
    
    2005NET CASH PROVIDED BY OPERATING ACTIVITIES
    
    $
    15,324,983
    
    
    $
    17,991,620CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from disposal of assets
    
    
    46,229
    
    
    
    66,340Cash from consolidation of variable interest entities
    
    
    688,346
    
    
    
    Purchases of property and equipment
    
    
    (5,795,165
    )
    
    
    (7,804,683
    )Net cash used in investing activities
    
    
    (5,060,590
    )
    
    
    (7,738,343
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from borrowings
    
    
    32,464,315
    
    
    
    41,390,743Principal payments on loans
    
    
    (41,989,266
    )
    
    
    (49,465,723
    )Repayment of bank overdraft
    
    
    
    
    
    
    (668,046
    )Dividend paid
    
    
    
    
    
    
    (853,928
    )Exercise of stock options
    
    
    256,875
    
    
    
    701,274Variable interest entity distribution
    
    
    
    
    (1,177,879
    )Net cash used in financing activities
    
    
    (9,268,076
    )
    
    
    (10,073,559
    )NET CHANGE IN CASH AND CASH EQUIVALENTS
    
    
    996,317
    
    
    
    179,718CASH AND CASH EQUIVALENTS, beginning of period
    
    
    1,782,713
    
    
    
    549,002CASH AND CASH EQUIVALENTS, end of period
    
    $
    2,779,030
    
    
    $
    728,720
 The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements. -8-




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##### Table of Contents



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 wholly-owned subsidiaries 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 and wholly-owned subsidiaries. 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 (the SEC). 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 year ended June 30, 2004. 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 63
distribution or retail locations. In addition, Valley distributes propane to industrial and
residential customers. Welding equipment and supplies sales include welding machines, wire, fluxes
and electrodes, as well as a wide variety of supporting equipment. 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 the Company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 nine months of fiscal 2005. 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. -9-




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The roll-forward of the allowance for doubtful accounts as of March 31 is as follows: 2004
    
    
    2005Beginning of the year
    
    $
    814,846
    
    
    $
    747,309Charges
    
    
    519,192
    
    
    
    499,525Deductions
    
    
    (549,319
    )
    
    
    (374,012
    )March 31
    
    $
    784,719
    
    
    $
    872,822
 INVENTORY Inventory is carried at the lower of cost or market, cost being determined by the first-in,
first-out method. 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,
    
    
    March 31,2004
    
    
    2005Hard goods
    
    $
    7,530,414
    
    
    $
    7,295,447Gases
    
    
    2,239,543
    
    
    
    2,519,855Reserves
    
    
    (354,082
    )
    
    
    (707,499
    )$
    9,415,875
    
    
    $
    9,107,803
 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 $16,271,000 and $15,614,000 for the nine
months ended March 31, 2005 and 2004, 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. Depreciation expense associated with the Companys delivery fleet amounted to $1,092,000
and $720,000 for the nine months ended March 31, 2005 and 2004, respectively, and is included in
depreciation expense. Third party freight costs relating to the delivery of products to customers totaled $422,391
and $529,389 for the nine months ended March 31, 2005 and 2004, -10-




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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 $11,829,000 and $11,088,000 for the nine
months ended March 2005 and 2004, 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 Accounting Principles Board
(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 has 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 Statement of
Financial Accounting Standards (SFAS) No. 123, Accounting for Stock Based
Compensation, Valleys net earnings and earnings per share would have been the pro forma amounts
indicated below: Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Net earningsAs reported
    
    $
    3,765,500
    
    
    $
    5,539,778
    
    
    $
    6,466,110
    
    
    $
    10,596,210Deduct: Total stock-based
employee compensation
expense based on the fair
value method for all
awards, net of related
tax effects
    
    20,514
    
    
    19,581
    
    
    63,940
    
    
    62,253Pro forma
    
    $
    3,744,986
    
    
    $
    5,520,197
    
    
    $
    6,402,170
    
    
    $
    10,533,957Earnings per share assuming
dilutionAs reported
    
    $
    0.40
    
    
    $
    0.57
    
    
    $
    0.69
    
    
    $
    1.10Pro forma
    
    $
    0.40
    
    
    $
    0.57
    
    
    $
    0.68
    
    
    $
    1.09
 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 March 31, 2005 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. VARIABLE INTEREST ENTITIES The
Company leases buildings and equipment and rents cylinders from West
Rentals, Inc., G.E.W.
Real Estate LLC, RealEquip-Lease LLC, Equip-Lease Co. and Acetylene Products Corp., entities that are engaged
primarily in the purchase, development, sale and/or lease of real estate and that are controlled by
Gary West, our -11-




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##### Table of Contents



Chairman and principal shareholder. Under Financial Accounting Standards Board Interpretation
No. 46R, Consolidation of Variable Interest Entities, (FIN 46R) effective March 31, 2004, we
consolidated the financial statements of these related entities. New Accounting Standards
      SUPPLEMENTAL CASH FLOW INFORMATION For the Nine MonthsEnded March 31,2004
    
    
    2005Non-cash financing activity 
Adjustment of seller notes and fixed assets
    
    $
    (82,080
    )
    
    $
    Non-cash investing activity 
Fixed asset purchases in accounts payable
    
    
    291,199
    
    
    
    685,494
 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, at
June 30, 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 March 31, 2005, Valleys noncompete
agreements, consulting agreements and customer lists are summarized as follows: Gross
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedAmount
    
    
    Accumulated
    
    
    
    
    
    Accumulated
    
    
    Averageas of
    
    
    Amortization as of
    
    
    Gross Amount as of
    
    
    Amortization as of
    
    
    Amortization PeriodJune 30, 2004
    
    
    June 30, 2004
    
    
    March 31, 2005
    
    
    March 31, 2005
    
    
    (years)Non-competition agreements
    
    $
    10,811,651
    
    
    $
    8,528,931
    
    
    $
    10,811,651
    
    
    $
    9,339,677
    
    
    
    5.2Consulting agreements
    
    
    357,411
    
    
    
    228,244
    
    
    
    357,411
    
    
    
    265,744
    
    
    
    3.0Customer lists
    
    
    339,000
    
    
    
    39,550
    
    
    
    339,000
    
    
    
    56,500
    
    
    
    15.0Total
    
    $
    11,508,062
    
    
    $
    8,796,725
    
    
    $
    11,508,062
    
    
    $
    9,661,921
 Amortization
expense for the three months ended March 31, 2005 and 2004
totaled $243,003 and $398,378, respectively and the nine months ended March 31, 2005 and
2004 totaled $865,280 and
$1,297,015, respectively. Estimated amortization expense for the remainder of fiscal 2005 as of
March 31, 2005 and the next five fiscal years is summarized as follows: Fiscal year Ending June 30,Remainder of 2005
    
    $
    242,9752006
    
    $
    588,5682007
    
    $
    351,0682008
    
    $
    309,8182009
    
    $
    117,4372010
    
    $
    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. -12-




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2004
    
    
    2005
    
    
    2004
    
    
    2005Net earnings available for common stock
    
    $
    3,765,500
    
    
    $
    5,539,778
    
    
    $
    6,466,110
    
    
    $
    10,596,210Basic earnings per common share:Weighted average common shares
    
    
    9,378,400
    
    
    
    9,492,746
    
    
    
