VALLEY NATIONAL GASES INC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended June 30, 2002

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from ________________ to ________________

COMMISSION FILE NUMBER 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
incorporation or organization) Identification No.)

67 43RD STREET
WHEELING, WEST VIRGINIA 26003
(Address of principal executive offices)

(304) 234-4460
(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark 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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]

The aggregate market value of voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price of such stock on
September 12, 2002, as reported on the American Stock Exchange, was $12,596,193.

As of September 12, 2002, the Company had outstanding 9,347,584 shares of
common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain specified portions of the Company's definitive proxy statement for
the annual meeting of shareholders to be held October 29, 2002 are incorporated
by reference in response to Part III.

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VALLEY NATIONAL GASES INCORPORATED

TABLE OF CONTENTS

PART I

PART I

ITEM 1. BUSINESS

OVERVIEW

Valley National Gases, Incorporated (the "Company") is a leading packager
and distributor of cylinder and bulk industrial, medical and specialty gases,
welding equipment and supplies, propane and fire protection equipment in 11
states in the eastern United States. The Company's net sales have grown 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 $144.5 million in
fiscal 2002. In fiscal 2002, gases accounted for approximately 43% of net sales,
welding equipment and supplies accounted for approximately 41% of net sales, and
cylinder and tank rental accounted for approximately 16% of net sales. The
Company is a Pennsylvania corporation.

The Company'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
the Company's 71 distribution or retail locations. The Company also distributes
propane to industrial and residential customers. Customers pay a rental fee for
use of Company cylinders. The Company owns approximately 527,000 cylinders,
which require minimal maintenance and have useful lives that the Company expects
will average 30 years or longer. The Company selectively participates in the
small bulk gas market through the delivery of gases in cryogenic transports and
the storage of gases in cryogenic and propane tanks that are also rented to
customers. The Company owns approximately 27,000 bulk propane tanks and 414 bulk
cryogenic tanks, which have useful lives generally less than those of cylinders.
In connection with the distribution of gases, the Company sells welding
equipment and supplies, including welding machines, wire, fluxes and electrodes
and a wide variety of supporting equipment.

The Company's principal business strategy is to primarily pursue growth
through the acquisition of other independent distributors and also through
internally generated growth. Since the Company was founded, it has completed 69
acquisitions. Since July 1, 2001, the Company has acquired three independent
distributors, adding approximately $6.0 million in annualized sales. Management
believes there will continue to be numerous attractive acquisition candidates
available to the Company as a result of the consolidation trend in the industry
and that the Company will be able to successfully integrate acquired operations
into its base business, generating growth and operational synergies. The Company
expects that acquisitions will be financed primarily with internally generated
funds, borrowings under the Company's credit facility and seller financing.
While highly focused on external growth, management believes that the Company's
competitive strengths will allow it to increase sales and improve market share
in existing markets, while maintaining acceptable levels of profitability.

INDUSTRY OVERVIEW

GENERAL

Historically, the industrial gas distribution business had a base of
customers engaged primarily in metal fabrication. In order to better serve these
customers, industrial gas distributors have also traditionally sold welding
equipment and supplies. As certain sectors of the economy have grown, such as
the electronics and chemicals industries, and as new applications for gases have
developed, the customer base of the industry has significantly broadened to
include almost every major industry, including health care, electronics,
chemicals, aerospace, beverages, environmental remediation, food processing, oil
and gas, and primary metals, as well as metal fabrication.

The industrial, medical and specialty gas industry consists of two major
segments, the bulk segment and the packaged gas segment. The bulk segment
supplies gases to customers with large volume requirements, generally by truck
or pipeline to a customer's facility, or in some cases by the actual
construction of a gas production plant at a customer's facility. This segment is
primarily supplied by the major gas producers in the United States, although
some large distributors, such as the Company, selectively participate in the
small bulk gas market.

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The Company competes primarily in the packaged gas segment, which consists
of the packaging, mixing and distribution of gases to customers with smaller
volume needs or requirements for specially blended or purified gases.

This segment of the industry is estimated to have annual sales of $8
billion in the United States, including welding equipment and supplies.
Participants in this segment can be further divided into two groups, large
multi-state distributors with annual sales exceeding $25 million, and smaller,
privately owned companies with few or single locations and annual sales below
$25 million. Management believes that large, multi-state distributors, including
the Company, account for approximately 50% of sales in the packaged gas segment.
Management estimates that the remaining sales are generated by approximately 850
smaller distributors, many of which it believes are potential candidates for
acquisition by larger distributors in the current wave of industry
consolidation.

The Company believes that the following characteristics make distribution
of packaged gases attractive and different from ordinary industrial
distribution: (i) the production, packaging and mixing of gases, as well as the
logistics of a large distribution network, require significant knowledge and
expertise; (ii) customers expect technical support and assistance in a wide
variety of gas applications; and (iii) the currently existing logistical
framework is unlikely to change significantly because of the economics
associated with the delivery and exchange of cylinders.

INDUSTRY CONSOLIDATION

The industry is undergoing significant consolidation, a trend which began
in the early 1980's. The Company believes there are many reasons for this trend,
including:

- Many owners are reaching retirement age without qualified succession.

- Small distributors are facing increasing competition from large
distributors who sometimes operate with lower cost structures due to
economies of scale.

- Changes in technology are providing opportunities for more efficient
order entry, inventory and distribution management. Larger distributors
are more likely to have the capital and human resources to take advantage
of these opportunities, thereby creating greater cost and service
reliability advantages.

- Larger customers are demanding additional services from their suppliers
in such areas as automated order entry, automated restocking and
applications technology support. These services require an investment in
technology and equipment that many smaller distributors are incapable or
unwilling to make.

- The number and complexity of government regulations is increasing,
especially for distributors who produce or package gas products.
Complying with new regulations requires expertise, which is difficult for
the smaller distributor to access and maintain.

The Company believes this consolidation trend will continue, providing
opportunities for those distributors, such as the Company, who have the
financial and human resources to acquire and effectively assimilate acquisitions
into their base business. The Company believes that distributors who fail to
successfully participate in this consolidation trend and achieve a strong or
leading position in their market areas will be at a cost disadvantage in the
long term.

In recent years, the propane industry has also been undergoing
consolidation for many of the same reasons as the industrial gas industry. The
Company has been taking advantage of this consolidation trend through selective
acquisitions. Except for a few large companies, the propane distribution
industry is highly fragmented. Industry sources indicate there are approximately
7,000 retail propane companies operating 13,500 local distribution centers
nationwide. The Company believes that the 50 largest propane distributors have
less than a 50% share of the approximately nine billion gallon annual market.

2

ECONOMIC CHARACTERISTICS OF THE INDUSTRIAL GAS INDUSTRY

The industrial gas industry is mature with historical real growth
consistent with growth in the overall economy. Gas sales tend to be less
adversely impacted by a decline in general economic conditions than the sale of
welding equipment and supplies. Management believes that the industrial gas
distribution business is relatively resistant to downturns in the business cycle
due to the following factors: (i) the industry has a broad and diverse customer
base; (ii) gases frequently represent a fixed component of operating costs which
does not decline with production levels; (iii) gases are required for
maintenance and renovation activities, which tend to increase during economic
downturns; (iv) industries less impacted by economic downturns are major
purchasers of industrial gases; and (v) gas purchases represent a small portion
of operating expenses and, therefore, are not a large cost cutting item. The
total market for industrial gases has continued to expand due to strong growth
in certain segments, such as electronics, food processing and health care, and
significant growth from new applications for industrial gases. However, other
activities which use industrial gases, such as metal fabrication, have declined
in recent years.

BUSINESS STRATEGY

The Company has implemented a strategic plan designed to (i) sustain
profitable growth through the acquisition of key distributors in selected
markets, (ii) achieve and maintain a low-cost supplier position in each market
segment where the Company participates and (iii) build a unified, cohesive
organization, staffed by skilled employees who are responsive to changing
customer requirements.

GROWTH THROUGH ACQUISITIONS

Prior Acquisitions. Since the formation of the Company in 1958, the
Company has completed the acquisition of 69 distributors. The Company's
acquisitions historically have been debt financed, and the Company expects that
future acquisitions will be financed, primarily with internally generated funds
supplemented with borrowings under the Company's credit facility and seller
financing. The Company does not currently intend to issue shares of its common
stock or other securities in order to consummate its acquisitions, but may in
the future elect to do so.

Acquisition Strategy. The Company intends to continue to focus its
acquisition efforts both on market areas where the Company has an existing
presence and on new areas where it believes it can achieve a leading presence.
However, in the next two (2) fiscal years, the Company will limit its
acquisition expenditures and modify its focus to concentrate on the improvement
in its operating performance and capital leverage. Over the next five (5) year
period, the Company expects its expenditures for acquisitions to be at or near
historical levels. The Company believes there are many potential acquisition
candidates with operations in these market areas. The Company seeks to achieve
operating efficiencies when it acquires a distributor in an overlapping or
contiguous market area by closing redundant locations, eliminating a significant
portion of the acquired distributor's overhead and consolidating distribution
routes. Acquisitions in new markets allow the Company to achieve operating
efficiencies through volume discounts on purchases, lower administrative and
professional expenses and the purchase of new equipment to replace inefficient
equipment and equipment previously leased at relatively expensive lease rates.

