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, 2004
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. $16,014,275

As of September 13, 2004, the registrant had outstanding 9,488,049 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, 2004 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, a Pennsylvania corporation, referred
to as Valley, 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.
Valley's net sales have grown, primarily as a result of acquisitions, at a
compound annual rate of approximately 16% per year since Valley started business
in 1958, increasing from $190,000 in that year to $154.5 million in fiscal 2004.
In fiscal 2004, gases accounted for approximately 49.2% of net sales, welding
equipment and supplies (generally referred to in the industry as "hard goods")
accounted for approximately 35.0% of net sales, while cylinder rental, tank
rental, delivery charges and compliance charges accounted for approximately
15.8% of net sales.

Valley's gas operations consist primarily of packaging and mixing
industrial, medical and specialty gases, such as oxygen, nitrogen and argon, in
pressurized cylinders and transporting these cylinders to customers from one of
Valley's 64 distribution or retail locations. Valley also distributes propane to
industrial and residential customers. Most customers pay a rental fee for use of
company cylinders. Valley owns approximately 500,000 cylinders, which require
minimal maintenance and have useful lives that Valley expects will average 30
years or longer depending upon the style. Valley selectively participates in the
small bulk gas market through the supply of gases in cryogenic transports and
the storage of gases in supplier provided cryogenic and propane tanks that are
also rented to customers. Valley owns approximately 32,000 bulk propane tanks
and 406 bulk cryogenic tanks, which have useful lives generally less than those
of cylinders. In connection with the distribution of gases, Valley sells welding
equipment and supplies, including welding machines, wire, fluxes and electrodes
and a wide variety of supporting equipment.

Effective with the adoption of Financial Accounting Standards Board (FASB)
Interpretation No. 46, "Consolidation of Variable Interest Entities", referred
to as FIN 46R, in the third quarter of 2004 and the required consolidation of
certain variable interest entities, Valley has two reportable segments: Valley
and Variable Interest Entities (as defined below). Since these are two separate
and distinct businesses, the financial information for each company is
maintained and managed separately. The results of operations and assets for each
of these segments are derived from each company's respective financial reporting
system. See Note 1 to the financial statements. All inter-company activity is
eliminated in consolidation.

The Variable Interest Entities reportable segment, including West Rentals,
Inc., GEW Real Estate LLC, Real Equip-Lease LLC and Acetylene Products
Corporation, primarily purchases, develops, sells and/or leases real estate.

The Valley reportable segment operates 64 retail and distribution locations
in 11 states. All locations offer the same core products of packaged gases,
welding equipment and supplies. All locations generally sell to the same types
of customers such as metal fabrication, construction, general industrial,
research and laboratory, hospital and other medical, commercial, agricultural
and residential. Valley considers each of the locations to be an operating
segment as defined in FASB No. 131, although none of these locations
individually meet the quantitative thresholds stated in FASB No. 131 of 10% of
revenue (or profits or assets). In addition, these operating segments are
similar in economic characteristics, long-term gross margin averages, products
sold, types of customers, methods of distribution and regulatory environment and
therefore they are aggregated into one reporting segment in accordance with FASB
No. 131.

Valley's current business strategy is to grow sales through the selective
acquisition of other independent distributors and, to a lesser degree, through
internally generated growth. Earnings growth is to occur from the additional
sales, and from the implementation of policies and procedures which more
effectively administer, control and monitor customer pricing. Earnings growth is
also to occur through cost leveraging of operations and through the proper
implementation of certain key operating procedures and staffing based upon "best
practices" standards. Since Valley was founded in 1958 it has completed 70
acquisitions. Since July 1, 2002, however, Valley has acquired only one
independent distributor, adding approximately $2 million in annualized

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sales. Valley's fiscal year 2003 and 2004 acquisitions of independent
distributors have been purposely limited in order to better implement its
improvement initiatives. However, management believes that, over the long term,
there will continue to be attractive acquisition candidates available as a
result of the consolidation trend in the industries in which Valley participates
and that Valley will be able to successfully integrate acquired operations into
its base business, generating growth and operational synergies. Valley expects
that acquisitions will be financed primarily with internally generated funds and
to a much lesser extent by borrowings under Valley's existing credit facility
and seller financing. While highly focused on acquisitions, price attainment and
cost leveraging, management believes that Valley's competitive strengths will
allow it to continue to increase sales through internal growth.

INDUSTRY OVERVIEW

GENERAL

Historically, the industrial gas distribution business has 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 in areas
such as electronics, chemicals and health care and as new applications for gases
have developed, the customer base of the industry has significantly broadened to
include almost every major industry, such as aerospace, beverages, environmental
remediation, food processing, oil and gas and primary metals, in addition to
metal fabrication.

The industrial, medical and specialty gas industry consists of two major
categories -- 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 site. The major gas producers in the
United States primarily supply the "high volume" portion of this segment,
although some large distributors, such as Valley, selectively participate in the
lower volume end.

Valley 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.

Valley's management believes that the packaged gas market has annual sales
of approximately $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 also believes that large, multi-state
distributors, including Valley, account for approximately 45% of sales in the
packaged gas market. Management estimates that the remaining sales are generated
by approximately 900 smaller distributors, many of which it believes are
potential candidates for acquisition by larger distributors or industrial gas
producers.

Valley 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)
the fact that 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. Valley believes there are many reasons for this trend, including the
following:

- Owners of smaller gas distribution companies are reaching retirement age
without qualified succession.

- Changes in technology are providing opportunities for more efficient and
effective pricing, order entry, inventory and distribution management.
Larger distributors are more likely to have the capital and

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human resources to take advantage of these opportunities, thereby
creating greater margin, 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 smaller distributors to access, maintain and afford.
Several major gas producers no longer provide full service support to
distributors, which service support had historically included manuals,
audits and training.

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

In recent years, the propane industry has also been undergoing
consolidation for many of the same reasons as the industrial gas industry.
Valley has been taking advantage of this consolidation trend through selective
acquisitions. Except for several large companies, the propane distribution
industry is also highly fragmented. Industry sources indicate there are
approximately 7,000 retail propane companies operating 13,500 local distribution
centers nationwide. Valley believes that the 20 largest propane distributors, of
which Valley is one, have 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 affect 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 typically a large cost-cutting item for
purchasers. 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.

The propane distribution industry is also a mature industry with growth
consistent primarily with housing starts, energy consumption and replacement of
alternate fuels. The cost of propane per BTU compares favorably with heating oil
and natural gas but is much less costly than electricity. Although there are
commercial and industrial applications for propane, which include forklift
motors, agriculture and heat-treating, the majority of distributor propane sales
are in support of residential heating. Because the supplier typically owns most
of the storage tanks which are used for propane home heating, good service and
the inconvenience of changing tanks normally results in minimal account
turnover. Home heating propane also typically is resistant to economic downturns
but is influenced by seasonal temperature variation or "degree days". With new
construction resulting in larger houses, there has been a corresponding increase
in demand. From area to area, there can be a significant variation in demand,
which is not only dependent on housing growth but also the availability of
alternate sources of energy.

3

BUSINESS STRATEGY

Valley has implemented a strategic plan primarily focused on earnings
improvement rather than short term sales growth. The plan reflects a concerted
effort to improve variable margins and reduce operating expenses to historical
levels. The plan calls for real internal growth above the Gross National Product
from Valley's propane product line only, with all other products providing
growth at or slightly below the Gross National Product. Fiscal years 2003 and
2004 were focused on returning Valley to acceptable levels of profitability.
Valley plans to resume growth through acquisitions beginning in fiscal year
2005. Variable margin improvement will result from policies, procedures,
software design changes and training, which support proper product discounting
(primarily hard goods) by branch personnel. To a lesser degree, margin
improvement will also result from private labeling certain hard goods and
preferentially selling products from suppliers which will provide higher
margins. Operating expenses, measured as a percentage of sales, will be
systematically reduced to levels consistent with pre fiscal year 2002 historical
averages. Reductions will occur in most categories of expenses, with the most
significant impact occurring from reductions in staff. The limited acquisition
effort, which will begin again in fiscal year 2005, will be funded primarily
through internally generated funds. Opportunities given serious consideration
must be capable of providing Valley with value added through consolidation and
rationalization of assets and personnel. Valley may also consider debt financing
to accommodate a reasonable size "one chance" acquisition opportunity, if it
were to develop. If a larger acquisition opportunity were to become available,
Valley may also consider issuing additional equity to supplement its then
available senior debt resources.

