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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
COMMISSION FILE NO. 000-29226
VALLEY NATIONAL GASES INCORPORATED
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-2888240
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 November 13, 1998
----- --------------------------------
Common stock, $0.001 par value 9,620,084
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VALLEY NATIONAL GASES INCORPORATED
----------------------------------
TABLE OF CONTENTS
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Page
----
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Balance Sheets as of June 30, 1998
And September 30, 1998 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 1997 and 1998 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended September 30, 1997 and 1998 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 17
EXHIBIT INDEX 18
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PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
A S S E T S
-----------
June 30, September 30,
1998 1998
------------ ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 589,170 $ 208,176
Accounts receivable, net of allowance for
doubtful accounts of $345,000 and
$354,239, respectively 11,657,659 10,337,299
Inventory 8,731,834 9,119,520
Prepaids and other 1,242,799 984,258
------------ ------------
Total current assets 22,221,462 20,649,253
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land 49,786 49,786
Buildings and improvements 3,957,774 4,015,269
Equipment 49,212,815 50,347,046
Transportation equipment 8,520,471 8,836,288
Furniture and fixtures 3,341,977 3,465,695
------------ ------------
Total property, plant and equipment 65,082,823 66,714,084
Accumulated depreciation (26,580,317) (27,504,059)
------------ ------------
Net property, plant and equipment 38,502,506 39,210,025
------------ ------------
OTHER ASSETS:
Intangibles, net of amortization of
$6,888,902 and $7,082,822, respectively 34,706,927 34,769,450
Deposits and other assets 1,628,161 1,619,426
------------ ------------
Total other assets 36,335,088 36,388,876
------------ ------------
TOTAL ASSETS $ 97,059,056 $ 96,248,154
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
June 30, September 30,
1998 1998
----------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,611,714 $ 4,438,141
Bank overdraft 393,530 621,995
Accounts payable, trade 4,584,388 3,060,427
Accrued compensation and employee benefits 3,177,180 2,065,703
Other current liabilities 1,271,817 862,857
----------- -----------
Total current liabilities 15,038,629 11,049,123
LONG-TERM DEBT, less current maturities 48,655,869 50,988,469
DEFERRED TAX LIABILITY 5,933,192 5,933,192
OTHER LONG-TERM LIABILITIES 1,368,766 1,373,923
----------- -----------
Total liabilities 70,996,456 69,344,707
----------- -----------
REDEEMABLE COMMON STOCK, par value, $.001
per share, issued 235,000 shares 1,880,000 1,880,000
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share-
Authorized, 30,000,000 shares
Issued, 9,385,084 shares 9,385 9,385
Paid-in-capital 17,162,396 17,162,396
Retained earnings 7,010,819 7,851,666
----------- -----------
Total stockholders' equity 24,182,600 25,023,447
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $97,059,056 $96,248,154
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1997 1998
----------- ------------
<S> <C> <C>
NET SALES $20,621,152 $23,208,917
COST OF PRODUCTS SOLD, excluding depreciation
and amortization 9,474,469 10,270,048
----------- -----------
Gross profit 11,146,683 12,938,869
----------- -----------
EXPENSES:
Operating and administrative 7,364,071 8,652,495
Depreciation and amortization 1,898,901 1,972,662
----------- -----------
Total expenses 9,262,972 10,625,157
----------- -----------
Income from operations 1,883,711 2,313,712
INTEREST EXPENSE 571,167 968,888
OTHER INCOME (EXPENSE) NET 61,374 80,340
----------- -----------
EARNINGS BEFORE INCOME TAXES 1,373,918 1,425,164
PROVISION FOR INCOME TAXES 549,567 584,317
----------- -----------
NET EARNINGS $ 824,351 $ 840,847
=========== ===========
BASIC EARNINGS PER SHARE $ 0.09 $ 0.09
DILUTED EARNINGS PER SHARE 0.09 0.09
WEIGHTED AVERAGE SHARES:
Basic 9,620,084 9,620,084
Diluted 9,662,294 9,631,620
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
----------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------
1997 1998
----------- -----------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 2,095,884 $ 1,374,996
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets 8,150 --
Purchases of property and equipment (1,219,416) (908,371)
Business acquisitions, net of cash acquired (8,724,000) (1,806,626)
----------- -----------
Net cash used by investing
activities
(9,935,266) (2,714,997)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 8,673,300 4,113,901
Principal payments on loans (1,679,604) (3,154,894)
----------- -----------
Net cash provided by
financing activities 6,993,696 959,007
----------- -----------
NET CHANGE IN CASH AND CASH EQUIVALENTS (845,686) (380,994)
CASH AND CASH EQUIVALENTS, beginning of period 1,551,949 589,170
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 706,263 $ 208,176
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash payments for interest $ 474,182 $ 856,794
=========== ===========
Cash payments for income taxes $ -- $ 58,676
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VALLEY NATIONAL GASES INCORPORATED
----------------------------------
NOTES TO CONDENSED CONSOLIDATED 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, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
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, 1998 September 30, 1998
------------- ------------------
(Unaudited)
Hardgoods $7,651,443 $8,130,519
Gases 1,080,391 989,001
---------- ----------
$8,731,834 $9,119,520
========== ==========
PLANT AND EQUIPMENT
Plant and equipment are stated at cost. Depreciation is provided on the
straight-line basis over the estimated useful lives of the related assets.
