SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
Commission File No. 000-29226
VALLEY NATIONAL GASES INCORPORATED
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania
- --------------------------------------------------------------------------------
(State or other jurisdiction of incorporation or organization)
23-2888240
- --------------------------------------------------------------------------------
(I.R.S. Employer Identification No.)
67 43rd Street, Wheeling, West Virginia 26003
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(304) 232-1541
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ] No [ ]
Indicate 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 21, 1997
- --------------------------------------------------------------------------------
Common stock, $0.001 par value 9,620,084
<PAGE>
VALLEY NATIONAL GASES INCORPORATED
TABLE OF CONTENTS
Page
PART I FINANCIAL INFORMATION
Item 1 Condensed Balance Sheets as of June 30, 1996 and
March 31, 1997 3
Condensed Statements of Operations for the Three
and Nine Months Ended March 31, 1996 and 1997 5
Condensed Statements of Changes in Stockholder's
Equity for the Year Ended June 30, 1996 and the Nine
Months Ended March 31, 1997 7
Condensed Statements of Cash Flows for the Nine Months
Ended March 31, 1996 and 1997 8
Notes to Condensed Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
2
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PART I. FINANCIAL INFORMATION
<TABLE>
VALLEY NATIONAL GASES INCORPORATED
CONDENSED BALANCE SHEETS
<CAPTION>
A S S E T S
June 30, March 31,
1996 1997
------------------- -------------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,148,546 $ 3,276,982
Restricted cash 400,000 -
Accounts receivable, net of allowance for doubtful accounts of
$140,000 and $259,423, respectively
6,701,939 9,622,027
Inventory 4,157,906 6,968,005
Prepaids and other 832,899 910,964
------------------- -------------------
Total current assets 16,241,290 20,777,978
------------------- -------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 7,000 7,000
Buildings and improvements 2,664,460 3,191,086
Equipment 30,788,676 35,400,482
Transportation equipment 5,758,581 6,281,581
Furniture and fixtures 1,937,110 2,131,894
------------------- -------------------
Total property, plant and equipment 41,155,827 47,012,043
Accumulated depreciation (18,029,419) (20,830,490)
------------------- -------------------
Net property, plant and equipment 23,126,408 26,181,553
------------------- -------------------
OTHER ASSETS:
Intangibles, net of amortization of $1,745,353 and $2,979,277,
respectively 5,902,885 14,753,131
Deposits and other assets 220,265 340,042
------------------- -------------------
Total other assets 6,123,150 15,093,173
------------------- -------------------
TOTAL ASSETS $ 45,490,848 $ 62,052,704
=================== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
3
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<TABLE>
VALLEY NATIONAL GASES INCORPORATED
CONDENSED BALANCE SHEETS
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY June 30, March 31,
1996 1997
------------------- --------------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 2,736,814 $ 4,186,750
Accounts payable, trade 2,835,920 2,831,653
Accrued compensation and employee benefits 2,970,987 3,227,437
Other current liabilities 479,126 847,075
------------------- --------------------
Total current liabilities 9,022,847 11,092,915
LONG-TERM DEBT, less current maturities 19,506,728 30,608,582
OTHER LONG-TERM LIABILITIES 590,181 1,328,358
------------------- --------------------
Total liabilities 29,119,756 43,029,855
------------------- --------------------
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares
Issued, 18,300,653 shares 18,301 18,301
Paid-in-capital 95,914 95,914
Treasury stock, 11,300,653 shares at cost (3,705,000) (3,705,000)
Retained earnings 19,961,877 22,613,634
------------------- --------------------
Total stockholders' equity 16,371,092 19,022,849
------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 45,490,848 $ 62,052,704
=================== ====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
4
<PAGE>
<TABLE>
VALLEY NATIONAL GASES INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
-----------------------------------------
1996 1997
------------------ ------------------
<S> <C> <C>
NET SALES $ 14,934,491 $ 20,271,994
COST OF PRODUCTS SOLD, excluding depreciation and amortization 6,598,350 9,421,847
------------------ ------------------
Gross profit 8,336,141 10,850,147