    9,363,970
    
    
    
    9,489,221Basic earnings per common share
    
    $
    0.40
    
    
    $
    0.58
    
    
    $
    0.69
    
    
    $
    1.12Diluted earnings per common share:Weighted average common shares
    
    
    9,378,400
    
    
    
    9,492,746
    
    
    
    9,363,970
    
    
    
    9,489,221Shares issuable from assumed
conversion of common stock equivalents
    
    84,585
    
    
    182,229
    
    
    51,443
    
    
    163,753Weighted average common and common
equivalent shares
    
    9,462,985
    
    
    9,674,975
    
    
    9,415,413
    
    
    9,652,974Diluted earnings per common share
    
    $
    0.40
    
    
    $
    0.57
    
    
    $
    0.69
    
    
    $
    1.10
 Stock options to purchase 12,920 shares of common stock for the nine months ended March 31, 2005
were excluded from the diluted net income per share calculation because their effect would be
anti-dilutive. No such shares were excluded for the three months ended March 31, 2005. For the
quarter and nine months ended March 31, 2004, options to purchase 1,500 and 278,416 shares,
respectfully, were excluded because their effect would have been anti-dilutive. 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 are generally based on changes
in the consumer price index over the escalation term. These leases are accounted for in accordance
SFAS No. 29, Contingent Rentals. During the three
and nine months ended March 31, 2005, we evaluated
these leases and recorded an expense of $31,000 in the consolidated financial statements to
straight-line estimated total lease expense including escalation clauses. Our 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 nine 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: -13-




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##### Table of Contents



Fiscal year ending
    
    
    
    
    
    
    
    
    
    
    
    
    
    Elimination
    
    
    FinalJune 30,
    
    Real Estate
    
    
    Equipment
    
    
    Subtotal
    
    
    (1)
    
    
    TotalRemainder
of 2005
    
    $
    841,509
    
    
    $
    12,675
    
    
    $
    854,184
    
    
    $
    496,581
    
    
    $
    357,6032006
    
    
    3,315,096
    
    
    
    26,100
    
    
    
    3,341,196
    
    
    
    2,012,110
    
    
    
    1,329,0862007
    
    
    3,397,974
    
    
    
    26,100
    
    
    
    3,424,074
    
    
    
    2,062,413
    
    
    
    1,361,6612008
    
    
    3,482,923
    
    
    
    
    
    
    
    3,482,923
    
    
    
    2,113,973
    
    
    
    1,368,9502009
    
    
    3,569,996
    
    
    
    
    
    
    
    3,569,996
    
    
    
    2,166,822
    
    
    
    1,403,1742010
    
    
    3,659,246
    
    
    
    
    
    
    
    3,659,246
    
    
    
    2,220,993
    
    
    
    1,438,253Totals
    
    $
    18,266,744
    
    
    $
    64,875
    
    
    $
    18,331,619
    
    
    $
    11,072,892
    
    
    $
    7,258,727
   (1)
    
    Reflects the elimination of intercompany rent of the Variable Interest Entities. 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. The Company accrues for estimated losses in accordance with SFAS No. 5,
Contingencies. 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 $11.4 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 March 31, 2005 and June 30, 2004, as a long-term asset. Management believes that the
carrying value of the option is not impaired, based upon its estimate of the market value of the
independent distributor and 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 -14-




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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 implied variable interest guidance under FSP FIN 46R-5 (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. These entities include West
Rentals, Inc., G.E.W. Real Estate LLC, RealEquip-Lease LLC,
Equip-Lease Co. and Acetylene Products Corp. 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 FSP FIN 46R-5, in situations where no contractual
residual value guarantees exist, a related party lease arrangement with these characteristics 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 -15-




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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 $8.3 million at March 31, 2005,
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
$5,477,000 as of March 31, 2005. 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-




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##### Table of Contents



The following table shows the consolidating balance sheet of the Company at March 31, 2005: A S S E T S
    
    As of March 31, 2005VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyCURRENT ASSETS:Cash and cash equivalents
    
    $
    293,848
    
    
    $
    434,872
    
    
    
    
    
    
    $
    728,720Accounts receivable, net of
allowance for doubtful accounts
of $872,822
    
    
    20,208,909
    
    
    
    364,732
    
    
    $
    (117,696
    )
    
    
    20,455,945Inventory
    
    
    9,107,803
    
    
    
    
    
    
    
    
    
    
    
    9,107,803Prepaids and other current assets
    
    
    1,499,666
    
    
    
    10,000
    
    
    
    
    
    
    
    1,509,666Deferred tax assets
    
    
    2,019,241
    
    
    
    
    
    
    
    
    
    
    
    2,019,241Total current assets
    
    
    33,129,467
    
    
    
    809,604
    
    
    
    (117,696
    )
    
    
    33,821,375PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    55,000
    
    
    
    1,827,195
    
    
    
    
    
    
    
    1,882,195Buildings and improvements
    
    
    7,272,571
    
    
    
    12,386,684
    
    
    
    
    
    
    
    19,659,255Equipment
    
    
    91,895,916
    
    
    
    551,031
    
    
    
    
    
    
    
    92,446,947Transportation equipment
    
    
    18,964,923
    
    
    
    173,249
    
    
    
    
    
    
    
    19,138,172Furniture and fixtures
    
    
    8,291,773
    
    
    
    166,253
    
    
    
    
    
    
    
    8,458,026Total property, plant and
equipment
    
    126,480,183
    
    
    15,104,412
    
    
    
    
    
    141,584,595Accumulated depreciation
    
    
    (52,451,311
    )
    
    
    (3,679,312
    )
    
    
    
    
    
    
    (56,130,623
    )Net property, plant and
equipment
    
    74,028,872
    
    
    11,425,100
    
    
    
    
    
    85,453,972OTHER ASSETS:Non-compete agreements,
consulting agreements and
customer lists, net of
accumulated amortization of
$9,661,921
    
    
    1,846,141
    
    
    
    
    
    
    
    
    
    
    
    1,846,141Goodwill
    
    
    40,997,738
    
    
    
    
    
    
    
    
    
    
    
    40,997,738Deposits and other assets
    
    
    1,486,884
    
    
    
    11,458
    
    
    
    
    
    
    
    1,498,342Total other assets
    
    
    44,330,763
    
    
    
    11,458
    
    
    
    
    
    
    
    44,342,221TOTAL ASSETS
    
    $
    151,489,102
    
    
    $
    12,246,162
    
    
    $
    (117,696
    )
    
    $
    163,617,568
 -17-




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LIABILITIES AND STOCKHOLDERS EQUITY
    
    As of March 31, 2005Variable InterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyCURRENT LIABILITIES:Current maturities of long-term
debt
    
    $
    783,859
    
    
    $
    2,067,769
    
    
    
    
    
    
    $
    2,851,628Accounts payable
    
    
    8,538,843
    
    
    
    283,366
    
    
    
    
    
    
    
    8,822,209Accrued compensation and employee
benefits
    
    
    4,476,275
    
    
    
    
    
    
    
    
    
    
    
    4,476,275Interest rate derivatives
    
    
    499,284
    
    
    
    
    
    
    
    
    
    
    
    499,284Other current liabilities
    
    
    4,539,676
    
    
    
    517,664
    
    
    
    (117,696
    )
    