DEVELOP OR ENHANCE UNIFORM MARKETING PRACTICES

Valley's acquisition strategy has created a diversified cultural base of
employees, whose operating practices are often the result of various past
ownership philosophies and management styles. The creation of a unified
organization with a common focus, common objectives and common practices is
critical if customer service, pricing and operating costs are to be optimized.
To accomplish this requires Valley management to develop and provide: (i)
clearly stated polices and procedures, which are based upon an accurate
understanding of the needs and characteristics of each size and class of
customer; (ii) required capital assets, such as containers and vehicles to
respond to customer needs; and (iii) a management information system which
facilitates detailed customer and local market intelligence. Valley believes
significant margin improvement will result from the further development and
better utilization of its management information systems by providing the
ability to effectively limit unnecessary discounting, supporting the adherence
to uniform policies and procedures, taking advantage of volume discount
purchases not available to smaller competitors and selling more private label
products.

ACHIEVE AN OPTIMAL COST PROFILE

Valley is striving to produce, package and market its products and services
at optimal cost. An optimal cost position should be achieved by increasing
branch size, staffing all locations based upon recognized standards and
minimizing the size and increasing the value-added effectiveness of corporate
staff. Valley believes it will be successful in optimizing both its cost
position and its overall financial performance by recognizing and responding to
the uniqueness of each market area. Where branch size is sub-optimal, Valley has
and will develop alternatives to increase size through acquisitions and limited
product diversification. Valley has implemented a "best practices" effort
involving identification of the most effective method of performing a specific
activity, such as the effective selection of product lines and brands, and has
adopted procedures and training to implement the practice as a standard
throughout Valley's operations.

Valley 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. Valley has focused and will continue to focus on expanding propane, its
main complementary product line. 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.

4

GROWTH THROUGH ACQUISITIONS

Prior Acquisitions. Since the formation of Valley in 1958, Valley has
completed the acquisition of 70 distributors. Valley's acquisitions historically
have been financed through debt, although Valley expects that future
acquisitions will be financed, primarily with internally generated funds,
supplemented with limited borrowings under Valley's existing credit facility,
and acquisition-specific seller financing. Valley does not currently intend to
issue shares of its common stock or other securities in order to finance its
acquisitions, but may in the future elect to do so as described above.

Acquisition Strategy. Valley intends to continue to focus its acquisition
efforts in market areas where Valley has an existing presence. Over the next
five-year period, Valley expects its expenditures for acquisitions to be below
pre-fiscal year 2003 historical levels unless opportunities develop in locations
and at prices which would justify additional capital expenditures. Valley
believes there are many potential acquisition target companies with operations
in these market areas. Valley 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 Valley to achieve limited operating efficiencies through
volume discounts on purchases, lower administrative and professional expenses
and the purchase of new equipment to replace inefficient and previously leased
equipment at relatively expensive lease rates.

Valley 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. Valley also believes that it has a
well-organized acquisition approach, 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 Valley's
experience, price is not always the primary determining factor in a selling
distributor's choice of a buyer. Rather, most owners of independent distributors
are sensitive as to whom they sell their business and have concern for the well
being of their employees following the acquisition. Valley 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, Valley
competes with a limited number of major industrial gas producers, as well as
national and regional gas distributors. The largest national distributor is
Airgas, Inc., referred to as Airgas, which has been growing through acquisitions
since the mid-1980s. Valley expects that Airgas will continue to selectively
acquire distributors in the future, and in some situations will compete with
Valley for acquisitions. Valley believes that the major industrial gas producers
have self-imposed size and geographic constraints with respect to acquiring
independent distributors. Valley 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, Valley believes
that the prices paid for independent distributors will generally decrease to the
level of the 1980s, when such price consisted primarily of the adjusted asset
value of a distributor plus a small premium.

The smaller, independent distributors with which Valley 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. Valley has established formal procedures for
locating, investigating and valuing potential distributor acquisitions. Criteria
used by Valley in evaluating potential acquisitions include (i) a history of
profitability; (ii) a realistic projection of future performance; (iii) a sales
mix with 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.

5

ENHANCE ORGANIZATIONAL STRENGTH

Valley believes that to attract and maintain customers it must have a
skilled, responsive work force dedicated to providing excellent service. Valley
works to instill a service culture through various operational policies. Valley
places special emphasis on customer service, including the ability to quickly
respond to technical questions on products and applications. Valley believes
this is a significant advantage provided to customers.

Valley strives to utilize fully its existing management resources.
Beginning in fiscal year 2002, Valley has been realigning certain reporting
relationships to place operating and key customer account responsibility at the
local market level. These changes also allowed Valley to redirect the focus of
support management efforts to important functions, such as non-key customers,
logistics, training, and the formulation of standard practices and procedures,
which are vital to Valley's financial growth. During fiscal year 2003 and 2004,
Valley replaced certain members of its executive management in order to improve
its strategic focus.

PRODUCTS

Gases packaged and distributed by Valley 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, Valley 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, Valley also
manufactures a portion of its acetylene requirements at its facilities in West
Mifflin 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 2004, acetylene accounted for
approximately 3.0% of net sales.

Valley 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.

Financial information by product is prepared and evaluated on a location
basis. (See segment discussion in Part 1 -- Item 1 -- Business -- Overview)

The following table sets forth the percentage of Valley's net sales for the
fiscal years ended June 30, 2002, 2003 and 2004 for each of the following
products and services:

CUSTOMERS

Valley currently has more than 159,000 customers, none of which accounted
for more than 1.0% of net sales in fiscal 2004. In fiscal 2004, major industry
categories served by Valley included manufacturing which represented 15% of
Valley's net sales, industrial -- 11%, metal production and fabrication
customers -- 10%, construction -- 9%, health care -- 6% and mining, oil and
chemicals -- 5%. The customer base also includes

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smaller distributors in close proximity to one of Valley's larger facilities,
making it economically advantageous to purchase certain products from Valley.

Valley believes that 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 geographic market to acquire existing customers. However, service
requirements for certain large customers are becoming more demanding and
sophisticated, and Valley 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. Valley 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.
Valley believes that the average market size is approximately $25 million.
Valley solicits and maintains business primarily through a direct selling effort
using an experienced sales force of approximately 63 sales representatives.
Sales representatives receive continuous training so that they are knowledgeable
about gas and product performance characteristics and current application
technology. On average, Valley'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 Valley suppliers to address difficult or innovative
application requirements. Valley has been testing both telemarketing and catalog
solicitation at selected locations to attract new accounts. Valley believes that
electronic commerce conducted through the internet, or e-commerce, will become
an important method in attracting and maintaining some customers in the future.
Valley 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. Valley'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. Valley competes in many
markets throughout West Virginia, Pennsylvania, Kentucky, Ohio, Virginia,
Tennessee, Maryland, Delaware, New Jersey, Wisconsin and Florida. Valley
believes it has a strong or leading position in most of the markets it serves.

While Valley competes with the distribution subsidiaries of the major
industrial gas producers, Valley 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.

7

SUPPLIERS

Valley purchases industrial gases pursuant to short-term supply
arrangements having no minimum commitments and open purchase orders with three
of the five major gas producers in the United States. One such producer
accounted for approximately 45.0% of Valley's gas purchases in fiscal year 2004.
If any of these arrangements were terminated, Valley believes it would be able
to readily secure an alternate source of supply.

Valley purchases welding equipment and consumable supplies from
approximately 49 primary vendors, of which purchases from the top five vendors
represented approximately 64.0% of total purchases in fiscal year 2004.
Purchases from major vendors are made pursuant to purchase orders that are
cancelable by Valley upon minimal notice. With supplier overcapacity in most
product lines and high competitive rivalry for volume purchasers, large
distributors, such as Valley, are generally able to purchase welding equipment
and supplies from the vendor of their choice. This enables Valley to participate
in vendor discount and rebate programs and obtain products at competitive costs.

Valley purchases propane from pipeline sources at various supply points in
its market areas from approximately five primary vendors. One such vendor
accounted for 65.0% of total propane purchases in fiscal year 2004, generally on
a short-term basis at prevailing market prices. Valley historically has been
able to adjust prices to customers to reflect changes in product cost, which
varies with season and availability. Valley is not dependent upon any single
supplier for propane and supplies have historically been readily available. A
significant portion of Valley's propane sales are made to industrial customers.
As a result, Valley's sales are less seasonal than those of many competitors who
focus on the residential market. Because of Valley's off-peak seasonal demand,
Valley 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, 2004, Valley employed 647 people, compared to 678 at June 30,
2003. Approximately 13.0% were covered by collective bargaining agreements.
Historically, Valley has not been adversely affected by strikes or work
stoppages. Approximately 62.0% of Valley's employees are hourly workers. Valley
believes it has a skilled and motivated work force and that its relationship
with employees is good. Valley believes that its wages and benefits, which
reflect local conditions, are competitive with those provided by major
competitors. All of Valley's hourly employees are currently paid wages at a rate
that exceeds the current and federally mandated increases in the minimum wage.
Valley believes it would not be materially impacted by future increases in the
minimum wage.