------------------ ------------------
EXPENSES:
Operating and administrative 5,589,523 7,139,159
Depreciation and amortization 1,308,900 1,764,032
------------------ ------------------
Total expenses 6,898,423 8,903,191
------------------ ------------------
Income from operations 1,437,718 1,946,956
------------------ ------------------
INTEREST EXPENSE 389,185 614,923
------------------ ------------------
OTHER INCOME/(EXPENSE):
Interest and dividend income 80,189 71,918
Gain on sale of investments - 73,586
Rental income 34,167 650
Gain on disposal of assets 6,620 8,581
Other income 59,741 19,675
------------------ ------------------
Total other income 180,717 174,410
------------------ ------------------
NET INCOME $ 1,229,250 $ 1,506,443
================== ==================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Information (Unaudited)
-------------------------------------------
1996 1997
------------------- --------------------
<S> <C> <C>
NET INCOME $ 1,229,250 $ 1,506,443
PRO FORMA INCOME TAXES 491,700 602,577
------------------- --------------------
PRO FORMA NET INCOME $ 737,550 $ 903,866
=================== ====================
PRO FORMA NET INCOME PER SHARE $ 0.10 $ 0.11
=================== ====================
PRO FORMA WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,267,074 8,335,282
=================== ====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
5
<PAGE>
<TABLE>
VALLEY NATIONAL GASES INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
-------------------------------------------
1996 1997
------------------- --------------------
<S> <C> <C>
NET SALES $ 39,072,324 $ 54,049,282
COST OF PRODUCTS SOLD, excluding depreciation and amortization 17,276,767 24,926,122
------------------- --------------------
Gross profit 21,795,557 29,123,160
------------------- --------------------
EXPENSES:
Operating and administrative 14,785,112 19,706,352
Depreciation and amortization 3,307,608 4,698,272
------------------- --------------------
Total expenses 18,092,720 24,404,624
------------------- --------------------
Income from operations 3,702,837 4,718,536
------------------- --------------------
INTEREST EXPENSE 1,064,481 1,607,774
------------------- --------------------
OTHER INCOME/(EXPENSE):
Interest and dividend income 244,507 245,016
Gain on sale of investments - 73,586
Rental income (expense) 65,477 (9,430)
Loss on disposal of assets (2,861) (9,049)
Other income 179,631 24,302
------------------- --------------------
Total other income 486,754 324,425
------------------- --------------------
NET INCOME $ 3,125,110 $ 3,435,187
=================== ====================
</TABLE>
<TABLE>
<CAPTION>
Pro Forma Information (Unaudited)
-------------------------------------------
1996 1997
------------------- --------------------
<S> <C> <C>
NET INCOME $ 3,125,110 $ 3,435,187
PRO FORMA INCOME TAXES 1,250,044 1,374,075
------------------- --------------------
PRO FORMA NET INCOME $ 1,875,066 $ 2,061,112
=================== ====================
PRO FORMA NET INCOME PER SHARE $ 0.26 $ 0.25
=================== ====================
PRO FORMA WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 7,267,074 8,335,282
=================== ====================
The accompanying notes are an integral part of these financial statements.
</TABLE>
6
<PAGE>
<TABLE>
VALLEY NATIONAL GASES INCORPORATED
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED JUNE 30, 1996 AND
THE NINE MONTHS ENDED MARCH 31, 1997
<CAPTION>
Common Stock Treasury Stock
----------------------- --------------------------
Total
Paid-in- Retained Stockholders'
Shares Amount Shares Amount Capital Earnings Equity
---------- -------- ---------- ------------ ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995 18,300,653 $18,301 11,300,653 $(3,705,000) $ - $17,482,478 $ 13,795,779
Net income - - - - - 4,100,928 4,100,928
Contribution of
capital - - - - 95,914 - 95,914
Dividends paid - - - - - (1,621,529) (1,621,529)
---------- -------- ---------- ------------ --------- ------------ --------------
BALANCE, June 30, 1996 18,300,653 18,301 11,300,653 (3,705,000) 95,914 19,961,877 16,371,092
Net income - - - - - 3,435,187 3,435,187
Dividends paid - - - - - (783,430) (783,430)
---------- -------- ---------- ------------ --------- ------------ --------------
BALANCE, March 31, 1997
(Unaudited) 18,300,653 $18,301 11,300,653 $(3,705,000) $ 95,914 $22,613,634 $ 19,022,849
========== ======== ========== ============ ========== ============ ==============
The accompanying notes are an integral part of these financial statements.