The Company believes that its principal competitive advantages in acquiring
distributors are (i) its flexibility in structuring acquisitions to meet the
concerns of sellers, (ii) its ability to offer sellers a continuing role in
management and (iii) its methodology in assimilating acquisitions. The Company
also believes it has a well organized acquisition program which utilizes
individuals who are well respected in the industry and who have extensive
experience in evaluating and negotiating transactions with distributor owners.
Based upon the Company's experience, price is not always the primary determining
factor in a selling distributor's choice of a buyer. Most owners of independent
distributors are sensitive as to whom they sell their business and have concern
for the well being of their employees after the acquisition. The Company has
found that relationships, existing competitive rivalry and reputation are key
elements in the success of acquiring most small, privately-owned distributors.
The Company believes it has earned an excellent reputation for treating fairly
the

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employees of businesses it has acquired, providing them with competitive wages
and benefits and opportunities for advancement within the scope of the Company's
operations.

Competition for Acquisitions. In seeking to acquire distributors, the
Company competes with the major industrial gas producers and national and
regional gas distributors. The largest national distributor is Airgas, Inc.
("Airgas") which has been growing through acquisitions since the mid-1980's. The
Company expects that Airgas will continue to selectively acquire distributors in
the future, and in some situations will compete with the Company for
acquisitions. The Company believes that the major industrial gas producers have
self-imposed size and geographic constraints with respect to acquiring
independent distributors. The Company also believes that some major industrial
gas producers have eliminated or limited their acquisition efforts due primarily
to the difficulty of resolving management differences, cultural differences and
cost structure differences between the small, privately-held business and the
large multinational corporation. The smaller, independent distributors with
which the Company competes for acquisitions generally do not seek acquisitions
beyond their immediate geographic region.

Acquisition Process. The Company has established formal procedures for
locating, investigating and valuing potential distributor acquisitions. Criteria
used by the Company in evaluating potential acquisitions include (i) a history
of profitability, (ii) realistic projections of future performance, (iii) a
sales mix which is or has the potential to become weighted towards the sale of
gases, which generally have higher profit margins than welding equipment and
supplies, (iv) a cylinder gas market which is serviced primarily by independent
distributors, as opposed to industrial gas producers and (v) availability of
qualified management and key personnel.

Assimilation of Acquired Businesses. The Company believes that the
effective assimilation of acquired businesses into the Company's existing
operations is critical to the success of the Company's acquisition strategy. The
Company has established a transition team comprised of selected personnel with
technical expertise in various areas, such as management, purchasing,
accounting, operations and sales. This team has primary responsibility for
converting the acquired business from its existing methods and practices to
those used by the Company. A primary goal of the assimilation process is to
instill the Company's culture into the new operations. The Company believes the
ability to instill its culture provides a distinct and key advantage. This is
partly accomplished by requiring the adoption of uniform policies and procedures
which support the Company's operational strategies.

ACHIEVE AND MAINTAIN POSITION AS A LOW-COST SUPPLIER

The Company strives to produce, package and market its products and
services at costs are lower than its local market competitors. This is achieved
by optimizing branch size and location, requiring adherence to uniform policies
and procedures, taking advantage of volume discount purchases not available to
smaller competitors and utilizing the Company's management information systems.
Where branch size is suboptimal, the Company has developed alternatives to
increase size or profitability through growth or product diversification. The
Company has implemented a "best practices" program involving identification of
the most effective method of performing a specific activity, such as inventory
control, and has adopted procedures and training to implement the practice as a
standard throughout the Company's operations.

The Company has made significant investments in its management information
system as part of its strategy to be a low cost supplier. The Company has
installed an integrated company-wide point-of-sale system that provides current
information on inventory levels and account status. The Company believes
significant cost savings have resulted from the ability to efficiently manage
inventory.

The Company believes the selective addition of complementary product
offerings will enable it to better serve its diverse, expanding customer base,
reach new customers, increase sales in existing locations and leverage its
distribution system. The Company has focused in recent years on expanding its
propane business. The addition of propane distribution at existing locations has
proven advantageous by providing the opportunity to leverage fixed costs at
existing locations, thereby creating economies of scale. Certain locations are
more attractive for propane distribution, due primarily to residential growth
potential, availability of competing sources of energy and existing branch size.
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ENHANCE ORGANIZATIONAL STRENGTH

The Company believes that to attract and maintain customers it must have a
skilled, responsive work force dedicated to providing excellent service. The
Company works to instill a service culture through various operational policies.
The Company places special emphasis on customer service, including the ability
to quickly respond to technical questions on products and applications. The
Company believes this is a key value provided to customers. The Company commits
significant resources to training and educating employees through various
programs.

The Company strives to fully utilize its existing management resources. In
fiscal year 2002 the Company began restructuring certain reporting relationships
and responsibilities to place operating and financial responsibility at the
local market level, eliminating a layer of management and improving
communication. These changes also allowed the Company to redirect the focus of
certain key management to increasingly important operating issues, such as
logistics, training, budgeting and overall operating performance, that are vital
to the Company's growth.

PRODUCTS

Gases packaged and distributed by the Company include oxygen, nitrogen,
hydrogen, argon, helium, acetylene, carbon dioxide, nitrous oxide, specialty
gases and propane. Specialty gases include rare gases, high-purity gases and
blended, multi-component gas mixtures. In connection with the distribution of
gases, the Company sells welding equipment and supplies, including welding
machines, wire, fluxes and electrodes and a wide variety of supporting
equipment.

In fiscal 2002, the Company sold approximately twenty two million gallons
of propane to approximately 37,000 residential, commercial and industrial users.
The Company believes that it is now the twenty-fourth largest distributor of
propane in an industry comprised of approximately 7,500 companies. Propane sales
accounted for approximately 18% of net sales in fiscal 2002. 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.

While primarily a packager and distributor of gases, the Company also
manufactures a portion of its acetylene requirements at its facilities in West
Mifflin, Pennsylvania, Canton, Ohio and Eddystone, Pennsylvania. Acetylene is
produced through a combination of calcium carbide and water at relatively high
temperatures. The reaction of these elements also produces lime as a by-product,
which is sold in bulk to customers for a variety of applications. In fiscal
2002, acetylene accounted for approximately 2% of net sales.

The following table sets forth the percentage of the Company's net sales
for the fiscal years ended June 30, 2000, 2001 and 2002 for each of the
following products and services:

CUSTOMERS

The Company currently has more than 143,000 customers, none of which
accounted for more than 1% of net sales in fiscal 2002. In fiscal 2002,
approximately 10% of the Company's net sales were to metal production and
fabrication customers. Other major industry categories served by the Company
include manufacturing 14%, industrial 9%, construction 9%, services 7%, health
care 5%, mining, oil and chemicals at 4% of net sales.

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The customer base also includes smaller distributors in close proximity to one
of the Company's larger facilities who find it economically advantageous to
source certain products from the Company.

The Company believes the industry has been characterized by relatively high
customer loyalty because of the importance of quality service and personal
relationships. This characteristic has made it difficult for new entrants in a
market to acquire existing customers. However, service requirements for certain
large customers are becoming more demanding and sophisticated and the Company
expects that this will result in more account turnover in the future.

For some larger volume customers, bulk cryogenic products are delivered in
transports to cryogenic tanks at the customer location. The Company serves small
bulk customers only where it can compete effectively with producers, primarily
on the basis of service and the supply of other products, such as cylinder gases
and hard goods.

SALES AND MARKETING

The distribution of most packaged gases is most economically performed
within approximately a thirty-mile radius of the product packaging or inventory
location due primarily to costs associated with delivery of cylinders.
Therefore, the estimated national market of $8 billion consists of hundreds of
regional markets with an estimated annual size of $5 million to $100 million.
The Company believes the average market size is approximately $25 million. The
Company solicits and maintains business primarily through a direct selling
effort using an experienced sales force of approximately 106 sales
representatives. Sales representatives receive continuous training so that they
are knowledgeable about gas and product performance characteristics and current
application technology. On average, the Company's sales representatives have
more than ten years of industry experience. Sales representatives are paid a
base salary and commissions based upon account profit margin. Efforts are
focused on accounts generating sales of high margin products. Occasionally,
sales representatives make joint sales calls with Company suppliers to address
difficult or innovative application requirements. The Company has been testing
both telemarketing and catalog solicitation at selected locations to attract new
accounts. The Company believes that electronic commerce conducted through the
internet, ("e-commerce"), will become an important method in attracting and
maintaining some customers in the future. The Company plans to continue
developments in this area.