    
    4,939,644Total current
liabilities
    
    
    18,837,937
    
    
    
    2,868,799
    
    
    
    (117,696
    )
    
    
    21,589,040LONG-TERM DEBT, less current maturities
    
    
    49,654,564
    
    
    
    4,356,802
    
    
    
    
    
    
    
    54,011,366DEFERRED TAX LIABILITIES
    
    
    23,692,401
    
    
    
    
    
    
    
    
    
    
    
    23,692,401OTHER LONG-TERM LIABILITIES
    
    
    1,473,755
    
    
    
    
    
    
    
    
    
    
    
    1,473,755INTEREST RATE DERIVATIVES
    
    
    10,599
    
    
    
    
    
    
    
    
    
    
    
    10,599Total liabilities
    
    $
    93,669,256
    
    
    
    7,225,601
    
    
    
    (117,696
    )
    
    
    100,777,161MINORITY INTEREST IN VARIABLE INTEREST
ENTITIES
    
    
    
    
    
    
    
    
    
    
    5,020,561
    
    
    
    5,020,561COMMITMENTS 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, 9,565,499 shares
    
    
    9,620
    
    
    
    3,800
    
    
    
    (3,800
    )
    
    
    9,620Paid-in-capital
    
    
    19,134,734
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    19,134,734Retained earnings
    
    
    39,410,968
    
    
    
    4,680,776
    
    
    
    (4,680,776
    )
    
    
    39,410,968Accumulated other comprehensive
loss
    
    
    (282,447
    )
    
    
    
    
    
    
    
    
    
    
    (282,447
    )Treasury stock at cost, 54,585
shares
    
    
    (453,029
    )
    
    
    
    
    
    
    
    
    
    
    (453,029
    )Total stockholders
equity
    
    
    57,819,846
    
    
    
    5,020,561
    
    
    
    (5,020,561
    )
    
    
    57,819,846TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    151,489,102
    
    
    $
    12,246,162
    
    
    $
    (117,696
    )
    
    $
    163,617,568
 -18-




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##### Table of Contents



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, 2004Variable InterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyCURRENT ASSETS:Cash and cash equivalents
    
    $
    105,699
    
    
    $
    443,303
    
    
    
    
    
    
    $
    549,002Accounts receivable, net of
allowance for doubtful accounts
of $747,309
    
    
    14,726,848
    
    
    
    1,544,471
    
    
    $
    (1,227,679
    )
    
    
    15,043,640Inventory
    
    
    9,415,875
    
    
    
    
    
    
    
    
    
    
    
    9,415,875Prepaids and other current assets
    
    
    873,681
    
    
    
    10,000
    
    
    
    
    
    
    
    883,681Deferred tax assets
    
    
    2,346,484
    
    
    
    
    
    
    
    
    
    
    
    2,346,484Refundable taxes
    
    
    1,183,324
    
    
    
    
    
    
    
    
    
    
    
    1,183,324Total current assets
    
    
    28,651,911
    
    
    
    1,997,774
    
    
    
    (1,227,679
    )
    
    
    29,422,006PROPERTY, PLANT AND EQUIPMENT:Land
    
    
    55,000
    
    
    
    2,128,176
    
    
    
    
    
    
    
    2,183,176Buildings and improvements
    
    
    6,330,221
    
    
    
    12,199,606
    
    
    
    
    
    
    
    18,529,827Equipment
    
    
    88,479,962
    
    
    
    604,700
    
    
    
    
    
    
    
    89,084,662Transportation equipment
    
    
    17,912,966
    
    
    
    145,549
    
    
    
    
    
    
    
    18,058,515Furniture and fixtures
    
    
    7,830,225
    
    
    
    130,977
    
    
    
    
    
    
    
    7,961,202Total property, plant and
equipment
    
    
    120,608,374
    
    
    
    15,209,008
    
    
    
    
    
    
    
    135,817,382Accumulated depreciation
    
    
    (49,360,206
    )
    
    
    (3,788,204
    )
    
    
    
    
    
    
    (53,148,410
    )Net property, plant and
equipment
    
    
    71,248,168
    
    
    
    11,420,804
    
    
    
    
    
    
    
    82,668,972OTHER ASSETS:Non-compete agreements,
consulting agreements and
customer lists, net of
accumulated amortization of
$8,796,725
    
    
    2,711,337
    
    
    
    
    
    
    
    
    
    
    
    2,711,337Goodwill
    
    
    40,997,738
    
    
    
    
    
    
    
    
    
    
    
    40,997,738Deposits and other assets
    
    
    1,523,532
    
    
    
    11,457
    
    
    
    
    
    
    
    1,534,989Total other assets
    
    
    45,232,607
    
    
    
    11,457
    
    
    
    
    
    
    
    45,244,064TOTAL ASSETS
    
    $
    145,132,686
    
    
    $
    13,430,035
    
    
    $
    (1,227,679
    )
    
    $
    157,335,042
 -19-




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LIABILITIES AND STOCKHOLDERS EQUITY
    
    As of June 30, 2004VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyCURRENT LIABILITIES:Current maturities of long-term
debt
    
    $
    1,105,622
    
    
    $
    1,546,312
    
    
    
    
    
    
    $
    2,651,934Bank overdraft
    
    
    918,046
    
    
    
    
    
    
    $
    (250,000
    )
    
    
    668,046Accounts payable
    
    
    7,982,973
    
    
    
    252,220
    
    
    
    
    
    
    
    8,235,193Accrued compensation and
employee benefits
    
    
    3,734,967
    
    
    
    
    
    
    
    
    
    
    
    3,734,967Interest rate derivatives
    
    
    1,760,338
    
    
    
    
    
    
    
    
    
    
    
    1,760,338Other current liabilities
    
    
    2,378,582
    
    
    
    112,869
    
    
    
    
    
    
    
    2,491,451Total current liabilities
    
    
    17,880,528
    
    
    
    1,911,401
    
    
    
    (250,000
    )
    
    
    19,541,929LONG-TERM DEBT, less current maturities
    
    
    57,126,585
    
    
    
    6,137,134
    
    
    
    (977,679
    )
    
    
    62,286,040DEFERRED TAX LIABILITIES
    
    
    21,977,647
    
    
    
    
    
    
    
    
    
    
    
    21,977,647OTHER LONG-TERM LIABILITIES
    
    
    1,681,696
    
    
    
    
    
    
    
    
    
    
    
    1,681,696INTEREST RATE DERIVATIVES
    
    
    358,105
    
    
    
    
    
    
    
    
    
    
    
    358,105Total liabilities
    
    
    99,024,561
    
    
    
    8,048,535
    
    
    
    (1,227,679
    )
    
    
    105,845,417MINORITY INTEREST IN VARIABLE INTEREST
ENTITIES
    
    
    
    
    
    
    
    
    
    
    5,381,500
    
    
    
    5,381,500COMMITMENTS 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
    )
    
    
    9,620Paid-in-capital
    
    
    18,905,761
    
    
    
    335,985
    
    
    
    (335,985
    )
    
    
    18,905,761Retained earnings
    
    
    29,668,686
    
    
    
    5,041,715
    
    
    
    (5,041,715
    )
    
    
    29,668,686Accumulated 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
    )
    
    
    46,108,125TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    145,132,686
    
    
    $
    13,430,035
    
    
    $
    (1,227,679
    )
    