</TABLE>
7
<PAGE>
<TABLE>
VALLEY NATIONAL GASES INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Nine Months Ended
March 31,
-------------------------------------------
1996 1997
------------------- -------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 4,143,499 $ 3,953,035
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 43,659 42,302
Purchases of property and equipment (2,263,184) (2,841,855)
Business acquisitions, net of cash acquired (5,420,806) (4,961,045)
Change in restricted cash - 400,000
------------------- -------------------
Net cash used by investing activities (7,640,331) (7,360,598)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 6,530,000 5,511,102
Principal payments on loans (2,011,061) (2,191,673)
Dividends paid (642,082) (783,430)
------------------- -------------------
Net cash provided by financing
activities 3,876,857 2,535,999
------------------- -------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 380,025 (871,564)
CASH AND CASH EQUIVALENTS, beginning of period 3,854,889 4,148,546
------------------- -------------------
CASH AND CASH EQUIVALENTS, end of period $ 4,234,914 $ 3,276,982
=================== ===================
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 1,064,481 $ 1,450,925
=================== ===================
The accompanying notes are an integral part of these financial statements.
</TABLE>
8
<PAGE>
VALLEY NATIONAL GASES INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements of Valley National Gases Incorporated (the Company)
presented herein are unaudited. Certain information and footnote disclosures
normally prepared in accordance with generally accepted accounting principles
have been either condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Although the Company believes that all
adjustments, consisting of only normal recurring adjustments, 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 financial
statements for the period ending June 30, 1996.
2. INVENTORY:
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventory are as follows:
June 30, 1996 March 31, 1997
----------------- -----------------
(Unaudited)
Hardgoods $3,529,294 $5,672,563
Gases 628,612 1,295,442
----------------- -----------------
$4,157,906 $6,968,005
================= =================
3. ACQUISITIONS:
The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
In August 1996, the Company purchased Weber Gas & Welding Supply Co. Inc. for
an aggregate purchase price of approximately $1,549,000.
On October 10, 1996, the Company purchased substantially all of the assets of
Weldco Inc. (Weldco) pursuant to a Purchase and Sale Agreement (the Weldco
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Purchase Agreement) for approximately $11.1 million. Approximately $7.9 million
of the purchase price was paid by promissory notes from the Company. In
conjunction with the Company's initial public offering, Weldco shareholders
converted a portion of the Company's promissory notes to shares of the Company's
common stock at the initial public offering price. The Company prepaid
$1,720,000 under the Company's promissory notes and issued 135,000 shares of
common stock to Weldco shareholders immediately prior to the closing of the
Offering in exchange for the cancellation of indebtedness in the amount of
$2,800,000. Additionally, certain Weldco shareholders purchased 100,000 shares
of common stock in the Offering. The Weldco Purchase Agreement further grants
Weldco shareholders the right to cause the Company to purchase the 235,000
shares of common stock issued to Weldco shareholders pursuant to the conversion
of indebtedness for a period of three years following the closing of the
Offering at the initial public offering price plus interest from the date of
issuance at the rate of 6.6% per annum. Accordingly, such shares will not be
classified as shareholders' equity. The Company's payment obligation is secured
by a letter of credit.
In connection with these acquisitions, the total purchase price, fair value of
assets acquired, cash paid and liabilities assumed were as follows:
Nine Months Ended
March 31, 1997
--------------------
(Unaudited)
Cash paid $ 5,283,830
Notes issued to sellers 8,822,187
Notes payable and capital leases assumed 405,674
Other liabilities assumed and acquisition costs 4,921,766
--------------------
Total purchase price allocated to assets acquired $ 19,433,457
====================
10
<PAGE>
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 1996 March 31, 1997
------------------- ------------------
(Unaudited)
<S> <C> <C>
Revolving note, interest at LIBOR plus 2% payable monthly through
September 2003. Secured by the assets of the Company. $ - $10,162,514
Term note, interest at same rate as revolving note, payable monthly
through September 1999. Secured by the assets of the Company. - 12,071,429
Acquisitions offering revolving line of credit, interest at prime rate minus
.125%, as defined, payable in full on November 1997 or if notified by the
bank in equal monthly installments. Secured by the assets of Company. 9,748,696 -
Term note, interest at prime rate, as defined, payable in monthly
installments through November 2000. Secured by the assets of the
Company. 7,000,000 -
Term note, interest at prime rate minus .125%, as defined, payable in monthly
installments through April 2002. Secured by the assets of the Company. 833,330 -
Term note, interest at prime rate plus 1%, as defined, payable in monthly
installments through April 2005. Secured by the assets of the Company. 1,048,184 -
Convertible notes, interest at 6.6% payable annually through October 2003.