Smaller accounts are usually served from "walk in" retail locations, where
gases and hard goods are picked up rather than delivered. Each retail location
contains a showroom to allow customer easy access to equipment and supplies.
Branch locations are chosen on the basis of local market distribution logistics
rather than suitability for "walk in" retail sales. The Company's advertising
efforts are limited primarily to the residential propane market as management
does not consider advertising to be a significant factor in generating sales.

COMPETITION

Competition is almost always on a regional market basis and is based
primarily on customer loyalty, service and, to a lesser extent, price. Most
regional markets have between three and six competitors, the majority of whom
are small independent companies, with one or two competitors having a
significantly higher market share than the others. The Company competes in many
markets throughout West Virginia, Pennsylvania, Kentucky, Ohio, Virginia,
Tennessee, Maryland, Delaware, New Jersey, Wisconsin and Florida. The Company
believes it has a strong or leading position in most of the markets it serves.

While the Company competes with the distribution subsidiaries of the major
industrial gas producers, the Company does not believe that the production of
industrial gas provides these producers with a significant competitive advantage
because in most cases, the cost for base gases represents a relatively minor
component of the total selling price in comparison to the packaging and
distribution expenses.

6

SUPPLIERS

The Company purchases industrial gases pursuant to short-term supply
arrangements and open purchase orders with three of the five major gas producers
in the United States. One such producer accounted for approximately 52% of the
Company's gas purchases in fiscal 2002. If any of these arrangements were
terminated, the Company believes it would be able to readily secure an alternate
source of supply.

The Company purchases welding equipment and consumable supplies from
approximately 67 primary vendors, of which purchases from the top five vendors
represented approximately 63% of total purchases in fiscal 2002. Purchases from
major vendors are made pursuant to purchase orders that are cancelable by the
Company upon minimal notice. With supplier overcapacity in most product lines
and high competitive rivalry for volume purchasers, large distributors such as
the Company are generally able to purchase welding equipment and supplies from
the vendor of their choice. This enables the Company to participate in vendor
discount and rebate programs and obtain products at competitive costs.

The Company purchases propane from pipeline sources at various supply
points in its market areas, generally on a short-term basis at prevailing market
prices. The Company historically has been able to adjust prices to customers to
reflect changes in product cost, which varies with season and availability. The
Company is not dependent upon any single supplier for propane and supplies have
historically been readily available. A significant portion of the Company's
propane sales are made to industrial customers. As a result, the Company's sales
are less seasonal than those of many competitors who focus on the residential
segment. Because of the Company's off-peak season demand, the Company believes
that it would be less likely than other distributors to be placed on allocation
by suppliers during a period of tight supply and accordingly would receive
adequate supplies to meet customer demand.

EMPLOYEES

At June 30, 2002, the Company employed 699 people. Approximately 14% were
covered by collective bargaining agreements. Historically, the Company has not
been adversely affected by strikes or work stoppages. Approximately 62% of the
Company's employees are hourly workers. The Company believes it has a skilled
and motivated work force and that its relationship with employees is good. The
Company believes that its wages and benefits, which reflect local conditions,
are competitive with those provided by major competitors. All of the Company's
hourly employees are currently paid wages at a rate that exceeds the current,
and federally mandated increases in, the minimum wage. The Company believes it
would not be materially impacted by future increases in the minimum wage.

The Company believes that continuing education is necessary for its
employees to achieve and maintain the skills required to be effective in today's
competitive environment. The Company provides a variety of training programs to
its employees through modules maintained on the internet. This provides
consistent, low-cost training across the entire organization. Key suppliers also
provide employees product training relating primarily to welding and gas
application technology at the Company's various locations.

REGULATORY MATTERS

The Company is subject to federal and state laws and regulations adopted
for the protection of the environment, and the health and safety of employees
and users of its products. In addition, the Company voluntarily complies with
applicable industry safety standards. Management believes that the Company is in
substantial compliance with all such laws, regulations and standards currently
in effect and that the cost of compliance with such laws, regulations and
standards will not have a material adverse effect on the Company.

PRODUCT LIABILITY AND INSURANCE

The Company maintains insurance coverage which it believes to be adequate.
The nature of the Company's business may subject it to product liability
lawsuits. To the extent that the Company is subject to claims which exceed or
are outside of its liability insurance coverage, such suits could have a
material adverse effect on the Company. The Company has not suffered any
material losses from such lawsuits in the past.

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ITEM 2. PROPERTIES

The Company owns approximately 527,000 cylinders, 27,000 bulk propane tanks
and 414 bulk cryogenic tanks, generally ranging in size from 250 gallons to
11,000 gallons. Most cylinders and storage tanks are located at customer sites.
Cylinders require minimal maintenance and have useful lives that the Company
expects will extend on average for 30 years or longer. Bulk tanks have useful
lives generally less than those of cylinders, however, if well maintained their
useful life can be over 30 years.

The Company has 70 industrial gas and welding supply distribution locations
in 11 states, 32 of which also package and distribute propane. A typical
location has two acres of property, 5,000 square feet of space used to warehouse
hard goods, 5,000 square feet of space used for gas filling and cylinder storage
and 2,000 square feet of space used for a retail showroom. The Company's
headquarters are located in 20,000 square feet of leased space in Wheeling, West
Virginia.

Most of the specialty gas products sold by the Company are purified,
packaged and mixed at the Company's facility in Cranberry Township,
Pennsylvania. This facility processes approximately 25,000 cylinders per month,
but has capacity to process approximately 100% more volume, which the Company
believes would be sufficient to meet estimated future volume requirements.

All of the Company's facilities are leased on terms which the Company
believes are consistent with commercial rental rates prevailing in the
surrounding rental market. All of the Company's major facilities are leased
under long-term arrangements. The Company believes that its facilities are
adequate for its needs and that its properties are generally in good condition,
well maintained and suitable for their intended use.

ITEM 3. LEGAL PROCEEDINGS

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. The Company, in the ordinary course
of business, is threatened with or is named as a defendant in various lawsuits
which, among other items, seek actual and punitive damages for product
liability, personal injury and property damage. The Company has not to date
suffered any material loss as a result of any such lawsuit. The Company
maintains liability insurance policies with insurers in such amounts and with
such coverages and deductibles as the Company believes is reasonable and
prudent. However, there can be no assurance that such insurance will be adequate
to protect the Company from material expenses related to such personal injury or
property damage or that such levels of insurance will continue to be available
in the future at economical prices. There are no known claims or known
contingent claims that management believes are likely to have a material adverse
effect on the results of operations or financial condition of the Company.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended June 30, 2002.

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PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND
RELATED STOCKHOLDER MATTERS

The Company's common stock is traded on the American Stock Exchange under
the symbol "VLG".

The range of daily closing prices per share for the Company's common stock
from July 1, 2000 to June 30, 2002 was:

The reported last sale price of the company's common stock on the American
Stock Exchange on September 12, 2002 was $6.20.

On September 12, 2002, there were 97 record holders of the Company's common
stock.

The Company has not paid any cash dividends since its initial public
offering, and does not anticipate that it will pay dividends in the foreseeable
future. The Company currently intends to retain future earnings, if any, to
provide funds for the growth and development of the Company's business.

In addition, the Company's existing credit facilities prohibit the payment
of cash or stock dividends on the Company's capital stock without the bank's
prior written consent. See Item 7 -- "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and Note 6 of Notes to Consolidated Financial Statements contained in
Item 14.

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ITEM 6. SELECTED FINANCIAL DATA

Selected consolidated financial data for the Company is presented in the
table below and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 and
the Company's consolidated financial statements included in Item 14 herein.

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(1) Effective July 1, 1998, the Company changed its estimate of useful lives for
cylinders and tanks for depreciation purposes from 12 years to 30 years.

Effective July 1, 2001, the Company changed its estimate of the useful lives
of its delivery vehicles from 3 to 7 years. This change was made to better
reflect the estimated periods during which these assets will remain in
service. See Note 2 to the financial statements.

Effective July 1, 2001, the Company changed its method of accounting for
goodwill to comply with SFAS No. 142 whereby it discontinued amortization of
goodwill. In fiscal year ended June 30, 2001, goodwill amortization expense
of $2.1 million was recorded. See Note 4 to the financial statements.

(2) Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in 11 states in
the eastern 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 $144.5 million in fiscal 2002. In fiscal 2002, gases accounted for
approximately 43% of net sales, welding equipment and supplies accounted for
approximately 41% of net sales, and cylinder and tank rental accounted for
approximately 16% of net sales.

The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 53 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions will
have, a dilutive effect upon the Company's income from operations and income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of

10

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 have increased as a percentage of total
sales.

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.

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"). Future acquisitions may affect the Company's gross
profit margins as a percentage of sales depending upon the product mix of the
acquired businesses.

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items in
the Company's consolidated statements of operations as a percentage of net
sales. Results for any one or more periods are not necessarily indicative of
continuing trends.

- ---------------
(1) Effective July 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133.

(2) Effective July 1, 2001, the Company changed its estimate of the useful lives
of its delivery vehicles from 3 to 7 years. This change was made to better
reflect the estimated periods during which these assets will remain in
service. See Note 2 to the financial statements.