Effective July 1, 1998, the Company changed its estimate of the useful
lives of its cylinders and tanks from 12 to 30 years. This change was made to
better reflect the estimated periods during which these assets will remain in
service. The change had the effect of reducing depreciation expense in the
quarter ended September 30, 1998 by approximately $0.5 million and increasing
net earnings by $0.3 million or $.03 per share.
The Company changed the estimated useful life of cylinders as a result
of thorough studies and analyses. The studies considered technological advances
in cylinders, empirical data obtained from cylinder manufacturers and other
industry experts and experience gained from the Company's maintenance of a
cylinder population of approximately 375,000 cylinders.
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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.
During the quarter ended September 30, 1998, the Company purchased two
businesses. The largest of these acquisitions and the effective date was Altoona
Welding Supply Company, Inc. (September 1998).
In connection with these acquisitions, the total purchase price, fair value
of assets acquired, cash paid and liabilities assumed were as follows:
Three Months
Ended
September 30,
1998
-------------
(Unaudited)
Cash paid $1,198,901
Notes payable and capital leases
assumed 700,000
Other liabilities assumed and
acquisition costs 203,997
----------
Total purchase price allocated to
assets acquired $2,102,898
==========
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4. LONG-TERM DEBT:
---------------
Long-term debt consists of the following:
<TABLE>
<CAPTION>
June 30, 1998 September 30, 1998
-------------- ------------------
(Unaudited)
<S> <C> <C>
Revolving note, interest at LIBOR plus 1.625%
payable monthly through January 2001. Secured
by the assets of the Company $26,831,036 $28,544,937
Termnote, interest at LIBOR plus 1.625% payable
monthly through October 2003. Secured by the
assets of the Company 13,431,245 12,791,660
Note payable, interest at 6.6% payable annually
through October 2003. Secured by certain
assets of the Company 4,098,447 4,098,447
Individuals and corporations, mortgages and
notes, interest at 7.0% to 10.0%, payable at
various dates through 2010 10,087,261 10,166,024
----------- -----------
54,447,989 55,601,068
Original issue discount (180,406) (174,458)
Current maturities (5,611,714) (4,438,141)
----------- -----------
Total long-term debt $48,655,869 $50,988,469
=========== ===========
</TABLE>
Prime rate was 8.25% and LIBOR was 5.527% at September 30, 1998.
On February 5, 1998 the Company entered into an amended and restated credit
facility with Bank One, as agent. The new credit facility increased the maximum
revolving note borrowings to $75.3 million, including a letter of credit
sublimit of $25.0 million, and refinanced the term note at the existing balance
of $14.7 million. The new scheduled maturity date of the term note is October 4,
2003. The new scheduled maturity date of the revolving note is January 16, 2001.
The Company pays a fee for the unused portion of the revolving loan. 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 7.2% as of September 30, 1998. As of September 30, 1998,
availability under the revolving loan was approximately $39.2 million, with
outstanding borrowings of approximately $28.5 million and outstanding letters of
credit of approximately $7.6 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.