    $
    157,335,042
 -20-




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The following table shows the consolidating statement of operations of the Company for
the nine months ended March 31, 2005: InterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    129,892,135
    
    
    $
    1,639,098
    
    
    $
    (1,639,098
    )
    
    $
    129,892,135COSTS AND EXPENSESCost of products sold, excluding
depreciation
    
    
    60,859,258
    
    
    
    
    
    
    
    
    
    
    
    60,859,258Operating, distribution and
administrative
    
    
    43,423,415
    
    
    
    589,115
    
    
    
    (1,639,098
    )
    
    
    42,373,432Depreciation
    
    
    4,616,360
    
    
    
    340,174
    
    
    
    
    
    
    
    4,956,534Amortization of intangibles
    
    
    865,196
    
    
    
    84
    
    
    
    
    
    
    
    865,280Loss on disposal of assets
    
    
    120,310
    
    
    
    
    
    
    
    
    
    
    
    120,310Total costs and expenses
    
    
    109,884,539
    
    
    
    929,373
    
    
    
    (1,639,098
    )
    
    
    109,174,814INCOME FROM OPERATIONS
    
    
    20,007,596
    
    
    
    709,725
    
    
    
    
    
    
    
    20,717,321INTEREST EXPENSE
    
    
    3,194,391
    
    
    
    158,230
    
    
    
    
    
    
    
    3,352,621OTHER INCOME, NET
    
    
    180,105
    
    
    
    160,950
    
    
    
    
    
    
    
    341,055EARNINGS BEFORE MINORITY INTEREST
    
    
    16,993,310
    
    
    
    712,445
    
    
    
    
    
    
    
    17,705,755MINORITY INTEREST
    
    
    
    
    
    
    712,445
    
    
    
    
    
    
    
    712,445NET EARNINGS BEFORE TAXES
    
    
    16,993,310
    
    
    
    
    
    
    
    
    
    
    
    16,993,310PROVISION FOR INCOME TAXES
    
    
    6,397,100
    
    
    
    
    
    
    
    
    
    
    
    6,397,100NET EARNINGS
    
    $
    10,596,210
    
    
    
    
    
    
    
    
    
    
    $
    10,596,210
 The following table shows the consolidating statement of operations of the Company for
the three months ended March 31, 2005: VariableInterestValley
    
    
    EntitiesSegment
    
    
    Segment
    
    
    Eliminations
    
    
    CompanyNET SALES
    
    $
    50,488,243
    
    
    $
    614,302
    
    
    $
    (614,302
    )
    
    $
    50,488,243COSTS AND EXPENSESCost of products sold, excluding
depreciation
    
    
    23,310,094
    
    
    
    
    
    
    
    
    
    
    
    23,310,094Operating, distribution and
administrative
    
    
    15,583,566
    
    
    
    193,699
    
    
    
    (614,302
    )
    
    
    15,162,963Depreciation
    
    
    1,556,360
    
    
    
    76,807
    
    
    
    
    
    
    
    1,633,167Amortization of intangibles
    
    
    242,975
    
    
    
    28
    
    
    
    
    
    
    
    243,003Loss on disposal of assets
    
    
    59,038
    
    
    
    
    
    
    
    
    
    
    
    59,038Total costs and expenses
    
    
    40,752,033
    
    
    
    270,534
    
    
    
    (614,302
    )
    
    
    40,408,265INCOME FROM OPERATIONS
    
    
    9,736,210
    
    
    
    343,768
    
    
    
    
    
    
    
    10,079,978INTEREST EXPENSE
    
    
    952,609
    
    
    
    51,814
    
    
    
    
    
    
    
    1,004,423OTHER INCOME, NET
    
    
    54,175
    
    
    
    45,743
    
    
    
    
    
    
    
    99,918EARNINGS BEFORE MINORITY INTEREST
    
    
    8,837,776
    
    
    
    337,697
    
    
    
    
    
    
    
    9,175,473MINORITY INTEREST
    
    
    
    
    
    
    337,697
    
    
    
    
    
    
    
    337,697NET EARNINGS BEFORE TAXES
    
    
    8,837,776
    
    
    
    
    
    
    
    
    
    
    
    8,837,776PROVISION FOR INCOME TAXES
    
    
    3,297,998
    
    
    
    
    
    
    
    
    
    
    
    3,297,998NET EARNINGS
    
    $
    5,539,778
    
    
    
    
    
    
    
    
    
    
    $
    5,539,778
 No tables are provided to present the consolidating income statement of the Company for
the three and nine month periods ended March 31, 2004, 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 -21-




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are two separate and distinct businesses, the financial information for each business is
maintained and managed separately. The results of operations and assets for each of these segments
are derived from each business financial reporting system. All intercompany activity is eliminated
in consolidation. The
Variable Interest Entities reportable segment, including West
Rentals, Inc., G.E.W. Real
Estate LLC, RealEquip-Lease LLC, Equip-Lease Co. and Acetylene
Products Corp., primarily purchases, develops,
sells and leases real estate. The Valley reportable segment operates 63 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
SFAS No. 131, however, none of these locations individually
meet the quantitative thresholds stated in SFAS 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 Financial Accounting Standards Board (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 SFAS No. 131. The effective
date of this statement is not yet determined, but likely to be effective in late 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 (See Note 8): June 30,
    

    March 31,2004
    

    2005Valley
    
    $
    145,132,686
    

    $
    155,011,975Variable Interest Entities
    
    
    12,202,356
    

    
    12,128,466Total assets
    
    $
    157,335,042
    

    $
    167,140,441
 Please refer to Note 8 for revenue and income by reporting segment. 10. SUBSEQUENT EVENT On May 9, 2005, the independent distributor, referred to in Note 7 with which Valley has an
option agreement, exercised its put right to sell its business to Valley. Valley estimates that it
will be required to pay the distributor approximately $6.8 million for all of the capital stock of
the distributor ($1.0 million of which was paid upon purchase of the option) and to assume and
refinance approximately $4.6 million of indebtedness of the distributor. The acquisition, which
Valley anticipates will be consummated in the fourth fiscal quarter, is subject to final due
diligence and customary closing conditions. The Company expects that
the acquisition will not meet the materiality thresholds for filing
audited financial statements of the distributor. 
 -22-




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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 our 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
negative equivalents. Please see Exhibit 99.1 for important
information regarding forward-looking statements. We do not
undertake any obligation to publicly update any forward-looking statements. OVERVIEW OPERATIONS We are a leading distributor of industrial, medical and specialty gases, and related welding
equipment and supplies, in 11 states in the eastern United States. We also have a growing presence
in the distribution of non-pipeline propane in our geographic markets. We generate revenue through the sale of packaged industrial, medical and specialty gases and
rental and delivery charges for the cylinders and tanks in which they are delivered, as well as
through sale of related welding equipment and supplies. We sell -23-