Effective July 1, 2001, the Company changed its method of accounting for
goodwill to comply with SFAS No. 142 whereby it discontinued amortization of
goodwill. See Note 4 to the financial statements.

11

COMPARISON OF YEARS ENDED JUNE 30, 2002 AND 2001

Net sales increased 2.3%, or $3.2 million, to $144.5 million from $141.3
million for the years ended June 30, 2002 and 2001, respectively. Acquisitions
made during the preceding twelve months contributed $13.8 million of the
increase in net sales, while same store sales decreased $10.6 million or 7.5%
(3.2% without propane). Same store sales for the fiscal year reflected a
decrease of 5.0% for hard goods and a decline of 1.0% for industrial gases,
cylinder rent and other. Propane sales declined $6.9 million, or 23.0%, on a
same store basis, reflecting $5.1 million in price deflation and $1.8 million
decrease in the volume due to warmer than normal temperatures during the past
heating season. Gases and cylinder rent represented 59.0% of net sales for the
year, with hard goods representing the remaining 41.0%. In comparison, net sales
for the prior year reflected gases and cylinder rent as 59.7% and hard goods as
40.3%.

Gross profit, which excludes depreciation and amortization, increased 4.4%,
or $3.2 million, to $76.6 million for the year, compared to $73.4 million for
the prior year. Acquisitions made during the preceding twelve months contributed
$7.7 million of the increase in gross profit, while same store gross profit
decreased $4.5 million. Gross profit as a percentage of net sales was 53.0% for
the year, compared to 51.9% for the prior year.

Operating and administrative expenses increased 11.7%, or $5.9 million, to
$56.2 million for the year, compared to $50.3 million for the prior year. Of
this increase, $6.3 million was related to acquired businesses, with the balance
of the change, or $(0.4) million, attributable to same store expenses. Expenses
related to the search for a new Chief Executive Officer and settlement of
litigation of $0.7 million were recorded in fiscal year 2002. Depreciation and
amortization expense decreased $2.5 million for the fiscal year, compared to the
prior year period. On July 1, 2001, the Company changed its method of accounting
for goodwill to comply with SFAS No. 142 whereby it discontinued amortization of
goodwill. In the prior year, goodwill amortization expense of $2.1 million was
recorded. Under the new standard, pro forma diluted earnings per share for the
prior year would have been $0.57. As a result of a study on the useful life of
delivery vehicles, the Company changed its estimate of useful lives for delivery
vehicles, effective July 1, 2001, from three years to seven years. Depreciation
and amortization would have been $0.5 million higher for the year before this
change. This change increased net earnings $0.3 million and earnings per diluted
share $0.03 for the year.

Interest expense decreased 10.1%, or $0.7 million, to $5.9 million for the
year, compared to $6.6 million for the prior year. Reflected in interest expense
was a decrease of $0.7 million for the year to record changes in the fair market
value of the Company's interest rate swap agreements under SFAS No. 133.

The Company's effective tax rate decreased from 44% for the prior year to
41.5% for the current year as a result of decreased nondeductible goodwill under
SFAS No. 142.

Net earnings for the year were $4.2 million, compared to $3.9 million for
the fiscal year ended June 30, 2001.

Earnings before interest, taxes, depreciation, amortization and other
noncash charges decreased 12.1%, or $2.9 million, to $20.9 million for the year,
compared to $23.8 million for the prior year. Earnings before interest, taxes,
depreciation, amortization and other noncash charges is an important measurement
of the Company's ability to repay debt through operations and provides the
Company with the ability to pursue investment alternatives.

COMPARISON OF YEARS ENDED JUNE 30, 2001 AND 2000

Net sales increased 12.1%, or $15.2 million, to $141.3 million from $126.1
million for the years ended June 30, 2001 and 2000, respectively. Acquisitions
made during the preceding twelve months contributed $8.4 million of the increase
in net sales, while same store sales growth contributed $6.8 million of the
increase. Same store sales increased 5.4% over the prior year, reflecting the
increase in sale of propane products as a result of internal growth and higher
demand, partially offset by reduced demand for hard goods. Gases and cylinder
income represented 59.7% of net sales for the year, with hard goods representing
the remaining 40.3%. In comparison, net sales for the prior year reflected gases
and cylinder income as 54.9% and hard goods as 45.1%.
12

Gross profit, which excludes depreciation and amortization, increased
13.7%, or $8.9 million, to $73.4 million for the year, compared to $64.5 million
for the prior year. Acquisitions made during the preceding twelve months
contributed $4.5 million of the increase in gross profit, while same stores
contributed $4.4 million of the increase. Gross profit as a percentage of net
sales was 51.9% for the year, compared to 51.2% for the prior year.

Operating and administrative expenses increased 14.6%, or $6.4 million, to
$50.3 million for the year, compared to $43.9 million for the prior year. Of
this increase, $3.5 million was related to acquired businesses, with the balance
of the change, or $2.9 million, attributable to same store expenses.
Depreciation and amortization expense increased $0.8 million for the year,
primarily as a result of acquisitions made during the last twelve months.

Interest expense increased 24.1%, or $1.3 million, to $6.6 million for the
year, compared to $5.3 million for the prior year. This increase reflects the
impact of additional borrowings related to acquisitions and the effect of
adopting SFAS No. 133, which increased interest expense $0.5 million to record
the changes in fair market value of the Company's interest rate swap agreements.

The Company's effective tax rate was 44% for both fiscal year 2001 and
2000.

Net earnings for the year were $3.9 million, compared to $3.6 million for
the fiscal year ended June 30, 2000.

Earnings before interest, taxes, depreciation, amortization and other
noncash charges increased 12.2%, or $2.6 million, to $23.7 million for the year,
compared to $21.1 million for the prior year. Earnings before interest, taxes,
depreciation, amortization and other noncash charges is an important measurement
of the Company's ability to repay debt through operations and provides the
Company with the ability to pursue investment alternatives.

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 June 30, 2002, the Company had working capital of approximately $14.1
million. Funds provided by operations for the twelve months ended June 30, 2002
were approximately $16.7 million. Funds used for investing activities were
approximately $12.7 million for the twelve months ended June 30, 2002,
consisting primarily of capital spending and financing for acquisitions. Funds
used for financing activities for the twelve months ended June 30, 2002 were
approximately $3.4 million from net payments of debt. The Company's cash balance
increased $0.7 million during the twelve months to $1.2 million.

On June 28, 2002, the Company entered into an amendment to the second
amended and restated credit agreement with Bank One, as agent. This amendment
decreased the maximum revolving note borrowings to $75.0 million, from the
previous maximum borrowings level of $100.0 million, and extended the maturity
of the revolving note to June 28, 2005. The agreement permits the Company, on an
annual basis, to request that the maturity be extended one year. No significant
changes were made to pricing and the covenant requirements when compared to the
original agreement. The weighted average interest rate for substantially all of
the borrowings under the credit facility was 4.6% as of June 30, 2002. As of
June 30, 2002, availability under the revolving loan was approximately $13.1
million, with outstanding borrowings of approximately $58.0 million and
outstanding letters of credit of approximately $3.9 million. The credit facility
is secured by all of the Company's assets. 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 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

13

minimum net worth. As of June 30, 2002, 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
5.75% to 10.0% per annum, and maturities through 2010. The outstanding balance
of these notes as of June 30, 2002 was $6.8 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.

The Company enters into contractual agreements in the ordinary course of
business to hedge its exposure to interest rate risks. Counterparties to these
agreements are major financial institutions. Management believes the risk of
incurring losses related to credit risk is remote and any losses would be
immaterial.

Interest rate swap agreements are used to reduce interest rate risks and
costs inherent in the Company's debt portfolio. The Company enters into these
agreements to change the fixed/variable interest rate mix of the debt portfolio
in order to maintain the percentage of fixed and variable debt within certain
parameters set by management. Accordingly, the Company enters into agreements to
effectively convert variable-rate debt to fixed-rate debt.

As of June 30, 2002, the Company had $60.0 million in notional amounts
outstanding under interest rate swap agreements. These swaps have an average pay
rate of 5.9% versus a receive rate of 1.8%.

The Company has previously entered into a put/call option agreement with an
independent distributor for the purchase of its business. This option became
exercisable in May 2002 and ends 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.

The Company believes that cash generated from operations, borrowing
availability under its credit facility and the ability to obtain financing with
sellers of businesses will be sufficient to satisfy the Company's requirements
for operating funds, capital expenditures and future acquisitions for at least
the next twelve months. The Company has no plans at this time to issue
additional shares of common stock.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States
requires management to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and accompanying
notes. Note 2 to the consolidated financial statements describes the significant
accounting policies and methods used in the preparation of the consolidated
financial statements. Estimates are used for, but not limited to, determining
the net carrying value of trade receivables, inventories, goodwill, other
intangible assets and employee health care benefit reserves. Actual results
could differ from these estimates. The following critical accounting policies
are impacted significantly by judgments, assumptions and estimates used in the
preparation of the consolidated financial statements.