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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 common share were computed based on the weighted average number of
common shares issued and outstanding plus additional shares assumed to be
outstanding to reflect the dilutive effect of common stock equivalents using the
treasury stock method.
Three Months Ended
September 30,
----------------------------
1997 1998
---------- ----------
Net earnings for per common share
computation $ 824,351 $ 840,847
========== ==========
Basic earnings per common share:
Weighted average common shares 9,620,084 9,620,084
========== ==========
Basic earnings per common share $ 0.09 $ 0.09
========== ==========
Diluted earnings per common share:
Weighted average common shares 9,620,084 9,620,084
Shares issuable from assumed
conversion of common stock
equivalents 42,210 11,536
---------- ----------
Weighted average common and common
equivalent shares 9,662,294 9,631,620
========== ==========
Diluted earnings per common share $ 0.09 $ 0.09
========== ==========
6. NEW ACCOUNTING PRONOUNCEMENT:
-----------------------------
Effective July 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," ("SFAS No. 130"), which
establishes standards for the reporting and display of comprehensive income in
financial statements. Comprehensive income is defined as the change in equity
during a period from transactions and other events and circumstances from
nonowner sources. SFAS No. 130 had no impact on the Company's financial
statements, as no items of other comprehensive income were recorded in the
accompanying interim financial statements.
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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 ten 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 17% per year since the Company started business in 1958,
increasing from $190,000 in that year to $97.6 million for the last twelve
months. In fiscal 1998, gases accounted for approximately 40% of net sales,
welding equipment and supplies accounted for approximately 47% of net sales, and
cylinder and tank rental accounted for approximately 13% of net sales.
The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 36 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 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. Seasonality of total
sales has increased as propane sales as a percentage of total sales have
increased.
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 seasonality of sales mentioned above and the
generally fixed nature of these expenses.
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
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Company's average gross profit as a percentage of sales has decreased in
comparison to prior years. Future acquisitions may affect this pattern depending
upon the product mix of the acquired businesses.
Until April 10, 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 its initial public offering of stock and become a C
Corporation. As a result of termination of the S Corporation election, the
Company recognized $3.9 million of deferred income taxes in the fourth quarter
of fiscal year 1997.
RESULTS OF OPERATIONS
Comparison of Three Months Ended September 30, 1998 and 1997
- ------------------------------------------------------------
Net sales increased 12.5%, or $2.6 million, to $23.2 million from $20.6
million for the three months ended September 30, 1998 and 1997, respectively.
Acquisitions made during the preceding twelve months contributed $3.9 million of
the increase in net sales, while same store sales declined $1.3 million. Same
store sales decreased 6.3% versus the same quarter last year reflecting a
general softness in the Company's hardgood sales along with the performance of
its branches in Southwest Ohio impacted by the actions of former employees who,
in the Company's opinion acted in violation of covenants not to compete. Gases
and cylinder revenue represented 54.2% of net sales for the three months ended
September 30, 1998, with hard goods representing 45.8%. In comparison, net sales
for the three months ended September 30, 1997 reflected gases and cylinder
revenue as 52.8% and hard goods as 47.2%. This change in sales mix reflects the
effect of acquisitions made during the preceding twelve months and the before
mentioned factors that affected same store sales.
Gross profit, which excludes depreciation and amortization, increased 16.1%,
or $1.8 million, to $12.9 million from $11.1 million for the three months ended
September 30, 1998 and 1997, respectively. Acquisitions made during the
preceding twelve months contributed $1.8 million of the increase in gross
profit, while the gross profit for the base business remained the same. Gross
profit as a percentage of net sales was 55.7% for the three months ended
September 30, 1998, compared to 54.1% for the three months ended September 30,
1997. This change reflected an increase in the proportion of gas and cylinder
rent sales, which have a higher gross profit margin as a percentage of net sales
than hardgoods.
Operating and administrative expenses increased 17.5%, or $1.3 million, to
$8.7 million from $7.4 million for the three months ended September 30, 1998 and
1997, respectively. Of this increase, $1.1 million was related to acquired
businesses and the remaining $0.2 million reflected increases on a same store
basis. Operating and administrative expenses as a percentage of sales was 37.3%
for the three months ended September 30, 1998, as compared to 35.7% for the same
quarter in 1997, reflecting the addition of operating expenses related to
acquired businesses as a percentage of sales offset by the effect of the decline
in the same store sales.
