<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997
REGISTRATION NO. 333-19973
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------------
VALLEY NATIONAL GASES INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 5169 APPLIED FOR
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
67 43RD STREET, WHEELING, WEST VIRGINIA 26003 (304) 232-1541
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------------------
LAWRENCE E. BANDI
PRESIDENT AND CHIEF EXECUTIVE OFFICER
67 43RD STREET
WHEELING, WEST VIRGINIA 26003
(304) 232-1541
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------------------
COPIES OF ALL CORRESPONDENCE TO:
LARRY D. IRICK, ESQ. JOHN R. SHORT, ESQ.
BRYAN CAVE LLP PEPER, MARTIN, JENSEN, MAICHEL AND HETLAGE
1200 MAIN STREET, SUITE 3500 720 OLIVE STREET, 24TH FLOOR
KANSAS CITY, MISSOURI 64105 ST. LOUIS, MISSOURI 63101-2396
(816) 374-3200 (314) 421-3850
----------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
----------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
================================================================================================================================
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED<F1> PER SHARE PRICE<F2> FEE<F3>
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par value....................... 3,105,000 $11.00 $34,155,000.00 $10,350.00
================================================================================================================================
<FN>
<F1> Includes 405,000 shares of Common Stock issuable upon exercise of an
over-allotment option granted to the Underwriters. See "Underwriting."
<F2> Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457.
<F3> Reflects a fee increase of $940.00.
</TABLE>
----------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
********************************************************************************
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE *
* SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR *
* MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT *
* BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR *
* THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE *
* SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE *
* UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS *
* OF ANY SUCH STATE. *
********************************************************************************
SUBJECT TO COMPLETION, DATED MARCH 13, 1997
2,700,000 SHARES
[LOGO] VALLEY(TM)
----------------------------
NATIONAL GASSES INCORPORATED
----------------------------
COMMON STOCK
--------------
Of the 2,700,000 shares of common stock, par value $0.001 per share (the
"Common Stock"), of Valley National Gases Incorporated (the "Company")
offered hereby (the "Offering"), 2,618,000 shares are being sold by the
Company and 82,000 shares are being sold by certain shareholders of the Company
(the "Selling Shareholders"). The Company will not receive any of the
proceeds from the sale of shares by the Selling Shareholders. See "Principal
and Selling Shareholders."
Prior to the Offering, there has been no public market for the Company's
Common Stock. It is currently anticipated that the initial public offering
price will be between $9.00 and $11.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Company has received approval for the trading of its Common
Stock on the Nasdaq National Market under the symbol "VNGI" subject to
official notice of issuance.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK
OFFERED HEREBY.
----------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
=================================================================================================================================
<CAPTION>
UNDERWRITING PROCEEDS TO
DISCOUNTS AND PROCEEDS TO SELLING
PRICE TO PUBLIC COMMISSIONS<F1> COMPANY<F2> SHAREHOLDERS
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share........................................... $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Total<F3>........................................... $ $ $ $
=================================================================================================================================
<FN>
<F1> The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
<F2> Before deducting offering expenses payable by the Company, estimated at
$600,000.
<F3> The Company has granted the Underwriters a 30-day option to purchase up to
an additional 405,000 shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions and Proceeds to
Company will be $ , $ and $ , respectively.
See "Underwriting."
</TABLE>
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if issued to and accepted by them and subject to
certain conditions. The Underwriters reserve the right to withdraw, cancel or
modify such offer or to reject any orders in whole or in part. It is expected
that delivery of the shares of Common Stock will be made on or about
, 1997.
A.G. EDWARDS & SONS, INC. OPPENHEIMER & CO., INC.
The date of this Prospectus is , 1997.
<PAGE> 3
[The map to be included in this space depicts the nine states in which the
Company operates: Delaware, Kentucky, Maryland, North Carolina, Ohio,
Pennsylvania, Tennessee, Virginia and West Virginia. The Company's locations in
those states are named and identified by a dot.]
[MAP]
This discussion contains certain forward-looking statements that involve
substantial risks and uncertainties. When used in this Prospectus, the words
"anticipate," "believe," "estimate," "expect" and similar expressions
as they relate to the Company or its management are intended to identify such
forward-looking statements. The Company's actual results, performance or
achievements could differ materially from those expressed in, or implied by,
these forward-looking statements as a result of, among other things, the
factors set forth in the section entitled "Risk Factors."
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING SYNDICATE COVERING TRANSACTIONS AND THE IMPOSITION OF A PENALTY BID.
FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. All
references in this Prospectus to a fiscal year refer to the fiscal year ending
on June 30 of that year. Unless otherwise indicated, the information in this
Prospectus (i) assumes no exercise of the over-allotment option granted to the
Underwriters and (ii) assumes the Company implements a holding company
structure prior to the completion of the Offering. See "The Reorganization."
Unless the context otherwise indicates, references to the Company include
Valley National Gases Incorporated and its wholly-owned subsidiaries.
THE COMPANY
The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in nine states
in the mid-Atlantic and midwestern regions of the United States. The Company's
net sales have grown, primarily as a result of acquisitions, at a compound
annual rate of approximately 17% per year since the Company started business in
1958, increasing from $190,000 in that year to $64.6 million on a pro forma
combined basis in fiscal 1996. In fiscal 1996, gases accounted for
approximately 46% of net sales, welding equipment and supplies accounted for
approximately 40% of net sales, and cylinder and tank rental accounted for
approximately 14% of net sales.
The Company's gas operations consist primarily of the packaging and mixing
of industrial, medical and specialty gases, such as oxygen, nitrogen and argon,
in pressurized cylinders and the transportation of these cylinders to customers
from one of the Company's 40 distribution and retail locations. The Company
also distributes propane to industrial and residential customers. Customers pay
a rental fee for use of the Company's cylinders. The Company owns approximately
290,000 cylinders, which require minimal maintenance and have useful lives that
the Company expects will extend on average for 50 years or longer. The Company
selectively participates in the small bulk gas market through the delivery of
gases in cryogenic transports and the storage of gases in cryogenic tanks and
propane tanks, which are also rented to bulk gas customers. The Company owns
approximately 7,000 bulk propane tanks and 250 bulk cryogenic tanks, which have
useful lives generally less than those of cylinders. In connection with the
distribution of gases, the Company sells welding equipment and supplies,
including welding machines, wire, fluxes and electrodes and a wide variety of
supporting equipment.
Historically, the industrial gas distribution business had a base of
customers engaged primarily in metal fabrication. In order to better serve
these customers, industrial gas distributors have also traditionally sold
welding equipment and supplies. As certain sectors of the economy have grown,
such as the electronics and chemicals industries, and as new applications for
gases have developed, the customer base of the industry has significantly
broadened to include almost every major industry, including health care,
electronics, chemicals, aerospace, beverages, environmental remediation, food
processing, oil and gas and primary metals, as well as metal fabrication.
The Company's principal business strategy is to aggressively pursue growth
through the acquisition of other independent distributors and also through
internally generated growth. Since the Company was founded, it has completed 38
acquisitions. Since January 1, 1996, the Company has acquired four independent
distributors, including Weldco, Inc. ("Weldco") with annual sales of
approximately $11 million in its most recent fiscal year and operations in
Cincinnati and Dayton, Ohio, and Weber Gas & Welding Supply Co., Inc. ("Weber")
with annual sales of approximately $5 million in its most recent fiscal year and
operations in western Pennsylvania. The integration of Weldco and Weber into
the Company's existing operations is currently in progress, with the benefits
of integration expected to be realized in the next two to eight quarters.
Management believes there will continue to be numerous attractive acquisition
candidates available to the Company as a result of the consolidation trend in
the industry and that the Company will be able to successfully integrate
acquired operations into its base business, generating growth and operational
synergies. Acquisitions will be financed primarily with borrowings under the
Company's credit facility and seller financing. While highly focused on
external growth, management believes that the Company's competitive strengths
will allow it to increase sales and improve market share in existing markets,
while maintaining acceptable levels of profitability.
The Company's principal executive offices are located at 67 43rd Street,
Wheeling, West Virginia 26003 and its telephone number is (304) 232-1541.
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company............................... 2,618,000 Shares
Selling Shareholders...................... 82,000 Shares
Common Stock to be outstanding
after the Offering<F1>...................... 10,020,084 Shares
Use of proceeds............................... For repayment of indebtedness, payment of the S
Corporation Distribution and for general corporate
purposes. See "Use of Proceeds" and "S Corporation
Distribution."
Nasdaq National Market symbol................. VNGI
<FN>
- --------
<F1> Excludes 650,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Option Plan, of which options to purchase 175,000
shares will be granted effective as of the closing of the Offering.
Includes (i) 135,000 shares of Common Stock to be issued to Weldco or
certain shareholders of Weldco immediately prior to the closing of the
Offering pursuant to the purchase agreement among the Company, Weldco and
certain other parties, (ii) 170,718 shares of Common Stock to be issued to
two executive officers immediately prior to the closing of the Offering in
connection with the termination of certain deferred compensation
agreements and (iii) 96,366 shares of Common Stock to be issued to a
director immediately prior to the closing of the Offering pursuant to a
right under a consulting agreement to convert deferred consulting payments
to Common Stock. See "Management--Benefit Plans" and "Certain
Relationships and Related Transactions."
</TABLE>
RISK FACTORS
For a discussion of considerations relevant to an investment in the Common
Stock, see "Risk Factors."
4
<PAGE> 6
<TABLE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
<CAPTION>
PRO
PRO FORMA
FORMA SIX MONTHS SIX
YEAR ENDED MONTHS
YEARS ENDED JUNE 30, ENDED DECEMBER 31, ENDED
--------------------------------------------------- JUNE 30, ------------------ DEC. 31,
1992 1993 1994 1995 1996 1996<F1> 1995 1996 1996<F1>
------- ------- ------- ------- ------- -------- ------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF
OPERATIONS DATA:
Net sales............ $30,789 $35,251 $39,166 $44,914 $53,612 $64,585 $24,138 $33,777 $37,079
Gross profit......... 17,672 20,340 22,322 24,983 29,995 33,903 13,460 18,273 19,632
Income from
operations.......... 2,982 3,281 3,828 4,183 5,000 4,757 2,265 2,772 2,926
Net income<F2>....... 2,020 2,419 3,061 3,555 4,101 4,374 1,896 1,929 2,534
Pro forma net
income<F3>.......... 1,212 1,451 1,837 2,133 2,461 2,624 1,138 1,157 1,520
Pro forma net income
per common
share<F3>.......... $ 0.17 $ 0.20 $ 0.25 $ 0.29 $ 0.30 $ 0.32 $ 0.16 $ 0.14 $ 0.19
Pro forma weighted
average shares
outstanding<F4>.... 7,267 7,267 7,267 7,267 8,122<F5> 8,122<F5> 7,267 8,122<F5> 8,122<F5>
OTHER FINANCIAL DATA:
Depreciation and
amortization....... $ 2,169 $ 2,324 $ 2,790 $ 3,112 $ 4,700 $ 5,756 $ 1,999 $ 2,934 $ 3,197
Capital
expenditures........ 1,055 1,218 2,908 4,426 3,647 4,151 1,288 1,377 1,464
Cash flow from
operating,
investing and
financing
activities......... 1,350 212 45 774 694 -- (250) (742) --
OTHER NON-GAAP FINANCIAL
DATA:
EBITDA<F6>........... $ 5,518 $ 5,947 $ 6,889 $ 7,739 $10,362 $11,175 $ 4,570 $ 5,856 $ 6,275
<CAPTION>
DECEMBER 31, 1996
-------------------------
PRO FORMA AS
ACTUAL ADJUSTED<F7>
------- ------------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 9,709 $ 9,966
Total assets.................................. 62,471 62,471
Total debt including redeemable common
stock....................................... 35,717 22,070
Shareholders' equity.......................... 17,911 28,580
<FN>
- ---------
<F1> The pro forma statement of operations data gives effect to the acquisition
of Weldco as if it had occurred on July 1, 1995 and the application of
the estimated net proceeds of the Offering.
<F2> For all periods shown, the Company elected to be treated as an S
Corporation. As a result, the income of the Company was taxed for federal
and state purposes directly to the Company's shareholders rather than to
the Company.
<F3> The pro forma net income and pro forma net income per common share reflect
federal and state income taxes, assuming a 40% statutory tax rate, as if
the Company had been taxed as a C Corporation for all periods presented.
<F4> Pro forma weighted average number of shares outstanding used to calculate
pro forma net income per share is based on the historical weighted average
number of shares outstanding, as adjusted to reflect (i) the issuance of
170,718 shares of Common Stock to two executive officers immediately prior
to the closing of the Offering in connection with the termination of
certain deferred compensation agreements and (ii) the issuance of 96,366
shares of Common Stock to a director immediately prior to the closing of
the Offering pursuant to a right under a consulting agreement to convert
deferred consulting payments to Common Stock. See "Management--Benefit
Plans" and "Certain Relationships and Related Transactions." In
connection with these compensation and consulting arrangements, the
Company will incur a one-time expense of $2.4 million in the period in
which the closing of the Offering occurs.
<F5> Further adjusted to reflect the assumed issuance of 854,567 shares of
Common Stock to fund the excess of dividends (including the estimated S
Corporation Distribution) over net income for the six months ended
December 31, 1996.
<F6> EBITDA represents the earnings of the Company before income taxes, net
interest expense, depreciation and amortization and other noncash items
reducing net income. EBITDA is not a measure of financial performance
under generally accepted accounting principles ("GAAP") and may not be
comparable to other similarly titled measures by other companies.
Accordingly, it does not represent net income or cash flows from
operations as defined by GAAP and does not necessarily indicate that cash
flows will be sufficient to fund cash needs. As a result, EBITDA should
not be considered an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. The
Company incurs significant capital expenditures and incurs debt, primarily
related to acquisitions, which are not reflected in EBITDA. As such, the
Company has provided above cash flows from operating, investing and
financing activities, and capital expenditures which reflect these
transactions. The Company has included information concerning EBITDA as it
understands that it is used by certain investors as one measure of an
issuer's historical ability to service its debt.
<F7> Adjusted to give effect to (i) the payment of the S Corporation
Distribution estimated to be $10.1 million at December 31, 1996, (ii) the
recognition of a deferred tax liability of approximately $4.2 million upon
termination of the Company's S Corporation status, (iii) the issuance of
2,618,000 shares of Common Stock by the Company at an assumed initial
public offering price of $10.00 per share and the application of the
estimated net proceeds therefrom, (iv) the issuance of 135,000 shares of
Common Stock to Weldco (or certain shareholders of Weldco), and the
retirement of indebtedness payable to Weldco in the aggregate principal
amount of $1,450,000, in each case immediately prior to the closing of the
Offering pursuant to the purchase agreement among the Company, Weldco and
certain other parties, (v) the issuance of 170,718 shares of Common Stock
to two executive officers immediately prior to the closing of the Offering
in connection with the termination of certain deferred compensation
agreements, (vi) the issuance of 96,366 shares of Common Stock to a
director immediately prior to the closing of the Offering pursuant to a
right under a consulting agreement to convert deferred consulting payments
to Common Stock, (vii) recognition of an expense of $2.4 million ($1.4
million after assumed taxes) in connection with the compensation and
consulting arrangements and (viii) the cancellation of treasury stock.
See "Use of Proceeds," "S Corporation Distribution," "Management--Benefit
Plans" and "Certain Relationships and Related Transactions."
</TABLE>
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully by prospective investors in evaluating
the Company before purchasing the Common Stock offered hereby. This Prospectus
contains forward-looking statements that involve risks and uncertainties.
Actual results could differ from those discussed in the forward-looking
statements as a result of certain factors, including those set forth below and
elsewhere in this Prospectus.
THE COMPANY MAY NOT BE SUCCESSFUL IN MAKING ACQUISITIONS
The Company has historically expanded its business primarily through
acquisitions. A key part of the Company's business strategy is the continuation
of growth through strategic acquisitions. The Company will consider and
evaluate acquisitions on a continuing basis, although it currently has no
material acquisitions under consideration. There can be no assurance that the
Company will continue to be able to identify attractive or willing acquisition
candidates, or that the Company will be able to acquire such candidates on
economically acceptable terms. The Company will compete with other distributors
for suitable acquisition candidates. The Company has a revolving loan in the
amount of $25 million to finance acquisitions, of which $10 million was
available for borrowing at December 31, 1996. The Company believes that it
could increase the amount of the credit facility, or obtain financing from
other sources, if necessary to finance an acquisition. To the extent cash and
available borrowings are not adequate to finance acquisitions, there can be no
assurance that the Company will be able to obtain adequate financing for any
acquisition or that, if available, such financing would be on terms acceptable
to the Company. See "Business--Business Strategy" and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
RISKS ASSOCIATED WITH THE SUCCESSFUL ASSIMILATION OF ACQUISITIONS
The success of the Company's acquisition strategy will depend, among other
factors, upon its ability to successfully integrate acquired businesses with
existing operations in a timely manner, at reasonable costs. There can be no
assurance that acquired companies would perform in accordance with management's
expectations or that the Company would not encounter unanticipated problems or
liabilities. Some acquisitions have had, and the Company expects some future
acquisitions may have, a dilutive effect upon the Company's income from
operations and net income before tax for a short period following consummation.
This temporary dilution occurs because some of the benefits of acquisitions,
such as leveraging of operating and administrative expenses, improved product
gross margins and real sales growth, occur over a period ranging from two to
eight quarters, depending upon the complexity of integrating each acquisition
into the Company's existing operations.
RISKS ASSOCIATED WITH MANAGING GROWTH
The Company has grown rapidly in recent years. A continuing period of rapid
growth could place a significant strain on the Company's management, operations
and other resources. The Company's ability to manage its growth will require it
to continue to invest in its operational, financial and management information
systems, and to attract, retain, motivate and effectively manage its employees.
The inability of the Company's management to manage growth effectively would
have a material adverse effect on the financial condition, results of operation
and business of the Company.
COMPETITION
The Company's profitability may be affected by competition, which is based
primarily on customer loyalty, service and to a lesser extent, price. The
Company has several competitors in all of the markets in which it operates,
some of which are substantially larger and have substantially greater resources
than the Company. Many customers tend to develop long-term relationships with
their distributor and, therefore, it may be difficult to obtain new customers
other than through the acquisition of other distribution businesses.
DEPENDENCE ON KEY PERSONNEL
The Company's businesses are managed by a small number of management and
operating personnel, the loss of certain of whom could have a material adverse
effect on the Company. See "Management." The Company believes that its
ability to manage its planned growth successfully will depend in large part on
its continued ability to attract and retain highly skilled and qualified
personnel. None of the Company's key executives has a written employment
6
<PAGE> 8
agreement or non-compete agreement with the Company except for John R. Bushwack
who has a non-compete agreement with the Company. The Company maintains key
person life insurance on Gary E. West, Lawrence E. Bandi and John R. Bushwack.
See "Management" for detailed information on the Company's management and
directors.
DEPENDENCE ON KEY SUPPLIERS
There are several competing suppliers of most of the products that the
Company purchases. The Company purchases industrial gases pursuant to
short-term supply arrangements and open purchase orders with three of the five
major gas producers in the United States. One such producer accounted for
approximately 80% of the Company's gas purchases in fiscal 1996. The Company
purchases welding equipment and consumable supplies from approximately 85
primary vendors, of which purchases from the top five vendors represented
approximately 61% of total purchases in fiscal 1996. The Company purchases
most of its propane from three suppliers. The Company is not dependent upon
any single supplier for propane and supplies have historically been readily
available. If a particular supplier were to unexpectedly discontinue sales
of a product to the Company, the Company believes it would be able to
readily secure alternate sources of supply. However, the Company could
experience temporary decreases in its profit margins if its arrangements
with such alternate sources of supply were less favorable to the Company
than its current arrangements with suppliers.
CONTROL BY PRINCIPAL SHAREHOLDER
Upon completion of the Offering, Gary E. West, Chairman of the Board of
Directors, will control approximately 69.9% of the outstanding shares of Common
Stock (67.1% if the Underwriters' over-allotment option is exercised in full).
If all outstanding options to purchase Common Stock were exercised (and none
are currently vested), Mr. West would control approximately 68.7% of the
outstanding shares of Common Stock (66.0% if the Underwriters' over-allotment
option is exercised in full). Mr. West has the ability to exercise effective
control over the election of the Company's Board of Directors and the outcome
of corporate actions requiring shareholder approval. See "Management" and
"Principal and Selling Shareholders."
PRODUCT LIABILITY
The Company's business entails an inherent risk of liability in the event
of product failure or claim of it caused by use of the Company's products. The
Company has not had any material claims made nor is it aware of any material
claims against it based upon the use or the failure of its products. The
Company maintains product liability insurance against any such claims in
amounts it believes to be adequate. There can be no assurance that the Company
will not be subject to such claims, that any claim will be successfully
defended, or if the Company is found liable, that the claim will not exceed the
limits of the Company's insurance. There is also no assurance that the Company
will be able to continue to obtain product liability insurance on acceptable
terms. Product liability claims could have a material adverse effect on the
Company.
BLANK CHECK PREFERRED STOCK; CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation (the "Articles") give the Board
of Directors the authority to issue up to 5,000,000 shares of preferred stock,
$.01 par value per share (the "Preferred Stock"), and to determine the price,
rights, preferences and privileges of those shares without any further vote or
action by the shareholders. The rights of the holders of Common Stock will be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of shares of
Preferred Stock, while potentially providing desirable flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of the outstanding voting stock of the Company. The Company has no present
intention to issue shares of Preferred Stock.
Furthermore, certain provisions of the Articles, the Company's Bylaws
(the "Bylaws") and the Pennsylvania Business Corporation Law, including
a provision that provides for the Board of Directors to be divided into
three classes to serve for staggered three-year terms, could limit the price
that certain investors might be willing to pay in the future for shares of
the Common Stock and may have the effect of delaying or preventing a
change-in-control of the Company. These provisions may also reduce the
likelihood of an acquisition of the Company at a premium price by
another person or entity. See "Description of Capital Stock--Common Stock,"
"--Anti-Takeover Effects of Provisions of the Company's Articles and
Bylaws" and "--Pennsylvania Anti-Takeover Laws."
7
<PAGE> 9
SHARES ELIGIBLE FOR FUTURE SALE; POSSIBLE ADVERSE EFFECT ON FUTURE MARKET
PRICES; PRAXAIR RIGHT OF FIRST REFUSAL
Sales of substantial numbers of additional shares of Common Stock in the
public market could adversely affect the market price of the Common Stock and
make it more difficult for the Company to raise funds through future equity
offerings. Upon completion of the Offering, Gary E. West, the Company's
Chairman, will control approximately 69.9% of the Common Stock (67.1% if the
Underwriters' over-allotment option is exercised in full). See "Principal and
Selling Shareholders." A sale by Mr. West of these shares could adversely
affect the market price of the Common Stock. Mr. West and other shareholders
holding, in the aggregate, 7,320,084 of the 10,020,084 shares to be outstanding
immediately after the closing of the Offering (the "Previously Issued
Shares") have agreed to enter into agreements under which they will agree,
other than with the consent of A.G. Edwards & Sons, Inc., not to sell such
shares for a period of 180 days following the completion of the Offering. At
the expiration of such 180-day period, all of the Previously Issued Shares will
be eligible for sale, subject to volume and other limitations of Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"). See "Shares
Eligible for Future Sale." Following effectiveness of the registration
statement covering the shares offered hereby, the Company will register on Form
S-8 under the Securities Act 650,000 shares of Common Stock issuable under the
Company's 1997 Stock Option Plan, which registrations are expected to become
effective upon filing. There will be options to purchase 175,000 shares of
Common Stock outstanding effective as of the closing of the Offering, none of
which will be exercisable at such time. See "Management--Benefit Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale."
In September 1991, in connection with the purchase by the Company of certain
assets of a predecessor of Praxair, Inc. (``Praxair''), the Company, Mr. West
and certain of his affiliates entered into a Right of First Refusal Agreement
with Praxair. In March 1997, the parties to such agreement entered into an
Amended and Restated Right of First Refusal Agreement (the ``Right of
First Refusal Agreement'') in connection with the Company's reorganization.
Pursuant to this agreement, if at any time during the term of the agreement
the Company wishes to accept a third party offer to purchase all or a
material part of the assets of the Company, or Mr. West and his affiliates
wish to accept an offer to purchase shares of Common Stock owned by them
in a transaction that would result in Mr. West and his affiliates
collectively owning less than 51% of the Company's issued and outstanding shares
of Common Stock on a fully diluted basis, then Praxair will have a right of
first refusal to match the offer. In addition, in the absence of a third
party offer, if (a) Mr. West and his affiliates wish to sell shares of
Common Stock which would result in their owning collectively less than
51% or more of the Company's issued and outstanding shares of Common Stock,
(b) the Company wishes to sell all or a material part of its assets, or
(c) the Company wishes to issue additional shares, or options or securities
exercisable or convertible into shares of Common Stock, pursuant to employee
stock options, a public offering, private placement, merger, share exchange or
otherwise, which in the aggregate on a fully diluted basis would result in
Mr. West and his affiliates collectively owning less than 51% of all the issued
and outstanding shares of Common Stock, then Praxair will have the right
to purchase from Mr. West and his affiliates up to all of the issued and
outstanding shares of Common Stock held by them (but not less than 51% of
all of the issued and outstanding shares of the Company's Common Stock on a
fully diluted basis) at the then prevailing market price. See ``The Right of
First Refusal Agreement.''
After completion of the Offering, after giving effect to the issuance of
Common Stock to certain persons contemplated to take place immediately prior to
the Offering, Mr. West will be the beneficial owner of approximately 69.9% of
the Common Stock (67.1% if the Underwriters' over-allotment option is exercised
in full). Under the Right of First Refusal Agreement, there is no limitation on
the Company's ability to issue additional shares of Common Stock, or options or
securities exercisable or convertible into shares of Common Stock, as long as
Mr. West and his affiliates own 51% or more of the issued and outstanding
Common Stock. However, such Agreement will effectively restrict the ability of
the Company to issue such additional securities if the issuance would result in
Mr. West and his affiliates owning less than 51% of issued and outstanding
Common Stock. Therefore, the Right of First Refusal Agreement could in the
future limit the ability of the Company to raise capital through the sale of
stock to parties other than Praxair, may delay future offerings by the Company,
may restrict the ability of the Company to consummate strategic transactions
involving the issuance of stock, such as mergers, acquisitions, share exchanges
and the like, and may limit the flexibility of the Company to incentivize
employees through the issuance of stock options and other convertible
securities. The Right of First Refusal Agreement expires in September 2006.
ABSENCE OF PUBLIC MARKET; POSSIBLE VOLATILITY OF COMMON STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock, and there can be no assurance that an active trading market will develop
or be sustained after the Offering or that investors will be able to sell the
Common Stock should they desire to do so. The initial public offering price
will be determined by negotiations
8
<PAGE> 10
between the Company and the representatives of the Underwriters and may bear no
relationship to the price at which the Common Stock will trade upon completion
of the Offering. There can be no assurance that the market price of the Common
Stock after the Offering will not fall below the initial public offering price.
The market price of the shares of Common Stock could be subject to significant
fluctuations in response to variations in quarterly results, general market
conditions and other factors. The stock market has experienced price and volume
fluctuations that often have been unrelated or disproportionate to a company's
operating performance. These market fluctuations, as well as general economic,
political and market conditions such as recessions, may adversely affect the
market price of the Common Stock. See "Underwriting" for a discussion of the
factors considered in determining the initial public offering price.
ABSENCE OF DIVIDENDS
The Company does not anticipate paying dividends on the Common Stock for
the foreseeable future. The payment of dividends is prohibited by certain
covenants in the Company's credit facility. The Company anticipates that it
will reinvest its net income, if any, in its businesses. See "Dividend
Policy."
