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, 2003
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.)

200 WEST BEAU STREET, SUITE 200
WASHINGTON, PENNSYLVANIA 15301
(Address of principal executive offices)

(724) 228-3000
(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 ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [ X ]

State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter. $12,416,173

As of September 11, 2003, the registrant had outstanding 9,356,834 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 28, 2003 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"), a Pennsylvania
corporation, 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 $151 million in fiscal 2003. In fiscal 2003, gases accounted for
approximately 48% of net sales, welding equipment and supplies (generally
referred to in the industry as "hard goods") accounted for approximately 36% of
net sales, and cylinder and tank rental accounted for approximately 16% of net
sales.

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 65 distribution or retail locations. The Company also distributes
propane to industrial and residential customers. Most customers pay a rental fee
for use of Company cylinders. The Company owns approximately 546,000 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 supply 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 30,000 bulk propane tanks and 390 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 has determined that its business has one reportable segment in
the industrial gas and welding supply industry. Although the Company
participates in both of these markets and internally develops internal sales
results for the various product categories, this information is not considered
sufficient for segment reporting purposes nor does the chief operating decision
maker base his critical decisions or allocate resources solely on this
information.

The Company's current business strategy is to grow earnings through cost
leveraging its operations, and grow sales through the selective acquisition of
other independent distributors; and, to a lesser degree, through internally
generated growth. The Company believes that the proper implementation of certain
key operating procedures and staffing based upon "best practices" standards will
facilitate the reduction of total operating expenses and higher product margins.
Since the Company was founded, it has completed 70 acquisitions. Since July 1,
2002, the Company has acquired one independent distributor, adding approximately
$2 million in annualized sales. The Company believes that the current activity
regarding the sale and purchase of independent distributors has been slow,
relative to historical levels. However, management believes that, over the long
term, there will continue to be 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, and to
a much lesser extent, borrowings under the Company's credit facility and seller
financing. While highly focused on cost leveraging, management believes that the
Company's competitive strengths will allow it to increase sales.

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,

1

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
markets, bulk and packaged gases. The bulk market consists of supplying 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 market 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.

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

In the Company's opinion, the packaged gas market is estimated to have
annual sales of $8 billion in the United States, including welding equipment and
supplies. Participants in this market 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 55% of sales in the packaged
gas market. 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.

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

- 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 and expense, which is
difficult for the smaller distributor to access, maintain and cost
justify.

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.

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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, of
which the Company is one, have less than a 50% share of the approximately nine
billion gallon annual market.

ECONOMIC CHARACTERISTICS OF THE INDUSTRIAL GAS INDUSTRY

The industrial gas industry is mature with historical real growth
consistent with growth in the overall economy. From market to market, there can
be significant variations in growth, based upon the nature of the industries,
which predominantly effect specific markets. 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 somewhat 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
industries, 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 (i) to achieve and
maintain a low-cost supplier position (a) by minimizing costs in each market
where the Company participates and (b) providing true "value added" support to
each market on a cost effective basis; (ii) to sustain profitable growth through
the acquisition of key distributors in selected markets; and (iii) to build a
unified, cohesive organization, staffed by skilled employees who are responsive
to changing customer requirements and are capable and willing to implement
standardized polices and procedures.

ACHIEVE AND MAINTAIN POSITION AS A LOW-COST SUPPLIER

The Company is striving to produce, package and market its products and
services at costs lower than its local market competitors. This low cost
position will be achieved by optimizing branch size and location, optimizing the
size and value added effectiveness of corporate staff, 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. The Company believes it will be successful in optimizing
both its relative cost position and its overall financial performance by
recognizing and responding to the uniqueness of each market area. Where branch
size is sub-optimal, the Company has developed alternatives to increase size or
profitability through limited product diversification. The Company has
implemented a "best practices" program involving identification of the most
effective method of performing a specific activity, such as the effective
control of discretionary discounting, 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 hard good inventory levels and account status. The Company
believes significant margin improvement will result from the ability to
effectively limit unnecessary discounting.

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.

3

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.

GROWTH THROUGH ACQUISITIONS

Prior Acquisitions. Since the formation of the Company in 1958, the
Company has completed the acquisition of 70 distributors. The Company's
acquisitions historically have been debt financed, however, the Company expects
that future acquisitions will be financed, primarily with internally generated
funds, supplemented with limited 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 on market areas where the Company has an existing presence.
However, in the next fiscal year, the Company will limit its acquisition
expenditures and focus 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 below historical levels, unless there are
ample opportunities available, in locations and at prices, which would justify
additional capital expenditures. 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 limited 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 (iii) its ready access to financial resources and (iv) 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.

Competition for Acquisitions. In seeking to acquire distributors, the
Company competes with the major industrial gas producers as well as 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 several 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. With fewer strategic buyers,
the Company believes that the prices paid for independent distributors will
generally reduce to the level of the 1980s, which was basically asset value plus
a small premium.