TRADE RECEIVABLES

The Company must make estimates of the collectability of its trade
receivables. 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. Management
believes that the allowances for doubtful accounts as of June 30, 2002 and 2001
are adequate.

INVENTORIES

The Company's inventories are stated at the lower of cost or market. The
Company writes down its inventory for estimated obsolescence or unmarketable
inventory equal to the difference between the cost of

14

inventory and the 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.

GOODWILL AND OTHER INTANGIBLE ASSETS

The Company adopted SFAS 142, Goodwill and Other Intangible Assets, as of
July 1, 2001. SFAS 142 requires goodwill and intangible assets with indefinite
useful lives not to be amortized, but instead be tested for impairment at least
annually. The Company has elected to perform its annual tests for indications of
goodwill impairment as of June 30th of each year. The annual impairment test
used by the Company includes a discounted cash flow analysis as well as other
tests of the market value of its business entity. The discounted cash flow
analysis requires the use of significant estimates, assumptions and judgments.
Examples include, (i) projections on Company operating performance, (ii)
assumptions as to the Company's cost of capital, and (iii) assumptions as to the
availability of capital in the future.

EMPLOYEE HEALTH CARE BENEFITS PAYABLE

The Company has self-funded health care benefit programs in place whereby a
third party administrator settles and pays incurred claims on an on-going basis.
The Company estimates the level of outstanding claims, at any point in time,
based upon historical payment patterns, knowledge of individual claims and
estimates of health care costs. The Company has stop-loss insurance coverage in
place to limit the extent of individual claims.

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. The timing
of acquisitions may also have an appreciable effect on quarter to quarter
earnings.

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

Subsequent to June 30, 2002, the Company acquired substantially all of the
assets of Gerber's Propane, Inc. a propane distributor having approximately $2.0
million in annualized sales. This transaction was financed through the Company's
credit facility.

NEW ACCOUNTING STANDARDS

In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), was issued. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
Accounting Principles Board ("APB") No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30") and APB No. 51, "Consolidated Financial Statements" ("APB 51"). This
statement is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company has adopted SFAS 144
effective July 1, 2002. The Company is currently evaluating the impact of
15

this statement but does not anticipate that the adoption of SFAS 144 will have a
material impact on the Company's financial position and results of operations.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was issued.
The Statement updates, clarifies and simplifies existing accounting
pronouncements. While the technical corrections to existing pronouncements are
not substantive in nature, in some instances, they may change accounting
practice. The provisions of this standard related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. All other provisions of this
standard must be applied for financial statements issued on or after May 15,
2002, with early application encouraged. The Company is currently evaluating the
effects of SFAS No. 145 and does not anticipate that the adoption of SFAS 145
will have a material impact on the Company's financial position and results of
operations.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial
accounting an reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early adoption encouraged. The Company
is currently evaluating the effects of SFAS No. 146 and does not anticipate that
the adoption of SFAS 146 will have a material impact on the Company's financial
position and results of operations.

FORWARD LOOKING STATEMENTS AND RISK FACTORS

This report includes statements that are forward-looking as that term is
defined by the Private Securities Litigation and Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases,
including statements regarding the Company's ability to identify attractive
acquisition targets and to successfully acquire new businesses and assimilate
the operations of those businesses into its operations, its ability to finance
such acquisitions, its plans to develop e-commerce capabilities, its ability to
secure alternative sources of supply if needed, its ability to maintain its
supply of propane, its ability to meet increased demand for specialty gas
products, the effect of product liability or other claims on the Company's
results of operations or financial condition and the trend towards consolidation
in the industry. The Company intends that such forward-looking statements be
afforded the protections provided by the safe harbor created by the Private
Securities Litigation and Reform Act of 1995.

All forward-looking statements are based upon current expectations
regarding important factors. Accordingly, actual results may differ materially
from those expressed in the forward-looking statements and the making of such
statements should not be regarded as a representation by the Company or any
other person that the results expressed will be achieved. Important risk factors
that may affect the Company's ability to achieve the results expressed in the
forward-looking statements include, but are not limited to, the Company's
ability to (i) accurately identify attractive acquisition targets and make
accurate predictions regarding the performance of those business if integrated
into the Company's operations, (ii) successfully negotiate agreements for the
acquisition of those businesses, (iii) integrate the operations of the acquired
businesses as anticipated, (iv) secure financing necessary to make acquisitions,
including maintaining and/or expanding its line of credit, negotiating seller
financing, or securing other financing methods, (v) manage rapid growth, (vi)
effectively compete, (vii) attract and retain key personnel and (viii) maintain
good relationships with suppliers and locate alternative suppliers if needed. In
addition, the Company's ability to achieve the results expressed by the
forward-looking statements may be affected by litigation or other claims arising
out of accidents involving the Company's products, changes in the economy,
monetary or fiscal policies, changes in laws and regulations affecting the
Company's business, inflation and fluctuations in interest rates.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt

16

obligations. 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.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and the Report of
Independent Public Accountants listed in the accompanying Index to Consolidated
Financial Statements are incorporated herein by reference.

Summarized quarterly financial data for fiscal 2002 and 2001 is as follows:

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES

Previously reported.

17

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

The directors and executive officers of the Company are as follows:

GARY E. WEST, CHAIRMAN OF THE BOARD. Mr. West has served as Chairman of
the Board of Directors of the Company since 1984. From 1970, when he purchased
the Company, to March 1995, Mr. West served as President of the Company. Mr.
West has also served as President of West Rentals, Inc. and Equip Lease Corp.
and Vice President of Acetylene Products Corp. since 1992, 1988 and 1985,
respectively. Since June 1993, he has served as a director of WesBanco Wheeling,
and since June 1990 he has served as a director of H.E. Neumann Co., a plumbing,
heating and mechanical contracting company. Mr. West received his Bachelor of
Science degree in Business Administration from West Liberty State College.

WILLIAM A. INDELICATO, VICE CHAIRMAN, ACTING CHIEF EXECUTIVE OFFICER AND
DIRECTOR. Mr. Indelicato was elected a director of the Company in January 1997
and was appointed as the Company's Vice Chairman and Acting Chief Executive
Officer in February 2002. Mr. Indelicato has been President of ADE Vantage,
Inc., a business consulting firm which provides certain services to the Company,
since July 1992. From 1988 to 1991, Mr. Indelicato served as General Business
Director of Union Carbide Industrial Gases Inc. Mr. Indelicato has also been an
associate professor of strategic management at Pace University in New York. Mr.
Indelicato received his Bachelor of Science degree in Electrical Engineering
from the University of Notre Dame and his Masters in Business Administration
degree from Pace University.

AUGUST E. MAIER, ACTING PRESIDENT AND DIRECTOR. Mr. Maier was elected a
Director of the Company in January 1997 and was appointed as the Company's
Acting President in February 2002. In September 1997, Mr. Maier became an
employee of the Company and served as Corporate Director of Field Operations
until his retirement in July 1999. He served as Chief Executive Officer of
Houston Fearless 76, a manufacturer of digital imaging and film processing
equipment, from May 1995 to August 1997. From October 1987 to May 1995, Mr.
Maier was Chief Executive Officer of Holox, Inc., a large distributor of
industrial gases and welding equipment. Mr. Maier received his Bachelor of
Science degree in Mechanical Engineering from the Indiana Institute of
Technology and his Masters in Business Administration degree from the Harvard
Business School.

JOHN R. BUSHWACK, EXECUTIVE VICE PRESIDENT, SECRETARY AND DIRECTOR. Mr.
Bushwack has served as the Executive Vice President, Secretary and a director of
the Company since January 1997. From 1991 to 1996, Mr. Bushwack served in
various positions with the Company, including Executive Vice President of Sales
and Acquisitions, Vice President of Sales and Acquisitions, Vice President of
Sales and General Manager. From 1987 to 1990, Mr. Bushwack served as President
of the Harvey Company, a gas distributor, and from 1990 to 1991 he served as
Vice President and director of Linde Gases of the Great Lakes, also a gas
distributor. In addition, Mr. Bushwack has been a director of Convenient Care

18

Products Group, Ltd., a division of Westmoreland Health System, since 1991 and
Westmoreland Holding Company, Inc., since 1999.

ROBERT D. SCHERICH, CHIEF FINANCIAL OFFICER. Mr. Scherich has served as
the Company's Chief Financial Officer since May 1996. From January 1993 to April
1996, he served as Controller and General Manager of Wheeling Pittsburgh Steel
Corporation, a subsidiary of WHX Corporation, and from January 1988 to December
1993 he served as Division Controller of such corporation. Mr. Scherich was an
accountant with Ernst & Whinney from 1981 to 1984. Mr. Scherich received his
Bachelor of Science degree in Accounting from The Pennsylvania State University
and is a Certified Public Accountant.