S CORPORATION DISTRIBUTION
Historically, the Company has been treated for federal and certain state
income tax purposes as an S Corporation under the Internal Revenue Code of
1986, as amended (the "Code"), and comparable state tax laws. As a result,
the Company's earnings have been taxed for federal and certain state income tax
purposes directly to its shareholders. Immediately prior to the closing of the
Offering, the Company's status as an S Corporation will be terminated and the
Company will be taxed as a C corporation thereafter. The Company intends to
declare a distribution (the "S Corporation Distribution") of all of its
undistributed earnings through the date of termination of its S Corporation
status to shareholders of record of the Company at such time. As of December
31, 1996, the estimated amount of the S Corporation Distribution totaled
approximately $10.1 million. The actual amount of the S Corporation
Distribution will also include the taxable income of the Company for the period
from January 1, 1997, through the date of the termination, less any other taxes
payable by the Company. The S Corporation Distribution will be paid by the
Company with a portion of the net proceeds of the Offering. See "Use of
Proceeds." The purchasers of the Common Stock in the Offering will not receive
any portion of the S Corporation Distribution.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,618,000 shares of
Common Stock offered by the Company hereby are estimated to be approximately
$23.7 million, assuming an initial public offering price of $10.00 per share
(after deducting the underwriting discount and estimated offering expenses
payable by the Company). The Company will not receive any proceeds from the
sale of Common Stock by the Selling Shareholders.
The Company will use the net proceeds to repay outstanding indebtedness,
including interest thereon, under the Company's credit facility, pay the S
Corporation Distribution and for general corporate purposes. The Company's
credit facility had an outstanding balance of $22.9 million as of December 31,
1996, and accrues interest at a weighted average interest rate of 7.6%.
Following such reduction, the outstanding indebtedness under the credit
facility will be approximately $12.7 million and the available borrowings
thereunder will be approximately $20.1 million. The outstanding indebtedness
under the credit facility has been used for various acquisitions by the
Company. See "S Corporation Distribution" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
The Company anticipates that the increased borrowings available under the
credit facility will be used for future acquisitions and general corporate
purposes. The Company's business strategy contemplates that it will seek to
complement internal growth with strategic investments and acquisitions. The
Company has entered into two letters of intent with two third parties
concerning the Company's purchase of two gas distribution businesses for a
purchase price of approximately $3.5 million and $3.8 million, respectively,
subject to certain adjustments. The parties are proceeding with due diligence
and the negotiation of definitive purchase agreements. The Company has no other
present understandings, agreements or commitments with respect to any
acquisitions.
9
<PAGE> 11
DIVIDEND POLICY
The Company has not paid any cash dividends other than S Corporation
distributions, and does not anticipate that it will pay dividends in the
foreseeable future. The Company currently intends to retain future earnings, if
any, to provide funds for the growth and development of the Company's business.
The payment of dividends is prohibited by certain covenants in the Company's
credit facility.
CAPITALIZATION
The following table sets forth the short-term debt and capitalization of
the Company on an actual basis as of December 31, 1996 and as adjusted to give
effect to the transactions described in the footnotes below. The information
set forth below should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," the Company's
Financial Statements and the related Notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------
PRO FORMA AS
ACTUAL ADJUSTED<F1>
------- -------------
(IN THOUSANDS)
<S> <C> <C>
Total short-term debt................................................................................ $ 4,182 $ 4,182
======= =======
Total long-term debt................................................................................. $31,535 $15,538
Redeemable common stock<F2>.......................................................................... -- 2,350
Shareholders' equity<F3>:
Preferred stock, $.01 par value, 5,000,000 shares authorized, no shares issued and outstanding as
adjusted......................................................................................... -- --
Common stock, $.001 par value, 30,000,000 shares authorized, 7,000,000 shares issued and
outstanding excluding treasury stock and 10,020,084 shares issued and outstanding as adjusted.... 18 10
Paid in capital...................................................................................... 96 26,510
Treasury stock (11,300,653 shares)................................................................... (3,705) --
Retained earnings.................................................................................... 21,502 2,060
------- -------
Total shareholders' equity....................................................................... 17,911 28,580
------- -------
Total capitalization............................................................................. $49,446 $46,468
======= =======
<FN>
- --------
<F1> Adjusted to give effect to (i) the payment of the S Corporation
Distribution estimated to be $10.1 million at December 31, 1996, (ii) the
recognition of a deferred tax liability of approximately $4.2 million upon
termination of the Company's S Corporation status, (iii) the issuance of
2,618,000 shares of Common Stock by the Company at an assumed initial
public offering price of $10.00 per share and the application of the
estimated net proceeds therefrom, (iv) the issuance of 135,000 shares of
Common Stock to Weldco (or certain shareholders of Weldco), and the
retirement of indebtedness payable to Weldco in the aggregate principal
amount of $1,450,000, in each case immediately prior to the closing of the
Offering pursuant to the purchase agreement among the Company, Weldco and
certain other parties, (v) the issuance of 170,718 shares of Common Stock
to two executive officers immediately prior to the closing of the Offering
in connection with the termination of certain deferred compensation
agreements, (vi) the issuance of 96,366 shares of Common Stock to a
director immediately prior to the closing of the Offering pursuant to a
right under a consulting agreement to convert deferred consulting payments
to Common Stock, (vii) recognition of an expense of $2.4 million ($1.4
million after assumed taxes) in connection with the compensation and
consulting arrangements and (viii) the cancellation of treasury stock.
See "Use of Proceeds," "S Corporation Distribution," "Management--Benefit
Plans" and "Certain Relationships and Related Transactions."
<F2> Reflects shares to be issued to former shareholders of Weldco who have
the right to cause the Company to repurchase said shares. See "Certain
Relationships and Related Transactions."
<F3> Excludes 650,000 shares of Common Stock reserved for issuance under the
Company's 1997 Stock Option Plan. See "Management."
</TABLE>
10
<PAGE> 12
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the net tangible book value of their Common Stock
from the assumed initial public offering price. The net tangible book value of
the Company at December 31, 1996 was approximately $2.8 million, or $0.39 per
share. Net tangible book value per share is equal to net tangible assets
(tangible assets of the Company less total liabilities) divided by the number
of shares of Common Stock outstanding. Net tangible book value dilution per
share represents the difference between the amount per share paid by purchasers
of shares of Common Stock in the Offering and the pro forma net tangible book
value per share of Common Stock immediately after completion of the Offering.
After giving effect to the sale of the 2,618,000 shares of Common Stock
issued in the Offering (after deducting the underwriting discount and
estimated offering expenses), the pro forma net tangible book value of the
Company as of December 31, 1996 would have been approximately $13.5 million,
or $1.26 per share. This represents an immediate dilution of net tangible book
value of $8.74 per share to purchasers of Common Stock in the Offering, as
illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed public offering price per share......................................... $10.00
Net tangible book value per share at December 31, 1996.................. $ 0.39
Increase in net tangible book value per share attributable to new
investors............................................................. 0.87
------
Pro forma net tangible book value per share after the Offering.................. 1.26
------
Net tangible book value dilution per share to new investors..................... $ 8.74
======
</TABLE>
The following table sets forth certain information with respect to the
number of shares of Common Stock purchased from the Company, the total cash
consideration paid and the average price per share paid by officers and
directors who have purchased Common Stock during the prior five years and by
new investors purchasing shares from the Company in the Offering:
<TABLE>
<CAPTION>
AVERAGE
PRICE PER
SHARES PURCHASED TOTAL CONSIDERATION SHARE
---------------- ------------------- ---------
<S> <C> <C> <C>
Officers and directors............................ 367,084 $ 1,437,483 $ 3.92
New investors..................................... 2,618,000 $26,180,000 $10.00
</TABLE>
The foregoing table assumes no exercise of outstanding options. As of
December 31, 1996, there were no options outstanding. There are options to
purchase 175,000 shares of Common Stock outstanding effective as of the closing
of the Offering, none of which will be exercisable within 60 days of the date
of grant. See "Management--Benefit Plans" and "Shares Eligible for Future
Sale."
11
<PAGE> 13
SELECTED PRO FORMA FINANCIAL DATA
The following sets forth the unaudited Pro Forma Condensed Statement of
Operations of the Company and Weldco for the twelve months ended June 30, 1996
and the six months ended December 31, 1996, after giving effect to the
acquisition of Weldco by the Company (the "Acquisition"), which on October 10,
1996 was purchased for approximately $11.1 million. Refer to Note 10 to the
financial statements. The Pro Forma Condensed Statement of Operations and other
data gives effect to the Acquisition as if it had occurred on July 1, 1995. The
Pro Forma Condensed Balance Sheet and Pro Forma Condensed Statement of
Operations information also give effect to the use of the estimated proceeds
from the Offering. The unaudited pro forma financial information is presented
for information purposes only and is not necessarily indicative of the results
that actually would have occurred had the Acquisition been consummated on the
dates indicated or the results that may occur or be obtained in the future. The
following information is qualified in its entirety by reference to and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements of the Company
and Weldco, respectively, and related Notes thereto and other historical
financial information included elsewhere in this Prospectus.
The Acquisition was accounted for by the Company as a purchase whereby the
basis for accounting for Weldco's assets and liabilities was based upon their
fair market values at the date of the Acquisition. Pro forma adjustments
represent the Company's determination of these adjustments and are based upon
available information and certain assumptions the Company considers reasonable
under the circumstances.
12
<PAGE> 14
<TABLE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
TWELVE MONTHS ENDED JUNE 30, 1996
-----------------------------------------------------------------------
WELDCO
ACQUISITION PRO FORMA PRO FORMA
COMPANY WELDCO ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
-------- -------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 53,612 $ 10,973 $64,585
Cost of products sold, excluding depreciation and
amortization.................................... 23,617 7,065 30,682
-------- -------- -------
Gross profit...................................... 29,995 3,908 33,903
Operating and administrative expenses............. 20,295 3,406 (311)<F1> 23,390
Depreciation and amortization..................... 4,700 204 852 <F2> 5,756
-------- -------- ------- ------- -------
Income from operations............................ 5,000 298 (541) 4,757
Interest expense.................................. 1,561 33 782 <F3> (1,331)<F8> 1,045
Other income...................................... 662 662
-------- -------- ------- ------- -------
Net income<F4>.................................... 4,101 265 (1,323) 1,331 4,374
Pro forma income tax provision<F5>................ 1,640 106 (529) 533 1,750
-------- -------- ------- ------- -------
Pro forma net income<F5>.......................... $ 2,461 $ 159 $ (794) $ 798 <F7> $ 2,624
======== ======== ======= ======= =======
Pro forma net income per common share<F5>......... $ 0.30 $ 0.32
Pro forma weighted average shares
outstanding<F6>................................. 8,122 8,122
<FN>
- --------
<F1> Reflects elimination of salaries and benefits provided to former
shareholders of Weldco whose employment by Weldco was terminated as part
of the acquisition.
<F2> Reflects (i) $7.9 million related to goodwill amortized over twenty years,
(ii) $1.0 million related to consulting agreements amortized over the
three-year service period and (iii) the fair market value of assets
acquired depreciated over twelve years.
<F3> Reflects increased interest expense from acquisition debt of $3.2 million
under the revolving credit facility at 7.2% and seller notes of $7.9
million at 6.6%.
<F4> The Company and Weldco elected to be treated as S Corporations for the
periods presented. As a result, their income was taxed for federal and
state purposes directly to their respective shareholders.
<F5> The pro forma income tax provision, pro forma net income and pro forma net
income per common share reflect federal and state income taxes (assuming a
40% statutory tax rate) as if the Company and Weldco had been taxed as C
Corporations for all periods presented.
<F6> Weighted average number of shares outstanding used to calculate pro forma
net income per share is based on the historical weighted average number of
shares outstanding, as adjusted to reflect (i) the assumed issuance of
854,567 shares of Common Stock to fund the excess of dividends (including
the estimated S Corporation Distribution) over net income for the six
months ended December 31, 1996, (ii) the issuance of 170,718 shares of
Common Stock to two executive officers immediately prior to the closing of
the Offering in connection with the termination of certain deferred
compensation agreements and (iii) the issuance of 96,366 shares of Common
Stock to a director immediately prior to the closing of the Offering
pursuant to a right under a consulting agreement to convert deferred
consulting payments to Common Stock. See "Management--Benefit Plans" and
"Certain Relationships and Related Transactions." In connection with
these compensation and consulting arrangements, the Company will incur a
one-time expense of $2.4 million in the period in which the closing of the
Offering occurs.
<F7> Excludes non-recurring charges of approximately $1.4 million, net of taxes
related to the compensation and consulting arrangements and approximately
$4.2 million upon termination of the Company's S Corporation status.
<F8> Reflects a decrease to interest expense associated with debt repaid from
the estimated Offering proceeds.
</TABLE>
13
<PAGE> 15
<TABLE>
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
(UNAUDITED)
<CAPTION>
SIX MONTHS ENDED DECEMBER 31, 1996
-----------------------------------------------------------------------
WELDCO
ACQUISITION PRO FORMA PRO FORMA
COMPANY WELDCO<F1> ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
-------- ---------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $33,777 $3,302 $37,079
Cost of products sold, excluding depreciation and
amortization..................................... 15,504 1,943 17,447
------- ------ -------
Gross profit....................................... 18,273 1,359 19,632
Operating and administrative expenses.............. 12,567 1,353 (411)<F2> 13,509
Depreciation and amortization...................... 2,934 50 213 <F3> 3,197
------- ------ ------ -------
Income from operations............................. 2,772 (44) 198 2,926
Interest expense................................... 993 20 196 <F4> (665)<F9> 544
Other income....................................... 150 2 152
------- ------ ------ ----- -------
Net income<F5>..................................... 1,929 (62) 2 665 2,534
Pro forma income tax provision<F6>................. 772 (25) 267 1,014
------- ------ ------ ----- -------
Pro forma net income<F6>........................... $ 1,157 $ (37) $ 2 $ 398 <F8> $ 1,520
======= ====== ====== ===== =======
Pro forma net income per common share<F6>.......... $ 0.14 $ 0.19
Pro forma weighted average shares
outstanding<F7>.................................. 8,122 8,122
<FN>
- --------
<F1> Results from Weldco for the period from July 1, 1996 through October 10,
1996 (the acquisition date) and includes a one-time charge of $333,000
reflecting bonuses paid by Weldco as a result of the acquisition.
<F2> Reflects elimination of salaries and benefits provided to former
shareholders of Weldco whose employment by Weldco was terminated as part
of the acquisition and one-time bonuses declared by Weldco immediately
prior to the acquisition.
<F3> Reflects (i) $7.9 million related to goodwill amortized over twenty years,
(ii) $1.0 million related to consulting agreements amortized over the
three-year service period and (iii) the fair market value of assets
acquired depreciated over twelve years.
<F4> Reflects increased interest expense from acquisition debt of $3.2 million
under the revolving credit facility at 7.2% and seller notes of $7.9
million at 6.6%.
<F5> The Company and Weldco elected to be treated as S Corporations for the
periods presented. As a result, their income was taxed for federal and
state purposes directly to their respective shareholders.
<F6> The pro forma income tax provision, pro forma net income and pro forma net
income per common share reflect federal and state income taxes (assuming a
40% statutory tax rate) as if the Company and Weldco had been taxed as C
Corporations for all periods presented.
<F7> Weighted average number of shares outstanding used to calculate pro forma
net income per share is based on the historical weighted average number of
shares outstanding, as adjusted to reflect (i) the assumed issuance of
854,567 shares of Common Stock to fund the excess of dividends (including
the estimated S Corporation Distribution) over net income for the six
months ended December 31, 1996, (ii) the issuance of 170,718 shares of
Common Stock to two executive officers immediately prior to the closing of
the Offering in connection with the termination of certain deferred
compensation agreements and (iii) the issuance of 96,366 shares of Common
Stock to a director immediately prior to the closing of the Offering
pursuant to a right under a consulting agreement to convert deferred
consulting payments to Common Stock. See "Management--Benefit Plans" and
"Certain Relationships and Related Transactions." In connection with
these compensation and consulting arrangements, the Company will incur a
one-time expense of $2.4 million in the period in which the closing of the
Offering occurs.
<F8> Excludes non-recurring charges of approximately $1.4 million, net of taxes
related to the compensation and consulting arrangements and approximately
$4.2 million upon termination of the Company's S Corporation status.
<F9> Reflects a decrease to interest expense associated with debt repaid from
the estimated Offering proceeds.
</TABLE>
14
<PAGE> 16
<TABLE>
PRO FORMA CONDENSED BALANCE SHEET
(UNAUDITED)
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------------------------
PRO FORMA
PRO FORMA AS
COMPANY ADJUSTMENTS<F1> ADJUSTED
------- -------------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents.............................. $ 3,407 $ 3,407
Accounts receivable, net............................... 9,954 9,954
Inventory.............................................. 7,108 7,108
Other current assets................................... 798 798
------- -------- -------
Total current assets........................... 21,267 21,267
Property, plant and equipment, net..................... 25,747 25,747
Intangibles............................................ 15,061 15,061
Other assets........................................... 396 396
------- -------- -------
Total assets................................... $62,471 0 $62,471
======= ======== =======
Short-term debt........................................ $ 4,182 $ 4,182
Accounts payable....................................... 3,607 3,607
Accrued liabilities.................................... 3,768 (256)<F3> 3,512
Accrued distribution to shareholders................... -- 10,100 <F2> 0
(10,100)<F3>
------- -------- -------
Total current liabilities...................... 11,557 (256) 11,301
Long-term debt (less current maturities)............... 31,535 (15,997)<F3> 15,538
Deferred income taxes.................................. -- 4,200 <F2> 3,234
(966)<F3>
Other long-term liabilities............................ 1,468 1,468
------- -------- -------
Total liabilities.............................. $44,560 $(13,019) $31,541
Redeemable common stock................................ -- 2,350 <F3> 2,350
Common stock, 7,000,000 and 10,020,084 shares issued
respectively......................................... 18 (8)<F2><F3> 10
Paid-in-Capital........................................ 96 26,414 <F2><F3> 26,510
Treasury stock 11,300,653 and 0 shares issued
respectively......................................... (3,705) 3,705 <F2> --
Retained earnings...................................... 21,502 (19,442)<F2><F3> 2,060
------- -------- -------
Total shareholders' equity............................. $17,911 $ 10,669 $28,580
------- -------- -------
Total liabilities and shareholders' equity............. $62,471 0 $62,471
======= ======== =======
<FN>
- --------
<F1> Reflects adjustments for the Offering and the intended application of the
proceeds therefrom.
<F2> Reflects (i) the payment of the S Corporation Distribution estimated to be
$10.1 million at December 31, 1996 and (ii) the recognition of a deferred
tax liability of approximately $4.2 million upon termination of the
Company's S Corporation status.
<F3> Reflects (i) the offering of 2,618,000 shares of Common Stock by the
Company at an assumed initial public offering price of $10.00 per
share and the application of the estimated net proceeds therefrom,
(ii) the issuance of 135,000 shares of Common Stock to Weldco (or certain
shareholders of Weldco), and the retirement of indebtedness payable to
Weldco in the aggregate principal amount of $1,450,000, in each case
immediately prior to the closing of the Offering pursuant to the purchase
agreement among the Company, Weldco and certain other parties, (iii) the
issuance of 170,718 shares of Common Stock to two executive officers
immediately prior to the closing of the Offering in connection with the
termination of certain deferred compensation agreements, (iv) the issuance
of 96,366 shares of Common Stock to a director immediately prior to the
closing of the Offering pursuant to a right under a consulting agreement
to convert deferred consulting payments to Common Stock, (v)
recognition of an expense of $2.4 million ($1.4 million after assumed
taxes) in connection with the compensation and consulting arrangements
and (vi) cancellation of treasury stock. See "Use of Proceeds,"
"S Corporation Distribution," "Management--Benefit Plans" and "Certain
Relationships and Related Transactions."
</TABLE>
15
<PAGE> 17
SELECTED HISTORICAL FINANCIAL DATA
Set forth below is selected financial data for each of the five years ended
June 30, 1996 and for the six-month periods ended December 31, 1995 and 1996.
The selected financial data for each of the three years ended June 30, 1996 has
been derived from the Company's Financial Statements included elsewhere in this
Prospectus which have been audited by Arthur Andersen LLP, independent public
accountants. The selected financial data for the years ended June 30, 1992 and
1993 has been derived from financial statements that are not included herein.
The selected financial data for the six months ended December 31, 1995 and 1996
has been derived from the Company's unaudited interim financial statements
contained elsewhere in this Prospectus. In the opinion of management, the
unaudited financial statements have been prepared on the same basis as the
audited Financial Statements and include all adjustments, consisting of only
normal recurring adjustments, necessary for a fair presentation of the
financial position and results of operations for these periods. Results of
operations for the six months ended December 31, 1996 are not necessarily
indicative of results to be expected for the year ending June 30, 1997. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business,"
"Risk Factors" and the Financial Statements and the Notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................. $30,789 $35,251 $39,166 $44,914 $53,612 $24,138 $33,777
Cost of products sold,
excluding depreciation
and amortization........ 13,117 14,911 16,844 19,931 23,617 10,678 15,504
------- ------- ------- ------- ------- ------- -------
Gross profit.............. 17,672 20,340 22,322 24,983 29,995 13,460 18,273
Operating and
administrative
expenses................ 12,521 14,735 15,704 17,688 20,295 9,196 12,567
Depreciation and
amortization............ 2,169 2,324 2,790 3,112 4,700 1,999 2,934
------- ------- ------- ------- ------- ------- -------
Income from operations.... 2,982 3,281 3,828 4,183 5,000 2,265 2,772
Interest expense.......... 1,329 1,204 1,038 1,072 1,561 675 993
Other income.............. 367 342 271 444 662 306 150
------- ------- ------- ------- ------- ------- -------
Net income<F1>............ 2,020 2,419 3,061 3,555 4,101 1,896 1,929
Pro forma income tax
provision<F2>........... 808 968 1,224 1,422 1,640 758 772
------- ------- ------- ------- ------- ------- -------
Pro forma net
income<F2>.............. $ 1,212 $ 1,451 $ 1,837 $ 2,133 $ 2,461 $ 1,138 $ 1,157
======= ======= ======= ======= ======= ======= =======
Pro forma net income per
common share<F2>........ $ 0.17 $ 0.20 $ 0.25 $ 0.29 $ 0.30 $ 0.16 $ 0.14
Pro forma weighted average
shares outstanding<F3>.. 7,267 7,267 7,267 7,267 8,122<F4> 7,267 8,122<F4>
OTHER FINANCIAL DATA:
Capital expenditures...... $ 1,055 $ 1,218 $ 2,908 $ 4,426 $ 3,647 $ 1,288 $ 1,377
Cash flow from operating,
investing and financial
activities.............. 1,350 212 45 774 694 (250) (742)
OTHER NON-GAAP FINANCIAL DATA:
EBITDA<F5>................ $ 5,518 $ 5,947 $ 6,889 $ 7,739 $10,362 $ 4,570 $ 5,856
<CAPTION>
JUNE 30, DECEMBER 31,
------------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1995 1996
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........... $ 3,889 $ 4,376 $ 5,116 $ 6,327 $ 7,218 $ 9,194 $ 9,709
Total assets.............. 26,600 25,268 27,133 33,421 45,491 41,791 62,471
Total debt................ 15,145 12,835 11,931 15,099 22,244 21,047 35,717
Shareholders' equity...... 7,848 9,529 11,648 13,796 16,371 15,375 17,911
16
<PAGE> 18
<FN>
- --------
<F1> For all periods shown, the Company elected to be treated as an S
Corporation. As a result, the income of the Company was taxed for federal
and state purposes directly to the Company's shareholders rather than to
the Company.
<F2> The pro forma income tax provision, pro forma net income and pro forma net
income per common share reflect federal and state income taxes, assuming a
40% statutory tax rate, as if the Company had been taxed as a C
Corporation for all periods presented.
<F3> Pro forma weighted average number of shares outstanding used to calculate
pro forma net income per common share is based on the historical weighted
average number of shares outstanding, as adjusted to reflect (i) the
issuance of 170,718 shares of Common Stock to two executive officers
immediately prior to the closing of the Offering in connection with the
termination of certain deferred compensation agreements and (ii) the
issuance of 96,366 shares of Common Stock to a director immediately prior
to the closing of the Offering pursuant to a right under a consulting
agreement to convert deferred consulting payments to Common Stock. See
"Management--Benefit Plans" and "Certain Relationships and Related
Transactions." In connection with these compensation and consulting
arrangements, the Company will incur a one-time expense of $2.4 million in
the period in which the closing of the Offering occurs.
<F4> Further adjusted to reflect the assumed issuance of 854,567 shares of
Common Stock to fund the excess of dividends (including the estimated S
Corporation Distribution) over net income for the six months ended
December 31, 1996.
<F5> EBITDA represents the earnings of the Company before income taxes, net
interest expense, depreciation and amortization and other noncash items
reducing net income. EBITDA is not a measure of financial performance
under GAAP and may not be comparable to other similarly titled measures by
other companies. Accordingly, it does not represent net income or cash
flows from operations as defined by GAAP and does not necessarily indicate
that cash flows will be sufficient to fund cash needs. As a result, EBITDA
should not be considered an alternative to net income as an indicator of
operating performance or to cash flows as a measure of liquidity. The
Company incurs significant capital expenditures and incurs debt, primarily
related to acquisitions, which are not reflected in EBITDA. As such, the
Company has provided above cash flows from operating, investing and
financing activities, and capital expenditures which reflect these
transactions. The Company has included information concerning EBITDA as it
understands that it is used by certain investors as one measure of an
issuer's historical ability to service its debt.
</TABLE>
17
<PAGE> 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with, and is
qualified in its entirety by, the Financial Statements and the Notes thereto
and the Selected Historical Financial Data included elsewhere in this
Prospectus. This discussion contains certain forward-looking statements that
involve substantial risks and uncertainties. When used in this section, the
words "anticipate," "believe," "estimate," "expect" and similar
expressions as they relate to the Company or its management are intended to
identify such forward-looking statements. The Company's actual results,
performance or achievements could differ materially from those expressed in, or
implied by, these forward-looking statements as a result of, among other
things, the factors set forth in the section entitled "Risk Factors."
Historical operating results are not necessarily indicative of the trends in
operating results for any future period.
OVERVIEW
The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in nine states
in the mid-Atlantic and midwestern regions of the United States. The Company's
net sales have grown, primarily as a result of acquisitions, at a compound
annual rate of approximately 17% per year since the Company started business in
1958, increasing from $190,000 in that year to $64.6 million on a pro forma
combined basis in fiscal 1996. In fiscal 1996, gases accounted for
approximately 46% of net sales, welding equipment and supplies accounted for
approximately 40% of net sales, and cylinder and tank rental accounted for
approximately 14% of net sales.
The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 22 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions may
have, a dilutive effect upon the Company's income from operations and net
income before tax for a short period following consummation. This temporary
dilution occurs because some of the benefits of acquisitions, such as
leveraging of operating and administrative expenses, improved product gross
margins and real sales growth, occur over a period ranging from two to eight
quarters, depending upon the complexity of integrating each acquisition into
the Company's existing operations. The Company anticipates that the benefits of
the Weldco and Weber acquisitions will be realized over a comparable period.
The consideration for most acquisitions includes a combination of a cash
payment at closing, seller financing and payments under covenants not to
compete and consulting agreements. In most cases, operating cash flow of an
acquired business is positive in a relatively short period of time. For many
acquisitions, the Company believes that projections of future cash flows
justify payment of amounts in excess of the book or market value of the assets
acquired, resulting in goodwill being recorded.
The Company's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months
falling in the Company's second and third fiscal quarters.
Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a quarter-
to-quarter basis. The Company believes that changes in these expenses as a
percentage of sales should be evaluated over the long term rather than on a
quarter-to-quarter basis due to the moderate seasonality of sales mentioned
above and the generally fixed nature of these expenses.
Historically, the Company's gross profit margins as a percentage of sales
have been higher on the sale of gases than on the sale of welding equipment and
supplies ("hard goods"). As a result of recent acquisitions of some
distributors with a higher proportion of hard goods to gas sales, the Company's
average gross profit as a percentage of sales has decreased in comparison to
prior years, even though the dollar amount of the gross margin has increased.