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packaged gases to customers for manufacturing, industrial, metal production and fabrication,
construction, health care, mining, oil and chemicals and other applications. Sale of our packaged
gases is generally not seasonal. We also sell propane to the residential, commercial and
industrial markets. Typical residential and commercial uses include conventional space heating,
water heating and cooking. Typical industrial uses include engine fuel for forklifts and other
vehicles, metal cutting, brazing and heat treating. The distribution of propane is seasonal in
nature and sensitive to variations in weather with consumption as a heating fuel peaking sharply in
winter months. In the 2004 fiscal year, packaged gases and rental, together with related equipment
and supplies, accounted for approximately 74% of our net sales, while propane accounted for
approximately 26% of our net sales. Our
cost of products sold include the direct cost of industrial, medical and specialty gases pursuant to supply arrangements and
open purchase orders with three out of the five major gas producers
in the United States, the purchase of hard goods from a number of
vendors and the
purchase of propane from one of the three major propane suppliers. Although the cost of the gases we
sell is subject to formula pricing and variation based on market prices for such gases, because
packaging, delivery and other service constitutes a substantial portion of the cost and the value
of the packaged gases we provide our customers, we believe that we are not significantly exposed to
decreased margins because of those variations. Our operating, distribution and administrative expenses primarily are composed of delivery expense, salaries, benefits, professional
fees, transportation equipment operating costs, facility
lease expenses and general office expenses. We believe that changes in these expenses as a
percentage of sales should be evaluated over the long term rather than on a quarter-to-quarter
basis due to the moderate seasonality of sales mentioned above and the generally fixed nature of
these expenses. We also incur depreciation expense related to our fixed assets, including
approximately 500,000 cylinders which are depreciated over a period of 12 to 30 years. We also own
approximately 200 delivery vehicles that we depreciate over a period of 3 to 7 years. ACQUISITIONS We believe that we have been successful in executing our strategy of growth through
acquisitions, having completed over 30 acquisitions since 1997, the year of our initial public offering. The
consideration for most acquisitions includes a combination of a cash payment at closing, seller
financing and payments under covenants not to compete and consulting agreements. For many
acquisitions, we believe that projections of future cash flows justify payment of amounts in excess
of the book or market value of the assets acquired, resulting in goodwill being recorded. Some
acquisitions have had, and we expect that some future acquisitions may have, a dilutive effect upon
our income from operations and income before tax for a period following their consummation. This
dilution can occur because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins
and expected sales growth, occur
over time. In most cases, the operating cash flow of an acquired
business has been positive in a relatively short period of time after consummation of the
acquisition. In part to manage our operations independent of the effect of acquisitions, we monitor the
results of each of our 63 locations separately. Although each location is therefore a separate
operating segment, because no single store generates an amount of revenue or income, or maintains
assets, in excess of the thresholds in accounting releases that would
require us to report them as separate segments, and because all stores offer similar
products and services, we report their results on an aggregate basis. We do maintain records of same store sales, which are sales from those
stores that have been operated by us for the full two-year comparison period. The value of sales
increase related to acquisitions is determined by the specific sales of each acquired -24-




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location. New stores would be considered in same store sales once we have operated them for
the entire comparison period. VARIABLE INTEREST ENTITIES We lease buildings and equipment and rent cylinders from West Rentals, Inc., G.E.W. Real Estate
LLC, Real Equip-Lease LLC and Acetylene Products Corp., entities that are engaged primarily
in the purchase, development, sale and/or lease of real estate and that are controlled by Gary
West, our Chairman and principal shareholder. Under accounting interpretations that were effective
for us on March 31, 2004, and because we are under common control with these entities, we must consolidate in our financial statements, the
financial statements of these related entities. In consolidation, the rent expense we pay to these
entities is eliminated, resulting in us reporting slightly less operating, distribution and
administrative expense and slightly more income from operations. Because some of the properties
held by the variable interest entities are financed, and because of the amount of depreciable
assets these entities hold, the consolidation results in us reporting slightly more interest and
depreciation expense. Further, because we classify the rental income that these entities generate
as other income for our purposes, these entities result in our reporting more other income.
Substantially all of the effect of these entities on our net income is eliminated when we deduct
the net effect as a minority interest The real property and equipment held by these entities results
in our reporting significantly higher balances of buildings and equipment on our balance sheet. Although these entities are controlled by related
parties, we have no equity interest in any of them and the creditors and beneficial interest
holders of these entities have no recourse to our general credit. CRITICAL ACCOUNTING POLICIES The preparation of our financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States requires us to make judgments,
assumptions and estimates that affect the amounts we report in our consolidated financial
statements and accompanying notes included herein. We describe the significant accounting policies and methods
that we use to prepare our consolidated financial statements in Note 3. The
most critical accounting matters in which we use estimates include our determination of the net
carrying value of our trade receivables, our inventories, our goodwill, our other intangible assets
and our employee health care benefit reserves. If our estimates have to be revised, we may be required
to adjust the carrying value of these assets, affecting our results of operations during the period
when the adjustment is recorded, and affecting our net assets and equity. The following critical
accounting policies are impacted significantly by judgments, assumptions and estimates used in the
preparation of the consolidated financial statements. TRADE RECEIVABLES We estimate the collectability of our trade receivables on a monthly basis. We have
established an allowance for doubtful accounts to adjust the carrying value of trade receivables to
fair value based on the amount of trade receivables that we estimate are uncollectible. We
establish the allowance for doubtful accounts based on our historical experience, economic trends
and our knowledge of significant accounts. Although we believe that the allowance for doubtful accounts as of March 31, 2005
are adequate, if a significant customer refuses to pay a large account, or if economic conditions cause a class of customers to be
unable to pay accounts, we might be required to increase the provision for doubtful accounts, affecting our income. INVENTORIES Our inventories are stated at the lower of cost or market, cost being determined by the
first-in first-out method. We write down our inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of inventory and the -25-




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estimated market value based upon its physical condition as well as assumptions about future
demand and market conditions. If actual demand or market conditions in the future are less
favorable than those estimated, additional inventory write-downs may be required. Estimates of
physical losses of inventory are made on a quarterly basis based upon historical results. GOODWILL AND OTHER INTANGIBLE ASSETS We
adopted SFAS No. 142, Goodwill and Other Intangible Assets, as of July 1, 2001. SFAS No. 142
requires goodwill and intangible assets with indefinite useful lives not to be amortized, but
instead to be tested for impairment at least annually. We have elected to perform our annual test
for indications of goodwill impairment as of June 30th of each year. In testing the impairment of
goodwill, we consider and balance a variety of valuation methods, including formal criteria of the Uniform Standards
of Professional Appraisal Practice (USPAP) for assessment of the fair market value of a business as
a whole. In accordance with USPAP, we use a discounted cash flow analysis including, where
applicable, appropriate market-based deductions and discounts, and take into
account any extraordinary assumptions and hypothetical conditions which may have an
impact on our determination. In addition to this approach for valuing our business as a whole, we also consider goodwill by location or
groups of locations based upon our operating segments. The application of each of these methods
involves a number of estimates and assumptions, and the weighting and balancing of the methods and
their results also involves assumptions and the application of considerable judgment. We may be
required to adjust our assumptions and estimates when events or changes in circumstances indicate
that the carrying amount of goodwill may not be recoverable. To the extent we make this
determination, we would be required to reduce the carrying value of our goodwill by taking a charge
that will reduce our earnings in the period taken and reduce our equity at the end of the period.
We cannot be certain that the assumptions and judgments we have made regarding the carrying value
of our goodwill will prove accurate and that we will not be required to take impairment charges in
the future. EMPLOYEE HEALTH CARE BENEFITS PAYABLE We have self-funded health care benefit programs in place through which a third party
administrator settles and pays claims by our employees on an on-going basis. We estimate the level
of outstanding claims, at any point in time, including claims incurred but not reported, based upon
historical payment patterns, knowledge of individual claims and estimates of health care costs. We
have stop-loss insurance coverage in place to limit the extent of individual claims. VALUATION OF LONG-LIVED ASSETS Long-lived assets to be held and used are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of such assets may not be recoverable.
Estimates of the remaining useful lives of assets are reviewed at least annually at the close of
the fiscal year. Determination of recoverability is based on an estimate of discounted or
undiscounted future cash flows resulting from the use of the assets and their eventual disposition.
Measurement of an impairment loss for long-lived assets that management expects to hold and use is
based on the fair value of the assets. INCOME TAXES We account for income
taxes 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 -26-