The smaller, independent distributors with which the Company competes for
acquisitions generally do not consider acquisitions beyond their immediate
geographic region. Historically, small independent distributors are unwilling to
assume the financial risk associated with buying out a competitor.

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

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include (i) a history of profitability, (ii) a realistic projection 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) a team of available, qualified management and key personnel.

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 strives to fully utilize its existing management resources. In
fiscal year 2002, the Company began realigning certain reporting relationships
and responsibilities to place operating and financial responsibility at the
local market level. 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, which are
vital to the Company's financial growth. During fiscal year 2003, the Company
replaced several members of Executive Management in order to improve its
strategic focus. The Company also replaced several field individuals during 2003
under an initiative to upgrade talent.

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.

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
2003, acetylene accounted for approximately 3% of net sales.

The Company sells propane to the residential, commercial and industrial
markets. Typical residential and commercial uses include conventional space
heating, water heating and cooking. Typical industrial uses include engine fuel
for forklifts and other vehicles, metal cutting, brazing and heat treating. The
distribution of propane is seasonal in nature and sensitive to variations in
weather with consumption as a heating fuel peaking sharply in winter months.

The following table sets forth the percentage of the Company's net sales
for the fiscal years ended June 30, 2001, 2002 and 2003 for each of the
following products and services:

5

CUSTOMERS

The Company currently has more than 148,000 customers, none of which
accounted for more than 1% of net sales in fiscal 2003. In fiscal 2003, major
industry categories served by the Company included manufacturing at 15% of the
Company's net sales, industrial 10%, construction 10%, metal production and
fabrication customers 10%, other services 8%, health care 5% and mining, oil and
chemicals at 4%. 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 packaged gas 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 64 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 customers 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 for packaged
gases is based primarily on customer loyalty, service and, to a lesser extent,
price. Customer loyalty can be lessened when businesses are acquired. 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.

6

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. In most cases, the cost for base gases represents a relatively minor
component of the total cost in comparison to the packaging and distribution
expenses.

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 47% of the
Company's gas purchases in fiscal 2003. 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 54 primary vendors, of which purchases from the top five vendors
represented approximately 59% of total purchases in fiscal 2003. 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
market. Because of the Company's off-peak seasonal 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, 2003, the Company employed 678 people, compared to 699 at June
30, 2002. Approximately 19% 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 does not have a material adverse effect on the Company.

7

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.

ITEM 2. PROPERTIES

The Company owns approximately 546,000 cylinders, 30,000 bulk propane tanks
and 390 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 65 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
Corporate operations are located in 20,000 square feet of leased space in
Wheeling, West Virginia and its Executive offices are located in 3,000 square
feet of leased space in Washington, Pennsylvania.

Historically, most of the specialty gas products sold by the Company were
purified, packaged and mixed at the Company's facility in Cranberry Township,
Pennsylvania. During 2003, the Company concluded that service to its customers
and its cost structure would be improved by consolidating this facility into
nearby operations. This transition is expected to be concluded during the first
half of fiscal year 2004 without a significant impact to the Company's results
of operations.

The Company's facilities are leased on terms that 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. Management is of the opinion that there are
no known claims that are likely to have a material adverse effect on the results
of operations, financial condition or cash flows 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, 2003.

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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, 2001 to June 30, 2003 was:

The reported last sale price of the Company's common stock on the American
Stock Exchange on September 11, 2003 was $5.25.

On September 11, 2003, there were 833 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 5 of Notes to Consolidated Financial Statements contained in
Item 15.

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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 15 herein.

- ---------------
(1) 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.

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 $151 million in fiscal 2003. In fiscal 2003, gases accounted for
approximately 48% of net sales, welding equipment and supplies accounted for
approximately 36% of net sales, and cylinder and tank rental and other accounted
for approximately 16% of net sales.

The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 54 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 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

10

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, 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.

COMPARISON OF YEARS ENDED JUNE 30, 2003 AND 2002

Net sales increased 4.6%, or $6.7 million, to $151.2 million from $144.5
million for the years ended June 30, 2003 and 2002, respectively. Acquisitions
made during the preceding twelve months contributed $3.2 million of the increase
in net sales, while same store sales increased $3.5 million or 2.4% (5.1%
decrease without propane). The Company sells propane to the residential,
commercial and industrial markets. Typical residential and commercial uses
include conventional space heating, water heating and cooking. Typical
industrial uses include engine fuel for forklifts and other vehicles, metal
cutting, brazing and heat treating. The distribution of propane is seasonal in
nature and sensitive to variations in weather with consumption as a

11

heating fuel peaking sharply in winter months. Propane sales increased $9.7
million, or 38.1%, on a same store basis, reflecting $3.1 million in price
inflation and a $6.6 million increase in the volume due to colder than normal
temperatures during the past heating season and internal growth. Gases and
cylinder rent represented 63.7% of net sales for the year, with hard goods
representing the remaining 36.3%. In comparison, net sales for the prior year
reflected gases and cylinder rent of 59.0% and hard goods of 41.0%.