Future acquisitions may affect this pattern depending upon the product mix of
the acquired businesses.
The Company has been an S Corporation for federal and state income tax
purposes. As a result, the Company has not been subject to federal and state
income taxes. The Company will terminate its S Corporation election in
connection with the Offering and become a C Corporation. Upon termination of
the S Corporation election, the Company will be required to recognize
approximately $4.2 million of deferred income taxes in the period in which the
closing of the Offering occurs.
18
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain items in
the Company's statements of operations as a percentage of net sales. Results
for any one or more periods are not necessarily indicative of annual results or
continuing trends.
<TABLE>
<CAPTION>
AS A PERCENTAGE OF NET SALES
-----------------------------------------------------
SIX MONTHS
ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------- -----------------
1994 1995 1996 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of products sold, excluding depreciation and
amortization.............................................. 43.0 44.4 44.1 44.2 45.9
----- ----- ----- ----- -----
Gross profit................................................ 57.0 55.6 55.9 55.8 54.1
Operating and administrative expenses....................... 40.1 39.4 37.8 38.1 37.2
Depreciation and amortization............................... 7.1 6.9 8.8 8.3 8.7
----- ----- ----- ----- -----
Income from operations...................................... 9.8 9.3 9.3 9.4 8.2
Interest expense............................................ 2.7 2.4 2.9 2.8 2.9
Other income................................................ 0.7 1.0 1.2 1.3 0.4
----- ----- ----- ----- -----
Net income<F1>.............................................. 7.8% 7.9% 7.6% 7.9% 5.7%
===== ===== ===== ===== =====
EBITDA<F2>.................................................. 17.6% 17.2% 19.3% 18.9% 17.3%
<FN>
- --------
<F1> For all periods shown, the Company elected to be treated as an S
Corporation. As a result, the income of the Company was taxed for federal
and state purposes directly to the Company's shareholders rather than to
the Company.
<F2> EBITDA represents the earnings of the Company before income taxes, net
interest expense, depreciation and amortization and other noncash items
reducing net income. EBITDA is not a measure of financial performance
under GAAP and may not be comparable to other similarly titled measures by
other companies. See footnote 5 to the Selected Historical Financial Data.
</TABLE>
Comparison of Six Months Ended December 31, 1996 and 1995
Net sales increased 39.9%, or $9.7 million, to $33.8 million from $24.1
million for the six months ended December 31, 1996 and 1995, respectively.
Acquisitions made during the preceding twelve months contributed $7.9 million
of the increase in net sales, while base business growth contributed $1.7
million of the increase. Gases and cylinder income represented 57.3% of net
sales for the six months ended December 31, 1996, with hard goods representing
the remaining 42.7%. In comparison, net sales for the six months ended December
31, 1995 reflected gases and cylinder income as 61.5% and hard goods as 38.5%.
This change in sales mix reflects the effect of acquisitions made during the
preceding twelve months that as a consolidated group have had a sales mix of
36.5% gases and cylinder income and 63.5% hard goods. The Company believes that
this base of hard good customers related to these acquisitions provides it the
opportunity to build gas and cylinder business in the future.
Gross profit increased 35.8%, or $4.8 million, to $18.3 million from $13.5
million for the six months ended December 31, 1996 and 1995, respectively.
Acquisitions made during the preceding twelve months contributed $3.9 million
of the increase in gross profit, while the base business contributed $0.9
million of the increase. Gross profit as a percentage of net sales was 54.1%
compared to 55.8% for the six months ended December 31, 1995. This change
reflected an increase in the proportion of hard good sales, which have a lower
gross profit margin as a percentage of net sales than gases, to 42.7% compared
to 38.5% of net sales for the same six months in 1995. This increase in the
proportion of hard good sales was primarily attributable to the two most recent
acquisitions. Sharp increases in propane costs during the six month period
reduced the total gases gross profit margin as a percentage of net sales as
compared to the same six months in 1995. The Company implemented propane
pricing policy changes during this period to help insure that future cost
changes are passed to its customers.
19
<PAGE> 21
Operating and administrative expenses increased 36.7%, or $3.4 million, to
$12.6 million from $9.2 million for the six months ended December 31, 1996 and
1995, respectively. Of this increase, $2.6 million was related to acquired
businesses, $0.2 million was for employee benefits, and $0.4 million was for
facility lease expenses. The increase in employee benefits reflects additional
amounts accrued for hospitalization and profit sharing. The increase in
facility lease expense was due to the commencement of lease payments on certain
properties subsequent to the sale of those properties by the Company to West
Rentals, Inc. See "Certain Relationships and Related Transactions." The
remaining increase is primarily attributable to inflation and expenses
associated with acquisitions made during the six month period. Depreciation and
amortization expense increased $0.9 million for the six months ended December
31, 1996 compared to the same period in 1995, primarily as a result of
acquisitions made during the last twelve months.
Net income of $1.9 million for the six months ended December 31, 1996 was
basically unchanged compared to the same period in 1995, although net income
as a percent of net sales decreased from 7.9% to 5.7%, reflecting primarily the
increase in depreciation, amortization and interest expense attributable to
acquisitions.
Earnings before interest, taxes, depreciation and amortization increased
28.1%, or $1.3 million, to $5.9 million for the six months ended December 31,
1996 compared to the same period in 1995.
Comparison of Years Ended June 30, 1996 and 1995
Net sales increased 19.4%, or $8.7 million, to $53.6 million from $44.9
million in fiscal 1996 and fiscal 1995, respectively. Acquisitions contributed
$7.7 million of the increase in net sales, while base business growth
contributed $1.0 million of the increase, fiscal 1996 sales mix of 60.3% gases
and cylinder income and 39.7% hard goods compared to fiscal 1995 sales mix of
62.0% gases and cylinder income and 38.0% hard goods, reflecting the effect of
acquisitions made during fiscal 1996 that had a sales mix of 42.2% gases and
cylinder income and 57.8% hard goods.
Gross profit increased 20.1%, or $5.0 million, to $30.0 million from $25.0
million in fiscal 1996 and fiscal 1995, respectively. Acquisitions contributed
$4.7 million of the increase in gross profit, while the base business
contributed $0.3 million of the increase. Gross profit as a percentage of net
sales improved to 55.9% in fiscal 1996, compared to 55.6% in fiscal 1995, with
improvements in gross profit as a percentage of sales for each of the product
groups being partially offset by sales of hard goods increasing to 39.7% of net
sales compared to 38.0% of net sales in fiscal 1995.
Operating and administrative expenses increased 14.7%, or $2.6 million, to
$20.3 million from $17.7 million in fiscal 1996 and fiscal 1995, respectively.
Acquisitions contributed substantially all of this increase. Operating and
administrative expenses as a percentage of net sales improved to 37.8% in fiscal
1996, compared to 39.4% in fiscal 1995, reflecting the leveraging of general and
administrative costs as net sales were added from acquisitions. Depreciation and
amortization expense increased $1.6 million in fiscal 1996 compared to fiscal
1995, reflecting increased spending for acquisitions and capital expenditures.
Interest expense increased $0.5 million in fiscal 1996 compared to fiscal 1995
reflecting increased borrowings to finance acquisitions.
Net income increased 15.4%, or $0.5 million, to $4.1 million from $3.6
million in fiscal 1996 and fiscal 1995, respectively.
Earnings before interest, taxes, depreciation and amortization increased
33.9%, or $2.7 million, to $10.4 million from $7.7 million in fiscal 1996 and
fiscal 1995, respectively.
Comparison of Years Ended June 30, 1995 and 1994
Net sales increased 14.7%, or $5.7 million, to $44.9 million from $39.2
million in fiscal 1995 and fiscal 1994, respectively. Acquisitions contributed
$1.9 million of the increase in net sales, while base business growth
contributed $3.8 million of the increase, reflecting the growth of propane and
welding supplies sales at existing locations. The Company's net sales mix
remained relatively unchanged between fiscal 1995 and fiscal 1994 with gases and
cylinder income representing 62.0% and 62.5% respectively.
Gross profit increased 11.9%, or $2.7 million, to $25.0 million from $22.3
million in fiscal 1995 and fiscal 1994, respectively. Acquisitions contributed
$1.2 million of the increase in gross profit in fiscal 1995, while the base
business contributed $1.5 million of the increase. Gross profit as a percentage
of net sales declined to 55.6% in fiscal 1995, compared to 57.0% in fiscal 1994.
The decline in gross profit as a percentage of net sales reflects an increase in
propane sales, which have a lower gross profit as a percentage of net sales than
other gases, and an increase in product
20
<PAGE> 22
costs for hard goods. In fiscal 1995, the Company began directing vendors to
ship hard goods directly to the Company's branch locations, rather than to the
Company's central warehouse as in prior years. Vendors increased purchase prices
for hard goods to cover their additional shipping costs. This increase in
product cost was more than offset by reduced internal distribution costs, which
are reflected in operating expenses.
Operating and administrative expenses increased 12.6%, or $2.0 million, to
$17.7 million in fiscal 1995, compared to $15.7 million in fiscal 1994.
Acquisitions contributed $1.1 million of the increase in operating and
administrative expenses, while the base business contributed $0.9 million of
the increase.
Net income increased 16.1%, or $0.5 million, to $3.6 million from $3.1
million in fiscal 1995 and fiscal 1994, respectively.
Earnings before interest, taxes, depreciation and amortization increased
12.3%, or $0.8 million, to $7.7 million from $6.9 million in fiscal 1995 and
fiscal 1994, respectively.
QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited quarterly financial
information for each of the Company's last ten quarters. The Company believes
that this information includes all adjustments, consisting of only normal
recurring adjustments, necessary for a fair presentation of such quarterly
information when read in conjunction with the Financial Statements and the
Notes thereto included elsewhere in this Prospectus. The Company believes that
quarter-to-quarter comparisons of its financial results are not necessarily
meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
QUARTERS ENDED
----------------------------------------------------------------------------------------------------------------
SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30, DEC. 31,
1994 1994 1995 1995 1995 1995 1996 1996 1996 1996
--------- -------- --------- -------- --------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales....... $10,341 $11,081 $12,028 $11,464 $11,323 $12,815 $14,934 $14,540 $14,514 $19,263
Cost of products
sold,
excluding
depreciation
and
amortization.. 4,546 5,123 5,294 4,968 4,942 5,737 6,598 6,341 6,331 9,173
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit.... 5,795 5,958 6,734 6,496 6,381 7,078 8,336 8,199 8,183 10,090
Operating and
administrative
expenses...... 4,154 4,235 4,754 4,546 4,333 4,862 5,590 5,510 5,741 6,826
Depreciation and
amortization.. 676 726 780 929 827 1,171 1,309 1,392 1,373 1,561
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income from
operations.... 965 997 1,200 1,021 1,220 1,045 1,437 1,297 1,069 1,703
Interest
expense....... 224 250 273 324 334 341 389 497 415 578
Other income.... 67 111 154 112 177 128 181 175 74 76
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net
income<F1>.... $ 808 $ 858 $ 1,081 $ 809 $ 1,064 $ 832 $ 1,229 $ 975 $ 728 $ 1,201
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
EBITDA<F2>...... $ 1,708 $ 1,834 $ 2,134 $ 2,062 $ 2,225 $ 2,344 $ 2,927 $ 2,864 $ 2,516 $ 3,340
<FN>
- ---------
<F1> For all periods shown, the Company elected to be treated as an S
Corporation. As a result, the income of the Company was taxed for federal
and state purposes directly to the Company's shareholders rather than to
the Company.
<F2> EBITDA represents the earnings of the Company before income taxes, net
interest expense, depreciation and amortization and other noncash items
reducing net income. EBITDA is not a measure of financial performance
under GAAP and may not be comparable to other similarly titled measures by
other companies. See footnote 5 to the Selected Historical Financial Data.
</TABLE>
21
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has financed its operations, capital expenditures
and debt service with funds provided from operating activities. Acquisitions
have been financed by a combination of seller financing, bank borrowings and
funds generated from operations. Since April 1994, required debt service on
borrowings from banks has been limited primarily to interest payments.
At December 31, 1996, the Company had working capital of approximately $9.7
million. Funds provided by operations for the six months ended December 31,
1996 were approximately $1.2 million. Funds used for investing activities were
approximately $5.8 million for the six months, consisting primarily of capital
spending and financing for two acquisitions. Uses of funds for financing
activities for the six months were approximately $4.3 million for debt service
and $0.4 million of S Corporation distribution for payment of shareholder
taxes.
Net cash provided by operating activities increased $1.1 million, to $7.4
million for fiscal 1996, compared to $6.3 million for fiscal 1995. Cash used
for acquisitions was approximately $6.4 million and $2.8 million for fiscal
1996 and fiscal 1995, respectively. Capital expenditures, made primarily for
the purchase of cylinders, tanks and delivery trucks, were approximately $3.6
million and $4.4 million for fiscal 1996 and fiscal 1995, respectively. The
Company received proceeds of $0.9 million in fiscal 1996 from the sale of real
estate. See "Certain Relationships and Related Transactions." The Company
borrowed $6.5 million and $5.0 million, made debt service payments of $2.5
million and $2.0 million, and made S Corporation distributions, principally for
payment of taxes, of $1.6 million and $1.4 million during fiscal 1996 and
fiscal 1995, respectively.
On October 4, 1996, the Company entered into a new credit facility totaling
$38.0 million, consisting of a $13.0 million term loan, which matures in seven
years and is amortized in equal monthly payments, and a $25.0 million revolving
loan with a $15.0 million sublimit for letters of credit, which matures in
October 1999. The revolving loan is used primarily to fund acquisitions. The
Company is not required to make principal payments on outstanding balances of
the revolving loan as long as certain covenants are satisfied. Interest is
charged on both the term loan and the revolving loan at either the lender's
prime rate or various LIBOR rates, at the Company's discretion, plus an
applicable spread. The weighted average interest rate for substantially all of
the borrowings under the credit facility was 7.62% as of December 31, 1996. The
Company pays a fee for the unused portion of the revolving loan. As of December
31, 1996, availability under the revolving loan was approximately $9.9 million,
with outstanding borrowings of approximately $10.1 million and outstanding
letters of credit of approximately $5.0 million. The credit facility is secured
by all of the Company's assets.
The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum
fixed charge coverage, maximum funded debt to EBITDA, and minimum net worth.
The Company is in compliance with these covenants and believes that it will
continue to be in compliance through at least the next twelve months.
The Company is obligated under various promissory notes related to the
financing of acquisitions that have various rates of interest, ranging from
3.0% to 10.0% per annum, and maturities through 2010. The outstanding balance
of these notes as of June 30, 1996 and 1995 was $3.8 million and $1.1 million,
respectively. The outstanding balance of these notes increased to $12.9 million
as of December 31, 1996, reflecting notes added as a result of the Weber and
Weldco acquisitions. Some of these notes are secured by assets related to the
applicable acquisition, some are unsecured, and some are backed by bank letters
of credit issued under the Company's credit facility. Outstanding letters of
credit as of June 30, 1996 and 1995 were $1.9 million and $0.7 million,
respectively.
The Company intends to use a portion of the net proceeds from the Offering
to reduce the balance of the revolving loan. The Company expects to use the
increased borrowing availability to pay for future acquisitions.
The Company believes that cash generated from operations, borrowing
availability under its credit facility and the net proceeds of the Offering
will be sufficient to satisfy the Company's requirements for operating funds,
capital expenditures and future acquisitions for at least the next twelve
months.
FLUCTUATIONS IN QUARTERLY RESULTS
The Company generally has experienced higher sales activity during its
second and third quarters as a result of seasonal sales of propane, with
corresponding lower sales for the first and fourth quarters. As a result,
income from
22
<PAGE> 24
operations and net income typically are higher for the second and third quarters
than for the first and fourth quarters of the fiscal year.
INFLATION
The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally low rates of inflation in the
economy and the Company's historical ability to pass purchase price increases
to its customers in the form of sales price increases. While inflation has not
had, and the Company does not expect that it will have, a material impact upon
operating results, there is no assurance that the Company's business will not
be affected by inflation in the future.
SUBSEQUENT EVENTS
On January 30, 1997, the Company entered into a letter of intent for the
purchase of all the outstanding shares of an industrial gas and welding supply
distributor for approximately $3.5 million. On February 28, 1997, the Company
entered into another letter of intent for the purchase of substantially all
the assets of an industrial gas and welding supply distributor for
approximately $3.8 million. The Company is proceeding with due diligence and
the negotiation of definitive purchase agreements. These acquisitions will be
financed by borrowings under the Company's credit facility. The Company does
not anticipate consummation of these transactions prior to the closing of the
Offering.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed of, was issued in March 1995. SFAS No. 121 requires that the carrying
value of long-lived operating assets, when determined to be impaired, be
adjusted so as not to exceed the estimated undiscounted cash flows provided by
such assets. SFAS No. 121 also addresses the accounting for long-lived assets
that are to be disposed of in future periods. The Company adopted the
provisions of SFAS No. 121 in the first quarter of fiscal 1997. The adoption of
SFAS No. 121 did not have any effect on the Company's financial position or
results of operations for the six months ended December 31, 1996.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, was issued in October 1995. The Company will be
required to adopt the new standard no later than fiscal 1997, although early
adoption is permitted. This standard establishes the fair value based method
(the "SFAS 123 Method") rather than the intrinsic value based method as the
preferred accounting methodology for stock-based compensation arrangements.
Entities are allowed to either (i) continue to use the intrinsic value based
methodology in their basic financial statements and provide in the footnotes
pro forma net income and earnings per share information as if the SFAS 123
Method had been adopted or (ii) adopt the SFAS 123 Method. Following adoption,
the Company anticipates providing the required disclosures in the notes to its
financial statements.
23
<PAGE> 25
BUSINESS
OVERVIEW
The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in nine states
in the mid-Atlantic and midwestern regions of the United States. The Company's
net sales have grown, primarily as a result of acquisitions, at a compound
annual rate of approximately 17% per year since the Company started business in
1958, increasing from $190,000 in that year to $64.6 million on a pro forma
combined basis in fiscal 1996. In fiscal 1996, gases accounted for
approximately 46% of net sales, welding equipment and supplies accounted for
approximately 40% of net sales, and cylinder and tank rental accounted for
approximately 14% of net sales.
The Company's gas operations consist primarily of the packaging and mixing
of industrial, medical and specialty gases, such as oxygen, nitrogen and argon,
in pressurized cylinders and the transportation of these cylinders to customers
from one of the Company's 40 distribution and retail locations. The Company
also distributes propane to industrial and residential customers. Customers pay
a rental fee for use of the Company's cylinders. The Company owns approximately
290,000 cylinders, which require minimal maintenance and have useful lives that
the Company expects will extend on average for 50 years or longer. The Company
selectively participates in the small bulk gas market through the delivery of
gases in cryogenic transports and the storage of gases in cryogenic tanks and
propane tanks which are also rented to bulk gas customers. The Company owns
approximately 7,000 bulk propane tanks and 250 bulk cryogenic tanks, which have
useful lives generally less than those of cylinders. In connection with the
distribution of gases, the Company sells welding equipment and supplies,
including welding machines, wire, fluxes and electrodes and a wide variety of
supporting equipment.
The Company's principal business strategy is to aggressively pursue growth
through the acquisition of other independent distributors and also through
internally generated growth. Since the Company was founded, it has completed 38
acquisitions. Since January 1, 1996, the Company has acquired four independent
distributors, including Weldco with annual sales of approximately $11 million
in its most recent fiscal year and operations in Cincinnati and Dayton, Ohio,
and Weber with annual sales of approximately $5 million in its most recent
fiscal year and operations in western Pennsylvania. The integration of Weldco
and Weber into the Company's existing operations is currently in progress, with
the benefits of integration expected to be realized in the next two to eight
quarters. Management believes there will continue to be numerous attractive
acquisition candidates available to the Company as a result of the
consolidation trend in the industry and that the Company will be able to
successfully integrate acquired operations into its base business, generating
growth and operational synergies. Acquisitions will be financed primarily with
borrowings under the Company's credit facility and seller financing. While
highly focused on external growth, management believes that the Company's
competitive strengths will allow it to increase sales and improve market share
in existing markets, while maintaining acceptable levels of profitability.
INDUSTRY OVERVIEW
GENERAL
Historically, the industrial gas distribution business had a base of
customers engaged primarily in metal fabrication. In order to better serve
these customers, industrial gas distributors have also traditionally sold
welding equipment and supplies. As certain sectors of the economy have grown,
such as the electronics and chemicals industries, and as new applications for
gases have developed, the customer base of the industry has significantly
broadened to include almost every major industry, including health care,
electronics, chemicals, aerospace, beverages, environmental remediation, food
processing, oil and gas, and primary metals, as well as metal fabrication.
The industrial, medical and specialty gas industry consists of two major
segments, the bulk segment and the packaged gas segment. The bulk segment
supplies gases to customers with large volume requirements, generally by truck
or pipeline to a customer's facility, or in some cases by the actual
construction of a gas production plant at a customer's facility. This segment
is primarily supplied by the major gas producers in the United States, although
some large distributors, such as the Company, selectively participate in the
small bulk gas market.
The Company competes primarily in the packaged gas segment, which consists
of the packaging, mixing and distribution of gases to customers with smaller
volume needs or requirements for specially blended or purified gases.
24
<PAGE> 26
This segment of the industry is estimated to have sales of $6 billion in the
United States, including sales of welding equipment and supplies. Participants
in this segment can be further divided into two groups, large multi-state
distributors with annual sales exceeding $25 million, and smaller, privately
owned companies with few or single locations and annual sales below $25
million. Management believes that large, multi-state distributors, including
the Company, account for approximately 50% of sales in the packaged gas
segment. Management estimates that the remaining sales are generated by
approximately 750 smaller distributors, many of which it believes are potential
candidates for acquisition by larger distributors in the current wave of
industry consolidation.
The Company believes that the following characteristics make the
distribution of packaged gases attractive and different from ordinary
industrial distribution: (i) the production, packaging and mixing of gases, as
well as the logistics of a large distribution network, require significant
knowledge and expertise; (ii) customers expect technical support and assistance
in a wide variety of gas applications; and (iii) the currently existing
logistical framework is unlikely to change significantly because of the
economics associated with the delivery and exchange of cylinders.
INDUSTRY CONSOLIDATION
The industry is undergoing significant consolidation, a trend which began
in the early 1980's. The Company believes there are many reasons for this
trend, including:
* Many of the owners who started welding supply distributors after World
War II are reaching retirement age without qualified succession.
* Small distributors are facing increasing competition from large
distributors who generally operate with lower cost structures due to
economies of scale.
* Rapid changes in technology in recent years are providing opportunities
for more efficient order entry, inventory and distribution management.
Larger distributors are more likely to have the capital and human
resources to take advantage of these opportunities, thereby creating
greater cost and service reliability advantages.
* Larger customers are demanding additional services from their suppliers
in such areas as automated order entry, automated restocking and
applications technology support. These services require an investment in
technology and equipment that many smaller distributors are incapable or
unwilling to make.
* The number and complexity of government regulations is increasing,
especially for distributors who produce or package gas products.
Complying with new regulations requires human resource expertise, which
is difficult for the smaller distributor to access and maintain.
* The acquisition of a distributor generally requires greater financial
resources than in the past because the businesses are generally larger,
sellers often demand full payment in cash, and sellers and major
industrial gas producers appear to be less willing to provide financing.
The Company believes this consolidation trend will continue, providing
opportunities for those distributors, such as the Company, who have the
financial and human resources to acquire and effectively assimilate
acquisitions into their base business. The Company believes that distributors
who fail to successfully participate in this consolidation trend and achieve a
strong or leading position in their market areas will be at a cost disadvantage
in the long term.
In recent years, the propane industry has also been undergoing
consolidation for many of the same reasons as the industrial gas industry. The
Company has been taking advantage of this consolidation trend through selective
acquisitions. Except for a few large companies, the propane distribution
industry is highly fragmented. Industry sources indicate there are
approximately 8,000 retail propane companies operating 13,500 local
distribution centers nationwide. The Company believes that the 50 largest
propane distributors have less than a 50% share of the approximately nine
billion gallon annual market.
ECONOMIC CHARACTERISTICS OF THE INDUSTRY
The industrial gas industry is mature with real growth consistent with
growth in the overall economy. Gas sales tend to be less adversely impacted by
a decline in general economic conditions than the sale of welding equipment and
supplies. Management believes that the industrial gas distribution business is
relatively resistant to downturns in the
25
<PAGE> 27
business cycle due to the following factors: (i) the industry has a broad and
diverse customer base; (ii) gases frequently represent a fixed component of
operating costs which does not decline with production levels; (iii) gases are
required for maintenance and renovation activities, which tend to increase
during economic downturns; (iv) industries less impacted by economic downturns
are major purchasers of industrial gases; and (v) gas purchases represent a
small portion of operating expenses and, therefore, are not a large cost
cutting item. The total market for industrial gases has continued to expand due
to strong growth in certain segments, such as electronics, food processing and
health care, and significant growth from new applications for industrial gases.
However, other activities which use industrial gases, such as metal
fabrication, have declined in recent years.
BUSINESS STRATEGY
The Company has implemented a strategic plan designed to (i) sustain
profitable growth through the acquisition of key distributors in selected
markets, (ii) achieve and maintain a low-cost supplier position in each market
segment where the Company participates and (iii) build a unified, cohesive
organization, staffed by skilled employees who are responsive to changing
customer requirements.
GROWTH THROUGH ACQUISITIONS
Prior Acquisitions. Since the formation of the Company in 1958, the Company
has completed the acquisition of the 38 distributors identified below:
<TABLE>
<CAPTION>
DISTRIBUTOR PRINCIPAL LOCATION FISCAL YEAR ACQUIRED
- ----------- ------------------ --------------------
<S> <C> <C>
Weldco, Inc. Cincinnati, OH 1997
Weber Gas & Welding Supply Co., Inc. Pittsburgh, PA 1997
Gas & Oil, Inc. Croydon, PA 1996
U.S. Air & Supplies, Inc. Chambersburg, PA 1996
Wootten Industries, Inc. Salisbury, MD 1996
Quest Welding Supply Columbus, OH 1996
AL Compressed Gases Sharonville, OH 1995
Ted's Bottled Gas, Inc. Tarentum, PA 1995
Allegheny LP Gas Evans City, PA 1995
Evans Welding Supply Co. Johnson City, TN 1995
Ina Oil Co. Southport, NC 1995
Smith LP Gases Bruceton Mills, WV 1995
Green's LP Gases Carrollton, OH 1994
Allegheny Air Gas Washington, PA 1994
A-1 Welding Supply Co. Bluefield, VA 1994
Big Sandy Welding Supply Co. Paintsville, KY 1993
Fort Pitt Paint and Glass Pittsburgh, PA 1992
Linde Gases of Western Pennsylvania Greensburg, PA 1992
Malanzak Bottled Gas Co. Uniontown, PA 1991
Penn-Ohio Welding Supply Co. New Castle, PA 1990
Penn-Air Industrial Gases New Castle, PA 1990
Airco Rare and Specialty Gases Pittsburgh, PA 1990
Speedy Welding Supply Co. Wilmington, NC 1989
Safety Equipment Co. Wilmington, NC 1989
A-B-C Fire Protection Wilmington, NC 1989
Herdman Brothers Welding Supply Co. Steubenville, OH 1989
Dunlap Welding Supply Zanesville, OH 1989
Airco Retail Leetsdale, PA 1988
26
<PAGE> 28
<CAPTION>
DISTRIBUTOR PRINCIPAL LOCATION FISCAL YEAR ACQUIRED
- ----------- ------------------ --------------------
<S> <C> <C>
Interstate Welding Supply Co. Huntington, WV 1985
Welder's Products Connellsville, PA 1984
Wood Brothers Propane Co. Uniontown, PA 1983
Home Bottled Gas Co. Uniontown, PA 1983
Fayette Oxygen Co. Uniontown, PA 1983
Cambridge Welding Cambridge, OH 1980
Washington Welding Supply Co. Washington, PA 1980
Better Welding Supply Wheeling, WV 1978
Fire Safety Service Wheeling, WV 1975
Johnson Welder's Supply Co. Friendly, WV 1973
</TABLE>
The Company has entered into two letters of intent with two third parties
concerning the Company's purchase of two gas distribution businesses for a
purchase price of approximately $3.5 million and $3.8 million, respectively,
subject to certain adjustments. The parties are proceeding with due diligence
and the negotiation of definitive purchase agreements.