Secured by letter of credit and certain assets of the Company. - 7,886,721
Note payable, interest at 7.0% payable monthly through July 2003. Secured by
certain assets of the Company. - 877,078
Individuals and corporations, mortgages and notes, interest at 2.978% to 10.50%,
payable at various dates through 2010. 3,843,591 4,008,609
------------------- ------------------
22,473,811 35,006,351
Original issue discount (230,269) (211,019)
Current maturities (2,736,814) (4,186,750)
------------------- ------------------
Total long-term debt $19,506,728 $30,608,582
=================== ==================
</TABLE>
Prime rate was 8.5% and LIBOR was 5.6875% at March 31, 1997.
On October 4, 1996, the Company executed a three year revolving credit agreement
with Bank One for the purpose of refinancing the then existing revolving credit
agreement with NationsBank and to provide additional
11
<PAGE>
acquisition capital. This agreement provides for a term note of $13,000,000 at a
variable interest rate based upon prime or LIBOR, depending on the Company's
funded debt to EBITDA ratio, payable monthly through September of 2003. The
agreement also provides for a revolving note with maximum borrowings (including
letters of credit) of $25,000,000 at a variable interest rate equal to that of
the term note payable monthly through September of 1999. A commitment fee of
$32,500 was paid upon acceptance of the agreement. These notes are secured by
the Company's accounts receivable, equipment, inventory, and general
intangibles, and the proceeds thereof. The agreement also contains various
financial covenants including minimum fixed charge coverage, maximum of funded
debt to EBITDA, and minimum net worth level.
5. SUBSEQUENT EVENTS:
A. Initial Public Offering and Reorganization
On April 15, 1997, the Company completed an initial public offering (the
Offering) of its common stock with 2.2 million shares being sold by
the Company at $8.00 per share (including 300,000 overallotment shares
subsequently sold on May 2, 1997). The net proceeds of approximately $15.9
million have been or will be used to pay the Company's estimated S
Corporation distribution of $11.2 million and to reduce the loans of $4.7
million outstanding under its revolving credit facility.
In connection with the Offering, the following transactions occurred on
April 9, 1997:
a. Termination of the Company's S Corporation status. In connection with
the termination of S Corporation status, the Company declared a
distribution (the S Corporation Distribution) of all of its
undistributed earnings, estimated to be $11.2 million as of March 31,
1997. In addition, the Company will be required to record a deferred
tax liability with a corresponding one-time tax provision of
approximately $4.2 million in accordance with SFAS No. 109.
b. The reorganization, whereby Valley National Gases, Inc., a West
Virginia corporation, has become an indirect wholly owned subsidiary
of Valley National Gases Incorporated, a Pennsylvania corporation, by
exchange of stock. Valley National Gases Incorporated has authorized
common stock of 30,000,000 shares, par value $.001, and authorized
preferred stock of 5,000,000 shares, par value $.01.
c. Issuance of 267,084 shares of common stock as part of compensation
agreements with certain executive officers and directors. In
connection with these compensation arrangements, the Company will
incur an expense of approximately $1.9 million in the period in which
the closing of the Offering occurred.
d. The cancellation of treasury stock of Valley National Gases, Inc.
Accordingly, the Company's shareholders' equity accounts and the number of
shares in the accompanying financial statements have been retroactively
restated to give effect to the reorganization and increase in authorized
capital stock.
12
<PAGE>
B. Business Acquisitions
In April 1997, the Company purchased substantially all of the assets of
an industrial gas and welding supply distributor and a fire safety
equipment distributor for an aggregate purchase price of approximately $4.3
million. These acquisitions were financed by borrowings under the Company's
credit facility and a note payable to one of the sellers.
C. 1997 Stock Option Plan
The Company adopted the 1997 Stock Option Plan (the Plan) in February 1997.
The Plan provides for the issuance of options to purchase up to 650,000
shares of Common Stock to key employees, officers and directors of the
Company and is administered by the Nominating and Compensation Committee of
the Board of Directors.
The Company granted options to purchase 175,000 shares effective as of the
closing of the Offering, which includes options to purchase 42,000 shares
and 25,000 shares, respectively, granted to two executives, and options to
purchase 5,000 shares granted to each of the five independent directors.
The options granted to the two executives vest in annual installments of
12,500 options until all such options are vested. All other options vest
three years after the date of the grant and have a term of ten years. The
options are exercisable at a price equal to the fair market value of the
shares of Common Stock on the date of the grant. In the case of key
employees and officers, unexercised options granted under the Plan are
subject to forfeiture upon termination of employment for any reason other
than death, disability or normal retirement.
D. Right of First Refusal
In September 1991, in connection with the purchase by the Company of
certain assets of Praxair, Inc. (Praxair), the Company, Mr. 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 the Company's reorganization.