Gross profit, which excludes depreciation and amortization, increased 1.9%,
or $1.5 million, to $78.1 million for the year, compared to $76.6 million for
the prior year. Acquisitions made during the preceding twelve months contributed
$1.9 million of the increase in gross profit. Same store gross profit decreased
$0.4 million, which included a $1.4 million non-recurring charge for disposal of
slow-moving hard goods inventory. Gross profit as a percentage of net sales was
51.6% for the year, compared to 53.0% for the prior year.

Operating and administrative expenses increased 11.0%, or $6.2 million, to
$62.4 million for the year, compared to $56.2 million for the prior year. Of
this increase, $1.4 million was related to acquired businesses, with the balance
of the change, or $4.8 million, attributable to same store expenses. The
increase in same store operating expenses included $1.9 million of non-recurring
charges relating to severance of personnel, termination of an airplane lease,
conversion of Company provided vehicles to employee owned vehicles and unclaimed
property audits. These charges resulted from the Company's repositioning and
upgrade initiatives that were undertaken late in fiscal year 2003 to reduce its
on-going cost structure, upgrade personnel and improve efficiency. Operating
expenses also increased as a result of increased bad debt, settlement of sales
and use tax audits with several states, increased liability insurance expense
and an increase in estimated health insurance claims including claims incurred
but not reported. During the year, the Company changed its estimate of the
amount of health insurance claims incurred but not paid. The Company increased
its accrual for estimated unpaid claims by $0.7 million, in the fourth quarter
of fiscal year 2003 as a result of this change. Depreciation and amortization
expense increased $1.2 million for the fiscal year, compared to the prior year.
This increase was primarily attributable to non-recurring charges of $1.2
million relating to write-off of non-compete agreements held with former
executives, which the Company determined to no longer be of value, based upon a
review of each individual's circumstances and the probability of effect on the
Company's performance and accelerated depreciation associated with leasehold
improvements at facilities being closed by the Company. For each of the
facilities being closed, the Company determined the expected date for operations
to cease and revised the estimated useful lives for applicable assets
accordingly. These initiatives were implemented during the fourth quarter of
fiscal year 2003 by the Company in order to reduce its cost structure and to
improve its operating efficiency.

The Company does not expect to have any significant level of expense in the
future related to these closings.

Interest expense increased 11.4%, or $0.7 million, to $6.6 million for the
year, compared to $5.9 million for the prior year. This increase reflected
higher interest rates and fees associated with the amendment of the Company's
credit facility, and was partially offset by lower average debt balances.

The Company's effective tax rate decreased from 41.5% for the prior year to
39.0% for the current year as a result primarily of changes in estimates for
federal and state accrued taxes.

Net earnings for the year were $0.2 million, compared to $4.2 million for
the fiscal year ended June 30, 2002. Diluted earnings per share were $0.03 for
fiscal year 2003 compared to $0.45 for fiscal year 2002. Diluted weighted
average shares outstanding for fiscal year 2003 was 9,392,885 compared to
9,398,514 for fiscal year 2002.

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

12

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.

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, 2003, the Company had working capital of approximately $10.7
million, compared to $15.4 million as of June 30, 2002, reflecting primarily the
reduction in inventory levels. Funds provided by operations for the twelve
months ended June 30, 2003 were approximately $16.4 million, compared to $16.7
million for fiscal year 2002. Funds used for investing activities were
approximately $7.3 million for the twelve months ended June 30, 2003, consisting
primarily of capital spending and acquisitions, compared to $12.7 million in
fiscal year 2002. Funds used for financing activities for the twelve months
ended June 30, 2003 were approximately $8.6 million from net payments of debt,
compared to $3.4 million for 2002. The Company's cash balance increased $0.6
million during the twelve months to $1.8 million.

On June 30, 2003, the Company entered into a third amendment to its second
amended and restated credit agreement changing the covenant requirements and the
interest rate pricing grid. The maximum revolving note borrowings under this
agreement are $68.5 million with a June 28, 2005 maturity date. The Company
believes that it will be able to refinance its credit facility when required.

The weighted average interest rate for substantially all of the borrowings
under the credit facility was 3.75% as of June 30, 2003. As of June 30, 2003,
availability under the revolving loan was approximately $9.0 million, with
outstanding borrowings of approximately $55.8 million and outstanding letters of
credit of

13

approximately $2.7 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, as amended, 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 June 30, 2003, the Company is in compliance with these covenants
and believes that it will continue to be in compliance through at least the next
twelve months.

The Company is obligated under various promissory notes related to the
financing of acquisitions that have various rates of interest, ranging from
3.75% to 10.0% per annum, and maturities through 2010. The outstanding balance
of these notes as of June 30, 2003 was $5.1 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 variable/fixed 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, 2003,
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 1.2%.