The Company's acquisitions historically have been financed, and the Company
expects that future acquisitions will be financed, primarily with borrowings
under the Company's credit facility and seller financing. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." The Company does not currently intend to
issue shares of its Common Stock or other securities in order to consummate
its acquisitions, but may in the future elect to do so. Any such issuances
may be limited by the Right of First Refusal Agreement. See "The Right of
First Refusal Agreement."
Acquisition Strategy. The Company intends to continue to focus its
acquisition efforts both on market areas where the Company has an existing
presence and on new areas where it believes it can achieve a leading presence.
The Company believes there are many potential acquisition candidates with
operations in these market areas. The Company seeks to achieve operating
efficiencies when it acquires a distributor in an overlapping or contiguous
market area by closing redundant locations, eliminating a significant portion
of the acquired distributor's overhead and consolidating distribution routes.
Acquisitions in new markets allow the Company to achieve operating efficiencies
through volume discounts on purchases, lower administrative and professional
expenses and the purchase of new equipment to replace inefficient equipment and
equipment previously leased at relatively expensive rental rates.
The Company believes that its principal competitive advantages in acquiring
distributors are (i) its flexibility in structuring acquisitions to meet the
concerns of sellers, (ii) its ability to offer sellers a continuing role in
management and (iii) its methodology in assimilating acquisitions. The Company
also believes it has a well organized acquisition program which utilizes
individuals who are well respected in the industry and who have extensive
experience in evaluating and negotiating transactions with distributor owners.
Based upon the Company's experience, price is not always the primary
determining factor in a selling distributor's choice of a buyer. Most owners of
independent distributors are sensitive as to whom they sell their business and
have concern for the well being of their employees after the acquisition. The
Company has found that relationships, existing competitive rivalry and
reputation are key elements in the success of acquiring most small,
privately-owned distributors. The Company believes it has earned an excellent
reputation for treating fairly the employees of businesses it has acquired,
providing them with competitive wages and benefits and opportunities for
advancement within the scope of the Company's operations.
Competition for Acquisitions. In seeking to acquire distributors, the
Company competes with the major industrial gas producers and national and
regional gas distributors. The largest national distributor is Airgas, Inc.
("Airgas") which has been growing through acquisitions since the mid-1980's.
The Company expects that Airgas will continue to selectively acquire
distributors in the future, and in some situations will compete with the
Company for acquisitions. The Company believes that Praxair and AGA Gas, Inc.
are the only major industrial gas producers who are actively soliciting
independent distributors for purchase at this time, but that both have
self-imposed size and geographic constraints. The Company also believes that
some major industrial gas producers have limited their acquisition efforts due
primarily to the difficulty of resolving management differences, cultural
differences and cost structure differences between the small, privately-held
business and the large multinational corporation. The smaller independent
27
<PAGE> 29
distributors with which the Company competes for acquisitions generally do not
seek acquisitions beyond their immediate geographic region.
Acquisition Process. The Company has established formal procedures for
locating, investigating and valuing potential distributor acquisitions.
Criteria used by the Company in evaluating potential acquisitions include (i) a
history of profitability, (ii) realistic projections of future performance,
(iii) a sales mix which is or has the potential to become weighted towards the
sale of gases, which generally have higher profit margins than welding
equipment and supplies, (iv) a cylinder gas market which is serviced primarily
by independent distributors, as opposed to industrial gas producers and (v)
availability of qualified management and key personnel.
Assimilation of Acquired Businesses. The Company believes that the
effective assimilation of acquired businesses into the Company's existing
operations is critical to the success of the Company's acquisition strategy.
The Company has established a transition team comprised of selected personnel
with technical expertise in various areas, such as purchasing, accounting,
operations and sales. This team has primary responsibility for converting the
acquired business from its existing methods and practices to those used by the
Company. A primary goal of the assimilation process is to instill the Company's
culture into the new operations. The Company believes the ability to instill
its culture provides a distinct and key competitive advantage. This is partly
accomplished by requiring the adoption of uniform policies and procedures which
support the Company's operational strategies.
ACHIEVE AND MAINTAIN POSITION AS A LOW-COST SUPPLIER
The Company strives to produce, package and market the Company's products
and services at costs which are lower than its local market competitors. This
is achieved by optimizing branch size and location, requiring adherence to the
Company's uniform policies and procedures, taking advantage of volume discount
purchases not available to smaller competitors and utilizing the Company's
management information systems. Where branch size is suboptimal, the Company
has developed alternatives to increase size or profitability through growth or
product diversification. The Company has implemented a "best practices"
program involving the identification of the most effective method of performing
a specific activity, such as inventory control, and has adopted procedures and
training to implement the practice as a standard throughout the Company's
operations.
The Company has made a significant investment in its management information
systems as part of its strategy to be a low cost supplier. The Company has
installed an integrated company-wide point-of-sale data entry system that
provides current information on inventory levels and account status. The
Company believes significant costs savings have resulted from the increased
ability to efficiently manage inventory levels and accounts payable.
The Company believes the selective addition of complementary product
offerings will enable it to better serve its diverse, expanding customer base,
reach new customers, increase sales in existing locations and leverage its
distribution system. For this reason, the Company has focused in recent years
on expanding its propane business. The addition of propane distribution at
existing Company locations has proven to be advantageous by providing the
opportunity to leverage fixed costs at existing locations, thereby creating
economies of scale. Certain Company locations are more attractive than others
for propane distribution, due primarily to residential growth potential and
existing branch size. In addition to propane, the Company believes that fire
safety equipment, currently a very small component of total sales, may be
suitable for distribution to portions of the Company's existing customer base.
ENHANCE ORGANIZATIONAL STRENGTH
The Company believes that to be competitive in attracting and maintaining
customers it must have a skilled and responsive work force dedicated to
providing excellent service. The Company works to instill a service culture
through various operational policies. The Company places special emphasis on
customer service, including the ability to quickly respond to technical
questions on products and applications. The Company believes this is a key
value provided to its customers. The Company commits significant resources to
the training and education of its employees through various programs. See
"--Employees."
The Company strives to utilize to the fullest extent its existing
management resources. The Company recently restructured certain management
reporting relationships and areas of responsibility to place operating and
financial responsibility at the local market level, thereby eliminating a layer
of management and improving communication. These changes also allowed the
Company to redirect the focus of certain key management members on important
28
<PAGE> 30
operating issues, such as system logistics, training, budgeting and overall
operating performance, that are vital to managing the Company's growth.
PRODUCTS
Gases packaged and distributed by the Company include oxygen, nitrogen,
hydrogen, argon, helium, acetylene, carbon dioxide, nitrous oxide, specialty
gases and propane. Specialty gases include rare gases, high-purity gases and
blended, multi-component gas mixtures. In connection with the distribution of
gases, the Company sells welding equipment and supplies, including welding
machines, wire, fluxes and electrodes and a wide variety of supporting
equipment.
In fiscal 1996, the Company sold approximately eight million gallons of
propane to approximately 2,000 residential, commercial and industrial users.
Propane sales accounted for approximately 6% of net sales in fiscal 1996.
Typical residential and commercial uses include conventional space heating,
water heating and cooking. Typical industrial uses include engine fuel for fork
lifts and other vehicles, metal cutting, brazing and heat treating. The
distribution of propane is seasonal in nature and sensitive to variations in
weather with consumption as a heating fuel peaking sharply in winter months.
While primarily a packager and distributor of gases, the Company also
manufactures a portion of its acetylene requirements at its facility in West
Mifflin, 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 1996, acetylene accounted for
approximately 3% of net sales.
The following table sets forth the percentage of the Company's net sales
for the fiscal years ended June 30, 1994, 1995 and 1996 and for the six months
ended December 31, 1996 for each of the following products and services:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS
-------------------------- ENDED
1994 1995 1996 DEC. 31, 1996
---- ---- ---- --------------
<S> <C> <C> <C> <C>
Gases............................................. 47.5% 47.2% 45.9% 43.6%
Welding equipment and supplies.................... 37.5 38.0 39.7 42.7
Cylinder rental................................... 15.0 14.8 14.4 13.7
</TABLE>
CUSTOMERS
The Company currently has more than 40,000 customers, none of which
accounted for more than 1.5% of net sales in fiscal 1996. In fiscal 1996,
approximately 23% of the Company's net sales were to metal production and
fabrication customers. The second largest customer category was health care,
which represented 9% of the Company's net sales in fiscal 1996 and is one of
the Company's fastest growing categories. The customer base also includes
smaller distributors who are in close proximity to one of the Company's larger
packaging facilities and find it economically advantageous to source certain
products from the Company.
The Company believes the industry has been characterized by relatively high
customer loyalty because of the importance of quality service and personal
relations. This characteristic has made it difficult for new entrants in a
market to acquire existing customers. However, service requirements for certain
large customers are becoming more demanding and sophisticated and the Company
expects that this will result in more account turnover in the future.
For some larger volume customers, bulk cryogenic products are delivered in
transports to cryogenic tanks at the customer location. The Company serves
small bulk customers only where it can compete effectively with producers,
primarily on the basis of service and the supply of other products, such as
cylinder gases and hard goods.
SALES AND MARKETING
The distribution of most packaged gases is most economically performed
within approximately a thirty-mile radius of the product packaging or inventory
location due primarily to the costs associated with the delivery of cylinders.
Therefore, the aggregate national market of $6 billion consists of hundreds of
regional markets with an estimated size of $5 million to $100 million in annual
sales. The Company believes the average market size is approximately $20
million.
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<PAGE> 31
The Company solicits and maintains business primarily through a direct
selling effort using an experienced sales force of approximately 60 sales
representatives. Sales representatives receive continuous training so that they
are knowledgeable about gas and product performance characteristics and current
application technology. On average, the Company's sales representatives have
more than ten years of industry experience. Sales representatives are paid a
base salary and commissions based upon account profit margin. Efforts are
focused on accounts generating sales of high margin products. Occasionally,
sales representatives make joint sales calls with the Company's suppliers to
address difficult or innovative customer application requirements. The Company
has been testing both telemarketing and catalog solicitation at selected
locations to attract new accounts.
Smaller accounts are usually served from "walk in" retail locations,
where the gases and hard goods are picked up rather than delivered. Each retail
location contains a showroom to allow the customer easy access to equipment and
supplies. Branch locations are chosen on the basis of local market distribution
logistics rather than suitability for "walk in" retail sales. The Company's
advertising efforts are limited as management does not consider advertising to
be a significant factor in generating sales.
COMPETITION
Competition is almost always on a regional market basis and is based
primarily on customer loyalty, service and, to a lesser extent, price. Most
regional markets have between three and six competitors, the majority of whom
are small independent companies, with one or two competitors having a
significantly higher market share than the others. The Company competes in many
markets throughout West Virginia, Pennsylvania, Kentucky, Ohio, Virginia,
Tennessee, Maryland, Delaware and North Carolina. The Company believes it has a
strong or leading position in most of the markets it serves.
While the Company competes with the distribution subsidiaries of the major
industrial gas producers, the Company does not believe that the production of
industrial gas provides these producers with a significant competitive
advantage because in most cases, the cost for base gases represents a
relatively minor component of the total selling price in comparison to the
packaging and distribution expenses.
SUPPLIERS
The Company purchases industrial gases pursuant to short-term supply
arrangements and open purchase orders with three of the five major gas
producers in the United States. One such producer accounted for approximately
80% of the Company's gas purchases in fiscal 1996. If any of these arrangements
were terminated, the Company believes it would be able to readily secure an
alternate source of supply.
The Company purchases welding equipment and consumable supplies from
approximately 85 primary vendors, of which purchases from the top five vendors
represented approximately 61% of total purchases in fiscal 1996. Purchases from
major vendors are made pursuant to purchase orders that are cancelable by the
Company upon minimal notice. With supplier overcapacity in most product lines
and high competitive rivalry for volume purchasers, large distributors such as
the Company are generally able to purchase welding equipment and supplies from
the vendor of their choice. This enables the Company to participate in vendor
discount and rebate programs and obtain products at competitive costs.
The Company purchases propane from pipeline sources at various supply
points in its market areas, generally on a short-term basis at prevailing
market prices. The Company historically has been able to adjust prices to
customers to reflect changes in product cost, which varies with season and
availability. The Company is not dependent upon any single supplier for propane
and supplies have historically been readily available. A significant portion of
the Company's propane sales are made to industrial customers. As a result, the
Company's sales are less seasonal than those of many competitors in the propane
market who focus on the residential segment. Because of the Company's off-peak
season demand, the Company believes that it would be less likely than some
distributors to be placed on allocation by suppliers during a period of tight
supply and accordingly would receive adequate supplies to meet customer demand.
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<PAGE> 32
EMPLOYEES
At December 31, 1996, the Company employed 441 people, of whom
approximately 19% were covered by collective bargaining agreements.
Historically, the Company has not been adversely affected by strikes or work
stoppages. Approximately 58% of the Company's employees are hourly workers. The
Company believes it has a skilled and motivated work force and that its
relationship with employees is good. The Company believes that its wages and
benefits, which reflect local conditions, are competitive with those provided
by major competitors. All of the Company's hourly employees are currently paid
wages at a rate that exceeds the current, and federally mandated increases in,
the minimum wage. The Company believes it would not be materially impacted by
future increases in the minimum wage.
The Company believes that continuing education is necessary for its
employees to achieve and maintain the skills required to be effective in
today's competitive environment. At its Wheeling, West Virginia training
center, the Company provides a variety of programs and courses covering all
phases of operations, sales, safety and distribution. Key suppliers also
provide employees product training relating primarily to welding and gas
application technology.
PROPERTIES
The Company owns approximately 290,000 cylinders, 7,000 bulk propane tanks
and 250 bulk cryogenic tanks, generally ranging in size from 250 gallons to
11,000 gallons. Most cylinders and storage tanks are located at customer sites.
Cylinders require minimal maintenance and have useful lives that the Company
expects will extend on average for 50 years or longer. Bulk tanks have useful
lives generally less than those of cylinders.
The Company has 40 industrial gas and welding supply distribution locations
in nine states, twelve of which also package and distribute propane. A typical
location has two acres of property, 5,000 square feet of space used to
warehouse hard goods, 5,000 square feet of space used for gas filling and
cylinder storage and 2,000 square feet of space used for a retail showroom. The
Company's headquarters are located in 20,000 square feet of space located in
Wheeling, West Virginia.
Most of the specialty gas products sold by the Company are purified,
packaged and mixed at a facility operated by the Company in Evans City,
Pennsylvania. This facility normally processes approximately 30,000 cylinders
per month, but has capacity to process approximately 50% more volume, which the
Company believes would be sufficient to meet increased volume requirements in
the future.
All of the Company's facilities are leased on terms which the Company
believes are consistent with commercial rental rates prevailing in the
surrounding rental market. See "Certain Relationships and Related
Transactions." The Company believes that its facilities are adequate for its
needs and that its properties are generally in good condition, well maintained
and suitable for their intended use.
REGULATORY MATTERS
The Company is subject to federal and state laws and regulations adopted
for the protection of the environment, and the health and safety of employees
and users of its products. In addition, the Company voluntarily complies with
applicable industry safety standards. Management believes that the Company is
in substantial compliance with all such laws, regulations and standards
currently in effect and that the cost of compliance with such laws, regulations
and standards will not have a material adverse effect on the Company.
PRODUCT LIABILITY AND INSURANCE
The Company maintains insurance coverage which it believes to be adequate.
The nature of the Company's business may subject it to product liability
lawsuits. To the extent that the Company is subject to claims which exceed its
liability insurance coverage, such suits could have a material adverse effect
on the Company. No such lawsuits are pending against the Company and the
Company has not suffered any material losses from such lawsuits in the past.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings.
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<PAGE> 33
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
YEARS
EXPERIENCE IN
NAME AGE INDUSTRY POSITION
---- --- ------------- --------
<S> <C> <C> <C>
Gary E. West...................................... 60 27 Chairman of the Board of Directors
Lawrence E. Bandi................................. 42 23 President, Chief Executive Officer, Director
John R. Bushwack.................................. 46 21 Executive Vice President, Chief Operating
Officer, Secretary, Director
Robert D. Scherich................................ 36 1 Chief Financial Officer
Ben Exley, IV..................................... 50 1 Director
James P. Hart..................................... 42 1 Director
William A. Indelicato............................. 57 28 Director
R. Bruce Kraemer.................................. 51 30 Director
August E. Maier................................... 67 14 Director
</TABLE>
GARY E. WEST, CHAIRMAN OF THE BOARD. Mr. West has served as Chairman of the
Board of Directors of the Company since 1984. From 1970, when he purchased the
Company, to March 1995, Mr. West served as President of the Company. Mr. West
is primarily responsible for the growth and success of the Company. Mr. West
has also served as President of West Rentals, Inc. and Equip Lease Corp. and
Vice President of Acetylene Products Corp. since 1992, 1988 and 1985,
respectively. See "Certain Relationships and Related Transactions." Since
June 1993, he has served as a director of WesBanco Wheeling, and since June
1990 he has served as a director of H.E. Newmann Co., a plumbing, heating and
mechanical contracting company. Mr. West received his Bachelor of Science
degree in Business Administration from West Liberty State College.
LAWRENCE E. BANDI, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr. Bandi has
served as President and Chief Executive Officer of the Company since March 1995
and April 1991, respectively, and as a director of the Company since March
1984. Mr. Bandi has held various positions with the Company since joining it in
1974. Mr. Bandi is a Director of the Ohio Valley Industrial and Business
Development Corporation, a private corporation established for the purpose of
attracting various business entities to West Virginia. Mr. Bandi received his
Bachelor of Science degree in Accounting from Wheeling College and his Masters
in Business Administration degree from Wheeling Jesuit College.
JOHN R. BUSHWACK, EXECUTIVE VICE PRESIDENT, CHIEF OPERATING OFFICER AND
DIRECTOR. Mr. Bushwack has served as the Executive Vice President, Chief
Operating Officer and a director of the Company since January 1997. From 1991
to 1996, Mr. Bushwack served in various positions with the Company, including
Executive Vice President of Sales and Acquisitions, Vice President of Sales and
Acquisitions, Vice President of Sales and General Manager. From 1987 to 1990,
Mr. Bushwack served as President of the Harvey Company, a gas distributor, and
from 1990 to 1991 he served as Vice President and director of Linde Gases of
the Great Lakes, also a gas distributor. In addition, Mr. Bushwack has been a
director of Convenient Care Products Group, Ltd., a division of Westmoreland
Health System, since 1991.
ROBERT D. SCHERICH, CHIEF FINANCIAL OFFICER. Mr. Scherich has served as the
Company's Chief Financial Officer since May 1996. From January 1993 to April
1996, he served as Controller and General Manager of Wheeling Pittsburgh Steel
Corporation, a subsidiary of WHX Corporation, and from January 1988 to December
1993 he served as Division Controller of such corporation. Mr. Scherich was an
accountant with Ernst & Whinney from 1981 to 1984. Mr. Scherich received his
Bachelor of Science degree in Accounting from Pennsylvania State University and
is a Certified Public Accountant.
BEN EXLEY, IV, DIRECTOR. Mr. Exley was elected a Director of the Company in
January 1997. He has served as the President of Ohio Valley-Clarksburg, Inc.
since 1990 and Bailey Drug Company since 1993, both of which are pharmaceutical
distributors and wholly-owned subsidiaries of Cardinal Health Inc. Mr. Exley
has also served on the
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<PAGE> 34
board of directors of several companies, including BankOne West Virginia N.A.
since 1994, BankOne Wheeling-Steubenville N.A. since 1991 and Stone & Thomas, a
chain of clothing department stores, since 1991. Mr. Exley is a graduate of
West Virginia Wesleyan with a Bachelor of Science degree in Business
Administration. He also holds a Masters in Business Administration degree from
Northern Illinois University.
JAMES P. HART, DIRECTOR. Mr. Hart was elected a director of the Company in
January 1997. He has been 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, since August
1994. 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 Scranton
University.
WILLIAM A. INDELICATO, DIRECTOR. Mr. Indelicato was elected a director of
the Company in January 1997. Mr. Indelicato has been President of ADE Vantage,
Inc., a business consulting firm which provides certain services to the
Company, since July 1992. From 1988 to 1991, Mr. Indelicato served as General
Business Director of Union Carbide Industries Gases Inc. Mr. Indelicato is also
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.
R. BRUCE KRAEMER, DIRECTOR. Mr. Kraemer was elected a Director of the
Company in January 1997. He is the owner of Reading Supplies Inc., a
distributor of pipe, valves and fittings. Mr. Kraemer was President of Weldco
from 1985 to 1996 and a sales representative of Weldco from 1966 to 1985. Mr.
Kraemer received a degree from the Ohio College of Applied Sciences.
AUGUST E. MAIER, DIRECTOR. Mr. Maier was elected a Director of the Company
in January 1997. He has served as Chief Executive Officer of Houston Fearless
79, a manufacturer of film processing equipment, since May 1995. From October
1987 to May 1995, Mr. Maier was Chief Executive officer of Holox, Inc., a
manufacturer and distributor of industrial gases and welding equipment, which
is wholly owned by Hoeklos Ltd. of Holland. Mr. Maier received his Bachelor of
Science degree in Mechanical Engineering from the Indiana Institute of
Engineering and his Masters in Business Administration degree from the Harvard
Business School.
Officers are elected annually and serve at the discretion of the Board of
Directors.
BOARD OF DIRECTORS
Prior to the Offering, the Board of Directors will be divided into three
classes with terms expiring, respectively, at the annual meeting of
shareholders in 1998 (Messrs. Bandi and Kraemer), 1999 (Messrs. Bushwack, Hart
and West) and 2000 (Messrs. Exley, Indelicato and Maier).
The Company's Board of Directors has established an Executive Committee, an
Audit and Finance Committee, and a Nominating and Compensation Committee. The
Executive Committee is comprised of Messrs. West, Bandi and Indelicato. The
Executive Committee has authority to exercise most of the powers of the full
Board during the intervals between meetings. The Audit and Finance Committee is
made up of a majority of independent directors comprised of Messrs. Hart,
Buschwack, Kraemer and Maier. The Audit and Finance Committee reviews the
Company's accounting practices, internal accounting controls and financial
results and oversees the engagement of the Company's independent auditors. The
Nominating and Compensation Committee is comprised of Messrs. West, Indelicato
and Exley. The Nominating and Compensation Committee establishes salaries,
incentives and other forms of compensation for directors, officers and other
employees of the Company, administers the Company's benefit plans and
recommends policies relating to such plans, and administers the issuance of
stock options and other awards under the Company's 1997 Stock Option Plan to
all Company employees and directors, other than the members of such committee,
and recommends to the Board of Directors nominees for election as directors,
and periodically reviews potential candidates, including incumbent directors.
The Company intends to pay each outside director a $1,000 fee for each
Board meeting attended and a $500 fee for each Committee meeting attended.
Directors are also reimbursed for certain reasonable expenses incurred in
attending Board meetings. Officers of the Company do not receive any additional
compensation for serving as members of the Board of Directors or any of its
Committees.
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<PAGE> 35
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to the Chief Executive
Officer and the two other executive officers whose annual salary and bonus
exceeded $100,000 for services rendered in all capacities to the Company for
fiscal year 1996.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
ANNUAL COMPENSATION<F1>
NAME AND ----------------------- ALL OTHER
PRINCIPAL POSITION SALARY BONUS COMPENSATION
------------------ -------- -------- ------------
<S> <C> <C> <C>
Gary E. West........................................... $ 61,159 $125,000 $ 9,712<F3>
Chairman of the Board<F2>
Lawrence E. Bandi...................................... 93,408 128,631 64,827<F3>
President and Chief Executive Officer
John R. Bushwack....................................... 110,238 46,500 32,260<F3>
Executive Vice President and Chief Operating Officer
<FN>
- --------
<F1> The named individuals did not receive any annual compensation not properly
categorized as salary or bonus, except for certain perquisites and other
personal benefits which are not shown because the value of such
perquisites and other personal benefits provided by the Company did not
exceed the lesser of $50,000 or 10% of the total of annual salary and
bonus for the named executive officer for such year.
<F2> In addition to salary, Mr. West received S Corporation distributions as a
shareholder of the Company.
<F3> Represents amounts accrued by the Company on behalf of Mr. Bandi and Mr.
Bushwack in the amounts of $54,616 and $21,846, respectively, pursuant to
deferred compensation agreements. Represents contributions by the Company
to the pension and profit sharing plan accounts of Messrs. West, Bandi and
Bushwack in the amount of $9,712 each. Represents premiums paid by the
Company on behalf of Messrs. Bandi and Bushwack in the amounts of $499 and
$702, respectively, for insurance to fund death, disability and retirement
benefits under certain agreements.
</TABLE>
BENEFIT PLANS
1997 STOCK OPTION PLAN
The Company adopted the 1997 Stock Option Plan (the "Plan") in February
1997. The Plan provides for the issuance of options to purchase up to 650,000
shares of Common Stock to key employees, officers and directors of the Company
and is administered by the Nominating and Compensation Committee of the Board
of Directors.
The Company will grant to Lawrence E. Bandi, John R. Bushwack and each of
the five independent directors options to purchase 46,000, 26,000 and 5,000
shares, respectively, of the Common Stock effective as of the closing of the
Offering. The options vest three years after the date of the grant and have a
term of ten years. The options are exercisable at a price equal to the fair
market value of the shares of Common Stock on the date of the grant. In the
case of key employees and officers, unexercised options granted under the Plan
are subject to forfeiture upon termination of employment for any reason other
than death, disability or normal retirement.
401(K) PLAN
The Company has a qualified 401(k) savings and retirement plan (the
"401(k) Plan"). Eligibility to participate in the 401(k) Plan requires an
employee to have been employed with the Company for twelve months ("Eligible
Employees"). The 401(k) Plan allows Eligible Employees to defer into their
plan account a certain dollar amount or stated percentage of their salary, not
to exceed statutorily mandated annual limits (the "Employee Contributions").
Eligible Employees are 100% vested in their Employee Contributions. The Company
makes an annual contribution (the "Company Contribution") to all Eligible
Employees' plan account in an amount equal to 5% of their salary or wages.
Company Contributions vest over a term of seven years. The Company also makes a
determination each year based upon performance as to the amount, if any, of
additional contributions to be made to Eligible Employees' plan accounts. If a
determination is made to make additional contributions in any year, such
amounts are contributed on a pro rata basis to the plan accounts of Eligible
Employees who made voluntary contributions during such year.
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<PAGE> 36
Distributions under the 401(k) Plan may be made at retirement, death, permanent
disability or other termination of employment, in a lump sum payment.
CERTAIN AGREEMENTS WITH EXECUTIVE OFFICERS
Lawrence E. Bandi and John R. Bushwack have entered into long-term deferred
compensation agreements with the Company pursuant to which the Company has
awarded units to Mr. Bandi and Mr. Bushwack having a value based upon a
percentage of the value of the Company. For purposes of such agreements, the
value of the Company is generally determined pursuant to a formula based upon a
multiple of earnings before interest, income taxes, depreciation and
amortization, subject to certain adjustments. The value of the units is
adjusted annually. The interests of Mr. Bandi and Mr. Bushwack in their units
vest either over a period of years or automatically upon the occurrence of
certain transactions, including closing of the Offering. These agreements will
be terminated immediately prior to the closing of the Offering and the Company
will issue to Mr. Bandi and Mr. Bushwack 121,942 and 48,776 shares of Common
Stock, respectively, in exchange for their units. In connection with the
termination of these agreements, the Company will recognize a one-time,
non-cash expense of $1.6 million in the period in which the closing of the
Offering occurs.