BEN EXLEY, IV, DIRECTOR. Mr. Exley was elected a Director of the Company
in January 1997. He served as a Marketing Specialist for the Ohio Valley
Industrial and Business Development Corporation from April 1998 to May 2000 and
served as Interim Executive Director during 1999. He served as the President of
Ohio Valley Clarksburg, Inc. from 1987 through 1997 and Bailey Drug Company from
1993 through 1997, both of which are pharmaceutical distributors and
wholly-owned subsidiaries of Cardinal Health Inc. Mr. Exley has also served on
the board of directors of several companies, including BankOne West Virginia
N.A. from 1994 through 2000, BankOne Wheeling-Steubenville N.A. from 1991
through 2000 and Stone & Thomas, a chain of clothing department stores, from
1991 through 1997. Mr. Exley is a graduate of West Virginia Wesleyan College
with a Bachelor of Science degree in Business Administration. He also holds a
Masters in Business Administration degree from Northern Illinois University.

JAMES P. HART, DIRECTOR. Mr. Hart was elected a director of the Company in
January 1997. He served as Vice President and Chief Financial Officer of
Industrial Scientific Corporation ("ISC"), a manufacturer of portable
instruments used for detecting and monitoring a variety of gases, from August
1994 through September 2002. From March 1984 to August 1994, Mr. Hart was
Treasurer and Controller of ISC. Mr. Hart holds a Bachelor of Science degree in
Accounting from the University of Scranton.

F. WALTER RIEBENACK, DIRECTOR. Mr. Riebenack was elected a Director of the
Company in January 1999. He has served as the Chief Financial Officer, General
Counsel and as a member of the Board of Site-Blauvelt Engineers, Inc. since
1990, a multi-disciplinary consulting engineering firm offering transportation
design, geotechnical engineering, subsurface exploration, construction
inspection and materials testing services to a wide range of clients in both the
public and private sectors of the marketplace, with offices in New Jersey,
Pennsylvania, New York, Delaware, Virginia, Ohio, Maryland, South Carolina and
West Virginia. Mr. Riebenack received his law degree along with his Bachelor of
Business Administration degree in Finance and Accounting from the University of
Notre Dame. Mr. Riebenack has served as an instructor of Business Law at Indiana
University in Fort Wayne, Indiana and has also served as an instructor of
Business Law, Principles of Insurance and Seminars in Business at the University
of St. Francis in Fort Wayne, Indiana.

The information called for by item 405 of Regulation S-K is contained in
the Company's definitive proxy statement relating to the annual meeting of
shareholders to be held October 29, 2002, in the section titled "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 29, 2002, in the section titled "Executive Compensation" and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 29, 2002, in the section titled "Common Stock Ownership of
Directors, Nominees and Officers" and is incorporated herein by reference.

19

Following is the equity compensation plan information for the Company as of
June 30, 2002:

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 29, 2002, in the section titled "Certain Relationships and Related
Transactions" and is incorporated herein by reference.

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

The consolidated financial statements of the Company required by this item
are listed in the Index to Consolidated Financial Statements set forth on page
F-1.

(a)(2) Financial Statements Schedules

The financial statement schedules required by this item are set forth
beginning on page S-1. Schedules not filed herewith have been omitted as
inapplicable, or not required, or the information is included in the Company's
consolidated financial statements or the notes thereto.

(a)(3) Exhibits

The exhibits required by this item are listed in the Index to Exhibits set
forth on page E-1.

(b) Reports on Form 8-K

The Company filed a Form 8-K on June 4, 2002 reporting under Item 4 Changes
in Registrant's Accountant.

20

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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
September 24, 2002
/s/ WILLIAM A. INDELICATO
--------------------------------------
William A. Indelicato
Acting Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

21

CERTIFICATIONS

CHIEF EXECUTIVE OFFICER

I, William A. Indelicato, certify that:

1. I have reviewed this annual report on Form 10-K of Valley National Gases
Incorporated;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and cash
flows of the registrant as of, and for, the periods presented in this
annual report.

Date: 9/24/02
--------------------
/s/ WILLIAM A. INDELICATO
--------------------------------------
Chief Executive Officer

CHIEF FINANCIAL OFFICER

I, Robert D. Scherich, certify that:

1. I have reviewed this annual report on Form 10-K of Valley National Gases
Incorporated;

2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this annual report; and

3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operation and cash
flows of the registrant as of, and for, the periods presented in this
annual report.

Date: 9/24/02
--------------------
/s/ ROBERT D. SCHERICH
--------------------------------------
Chief Financial Officer

22

VALLEY NATIONAL GASES INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
Valley National Gases Incorporated:

We have audited the accompanying consolidated balance sheet of Valley
National Gases Incorporated (a Pennsylvania corporation) and subsidiary as of
June 30, 2002, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of Valley National Gases Incorporated as of
June 30, 2001 and for the two year period then ended, were audited by other
auditors who have ceased operations and whose report dated July 31, 2001,
expressed an unqualified opinion on those statements.

We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valley National Gases
Incorporated and subsidiary at June 30, 2002, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States.

As discussed in Notes 2 and 4 to the financial statements, in 2001 the
Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" and, in 2002 the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets."

/s/ ERNST & YOUNG LLP
Pittsburgh, Pennsylvania,
July 30, 2002

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
Valley National Gases Incorporated:

We have audited the accompanying consolidated balance sheets of Valley
National Gases Incorporated (a Pennsylvania corporation) and subsidiary as of
June 30, 2000 and 2001, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended June 30, 2001. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valley National Gases
Incorporated and subsidiary as of June 30, 2000 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 2001, in conformity with accounting principles generally accepted
in the United States.

As explained in Note 2 to the financial statements, effective July 1, 2000,
the Company changed its method of accounting for derivative instruments and
hedging activities.

/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
July 31, 2001

THIS IS A COPY OF THE AUDIT REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP
IN CONJUNCTION WITH VALLEY NATIONAL GASES INCORPORATED'S FILING ON FORM 10-K FOR
THE YEAR ENDED JUNE 30, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN LLP IN CONJUNCTION WITH THIS FILING ON FORM 10-K.

F-2

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2001 AND 2002

The accompanying notes are an integral part of these financial statements.
F-3

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002

The accompanying notes are an integral part of these financial statements.
F-4

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002

The accompanying notes are an integral part of these financial statements.
F-5

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002

The accompanying notes are an integral part of these financial statements.
F-6

VALLEY NATIONAL GASES INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2001 AND 2002

1. ORGANIZATION:

Valley National Gases Incorporated, a Pennsylvania corporation (the
Company), produces, packages and resells industrial gases, specialty gases and
propane; and resells welding hard goods and equipment. The Company, through its
consolidated subsidiaries has been in operation since 1958 and currently
operates in 11 states.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

INVENTORY

Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.

The components of inventory for the year ended June 30 were as follows:

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the properties
while leasehold improvements are amortized over the shorter of their useful life
or the term of the lease as follows:

The cost of maintenance and repairs is charged to operations as incurred.
Major renewals and betterments are capitalized.

Effective July 1, 2001, the Company changed its estimate of the useful
lives of its delivery vehicles from 3 to 7 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 for the year ended
June 30, 2002 by approximately $495,000 and increasing net earnings by $290,000
or $0.03 per diluted share.

The Company changed the estimated useful life of delivery vehicles as a
result of thorough studies and analyses. The studies considered empirical data
obtained from truck manufacturers and other industry experts and experience
gained from the Company's maintenance of a delivery vehicle population of
approximately 200 delivery vehicles.

F-7

INTANGIBLES

Intangibles consist of non-competition agreements, goodwill, consulting
agreements and deferred loan origination costs. Costs pursuant to
non-competition agreements entered into in connection with business acquisitions
are amortized over the terms of the arrangements. Annually, or more frequently
if needed, goodwill is evaluated for impairment, with any resulting impairment
charge reflected as an operating expense. Consulting agreements are entered into
with the owners of various businesses acquired by the Company and require such
owners to be available to perform services upon the Company's request.
Consulting payments are made regardless of the number of hours of service
performed and are payable to the consultant's successor upon death. Consulting
costs are amortized over the term of the agreement. Deferred loan origination
costs are amortized over the term of the related debt.

INCOME TAXES

Income taxes are accounted for in accordance with the liability method,
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 enacted marginal tax rate. 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.

EARNINGS PER SHARE

Basic earnings per share is computed by dividing net earnings by the number
of weighted-average common shares outstanding during the year. Diluted earnings
per share is computed by dividing net earnings by the number of weighted-average
common and common equivalent shares outstanding during the year (See Note 8).

COMPREHENSIVE INCOME

Comprehensive income includes net income and unrealized gains and losses on
derivatives designated and qualified as cash flow hedges. The components of
comprehensive income consist of the following for the fiscal years ending June
30:

MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:

The Company markets its products to a diverse customer base in unrelated
industries and, as such, does not have any significant concentrations of credit
risk. No one customer accounted for greater than 10% of revenues in 2000, 2001
and 2002.

REVENUE RECOGNITION

Revenues are recognized for product sales when such goods are received by
the customer. Additionally, revenues from cylinder leases are reported ratably
over the terms of the leases.