The Company has previously entered into a put/call option agreement with an
independent distributor for the purchase of its business. The put option became
exercisable in May 2002 and ends in May 2005. The call option becomes
exercisable upon expiration of the put option and ends in May 2008. The total
purchase price of this acquisition is currently estimated to be $10 million,
which includes $1 million previously paid for this option. The Company believes
that it will have adequate capital resources available to fund this acquisition
and be in compliance with it debt covenant requirements 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 estimates the collectability of its trade receivables on a
monthly basis. Management has established an allowance for doubtful accounts to
adjust the carrying value of trade receivables to fair value based on an
estimate of the amount of trade receivables that are deemed uncollectible. The
allowance for

14

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, 2003 and 2002 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 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. Estimates of physical losses of inventory are made
on a quarterly basis based upon historical results.

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 test 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,
including claims incurred but not reported ,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.

VALUATION OF LONG-LIVED ASSETS

Long-lived assets to be held and used are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of such
assets may not be recoverable. Estimates of the remaining useful lives of assets
are reviewed at least annually at the close of the fiscal year. Determination of
recoverability is based on an estimate of discounted or undiscounted future cash
flows resulting from the use of the assets and its eventual disposition.
Measurement of an impairment loss for long-lived assets that management expects
to hold and use is based on the fair value of the assets.

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. The following table
sets forth, for the periods indicated, the Company's quarterly sales as a
percentage of the

15

respective fiscal year's sales. Results for any one or more periods are not
necessarily indicative of continuing trends.

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.

NEW ACCOUNTING STANDARDS

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial
accounting and 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. The Company adopted this standard at January
1, 2003. Subsequent to adoption, this standard may affect the periods in which
costs are recognized for workforce reductions or facility closures, although the
ultimate amount of costs recognized would be the same.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN 45"). This interpretation
changes the accounting recognition and disclosure requirements for certain
guarantees issued on behalf of other parties, which represent either a
contingent or a non-contingent obligation for the guarantor to make payments or
to perform specified activities. Effective January 1, 2003, FIN 45 mandates the
separate fair value recognition of guarantees entered into on or after that
date. As of June 30, 2003, the Company has guarantees as defined in FIN 45 in
the form of standby letters of credit guaranteeing payments under the Company's
obligations for certain non-compete agreements and seller notes associated with
acquisitions. The outstanding letters of credit as of June 30, 2003 total $2.7
million and approximate the total liabilities that they are associated with. The
outstanding amounts of these letters of credit decrease monthly through 2007.
The Company has adopted the provisions of FIN 45 as of January 1, 2003.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" (SFAS No. 148), which amended SFAS No. 123 to allow multiple methods
of reporting the accounting transition for companies electing to adopt the
recognition provisions of SFAS 123 for fair valuing stock-based compensation. As
permitted by the accounting standards, the Company has elected to continue the
use of the intrinsic value method of accounting for stock-based compensation
under APB Opinion No. 25. The Company has adopted the disclosure provisions of
SFAS No. 148.

16

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is
one where the contractual or ownership interests in an entity change with
changes in the entity's net asset value. This interpretation requires the
consolidation of a VIE by the primary beneficiary, and also requires disclosure
about VIEs where an enterprise has a significant variable interest but is not
the primary beneficiary. FIN 46 is effective in the second quarter of fiscal
year 2004 for VIEs existing prior to February 1, 2003. The required disclosure
provisions of FIN 46 have been adopted in the current year. The Company is
currently analyzing the agreement discussed in Note 12 and it's impact to the
financial statements under FIN 46.

In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging" was issued. This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement was effective for
the Company after April 30, 2003 and did not have an impact on the Company's
results of operations or financial condition.

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
statement was effective for the Company for instruments entered into after May
31, 2003 and did not have a material impact on the Company's results of
operations or financial condition.

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 ability to meet its covenant requirements under its
credit facility, 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, the trend towards and cost impacts
of consolidation in the industry and the industry's general resistance to
downturns in the business cycle. 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 risks discussed
in Exhibit 99.1 and 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, maintaining compliance with covenants, 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.

17

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 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 unaudited financial data for fiscal 2003 and 2002 is
as follows:

18

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

Previously reported.

ITEM 9A. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer concluded that, as of the
end of the period covered by this report, our disclosure controls and procedures
are adequately designed to ensure that information required to be disclosed by
us in the reports we file or submit under the Exchange Act is recorded,
processed, summarized and reported, within the time periods specified in
applicable rules and forms.

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

During the fiscal quarter ended June 30, 2003, there has been no change in
our internal control over financial reporting (as defined in Rule 13a-15(f) or
15d-15(f) under the Exchange Act) that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

19

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. From June 1993 to 2002, he 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, 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 served as Acting Chief Executive
Officer from February 2002 to October 2002 and was appointed Chief Executive
Officer in June 2003. 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.