Lawrence E. Bandi and John R. Bushwack have entered into agreements with
the Company whereby the Company has agreed to pay each of them, or their
respective beneficiaries, certain death, disability and/or retirement benefits,
provided that they are employed with the Company until their respective
retirements or deaths, and that with respect to retirement benefits, they do
not thereafter compete with the Company. In the event of the death or
retirement of Mr. Bandi or Mr. Bushwack, the Company is obligated to make
payments of $2,000 and $1,000 per month, respectively, for eighty-four months.
In the event of disability, the Company is obligated to make payments of $2,000
and $1,000 per month, respectively, for the duration of the disability, but not
after 65 years of age.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
In January, 1997, the Company established a Compensation Committee
comprised of Messrs. West, Indelicato and Exley. The Company did not have a
compensation committee or other board committee performing equivalent functions
prior to 1997. Messrs. West and Bandi made all decisions relating to executive
officer compensation in 1996. None of the Company's directors serve on any
other board which relationship would be construed to constitute a compensation
committee interlock.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the Pennsylvania Business Corporation Law of 1988, as
amended (the "PBCL"), the Articles of the Company provide that (i) the Company
is required to indemnify its directors and officers to the maximum extent
permitted by Pennsylvania law, (ii) the Company may indemnify employees or
agents to the maximum extent permitted by Pennsylvania law, (iii) the Company
is required to advance expenses in defending a proceeding against its officers
and directors and may advance such expenses to its employees and agents, upon
receipt of an undertaking by such person to repay such amount if it is
determined that such person is not entitled to indemnification, (iv) the
rights conferred in the PBCL and in the Company's Articles are not exclusive,
(v) the Company may enter into agreements with any director, officer, employee
or agent to provide indemnification rights as it deems appropriate and (vi)
the Company is authorized to maintain insurance on behalf of its officers and
directors, employees and agents.
The Company has also adopted in its Articles and Bylaws a provision
limiting a director's personal liability for monetary damages unless (i) the
director has breached or failed to perform his or her duties under applicable
law and (ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Company pursuant
to the Company's Articles, Bylaws and the PBCL, the Company has been informed
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act
and is therefore unenforceable.
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<PAGE> 37
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock immediately prior to the Offering and as adjusted
to reflect the sale of shares offered hereby, for (i) each person known to the
Company to own beneficially 5% or more of the outstanding shares of Common
Stock, (ii) the Company's directors and named executive officers, (iii) each
Selling Shareholder and (iv) all the Company's directors and executive officers
as a group. Each named beneficial owner has sole voting and investment power.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY NUMBER OF SHARES BENEFICIALLY
OWNED PRIOR TO SHARES OWNED AFTER
OFFERING OFFERED OFFERING<F1>
------------------------ --------- -----------------------
NUMBER PERCENT NUMBER PERCENT
--------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Gary E. West<F2>................... 7,000,000 94.6 -- 7,000,000 69.9
Lawrence E. Bandi<F3>.............. 121,942 1.6 37,000 84,942 <F*>
John R. Bushwack<F3>............... 48,776 <F*> 15,000 33,776 <F*>
William A. Indelicato<F4>.......... 96,366 1.3 30,000 66,366 <F*>
Ben Exley, IV...................... -0- -- -- -- --
James P. Hart...................... -0- -- -- -- --
R. Bruce Kraemer<F5>............... 100,000 1.4 -- 100,000 1.0
August E. Maier.................... -0- -- -- -- --
All directors and executive
officers as a group.............. 7,367,084 99.5 82,000 7,285,084 72.7
<FN>
- --------
<F*> Less than 1%.
<F1> Assumes no exercise of the Underwriters' over-allotment option.
<F2> Gary E. West beneficially owns and controls the shares indicated through
six grantor retained annuity trusts.
<F3> Mr. Bandi is the President and Chief Executive Officer of the Company. Mr.
Bushwack is the Executive Vice President and Chief Operating Officer of
the Company. Each is also a director of the Company. See "Management."
<F4> Mr. Indelicato has been a director of the Company since January 1997 and
provides consulting services to the Company through ADE Vantage, Inc. See
"Certain Relationships and Related Transactions."
<F5> Subject to adjustment based upon the initial public offering price of the
Common Stock. See "Certain Relationships and Related Transactions."
</TABLE>
THE RIGHT OF FIRST REFUSAL AGREEMENT
In September 1991, in connection with the purchase by the Company of
certain assets of a predecessor of Praxair, Inc. (``Praxair''), the
Company, Mr. West and certain of his affiliates entered into a Right
of First Refusal Agreement with Praxair. In March 1997, the parties to such
agreement entered into an Amended and Restated Right of First Refusal
Agreement (the ``Right of First Refusal Agreement'') in connection
with the Company's reorganization. Pursuant to this agreement, if at
any time during the term of the agreement the Company wishes to accept
a third party offer to purchase all or a material part of the assets
of the Company, or Mr. West and his affiliates wish to accept an offer
to purchase shares of Common Stock owned by them in a transaction
that would result in Mr. West and his affiliates collectively owning
less than 51% of the Company's issued and outstanding shares of Common Stock
on a fully diluted basis, then Praxair will have a right of first
refusal to match the offer. If within 30 days of the notice, Praxair
elects to exercise its right of first refusal, it must purchase the
Company's assets or Mr. West's and his affiliates' shares of Common
Stock, as the case may be, at the same price and on the same terms
as those offered by any third party. If within such 30 day period
Praxair elects not to exercise such right, or fails to make any
election, Mr. West and his affiliates, or the Company, as the case may
be, may consummate the proposed sale to such third party within 100 days
of the expiration of such 30 day period. If such sale is not consummated
within such 100 day period, Praxair will have a right of first refusal
with respect to subsequent third party offers.
In addition, in the absence of a third party offer, if (a) Mr. West
and his affiliates wish to sell shares of Common Stock which would
result in their owning collectively less than 51% or more of the
Company's issued and outstanding shares of Common Stock, (b) the Company
wishes to sell all or a material part of its assets, or (c) the
Company wishes to issue additional shares, or options or securities exercisable
or convertible into shares of Common Stock, pursuant
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<PAGE> 38
to employee stock options, a public offering, private placement, merger, share
exchange or otherwise, which in the aggregate on a fully diluted basis would
result in Mr. West and his affiliates collectively owning less than 51% of all
the issued and outstanding shares of Common Stock, then, as a condition to that
transaction Mr. West and his affiliates must give notice of the proposed
sale or issuance to Praxair and Praxair will have the right within 30 days
of such notice to elect to purchase from Mr. West and his affiliates up to
all of the issued and outstanding shares of Common Stock held by them (but not
less than 51% of all of the issued and outstanding shares of the Company's
Common Stock on a fully diluted basis) at the then prevailing market price.
If within such 30 day period Praxair elects not to exercise such right,
or fails to make any election, Mr. West and his affiliates, or the
Company, as the case may be, may consummate the proposed sale or issuance
within 100 days of the expiration of such 30 day period. If such sale is not
consummated within such 100 day period, Praxair will have a right of first
refusal with respect to subsequent third party offers. If within two
years of any such sale to Praxair, Praxair acquires the remaining shares
of Common Stock in a second step transaction at a price per share
greater than that initially paid to Mr. West and his affiliates, it must
pay to Mr. West and his affiliates the difference between the average price
per share of Common Stock paid in such second step transaction and the
price per share initially paid to Mr. West and his affiliates. Additionally,
if within two years of any such sale, Praxair resells the Company's shares
at a price per share which exceeds the price per share paid by it to Mr. West
and his affiliates, Praxair will be required to turn over to Mr. West and
his affiliates 50% of the profit therefrom.
Praxair has agreed that until such time, if ever, as it acquires at least
51% of the issued and outstanding Common Stock it will not acquire Common
Stock through public purchases or otherwise and will not seek to change the
composition or the policies of the Company's Board of Directors. Mr. West
has agreed with Praxair that he will not, nor will he cause or permit the
Company to, take or permit any action which would result in his ceasing
to be the beneficial owner of at least 51% of the issued and outstanding
Common Stock until September 1998. Mr. West has informed the Company that
he does not currently intend to take, cause or permit the Company to take,
any such action at any time during the term of the Right of First Refusal
Agreement. The Right First Refusal Agreement expires in September 2006.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
WELDCO, INC.
On October 11, 1996, the Company purchased substantially all of the assets
of Weldco pursuant to a Purchase and Sale Agreement dated as of September 27,
1996 among the Company, Weldco and certain other persons (the "Weldco Purchase
Agreement"). Approximately $7.9 million of the purchase price was paid by the
delivery of the Company's promissory notes. Under the Weldco Purchase
Agreement, Weldco (or its shareholders following liquidation) has the right, in
the event of an initial public offering of the Company's Common Stock, to
convert a portion of the indebtedness evidenced by the Company's promissory
notes to shares of the Company's Common Stock based upon the initial public
offering price of the Common Stock. Under this provision, Weldco has the right
to receive 280,000 shares of the Common Stock in exchange for the cancellation
of indebtedness in the amount of $2,800,000. The Company and Weldco have agreed
that rather than issuing 280,000 shares to Weldco, the Company will prepay
$1,450,000 under the Company's promissory notes and issue 135,000 shares of
Common Stock to Weldco (or its shareholders) immediately prior to the closing
of the Offering. The Company understands that certain shareholders of Weldco
intend to purchase up to 100,000 shares of Common Stock in the Offering and
that the Underwriters have agreed to reserve such number of shares for purchase
by Weldco (or its shareholders). See "Underwriting." The Weldco Purchase
Agreement further grants Weldco (or its shareholders) the right to cause the
Company to purchase shares of Common Stock issued to Weldco (or its
shareholders) pursuant to the conversion of indebtedness. Such right shall be
exercised, if at all, within three years following the closing of the Offering
based upon the initial public offering price plus interest from the date of
issuance at the rate of 6.6% per annum. The Company expects that 235,000 shares
will be subject to this right following the closing of the Offering.
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<PAGE> 39
WEST RENTALS, INC.
The Company leases 38 buildings from West Rentals, Inc., a West Virginia
corporation ("West Rentals"), 35 of which are leased pursuant to a Master
Lease Agreement (the "Master Lease") and three of which are leased pursuant
to pass-through subleases. Gary E. West, the Company's Chairman of the Board,
is the sole shareholder of West Rentals. The Master Lease terminates on October
31, 2006 and may be renewed for an additional five-year term. Currently, the
Company pays an aggregate of $132,118 a month to West Rentals as rent for all
real property leased. In addition, the Company pays all utility bills and fees
as well as all property and local taxes on the real property leased from West
Rentals. In May 1996, the Company sold several of its properties to West
Rentals for an aggregate purchase price of approximately $850,000, which
purchase price was supported by a third-party appraisal.
In addition, the Company rents cylinders and trailers from West Rentals and
currently pays approximately $7,860 a month to West Rentals for such rentals.
Employees of the Company provide occasional construction, maintenance and
clerical related services to West Rentals. The Company bills West Rentals for
such services on an hourly basis. Aggregate expenditures by the Company under
the Master Lease and for rental of cylinders and trailers, for the fiscal year
ended June 30, 1996, was approximately $932,624. The Company believes that the
amounts it has paid for rental of real property, cylinders and trailers have
not been less favorable than could have been obtained in arms-length
transactions with unaffiliated third parties.
ACETYLENE PRODUCTS CORP.
On December 31, 1996, the Company terminated an oral take-or-pay agreement
with Acetylene Products Corp. ("APC"), whose shareholders are all directors,
officers or employees of the Company. The agreement obligated the Company to
purchase a minimum quantity of acetylene on an annual basis regardless of
whether it accepted delivery of the acetylene. During fiscal 1996 and the six
months ended December 31, 1996, the Company paid APC $159,915 and $96,216,
respectively. The Company also leases approximately 1,400 square feet of space
located in Wheeling, West Virginia from APC for use as an employee training
center at a cost of $700 per month. The lease has a one year term expiring in
October 1997. Employees of the Company provide occasional construction,
maintenance and clerical related services to APC. The Company bills APC for
such services on an hourly basis and the amounts received in fiscal 1996 were
$63,550. The Company believes that the current arrangements with APC are not
less favorable than could be obtained in arms-length transactions with
unaffiliated third parties.
The Company and APC have formed a Pennsylvania business trust through which
the Company conducts its operations in Pennsylvania. The financial results of
the business trust are consolidated in the Company's financial statements. The
Company and APC hold a 99% and 1% interest in the trust, respectively. The
Company realizes certain tax benefits as a result of this structure. In fiscal
1996, a nominal amount of cash was distributed by the trust to APC.
INDELICATO CONSULTING ARRANGEMENT
The Company has entered into a consulting agreement (the "Consulting
Agreement") with William A. Indelicato, a director of the Company, whereby Mr.
Indelicato provides consulting services concerning all aspects of the Company's
acquisition program. In return for his services, the Company accrues
"credits" for Mr. Indelicato in amounts based upon hours worked and hourly
rates that vary depending upon criteria related to each particular acquisition.
Mr. Indelicato can redeem accrued credits for cash at any time within seven
years from the date of accrual. The amount of the accrued, unredeemed credits
is adjusted proportionately following the end of each fiscal year based upon
the increase (but not any decrease) in the Company's net worth since the end of
the last fiscal year. In addition, Mr. Indelicato has the right, in connection
with a public offering of the Common Stock, to exchange all or a portion of his
accrued credits (excluding credits accrued for annual adjustments) for shares
of Common Stock based on the book value per share of Common Stock as of the end
of the fiscal year for which the credits were accrued, in which case the
accrued credits for annual adjustments are cancelled. As of June 30, 1996, the
total amount of the accrued credits was approximately $158,000. Mr. Indelicato
will exchange all the accrued credits for 96,366 shares of Common Stock, of
which 30,000 shares are being sold in the Offering. See "Principal and Selling
Shareholders." Pursuant to the Consulting Agreement, the Company also retains
ADE Vantage, Inc. ("ADE"), a consulting company wholly-owned by Mr. Indelicato,
to support Mr. Indelicato in providing consulting services. The Company pays Mr.
Indelicato a monthly retainer fee of $1,000 and reimburses his out-of-pocket
expenses related to the performance of services. Payments to Mr. Indelicato and
ADE for fiscal 1996 totaled $76,000. The term of the
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<PAGE> 40
Consulting Agreement expires on March 16, 1999, but either party may terminate
it at any time. The Company intends to continue using the consulting services of
Mr. Indelicato and ADE after the Offering.
EQUIPLEASE, CORP.
EquipLease Corp. ("EquipLease"), a corporation wholly-owned by Gary E.
West, rents its one airplane and helicopter to the Company at an hourly rate of
$220 and $150, respectively. The Company paid a total of $18,800 to EquipLease
for rental of the airplane and helicopter during fiscal 1996. The Company
believes that the arrangements with EquipLease have not been less favorable
than could have been obtained in arms-length transactions with unaffiliated
third parties.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering and assuming no exercise of outstanding
options, the Company will have outstanding 10,020,084 shares of Common Stock
(10,425,084 shares if the Underwriters' over allotment option is exercised in
full). Of these shares, the 2,700,000 shares sold in the Offering will be
immediately eligible for resale in the public market without restriction under
the Securities Act, except for any shares purchased by an "Affiliate" (as
that term is defined under the Securities Act) of the Company, which will be
subject to the resale limitations of Rule 144 under the Securities Act. The
remaining 7,320,084 shares of Common Stock outstanding following the Offering
(the "Previously Issued Shares") are deemed to be "restricted securities"
within the meaning of the Securities Act and may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as those provided by Rule 144 promulgated
under the Securities Act.
All of the holders of the Previously Issued Shares have agreed to enter
into agreements with the Company ("Lock-up Agreements") pursuant to which
they will agree that, during the 180-day period after the date of this
Prospectus, they will not, except with the prior consent of A.G. Edwards &
Sons, Inc., offer, sell, contract to sell or grant an option to purchase any of
such Previously Issued Shares. In addition, the Company has agreed that during
such period it will not, without the prior consent of A.G. Edwards & Sons,
Inc., offer, sell, contract to sell or grant an option to purchase any shares
of Common Stock. See "Underwriting." At the expiration of such lock-up period
all of the Previously Issued Shares will be eligible for sale, subject to the
volume and other limitations of Rule 144.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, an Affiliate of the Company or other person (or persons whose
shares are aggregated) who has beneficially owned Previously Issued Shares for
at least one year, will be entitled to sell in any three-month period a number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of the Company's Common Stock (approximately 10,425,084 shares
immediately after the offering, if the Underwriters' over-allotment option is
exercised in full) or (ii) the average weekly trading volume of the Company's
Common Stock on the Nasdaq National Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose shares
are aggregated) who is not deemed to have been an Affiliate of the Company at
any time during the 90 days immediately preceding the sale and who has
beneficially owned Restricted Shares for at least two years is entitled to sell
such shares pursuant to Rule 144(k) without regard to the limitations described
above.
Previously Issued Shares may also be resold (i) to a person whom the seller
reasonably believes is a qualified institutional buyer within the meaning of
Rule 144A under the Securities Act purchasing for its own account or for the
account of a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A and (ii) in an off-shore transaction complying with
Rules 903 or 904 of Regulation S under the Securities Act.
An employee of the Company who purchased shares or was awarded options to
purchase shares pursuant to a written compensatory plan or contract meeting the
requirements of Rule 701 under the Securities Act is entitled to rely on the
resale provisions of Rule 701 under the Securities Act which permits Affiliates
and non-Affiliates to sell their Rule 701 shares without having to comply with
the holding period restrictions of Rule 144, in each case commencing 90 days
after the date of this Prospectus. In addition, non-Affiliates may sell Rule 701
shares without complying with the public information, volume and notice
provisions of Rule 144.
Following the effectiveness of the registration statement covering the
shares of Common Stock offered hereby, the Company will register under the
Securities Act the shares of Common Stock reserved for issuance under the
Company's 1997 Stock Option Plan covering 650,000 shares. The Company expects
that this registration will automatically become effective upon filing.
Accordingly, shares registered under such registration statement and
39
<PAGE> 41
acquired pursuant to the Plan will be available for sale in the open market
upon the expiration of the public sale restrictions described below (see
"Underwriting"), subject to Rule 144 volume limitations applicable to
Affiliates, except to the extent such shares are subject to vesting
restrictions with the Company.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect market prices prevailing from time to
time. Sales of substantial amounts of Common Stock of the Company in the public
market after the restrictions lapse could adversely affect the prevailing
market price and the ability of the Company to raise equity capital in the
future.
THE REORGANIZATION
The business of the Company historically has been conducted through Valley
National Gases, Inc., a West Virginia corporation (the "Operating Company").
Prior to the closing of the Offering, a holding company structure will be
implemented by having the shareholders of the Operating Company exchange their
shares of common stock of the Operating Company for shares of Common Stock of
the Company, which is a newly organized Pennsylvania corporation. The Company
will then contribute all of the outstanding common stock of the Operating
Company to its wholly owned subsidiary, Valley National Gases Delaware, Inc., a
Delaware corporation.
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED CAPITAL STOCK
The Company's Articles provide for authorized capital stock to consist of
30,000,000 shares of Common Stock, and 5,000,000 shares of Preferred Stock. The
Company will have outstanding, immediately prior to the issuance and sale of
shares of Common Stock pursuant to the Offering, 7,402,084 shares of Common
Stock. Upon the closing of the Offering, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding stock
options, the Company will have outstanding 10,020,084 shares of Common Stock
and no shares of Preferred Stock.
COMMON STOCK
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by the shareholders, including the election of
directors. Holders of Common Stock do not have cumulative voting rights in the
election of directors or preemptive rights to purchase or subscribe for any
stock or other securities. Subject to the prior rights of the holders of any
shares of Preferred Stock, if any, which subsequently may be issued and
outstanding, holders of Common Stock are entitled to receive dividends as and
when declared by the Board of Directors out of funds legally available for the
purpose. Such dividends shall not be cumulative. The holders of Common Stock
shall share ratably in all assets remaining after payment of liabilities.
Additional shares of authorized Common Stock may be issued without shareholder
approval. All of the shares of Common Stock are, and the shares to be sold in
the Offering will be, upon issuance and payment therefor, fully paid and
non-assessable.
PREFERRED STOCK
The Board has the authority to issue up to an aggregate of 5,000,000 shares
of Preferred Stock from time to time in one or more series, without shareholder
approval. The Board has the authority to establish from time to time the number
of shares to be included in each such series, dividend rate, redemption and
liquidation rights and terms, sinking fund provisions, if any, for the
redemption or purchase of shares, conversion terms and conditions, if any,
voting rights, if any, and to set the designation of the series and to fix and
determine the relative rights and preferences of the shares of each such series
and any qualifications, limitations or restrictions thereof. Depending upon the
rights of such Preferred Stock, the issuance of Preferred Stock could have an
adverse effect on the holders of Common Stock by delaying or preventing a
change of control of the Company, making removal of the present management of
the Company more difficult, or resulting in restrictions upon the payment of
dividends and other distributions to the holders of Common Stock. The Company
has no current plans to issue any Preferred Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon the completion of the Offering, there will be 19,329,916 shares of
Common Stock and 5,000,000 shares of Preferred Stock available for future
issuance without shareholder approval, taking into consideration the 650,000
shares of Common Stock reserved for issuance upon exercise of outstanding
options. These additional shares may be
40
<PAGE> 42
issued for a variety of proper corporate purposes, including raising additional
capital, corporate acquisitions, and employee benefit plans. Except as
contemplated by the 1997 Stock Option Plan and other possible employee benefit
or stock purchase plans, the Company does not currently have any plans to issue
additional shares of Common Stock or Preferred Stock.
One of the effects of the existence of unissued and unreserved Common Stock
and Preferred Stock may be to enable the Board of Directors to issue shares to
persons friendly to current management, which could render more difficult or
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest, or otherwise, and thereby protect the continuity
of the Company's management and possibly deprive the shareholders of
opportunities to sell their shares of Common Stock at prices higher than the
prevailing market prices. Such additional shares also could be used to dilute
the stock ownership of persons seeking to obtain control of the Company
pursuant to the operation of the 1997 Stock Option Plan, or otherwise.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF THE COMPANY'S ARTICLES AND BYLAWS
Certain provisions of the Articles could have an anti-takeover effect.
These provisions are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors of the Company and in
the policies formulated by the Board of Directors and to discourage an
unsolicited takeover of the Company if the Board determines that such takeover
is not in the best interests of the Company and its shareholders. The
provisions are designed to reduce the vulnerability of the Company to an
unsolicited proposal for a takeover of the Company that does not contemplate
the acquisition of all of its outstanding shares or an unsolicited proposal for
the restructuring or sale of all or part of the Company. However, the following
provisions could have the effect of discouraging certain attempts to acquire
the Company or remove incumbent management even if some or a majority of
shareholders deemed such an attempt to be in their best interests.
PENNSYLVANIA ANTI-TAKEOVER LAWS
The Company has elected to have the "anti-takeover" provisions of
Subchapters 25E, F, G and H of the Pennsylvania Business Corporation Law
("PBCL") relating to "business combinations" with "interested shareholders"
not apply to the Company. However, other provisions of the PBCL provide that
directors may, in discharging their duties, consider the interests of a number
of different constituencies, including shareholders, employees, suppliers,
customers, creditors and the community in which it is located. Directors are
not required to consider the interests of shareholders to a greater degree
than other constituencies' interests. The PBCL expressly provides that
directors do not violate their fiduciary duties solely by relying on poison
pills or the anti-takeover provisions of the PBCL.
ARTICLES OF INCORPORATION
Classified Board of Directors. The Articles provide for the Board of
Directors to be divided into three classes of Directors serving three-year
terms. The initial terms of the Class I, Class II and Class III directors are
set to expire at the end of the 1998 annual shareholders meeting, the 1999
annual shareholders meeting and the 2000 annual shareholders meeting,
respectively. At each annual meeting of shareholders beginning in 1998,
successors to the directors whose term expires at the annual meeting shall be
elected to a three year term, with each director to hold office until a
successor has been duly elected and qualified. As a result, approximately
one-third of the Board of Directors will be elected each year. The Board of
Directors believes that a classified Board of Directors will help to assure the
continuity and stability of the Board of Directors and the business strategies
and policies of the Company as determined by the Board of Directors.
The classified board provision could have the effect of discouraging a
third party from making a tender offer or otherwise attempting to obtain
control of the Company and may maintain the incumbency of the Board even though
such an attempt might be beneficial to the Company and its shareholders. The
existence of a classified board could delay shareholders who do not agree with
the policies of the Board of Directors from removing a majority of the Board
for two years, unless they can show cause and obtain the requisite vote.
Number of Directors; Removal. The Articles provide that the Board of
Directors will consist of at least three (3) but not more than ten (10)
directors with the exact number to be fixed from time to time by resolution
adopted by a majority of the Board of Directors. Subject to the rights of the
holders of any series of Preferred Stock then outstanding, the Articles provide
that any director or the entire Board of Directors, may be removed only for
cause and only by the affirmative vote of holders of two-thirds of the
outstanding shares of the capital stock of the Company
41
<PAGE> 43
entitled to vote generally in the election of directors. This charter provision
prevents a shareholder from removing incumbent directors without cause and
simultaneously gaining control of the Board of Directors by filling the
vacancies created by such removal with its own nominees.
Special Meetings of Shareholders. The Articles provide that special
meetings of the shareholders of the Company may be called only by the Chairman,
the President or a majority of the members of the Board of Directors.
Amendment of Certain Provisions of the Articles. The Articles generally
require the affirmative vote of the holders of at least two-thirds of the
outstanding shares of the voting stock of the Company entitled to vote
generally in the election of directors in order to amend charter provisions
concerning (i) the classified Board of Directors, (ii) the removal of
directors, (iii) the amendment of the Bylaws, (iv) the calling of special
meetings of the shareholders, (v) indemnification of officers and directors,
(vi) limitation of director liability, (vii) the opting out of certain
anti-takeover provisions and (viii) the supermajority voting requirements
described in this paragraph. These voting requirements make it more difficult
for shareholders to make changes in the Articles designed to facilitate the
exercise of control over the Company. However, this provision shall be
inapplicable at any time at which the holders of at least a majority of the
voting stock of the Company shall be Praxair, its subsidiaries and/or its
affiliates (and in each case permitted successors and assigns thereof)
if they shall have acquired such voting stock pursuant to a transaction
required or permitted by the Right of First Refusal Agreement.
BYLAWS
Advance Notice Requirements for Shareholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the director of the Board of Directors or a
committee thereof, of candidates for election as director and for other
shareholder proposals to be considered at shareholder meetings.
Notice of shareholder proposals and director nominations must be timely
given in writing to the secretary of the Company prior to the meeting at which
the matters are to be acted upon or at which the directors are to be elected.
To be timely, notice must be received at the principal executive offices of the
Company not less than sixty (60) days prior to the shareholder meeting.
A shareholder's notice to the secretary with respect to a shareholder
proposal shall set forth as to each matter the shareholder proposes to bring
before the meeting (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting, (ii) the name and address of the shareholder proposing such business,
(iii) the class or series and number of shares of stock of the Company which
are owned beneficially or of record by such shareholder and the name and
address under which such stock is issued and (iv) a description of any material
interest of such shareholder in such business. A shareholder's notice to the
secretary with respect to a director nomination shall set forth (i) certain
information about the nominee, (ii) the signed consent of the nominee to serve
as a director of the Company if elected, (iii) the name and address of the
nominating shareholder and (iv) the class or series and number of shares of
stock of the Company which are beneficially owned by such shareholder and the
name and address under which such stock is held.
The purpose of requiring advance notice is to afford the Board of Directors
an opportunity to consider the qualifications of the proposed nominees or the
merits of other shareholder proposals and, to the extent deemed necessary or
desirable by the Board of Directors, to inform shareholders about those
matters.