F-8

SHIPPING AND HANDLING FEES AND COSTS

The Company recognizes delivery and freight charges to customers as
elements of net sales. Costs of third-party freight and costs of deliveries by
company vehicles and personnel are recognized as elements of operating and
administrative expenses and depreciation expense.

DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate that
value:

Cash and Cash Equivalents -- The carrying amount approximates fair value
because of the short maturity of those instruments.

Long-Term Debt -- The fair value of long-term debt bearing interest at
floating rates is estimated based on the quoted market prices for the
same or similar issues or on the current rates offered to the Company
for debt of the same remaining maturities. The fair value of the notes
payable are not practical to estimate due to a lack of a ready market
and certain restrictions associated with these instruments.

The estimated fair values of the Company's financial instruments as of June
30, 2002 are as follows:

The fair values and carrying amounts of the Company's term notes and
revolving note are deemed to be approximately equivalent as they bear interest
at floating rates which are based upon current market rates.

The Company utilizes interest rate swap agreements to reduce the potential
impact of increases in interest rates on floating-rate long-term debt.
Counterparties to these contracts are major financial institutions. The company
has established counterparty credit guidelines and only enters into transactions
with financial institutions of investment grade or better. Management believes
the risk of incurring losses related to credit risk is remote, and any losses
would be immaterial to financial results.

In accordance with the provisions of SFAS No. 133, as amended, the Company
recognizes all derivatives on the balance sheet at fair value. On the date the
derivative instrument is entered into, the Company generally designates the
derivative as a hedge of the variability of cash flows to be paid related to a
recognized liability (cash flow hedge). Changes in the fair value of a
derivative that is designated as and meets all the required criteria for a cash
flow hedge are recorded in accumulated other comprehensive income and
reclassified into earnings as the underlying hedged item affects earnings.
Changes in the fair value of a derivative that is not designated as a hedge are
recorded immediately in earnings. At June 30, 2002 and 2001 the Company had
interest rate swap agreements outstanding that effectively convert a notional
amount of $60.0 million from floating rates to fixed rates. The agreements
outstanding at June 30, 2002 mature at various times between December 2002 and
January 2006. The Company would have paid $3,874,204 and $2,095,366 to settle
its interest rate swap agreements at June 30, 2002 and 2001, respectively, which
represents the fair value of these agreements. The carrying value equals the
fair value for these contracts at June 30, 2002 and 2001. Fair value was
estimated based on the mark-to market value of the contracts which closely
approximates the amount the Company could receive or pay to terminate the
agreements at year end.

Based upon interest rates at June 30, 2002, the Company expects to
recognize into earnings in the next 12 months net current liabilities of
$242,198 related to outstanding derivative instruments and net losses of
$185,852 recorded in accumulated other comprehensive loss, related to the
classification of unrealized losses on derivatives that were not designated as
cash flow hedges upon the adoption of SFAS No. 133.

F-9

It is not practicable to estimate the fair value of the notes payable of
the Company as no ready market exists for these instruments and comparable
instruments available from outside the Company are not available.

NEW ACCOUNTING STANDARDS

In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" ("SFAS 144"), was issued. This statement addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" ("SFAS 121"),
Accounting Principles Board ("APB") No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" ("APB
30") and APB No. 51, "Consolidated Financial Statements" ("APB 51"). This
statement is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The Company has adopted SFAS 144
effective July 1, 2002. The Company is currently evaluating the impact of this
statement but does not anticipate that the adoption of SFAS 144 will have a
material impact on the Company's financial position and results of operations.

In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections", was issued.
The Statement updates, clarifies and simplifies existing accounting
pronouncements. While the technical corrections to existing pronouncements are
not substantive in nature, in some instances, they may change accounting
practice. The provisions of this standard related to SFAS No. 13 are effective
for transactions occurring after May 15, 2002. All other provisions of this
standard must be applied for financial statements issued on or after May 15,
2002, with early application encouraged. The Company is currently evaluating the
effects of SAFS No. 145 and does not anticipate that the adoption of SFAS 145
will have a material impact on the Company's financial position and results of
operations.

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial
accounting an reporting for costs associated with exit or disposal activities
and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." The provisions
of this Statement are effective for exit or disposal activities that are
initiated after December 31, 2002, with early adoption encouraged. The Company
is currently evaluating the effects of SAFS No. 146 and does not anticipate that
the adoption of SFAS 146 will have a material impact on the Company's financial
position and results of operations.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

SUPPLEMENTAL CASH FLOW INFORMATION

F-10

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant inter-company balances have
been eliminated.

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 fiscal 2002, the Company purchased three businesses. These
acquisitions and their effective dates were Buckeye Corporation (August 2001),
Mansfield Oxygen Corp. (August 2001) and Gas Arc, Inc. (December 2001).

During fiscal 2001, the Company purchased four businesses. The largest of
these acquisitions was Air Liquide America Corporation which was effective May
2001.

During fiscal 2000, the Company purchased four businesses. The largest of
these acquisitions was Lee's Gas Supply, Inc. which was effective December 1999.

In connection with these acquisitions, the total purchase price, fair value
of assets acquired, cash paid and liabilities assumed for the year ended June 30
were as follows:

As part of the acquisitions completed during fiscal 2002, the Company
recorded $684,000 for goodwill and $850,000 for non-compete agreements having an
amortization period of 3 years.

The following summarized unaudited pro forma results of operations for the
fiscal years ended June 30, 2000, 2001 and 2002, illustrate the estimated
effects of the 2000, 2001 and 2002 acquisitions, as if the transactions were
consummated as of the beginning of each fiscal year presented. These pro forma
results have been prepared for comparable purposes only and do not purport to be
indicative of what would have occurred had the acquisitions been made as of the
beginning of each fiscal year, or of results which may occur in the future.

4. INTANGIBLE ASSETS:

On July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," under which goodwill and other intangible assets with
indefinite lives are not amortized. Such intangibles were evaluated for
impairment as of July 1, 2001 and no impairment existed. In addition, each year,
the Company will evaluate the intangible assets for impairment with any
resulting impairment reflected as an operating expense. The Company's only
intangibles, other than goodwill, are its noncompete agreements and consulting

F-11

agreements, which the Company currently believes have finite lives. The Company
entered into an agreement with a former officer of the Company in connection
with his separation from the Company in February 2002. The agreement requires
payments of $16,667 per month from April 2002 through March 2005 and has been
accounted for in the same manner as the Company's other non-compete agreements.
As of June 30, 2002, the Company's noncompete agreements and consulting
agreements are summarized as follows:

Amortization expense for the years ended June 30, 2000,2001 and 2002
totaled $4,495,818, 4,890,261 and $2,631,213 respectively. Estimated
amortization expense for the next five fiscal years is summarized as follows:

The changes in the carrying amount of goodwill for the year ended June 30,
2002, are as follows:

Balance as of June 30, 2001................................. $39,521,506
Goodwill acquired during the current fiscal year............ $ 1,012,538
Goodwill written off related to sale of assets.............. (104,311)
-----------
Balance as of June 30, 2002................................. $40,429,733
-----------

The following table reports pro forma information as if SFAS No. 142 had
been adopted for all periods presented:

F-12

5. LONG-TERM DEBT:

Long-term debt consists of the following as of June 30:

The prime rate was 6.75% and 4.75% at June 30, 2001 and 2002, respectively.
The LIBOR rate was 1.83% and 1.84% at June 30, 2001 and 2002, respectively.

On June 28, 2002 the Company entered into an amendment to the second
amended and restated credit facility with Bank One, as agent. The amendment
decreased the maximum revolving note borrowings from $100.0 million to $75.0
million, including a letter of credit sublimit of $15.0 million. The term note
has a new balance of $15.0 million. The scheduled maturity date of both the term
and revolving note is June 28, 2005. 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 4.6% as of
June 30, 2002. As of June 30, 2002, availability under the revolving loan was
approximately $13.1 million, with outstanding borrowings of approximately $58.0
million and outstanding letters of credit of approximately $3.9 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. As of
April 30, 2001, the Company was not in compliance with the capital spending
covenant and obtained a waiver for the non-compliance.

The schedule of maturities as amended for the credit agreements for the
next five years and thereafter is as follows as of June 30, 2002:

F-13

6. PENSION PLANS:

The Company sponsors a defined contribution pension plan ("401-k") for
employees. All employees are eligible to participate in the 401-k plan after
meeting the age and service requirements. Cash contributions to the plan are
based on a percentage of employees' compensation. Pension expense for this plan
was $719,126, $892,849 and $1,049,497 respectively, in fiscal years 2000, 2001
and 2002.

The Company also maintains a profit sharing plan for its employees. Profit
sharing payments are based on a discretionary amount determined annually by the
Board of Directors and are paid as additional cash contributions to the pension
plan. In 2000, 2001 and 2002, the amount of additional cash contributions
distributed to the employees' pension plan amounted to $149,888, $142,604 and
$54,000 respectively.