JAMES P. HART, PRESIDENT AND DIRECTOR. Mr. Hart was elected a director of
the Company in January 1997. Mr. Hart was appointed as President of the Company
in June 2003. 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.

ROBERT D. SCHERICH, CHIEF FINANCIAL OFFICER AND SECRETARY. 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.

AUGUST E. MAIER, DIRECTOR. Mr. Maier was elected a Director of the Company
in January 1997 and served as the Company's Acting President from February 2002
to October 2002. In September 1997, Mr. Maier became an employee of the Company
and served as Corporate Director of Field

20

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. He currently serves on the board of
directors for Allied Insurance Corporation. 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.

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.

F. WALTER RIEBENACK, DIRECTOR. Mr. Riebenack was elected a Director of the
Company in January 1999. He is presently the Managing Member of U.S. Capital
Advisors, L.L.C., a management consulting firm. From 1990 until December, 2002,
he served as the Chief Financial Officer, General Counsel and as a member of the
Board of Site-Blauvelt Engineers, Inc., 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. He also serves as a
consultant to Site-Blauvelt Engineers, Inc., and serves on the Board of Members
of Harbor Investments, L.L.C. and Harbor Investments II, L.L.C., two private
equity funds. 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 28, 2003, 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 28, 2003, 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 28, 2003, in the section titled "Common Stock Ownership of
Directors, Nominees and Officers" and is incorporated herein by reference.

21

Following is the equity compensation plan information for the Company as of
June 30, 2003:

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 28, 2003, in the section titled "Certain Relationships and Related
Transactions" and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Pursuant to SEC Release No. 33-8183 (as corrected by Release No. 33-8183A),
the disclosure requirements of this Item are not currently effective for the
Company.

PART IV

ITEM 15. 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

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 April 30, 2003 reporting under Item 9
Regulation FD Disclosure

The Company filed a Form 8-K on July 23, 2003 reporting under Item 7
Financial Statements and Exhibits and Item 9 Regulation FD Disclosure (also Item
12, Disclosure of Results of Operations and Financial Condition).

The Company filed a form 8-K on August 12, 2003 reporting under Item 7
Financial Statements and Exhibits and Item 12 Disclosure of Results of
Operations and Financial Condition.

22

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 29, 2003
/s/ WILLIAM A. INDELICATO
--------------------------------------
William A. Indelicato
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.

23

VALLEY NATIONAL GASES INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORTS OF INDEPENDENT AUDITORS

To the Board of Directors,
Valley National Gases Incorporated:

In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of Valley
National Gases Incorporated at June 30, 2003, and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America. 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. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
August 11, 2003

F-1

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 year 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-2

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-3

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2002 AND 2003

The accompanying notes are an integral part of these consolidated financial
statements.

F-4

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2001, 2002 AND 2003

The accompanying notes are an integral part of these consolidated financial
statements.

F-5

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 2001, 2002 AND 2003

The accompanying notes are an integral part of these consolidated financial
statements.

F-6

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2001, 2002 AND 2003

The accompanying notes are an integral part of these consolidated financial
statements.

F-7

VALLEY NATIONAL GASES INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2002 AND 2003

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's gas
operations consist primarily of packaging and mixing industrial, medical and
speciality gases, such as oxygen, nitrogen and argon, in pressurized cylinders
and transporting these cylinders to customers from one of the Company's 65
distribution or retail locations. In addition, the Company distributes propane
to industrial and residential customers. Welding equipment and supplies sales
includes welding machines, wire, fluxes and electrodes, as well as a wide
variety of supporting equipment. Since the Company was founded, it has completed
70 acquisitions of smaller independent local companies. The Company, through its
consolidated subsidiaries has been in operation since 1958 and currently
operates in 11 states.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

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.

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.

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. No collateral or security is provided on these deposits,
other than the $100,000 of deposits per financial institution, which is insured
by the Federal Deposit Insurance Corporation.

TRADE RECEIVABLES

The Company makes estimates of the collectability of its trade receivables
on a monthly basis. Management has established an allowance for doubtful
accounts to adjust the carrying value of trade receivables to fair value based
on an estimate of the amount of trade receivables that are deemed uncollectible.
The allowance for doubtful accounts is determined based on historical
experience, economic trends and management's knowledge of significant accounts.

INVENTORY

Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method. The Company estimates reserves for product loss and
obsolete inventory on a quarterly basis.

F-8

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 that extend the useful life of the asset are
capitalized. The costs of property, plant and equipment retired or otherwise
disposed of and the related accumulated depreciation or amortization are removed
from the accounts, and any resulting gain or loss is reflected in other income
(expense).

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.

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 costs are amortized over the term of the agreement. Deferred loan
origination costs are amortized over the term of the related debt.