SHARE OWNERSHIP
After the consummation of this Offering, Mr. West will be the beneficial
owner of approximately 69.9% of the Common Stock (67.1% if the Underwriters'
over-allotment option is exercised in full). At such point in time as
Mr. West would cease to be the beneficial owner of at least 51% of the
Common Stock, Praxair will have the right to exercise its right of first
refusal. See "The Right of First Refusal Agreement." Control by Mr. West or
Praxair of a majority of the Common Stock will prevent third parties from
acquiring control of the Company and may deter third parties from seeking to
acquire large minority positions of the Company's Common Stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
42
<PAGE> 44
UNDERWRITING
Subject to the terms and conditions of an Underwriting Agreement among the
Company, the Selling Shareholders, and A.G. Edwards & Sons, Inc. and
Oppenheimer & Co., Inc. (the "Representatives"), the underwriters listed
below (the "Underwriters") have severally agreed to purchase from the Company
and the Selling Shareholders the aggregate number of shares of the Company's
Common Stock set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
A.G. Edwards & Sons, Inc...................................................
Oppenheimer & Co., Inc.....................................................
Total.............................................................. 2,700,000
=========
</TABLE>
Pursuant to the terms of the Underwriting Agreement, the Underwriters will
acquire the shares of Common Stock offered hereby from the Company and the
Selling Shareholders at the public offering price set forth on the cover page
hereof less the underwriting discounts and commissions set forth on the cover
page. The Underwriters propose to offer the shares to the public at the public
offering price set forth on the cover page. Some of the shares offered to the
public will be sold to certain dealers at the public offering price less a
dealers' concession not in excess of $ per share. The Underwriters
and such dealers may allow a discount not in excess of $ per share
to other dealers. After the shares are released for sale to the public, the
public offering price and other terms may be varied by the Representatives.
The nature of the obligations of the Underwriters is such that if any of
the shares offered hereby are purchased, all of such shares must be purchased.
The Company has granted to the Underwriters an option for 30 days to
purchase (at the public offering price less the underwriting discounts and
commissions shown on the cover page of this Prospectus) up to 405,000
additional shares. The Underwriters may exercise such option only to cover
over-allotments of shares made in connection with the sale of the shares
offered hereby. To the extent the Underwriters exercise such option, each of
the Underwriters will have a firm commitment, subject to certain conditions, to
purchase approximately the same percentage of the option shares that the number
of shares of Common Stock to be purchased by it shown in the above table bears
to 2,700,000, and the Company will be obligated, pursuant to the option, to
sell such shares to the Underwriters.
The Company and holders of Previously Issued Shares have agreed to enter
into Lock-up Agreements pursuant to which they will agree that they will not,
for 180 days from and after the date of this Prospectus, sell, offer to sell,
or otherwise dispose of, directly or indirectly, any shares of capital stock of
the Company (other than shares offered hereby, shares issuable pursuant to a
plan for employees or shareholders in effect on the date of this Prospectus,
and Common Stock issuable on conversion of securities or exercise of warrants
or options outstanding on the date of this Prospectus) without the prior
written consent of A.G. Edwards & Sons, Inc.
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the shares of Common Stock will be
negotiated among the Company and the Representatives. In addition to prevailing
market conditions, among the factors that may be considered in determining the
initial public offering price of the shares of Common Stock are the Company's
historical financial performance, estimates of the business potential and
earning prospects of the Company, an assessment of the Company's management and
the consideration of the above factors in relation to the market valuations of
companies in similar business.
The Company and the Selling Shareholders have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended, or to contribute to payments the
Underwriters may be required to make in respect thereof.
43
<PAGE> 45
In connection with the Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Shareholders,
and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such short
position. The Underwriters may also cover all or a portion of such short
position, up to 405,000 shares of Common Stock, by exercising the Underwriters'
over-allotment option referred to above. In addition, A.G. Edwards & Sons,
Inc., on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the offering) for the account of the
other Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to any accounts over which they exercise discretionary
authority.
The Underwriters have reserved approximately 270,000 shares of Common Stock
for sale, at the initial public offering price, to employees of the Company and
certain other individuals. The number of shares available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as the other shares
offered hereby.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby has been passed
upon for the Company and the Selling Shareholders by Bryan Cave LLP, New York,
New York. Certain legal matters will be passed upon for the Underwriters
by Peper, Martin, Jensen, Maichel and Hetlage, St. Louis, Missouri.
EXPERTS
The audited financial statements and related schedules included in this
Prospectus and elsewhere in the Registration Statement, to the extent and for
the periods indicated in their reports, have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of such firm as
experts in accounting and auditing in giving said reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. (the "Commission"), a Registration Statement (the
"Registration Statement") on Form S-1 under the Securities Act, with respects
to the Common Stock offered hereby. This Prospectus, which constitutes part of
the Registration Statement, omits certain of the information contained in the
Registration Statement and the exhibits and schedules thereto on file with the
Commission pursuant to the Act and the rules and regulations of the Commission
thereunder. The Registration Statement, including exhibits and schedules
thereto, may be inspected at the principal offices of the Commission at 450
Fifth Street, N.W., Washington, D.C., 20549, and at its regional offices at
Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661,
and at Seven World Trade Center, Suite 1300, New York, New York 10048, and
copies may be obtained at the prescribed rates from the Public Reference
Section of the Commission at its principal office in Washington, D.C. The
Commission maintains an Internet Web site (http://www.sec.gov.) that contains
such documents filed electronically by the Company with the Commission through
its Electronic Data Gathering, Analysis and Retrieval System (EDGAR) filing
system. Statements contained in this Prospectus as to the contents of any
contract, agreement or other document referred to herein are not necessarily
complete and in each instance reference is made to the copy of such contract,
agreement or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
44
<PAGE> 46
VALLEY NATIONAL GASES, INC.
<TABLE>
INDEX TO FINANCIAL STATEMENTS
<CAPTION>
PAGE
----
<S> <C>
VALLEY NATIONAL GASES, INC.
Condensed Balance Sheets as of June 30, 1996 and December 31, 1996 (unaudited)........ F-2
Unaudited Condensed Statements of Operations for the six month periods ended December
31, 1995 and 1996.................................................................... F-4
Statements of Changes in Shareholder's Equity for the year ended June 30, 1996 and the
six month period ended December 31, 1996 (unaudited)................................. F-5
Unaudited Condensed Statements of Cash Flows for the six month periods ended December
31, 1995 and 1996.................................................................... F-6
Notes to Unaudited Condensed Financial Statements..................................... F-7
Report of Independent Public Accountants.............................................. F-11
Balance Sheets as of June 30, 1995 and 1996........................................... F-12
Statements of Operations for the three years ended June 30, 1994, 1995 and 1996....... F-14
Statements of Changes in Shareholder's Equity for the three years ended
June 30, 1994, 1995 and 1996........................................................ F-15
Statements of Cash Flows for the three years ended June 30, 1994, 1995 and 1996....... F-16
Notes to Financial Statements......................................................... F-17
WELDCO, INC.
Report of Independent Public Accountants.............................................. F-26
Balance Sheets as of December 31, 1995................................................ F-27
Statements of Operations for the year ended December 31, 1995......................... F-29
Statements of Changes in Shareholder's Equity for the year ended December 31, 1995.... F-30
Statements of Cash Flows for the year ended December 31, 1995......................... F-31
Notes to Financial Statements......................................................... F-32
</TABLE>
F-1
<PAGE> 47
VALLEY NATIONAL GASES, INC.
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
PRO FORMA
JUNE 30, DECEMBER 31, DECEMBER 31,
ASSETS 1996 1996 1996 (NOTE 6)
------ -------- ------------ --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.............................................. $ 4,148,546 $ 3,406,886 $ 3,406,886
Restricted cash........................................................ 400,000 -- --
Accounts receivable, net of allowance for doubtful accounts of $140,000
and $259,423, respectively........................................... 6,701,939 9,954,160 9,954,160
Inventory.............................................................. 4,157,906 7,108,020 7,108,020
Prepaids and other..................................................... 832,899 797,719 797,719
----------- ----------- ------------
Total current assets............................................... 16,241,290 21,266,785 21,266,785
----------- ----------- ------------
PROPERTY, PLANT AND EQUIPMENT:
Land................................................................... 7,000 7,000 7,000
Buildings and improvements............................................. 2,664,460 3,379,283 3,379,283
Equipment.............................................................. 30,788,676 35,737,114 35,737,114
Transportation equipment............................................... 5,758,581 6,367,548 6,367,548
Furniture and fixtures................................................. 1,937,110 2,037,860 2,037,860
----------- ----------- ------------
Total property, plant and equipment................................ 41,155,827 47,528,805 47,528,805
Accumulated depreciation............................................... (18,029,419) (21,782,406) (21,782,406)
----------- ----------- ------------
Net property, plant and equipment.................................. 23,126,408 25,746,399 25,746,399
----------- ----------- ------------
OTHER ASSETS:
Intangibles, net of amortization of $1,745,353 and $2,368,920,
respectively......................................................... 5,902,885 15,061,249 15,061,249
Deposits and other assets.............................................. 220,265 396,294 396,294
----------- ----------- -----------
Total other assets................................................. 6,123,150 15,457,543 15,457,543
----------- ----------- -----------
TOTAL ASSETS............................................................... $45,490,848 $62,470,727 $62,470,727
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-2
<PAGE> 48
VALLEY NATIONAL GASES, INC.
<TABLE>
CONDENSED BALANCE SHEETS
<CAPTION>
PRO FORMA
JUNE 30, DECEMBER 31, DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1996 1996 1996 (NOTE 6)
------------------------------------ -------- ----------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt................................... $ 2,736,814 $ 4,181,927 $ 4,181,927
Accounts payable, trade................................................ 2,835,920 3,606,578 3,606,578
Accrued compensation and employee benefits............................. 2,970,987 3,037,794 3,037,794
Other current liabilities.............................................. 479,126 731,071 731,071
Accrued distribution to shareholders................................... -- -- 10,100,000
----------- ----------- -----------
Total current liabilities.......................................... 9,022,847 11,557,370 21,657,370
LONG-TERM DEBT, less current maturities.................................... 19,506,728 31,534,974 31,534,974
DEFERRED INCOME TAXES...................................................... -- -- 4,200,000
OTHER LONG-TERM LIABILITIES................................................ 590,181 1,467,589 1,467,589
----------- ----------- -----------
Total liabilities.................................................. 29,119,756 44,559,933 58,859,933
----------- ----------- -----------
COMMITMENTS
SHAREHOLDER'S EQUITY:
Preferred stock, par value, $.01 per share--5,000,000 shares
authorized, no shares issued
Common stock, par value, $.001 per share--Authorized, 30,000,000 shares
Issued, 18,300,653 shares............................................ 18,301 18,301 18,301
Paid-in-capital........................................................ 95,914 95,914 95,914
Treasury stock, 11,300,653 shares at cost.............................. (3,705,000) (3,705,000) (3,705,000)
Retained earnings...................................................... 19,961,877 21,501,579 7,201,579
----------- ----------- -----------
Total shareholder's equity......................................... 16,371,092 17,910,794 3,610,794
----------- ----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY................................. $45,490,848 $62,470,727 $62,470,727
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-3
<PAGE> 49
VALLEY NATIONAL GASES, INC.
<TABLE>
UNAUDITED CONDENSED STATEMENTS OF OPERATIONS
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
------------------------------
1995 1996
----------- -----------
<S> <C> <C>
NET SALES.................................................................. $24,137,833 $33,777,288
COST OF PRODUCTS SOLD, excluding depreciation and amortization............. 10,678,417 15,504,275
----------- -----------
Gross profit....................................................... 13,459,416 18,273,013
----------- -----------
EXPENSES:
Operating and administrative........................................... 9,195,589 12,567,193
Depreciation and amortization.......................................... 1,998,708 2,934,240
----------- -----------
Total expenses..................................................... 11,194,297 15,501,433
----------- -----------
Income from operations............................................. 2,265,119 2,771,580
----------- -----------
INTEREST EXPENSE........................................................... 675,296 992,851
----------- -----------
OTHER INCOME/(EXPENSE):
Interest and dividend income........................................... 164,318 173,098
Rental income (expense)................................................ 31,310 (10,080)
Gain (loss) on disposal of assets...................................... (9,481) (17,630)
Other income (expense)................................................. 119,890 4,628
----------- -----------
Total other income................................................. 306,037 150,016
----------- -----------
NET INCOME................................................................. $ 1,895,860 $ 1,928,745
=========== ===========
<CAPTION>
PRO FORMA INFORMATION
(UNAUDITED)
------------------------------
<S> <C> <C>
Net income................................................................. $ 1,895,860 $ 1,928,745
Pro forma income taxes..................................................... 758,344 771,498
----------- -----------
Pro forma net income....................................................... $ 1,137,516 $ 1,157,247
=========== ===========
Pro forma net income per share............................................. $ 0.16 $ 0.14
=========== ===========
Pro forma weighted average number of shares outstanding.................... 7,267,074 8,121,641
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-4
<PAGE> 50
VALLEY NATIONAL GASES, INC.
<TABLE>
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED JUNE 30, 1996 AND
THE SIX MONTHS ENDED DECEMBER 31, 1996
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
--------------------- PAID-IN- ------------------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS EQUITY
---------- ------- -------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1995........ 18,300,653 $18,301 -- 11,300,653 $(3,705,000) $17,482,478 $13,795,779
Net income................ -- -- -- -- -- 4,100,928 4,100,928
Contribution of capital... -- -- $95,914 -- -- -- 95,914
Dividends paid............ -- -- -- -- -- (1,621,529) (1,621,529)
---------- ------- ------- ---------- ----------- ----------- -----------
BALANCE, June 30, 1996........ 18,300,653 18,301 95,914 11,300,653 (3,705,000) 19,961,877 16,371,092
Net income................ -- -- -- -- -- 1,928,745 1,928,745
Dividends paid............ -- -- -- -- -- (389,043) (389,043)
---------- ------- ------- ---------- ----------- ----------- -----------
BALANCE, December 31, 1996
(Unaudited)................. 18,300,653 $18,301 $95,914 11,300,653 $(3,705,000) $21,501,579 $17,910,794
========== ======= ======= ========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-5
<PAGE> 51
VALLEY NATIONAL GASES, INC.
<TABLE>
UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net cash provided by operating activities.................................. $ 2,414,937 $ 1,186,735
----------- -----------
Cash flows from investing activities:
Proceeds from disposal of assets....................................... 30,609 24,353
Purchases of property and equipment.................................... (1,288,438) (1,377,456)
Business acquisitions, net of cash acquired............................ (5,161,389) (4,827,247)
Change in restricted cash.............................................. -- 400,000
----------- -----------
Net cash used by investing activities...................................... (6,419,218) (5,780,350)
----------- -----------
Cash flows from financing activities:
Proceeds from borrowings............................................... 5,524,087 5,511,102
Principal payments on loans............................................ (1,452,921) (1,270,104)
Dividends paid......................................................... (316,845) (389,043)
----------- -----------
Net cash provided (used) by financing activities........................... 3,754,321 3,851,955
----------- -----------
Net change in cash and cash equivalents.................................... (249,960) (741,660)
Cash and cash equivalents, beginning of period............................. 3,854,889 4,148,546
----------- -----------
Cash and cash equivalents, end of period................................... $ 3,604,929 $ 3,406,886
=========== ===========
Supplemental cash flow information:
Cash payments for interest............................................. $ 675,296 $ 814,226
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-6
<PAGE> 52
VALLEY NATIONAL GASES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The financial statements of Valley National Gases, Inc. (the Company)
presented herein are unaudited. Certain information and footnote disclosures
normally prepared in accordance with generally accepted accounting principles
have been either condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission. Although the Company believes that all
adjustments, consisting of only normal recurring adjustments, necessary for a
fair presentation have been made, interim periods are not necessarily
indicative of the financial results of operations for a full year. As such,
these financial statements should be read in conjunction with the financial
statements and notes thereto included or incorporated by reference in the
Company's audited financial statements for the period ending June 30, 1996.
2. INVENTORY:
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventory are as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
---------- ------------
(UNAUDITED)
<S> <C> <C>
Hardgoods......................................... $3,529,294 $5,978,689
Gases............................................. 628,612 1,129,331
---------- ----------
$4,157,906 $7,108,020
========== ==========
</TABLE>
3. ACQUISITIONS:
The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
The Company purchased Weber Gas & Welding Supply Co. Inc. for an aggregate
purchase price of approximately $ 1,549,000 in August, 1996.
On October 10, 1996, the Company purchased substantially all of the assets
of Weldco Inc. (Weldco) pursuant to a Purchase and Sale Agreement (the Weldco
Purchase Agreement) for approximately $11.1 million. Approximately $7.9 million
of the purchase price was paid by promissory notes from the Company. Under the
Weldco Purchase Agreement, Weldco shareholders have the right, in the event of
an initial public offering of the Company's common stock, to convert a portion
of the Company's promissory notes to shares of the Company's common stock at
the initial public offering price. Under this provision, Weldco shareholders
have the right to receive 280,000 shares of the common stock in exchange for
the cancellation of indebtedness in the amount of $2,800,000. The Company and
Weldco shareholders have agreed that rather than issuing 280,000 shares, the
Company will prepay $1,450,000 under the Company's promissory notes and issue
135,000 shares of common stock to Weldco shareholders immediately prior to the
closing of the Offering. The Company understands that certain Weldco
shareholders intend to purchase up to 100,000 shares of common stock in the
Offering. The Weldco Purchase Agreement further grants Weldco shareholders the
right to cause the Company to purchase shares of common stock issued to Weldco
shareholders pursuant to the conversion of indebtedness for a period of three
years following the closing of the Offering at the initial public offering
price plus interest from the date of issuance at the rate of 6.6% per annum.
The Company expects that 235,000 shares will be subject to this right following
the closing of the Offering. Accordingly, such shares will not be classified
as shareholders' equity. The Company's payment obligation is secured by a
letter of credit.
F-7
<PAGE> 53
VALLEY NATIONAL GASES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
In connection with these acquisitions, the total purchase price, fair value
of assets acquired, cash paid and liabilities assumed were as follows:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
DECEMBER 31,
1996
------------
(UNAUDITED)
<S> <C>
Cash paid....................................................................... $ 5,150,032
Notes issued to sellers......................................................... 8,822,187
Notes payable and capital leases assumed........................................ 405,674
Other liabilities assumed and acquisition costs................................. 4,921,766
-----------
Total purchase price allocated to assets acquired............................... $19,299,659
===========
</TABLE>
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1996
----------- ------------
(UNAUDITED)
<S> <C> <C>
Revolving Note, interest at LIBOR plus 2% payable monthly through September
2003. Secured by the assets of the Company................................ $ -- $10,162,514
Term note, interest equal to Revolving Note, payable monthly through
September 1999. Secured by the assets of the Company...................... -- 12,690,476
Acquisitions offering revolving line of credit, interest at prime rate minus
.125%, as defined, payable in full on November, 1997 or if notified by the
bank in equal monthly installments. Secured by the assets of the
Company................................................................... 9,748,696 --
Term note, interest at prime rate, as defined, payable in monthly
installments through November 2000. Secured by the assets of the
Company................................................................... 7,000,010 --
Term note, interest at prime rate minus .125%, as defined, payable in
monthly installments through April 2002. Secured by the assets of the
Company................................................................... 833,330 --
Term note, interest at prime rate plus 1%, as defined, payable in monthly
installments through April 2005. Secured by the assets of the Company..... 1,048,184 --
Convertible notes, interest at 6.6% payable annually through October 2003.
Secured by letter of credit and certain assets of the Company............. -- 7,886,721
Notes payable, interest at 7.0% payable monthly through July 2003. Secured
by certain assets of the Company.......................................... -- 910,657
Individuals and corporations, mortgages and notes, interest at 2.978% to
10.50%, payable at various dates through 2010............................. 3,843,591 4,283,839
----------- -----------
22,473,811 35,934,207
Original issue discount..................................................... (230,269) (217,306)
Current maturities.......................................................... (2,736,814) (4,181,927)
----------- -----------
Total long-term debt........................................................ $19,506,728 $31,534,974
=========== ===========
</TABLE>
Prime rate was 8.25% and LIBOR was 5.625% at December 31, 1996.
On October 4, 1996, the Company executed a three year revolving credit
agreement with Bank One for the purpose of refinancing the then existing
revolving credit agreement with NationsBank and to provide additional
acquisition capital. This agreement provides for a term note of $13,000,000 at
a variable interest rate based upon
F-8
<PAGE> 54
VALLEY NATIONAL GASES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
prime or LIBOR, depending on the Company's funded debt to EBITDA ratio, payable
monthly through September of 2003. The agreement also provides for a revolving
note with a maximum of $25,000,000 at a variable interest rate equal to that of
the term note payable monthly through September of 1999. A commitment fee of
$32,500 was paid upon acceptance of the agreement. These notes are secured by
the Company's accounts receivable, equipment, inventory, and general
intangibles, and the proceeds thereof. The agreement also contains various
financial covenants including minimum fixed charge coverage, maximum of funded
debt to EBITDA, and minimum net worth level.
5. SUBSEQUENT EVENTS:
A. INITIAL PUBLIC OFFERING AND REORGANIZATION
In connection with the proposed initial public offering (the Offering) by
the Company, subsequent to December 31, 1996, the following transactions are
anticipated to occur.
a. Termination of the Company's S Corporation status. In connection with
the termination of S Corporation status, the Company intends to declare
a distribution (the S Corporation Distribution) of all of its
undistributed earnings, estimated to be $10.1 million as of December 31,
1996. In addition, the Company will be required to record a deferred tax
liability with a corresponding one-time tax provision of approximately
$4.2 million in accordance with SFAS No. 109.
b. The reorganization, whereby Valley National Gases, Inc., a West Virginia
corporation will become an indirect wholly owned subsidiary of Valley
Natural Gases Incorporated, a Pennsylvania corporation by exchange of
stock. Valley National Gases Incorporated will have authorized common
stock of 30,000,000 shares, par value $.001 and authorized preferred
stock of 5,000,000 shares, par value $.01.
c. Issuance of 267,084 shares of common stock as part of compensation
agreements with certain executive officers and directors. In connection
with these compensation arrangements, the Company will incur an expense
of approximately $2.4 million in the period in which the closing of the
Offering occurs.
d. The cancellation of treasury stock of Valley National Gases, Inc.
Accordingly, the Company's shareholders' equity accounts and the number of
shares in the accompanying financial statements have been retroactively
restated to give effect to the reorganization and increase in authorized capital
stock.
B. BUSINESS ACQUISITIONS
On January 30, 1997, the Company entered into a letter of intent for the
purchase of all the outstanding shares of an industrial gas and welding supply
distributor for approximately $3.5 million. On February 28, 1997, the Company
entered into another letter of intent for the purchase of substantially all
of the assets of an industrial gas and welding supply distributor for
approximately $3.8 million. The Company is proceeding with due diligence and
the negotiation of definitive purchase agreements. These acquisitions will be
financed by borrowings under the Company's credit facility. The Company does
not anticipate consummation of these transactions prior to the closing of the
Offering.
C. 1997 STOCK OPTION PLAN
The Company adopted the 1997 Stock Option Plan (the "Plan") in February
1997. The Plan provides for the issuance of options to purchase up to 650,000
shares of Common Stock to key employees, officers and directors of the Company
and is administered by the Nominating and Compensation Committee of the Board
of Directors.
The Company will grant to two executives and each of the five independent
directors options to purchase 46,000, 26,000 and 5,000 shares, respectively,
of the Common Stock effective as of the closing of the Offering. The options
vest three years after the date of the grant and have a term of ten years. The
options are exercisable at a price equal to the fair market value of the
shares of Common Stock on the date of the grant. In the case of key employees
and
F-9
<PAGE> 55
VALLEY NATIONAL GASES, INC.
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
officers, unexercised options granted under the Plan are subject to
forfeiture upon termination of employment for any reason other than death,
disability or normal retirement.
D. Right of First Refusal
In September 1991, in connection with the purchase by the Company of certain
assets of a predecessor of Praxair, Inc. (``Praxair''), the Company, Gary E.
West, the Company's Chairman, and certain of his affiliates entered into a Right
of First Refusal Agreement with Praxair. In March 1997, the parties to such
agreement entered into an Amended and Restated Right of First Refusal Agreement
(the ``Right of First Refusal Agreement'') in connection with the Company's
reorganization. Pursuant to this agreement, if at any time during the term of
the agreement the Company wishes to accept a third party offer to purchase all
or a material part of the assets of the Company, or Mr. West and his affiliates
wish to accept an offer to purchase shares of Common Stock owned by them in a
transaction that would result in Mr. West and his affiliates collectively owning
less than 51% of the Company's issued and outstanding shares of Common Stock on
a fully diluted basis, then Praxair will have a right of first refusal to match
the offer. In addition, in the absence of a third party offer, if (a) Mr. West
and his affiliates wish to sell shares of Common Stock which would result in
their owning collectively less than 51% or more of the Company's issued and
outstanding shares of Common Stock, (b) the Company wishes to sell all or a
material part of its assets, or (c) the Company wishes to issue additional
shares, or options or securities exercisable or convertible into shares of
Common Stock, pursuant to employee stock options, a public offering, private
placement, merger, share exchange or otherwise, which in the aggregate on a
fully diluted basis would result in Mr. West and his affiliates collectively
owning less than 51% of all the issued and outstanding shares of Common Stock,
then Praxair will have the right to purchase from Mr. West and his affiliates up
to all of the issued and outstanding shares of Common Stock held by them (but
not less than 51% of all of the issued and outstanding shares of the Company's
Common Stock on a fully diluted basis) at the then prevailing market price.
6. PRO FORMA INFORMATION (UNAUDITED):
The pro forma balance sheet as of December 31, 1996 reflects an anticipated
S Corporation Distribution, estimated to be approximately $10.1 million
at that date, and the recording of a deferred tax liability of approximately
$4.2 million upon termination of the Company's S Corporation status.
The pro forma adjustments for income taxes included in the accompanying
income statements are based upon the statutory rates in effect for C
Corporations during the periods presented. Pro forma earnings per share were
calculated by dividing pro forma net income by the weighted average shares
outstanding for each period. The weighted average number of shares outstanding
used to calculate the pro forma net income per share is based on the historical
weighted average number of shares outstanding using an assumed offering price
of $10 per share as adjusted to reflect (i) the assumed issuance of 854,567
shares to fund the excess of dividends (including the estimated S Corporation
Distribution) over net income for the six months ended December 31, 1996 (ii)
the issuance of 170,718 shares of common stock to two executive officers
immediately prior to the closing of the Offering in connection with the
termination of certain deferred compensation agreements, and (iii) the issuance
of 96,366 shares of common stock to a director immediately prior to the closing
of the Offering, pursuant to a right under a consulting agreement to convert
deferred consulting payments to common stock. In connection with these
compensation arrangements, the Company will incur an expense of approximately
$2.4 million in the period in which the closing of the Offering occurs.
F-10
<PAGE> 56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
After the proposed transactions discussed in Note 10 to Valley National
Gases, Inc.'s Financial Statements are effected, we expect to be in a position
to render the following audit report.
ARTHUR ANDERSEN LLP
To Valley National Gases, Inc.:
We have audited the accompanying balance sheets of Valley National Gases,
Inc. (an S corporation) as of June 30, 1995 and 1996, and the related
statements of operations, changes in shareholder's equity and cash flows each
of the three years in the period ended June 30, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Valley National Gases, Inc.
as of June 30, 1995 and 1996, and the results of their operations and their
cash flows for each of the three years in the period ended June 30, 1996, in
conformity with generally accepted accounting principles.