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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. We estimate and record 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. VARIABLE INTEREST ENTITIES We lease buildings and equipment and rent cylinders from West Rentals, Inc., GEW Real Estate
LLC, Real Equip-Lease LLC and Acetylene Products Corporation, entities that are engaged primarily
in the purchase, development, sale and/or lease of real estate and that are controlled by Gary
West, our Chairman and principal shareholder. Under Financial Accounting Standards Board
Interpretation No. 46R, Consolidation of Variable Interest Entities, (FIN 46R) effective March
31, 2004, we consolidated in our financial statements, the financial statements of these related
entities. RESULTS OF OPERATIONS The following table presents information about our results of operations as a percentage of net sales. Results for any one or more periods are not
necessarily indicative of continuing trends. Three Months Ended
    
    
    Nine Months EndedMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005
    
    
    2004Net Sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Cost of products sold, excluding depreciation
    
    
    46.2
    
    
    
    47.8
    
    
    
    46.9
    
    
    
    46.8Operating, distribution and administrative
    
    
    30.1
    
    
    
    32.5
    
    
    
    32.6
    
    
    
    36.1Depreciation
    
    
    3.2
    
    
    
    3.0
    
    
    
    3.8
    
    
    
    3.6Amortization of intangibles
    
    
    0.5
    
    
    
    0.9
    
    
    
    0.7
    
    
    
    1.1Total costs and expenses
    
    
    80.0
    
    
    
    84.2
    
    
    
    84.0
    
    
    
    87.6Income from operations
    
    
    20.0
    
    
    
    15.8
    
    
    
    16.0
    
    
    
    12.4Interest expense
    
    
    2.0
    
    
    
    3.0
    
    
    
    2.6
    
    
    
    3.6Other income, net
    
    
    0.2
    
    
    
    0.1
    
    
    
    0.2
    
    
    
    0.1Earnings before minority interest
    
    
    18.2
    
    
    
    12.9
    
    
    
    13.6
    
    
    
    8.9Minority interest
    
    
    0.7
    
    
    
    
    
    
    
    0.5
    
    
    
    Net earnings before taxes
    
    
    17.5
    
    
    
    12.9
    
    
    
    13.1
    
    
    
    8.9Provision for income taxes
    
    
    6.5
    
    
    
    5.0
    
    
    
    4.9
    
    
    
    3.5Net earnings
    
    
    11.0
    %
    
    
    7.9
    %
    
    
    8.2
    %
    
    
    5.4
    %
 Comparison of Three Months Ended March 31, 2005 and 2004 Our net sales increased $2.6 million, or 5.3%, to $50.5 million for the third quarter ended
March 31, 2005 from $47.9 million for the third quarter ended March 31, 2004. Packaged gases and
cylinder rental revenue represented 31.2% of net sales for the third quarter 2005, with hard goods
representing 31.4% of net sales and total revenue from our packaged gas business represented 62.6%
of net sales. In comparison, packaged gases and cylinder rental revenue represented 32.3% of net
sales for the third quarter 2004, with hard goods representing 29.5% of net sales and total revenue
from our packaged gas business representing 61.8% of net sales. Sales of hard goods increased $1.7
million, or 12.3%, from the third quarter 2004 to the third quarter 2005, reflecting increased
demand from the improved economy and higher prices resulting from increased steel costs. Propane
sales represented 37.4% of net sales in the third quarter 2005 compared to 38.2% of net sales in
the third quarter 2004. -27-




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increased $0.5 million, or 2.9%, in the third quarter 2005 compared to the 2004 period due to
price increases. Propane gallons sold were down 7.4% for the quarter reflecting reduced demand due
to conservation resulting from higher prices of all energy sources and generally warmer
temperatures compared to the prior period. Our cost of products sold increased $0.4 million, or 1.7%, to $23.3 million for the third
quarter 2005 compared to $22.9 million for the third quarter 2004. Cost of products sold as a
percentage of net sales improved from 47.8% for the third quarter 2004 to 46.2 % for the third
quarter 2004. This improvement was principally the result of sales prices increasing at a higher
rate than cost increases for hard goods, packaged gases and cylinder rental, partially offset by
higher propane costs as a percentage of net sales. Operating, distribution and administrative expenses decreased $0.4 million, or 2.5%, to $15.2
million in the third quarter 2005 compared to $15.5 million in the 2004 period, principally due to
the consolidation of the Variable Interest Entities which resulted in a reduction in operating,
distribution and administrative expenses of $0.4 million. Excluding this reduction, operating,
distribution and administrative expenses were unchanged in total as increased distribution and
delivery costs resulting from higher fuel and vehicle repair costs and increased professional
expenses were offset by reductions in personnel costs, building and equipment rent and bad debt
expense. Operating, distribution and administrative expenses as a percentage of sales were 30.0%
for the third quarter 2005 compared to 32.4% for the third quarter 2004. Depreciation expense increased $0.2 million reflecting depreciation related to the variable
interest entities and increased depreciation resulting from capital expenditures. Amortization of intangibles decreased $0.2 million to $0.2 million in the third quarter 2005
compared $0.4 million in the third quarter 2004. This decrease was primarily the result of certain
intangibles becoming fully amortized. Interest expense decreased $0.4 million, or 30.1%, to $1.0 million for the third quarter 2005
compared to $1.4 million in the third quarter 2004, reflecting primarily reduced outstanding debt
balances and lower interest rates due to improved financial performance. Interest expense for the
third quarter 2005 included $0.1 million related to the variable interest entities which were not
consolidated in the prior year quarter. Minority interest earnings reflect the elimination of net pre-tax income earned by the
variable interest entities. The amount eliminated is primarily the reduction in operating expense
noted above, partially offset by expenses incurred by the entities. Our effective tax rate in the third quarter 2005 decreased to 37.3% compared to 39.0% in the
third quarter 2004. For the reasons stated above, our net income increased $1.8 million or 47.1% to $5.5 million
for the third quarter 2005 compared to $3.8 million for the third quarter 2004. Fully diluted
earnings per share increased to $0.57 for the third quarter 2005 compared to $0.40 for the third
quarter 2004. Comparison of Nine Months Ended March 31, 2005 and 2004 Our net sales increased $10.0 million, or 8.7%, to $129.9 million for the nine months ended
March 31, 2005, from $119.5 million for the nine months ended March 31, 2004. Packaged gases and
cylinder rental revenue represented 35.0% of net sales for the nine months ended March 31, 2005,
with hard goods representing 35.1% of net sales and total -28-