VALUATION OF LONG-LIVED ASSETS

Long-lived and intangible assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets may not be recoverable. Intangible assets are
reviewed at least annually at the close of the fiscal year. Determination of
recoverability is based on an estimate of discounted or undiscounted future cash
flows resulting from the use of the assets and its eventual disposition.
Measurement of an impairment loss for long-lived assets and certain identifiable
intangible assets that management expects to hold and use is based on the fair
value of the assets.

F-9

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,
including claims incurred but not reported, 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. During the year, the Company changed its estimate of the
amount of health insurance claims incurred but not paid. The Company increased
its accrual for estimated unpaid claims by $675,000 during fiscal year 2003 as a
result of this change.

INCOME TAXES

Income taxes are accounted for in accordance with the provisions of SFAS
No, 109, "Accounting for Income Taxes", under which deferred tax assets or
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted marginal tax
rates. These differences are classified as current or non-current based upon the
classification of the related asset or liability. For temporary differences that
are not related to an asset or liability, classification is based upon the
expected reversal date of the temporary difference. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized.

SEGMENTS

The Company follows the provisions of SFAS No. 131, "Disclosures about
Segment of an Enterprise and Related Information, Financial Reporting or
Segments of a Business". This statement establishes standards for reporting
information about operating segments, products and services, geographic areas
and major customers in annual and interim financial statements. The Company
manages and operates its business as one segment.

EARNINGS PER SHARE

Basic earnings per share is computed in accordance with SFAS No. 128,
"Earnings Per Share" 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).

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan which is described more
fully in Note 10. The Company accounts for this plan under the recognition and
measurement provisions of APB Opinion No. 25, "Accounting for Stock Issues to
Employees". Under these provisions, stock-based employee compensation cost is
not reflected in net earnings for any year, as all options granted under the
plan had an exercise price equal to or greater than the market value of the
underlying common stock on the grant date.

If the Company had elected to recognize compensation cost for these stock
options based on the fair value method set forth in SFAS No. 123, "Accounting
for Stock Based Compensation" the Company's net earnings and earnings per share
would have been the pro forma amounts indicated below:

F-10

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 2001, 2002
and 2003.

The Company purchases industrial gas, welding supplies, and bulk gas from a
variety of vendors. Three of those vendors in fiscal year 2003 individually
supplied purchases greater than 10%, accounting for 13.0%, 12.2% and 10.2%. One
vendor in fiscal year 2002 individually supplied purchases greater than 10%,
accounting for 15.7%.

REVENUE RECOGNITION

Revenue from product sales is recognized upon delivery to the customer when
both risk of loss and title has transferred to the customer and collection is
assured in accordance with Standard Accounting Bulleting No. 101. In most
revenue transactions, the Company delivers the product using internal trucking
or the customer purchases the product at the distribution location. Cylinder
lease revenue is deferred when the arrangement is negotiated and recognized into
revenue rateably over the terms of the lease. Customer prepayments are recorded
as deferred revenue.

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 due to 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.

F-11

The estimated fair values of the Company's financial instruments as of June
30, 2003 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). In determining effectiveness, the
Company considers the notional amount, the basis of the interest rate and the
fair market value of the derivative in comparison to the Company's bank financed
debt. 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. These changes
are recorded on a quarterly basis and resulted in an increase in interest
expense of $523,749 in 2001, a decrease in interest expense of $206,817 in 2002
and a decrease of $4,711 in 2003. At June 30, 2003 and 2002, 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, 2003 mature at various times between September 2003 and
January 2006. The Company would have paid $5,128,990 and $3,874,204 to settle
its interest rate swap agreements at June 30, 2003 and 2002, respectively, which
represents the fair value of these agreements. The carrying value equals the
fair value for these contracts at June 30, 2003 and 2002. 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, 2003, the Company expects to
recognize into earnings in the next 12 months net current liabilities of
$284,229 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.

NEW ACCOUNTING STANDARDS

In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" ("SFAS 146") was issued. This Statement addresses financial
accounting and 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. The Company adopted this standard at January
1, 2003. Subsequent to adoption, this standard may affect the periods in which
costs are recognized for workforce reductions or facility closures, although the
ultimate amount of costs recognized would be the same. See Note 12.

In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of the Indebtedness of Others" ("FIN 45"). This interpretation
changes the accounting recognition and disclosure requirements for certain
guarantees

F-12

issued on behalf of other parties, which represent either a contingent or a
non-contingent obligation for the guarantor to make payments or to perform
specified activities. Effective January 1, 2003, FIN 45 mandates the separate
fair value recognition of guarantees entered into on or after that date. As of
June 30, 2003, the Company has guarantees as defined in FIN 45 in the form of
standby letters of credit guaranteeing payments under the Company's obligations
for certain non-compete agreements and seller notes associated with
acquisitions. The outstanding letters of credit as of June 30, 2003 total $2.7
million and approximate the total liabilities that they are associated with. The
outstanding amounts of these letters of credit decrement monthly through 2007.
The Company has adopted the provisions of FIN 45 as of January 1, 2003.