Valley believes that continuing education is necessary for its employees to
achieve and maintain the skills required to be effective in today's competitive
environment. Valley 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
Valley's various locations.

REGULATORY MATTERS

Valley 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, Valley voluntarily complies with applicable
industry safety standards. Management believes that Valley 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 Valley.

PRODUCT LIABILITY AND INSURANCE

Valley maintains insurance coverage which it believes to be adequate. The
nature of Valley's business may subject it to product liability lawsuits. To the
extent that Valley is subject to claims which exceed or are

8

outside of its liability insurance coverage such suits could have a material
adverse effect on Valley. Valley has not suffered any material losses from such
lawsuits in the past.

VARIABLE INTEREST ENTITIES

Valley leases buildings and equipment and rents cylinders under operating
leases from related parties, collectively referred to as the Variable Interest
Entities, primarily including West Rentals, Inc., GEW Real Estate LLC, Real
Equip-Lease LLC and Acetylene Products Corporation. The purpose of these
entities is to purchase, develop, sell and/or lease real estate. Valley has
historically entered into these leases to preserve its capital to support its
growth through acquisition strategy. Valley's Chairman, who is the beneficial
owner of 75% of Valley's common stock, also beneficially owns more than 50% of
each of these entities. These arrangements are supported by a master lease
agreement, as well as certain individual lease agreements, that do not contain a
bargain purchase option, fixed renewal option or residual value guarantee.
Valley has no equity interest in any of these Variable Interest Entities.
Additionally, the creditors and beneficial interest holders of these entities
have no recourse to the general credit of Valley.

Based upon current interpretation of FIN 46R, in situations where no
contractual residual value guarantees exist, a related party lease is presumed
to contain an implied residual value guarantee. Therefore, management concluded
that these entities collectively represent a variable interest entity under the
provisions of FIN 46R and have been consolidated as required.

SEGMENT INFORMATION

Financial information regarding Valley's segments is contained in the
financial statements included in this report.

ITEM 2. PROPERTIES

Valley owns approximately 500,000 cylinders, 32,000 bulk propane tanks and
406 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 Valley expects
will extend on average for 30 years or longer.

Valley has 64 industrial gas and welding supply distribution locations in
11 states, 31 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. Valley'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 Valley were
purified, packaged and mixed at Valley's facility in Cranberry Township,
Pennsylvania. During 2003, Valley concluded that service to its customers and
its cost structure would be improved by consolidating this facility into nearby
operations. This transition was concluded during fiscal year 2004 without a
significant impact to Valley's results of operations.

Valley's facilities are leased on terms that Valley believes are consistent
with commercial rental rates prevailing in the surrounding rental market. All of
Valley's major facilities are leased under long-term arrangements. Valley
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. Valley, 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. Valley has not to date suffered
any material loss as a result of any such lawsuit. Valley maintains liability

9

insurance policies with insurers in such amounts and with such coverages and
deductibles as Valley believes is reasonable and prudent. However, there can be
no assurance that such insurance will be adequate to protect Valley from
material expenses related to such personal injury or property damage or that
such levels of insurance will continue to be available in the future at
economical prices. There are no known claims that are likely to have a material
adverse effect on the results of operations, financial condition or cash flows
of Valley.

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, 2004.

10

PART II

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

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

The range of daily closing prices per share for Valley's common stock from
July 1, 2002 to June 30, 2004 was:

The reported last sale price of Valley's common stock on the American Stock
Exchange on September 13, 2004 was $9.11.

On September 13, 2004, there were 91 record holders of Valley's common
stock.

For the year ended June 30, 2004, Valley has authorized a $.09 dividend per
share to be paid on October 1, 2004 to shareholders of record as of September 1,
2004.

Valley's new credit facility allows for the payment of cash dividends on
Valley's capital stock up to the limit established in the credit agreement. See
Item 7 -- "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and Note 6 of Notes to
Consolidated Financial Statements contained in Item 15.

11

ITEM 6. SELECTED FINANCIAL DATA

Selected consolidated financial data for Valley 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
Valley's consolidated financial statements included in Item 15 herein.

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

(1) Effective July 1, 2001, Valley 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 3 to the financial statements.

Effective July 1, 2001, Valley 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, 2000 and 2001 respectively, goodwill
amortization expense of $1.8 and $2.1 million was recorded. See Note 5 to
the financial statements.

(2) Operating and administrative expenses for the three months and twelve months
ended June 30, 2004 include a reduction of $0.8 million in rent expense,
partially offset by other expenses, as a result of consolidating under FIN
46R, Variable Interest Entities owned by a related party that leases
properties to Valley as of March 31, 2004.

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

OVERVIEW

Valley 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. Valley's net sales have grown, primarily as a result of
acquisitions, at a compound annual rate of approximately 16.0% per year since
Valley started business in 1958, increasing from $190,000 in that year to $154.5
million in fiscal 2004. In fiscal 2004, gases accounted for approximately 49.2%
of net sales, welding equipment and supplies accounted for approximately

12

35.0% of net sales, while cylinder rental, tank rental, delivery charges and
compliance charges accounted for approximately 15.8% of net sales.

Valley believes it has been successful in executing its strategy of growth
through acquisitions, having completed 54 acquisitions since 1990. Some
acquisitions have had, and Valley expects that some future acquisitions will
have, a dilutive effect upon Valley'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 Valley's existing
operations. The consideration for most acquisitions includes a combination of a
cash payment at closing, seller financing and payments under covenants not to
compete and consulting agreements. In most cases, operating cash flow of an
acquired business is positive in a relatively short period of time. For many
acquisitions, Valley 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.

Valley's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months
falling in Valley'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. Valley 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, Valley'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. Future acquisitions may affect Valley's gross profit margins as a
percentage of sales depending upon the product mix of the acquired businesses.

13

RESULTS OF OPERATIONS

The following table sets forth, for the periods indicated, certain items in
Valley'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.

As of March 31, 2004, Valley consolidated variable interest entities as
required under FIN 46R. Accordingly, fiscal 2004 results include three months of
operations of these entities. It is anticipated that fiscal 2005 will include
twelve months operations of these entities.

COMPARISON OF YEARS ENDED JUNE 30, 2004 AND 2003

Net sales increased 2.1%, or $3.2 million, to $154.5 million for the year
ended June 30, 2004 from $151.3 million for the year ended June 30, 2003.
Acquisitions made during the preceding twelve months contributed $0.1 million of
the increase in net sales for the year ended June 30, 2004, while same-store
sales increased $3.1 million or 2.1% for such twelve month period. Propane sales
increased $3.7 million on a same-store basis compared to the prior year period,
reflecting $3.3 million in price inflation and $0.4 million increase due to
increase in the volume of propane sold. Same-store bulk propane gallons sold
were down 0.1% for the year reflecting reduced demand due to warmer than average
temperatures as compared to the prior period. Sales of hard goods decreased $0.8
million from the prior year on a same-store basis, reflecting the effect of the
decline in the economy during the period and Valley's decision to reduce
activity with selective low margin accounts. Gases and cylinder revenue
represented 65.0% of net sales for the year ended June 30, 2004, with hard goods
representing 35.0%. In comparison, gases and cylinder revenue represented 63.7%
of net sales for the year ended June 30, 2003, with hard goods representing
36.3%.

Gross profit, which excludes depreciation and amortization, increased 6.2%,
or $4.8 million, to $82.9 million, for the year ended June 30, 2004, as compared
to $78.1 for the year ended June 30, 2003. Acquisitions made since the prior
year contributed $0.1 million of increase in gross profit while same-store gross
profit increased by $4.7 million. Gross profit as a percentage of net sales was
53.7% for the year ended June 30, 2004, compared to 51.6% for the year ended
June 30, 2003, primarily reflecting improvements in gross profits for hard goods
as average price realization increased and the non-recurrence of a charge of
$1.4 million for disposal of slow-moving hardgoods inventory in the fiscal year
ended June 30, 2003. Valley believes that these results reflect its efforts to
implement a more standardized pricing policy for its products and services.