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##### Table of Contents



revenue from our packaged gas business represented 70.1% of net sales. In comparison,
packaged gases and cylinder rental revenue represented 37.4% of net sales for the nine months ended
March 31, 2004, with hard goods representing 33.2% of net sales and total revenue from our packaged
gas business representing 70.6% of net sales. Sales of hard goods increased $5.9, million or
14.9%, from the 2004 nine month period to the 2005 nine month period, reflecting increased demand
from the improved economy, increased prices resulting from increased steel costs and increased
sales volume. Propane sales represented 29.9% of net sales in the 2005 nine month period compared
to 29.5% of net sales in the nine month 2004 period. Propane sales increased $3.6 million, or
10.3%, in the 2005 nine month period compared to the 2004 period due to price increases. Propane
gallons sold were down 6.5% year to date reflecting reduced demand due to conservation resulting
from higher prices of all energy sources and warmer temperatures compared to the prior nine month
period. Our cost of products sold increased $4.9 million, or 8.8%, to $60.9 million for the nine
months ended March 31, 2005, compared to $55.9 million for the nine months ended March 31, 2004.
Cost of products sold as a percentage of net sales was 46.9% and at 46.8% for the nine month
periods ended March 31, 2005 and 2004, respectively. Increased prices in hard goods, packaged gases and cylinder rental resulting from our
efforts to standardize our product offerings and pricing were offset by higher propane costs as a
percentage of net sales. Operating, distribution and administrative expenses decreased $0.8 million, or 1.8%, to $42.4
million in the nine months ended March 31, 2005, compared to $43.1 million for the 2004 nine month
period. Consolidation of the variable interest entities resulted in a decrease of $1.0 million in
building rent expense. Although personnel costs and equipment rent were also reduced, these
reductions were partially offset by increased legal and professional fees, vehicle fuel and repairs
and operating supplies. Operating, distribution and administrative expenses as a percentage of
sales were 32.6% for the nine months ended March 31, 2005, compared to 36.1% for the nine months
ended March 31, 2004. Depreciation expense increased $0.7 million to $5.0 million in the nine months ended March 31,
2005, from $4.3 million in the nine months ended March 31, 2004, reflecting depreciation related to
the variable interest entities and increased depreciation resulting from capital expenditures. Amortization of intangibles decreased $0.4 million to $0.9 million in the nine months ended
March 31, 2005, compared $1.3 million in the nine months ended March 31, 2004. This decrease was
primarily the result of certain intangibles becoming fully amortized during the interim period. Interest expense decreased $1.0 million, or 23.2%, to $3.4 million for the nine months ended
March 31, 2005, compared to $4.4 million in the nine months ended March 31, 2004, reflecting
primarily reduced outstanding debt balances and lower interest rates due to improved financial
performance. Interest expense for the nine months ended March 31, 2005 included $0.2 million
related to the variable interest entities which were not consolidated in the prior year quarter. Other income increased $0.1 million to $0.3 million in the nine months ended March 31, 2005,
compared to $0.2 million in the nine months ended March 31, 2004, due primarily to income earned by
the variable interest entities. Minority interest earnings reflect the elimination of net pre-tax income earned by the
variable interest entities. The amount eliminated is primarily the reduction in operating expense
noted above, partially offset by expenses incurred by the entities. Our effective tax rate decreased from 39.0% for the nine months ended March 31, 2004 to 37.6%
for the nine months ended March 31, 2005. -29-




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##### Table of Contents



For the reasons stated above our net income increased $4.1 million or 63.9% to $10.6 million
for the nine months ended March 31, 2005, compared to $6.5 million for the nine months ended March
31, 2004. Diluted earnings per share were $1.10 for the nine months ended March 31, 2005, compared
to $0.69 for the nine months ended March 31, 2004. LIQUIDITY AND CAPITAL RESOURCES Historically, we have financed our operations, capital expenditures and debt service with
funds provided from operating activities. Acquisitions have been financed by a combination of
seller financing, bank borrowings and funds generated from operations. At March 31, 2005, we had working capital of approximately $12.2 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 nine months ended March 31, 2005 were approximately
$18.0 million, as compared to $15.3 million for the nine months ended March 31, 2004. This increase
of $2.7 million is attributable to the $4.1 million increase in net income offset by increased
income taxes paid of $3.5 million and positive cash flow from other operating assets and
liabilities. Funds used for investing activities were approximately $7.7 million for the nine
months ended March 31, 2005, consisting primarily of capital spending, as compared to $5.1 million
for nine months ended March 31, 2004. We anticipate capital expenditures of approximately $8.4
million for fiscal year June 30, 2005. Funds used for financing activities for the nine months
ended March 31, 2005 were approximately $10.1 million as net borrowings of $41.4 million were more
than offset by debt repayment of $49.5 million and the repayment of prior year bank overdraft of $0.7
million. In addition, dividend payments of $0.9 million and a distribution by the variable
interest entities of $1.2 million were partially offset by funds received through the exercise of
stock options totaling $0.7 million. Our cash balance increased $0.2 million during the nine
months ended March 31, 2005 to $0.7 million. At March 31, 2005 we had the following contractual obligations: Payments Due By Period (In Thousands)Less Than
    
    
    1-3
    
    
    4-5
    
    
    More ThanContractual Obligations
    
    Total
    
    
    3 Months
    
    
    Years
    
    
    Years
    
    
    5 YearsLong-Term Debt
Including Current
Maturities
    
    $
    56,857
    
    
    $
    2,865
    
    
    $
    2,926
    
    
    $
    49,673
    
    
    $
    1,393Estimated Interest
Payments
    
    
    8,587
    
    
    
    517
    
    
    
    4,902
    
    
    
    3,028
    
    
    
    140Interest Rate Swap
Payments
    
    
    2,205
    
    
    
    630
    
    
    
    1,575
    
    
    
    
    
    
    
    Interest Rate Swap
Receipts
    
    
    (980
    )
    
    
    (280
    )
    
    
    (700
    )
    
    
    
    
    
    
    Capital Lease
Obligation
    
    
    6
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    Operating Leases,
Net of intercompany
eliminations
    
    
    8,732
    
    
    
    357
    
    
    
    4,060
    
    
    
    2,841
    
    
    
    1,474Purchase Obligations
    
    
    2,548
    
    
    
    1,500
    
    
    
    1,048
    
    
    
    
    
    
    