In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation -- Transition and
Disclosure" (SFAS No. 148), which amended SFAS No. 123 to allow multiple methods
of reporting the accounting transition for companies electing to adopt the
recognition provisions of SFAS 123 for fair valuing stock-based compensation. As
permitted by the accounting standards, the Company has elected to continue the
use of the intrinsic value method of accounting for stock-based compensation
under APB Opinion No. 25. The Company has adopted the disclosure provisions of
SFAS No. 148.

In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"). A variable interest entity ("VIE") is
one where the contractual or ownership interests in an entity change with
changes in the entity's net asset value. This interpretation requires the
consolidation of a VIE by the primary beneficiary, and also requires disclosure
about VIEs where an enterprise has a significant variable interest but is not
the primary beneficiary. FIN 46 is effective in the second quarter of fiscal
year 2004 for VIEs existing prior to February 1, 2003. The required disclosure
provisions of FIN 46 have been adopted in the current year. The Company is
currently analyzing the agreement discussed in Note 12 and its impact to the
financial statements under FIN 46.

In April 2003, SFAS No. 149, "Amendment of Statement 133 on Derivative
Instruments and Hedging" was issued. This statement amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement was effective for
the Company after April 30, 2003 and did not have a material impact on the
Company's results of operations or financial condition.

In May 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". This
statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. It requires that an issuer classify a financial instrument that is
within its scope as a liability (or an asset in some circumstances). This
statement was effective for the Company after May 31, 2003 and did not have a
material impact on the Company's results of operations or financial condition.

SUPPLEMENTAL CASH FLOW INFORMATION

RECLASSIFICATIONS

Certain reclassifications have been made to prior year amounts to conform
with the current year presentation. These reclassifications had no effect on
reported net earnings.

F-13

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
consolidated financial statements since the effective dates of the respective
acquisitions.

In August 2003, the Company purchased Gerber's Propane, Inc.

During fiscal 2002, the Company purchased 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 eight branches of Air Liquide America Corporation which
was effective May 2001.

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 fiscal year 2003 acquisition, the Company recorded $709,000
for goodwill and $300,000 for non-compete agreements having a term and
amortization period of 3 years. The remainder of the increase in goodwill of
$71,000 relates to finalization of prior years acquisition purchase prices. This
preliminary allocation made in 2003 for the Gerber's acquisition may change as
the verification of certain assets is completed in accordance with the purchase
agreement.

The following summarized unaudited pro forma results of operations for the
fiscal years ended June 30, 2001, 2002 and 2003, illustrate the estimated
effects of the 2001, 2002 and 2003 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
intangibles, other than goodwill, are its noncompete agreements and consulting

F-14

agreements, which the Company has assigned definite lives equal to the terms of
the agreements. As of June 30, 2003, the Company's noncompete agreements and
consulting agreements are summarized as follows:

Amortization expense for the years ended June 30, 2001, 2002 and 2003
totaled $4,890,261, $2,631,213 and $3,201,025 respectively. The fiscal year 2003
amortization expense included the write-off of $782,242 related to noncompete
agreements that the Company determined to no longer be of value, based upon a
review of each individual's circumstances and the probability of effect on the
Company's performance. 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,
2003, are as follows:

The following table reports pro forma information as if SFAS No. 142 had
been adopted for the earliest period presented:

F-15

5. LONG-TERM DEBT:

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

The prime rate was 4.75% and 4.00% at June 30, 2002 and 2003, respectively.
The LIBOR rate was 1.84% and 1.10% at June 30, 2002 and 2003, respectively.

On June 30, 2003, the Company entered into a third amendment to the second
amended and restated credit agreement. This agreement decreased the maximum
revolving note borrowings to $68.5 million from the previous maximum of $75.0
million. Certain covenants were also changed. The maturity of the credit
agreement remained unchanged.

On October 28, 2002, the Company entered into a second amendment to second
amended and restated credit agreement, making changes to required covenants.

On June 28, 2002, the Company entered into a second amended and restated
credit agreement with Bank One, as agent. This agreement 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, excluding the effect of interest rate swap
agreements, was 3.75% as of June 30, 2003. As of June 30, 2003, availability
under the revolving loan was approximately $9.0 million, with outstanding
borrowings of approximately $55.8 million and outstanding letters of credit of
approximately $2.7 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, as amended, 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 June 30, 2003, 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. (See Note 12)

F-16

The schedule of maturities as amended for the credit agreement for the next
five years and thereafter is as follows as of June 30, 2003:

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 $892,849, $1,049,497 and $1,041,352 respectively, in fiscal years 2001, 2002
and 2003.

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

In fiscal year 2003, the Company changed its contribution to the 401-k
plan, eliminating the discretionary profit sharing payment. Under the revised
plan, the Company contributed 3% of compensation and matched 50% of voluntary
contributions by the participants, up to 4%.