14

Operating and administrative expenses decreased 8.2%, or $5.1 million, to
$57.2 million for the year ended June 30, 2004. Approximately $0.7 million of
this decrease is due to a net reduction in expenses resulting from the
consolidation under FIN 46R, of Variable Interest Entities owned by a related
party that leases property to Valley. In addition, this reduction reflected,
primarily, the results of Valley's cost reduction initiatives and was partially
offset by the cancellation of related party lease obligations of $0.5 million.
The majority of these expense reductions were in the areas of wages, benefits,
legal, professional and other general expenses. Lastly, the fiscal year 2003
results included charges associated with Valley's repositioning and
strengthening program totaling $2.6 million for the year. Operating and
administrative expenses as a percentage of sales were 37.5% for the year ended
June 30, 2004, as compared to 41.2% for the year ended June 30, 2003.

Depreciation and amortization expense decreased $1.4 million for the year
ended June 30, 2004, as compared to the year ended June 30, 2003, primarily as a
result of certain intangibles becoming fully amortized, partially offset by
depreciation expense related to the Variable Interest Entities which totaled
$0.1 million during the three months since the March 31, 2004 consolidation.

Interest expense decreased $1.0 million to $5.6 million for the year ended
June 30, 2004, as compared to $6.6 million for the year ended June 30, 2003,
reflecting primarily the effect of reduced outstanding debt balances and lower
interest rates due to improved financial performance. Included in interest
expense was a decrease of $189,630 and $4,711 for the years ended June 30, 2004
and June 30, 2003, respectively, to record changes in the fair market value of
Valley's interest rate swap agreements under SFAS No. 133. Interest expense also
included $0.1 related to the Variable Interest Entities since the March 31, 2004
consolidation.

Other income increased $0.4 million year to date, as compared to prior year
comparable periods primarily due to income earned by the Variable Interest
Entities which was not related to the leasing of properties to Valley.

Minority interest earnings reflect the elimination of net pre-tax income
earned during the quarter by the Variable Interest Entities since Valley has no
direct ownership interest in these entities. The amount eliminated is primarily
the reduction in rent expense and other income noted above, partially offset by
expenses incurred by the entities.

The Company's effective tax rate decreased from 39.0% for the prior year to
37.0% for the current year due to a tax benefit of approximately $0.2 million
relating to the donation of inventory to a qualified charitable entity, which
resulted in a tax deduction for the fair market value of the inventory.

For the reasons state above, net income increased to $7.7 million for the
year ended June 30, 2004, as compared to $0.2 million for the fiscal year ended
June 30, 2003. Diluted earnings per share were $0.81 for fiscal year 2004, as
compared to $0.03 for fiscal year 2003. Diluted weighted average shares
outstanding for fiscal year 2004 were 9,426,609, as compared to 9,392,885 for
fiscal year 2003.

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). Valley 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. 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%.

15

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 Valley'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. Valley 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 Valley determined to no longer be
of value, based upon a review of each individual's circumstances and the
probability of effect on Valley's performance and accelerated depreciation
associated with leasehold improvements at facilities being closed by Valley. For
each of the facilities being closed, Valley 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 Valley in order to reduce its cost structure and to improve
its operating efficiency.

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 Valley's credit
facility, and was partially offset by lower average debt balances.

Valley'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 income for the year was $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.

LIQUIDITY AND CAPITAL RESOURCES

Historically, Valley 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, 2004, the Company had working capital of approximately $9.9
million, as compared to $10.7 million as of June 30, 2003, reflecting primarily
the reduction in inventory of $0.6 million and the reduction of accounts
receivable of $0.3. Funds provided by operations for the year ended June 30,
2004 were approximately $20.5 million, as compared to $16.5 million for the year
ended June 30, 2003. This increase of $4.0 million is primarily attributable to
the $7.4 million increase of net income, receipt of an income tax refund of $1.2
million, the non-recurrence of inventory write offs of $1.2 million and
reduction in inventory of $3.8 million. Funds used for investing activities were
approximately $7.1 million for the year ended June 30, 2004, consisting
primarily of capital spending, as compared to $7.3 million for the year ended
June 30, 2003. Valley anticipates capital expenditures of approximately $7.0
million for fiscal year June 30, 2005. Valley has committed $1.9 million of the
$7.0 million for the purchase of distribution vehicles to be delivered in fiscal
2005. Funds used for financing activities for the year ended June 30, 2004 were
approximately $14.7 million

16

from net payments of debt, compared to $8.6 million for the year ended June 30,
2003. The Company's cash balance decreased $1.2 million during the year ended
June 30, 2004 to $0.5 million.

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 $16.5 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, Valley 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 was $68.5 million with a June 28, 2005 maturity date at June 30, 2003.

On April 30, 2004, Valley entered into an amended credit agreement
establishing a $75 million revolving note with a maturity of five years,
replacing the previous revolving and term notes described above. Covenant
requirements under the amended agreement are not significantly different from
those under the previous agreement.

The weighted average interest rate for substantially all of the borrowings
under the credit facility was 2.64% as of June 30, 2004. As of June 30, 2004,
availability under the revolving loan was approximately $18.0 million, with
outstanding borrowings of approximately $55.4 million and outstanding letters of
credit of approximately $1.6 million. The credit facility is secured by all of
Valley's assets. The revolving loan is used primarily to fund acquisitions.
Valley 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 the revolving loan at either the lender's prime rate or various LIBOR rates,
at Valley's discretion, plus an applicable spread.

The loan agreement for the credit facility, as amended, contains various
financial covenants applicable to Valley, including covenants requiring minimum
fixed charge coverage and maximum funded debt to EBITDA. As of June 30, 2004,
Valley is in compliance with these covenants and believes that it will continue
to be in compliance through at least the next twelve months.

The Variable Interest Entities debt, in the amount of $6.7 million,
consists primarily of asset-backed mortgages for real estate. This debt has
various interest rates ranging from 3.5% to 7.0% and various maturities from
2004 to 2016. Certain mortgages are personally guaranteed by the Chairman of
Valley.

Valley 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, 2004 was $2.9 million. Some of these notes are secured by assets
related to the applicable acquisition, some are unsecured and some are backed by
bank letters of credit issued under Valley's credit facility.

Valley 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 not be
significant.

Interest rate swap agreements are used to reduce interest rate risks and
costs inherent in Valley's debt portfolio. Valley 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, Valley enters into agreements to effectively convert
variable-rate debt to fixed-rate debt. As of June 30, 2004, Valley had $55.0
million in notional amounts outstanding under interest rate swap agreements.
These swaps have an average pay rate of 6.1% versus a receive rate of 1.2%.

Valley 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

17

of this acquisition is currently estimated to be $10 million, which includes a
non-refundable payment of $1 million previously paid for this option. Valley
believes that it will have adequate capital resources available to fund this
acquisition and be in compliance with its debt covenant requirements at such
time that the option is exercised.

Valley 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 Valley's requirements for operating
funds, capital expenditures and future acquisitions for at least the next twelve
months. Valley has no plans at this time to issue additional shares of common
stock although it may consider issuing additional shares in the future as an
acquisition currency if a large acquisition opportunity were to develop in the
future. See Item 1. Business. "Industry Overview -- Business Strategy."

The schedule of maturities by segment of the Company's debt for the next
five years and thereafter is as follows:

The following table represents the Company's contractual obligations at
June 30, 2004:

Purchase obligations represent the total value of all open purchase orders
for the purchase of inventory as of June 30, 2004.

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 3 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

Valley 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

18

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, 2004 and 2003 are adequate.

INVENTORIES

Valley's inventories are stated at the lower of cost or market. Valley
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 and comparison to industry
averages.

GOODWILL AND OTHER INTANGIBLE ASSETS

Valley 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. Valley has elected to perform its annual test for indications of
goodwill impairment as of June 30th of each year. Since each Valley location is
an operating segment, management considers goodwill by location in evaluating
impairment. The annual impairment test used by Valley 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 Valley's cost of capital and (iii)
assumptions as to the availability of capital in the future.

EMPLOYEE HEALTH CARE BENEFITS PAYABLE

Valley has self-funded health care benefit programs in place whereby a
third party administrator settles and pays incurred claims on an on-going basis.
Valley estimates the level of outstanding claims, at any point in time, which
amounted to $1.1 million and $0.7 million at June 30, 2003 and 2004,
respectively. Included in this estimate are claims incurred but not reported,
based upon historical payment patterns, knowledge of individual claims and
estimates of health care costs. Valley 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.

INCOME TAXES

Income taxes are accounted for in accordance with the provisions of SFAS
No, 109, "Accounting for Income Taxes", under which deferred tax assets or
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the estimated tax rate at
the date of reversal. These differences are classified as current or non-current
based upon the classification of the related asset or liability. For temporary
differences that are not related to an asset or liability, classification is
based upon the expected reversal date of the temporary difference. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The Company estimates and records additional tax
expense based on uncertain tax positions taken by the Company within statutory
limitations. This estimate is adjusted when tax audits are completed or when the
statute of limitations expires on those recorded tax positions.