Pittsburgh, Pennsylvania,
August 13, 1996
(except for the matters discussed in
Note 10 as to which the date is
February , 1997)
F-11
<PAGE> 57
VALLEY NATIONAL GASES, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
JUNE 30,
-------------------------------
ASSETS 1995 1996
------ ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 3,454,889 $ 4,148,546
Restricted cash............................................................. 400,000 400,000
Accounts receivable, net of allowance for doubtful accounts of $140,000 in
1995 and 1996............................................................. 5,228,190 6,701,939
Inventory................................................................... 2,933,340 4,157,906
Prepaids and other.......................................................... 493,819 832,899
------------ ------------
Total current assets.................................................... 12,510,238 16,241,290
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land........................................................................ 146,242 7,000
Buildings and improvements.................................................. 3,533,507 2,664,460
Equipment................................................................... 26,182,328 30,788,676
Transportation equipment.................................................... 4,448,081 5,758,581
Furniture and fixtures...................................................... 1,228,580 1,937,110
------------ ------------
Total property, plant and equipment..................................... 35,538,738 41,155,827
Accumulated depreciation.................................................... (16,632,432) (18,029,419)
------------ ------------
Net property, plant and equipment....................................... 18,906,306 23,126,408
------------ ------------
OTHER ASSETS:
Intangibles, net of amortization of $552,560 and $1,745,353 respectively.... 1,861,589 5,902,885
Deposits and other assets................................................... 142,714 220,265
------------ ------------
Total other assets...................................................... 2,004,303 6,123,150
------------ ------------
TOTAL ASSETS.................................................................... $ 33,420,847 $ 45,490,848
============ ============
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-12
<PAGE> 58
VALLEY NATIONAL GASES, INC.
<TABLE>
BALANCE SHEETS
<CAPTION>
JUNE 30,
-----------------------------
LIABILITIES AND SHAREHOLDER'S EQUITY 1995 1996
------------------------------------ ----------- -----------
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt........................................ $ 2,134,583 $ 2,736,814
Accounts payable, trade..................................................... 1,919,682 2,835,920
Accrued compensation and employee benefits.................................. 1,819,687 2,970,987
Other current liabilities................................................... 308,804 479,126
----------- -----------
Total current liabilities........................................... 6,182,756 9,022,847
LONG-TERM DEBT, less current maturities......................................... 12,964,092 19,506,728
OTHER LONG-TERM LIABILITIES..................................................... 478,220 590,181
----------- -----------
Total liabilities................................................... 19,625,068 29,119,756
----------- -----------
COMMITMENTS
SHAREHOLDER'S EQUITY:
Preferred stock, par value; $.01 per share-5,000,000 shares authorized; no
shares issued
Common stock, par value, $.001 per share-Authorized, 30,000,000 shares;
Issued, 18,300,653 shares................................................. 18,301 18,301
Paid-in-capital............................................................. -- 95,914
Treasury stock, 11,300,653 shares at cost................................... (3,705,000) (3,705,000)
Retained earnings........................................................... 17,482,478 19,961,877
----------- -----------
Total shareholder's equity.......................................... 13,795,779 16,371,092
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY...................................... $33,420,847 $45,490,848
=========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-13
<PAGE> 59
VALLEY NATIONAL GASES, INC.
<TABLE>
STATEMENTS OF OPERATIONS
<CAPTION>
FOR THE YEARS ENDED JUNE 30,
-------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
NET SALES............................................................. $39,166,027 $44,914,252 $53,611,979
COST OF PRODUCTS SOLD, excluding depreciation and amortization........ 16,844,386 19,931,377 23,617,062
----------- ----------- -----------
Gross profit.................................................. 22,321,641 24,982,875 29,994,917
----------- ----------- -----------
EXPENSES:
Operating and administrative...................................... 15,704,048 17,688,338 20,295,254
Depreciation and amortization..................................... 2,789,657 3,111,516 4,699,608
----------- ----------- -----------
Total expenses................................................ 18,493,705 20,799,854 24,994,862
----------- ----------- -----------
Income from operations........................................ 3,827,936 4,183,021 5,000,055
----------- ----------- -----------
INTEREST EXPENSE...................................................... 1,037,845 1,071,794 1,561,081
----------- ----------- -----------
OTHER INCOME/(EXPENSE):
Interest and dividend income...................................... 161,063 268,313 332,133
Rental income..................................................... 50,964 61,460 81,565
(Loss) gain on disposal of assets................................. (1,491) 25,211 (5,095)
Other income...................................................... 60,510 88,753 253,351
----------- ----------- -----------
Total other income............................................ 271,046 443,737 661,954
----------- ----------- -----------
NET INCOME............................................................ $ 3,061,137 $ 3,554,964 $ 4,100,928
=========== =========== ===========
<CAPTION>
PRO FORMA INFORMATION
(UNAUDITED)
-------------------------------------------
<S> <C> <C> <C>
Net Income............................................................ $ 3,061,137 $ 3,554,964 $ 4,100,928
Pro forma income taxes................................................ 1,224,455 1,421,986 1,640,371
----------- ----------- -----------
Pro forma net income.................................................. $ 1,836,682 $ 2,132,978 $ 2,460,557
=========== =========== ===========
Pro forma net income per share........................................ $ 0.25 $ 0.29 $ 0.30
=========== =========== ===========
Pro forma weighted average number of shares outstanding............... 7,267,074 7,267,074 8,121,641
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-14
<PAGE> 60
VALLEY NATIONAL GASES, INC.
<TABLE>
STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED JUNE 30, 1994, 1995 AND 1996
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
--------------------- PAID-IN- ------------------------- RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL SHARES AMOUNT EARNINGS EQUITY
---------- ------ -------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1993... 18,300,653 $18,301 $ -- 11,300,653 $(3,705,000) $13,216,073 $ 9,529,374
Net income........... -- -- -- -- -- 3,061,137 3,061,137
Dividends paid....... -- -- -- -- -- (942,531) (942,531)
---------- ------- -------- ---------- ----------- ----------- -----------
BALANCE, June 30, 1994... 18,300,653 18,301 -- 11,300,653 (3,705,000) 15,334,679 11,647,980
Net income........... -- -- -- -- -- 3,554,964 3,554,964
Dividends paid....... -- -- -- -- -- (1,407,165) (1,407,165)
BALANCE, June 30, 1995... 18,300,653 18,301 -- 11,300,653 (3,705,000) 17,482,478 13,795,779
---------- ------- -------- ---------- ----------- ----------- -----------
Net income........... -- -- -- -- -- 4,100,928 4,100,928
Contribution of
capital............ -- -- 95,914 -- -- -- 95,914
Dividends paid....... -- -- -- -- -- (1,621,529) (1,621,529)
---------- ------- -------- ---------- ----------- ----------- -----------
BALANCE, June 30, 1996... 18,300,653 $18,301 $95,914 11,300,653 $(3,705,000) $19,961,877 $16,371,092
========== ======= ======== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-15
<PAGE> 61
VALLEY NATIONAL GASES, INC.
<TABLE>
STATEMENTS OF CASH FLOWS
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
-----------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 3,061,137 $ 3,554,964 $ 4,100,928
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation........................................ 2,520,392 2,737,188 3,437,208
Amortization........................................ 269,265 374,328 1,262,400
Loss (gain) on disposal of assets................... 1,491 (25,211) 5,095
Other long-term liabilities......................... 1,712 67,571 111,725
Changes in operating assets and liabilities--
Accounts receivable............................. (242,692) (256,165) (527,257)
Inventory....................................... (34,158) (353,250) (151,906)
Prepaids and other.............................. (255,523) (468,183) (308,617)
Accounts payable, trade......................... 372,551 233,207 421,667
Accrued compensation and employee benefits...... 236,513 437,852 (462,280)
Other current liabilities....................... 161,702 (103,541) 45,073
Deposits and other assets....................... (121,871) 118,620 (511,465)
----------- ----------- -----------
Net cash provided by operating activities... 5,970,519 6,317,380 7,422,571
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets........................ 37,565 66,230 903,621
Purchases of property and equipment..................... (2,907,967) (4,426,384) (3,646,899)
Business acquisitions, net of cash acquired............. (1,209,266) (2,806,545) (6,435,879)
----------- ----------- -----------
Net cash used by investing activities....... (4,079,668) (7,166,699) (9,179,157)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings................................ 1,642,954 4,996,063 6,530,000
Principal payments on loans............................. (2,546,626) (1,965,495) (2,458,228)
Dividends paid.......................................... (942,531) (1,407,165) (1,621,529)
----------- ----------- -----------
Net cash provided by (used for) financing
activities............................... (1,846,203) 1,623,403 2,450,243
----------- ----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 44,648 774,084 693,657
CASH AND CASH EQUIVALENTS, at beginning of year............. 2,636,157 2,680,805 3,454,889
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, at end of year................... $ 2,680,805 $ 3,454,889 $ 4,148,546
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-16
<PAGE> 62
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Valley National Gases, Inc. (the Company), formerly Valley Welding Supply
Co., is an S corporation. The Company produces, packages and resells industrial
gases, specialty gases and propane; and resells welding hardgoods and
equipment. The Company has been in operation since 1958 and currently operates
in nine states.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
The Company holds a certificate of deposit of $400,000 which is restricted
cash. This certificate of deposit is pledged as collateral for a bank loan
(original amount $1,250,000) and will be released as collateral when the
principal balance of the loan is reduced to $850,000.
The Company invested in certain repurchase agreements during the year ended
June 30.
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
WestBanco Bank--principal......................... $2,377,990 $3,038,249
--accrued interest................. 56,518 74,607
---------- ----------
$2,434,508 $3,112,856
--weighted average maturity........ 144 days 133 days
Bank One--principal............................... $ 691,811 $ 476,479
--accrued interest ....................... 3,613 216
---------- ----------
$ 695,424 $ 476,695
--weighted average maturity............... 4 days 1 day
Balance as of June 30............................. $3,129,932 $3,589,551
Average amount outstanding........................ 2,602,130 2,554,678
Maximum amount outstanding........................ 3,129,932 3,589,551
</TABLE>
Securities underlying the agreements exceed the repurchase liability and
consist primarily of certificates of deposit and U.S. government securities
held on behalf of the Company. These agreements are collectible upon demand
by the Company.
INVENTORY
Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
The components of inventory for the year ended June 30 were as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Hardgoods......................................... $2,545,862 $3,529,294
Gases............................................. 387,478 628,612
---------- ----------
$2,933,340 $4,157,906
========== ==========
</TABLE>
F-17
<PAGE> 63
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
properties while leasehold improvements are amortized over the shorter of their
useful life or the term of the lease as follows:
<TABLE>
<CAPTION>
YEARS
-------
<S> <C>
Buildings and improvements........................ 10 - 25
Cylinders......................................... 12
Equipment other than cylinders.................... 7
Transportation equipment.......................... 3 - 7
Furniture and fixtures............................ 3 - 7
</TABLE>
The cost of maintenance and repairs is charged to operations as incurred.
Major renewals and betterments are capitalized.
INTANGIBLES
Intangibles consist of noncompetition agreements, goodwill, consulting
agreements and deferred loan origination costs. Costs pursuant to
noncompetition agreements entered into in connection with business acquisitions
are amortized over the terms of the arrangements. Goodwill represents costs in
excess of net assets of businesses acquired and is amortized on a straight-line
basis over 15 years. The Company assesses the recoverability of goodwill by
determining whether it can be recovered through projected undiscounted cash
flows. Consulting costs are amortized over the term of the agreement. Deferred
loan origination costs are amortized over the term of the related debt.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Accordingly, the historical financial statements do
not include a provision for income taxes because the Company does not incur
federal or state income taxes. Instead, its earnings and losses are included in
the shareholder's personal income tax return and are taxed based on the
shareholder's personal tax strategy.
Certain events, including the public offering of the Company's Common
Stock, will automatically terminate its S Corporation status, thereby
subjecting future income to federal and state income taxes at the corporate
level. Due to temporary differences in recognition of revenue and expenses,
income for financial reporting purposes has exceeded income for income tax
purposes. Accordingly, the application of the provisions of SFAS No. 109,
"Accounting for Income Taxes" will result in the recognition of deferred tax
liabilities (and a corresponding one-time charge to expense) in the period in
which the initial public offering occurs. If the S Corporation status had been
terminated as of December 31, 1996, this liability would have been
approximately $4,200,000.
REVENUE RECOGNITION
Revenues are recognized for product sales when such goods are received by
the customer. Additionally, revenues from cylinder leases are reported ratably
over the terms of the leases.
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
during fiscal 1996.
The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS--The carrying amount approximates fair value
because of the short maturity of those instruments.
F-18
<PAGE> 64
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LONG-TERM DEBT--The fair value of the Company's long-term debt 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, 1996 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
---------- ----------
<S> <C> <C>
Cash and cash equivalents........................................ $4,148,546 $4,148,546
Restricted cash.................................................. 400,000 400,000
Term notes....................................................... 8,881,524 8,881,524
Acquisitions offering revolving line of credit................... 9,748,696 9,748,696
</TABLE>
The fair values and carrying amounts of the Company's term notes and
acquisitions offering revolving line of credit are deemed to be approximately
equivalent as they bear interest at floating rates which are based upon current
market rates.
SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
---------------------------------------------
1994 1995 1996
----------- ---------- ----------
<S> <C> <C> <C>
Cash paid for certain items:
Cash payments for interest.................... $ 869,197 $1,082,625 $1,503,680
Noncash investing and financing activities:
Retirement of long-term notes................. $10,289,547 $ -- $ --
Payment of accrued interest on notes.......... 123,055 -- --
Noncash portion of refinancing note issued........ $10,412,602 $ -- $ --
</TABLE>
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.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.
3. ACQUISITIONS:
The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
During fiscal 1996, the Company purchased four businesses. The largest of
these acquisitions and their effective dates included Quest Welding Supply
(September 1995) and Wootten Industries, Inc. (December 1995). The aggregate
purchase price for all acquisitions amounted to approximately $6,695,000.
During fiscal 1995, the Company purchased six businesses. The largest of
these acquisitions and their effective dates included Evans Welding Supply Co.
(December 1994), Allegheny LP Gas (February 1995). The aggregate purchase price
for all acquisitions amounted to approximately $3,776,000.
During fiscal 1994, the Company purchased three businesses for an aggregate
purchase price of approximately $1,643,000.
F-19
<PAGE> 65
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In connection with these acquisitions, the total purchase price, fair value
of assets acquired, cash paid and liabilities assumed for the year ended June
30 were as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Cash paid......................................... $1,060,847 $2,806,545 $6,435,879
Notes issued to sellers........................... 582,500 969,298 259,417
Notes payable and capital leases assumed.......... -- 132,274 176,678
Other liabilities assumed and acquisition costs... -- 337,482 682,142
---------- ---------- ----------
Total purchase price allocated to assets
acquired........................................ $1,643,347 $4,245,599 $7,554,116
========== ========== ==========
</TABLE>
The following presents unaudited estimated pro forma operating results as
if the 1996 and 1995 acquisitions had been consummated on July 1, 1994. 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 July 1, 1994, or of results which may occur in the future. Pro forma
net income includes an adjustment for income taxes as if the Company had been
taxed as a C Corporation (see Note 11).
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
---------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net sales.......................... $55,813,000 $57,816,000
Net income......................... 3,345,000 4,036,000
Pro forma net income............... 2,007,000 2,422,000
Pro forma net income per share..... 0.28 0.30
</TABLE>
4. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
The Company markets its products to a diverse customer base in unrelated
industries and, as such, does not have any significant concentrations of credit
risk. No one customer accounted for greater than 10% of revenues in 1994, 1995
and 1996.
5. INTANGIBLE ASSETS:
Intangible assets were recorded at the date of acquisition at their
allocated cost. Amortization is provided over the estimated useful lives of the
assets as disclosed below:
<TABLE>
<CAPTION>
AMORTIZATION ORIGINAL ACCUMULATED BALANCE AT BALANCE AT
PERIOD COST AMORTIZATION JUNE 30, 1996 JUNE 30, 1995
------------ ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Noncompetition and consulting
agreements.................. 3-7 years $5,798,238 $1,599,471 $4,198,767 $1,040,997
Goodwill...................... 15 years 1,642,699 116,921 1,525,778 762,651
Deferred financing and
organization costs.......... 5-12 years 207,301 28,961 178,340 57,941
---------- ---------- ---------- ----------
$7,648,238 $1,745,353 $5,902,885 $1,861,589
========== ========== ========== ==========
</TABLE>
F-20
<PAGE> 66
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following as of June 30:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Acquisitions offering revolving line of credit, interest at prime
rate minus .125%, as defined, payable in full on November, 1997
or if notified by the bank in equal monthly installments.
Secured by the assets of the Company........................... $ 3,218,696 $ 9,748,696
Term note, interest at prime rate, as defined, payable in monthly
installments through November 2000. Secured by the assets of
the Company.................................................... 8,615,390 7,000,010
Term note, interest at prime rate minus .125%, as defined,
payable in monthly installments through April 2002. Secured by
the assets of the Company...................................... 976,190 833,330
Term note, interest at prime rate plus 1%, as defined, payable in
monthly installments through April 2005. Secured by the assets
of the Company................................................. 1,118,300 1,048,184
Individuals and corporations, mortgages and notes, interest at
2.978% to 10.00%, payable at various dates through 2010........ 1,139,266 3,843,591
Wayne County Commission note, interest at 80% of prime, as
defined, payable at various dates through 1996................. 30,833 --
----------- -----------
15,098,675 22,473,811
Original issue discount.......................................... -- (230,269)
Current maturities............................................... (2,134,583) (2,736,814)
----------- -----------
Total long-term debt............................................. $12,964,092 $19,506,728
=========== ===========
</TABLE>
Prime rate was 8.25% at June 30, 1996.
On April 15, 1994, the Company entered into a loan agreement with
NationsBank. The agreement provides for borrowings in the form of a revolving
operating line of credit, a term loan and an acquisitions offering line of
credit.
Combined borrowings under the agreement can amount to $31,000,000. As of
June 30, 1996, the Company's borrowings under the agreement amounted to
$17,582,036. Borrowings bear interest at the bank's prime rate minus .125%. A
commitment fee of $10,000 was paid upon acceptance of the agreement and .25% is
payable upon each draw of the acquisitions offering line of credit. These fees
totaled $16,325 for the year ended June 30, 1996. The agreement also contains
various financial covenants including current ratio, working capital, tangible
net worth, leverage, interest coverage and debt service.
A $400,000 certificate of deposit, accounts receivable, inventory,
equipment and vehicles are pledged as collateral on the above notes and
acquisitions offering line of credit used to finance or refinance the purchase
of those assets. Additionally, letters of credit of $1,896,667 at June 30, 1996
serve as collateral on the individual notes.
On October 4, 1996, the Company executed a three year revolving credit
agreement with Bank One for the purpose of refinancing the then existing
revolving credit agreement with NationsBank and to provide additional
acquisition capital. This agreement provides for a term note of $13,000,000 at
a variable interest rate based upon prime or LIBOR, depending on the Company's
funded debt to EBITDA ratio, payable monthly through September of 2003. The
agreement also provides for a revolving note with a maximum of $25,000,000 at a
variable interest rate equal to that of the term note payable monthly through
September of 1999. A commitment fee of $32,500 was paid upon acceptance of the
agreement. These notes are secured by the Company's accounts receivable,
equipment, inventory, and general intangibles, and the proceeds thereof. The
agreement also contains various financial covenants including minimum fixed
charge coverage, maximum of funded debt to EBITDA, and minimum net worth level.
F-21
<PAGE> 67
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The schedule of maturities as amended for the new credit agreements for the
next five years and thereafter is as follows as of June 30, 1996:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
JUNE 30,
- ------------------
<S> <C>
1997....................... $ 2,727,604
1998....................... 2,715,913
1999....................... 2,567,400
2000....................... 2,271,295
2001....................... 2,030,952
Thereafter................. 9,930,378
-----------
Total...................... $22,243,542
===========
</TABLE>
7. PENSION PLANS:
The Company sponsors a defined contribution pension plan for employees. All
employees are eligible to participate in the Company-sponsored plan after
meeting the age and service requirements. Contributions to the plan are based
on a percentage of employees' compensation. Pension expense for this plan was
$232,066, $337,139 and $413,077, respectively, in 1994, 1995 and 1996.
Certain management employees are also covered by unfunded deferred
compensation agreements which provide supplemental retirement benefits. The
cost of these contracts is being accrued over the period of active employment
of the covered employees. The costs of the deferred compensation plans charged
to expense were $17,543, $83,206 and $78,203, respectively, in 1994, 1995 and
1996.
The Company also maintains a profit sharing plan for its employees. Profit
sharing payments are based on a discretionary amount determined annually by the
Board of Directors and are paid as additional contributions to the pension
plan. In 1994, 1995 and 1996, the amount of additional contributions to be
distributed to the employees' pension plan amounted to $61,233, $83,506 and
$91,961, respectively.
8. LEASE OBLIGATIONS:
The Company leases real estate at several locations for use as branch
stores and warehouses. Certain equipment is also leased. All of the leases,
which are with related and unrelated parties, are classified as operating
leases. The lease terms expire at various dates through the year 2006, with
options to renew for periods of three to five years. Lease expenses charged to
operations were $915,745, $1,330,394 and $1,541,898, respectively, in 1994,
1995 and 1996.
Minimum future rental payments under noncancelable operating leases for
each of the next five years are as follows:
<TABLE>
FISCAL YEAR ENDING
JUNE 30, REAL ESTATE EQUIPMENT TOTAL
- ------------------ ----------- --------- ----------
<S> <C> <C> <C>
1997............................ $1,746,294 $105,549 $1,851,843
1998............................ 1,629,948 73,963 1,703,911
1999............................ 1,576,248 66,720 1,642,968
2000............................ 1,558,746 60,360 1,619,106
2001............................ 1,541,244 41,175 1,582,419
----------- --------- ----------
Totals.......................... $8,052,480 $347,767 $8,400,247
=========== ========= ==========
</TABLE>
F-22
<PAGE> 68
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. RELATED PARTY TRANSACTIONS:
The Company leases buildings and equipment, rents cylinders and has sales
and purchase transactions with related parties, including the sole shareholder
and corporations owned by the sole shareholder and officers of the Company.
These transactions and balances for the year ended June 30 are summarized as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
Transactions--
Lease of buildings and equipment....................................... $731,020 $857,205 $932,624
Rental of aircraft..................................................... 26,100 26,100 18,800
Purchases of acetylene and services........................................ 271,016 267,657 159,915
Sales of material and services............................................. 183,453 533 379
Balances--
Accounts receivable--trade............................................. 280 -- --
Noncurrent receivable.................................................. 10,016 -- --
</TABLE>
During 1996, the Company realized a gain of $95,914 on the sale of various
operating properties to a related party for a total sale price of $850,000.
This gain was reflected as additional paid-in-capital in the accompanying
financial statements.
The Company has entered into a master lease agreement for virtually all of
its operating properties, including those sold in 1996, with this related
party. The terms of this master lease agreement are ten years with annual
minimum lease payments of $1,278,600 with renewal options and have been
accounted for as operating leases in the accompanying financial statements.
The Company has entered into a consulting agreement (the "Consulting
Agreement") with William A. Indelicato, a director of the Company, whereby Mr.
Indelicato provides consulting services concerning all aspects of the Company's
acquisition program. In return for his services, the Company accrues
"credits" for Mr. Indelicato in amounts based upon hours worked and hourly
rates that vary depending upon criteria related to each particular acquisition.
Mr. Indelicato can redeem accrued credits for cash at any time within seven
years from the date of accrual. The amount of the accrued, unredeemed credits
is adjusted proportionately following the end of each fiscal year based upon
the increase (but not any decrease) in the Company's net worth since the end of
the last fiscal year. In addition, Mr. Indelicato has the right, in connection
with a public offering of the Common Stock, to exchange all or a portion of his
accrued credits (excluding credits accrued for annual adjustments) for shares
of Common Stock based on the book value per share of Common Stock as of the end
of the fiscal year for which the credits were accrued, in which case the
accrued credits for annual adjustments are cancelled. As of June 30, 1996, the
total amount of the accrued credits was approximately $158,000. Mr. Indelicato
will exchange all the accrued credits for 96,366 shares of Common Stock, of
which 30,000 shares are being sold in the Offering. Pursuant to the Consulting
Agreement, the Company also retains ADE Vantage, Inc. ("ADE"), a consulting
company wholly-owned by Mr. Indelicato, to support Mr. Indelicato in providing
consulting services. The Company pays Mr. Indelicato a monthly retainer fee of
$1,000 and reimburses his out-of-pocket expenses related to the performance of
services. Payments to Mr. Indelicato and ADE for fiscal 1996 totaled $76,000.
The term of the Consulting Agreement expires on March 16, 1999, but either
party may terminate it at any time. The Company intends to continue using the
consulting services of Mr. Indelicato and ADE after the Offering.
F-23
<PAGE> 69
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS:
A. INITIAL PUBLIC OFFERING AND REORGANIZATION
In connection with the proposed initial public offering (the Offering) by
the Company, subsequent to December 31, 1996, the following transactions are
anticipated to occur.
a. Termination of the Company's S Corporation status. In connection with
the termination of S Corporation status the Company intends to declare a
distribution (the S Corporation Distribution) of all of its
undistributed earnings estimated to be $10.1 million as of December 31,
1996. In addition, the Company will be required to record a deferred tax
liability with a corresponding one-time tax provision of approximately
$4.2 million in accordance with SFAS No. 109.
b. The reorganization, whereby Valley National Gases, Inc., a West Virginia
corporation will become an indirect wholly owned subsidiary of Valley
Natural Gases Incorporated, a Pennsylvania corporation by exchange of
stock. Valley National Gases Incorporated will have authorized common
stock of 30,000,000 shares, par value $.001 and authorized preferred
stock of 5,000,000 shares, par value $.01.
c. Issuance of 267,074 shares of Common Stock as part of compensation
agreements with certain executive officers and directors. In connection
with these compensation arrangements, the Company will incur an expense
of approximately $2.4 million in the period in which the closing of the
Offering occurs; and
d. The cancellation of treasury stock of Valley National Gases, Inc.
Accordingly, the Company's shareholders' equity accounts and the number of
shares in the accompanying Financial Statements have been retroactively
restated to give effect to the reorganization and increase in authorized capital
stock.
B. WELDCO PURCHASE AGREEMENT
On October 10, 1996, the Company purchased substantially all of the assets
of Weldco Inc. (Weldco) pursuant to a Purchase and Sale Agreement (the Weldco
Purchase Agreement) for approximately $11.1 million. Approximately $7.9 million
of the purchase price was paid by promissory notes from the Company. Under the
Weldco Purchase Agreement, Weldco shareholders have the right, in the event of
an initial public offering of the Company's common stock, to convert a portion
of the Company's promissory notes to shares of the Company's common stock at
the initial public offering price. Under this provision, Weldco shareholders
have the right to receive 280,000 shares of the common stock in exchange for
the cancellation of indebtedness in the amount of $2,800,000. The Company and
Weldco shareholders have agreed that rather than issuing 280,000 shares, the
Company will prepay $1,450,000 under the Company's promissory notes and issue
135,000 shares of common stock to Weldco shareholders immediately prior to the
closing of the Offering. The Company understands that certain Weldco
shareholders intend to purchase up to 100,000 shares of common stock in the
Offering. The Weldco Purchase Agreement further grants Weldco shareholders the
right to cause the Company to purchase shares of common stock issued to Weldco
shareholders pursuant to the conversion of indebtedness for a period of three
years following the closing of the Offering at the initial public offering
price plus interest from the date of issuance at the rate of 6.6% per annum.
The Company expects that 235,000 shares will be subject to this right following
the closing of the Offering. Accordingly, such shares will not be classified
as shareholders' equity. The Company's payment obligation is secured by a
letter of credit.
C. WEBER PURCHASE
As of August 31, 1996, the Company consummated the acquisition of Weber Gas
& Welding Supply Co., Inc. (Weber), a business engaged in the distribution of
industrial, medical and specialty gases and related welding supplies and
accessories. Sales for the past fiscal year of the acquired business
approximated 9% of the Company's net sales.