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 $44,304, $7,085 and $3,782 respectively,
in fiscal years 2001, 2002 and 2003.

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.

F-17

Options to purchase 221,375, 154,500 and 481,750 shares of common stock
were outstanding during fiscal years 2001, 2002 and 2003, 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 $4,047,918, $4,722,281 and $4,895,868 respectively, in fiscal
years 2001, 2002 and 2003.

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 Company's 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:

F-18

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 $1,915,944 with
renewal options. The master lease agreement has been accounted for as an
operating lease in the accompanying consolidated financial statements. In April
2003, the Company terminated its lease for use of an aircraft by buying out the
remainder of the lease for $267,029. The Company believes that these
arrangements have not been less favorable than could have been obtained in
arms-length transactions with unrelated third parties.

Pursuant to a Consulting Agreement, the Company retained ADE Vantage, Inc.
("ADE"), a consulting company wholly-owned by Mr. Indelicato, 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 $7,000, 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 2001, 2002 and 2003 totaled $226,270, $168,982 and
$155,327 respectively. This agreement has a one year term and was renewed July
1, 2003.

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. All options granted under the Plan have a ten year
expiration and vest three years after the grant date.

The following summarizes the activity under the 1997 Plan:

F-19

The following table summarizes the status of the stock options outstanding
and exercisable at June 30, 2003:

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.

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-20

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, 2001, 2002 and 2003 were as
follows:

F-21

12. COMMITMENTS AND CONTINGENCIES

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 fiscal year 2003 the Company incurred charges of $0.5 million
related to the severance payments for certain terminated employees as part of
the Company's organization strengthening program. As of June 30, 2003 the
Company had $0.2 million accrued for severance payments and anticipates that
these payments will be completed during fiscal year 2004.

The Company entered into a put/call option agreement in May 1998 with an
independent distributor for the purchase of its business. The put option became
exercisable in May 2002 and ends in May 2005. The call option becomes
exercisable upon expiration of the put option and ends in May 2008. The total
purchase price of this acquisition is currently estimated to be $10 million
based upon the purchase price calculation stipulated in the agreement, which
includes $1 million previously paid for this option. Management believes that
the carrying value of the option is not impaired, based upon its estimated
market value of such independent distributor. The Company could incur a loss
when the put option is exercised if the market value of the option at inception
is greater than the market value of the option at the date of purchase.
Management believes that a material loss is unlikely to occur based upon the
historical performance of the independent distributor. In addition, the Company
believes that it will have adequate capital resources available to fund this
acquisition and be in compliance with it debt covenant requirements 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.

F-22

13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

- ---------------

(1) Includes the effect of charges associated with the Company's repositioning
initiatives of $4.0 million of which $1.4 million was associated with
disposal of slow-moving inventory, $1.5 million related to severance,
benefit and lease expense and the remaining $1.1 million related to the
write-off of non-compete agreements and accelerated depreciation for certain
assets.

F-23

INDEX TO EXHIBITS
- --------------------------------------------------------------------------------

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)

10.7 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 Amendment 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)

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

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

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

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

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

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

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

10.29 Amendment dated October 28, 2002 to Second Amendment and Restated
Credit Agreement dated May 1, 2000 between the Company and Bank One,
Indiana NA, as agent (g)

10.30 Agreement dated October 15, 2002 between the Company and Michael L.
Tyler (g)+

10.31 Agreement dated November 22, 2002 between the Company and John R.
Bushwack (h)+

10.32 Lease Agreement dated as of May 1, 2003 between the Company and
EquipLease Corp (filed herewith)

10.33 Amendment dated May 13, 2003 to Lease Agreement dated as of November 5,
1997 between the Company and West Rentals, Inc. (filed herewith)

10.34 Amendment dated June 30, 2003 to Second Amendment and Restated Credit
Agreement dated May 1, 2000 between the Company and Bank One, Indiana
NA, as agent (filed herewith)

10.35 Agreement dated June 1, 2003 between the Company and Michael L. Tyler
(filed herewith)+

10.36 Agreement dated June 1, 2003 between the Company and Gerald W. Zehala
(filed herewith)+

10.37 Agreement dated June 1, 2003 between the Company and James P. Hart
(filed herewith)+

10.38 Agreement dated July 1, 2003 between the Company and William A.
Indelicato providing for certain Consulting payments (filed herewith)+

21.1 Subsidiaries of Registrant (a)

23.1 Consent of Ernst & Young LLP

23.2 Consent of PricewaterhouseCoopers LLP

31.1 Certification of Chief Executive Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

31.2 Certification of Chief Financial Officer pursuant to section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith)

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

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

99.1 Risk Factors (filed herewith)

- -------------------------------------------------------------------------------

(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.

(f) Incorporated by reference to the Company's Annual Report on Form 10-K
filed September 27, 2002.

(g) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed November 14, 2002.

(h) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed February 13, 2003.

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