Certain management employees are provided supplemental retirement benefits.
The cost of these contracts is being accrued over the period of active
employment of the covered employees. The costs of the supplemental retirement
benefits plans charged to expense were $67,583, $44,304 and $7,085 respectively,
in fiscal years 2000, 2001 and 2002.

7. 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.

Options to purchase 222,750, 221,375 and 154,500 shares of common stock
were outstanding during fiscal years 2000, 2001 and 2002, respectively, but were
not included in the computation of diluted earnings per common share as the
options' exercise price was greater than the average market price of the common
stock for the respective periods.

8. LEASE OBLIGATIONS:

The Company 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 the year 2010, with
options to renew for periods of three to five years. Lease expenses charged to
operations were $3,844,848, $4,047,918 and 4,722,281 respectively, in fiscal
years 2000, 2001 and 2002.

F-14

Minimum future rental payments under noncancelable operating leases for
each of the next five years are as follows:

9. RELATED PARTY TRANSACTIONS:

The Company leases buildings and equipment, rents cylinders and has sales
and purchase transactions with related parties, including the sole shareholder
prior to the initial public offering and corporations owned by such sole
shareholder and officers of the Company. These transactions and balances for the
year ended June 30 are summarized as follows:

The Company has entered into a master lease agreement for virtually all of
its operating properties with a related party. The term of this master lease
agreement is ten years with annual minimum lease payments of $1,955,484 with
renewal options and have been accounted for as operating leases in the
accompanying financial statements.

Pursuant to a Consulting Agreement, the Company retained ADE Vantage, Inc.
("ADE"), a consulting company wholly-owned by Mr. Indelicato, Acting CEO, Vice
Chairman and director of the Company, to provide consulting services, including
appraisal valuation services used in connection with the adoption of SFAS No.
142. The Company pays Mr. Indelicato a monthly retainer fee of $4,500,
reimburses for out-of-pocket expenses, retains ADE for related acquisition
services and provides a variable payment for each acquisition completed based on
the purchase price and the annual sales of the acquired business. Payments to
Mr. Indelicato and ADE during fiscal year 2000, 2001 and 2002 totaled $181,607,
$226,270 and $168,982 respectively.

10. STOCK OPTIONS:

The Company adopted a stock option plan during fiscal year 1997 (the 1997
Plan). A total of 650,000 shares are authorized and have been reserved for
issuance under the 1997 Plan. These options are incentive stock options within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended. The
1997 Plan is administered by the Nominating and Compensation Committee of the
Board of Directors who determines, among other things, those individuals who
shall receive options, the time period during which the options may be
exercised, the number of shares of common stock that may be purchased under each
option, and the option price.

F-15

The following summarizes the activity under the 1997 Plan:

The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123) in October 1995. This statement establishes a fair value based method
of financial accounting and related reporting standards for stock-based employee
compensation plans. SFAS No. 123 became effective for fiscal year 1997 and
provides for adoption in the income statement or through footnote disclosure
only. The Company has continued to account for the 1997 Plan under APB No. 25,
"Accounting for Stock Issued to Employees", as permitted by SFAS No. 123.

Had compensation cost of the 1997 Plan been determined based on the fair
value at the grant dates for awards consistent with the method of SFAS No. 123,
the Company's net income and earnings per share would have been the pro forma
amounts indicated below:

F-16

The fair value of each option grant was estimated on the date of grant
using an option pricing model with the following assumptions:

11. INCOME TAXES:

The Company accounts for income taxes in accordance with the provisions of
SFAS No. 109. Although there can be no assurance that the Company will generate
any earnings or specific level of continuing earnings in future periods,
management believes that it is more likely than not that the net deductible
differences will reverse during periods when the Company generates sufficient
net taxable income.

The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes follows:

F-17

The provision for income taxes as shown in the accompanying consolidated
statement of operations, includes the following components for the year ended
June 30:

The components of the deferred tax assets and liabilities recorded in the
accompanying consolidated balance sheets at June 30, 2000, 2001 and 2002 were as
follows:

12. CONTINGENCIES, COMMITMENTS AND OTHER

Some industrial gases and propane are flammable, explosive products.
Serious personal injury and property damage can occur in connection with its
transportation, storage, production or use. The Company, in the ordinary course
of business, is threatened with or is named as a defendant in various lawsuits
which, among other items, seek actual and punitive damages for product
liability, personal injury and property damage. The Company maintains liability
insurance policies with insurers in such amounts and with such coverages and
deductibles as the Company believes is reasonable and prudent. However, there
can be no assurance that such insurance will be adequate to protect the Company
from material expenses related to such personal injury or property damage or
that such levels of insurance will continue to be available in the future at
economical prices. Management is of the opinion that there are no known claims
or known contingent claims that are likely to have a material adverse effect on
the results of operations, financial condition or cash flows of the Company.

During the fourth quarter of fiscal year 2002 the Company incurred
non-recurring charges of $0.4 million, net of taxes, related to its search for a
new Chief Executive Officer and settlement of litigation.

The Company has previously entered into a put/call option agreement with an
independent distributor for the purchase of its business. This option became
exercisable in May 2002 and ends in the year 2008. The

F-18

Company believes that it will have adequate capital resources available to fund
this acquisition at such time that the option is exercised.

In September 1991, in connection with the purchase by the Company of
certain assets of Praxair, Inc. (Praxair), the Company, 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 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, 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 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 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.

13. SUBSEQUENT EVENTS:

Subsequent to June 30, 2002, the Company acquired substantially all of the
assets of Gerber's Propane, Inc. a propane distributor having approximately $2.0
million in annualized sales. This transaction was financed through the Company's
credit facility.

14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

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(1) Includes the effect of non-recurring charges related to the search for a new
Chief Executive Officer and settlement of litigation which totaled $0.4
million, net of taxes.

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INDEX TO EXHIBITS

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3.1 Articles of Amendment (a)

3.2 Bylaws (a)

4.1 Form of Certificate for Common Stock (a)

10.2 Master Lease Agreement dated as of May 1, 2001 between the Company and
West Rentals, Inc. (d)

10.3 Amended and Restated Right of First Refusal Agreement dated March 12,
1997 among the Company, Valley National Gases Delaware, Inc., Valley
National Gases, Inc., West Rentals, Inc., Gary E. West, Phyllis J.
West, The Gary E. West Grantor Retained Annuity Trust #1, The Gary E.
West Grantor Retained Annuity Trust #2, The Gary E. West Grantor
Retained Annuity Trust #3, The Gary E. West Grantor Retained Annuity
Trust #4, The Gary E. West Grantor Retained Annuity Trust #5, The Gary
E. West Grantor Retained Annuity Trust #6 and Praxair, Inc. (a)

10.6 Agreement dated October 5, 1992 between the Company and Lawrence E.
Bandi providing for death, disability and retirement benefits (a)+

10.7 Agreement dated October 5, 1992 between the Company and John R.
Bushwack providing for death, disability and retirement benefits (a)+

10.10 Lease Agreement dated as of April 1, 1998 between the Company and
Acetylene Products, Inc. (d)

10.11 1997 Stock Option Plan as amended (d)

10.18 Second Amended and Restated Credit Agreement dated May 1, 2000 between
the Company and Bank One, Indiana NA, as agent (c)

10.19 Agreement dated July 1, 2001 between the Company and William A.
Indelicato providing for certain consulting payments (d)+

10.20 Lease Agreement dated as of April 1, 2000 between the Company and Real
Equip-Lease, LLC (d)

10.21 Agreement dated February 22, 2002 between the Company and Lawrence E.
Bandi (e)+

10.22 Amendment dated June 28, 2002 to Second Amended and Restated Credit
Agreement dated May 1, 2000 between the Company and Bank One, Indiana
NA, as agent (filed herewith)

10.23 Agreement dated July 1, 2002 between the Company and William A.
Indelicato providing for certain consulting payments (filed herewith)+

10.24 Agreement dated February 11, 2002 between the Company and August E.
Maier providing for certain consulting payments (filed herewith)+

10.25 Agreement dated June 30, 2002 between the Company and John R. Bushwack
relating to assignment of life insurance policy (filed herewith)+

10.26 Agreement dated June 30, 2002 between the Company and Robert D.
Scherich relating to assignment of life insurance policy (filed
herewith)+

10.27 Lease Agreement dated as of November 5, 1997 between the Company and
EquipLease Corp (filed herewith)

10.28 Lease Agreement dated as of September 24, 2001 between the Company and
GEW Realty LLC (filed herewith)

21.1 Subsidiaries of Registrant (a)

99.1 Certification of Chief Executive Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

99.2 Certification of Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

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(a) Incorporated by reference to the Company's Registration Statement on
Form S-1, Reg. No. 333-19973.

(b) Incorporated by reference to the Company's Annual Report on Form 10-K
filed September 28, 1999.

(c) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 15, 2000.

(d) Incorporated by reference to the Company's Annual Report on Form 10-K
filed September 28, 2001.

(e) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 15, 2002.

+ A management or compensatory plan or arrangement required to be filed
as an exhibit pursuant to Item 14(c) of Form 10-K.

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