Depreciation and amortization expense increased $0.1 million for the three
months ended September 30, 1998 compared to the same period in 1997, reflecting
the increase from acquisitions made during the last twelve months offset by the
impact of the company's change in its estimate of useful lives related to
cylinders and tanks from twelve to thirty years.
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Interest expense increased $0.4 million for the quarter, reflecting the
financing of acquisitions made during the last twelve months, partially reduced
by lower interest rates.
Net earnings increased 2.0% to $841 thousand for the three months ended
September 30, 1998 compared to $824 thousand for the prior year quarter.
YEAR 2000 COMPLIANCE
The Company's work on the Year 2000 ("Y2K") computer compliance issue began
in 1996. The Company's Y2K compliance program consists of five parts: inventory,
assessment, renovation, testing and implementation. The Company has conducted an
inventory and assessment of remediation required for business-critical
information technology applications. Project plans have been created, and
progress is being monitored on an ongoing basis. The Company's goal is to have
its business-critical information technology applications Y2K compliant by
December 31, 1998. The Company is also in the process of completing Company-wide
inventory, assessment and remediation project plans for business-critical
personal computers and software, user applications and embedded-chip systems.
The Company's goal is to have these business-critical components Y2K compliant
by June 30, 1999.
The Company is investigating the Y2K compliance status of its vendors,
suppliers and affiliates via the Company's own internal vendor compliance
effort. The Company will carry out this task through a Company-wide effort to
address internal issues, and jointly with industry trade groups, to address
issues related to third parties which are common to the industry.
The Company estimates that expenses incurred and expenses still to be
incurred for programming, internal staff costs and other expenses related to its
Y2K efforts will be less than $100,000.
While the Company believes it is taking all appropriate steps to achieve
Y2K compliance, its Y2K issues and any potential future business interruptions,
costs, damages or losses related thereto, are dependent, to a significant
degree, upon the Y2K compliance of third parties, both domestic and
international, such as government agencies, customers, vendors and suppliers.
The Y2K problem is pervasive and complex, as virtually every computer operation
will be affected in some way. Consequently, no assurance can be given that Y2K
compliance can be achieved without significant additional costs. The products
sold by the Company can be purchased through multiple vendors. Given these
multiple sources of supply, along with the Company`s inventory, the Company
believes that disruptions in supply caused by Y2K problems would not have a
significant impact on its results of operations.
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.
At September 30, 1998, the Company had working capital of approximately $9.6
million. Funds provided by operations for the three months ended September 30,
1998 were approximately $1.4 million. Funds used for investing
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<PAGE> 14
activities were approximately $2.7 million for the three months ended September
30, 1998, consisting primarily of capital spending and financing for
acquisitions. Sources of funds from financing activities for the three months
ended September 30, 1998 were approximately $1.0 million from net borrowings.
The Company's cash balance decreased $0.4 million during the quarter to $0.2
million.
On February 5, 1998 the Company entered into an amended and restated credit
facility with Bank One, as agent. The new credit facility increased the maximum
revolving note borrowings to $75.3 million, including a letter of credit
sublimit of $25.0 million, and refinanced the term note at the existing balance
of $14.7 million. The new scheduled maturity date of the term note is October 4,
2003. The new scheduled maturity date of the revolving note is January 16, 2001.
The Company pays a fee for the unused portion of the revolving loan. 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 7.2% as of September 30, 1998. As of September 30, 1998,
availability under the revolving loan was approximately $39.2 million, with
outstanding borrowings of approximately $28.5 million and outstanding letters of
credit of approximately $7.6 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 10.0% per annum, and maturities through 2010. The outstanding balance of
these notes as of September 30, 1998 was $14.3 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.