19

SEGMENTS

Effective with the adoption of FIN 46R in the third quarter of 2004 and the
required consolidation of certain variable interest entities (See Note 1), the
Company has two reportable segments: Valley and Variable Interest Entities.
Since these are two separate and distinct businesses, the financial information
for each company is maintained and managed separately. The results of operations
and assets for each of these segments are derived from separate financial
reporting systems. All intercompany activity is eliminated in consolidation.

The Variable Interest Entities reportable segment, including West Rentals,
Inc., GEW Real Estate LLC, Real Equip-Lease LLC and Acetylene Products
Corporation primarily purchases, develops, sells and/or leases real estate.

The Valley reportable segment operates 64 retail and distribution locations
in 11 states. All locations offer the same core products of packaged gases,
welding equipment and supplies. All locations generally sell to the same types
of customers such as metal fabrication, construction, general industrial,
research and laboratory, hospital and other medical, commercial, agricultural
and residential. The Company considers each of the locations to be an operating
segment as defined in FASB 131, however, none of these locations individually
meet the quantitative thresholds stated in FASB 131 of 10% of revenue (or
profits or assets). In addition, these segments are so similar in economic
characteristics, long-term gross margin averages, products sold, types of
customers, methods of distribution and regulatory environment that these
operating segments should be aggregated into one reporting segment.

FLUCTUATIONS IN QUARTERLY RESULTS

Valley 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, Valley's quarterly sales as a percentage of the
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 Valley's operating results has been moderate in
recent years, reflecting generally low rates of inflation in the economy and
Valley's historical ability to pass purchase price increases to its customers in
the form of sales price increases. While inflation has not had, and Valley does
not expect that it will have, a material impact upon operating results, there is
no assurance that Valley's business will not be affected by inflation in the
future.

NEW ACCOUNTING STANDARDS

In January 2003, the FASB issued FIN 46. A variable interest entity, or
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

20

about VIEs where an enterprise has a significant variable interest but is not
the primary beneficiary. FIN 46 was effective as of the second quarter of fiscal
year 2004 for VIEs existing prior to February 1, 2003. The required disclosure
provisions of FIN 46 were adopted in fiscal year 2003.

In December 2003, the FASB issued FIN 46R to further clarify the standard.
As required under the most recent deferral, Valley adopted FIN 46R as of March
31, 2004. Valley analyzed FIN 46R and its impact on the financial statements
with regard to the put/call agreement as well as related party lease agreements
discussed in Note 10 to the financial statements. Valley concluded that the
put/call agreement meets the scope exception requirements of FIN 46R for an
entity deemed to be a business and therefore was not consolidated at March 31,
2004. In addition, Valley concluded that the related party lease arrangement is
a variable interest entity and; therefore, is required to be consolidated with
Valley's financial statements, as of March 31, 2004, pursuant to the common
control provisions under FIN 46R (See Note 1 and 14 to the Financial
Statements).

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 Valley'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 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 Valley'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. Valley 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 Valley or any other
person that the results expressed will be achieved. Important risk factors that
may affect Valley'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 Valley's ability to (i) accurately identify attractive
acquisition targets and make accurate predictions regarding the performance of
those business if integrated into Valley'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, Valley'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 Valley's products, changes in the economy, monetary
or fiscal policies, changes in laws and regulations affecting Valley's business,
inflation and fluctuations in interest rates.

21

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information about Valley'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.

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

(1) Reflects the elimination of intercompany rent as a result of FIN 46R,
"Consolidation of Variable Interest Entities" at March 31, 2004.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

22

Summarized quarterly unaudited financial data for fiscal 2004 and 2003 is
as follows:

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 the acting 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 the acting 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, 2004, 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.

ITEM 9B. OTHER INFORMATION

None.

23

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF VALLEY

The directors and executive officers of Valley are as follows:

GARY E. WEST, CHAIRMAN OF THE BOARD. Mr. West has served as Chairman of
the Board of Directors of Valley since 1984. From 1970, when he purchased
Valley, to March 1995, Mr. West served as President of Valley. 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 Valley in January 1997 and
was appointed as Valley'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 Valley, 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, ACTING CHIEF FINANCIAL OFFICER AND DIRECTOR. Mr.
Hart was elected a director of Valley in January 1997. Mr. Hart was appointed as
President of Valley in June 2003 and as acting Chief Financial Officer in June
2004. 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.

AUGUST E. MAIER, DIRECTOR. Mr. Maier was elected a Director of Valley in
January 1997 and served as Valley's Acting President from February 2002 to
October 2002. In September 1997, Mr. Maier became an employee of Valley and
served as Corporate Director of Field Operations until his retirement in July
1999. He served as Chief Executive Officer of Houston Fearless 76, a
manufacturer of digital imaging and film processing equipment, from May 1995 to
August 1997. From October 1987 to May 1995, Mr. Maier was Chief Executive
Officer of Holox, Inc., a large distributor of industrial gases and welding
equipment. 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.

24

BEN EXLEY, IV, DIRECTOR. Mr. Exley was elected a Director of Valley 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
Valley 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 other information called for by Item 401 of Regulation S-K is contained
in Valley's definitive proxy statement relating to the annual meeting of
shareholders to be held on October 28, 2004, in the sections entitled "Election
of Directors" and is incorporated herein by reference.

The information called for by Item 405 of Regulation S-K is contained in
Valley's definitive proxy statement relating to the annual meeting of
shareholders to be held October 28, 2004, in the section titled "Section 16(a)
Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference.

The other information called for by Item 406 of Regulation S-K is contained
in Valley's definitive proxy statement relating to the annual meeting of
shareholders to be held on October 28, 2004, in the section entitled "Election
of Directors" and is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is contained in Valley's definitive
proxy statement relating to the annual meeting of shareholders to be held
October 28, 2004, 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 Valley's definitive
proxy statement relating to the annual meeting of shareholders to be held
October 28, 2004, in the section titled "Common Stock Ownership of Directors,
Nominees and Officers" and is incorporated herein by reference.

25

Following is the equity compensation plan information for Valley as of June
30, 2004:

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item is contained in Valley's definitive
proxy statement relating to the annual meeting of shareholders to be held
October 28, 2004, in the section titled "Certain Relationships and Related
Transactions" and is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information called for by this item is contained in Valley's definitive
proxy statement relating to the annual meeting of shareholders to be held
October 28, 2004, in the section entitled "Principal Accountant Fees and
Services" and is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) Financial Statements

The consolidated financial statements of Valley 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 Valley'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

Valley filed a Current Report on Form 8-K on August 11, 2004 reporting
under Item 5 -- Other Events and Regulation FD Disclosure, Item 7 -- Financial
Statements and Exhibits and Item 12 -- Disclosure of Results of Operations and
Financial Condition the Company's financial results for the fourth quarter and
fiscal year ended June 30, 2004 and the declaration of a one-time cash dividend.

Valley filed a Current Report on Form 8-K on April 28, 2004 reporting under
Item 7 -- Financial Statements and Exhibits and Item 12 -- Disclosure of Results
of Operations and Financial Condition its financial results for the third
quarter ended March 31, 2004.

26

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 28, 2004
/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.

27

VALLEY NATIONAL GASES INCORPORATED

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors,
Valley National Gases Incorporated:

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements 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, 2004 and 2003, and the results
of its operations and its cash flows for each of the two years in the period
ended June 30, 2004 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 audits. We conducted our
audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.

As discussed in Note 14 to the financial statements, in 2004 the Company
adopted FIN46R, "Consolidation of Variable Interest Entities."

/s/ PricewaterhouseCoopers LLP

Pittsburgh, Pennsylvania
August 9, 2004

F-1

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
Valley National Gases Incorporated:

We have audited the accompanying consolidated statements of operations,
changes in stockholders' equity, and cash flows of Valley National Gases
Incorporated (a Pennsylvania corporation) for the year ended June 30, 2002.
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 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 consolidated results of operations and cash flows
of Valley National Gases Incorporated for the year ended June 30, 2002, 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

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED BALANCE SHEETS

JUNE 30, 2003 AND 2004

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

F-3

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 2002, 2003 AND 2004

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

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 2002, 2003 AND 2004

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

F-5

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 2002, 2003 AND 2004

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

F-6

VALLEY NATIONAL GASES INCORPORATED

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2003 AND 2004

1. BASIS OF PRESENTATION:

The accompanying condensed consolidated financial statements include the
accounts of Valley National Gases Incorporated and entities, as of June 30,
2004, required to be consolidated pursuant to Financial Accounting Standards
Board Interpretation No. 46R, "Consolidation of Variable Interest Entities,"
("FIN 46R") effective March 31, 2004. The term "Valley" as used throughout this
document is used to indicate Valley National Gases Incorporated. The term "the
Company" as used throughout this document is used to indicate Valley as well as
entities required to be consolidated under FIN 46R. Effective with this
adoption, Valley has two reportable segments: Valley and Variable Interests
Entities (See Note 3).