Pursuant to this agreement, if at any time during the term of the agreement
the Company wishes to accept a third party offer to purchase all or a
material part of the assets of the Company, or Mr. West and his affiliates
wish to accept an offer to purchase shares of capital stock of the Company
(the Capital Stock) owned by them in a transaction that would result in Mr.
West and his affiliates collectively owning less than 51% of the Company'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 the Company, then 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 the
Company's issued and outstanding shares of Common Stock, (b) the Company
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<PAGE>
wishes to sell all or a material part of its assets, or (c) the Company
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 and 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 the Company'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.
6. PRO FORMA INFORMATION (UNAUDITED):
The pro forma adjustments for income taxes included in the accompanying income
statements are based upon the statutory rates in effect for C Corporations
during the periods presented. Pro forma earnings per share were calculated by
dividing pro forma net income by the weighted average shares outstanding for
each period. The weighted average number of shares outstanding used to calculate
the pro forma net income per share is based on the historical weighted average
number of shares outstanding using an offering price of $8 per share as adjusted
to reflect (i) the assumed issuance of 1,068,208 shares to fund the excess of
dividends (including the estimated S Corporation Distribution) over net income
for the nine months ended March 31, 1997 (ii) the issuance of 170,718 shares of
common stock to two executive officers immediately prior to the closing of the
Offering in connection with the termination of certain deferred compensation
agreements, and (iii) the issuance of 96,366 shares of common stock to a
director immediately prior to the closing of the Offering, pursuant to a right
under a consulting agreement to convert deferred consulting payments to common
stock. In connection with these compensation arrangements, the Company will
incur an expense of approximately $1.9 million ($2.2 million gross compensation
net of related accruals of $0.3 million) in the period in which the closing of
the Offering occurred.
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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, and is qualified in
its entirety by, the Financial Statements and the Notes thereto.
OVERVIEW
The Company is a leading packager and distributor of industrial, medical and
specialty gases, welding equipment and supplies, and propane in nine states
in the mid-Atlantic and midwestern regions of the United States. The Company's
net sales have grown, primarily as a result of acquisitions, at a compound
annual rate of approximately 16% per year since the Company started business in
1958, increasing from $190,000 in that year to $68.6 million for the last twelve
months. In fiscal 1996, gases accounted for approximately 46% of net sales,
welding equipment and supplies accounted for approximately 40% of net sales, and
cylinder and tank rental accounted for approximately 14% of net sales.
The Company believes it has been successful in executing its strategy of growth
through acquisitions, having completed 22 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions may
have, a dilutive effect upon the Company's income from operations and net income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins and real
sales growth, occur over a period ranging from two to eight quarters, depending
upon the complexity of integrating each acquisition into the Company's existing
operations. The Company anticipates that the benefits of the Weldco and Weber
acquisitions will be realized over a comparable period. 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.
In most cases, operating cash flow of an acquired business is positive in a
relatively short period of time. For many acquisitions, the Company believes
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.
The Company's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months
falling in the Company's second and third fiscal quarters.
Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a quarter-
to-quarter basis. The Company believes 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.
15
<PAGE>
Historically, the Company's gross profit margins as a percentage of sales have
been higher on the sale of gases than on the sale of welding equipment and
supplies ("hard goods"). As a result of recent acquisitions of some distributors
with a higher proportion of hard goods to gas sales, the Company's average gross
profit as a percentage of sales has decreased in comparison to prior years, even
though the dollar amount of the gross margin has increased. Future acquisitions
may affect this pattern depending upon the product mix of the acquired
businesses.
Prior to April 9, 1997, the Company was treated as an S Corporation for federal
and state income tax purposes. As a result, the Company was not subject to
federal and state income taxes. The Company terminated its S Corporation
election in connection with the Offering and become a C Corporation. As a result
of termination of the S Corporation election, the Company will be required to
recognize approximately $4.2 million of deferred income taxes in the period in
which the closing of the Offering occurred.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 and 1996
Net sales increased 35.7%, or $5.3 million, to $20.3 million from $14.9 million
for the three months ended March 31, 1997 and 1996, respectively. Acquisitions
made during the preceding twelve months contributed $4.7 million of the increase
in net sales, while base business growth contributed $0.6 million of the
increase. Gases and cylinder revenue represented 55.6% of net sales for the
three months ended March 31, 1997, with hard goods representing the remaining
44.4%. In comparison, net sales for the three months ended March 31, 1996
reflected gases and cylinder revenue as 60.9% and hard goods as 39.1%. This
change in sales mix reflects the effect of acquisitions made during the
preceding twelve months.