On December 23, 1997, the Company entered into two interest rate swap
agreements with Bank One to reduce the impact of changes in interest rates. The
first agreement was for a period of seven years, cancelable by the bank at the
end of five years, whereby the Company agreed to pay the bank a fixed rate of
5.90% per annum on the notional principal amount of $5.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
The second agreement was for a period of five years, cancelable by the bank at
the end of three years, whereby the Company agreed to pay the bank a fixed rate
of 5.80% per annum on the notional principal amount of $5.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
On January 15, 1998, the Company entered into two interest rate swap agreements
with Bank One to reduce the impact of changes in interest rates. The first
agreement was for a period of seven years, cancelable by the bank at the end of
five years, whereby, the Company agreed to pay the bank a fixed rate of 5.43%
per annum on the notional principal amount of $10.0 million and the bank agreed
to pay the Company the one month LIBOR rate on the same notional amount. The
second agreement was for a period of five years,
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<PAGE> 15
cancelable by the bank at the end of three years, whereby, the Company agreed to
pay the bank a fixed rate of 5.29% per annum on the notional principal amount of
$10.0 million and the bank agreed to pay the Company the one month LIBOR rate on
the same notional amount. On August 28, 1998, the Company entered into an
interest rate swap agreement with Bank One to reduce the impact of changes in
interest rates. This agreement was for a period of five years, cancelable by the
bank at the end of three years, whereby, the Company agreed to pay the bank a
fixed rate of 5.40% per annum on the notional principal amount of $5.0 million
and the bank agreed to pay the Company the one month LIBOR rate on the same
notional amount. The Company is exposed to credit loss in the event of
nonperformance by the bank. However, the Company does not anticipate
nonperformance by the bank.
The Company has entered into a put/call option agreement with an independent
distributor for the purchase of its business. This option becomes exercisable
beginning in the year 2002 and ending in the year 2008. The Company believes
that it will have adequate capital resources available to fund this acquisition
at such time that the option is exercised.
INTEREST RATE SENSITIVITY
There was no significant change to the composition of the Company's fixed and
variable rate long term debt during the quarter ended September 30, 1998. During
the quarter, the Company increased its fixed to variable interest rate swaps, as
mentioned above, to a total notional principal amount of $35 million. As of
September 30, 1998 the Company's average pay rate for these swaps was 5.51%
compared to its average receive rate of 5.53%.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way that public business enterprises report
financial and descriptive information about their reportable operating segments.
As required by SFAS No. 131, the Company will adopt the new statement in the
fiscal year ended June 30, 1999 and apply it to interim financial statements in
subsequent fiscal years.
- 15 -
<PAGE> 16
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and other Postretirment Benefits," which standardizes disclosures for
pensions and other postretirement benefits to the extent practicable, which
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis and eliminate
other disclosures no longer useful as prescribed in previous standards. The
Company does not have any pension or other postretirement benefit plans impacted
by SFAS NO 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and requires that an entity recognize all
derivatives as either assets or liabilities and measure those instruments at
fair value. As required by SFAS No. 133, the Company expects to adopt the new
statement in the first quarter of Fiscal 2000. The effect of this statement on
the Company's financial statements has not been determined.
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
See the Exhibit Index on page 18.
(b) Reports on Form 8-K:
No reports on Form 8-K were made during the quarter.
- 16 -
<PAGE> 17
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
November 13, 1998 /s/ ROBERT D. SCHERICH
-----------------------------------
Robert D. Scherich
Chief Financial Officer
- 17 -
<PAGE> 18
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)
27.1 Financial Data Schedule (provided for the information of the
U.S. Securities and Exchange Commission only)
- 18 -
<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> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 208,176
<SECURITIES> 0
<RECEIVABLES> 10,337,299
<ALLOWANCES> 354,239
<INVENTORY> 9,119,520
<CURRENT-ASSETS> 20,649,253
<PP&E> 66,714,084
<DEPRECIATION> 27,504,059
<TOTAL-ASSETS> 96,248,154
<CURRENT-LIABILITIES> 11,049,123
<BONDS> 50,988,469
0
0
<COMMON> 9,385
<OTHER-SE> 25,014,062
<TOTAL-LIABILITY-AND-EQUITY> 96,248,154
<SALES> 23,208,917
<TOTAL-REVENUES> 23,208,917
<CGS> 10,270,048
<TOTAL-COSTS> 10,270,048
<OTHER-EXPENSES> 10,625,157
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 968,888
<INCOME-PRETAX> 1,425,164
<INCOME-TAX> 584,317
<INCOME-CONTINUING> 840,847
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 840,847
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
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