2. ORGANIZATION:

Valley National Gases Incorporated, a Pennsylvania corporation (Valley),
produces, packages and resells industrial gases, specialty gases and propane;
and resells welding hard goods and equipment. Valley's gas operations consist
primarily of packaging and mixing industrial, medical and specialty gases, such
as oxygen, nitrogen and argon, in pressurized cylinders and transporting these
cylinders to customers from one of Valley's 65 distribution or retail locations.
In addition, Valley 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 Valley was
founded, it has completed 70 acquisitions of smaller independent local
companies. Valley, through its consolidated subsidiaries has been in operation
since 1958 and currently operates in 11 states.

3. 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

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

F-7

INVENTORY

Valley's inventories are stated at the lower of cost or market. Valley
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.

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

PROPERTY, PLANT AND EQUIPMENT

Valley's 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). See Note 14 for information related to property plant and equipment
owned by the Variable Interest Entities.

Effective July 1, 2001, Valley 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 and was
the result of thorough studies and analyses. The studies considered empirical
data obtained from truck manufacturers and other industry experts and experience
gained from Valley's maintenance of a delivery vehicle population of
approximately 200 delivery vehicles. The change had the effect of reducing
depreciation expense for the year ended June 30, 2002 by approximately $495,000
and increasing net income by $290,000 or $0.03 per diluted share.

GOODWILL AND OTHER INTANGIBLE ASSETS

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. Since each Valley location is an
operating segment, management considers goodwill by location compared to actual
and expected future results in evaluating impairment. Consulting agreements are
entered into with the owners of various businesses acquired by Valley and
require such owners to be available to perform services upon Valley'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 using the
straight line method.

F-8

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.

EMPLOYEE HEALTH CARE BENEFITS PAYABLE

Valley has self-funded health care benefit programs in place whereby a
third party administrator settles and pays incurred claims on an on-going basis.
Valley estimates the level of outstanding claims, at any point in time, which
amounted to $1.1 million and $0.7 million at June 30, 2003 and 2004,
respectively. Included in this estimate are claims incurred but not reported,
based upon historical payment patterns, knowledge of individual claims and
estimates of health care costs. Valley has stop-loss insurance coverage in place
to limit the extent of individual claims. As of July 1, 2003, Valley changed
third party administrators which resulted in more timely payment of claims and
reduced claim costs. As a result, Valley reduced its accrual by $400,000 at June
30, 2004.

INCOME TAXES

Income taxes are accounted for in accordance with the provisions of SFAS
No, 109, "Accounting for Income Taxes", under which deferred tax assets or
liabilities are computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the estimated tax rate at
the date of reversal. These differences are classified as current or non-current
based upon the classification of the related asset or liability. For temporary
differences that are not related to an asset or liability, classification is
based upon the expected reversal date of the temporary difference. Valuation
allowances are established, when necessary, to reduce deferred tax assets to the
amount expected to be realized. The Company estimates and records additional tax
expense based on uncertain tax positions taken by the Company within statutory
limitations. This estimate is adjusted when tax audits are completed or when the
statute of limitations expires on those recorded tax positions.

SEGMENTS

Effective with the adoption of FIN 46R in the third quarter of 2004 and the
required consolidation of certain variable interest entities (See Note 1), the
Company has two reportable segments: Valley and Variable Interest Entities.
Since these are two separate and distinct businesses, the financial information
for each company is maintained and managed separately. The results of operations
and assets for each of these segments are derived from separate financial
reporting systems. All intercompany activity is eliminated in consolidation.

The Variable Interest Entities reportable segment, including West Rentals,
Inc., GEW Real Estate LLC, Real Equip-Lease LLC and Acetylene Products
Corporation primarily purchases, develops, sells and/or leases real estate.

The Valley reportable segment operates 64 retail and distribution locations
in 11 states. All locations offer the same core products of packaged gases,
welding equipment and supplies. All locations generally sell to the same types
of customers such as metal fabrication, construction, general industrial,
research and laboratory, hospital and other medical, commercial, agricultural
and residential. The Company considers each of the locations to be an operating
segment as defined in FASB 131, however, none of these locations individually
meet the quantitative thresholds stated in FASB 131 of 10% of revenue (or
profits or assets). In addition, these segments are so similar in economic
characteristics, long-term gross margin averages, products sold, types of
customers, methods of distribution and regulatory environment that these
operating segments should be aggregated into one reporting segment.

F-9

EARNINGS PER SHARE

Basic earnings per share is computed in accordance with SFAS No. 128,
"Earnings Per Share" by dividing net income by the number of weighted-average
common shares outstanding during the year. Diluted earnings per share is
computed by dividing net income by the number of weighted-average common and
common equivalent shares outstanding during the year (See Note 8).

ACCOUNTING FOR STOCK-BASED COMPENSATION

Valley has a stock-based compensation plan which is described more fully in
Note 11. Valley 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 income for any year, as all options granted under the plan had an
exercise price equal to or greater than the market value of the underlying
common stock on the grant date.

If Valley 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" Valley's net income and earnings per share would
have been the pro forma amounts indicated below:

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 ended June
30:

MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:

Valley 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 10.0% of revenues in 2002, 2003
and 2004.

Valley purchases industrial gas, welding supplies, and bulk gas from a
variety of vendors. Two of those vendors in fiscal year 2004 individually
supplied purchases greater than 10.0%, accounting for 18.7% and 13.2%,
respectively. Three vendors in fiscal year 2003 individually supplied purchases
greater than 10.0%,

F-10

accounting for 13.0%, 12.2% and 10.2%, respectively. All vendors that exceeded
10.0% supplied gases to the company.

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 Bulletin No. 104. In most revenue
transactions, Valley delivers the product using owned or leased vehicles or the
customer purchases the product at the distribution location. Cylinder lease
revenue is deferred when the arrangement is negotiated and recognized into
revenue ratably over the terms of the lease. Customer prepayments are recorded
as deferred revenue.

SHIPPING AND HANDLING FEES AND COSTS

Valley 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 estimated fair values of the Company's financial instruments as of June
30, 2003 and 2004 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.

Valley 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. Valley 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, Valley
recognizes all derivatives on the balance sheet at fair value. On the date the
derivative instrument is entered into, Valley 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, Valley
considers the notional amount, the basis of the interest rate and the fair
market value of the derivative in comparison to Valley'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 a decrease in interest expense of

F-11

$206,817, $4,711 and $189,630 for fiscal years ended 2002, 2003 and 2004,
respectively. At June 30, 2004 and 2003, Valley had interest rate swap
agreements outstanding that effectively convert a notional amount of $60.0
million and $55.0 million, respectively, from floating rates to fixed rates. The
agreements outstanding at June 30, 2004 mature at various times between December
2004 and January 2006. Valley would have paid $2,107,444 and $5,128,990 to
settle its interest rate swap agreements at June 30, 2004 and 2003,
respectively, which represents the fair value of these agreements. The carrying
value equals the fair value for these contracts at June 30, 2004 and 2003. Fair
value was estimated based on the mark-to market value of the contracts, which
closely approximates the amount Valley could receive or pay to terminate the
agreements at year end.

Based upon interest rates at June 30, 2004, Valley expects to recognize
into earnings in the next 12 months net current liabilities of $247,804 related
to outstanding derivative instruments and net losses of $101,984 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 January 2003, the FASB issued FIN 46. A variable interest entity, or
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 was effective as of the second quarter of fiscal
year 2004 for VIEs existing prior to February 1, 2003. The required disclosure
provisions of FIN 46 were adopted in fiscal year 2003.

In December 2003, the FASB issued FIN 46R to further clarify the standard.
As required under the most recent deferral, Valley adopted FIN 46R as of March
31, 2004. Valley analyzed FIN 46R and its impact on the financial statements
with regard to the put/call agreement as well as related party lease agreements
discussed in Note 10 to the financial statements. Valley concluded that the
put/call agreement meets the scope exception requirements of FIN 46R for an
entity deemed to be a business and therefore was not consolidated at March 31,
2004. In addition, Valley concluded that the related party lease arrangement is
a variable interest entity and; therefore, is required to be consolidated with
Valley's financial statements, as of March 31, 2004, pursuant to the common
control provisions under FIN 46R (See Note 1 and 14 to the Financial
Statements).