Gross profit, which excludes depreciation and amortization, increased 30.2%, or
$2.5 million, to $10.9 million from $8.3 million for the three months ended
March 31, 1997 and 1996, respectively. Acquisitions made during the preceding
twelve months contributed $2.1 million of the increase in gross profit, while
the base business contributed $0.4 million of the increase. Gross profit as a
percentage of net sales was 53.5% for the three months ended March 31, 1997,
compared to 55.8% for the three months ended March 31, 1996. This change
reflected an increase in the proportion of hard good sales, which have a lower
gross profit margin as a percentage of net sales than gases. This increase in
the proportion of hard good sales was primarily attributable to the two most
recent acquisitions.
Operating and administrative expenses increased 27.7%, or $1.5 million, to $7.1
million from $5.6 million for the three months ended March 31, 1997 and 1996,
respectively. Of this increase, $1.2 million was related to acquired businesses
and the remaining $0.3 million reflected increases in the amounts accrued by the
Company for bonuses and profit sharing, facility lease expenses and inflationary
impacts on wages and other operating expenses. Operating and administrative
expenses as a percentage of sales decreased to 35.2% for the three months ended
March 31, 1997, as compared to 37.4% for the same quarter in 1996, reflecting
the addition of operating expenses related to acquired businesses as a
percentage of sales at a rate lower than the Company average
16
<PAGE>
before the acquisitions were made. Depreciation and amortization expense
increased $0.5 million for the three months ended March 31, 1997 compared to the
same period in 1996, primarily as a result of acquisitions made during the last
twelve months. Interest expense increased $0.2 million for the quarter,
reflecting the financing of acquisitions made during the last twelve months.
Net income increased 22.5%, or $0.3 million, to $1.5 million from $1.2 million
for the three months ended March 31, 1997 and 1996, respectively.
Comparison of Nine Months Ended March 31, 1997 and 1996
Net sales increased 38.3%, or $15.0 million, to $54.0 million from $39.0 million
for the nine months ended March 31, 1997 and 1996, respectively. Acquisitions
made during the preceding twelve months contributed $12.7 million of the
increase in net sales, while base business growth contributed $2.3 million of
the increase. Gases and cylinder revenue represented 56.7% of net sales for the
nine months ended March 31, 1997, with hard goods representing the remaining
43.3%. In comparison, net sales for the nine months ended March 31, 1996
reflected gases and cylinder revenue as 61.2% and hard goods as 38.8%. This
change in sales mix reflects primarily the effect of acquisitions made during
the preceding twelve months.
Gross profit, which excludes depreciation and amortization, increased 33.6%, or
$7.3 million, to $29.1 million from $21.8 million for the nine months ended
March 31, 1997 and 1996, respectively. Acquisitions made during the preceding
twelve months contributed $6.0 million of the increase in gross profit, while
the base business contributed $1.3 million of the increase. Gross profit as a
percentage of net sales was 53.9% for the nine months ended March 31, 1997,
compared to 55.8% for the nine months ended March 31, 1996. This change
reflected an increase in the proportion of hard good sales, which have a lower
gross profit margin as a percentage of net sales than gases. This increase in
the proportion of hard good sales was primarily attributable to the two most
recent acquisitions.
Operating and administrative expenses increased 33.3%, or $4.9 million, to $19.7
million from $14.8 million for the nine months ended March 31, 1997 and 1996,
respectively. Of this increase, $3.8 million was related to acquired businesses
and the remaining $1.1 million reflected increases in the amounts accrued by the
Company for bonuses and profit sharing, facility lease expenses and inflationary
impacts on wages and other operating expenses. Operating and administrative
expenses as a percentage of sales decreased to 36.5% for the nine months ended
March 31, 1997, as compared to 37.8% for the same period in 1996, reflecting the
addition of operating expenses related to acquired businesses as a percentage of
sales at a rate lower than the Company average before the acquisitions were
made. Depreciation and amortization expense increased $1.4 million for the nine
months ended March 31, 1997, compared to the same period in 1996, primarily as a
result of acquisitions made during the last twelve months. Interest expense
increased $0.5 million for the nine months ended March 31, 1997, reflecting the
financing of acquisitions made during the last twelve months.
Net income increased 9.9%, or $0.3 million, to $3.4 million from $3.1 million
for the nine months ended March 31, 1997 and 1996, respectively.