    Total Obligations
    
    $
    77,955
    
    
    $
    5,595
    
    
    $
    13,811
    
    
    $
    55,542
    
    
    $
    3,007
 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 -30-




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##### Table of Contents



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 all open purchase orders for the
purchase of inventory and distribution vehicles.
Other long-term liabilities at March 31, 2005 and June 30,
2004 consist primarily of deferred revenue related to cylinder
rentals with an average term of seven to ten years, which has been
excluded from the table above. On April 30, 2004, we entered into an amended credit agreement establishing a $75 million
revolving note with a maturity of five years, replacing the previous revolving credit agreement and
term notes. 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 2.94% as of March 31, 2005. As of March 31, 2005, availability under the revolving
loan was approximately $25.2 million, with outstanding borrowings of approximately $48.5 million
and outstanding letters of credit of approximately $1.3 million related to insurance policies and
seller notes. The credit facility is secured by all of our assets. The revolving loan is used
primarily to fund acquisitions. We are 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 our discretion,
plus an applicable spread. The loan agreement for the credit facility contains various financial covenants, including
covenants requiring minimum fixed charge coverage and maximum funded debt to EBITDA. As of March
31, 2005, we were in compliance with these covenants and believe that we will continue to be in
compliance through at least the next twelve months. The $8.4 million of the debt of the variable interest entities consists primarily of
asset-backed mortgages for real estate. The assets that are collateral for these obligations are
classified as land and buildings and improvements. The carrying value of these assets totaled
$5,477,000 as of March 31, 2005. 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 our Chairman. We are obligated under various promissory notes related to the financing of acquisitions that
have various rates of interest ranging from 3.75% to 10.0% per annum and maturities through 2010.
The outstanding balance of these notes as of March 31, 2005 was $1.9 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 our credit facility. The schedule of maturities by segment of our debt is as follows: VariableInterestFiscal year ending June 30,
    
    Valley
    
    
    Entities
    
    
    CompanyRemainder of 2005
    
    $
    213,293
    
    
    $
    1,604,754
    
    
    $
    1,818,0472006
    
    $
    760,596
    
    
    $
    642,008
    
    
    $
    1,402,6042007
    
    $
    546,554
    
    
    $
    610,526
    
    
    $
    1,157,0802008
    
    $
    189,580
    
    
    $
    627,090
    
    
    $
    816,6702009
    
    $
    48,634,665
    
    
    $
    646,999
    
    
    $
    49,281,6642010
    
    $
    61,708
    
    
    $
    591,039
    
    
    $
    652,747Thereafter
    
    $
    32,025
    
    
    $
    1,702,157
    
    
    $
    1,734,182Total
    
    $
    50,438,421
    
    
    $
    6,424,573
    
    
    $
    56,862,994
 We enter into contractual agreements in the ordinary course of our business to hedge our
exposure to interest rate risks. Counterparties to these agreements are major -31-




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##### Table of Contents



financial institutions. We believe 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 our
debt portfolio. We enter into these agreements to change the variable/fixed interest rate mix of
our debt portfolio in order to maintain the percentage of fixed and variable debt within certain
parameters we have established. Accordingly, we enter into agreements to effectively convert
variable-rate debt to fixed-rate debt. As of March 31, 2005, we had $40.0 million in notional
amounts outstanding under interest rate swap agreements. These swaps have an average pay rate of
6.3% versus a receive rate of 2.8% at March 31, 2005. In January 2005, we entered into swap
agreements for notional value of $25 million effective July 2005 and January 2006 to replace those
contracts up for expiration. Purchase obligations represent the total value of open purchase orders, consisting primarily
of inventory and capital expenditures, as of the period ending date. We entered into an option agreement in May 1998 with an independent distributor for the
purchase of the distributors business. The agreement provided the distributor the option to sell
its business to us commencing in May 2002 and ending in May 2005 and provides us the option to
purchase the business from the distributor commencing in June 2005 and ending in May 2008. The
distributor exercised the option on May 9, 2005. In addition to the $1 million we paid for the
option, we estimate we will pay approximately $5.8 million and assume approximately $4.6 million of
the distributors debt. We anticipate that we will complete this purchase, subject to due
diligence, in the quarter ending June 30, 2005. We believe that cash generated from operations, borrowing availability under our credit
facility and the ability to obtain financing with sellers of businesses will be sufficient to
satisfy our requirements for operating funds, capital expenditures and future acquisitions for at
least the next twelve months. New Accounting Standards
   -32-




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures About Market Risk The table below provides information about our derivative financial instruments and other
financial instruments that are sensitive to changes in interest rates, including interest rate
swaps and debt obligations as of March 31, 2005. 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. Balance of
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    There
    
    
    
    
    
    
    Fair2005
    
    
    2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    After
    
    
    Total
    
    
    Value(In Thousands)LiabilitiesLong term debt  ValleyFixed rate
    
    $
    211
    
    
    $
    762
    
    
    $
    547
    
    
    $
    190
    
    
    $
    134
    
    
    $
    94
    
    
    $
    1,938
    
    
    $
    1,790Average interest rate
    
    
    4.65
    %
    
    
    5.53
    %
    
    
    6.29
    %
    
    
    6.28
    %
    
    
    4.65
    %
    
    
    4.78
    %Variable rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    48,500
    
    
    
    
    
    
    $
    48,500
    
    
    $
    48,500Average interest rate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.94
    %
    
    
    Long term debt -Variable Interest
Entities mortgage debtFixed rate
    
    $
    1,605
    
    
    $
    642
    
    
    $
    611
    
    
    $
    627
    
    
    $
    647
    
    
    $
    2,293
    
    
    $
    6,425
    
    
    $
    5,770Average interest rate
    
    
    4.25
    %
    
    
    4.30
    %
    
    
    3.07
    %
    
    
    3.01
    %
    
    
    3.05
    %
    
    
    3.09
    %Interest rate swapsVariable to fixed
    
    $
    15,000
    
    
    $
    25,000
    
    
    
    
    
    
    
    
    
    
    $
    25,000
    
    
    
    
    
    
    
    
    
    
    $
    (510
    )Average pay rate
    
    
    6.3
    %
    
    
    6.3
    %
    
    
    
    
    
    
    
    
    
    
    6.5
    %
    
    
    Average receive rate
    
    
    2.8
    %
    
    
    2.8
    %
    
    
    
    
    
    
    
    
    
    
    2.4
    %
    
    
    CommitmentsOperating leases
    
    $
    854
    
    
    $
    3,341
    
    
    $
    3,424
    
    
    $
    3,483
    
    
    $
    3,570
    
    
    $
    7,410
    
    
    $
    22,082Intercompany
elimination (1)
    
    
    (497
    )
    
    
    (2,012
    )
    
    
    (2,062
    )
    
    
    (2,114
    )
    
    
    (2,167
    )
    
    
    (4,498
    )
    
    
    (13,350
    )Company total
    
    $
    357
    
    
    $
    1,329
    
    
    $
    1,362
    
    
    $
    1,369
    
    
    $
    1,403
    
    
    $
    2,912
    
    
    $
    8,732
   (1)
    
    Reflects the elimination of intercompany rent as a result of FIN 46R, Consolidation of
Variable Interest Entities at March 31, 2004. -33-




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Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our
Chief Executive Officer, William A. Indelicato, and our Chief Financial Officer, James P. Hart, we
evaluated the effectiveness of the design and operation of our 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, our Chief
Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered
by this report, our disclosure controls and procedures were effective in ensuring that information
required to be disclosed by us in the reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in applicable rules
and forms and that such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, in a manner that allows timely decisions
regarding required disclosure. (b) Changes in Internal Controls During the fiscal quarter covered by this report, there have not been any changes in our
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, our internal control
over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 6. Exhibit Index  10.46
    Modification of employment agreement between the Valley National Gases, Inc. and James
P. Hart10.47
    Modification of employment agreement between the Valley National Gases, Inc. and
Gerald W. Zehala31.1
    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 200299.1
    Risk factors -34-




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##### Table of Contents



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 INCORPORATEDMay 12, 2005
    /s/  James P. HartJames P. HartChief Financial Officer and
Duly Authorized Officer -35-