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-12

4. ACQUISITIONS:

Valley 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 Valley's
consolidated financial statements since the effective dates of the respective
acquisitions. Valley allocates the purchase price based upon the fair value at
the date of acquisition in accordance with SFAS 141, "Business Combinations".
Any contingencies are recorded when resolved.

In August 2002, Valley purchased Gerber's Propane, Inc.

During fiscal 2002, Valley purchased Buckeye Corporation (August 2001),
Mansfield Oxygen Corp. (August 2001) and Gas Arc, Inc. (December 2001).

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

The decrease in goodwill of $211,877 relates to settlement of a dispute
related to the final purchase price of prior years acquisitions.

The following summarized unaudited pro forma results of operations for the
fiscal years ended June 30, 2002 and 2003, illustrate the estimated effects of
the 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.

5. GOODWILL AND OTHER INTANGIBLE ASSETS:

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

F-13

lists, which Valley has assigned definite lives equal to the terms of the
agreements. As of June 30, 2004, Valley's noncompete agreements, consulting
agreements and customer lists are summarized as follows:

Amortization expense for the years ended June 30, 2002, 2003 and 2004
totaled $2,631,213, $3,201,025 and $1,662,980, respectively. The fiscal year
2003 amortization expense included the write-off of $782,242 related to
noncompete agreements that Valley determined to no longer be of value, based
upon a review of each individual's circumstances and the probability of effect
on Valley'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,
2004, are as follows:

Balance as of June 30, 2003................................. $41,209,615
Goodwill acquired and final purchase price adjustments...... (211,877)
-----------
Balance as of June 30, 2004................................. $40,997,738
===========

The changes in the carrying amount of goodwill for the year ended June 30,
2003, are as follows:

Balance as of June 30, 2002................................. $40,429,733
Goodwill acquired and final purchase price adjustments...... 779,882
-----------
Balance as of June 30, 2003................................. $41,209,615
===========

F-14

6. LONG-TERM DEBT:

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

The prime rate was 4.00% and 4.25% at June 30, 2003 and 2004, respectively.
The LIBOR rate was 1.10% and 1.34% at June 30, 2003 and 2004, respectively.

On June 30, 2003, Valley 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 at this time remained unchanged at this time.

On April 30, 2004, Valley entered into an amended credit agreement
establishing a $75 million revolving note with a maturity of five years,
replacing the previous revolving and term notes. Covenant requirements under the
new agreement are not significantly different than under the previous 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 2.64% as of June 30, 2004. As of June 30, 2004, availability
under the revolving loan was approximately $18.0 million, with outstanding
borrowings of approximately $55.4 million and outstanding letters of credit of
approximately $1.6 million. The credit facility is secured by all of Valley's
assets. The revolving loan is used primarily to fund acquisitions. Valley 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 Valley's discretion, plus an applicable spread.

The loan agreement for the credit facility, as amended, contains various
financial covenants applicable to Valley, including covenants requiring minimum
fixed charge coverage and maximum funded debt to EBITDA. As of June 30, 2004,
Valley was in compliance with these covenants and believes that it will continue
to be in compliance through at least the next twelve months. (See Note 13)

The Variable Interest Entities debt, in the amount of $6.7 million,
consists primarily of asset-backed mortgages for real estate. This debt has
various interest rates ranging from 3.5% to 7.0% and various maturity dates from
2004 to 2016. Certain mortgages are personally guaranteed by Valley's Chairman,
who is the

F-15

beneficial owner of 75% of Valley's common stock and also beneficially owns more
than 50% of each of these entities.

The schedule of maturities by segment, as amended for the credit agreement
for the next five years and thereafter is as follows as of June 30, 2004:

7. PENSION PLANS:

Valley 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 $1,049,497, $1,041,352 and $1,232,320, respectively, in fiscal years 2002,
2003 and 2004.

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

For fiscal year 2002, Valley 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 fiscal year 2002, the amount of additional
cash contributions distributed to the employees' pension plan amounted to
$54,000.

F-16

8. EARNINGS PER SHARE:

Basic earnings per share were computed based on the weighted average number
of common shares issued and outstanding during the relevant periods. Diluted
earnings per share were computed based on the weighted average number of common
shares issued and outstanding plus additional shares assumed to be outstanding
to reflect the dilutive effect of common stock equivalents using the treasury
stock method.

Options to purchase 154,500, 481,750 and 251,534 shares of common stock
were outstanding during fiscal years 2002, 2003 and 2004, 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.

9. LEASE OBLIGATIONS:

Valley leases real estate at several locations for use as branch stores and
warehouses. Certain equipment is also leased. All of the leases, which are with
related and unrelated parties, are classified as operating leases. The lease
terms expire at various dates through April 2013, with options to renew for
periods of three to five years. The Company's lease expenses charged to
operations were $4,722,281, $5,181,093 and $2,549,678, respectively, in fiscal
years 2002, 2003 and 2004. Fiscal 2004 is net of the elimination of $2,774,824
intercompany rent as a result of FIN 46R, "Consolidation of Variable Interest
Entities" at March 31, 2004.

During fiscal year ended June 30, 2004, Valley entered into agreements to
cancel the lease obligations for four properties, three of which Valley had
discontinued use of. Under these agreements, Valley paid $700,284 which was
included in operating expenses for the year ended June 30, 2004 to cancel the
remaining term of leases and the remaining obligations of $2,270,028. In fiscal
2003, Valley terminated its lease for use of an aircraft by buying out the
remainder of the lease for $267,029. Valley believes that these arrangements
have not been less favorable than could have been obtained in arms-length
transactions with unrelated third parties.

F-17

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

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

(1) Reflects the elimination of intercompany rent as a result of FIN 46R,
"Consolidation of Variable Interest Entities" at March 31, 2004.

10. RELATED PARTY TRANSACTIONS:

Valley leases buildings and equipment and rents cylinders under operating
leases, from related parties, including the sole shareholder prior to Valley's
initial public offering and corporations owned by such sole shareholder and
former officers of Valley. Valley concluded that the related party lease
agreement entities ("VARIABLE INTEREST ENTITIES") are required to be
consolidated, as of March 31, 2004, pursuant to common control provisions under
FIN 46R (See Note 14). These lease agreements have various maturity dates
through April 2013. These transactions and balances for the year ended June 30
are summarized as follows:

Valley has entered into a master lease agreement for a significant portion
of its operating properties with a related party. The term of this master lease
agreement is ten years with annual minimum lease payments of $1,725,192 with
renewal options. The master lease agreement has been accounted for as an
operating lease in the accompanying consolidated financial statements. During
fiscal year ended June 30, 2004, Valley entered into agreements to cancel the
lease obligation for three properties that Valley had discontinued use of. Under
this agreement, Valley paid $537,258 which was included in operating expenses
for the year ended June 30, 2004 to cancel the remaining term of leases and the
remaining obligations of $1,979,668. In fiscal 2003, Valley terminated its lease
for use of an aircraft by buying out the remainder of the lease for $267,029.
Valley 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, Valley retained ADE Vantage, Inc.
("ADE"), a consulting company wholly-owned by Mr. Indelicato, CEO, Vice Chairman
and director of Valley, to provide consulting services, including appraisal
valuation services used in connection with the adoption of SFAS No. 142. Valley
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 for fiscal years 2002, 2003 and 2004 totaled $168,982, $155,327 and
$220,216 respectively. This agreement has a two year term and was renewed July
1, 2004.

11. STOCK OPTIONS:

Valley 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

F-18

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:

The following table summarizes the status of the stock options outstanding
and exercisable at June 30, 2004 and June 30, 2003:

F-19

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. Valley 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:

12. INCOME TAXES:

Valley accounts for income taxes in accordance with the provisions of SFAS
No. 109. Although there can be no assurance that Valley 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 Valley 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

Based upon the Company's operating results, permanent differences and tax
audit outcomes related to recorded tax exposure, it is reasonably possible our
effective income tax rate could vary in the future.

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, 2002, 2003 and 2004 were as
follows:

F-21

13. 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. Valley, 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. Valley maintains liability
insurance policies with insurers in such amounts and with such coverages and
deductibles as Valley believes is reasonable and prudent. However, there can be
no assurance that such insurance will be adequate to protect Valley 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 Valley.

During fiscal year 2003, Valley incurred charges of $0.5 million related to
the severance payments for certain terminated employees as part of Valley's
organization strengthening program. Substantially all of these payments had been
made as of June 30, 2004.

Valley 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 a $1 million non-refundable fee 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. Valley 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,
Valley 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. Valley concluded that the put/call agreement
meets the scope exception requirements of FIN 46R for an entity deemed to be a
business and was therefore not consolidated at March 31, 2004.