17
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, capital expenditures and
debt service with funds provided from operating activities. Acquisitions have
been financed by a combination of seller financing, bank borrowings and funds
generated from operations. Since April 1994, required debt service on borrowings
from banks has been limited primarily to interest payments.
At March 31, 1997, the Company had working capital of approximately $9.7
million. Funds provided by operations for the nine months ended March 31, 1997
were approximately $4.0 million. Funds used for investing activities were
approximately $7.4 million for the nine months ended March 31, 1997, consisting
primarily of capital spending and financing for two acquisitions. Sources of
funds from financing activities for the nine months ended March 31, 1997 were
approximately $3.3 million from net borrowings net of $0.8 million of S
Corporation distribution for payment of shareholder taxes.
On October 4, 1996, the Company entered into a new credit facility totaling
$38.0 million, consisting of a $13.0 million term loan, which matures in seven
years and is amortized in equal monthly payments, and a $25.0 million revolving
loan with a $15.0 million sublimit for letters of credit, which matures in
October 1999. The revolving loan is used primarily to fund acquisitions. The
Company is not required to make principal payments on outstanding balances of
the revolving loan as long as certain covenants are satisfied. Interest is
charged on both the term loan and the revolving loan at either the lender's
prime rate or various LIBOR rates, at the Company's discretion, plus an
applicable spread. The weighted average interest rate for substantially all of
the borrowings under the credit facility was 7.44% as of March 31, 1997. The
Company pays a fee for the unused portion of the revolving loan. As of March 31,
1997, availability under the revolving loan was approximately $10.0 million,
with outstanding borrowings of approximately $10.1 million and outstanding
letters of credit of approximately $4.9 million. The credit facility is secured
by all of the Company's assets.
The loan agreement for the credit facility contains various financial covenants
applicable to the Company, including covenants requiring minimum fixed charge
coverage, maximum funded debt to EBITDA, and minimum net worth. The Company is
in compliance with these covenants and believes that it will continue to be in
compliance through at least the next twelve months.
The Company is obligated under various promissory notes related to the financing
of acquisitions that have various rates of interest, ranging from 3.0% to 10.5%
per annum, and maturities through 2010. The outstanding balance of these notes
as of March 31, 1997 was $12.6 million. Some of these notes are secured by
assets related to the applicable acquisition, some are unsecured, and some are
backed by bank letters of credit issued under the Company's credit facility.
Outstanding letters of credit as of March 31, 1997 were $4.9 million.
18
<PAGE>
FLUCTUATIONS IN QUARTERLY RESULTS
The Company generally has experienced higher sales activity during its second
and third quarters as a result of seasonal sales of propane, with corresponding
lower sales for the first and fourth quarters. As a result, income from
operations and net income typically are higher for the second and third quarters
than for the first and fourth quarters of the fiscal year.
INFLATION
The impact of inflation on the Company's operating results has been moderate in
recent years, reflecting generally low rates of inflation in the economy and the
Company's historical ability to pass purchase price increases to its customers
in the form of sales price increases. While inflation has not had, and the
Company does not expect that it will have, a material impact upon operating
results, there is no assurance that the Company's business will not be affected
by inflation in the future.
SUBSEQUENT EVENTS
On April 15, 1997, the Company completed an initial public offering of its
common stock with 2.2 million shares being sold by the Company at $8.00 per
share (including 300,000 overallotment shares subsequently sold on May 2, 1997).
The net proceeds of approximately $15.9 million have been or will be used to pay
the Company's estimated S Corporation distribution of $11.2 million and to
reduce the loans of $4.7 million outstanding under its revolving credit
facility.
In April 1997, the Company purchased substantially all of the assets of an
industrial gas and welding supply distributor and a fire safety equipment
distributor for an aggregate purchase price of approximately $4.3 million. These
acquisitions were financed by borrowings under the Company's credit facility
and a note payable to the one of the sellers.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of, was
issued in March 1995. SFAS No. 121 requires that the carrying value of
long-lived operating assets, when determined to be impaired, be adjusted so as
not to exceed the estimated undiscounted cash flows provided by such assets.
SFAS No. 121 also addresses the accounting for long-lived assets that are to be
disposed of in future periods. The Company adopted the provisions of SFAS No.
121 in the first quarter of fiscal 1997. The adoption of SFAS No. 121 did not
have any effect on the Company's financial position or results of operations for
the six months ended December 31, 1996.