Valley leases buildings and equipment and rents cylinders from related
parties, including the sole shareholder prior to Valley's initial public
offering and corporations owned by such sole shareholder and former officers of
Valley. Valley concluded that the related party lease agreement entities
("VARIABLE INTEREST ENTITIES") are required to be consolidated, as of March 31,
2004, pursuant to common control provisions under FIN 46R (See Note 14). These
lease agreements have various maturity dates through April 2013. For the year
ended June 30, 2004, 2003 and 2002 Valley incurred expenses under these leases
of $2,774,824, $2,254,345 and $2,259,800 respectively. Valley entered into
agreements, during fiscal 2004, to cancel the lease obligations for three
properties that Valley had discontinued use of. Under this agreement, Valley
paid $537,258 which was included in operating expenses for the year ended June
30, 2004 to cancel the remaining term of leases and the remaining obligations of
$1,979,668. This charge was eliminated in the consolidation of the Variable
Interest Entities (See Note 9 and 14).

In September 1991, in connection with the purchase by Valley of certain
assets of Praxair, Inc. (Praxair), Valley, Gary E. West and certain of his
affiliates entered into a Right of First Refusal Agreement with Praxair. In
March 1997, the parties to such agreement entered into an Amended and Restated
Right of First Refusal Agreement (the Right of First Refusal Agreement) in
connection with Valley's reorganization. Pursuant to this agreement, if at any
time during the term of the agreement Valley wishes to accept a third party
offer to purchase all or a material part of the assets of Valley, or Mr. West
and his affiliates wish to accept an offer to purchase shares of capital stock
of Valley (the Capital Stock) owned by them in a transaction that would result
in Mr. West and his affiliates collectively owning less than 51% of Valley's
issued and outstanding shares of Capital Stock on a fully diluted basis or
owning less than 51% of the combined voting power of all outstanding voting
securities of Valley, Praxair will have a right of first refusal to match the
offer. In addition, in the absence of a third party offer, if (a) Mr. West and
his affiliates wish to sell shares of Common Stock which would result in their
owning collectively less than 51% or more of Valley's issued and outstanding
shares

F-22

of Common Stock, (b) Valley wishes to sell all or a material part of its assets,
or (c) Valley wishes to issue additional shares or options or securities
exercisable or convertible into shares of Common Stock, pursuant to employee
stock options, a public offering, private placement, merger, share exchange or
otherwise, which in the aggregate on a fully diluted basis would result in Mr.
West and his affiliates collectively owning less than 51% of all the issued
outstanding shares of Common Stock, then Praxair will have the right to purchase
from Mr. West and his affiliates up to all of the issued and outstanding shares
of Common Stock held by them (but not less than 51% of all of the issued and
outstanding shares of Valley's Common Stock on a fully diluted basis) at the
then prevailing market price. If Praxair does purchase shares of Capital Stock
from Mr. West and his affiliates as described in this paragraph, then Mr. West
and his affiliates will be bound by certain non-compete provisions, as described
in the Right of First Refusal Agreement, for a period of three years from such
purchase.

14. VARIABLE INTEREST ENTITIES

Valley leases buildings and equipment and rents cylinders under operating
leases from related parties, collectively referred to as "Variable Interest
Entities", primarily including West Rentals, Inc., GEW Real Estate LLC, Real
Equip-Lease LLC and Acetylene Products Corporation. The primary activity of
these entities is to purchase, develop, sell and/or lease real estate. Valley
has historically entered into these leases to preserve its capital to support
its growth through acquisition strategy. Valley's Chairman, who is the
beneficial owner of 75% of Valley's common stock, beneficially owns greater than
50% of each of these entities. These arrangements are supported by a master
lease agreement, as well as certain individual lease agreements, that do not
contain a bargain purchase option, fixed renewal option or residual value
guarantee. Valley has no equity interest in any of the entities included in the
Variable Interest Entities. Additionally, the creditors and beneficial interest
holders of the entities have no recourse to the general credit of Valley.

Based upon current interpretation of FIN 46R, in situations where no
contractual residual value guarantees exist, a related party lease is presumed
to contain an implied residual value guarantee. Therefore, management concluded
that these entities collectively represent a variable interest entity under the
provisions of FIN 46R. The accounting policies of the Variable Interest Entities
are similar to those of Valley including the following:

REVENUE RECOGNITION

Rental revenue for real estate property, equipment and cylinders is
recorded ratably over the life of the agreement.

PROPERTY, PLANT AND EQUIPMENT

Depreciation is computed, primarily, using declining balance methods as
well as the straight line method over the estimated useful lives of the
properties as follows:

Accordingly, as a result of the implied residual value guarantee, Valley is
considered the primary beneficiary, and has consolidated the historical balance
sheet of the entities as of March 31, 2004, the date of adoption of the
consolidation provision of FIN46R. All intercompany balances have been
eliminated in consolidation.

F-23

The following table shows the consolidating balance sheet of the Company at
June 30, 2004:

F-24

The following table shows the consolidating income statement of the Company
at June 30, 2004:

15. SEGMENT DATA

Effective with the adoption of FIN 46R and the required consolidation of
certain variable interest entities in the third quarter of 2004 (See Note 1),
Valley has two reportable segments: Valley and Variable Interest Entities. Since
these are two separate and distinct businesses, the financial information for
each company is maintained and managed separately. The results of operations and
assets for each of these segments are derived from each company's financial
reporting system. All intercompany activity is eliminated in consolidation.

The Variable Interest Entities reportable segment, including West Rentals,
Inc., GEW Real Estate LLC, Real Equip-Lease LLC and Acetylene Products
Corporation, primarily purchases, develops, sells and/or leases real estate.

The Valley reportable segment operates 64 retail and distribution locations
in 11 states. All locations offer the same core products of packaged gases,
welding equipment and supplies. All locations generally sell to the same types
of customers such as metal fabrication, construction, general industrial,
research and laboratory,

F-25

hospital and other medical, commercial, agricultural and residential. The
Company considers each of the locations to be an operating segment as defined in
FASB 131, however, none of these locations individually meet the quantitative
thresholds stated in FASB 131 of 10% of revenue (or profits or assets). In
addition, these segments are so similar in economic characteristics, long-term
gross margin averages, products sold, types of customers, methods of
distribution and regulatory environment that these operating segments should be
aggregated into one reporting segment.

Identifiable assets by reporting segment are as follows at June 30, 2004:

Valley...................................................... $145,132,686
Variable Interest Entities.................................. 12,202,356
------------
Total assets................................................ $157,335,042
============

16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

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

(1) Fiscal year 2003 includes the effect of charges associated with the
Company's repositioning initiatives of $5.3 million of which $1.4 million
was associated with disposal of slow-moving inventory, $.7 million related
to changes in medical accrual, $2.1 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. $4.7
of these charges were reflected in fourth quarter earnings.

(2) Fiscal year 2004 operating and administrative expenses for the three months
and twelve months ended June 30, 2004 include a reduction of $0.8 million in
rent expense, partially offset by other expenses, as a result of
consolidating under FIN 46R, Variable Interest Entities owned by a related
party that leases properties to Valley as of March 31, 2004.

F-26

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 (i)

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

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 (i)

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

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

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

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

10.39 Fourth Amendment dated October 23, 2003 to Second Amended and Restated
Credit Agreement dated May 1, 2000 between the Company and Bank One,
Indiana NA, as agent (filed herewith)

10.40 Addendum #19 dated March 31, 2004 to Lease Agreement dated as of
November 5, 1997 between the Company and West Rentals, Inc. (filed
herewith)

10.41 Third Amended and Restated Credit Agreement dated April 30, 2004
between the Company and Bank One, Indiana NA, as agent (filed herewith)

10.42 Agreement dated June 1, 2004 between the Company and Gerald W. Zehala
(filed herewith)+

10.43 Addendum #18 dated June 7, 2004 to Lease Agreement dated as of November
5, 1997 between the Company and West Rentals, Inc. (filed herewith)

10.44 Addendum #20 dated June 30, 2004 to Lease Agreement dated as of
November 5, 1997 between the Company and West Rentals, Inc. (filed
herewith)

10.45 Agreement dated July 1, 2004 between the Company and William A.
Indelicato providing for certain Consulting payments (filed herewith)+

14.1 Code of Business Conduct and Ethics (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 (furnished herewith)

32.2 Certification of Chief Financial Officer pursuant to section 906 of the
Sarbanes-Oxley Act of 2002 (furnished 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.

(i) Incorporated by reference to the Company's Annual Report on Form 10-K
filed September 29, 2003.

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