19
<PAGE>
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", was issued in October 1995. The Company will be required to adopt
the new standard no later than fiscal 1997, although early adoption is
permitted. This standard establishes the fair value based method (the SFAS 123
Method) rather than the intrinsic value based method as the preferred accounting
methodology for stock-based compensation arrangements. Entities are allowed to
either (i) continue to use the intrinsic value based methodology in their basic
financial statements and provide in the footnotes pro forma net income and
earnings per share information as if the SFAS 123 Method had been adopted or
(ii) adopt the SFAS 123 Method. Following adoption, the Company anticipates
providing the required disclosures in the notes to its financial statements.
Financial Accounting Standard Board Statement No. 128, "Earnings Per Share"
(SFAS No. 128) was issued in February 1997 and is effective for periods ending
after December 15, 1997. This statement, upon adoption, will require all
prior-period earnings per share (EPS) data to be restated, to conform to the
provisions of the statement. This statement's objective is to simplify the
computation of EPS and to make the U.S. standard for EPS computations more
compatible with that of the International Accounting Standards Committee. The
Company will adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its reported EPS.
Financial Accounting Standard Board Statement No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) was issued in February 1997
and is effective for periods ending after December 15, 1997. This statement,
upon adoption, will require all companies to provide specific disclosure
regarding the entities capital structure. SFAS No. 129 will specify the
disclosures, for all companies, including descriptions of the securities
comprising the capital structure and the contractual rights of the holders of
such securities. The Company will adopt SFAS No. 129 in fiscal 1998 and does not
anticipate that the statement will have a significant impact on its disclosure.
20
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
See Exhibit Index on page 23.
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the quarter
ended March 31, 1997.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
VALLEY NATIONAL GASES INCORPORATED
May 23, 1997 /s/ Robert D. Scherich
--------------------------------------------
Robert D. Scherich
Chief Financial Officer
22
<PAGE>
EXHIBIT INDEX
Exhibit Number Description
- -------------- -------------------------------------------------------------
3.1 Articles of Amendment of the Company, incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form
S-1 under the Securities Act of 1933, as amended, (File
No. 333-19973)
3.2 Bylaws of the Company, incorporated by reference to Exhibit 3.2
to the Company's Registration Statement on Form S-1 under the
Securities Act of 1933, as amended, (File No. 333-19973)
11.1 Computation of Earnings Per Share
27.1 Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange Commission only)
23
Exhibit 11.1
<TABLE>
CALCULATION OF PRIMARY NET INCOME PER SHARE
<CAPTION>
Three Months Three Months Nine Months Ended Nine Months Ended
Ended Ended March 31, 1996 March 31, 1997
March 31, 1996 March 31, 1997
----------------- ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Net income $1,229,250 $1,506,443 $3,125,110 $3,435,187
Pro forma income taxes 491,700 602,577 1,250,044 1,374,075
----------------- ------------------ ------------------ ------------------
Pro forma net income $ 737,550 $ 903,866 $1,875,066 $2,061,113
Weighted average shares
outstanding during the period 7,000,000 7,000,000 7,000,000 7,000,000
Shares issuable under
consulting agreement 96,366 96,366 96,366 96,366
Shares issuable under
compensation agreement 170,708 170,708 170,708 170,708
Shares assumed outstanding to
support S Corporation distribution --- 1,068,208 --- 1,068,208
----------------- ------------------ ------------------ ------------------
Weighted average common
and common equivalent
shares outstanding during the
period 7,267,074 8,335,282 7,267,074 8,335,282
================= ================== ================== ==================
Pro forma net income per
share $0.10 $.011 $0.26 $0.25
================= ================== ================== ==================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR VALLEY NATIONAL GASES INCORPORATED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001030715
<NAME> VALLEY NATIONAL GASES INCORPORATED
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> MAR-31-1997
<CASH> 3,276,982
<SECURITIES> 0
<RECEIVABLES> 9,881,450
<ALLOWANCES> 259,423
<INVENTORY> 6,968,005
<CURRENT-ASSETS> 20,777,978
<PP&E> 47,012,043
<DEPRECIATION> 20,830,490
<TOTAL-ASSETS> 62,052,704
<CURRENT-LIABILITIES> 11,092,915
<BONDS> 30,608,582
0
0
<COMMON> 18,301
<OTHER-SE> 19,004,548
<TOTAL-LIABILITY-AND-EQUITY> 62,052,704
<SALES> 54,049,282
<TOTAL-REVENUES> 54,049,282
<CGS> 24,926,122
<TOTAL-COSTS> 24,926,122
<OTHER-EXPENSES> 24,404,624
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,607,774
<INCOME-PRETAX> 3,435,187
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,435,187
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,435,187
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