F-24
<PAGE> 70
VALLEY NATIONAL GASES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. PRO FORMA INFORMATION (UNAUDITED):
The pro forma adjustments for income taxes included in the accompanying
income statements are based upon the statutory rates in effect for C
Corporations during the period presented. Pro forma earnings per share were
calculated by dividing pro forma net income by the weighted average shares
outstanding for each period. The weighted average number of shares outstanding
used to calculate the pro forma net income per share is based on the historical
weighted average number of shares outstanding using an assumed offering price
of $10 per share as adjusted to reflect (i) the assumed issuance of 854,567
shares to fund the excess of dividends (including the estimated S Corporation
Distribution) over net income for the six months ended December 31, 1996 (ii)
the issuance of 170,718 shares of common stock to two executive officers
immediately prior to the closing of the Offering in connection with the
termination of certain deferred compensation agreements, and (iii) the issuance
of 96,366 shares of common stock to a director immediately prior to the closing
of the Offering, pursuant to a right under a consulting agreement to convert
deferred consulting payments to common stock. In connection with these
compensation arrangements, the Company will incur an expense of approximately
$2.4 million in the period in which the closing of the Offering occurs.
F-25
<PAGE> 71
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Valley National Gases, Inc.:
We have audited the accompanying balance sheet of Weldco, Inc. (an S
corporation) as of December 31, 1995, and the related statement of operations,
changes in shareholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Weldco, Inc. as of December
31, 1995, and the results of its operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
December 20, 1996
F-26
<PAGE> 72
WELDCO, INC.
<TABLE>
BALANCE SHEET
<CAPTION>
DECEMBER 31,
ASSETS 1995
------ ------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 115,642
Marketable securities....................................................... 106,851
Accounts receivable--trade, net of allowance for doubtful accounts of
$100,823................................................................... 1,596,759
Accounts receivable--shareholders........................................... 34,785
Inventory................................................................... 487,596
Prepaids and other.......................................................... 14,781
-----------
Total current assets.................................................... 2,356,414
-----------
PROPERTY, PLANT AND EQUIPMENT:
Leasehold improvements...................................................... 321,458
Equipment................................................................... 1,433,199
Transportation equipment.................................................... 223,379
Furniture and fixtures...................................................... 661,951
-----------
Total property, plant and equipment..................................... 2,639,987
Accumulated depreciation.................................................... (1,225,450)
-----------
Net property, plant and equipment....................................... 1,414,537
-----------
OTHER ASSETS.................................................................... 132,210
-----------
TOTAL ASSETS.................................................................... $ 3,903,161
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-27
<PAGE> 73
WELDCO, INC.
<TABLE>
BALANCE SHEET
<CAPTION>
DECEMBER 31,
LIABILITIES AND SHAREHOLDER'S EQUITY 1995
------------------------------------ ------------
<S> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt........................................ $ 184,291
Accounts payable, trade..................................................... 1,515,559
Accrued compensation and employee benefits.................................. 36,171
Other current liabilities................................................... 55,717
----------
Total current liabilities........................................... 1,791,738
LONG-TERM DEBT, less current maturities......................................... 265,940
----------
Total liabilities................................................... 2,057,678
----------
COMMITMENTS
SHAREHOLDER'S EQUITY:
Common stock, no par value
Authorized, 35,000 shares
Issued, 25,000 shares................................................... 500
Paid-in-capital............................................................. 19,919
Unrealized gain on marketable securities.................................... 106,851
Retained earnings........................................................... 1,718,213
----------
Total shareholder's equity.......................................... 1,845,483
----------
TOTAL LIABILITIES AND SHAREHOLDER'S EQUITY...................................... $3,903,161
==========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-28
<PAGE> 74
WELDCO, INC.
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
------------
<S> <C>
NET SALES....................................................................... $10,973,421
COST OF PRODUCTS SOLD, excluding depreciation and amortization.................. 7,064,773
-----------
Gross profit............................................................ 3,908,648
-----------
EXPENSES:
Operating and administrative................................................ 3,406,556
Depreciation and amortization............................................... 203,610
-----------
Total expenses.......................................................... 3,610,166
-----------
Income from operations.................................................. 298,482
-----------
INTEREST EXPENSE................................................................ 33,704
-----------
OTHER INCOME/(EXPENSE):
Interest and dividend income................................................ 6,886
(Loss) on disposal of assets................................................ (6,806)
-----------
Total other income...................................................... 80
-----------
NET INCOME...................................................................... $ 264,858
===========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-29
<PAGE> 75
WELDCO, INC.
<TABLE>
STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1995
<CAPTION>
COMMON UNREALIZED
STOCK GAIN ON TOTAL
--------------- PAID-IN- MARKETABLE RETAINED SHAREHOLDER'S
SHARES AMOUNT CAPITAL SECURITIES EARNINGS EQUITY
------ ------ -------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994.............. 25,000 $500 $19,919 $ -- $1,601,405 $1,621,824
Net income.......................... -- -- -- -- 264,858 264,858
Unrealized gain on marketable
securities........................ -- -- -- 106,851 -- 106,851
Dividends paid...................... -- -- -- -- (148,050) (148,050)
------ ---- ------- -------- ---------- ----------
BALANCE, December 31, 1995.............. 25,000 $500 $19,919 $106,851 $1,718,213 $1,845,483
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-30
<PAGE> 76
WELDCO, INC.
<TABLE>
STATEMENT OF CASH FLOWS
<CAPTION>
FOR THE YEAR
ENDED
DECEMBER 31,
1995
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 264,858
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization........................................... 203,610
Loss on disposal of assets.............................................. 6,806
Changes in operating assets and liabilities--
Accounts receivable................................................. (356,512)
Inventory........................................................... 21,842
Prepaids and other.................................................. (19,268)
Accounts payable and accrued expenses............................... 778,595
Other assets........................................................ 25,995
---------
Net cash provided by operating activities....................... 925,926
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets............................................ 3,200
Purchases of property and equipment......................................... (658,648)
---------
Net cash used by investing activities........................... (655,448)
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings.................................................... 5,499
Principal payments on loans................................................. (98,343)
Dividends paid.............................................................. (148,050)
---------
Net cash used by financing activities........................... (240,894)
---------
NET CHANGE IN CASH AND CASH EQUIVALENTS......................................... 29,584
CASH AND CASH EQUIVALENTS, at beginning of period............................... 86,058
---------
CASH AND CASH EQUIVALENTS, at end of period..................................... $ 115,642
=========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest...................................................... $ 33,704
=========
The accompanying notes are an integral part of these financial statements.
</TABLE>
F-31
<PAGE> 77
WELDCO, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Weldco, Inc. (the Company) is an S corporation involved in the sale and
distribution of industrial gases, welding equipment and supplies.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
MARKETABLE SECURITIES
Marketable securities consist of 4,090 shares of AllAmerica Financial
Corporation common stock with a cost of $0 and a market value of $106,851 on
December 31, 1995.
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115. Under SFAS No. 115, the recorded cost of investments
which are considered to be available for sale are adjusted to fair market
value. The difference between cost and fair market value is classified as an
unrealized gain in the shareholder's equity section of the balance sheet.
INVENTORY
Inventory is carried at the lower of cost or market. Cost is determined by
the last-in, first-out (LIFO) method.
The components of inventory are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Gross Inventory......................... $ 862,596
LIFO Reserve............................ (375,000)
---------
Net Inventory........................... $ 487,596
=========
</TABLE>
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
properties while leasehold improvements are amortized over the shorter of the
useful life or the term of the lease as follows:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Leasehold improvements............................ 15
Equipment......................................... 7-10
Transportation equipment.......................... 5
Furniture and fixtures............................ 10
</TABLE>
The cost of maintenance and repairs is charged to operations as incurred.
Major renewals and betterments are capitalized.
INCOME TAXES
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Accordingly, the financial statements do not include
a provision for income taxes because the Company does not incur federal or
state income taxes. Instead, its earnings and losses are included in the
shareholder's personal income tax return and are taxed based on the
shareholder's personal tax strategy.
F-32
<PAGE> 78
WELDCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
during fiscal year 1995.
The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate that
value:
CASH AND CASH EQUIVALENTS--The carrying amount approximates fair value
because of the short maturity of those instruments.
LONG-TERM DEBT--The fair value of the Company's long-term debt 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
December 31, 1995 are as follows:
<TABLE>
<CAPTION>
CARRYING
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Cash and cash equivalents........................................ $115,642 $115,642
Long-term debt................................................... 450,231 450,231
</TABLE>
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.
3. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
The Company markets its products to a diverse customer base in unrelated
industries and, as such, does not have any significant concentrations of credit
risk. No one customer accounted for greater than 10% of revenues in 1995.
4. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Fixed rate note payable to bank at 8.5% interest rate,
payable in monthly installments through September 1999...... $192,761
Bank revolving credit line................................... 70,014
Notes payable at 5% and 6% on life insurance cash
surrender value of life insurance............................ 51,760
Equipment obligation payable at 16.0% interest rate, payable
in monthly installments through February 1997............... 11,233
Variable rate note payable to bank at prime rate (8.5% at
December 31, 1995) plus 1.25%, payable in monthly
installments through March 1997............................. 31,984
Fixed rate note payable to bank at 7.125% interest rate,
payable in monthly installments through August 1998......... 92,479
--------
$450,231
Current maturities........................................... (184,291)
--------
Total long-term debt......................................... $265,940
========
</TABLE>
F-33
<PAGE> 79
WELDCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The schedule of maturities as amended for the new credit agreements for the
next five years and thereafter as of December 31, 1995 is as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
DECEMBER 31,
- ------------------
<S> <C>
1996........................ $184,291
1997........................ 91,959
1998........................ 79,009
1999........................ 43,212
2000........................ --
Thereafter.................. 51,760
--------
Total....................... $450,231
========
</TABLE>
These loans have certain covenants regarding current ratio, operating cash
flow to debt service, tangible net worth, total liabilities to tangible net
worth, and capital expenditures. At December 31, 1995, the Company was in
violation of certain covenants. These violations were waived as of December 31,
1995. Carrying value approximates fair value.
F-34
<PAGE> 80
WELDCO, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. PENSION PLANS:
The Company sponsors a defined contribution pension plan for employees. All
employees are eligible to participate in the Company-sponsored plan after
meeting the age and service requirements. Contributions to the plan are based
on a percentage of employees' compensation. Pension expense for this plan was
$26,890 for the year ended December 31, 1995.
6. LEASE OBLIGATIONS:
The Company leases certain office equipment and delivery vehicles. All of
the leases, which are with related and unrelated parties, are classified as
operating leases. The lease terms expire at various dates through the year
2002. Lease expenses charged to operations was $96,064 for the year ended
December 31, 1995.
Minimum future rental payments under noncancelable operating leases for
each of the next five years are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
DECEMBER 31, TOTAL
- ------------------ ----------
<S> <C>
1996........................ $ 365,001
1997........................ 346,652
1998........................ 338,239
1999........................ 333,069
2000........................ 330,367
----------
Totals...................... $1,713,328
==========
</TABLE>
7. RELATED PARTY TRANSACTIONS:
The Company leases office and warehouse facilities and rents equipment from
related parties who are shareholders of the Company. These transactions and
balances are summarized as follows for the year ended December 31, 1995:
Transactions--
Lease of office and warehouse
facilities............................. $209,469
Rental of equipment...................... 55,916
8. SUBSEQUENT EVENT:
In October 1996, substantially all of the Weldco's assets and liabilities
were purchased by Valley National Gases, Inc. for an approximate purchase price
of $11.1 million.
F-35
<PAGE> 81
===============================================================================
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON
STOCK OFFERED BY THIS PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN
WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO,
OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
----------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.............................................................. 3
Risk Factors.................................................................... 6
S Corporation Distribution...................................................... 9
Use of Proceeds................................................................. 9
Dividend Policy................................................................. 10
Capitalization.................................................................. 10
Dilution........................................................................ 11
Selected Pro Forma Financial Data............................................... 12
Selected Historical Financial Data.............................................. 16
Management's Discussion and Analysis of Financial Condition and Results of
Operations.................................................................... 18
Business........................................................................ 24
Management...................................................................... 32
Principal and Selling Shareholders.............................................. 36
The Right of First Refusal of Agreement......................................... 36
Certain Relationships and Related Transactions.................................. 39
Shares Eligible for Future Sale................................................. 39
The Reorganization.............................................................. 40
Description of Capital Stock.................................................... 40
Underwriting.................................................................... 43
Legal Matters................................................................... 44
Experts......................................................................... 44
Additional Information.......................................................... 44
Index to Financial Statements................................................... F-1
</TABLE>
----------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
================================================================================
================================================================================
- --------------------------------------------------------------------------------
2,700,000 SHARES
[LOGO] VALLEY(TM)
----------------------------
NATIONAL GASSES INCORPORATED
----------------------------
COMMON STOCK
-------------------
P R O S P E C T U S
-------------------
A.G. EDWARDS & SONS, INC.
OPPENHEIMER & CO., INC.
, 1997
- --------------------------------------------------------------------------------
======================================================================
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Expenses of the Registrant in connection with the issuance and distribution
of the securities being registered, other than underwriting discounts and
commissions, are as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........................ $ 10,350
NASD Filing Fee............................................................ 3,916
Nasdaq Filing Fee.......................................................... 42,550
Blue Sky Fees and Expenses (including attorneys' fees)..................... 5,000
Printing and Engraving Expenses............................................ 100,000
Legal Fees and Expenses.................................................... 200,000
Accounting Fees and Expenses............................................... 225,000
Transfer Agent and Registrar Fees and Expenses............................. 5,000
Miscellaneous.............................................................. 8,184
--------
Total.............................................................. $600,000
========
- --------
All expenses listed above are estimates, except for the Commission,
NASD and Nasdaq fees.
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
As permitted by the Pennsylvania Business Corporation Law of 1988, as
amended (the "PBCL"), the Articles of the Company provide
that (i) the Company is required to indemnify its directors and officers to the
maximum extent permitted by Pennsylvania law, (ii) the Company may indemnify
employees or agents to the maximum extent permitted by Pennsylvania law, (iii)
the Company is required to advance expenses in defending a proceeding against
its officers and directors and may advance such expenses to its employees and
agents, upon receipt of an undertaking by such person to repay such amount if
it is determined that such person is not entitled to indemnification, (iv) the
rights conferred in the PBCL and in the Company's Articles are not exclusive,
(v) the Company may enter into agreements with any director, officer, employee
or agent to provide indemnification rights as it deems appropriate and (vi)
the Company is authorized to maintain insurance on behalf of its officers and
directors, employees and agents.
The Company has also adopted in its Articles and Bylaws a provision
limiting a director's personal liability for monetary damages unless (i) the
director has breached or failed to perform his or her duties under applicable
law and (ii) the breach or failure to perform constitutes self-dealing,
willful misconduct or recklessness.
Insofar as indemnification for liabilities under the Securities Act may be
permitted to directors, officers or controlling persons of the Company pursuant
to the Company's Articles, Bylaws and the PBCL, the Company
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the three years preceding the filing of this Registration Statement, the
Company has not issued any securities in transactions that were not registered
under the Securities Act. Immediately prior to the closing of the Offering, the
Company will issue a total of 402,084 shares of Common Stock in the
transactions described below. In each of such transactions, the Company intends
to rely on the exemption afforded under Section 4(2) of the Securities Act.
(1) The Company will issue 121,942 shares of Common Stock to Lawrence E.
Bandi in connection with the cancellation of a deferred compensation agreement
and in exchange for Mr. Bandi's right to receive accrued compensation in the
amount of $199,631.
II-1
<PAGE> 83
(2) The Company will issue 48,776 shares of Common Stock to John R.
Bushwack in connection with the cancellation of a deferred compensation
agreement and in exchange for Mr. Bushwack's right to receive accrued
compensation in the amount of $79,852.
(3) The Company will issue 96,366 shares of Common Stock to William A.
Indelicato in connection with the conversion to shares of Common Stock of
consulting payments in the amount of $158,000 accrued under an existing
Consulting Agreement.
(4) The Company will issue 100,000 shares of Common Stock to R. Bruce
Kraemer in connection with the conversion to shares of Common Stock of
indebtedness in the amount of $1,000,000 originally payable by the Company to
Weldco, Inc.
(5) The Company will issue 35,000 shares of Common Stock to the estate of
Linda Bott in connection with the conversion to shares of Common Stock of
indebtedness in the amount of $350,000 originally payable by the Company to
Weldco, Inc.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
(a) EXHIBIT INDEX
<C> <S>
1.1 Form of Underwriting Agreement among the Company, the Selling
Shareholders, A.G. Edwards & Sons, Inc. and Oppenheimer &
Co., Inc.
3.1 Form of Articles of Amendment.
3.2 Bylaws.
4.1 Form of Certificate for Common Stock.
5.1 Opinion of Bryan Cave LLP.
10.1 <F*> Credit Agreement dated October 4, 1996 between the Company
and Bank One, Indianapolis, National Association, as amended
January 3, 1997.
10.2 <F*> Master Lease Agreement dated as of November 1, 1996 between
the Company and West Rentals, Inc.
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.
10.4 <F*> Deferred Compensation Agreement dated April 3, 1995 by and
between the Company and Lawrence E. Bandi.
10.5 <F*> Deferred Compensation Agreement dated April 3, 1995 by and
between the Company and John R. Bushwack.
10.6 <F*> Agreement dated October 5, 1992 between the Company and
Lawrence E. Bandi providing for death, disability and
retirement benefits.
10.7 <F*> Agreement dated October 5, 1992 between the Company and John
R. Bushwack providing for death, disability and retirement
benefits.
10.8 <F*> Agreement dated March 16, 1994 between the Company and
William A. Indelicato providing for certain consulting
payments, as amended January 23, 1995.
10.9 <F*> Purchase and Sale Agreement made as of September 27, 1996 by
and between Weldco, Inc., R.H. Kraemer, R. Bruce Kraemer,
William Bott, Linda Bott, Krabo Limited, Ltd., the Company
and West Rentals, Inc.
10.10<F*> Lease Agreement dated as of November 1, 1995 between the
Company and Acetylene Products, Inc.
II-2
<PAGE> 84
10.11 1997 Stock Option Plan.
10.12<F*> Real Estate Sale Agreement dated April 24, 1996 between the
Company and West Rentals, Inc.
10.13<F*> Trailer Lease Agreement dated November 20, 1995 between the
Company and West Rentals, Inc.
10.14<F*> Trailer Lease Agreement dated September 8, 1992 between the
Company and West Rentals, Inc.
10.15<F*> Trailer Lease Agreement dated May 29, 1996 between the
Company and West Rentals, Inc.
11.1 Computation of Earnings Per Share.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Bryan Cave LLP (appears in Exhibit 5.1).
23.5<F*> Power of Attorney.
27.1 Financial Data Schedule for year ended June 30, 1996.
27.2 Financial Data Schedule for the six months ended December 31, 1997.
<FN>
- --------
<F*>Previously filed.
</TABLE>
(b) Index to Financial Statement Schedules
II.1 Valuation and Qualifying Accounts--Valley National Gases, Inc.
II.2 Valuation and Qualifying Accounts--Weldco, Inc.--period ended
12-31-95
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, as amended, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A
and contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933, as
amended, shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act of
1933, as amended, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the underwriting agreements certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-3
<PAGE> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Wheeling, State of West Virginia, on March 13, 1997.
VALLEY NATIONAL GASES INCORPORATED
By: /s/ LAWRENCE E. BANDI
---------------------------------------------
Name: Lawrence E. Bandi
--------------------------------------
Title: President and Chief Executive Officer
--------------------------------------
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
<F*> Chairman of the Board of Directors March 13, 1997
---------------------------------------------
Gary E. West
/s/ LAWRENCE E. BANDI President, Chief Executive Officer and Director March 13, 1997
--------------------------------------------- (Principal Executive Officer)
Lawrence E. Bandi
<F*> Executive Vice President, Chief Operating Officer, March 13, 1997
--------------------------------------------- Secretary and Director
John R. Bushwack
<F*> Chief Financial Officer (Principal Financial and March 13, 1997
--------------------------------------------- Accounting Officer)
Robert D. Scherich
<F*> Director March 13, 1997
---------------------------------------------
Ben Exley, IV
<F*> Director March 13, 1997
---------------------------------------------
James P. Hart
<F*> Director March 13, 1997
---------------------------------------------
William A. Indelicato
<F*> Director March 13, 1997
---------------------------------------------
R. Bruce Kraemer
<F*> Director March 13, 1997
---------------------------------------------
August E. Maier
<F*>By: /s/ LAWRENCE E. BANDI
---------------------------------------
Lawrence E. Bandi
</TABLE>
II-4
<PAGE> 86
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the financial statements of Valley National Gases, Inc. and have issued our
report thereon dated August 13, 1996. Our audits were made for the purpose of
forming an opinion on the basic financial statements taken as a whole. The
schedule listed in the accompanying index is presented for purposes of
complying with the Securities and Exchange Commission's rules and regulations
and is not part of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, fairly states in all material
respects the financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
August 13, 1996
<PAGE> 87
SCHEDULE II
<TABLE>
VALLEY NATIONAL GASES, INC.
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
PERIOD ENDED DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
June 30, 1994 Allowance for uncollectible accounts $100,000 $198,437 $(178,437) $120,000
June 30, 1995 Allowance for uncollectible accounts $120,000 $333,228 $(313,228) $140,000
June 30, 1996 Allowance for uncollectible accounts $140,000 $210,246 $(210,246) $140,000
</TABLE>
<PAGE> 88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON SUPPLEMENTAL SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the financial statements of Weldco, Inc. and have issued our report thereon
dated December 20, 1996. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The schedule listed
in the accompanying index is presented for purposes of complying with the
Securities and Exchange Commission's rules and regulations and is not part of
the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
December 20, 1996
<PAGE> 89
SCHEDULE II
<TABLE>
WELDCO, INC.
VALUATION AND QUALIFYING ACCOUNTS
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END OF
PERIOD ENDED DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
December 31, 1995 Allowance for uncollectible accounts $68,000 $65,000 $(32,177) $100,823
</TABLE>
<PAGE> 1
VALLEY NATIONAL GASES INCORPORATED
2,700,000 SHARES
COMMON STOCK
($.001 PAR VALUE)
UNDERWRITING AGREEMENT
----------------------
----------------, 1997
A.G. Edwards & Sons, Inc.
Oppenheimer & Co., Inc.
As Representatives of the Several Underwriters
c/o A.G. Edwards & Sons, Inc.
One North Jefferson Avenue
St. Louis, Missouri 63103
The undersigned, Valley National Gases Incorporated, a
Pennsylvania corporation (the "Company") and the persons listed on
Schedule I hereto (the "Selling Shareholders"), hereby address you
as the representatives (the "Representatives") of each of the
persons, firms and corporations listed on Schedule II hereto
(collectively, the "Underwriters") and hereby confirm their
agreement with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and
sell to the Underwriters 2,618,000 shares of its Common Stock, par
value $0.001 per share, and the Selling Shareholders propose to
sell to the Underwriters a total of 82,000 shares of the Company's
Common Stock, par value $0.001 per share, as set forth on
Schedule I hereto (such 2,700,000 shares of Common Stock are herein
referred to as the "Firm Shares"). Solely for the purpose of
covering over-allotments in the sale of the Firm Shares, the
Company further proposes to grant to the Underwriters the right to
purchase up to an additional 405,000 shares of the Company Common
Stock (the "Option Shares"), as provided in Section 3 of this
Agreement. The Firm Shares and the Option Shares are herein
sometimes referred to as the "Shares" and are more fully described
in the Prospectus hereinafter defined.
2. PURCHASE, SALE AND DELIVERY OF FIRM SHARES. On the basis
of the representations, warranties and agreements herein contained,
but subject to the terms and conditions herein set forth, the
Company agrees and each Selling Shareholder agrees, severally and
not jointly, to sell to the Underwriters, and each such Underwriter
agrees, severally and not jointly, (a) to purchase from the Company
and from each of the Selling Shareholders, pro rata, at a purchase
price of $ per share, the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule II hereto and (b)
to purchase from the Company any additional number of Option Shares
which such Underwriter may become obligated to purchase pursuant to
Section 3 hereof.
The Company and the Selling Shareholders will deliver
definitive certificates for the Firm Shares at the office of A.G.
Edwards & Sons, Inc., 77 Water Street, New York, New York
("Edwards' Office"), or such other place as you and the Company may
mutually agree upon, for the accounts of the Underwriters against
payment to the Company and the Selling Shareholders of the purchase
price for the Firm Shares sold by them to the several Underwriters
by wire transfer in immediately available funds to bank accounts
designated by the Company and Selling Shareholders, respectively.
The closing shall take place at A.G. Edwards & Sons, Inc., One
North Jefferson Avenue, St. Louis, Missouri 63103, or at such other
place as may be agreed upon between you and the Company (the "Place
of Closing"), at 10:00 a.m., St. Louis time, on the third (fourth,
if pricing occurs after 3:30 p.m. St. Louis time) full business day
following the date of
<PAGE> 2
this Agreement, or at such other time and date as you and the Company may
agree, such time and date of payment and delivery being herein called the
"Closing Date."
The certificates for the Firm Shares so to be delivered
will be made available to you for inspection at Edwards' Office (or
such other place as you and the Company may mutually agree upon) at
least one full business day prior to the Closing Date and will be
in such names and denominations as you may request at least two
full business days prior to the Closing Date.
It is understood that an Underwriter, individually, may
(but shall not be obligated to) make payment on behalf of the other
Underwriters whose checks shall not have been received prior to the
Closing Date for Shares to be purchased by such Underwriter. Any
such payment by an Underwriter shall not relieve the other
Underwriters of any of their obligations hereunder.
It is understood that the Underwriters propose to offer
the Shares to the public upon the terms and conditions set forth in
the Registration Statement hereinafter defined.
3. PURCHASE, SALE AND DELIVERY OF THE OPTION SHARES. The
Company hereby grants options to the Underwriters to purchase from
the Company up to 405,000 Option Shares on the same terms and
conditions as the Firm Shares; provided, however, that such options
may be exercised only for the purpose of covering any
over-allotments which may be made by them in the sale of the Firm
Shares. No Option Shares shall be sold or delivered unless the
Firm Shares previously have been, or simultaneously are, sold and
delivered.
The options are exercisable on behalf of the several
Underwriters by you, as Representatives, at any time, and from time
to time, before the expiration of 30 days from the date of this
Agreement, for the purchase of all or part of the Option Shares
covered thereby, by notice given by you to the Company in the
manner provided in Section 13 hereof, setting forth the number of
Option Shares as to which the Underwriters are exercising the
options, and the date of delivery of said Option Shares, which date
shall not be more than five (5) business days after such notice
unless otherwise agreed to by the parties. You may terminate the
options at any time, as to any unexercised portion thereof, by
giving written notice to the Company to such effect.
You, as Representatives, shall make such allocation of
the Option Shares among the Underwriters as may be required to
eliminate purchases of fractional Shares.
Delivery of the Option Shares with respect to which the
options shall have been exercised shall be made to or upon your
order at Edwards' Office (or at such other place as you and the
Company may mutually agree upon), against payment by you of the per
share purchase price to the Company by wire transfer in immediately
available funds to a bank account designated by the Company. Such
payment and delivery shall be made at 10:00 a.m., St. Louis time,
on the date designated in the notice given by you as above provided
for, unless some other date and time are agreed upon, which date
and time of payment and delivery are called the "Option Closing
Date." The certificates for the Option Shares so to be delivered
will be made available to you for inspection at Edwards' Office at
least one full business day prior to the Option Closing Date and
will be in such names and denominations as you may request at least
two (2) full business days prior to the Option Closing Date. On
the Option Closing Date, the Company shall provide the Underwriters
such representations, warranties, opinions and covenants with
respect to the Option Shares as are required to be delivered on the
Closing Date with respect to the Firm Shares.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY
AND THE SELLING SHAREHOLDERS.
(a) The Company represents and warrants to and agrees
with each Underwriter that:
2
<PAGE> 3
(i) A registration statement (Registration No.
333-19973) on Form S-1 with respect to the
Shares, including a preliminary
prospectus, and such amendments to such
registration statement as may have been
required to the date of this Agreement,
has been carefully prepared by the Company
pursuant to and in conformity with the
requirements of the Securities Act of
1933, as amended (the "Act"), and the
Rules and Regulations (the "Rules and
Regulations") of the Securities and
Exchange Commission (the "Commission")
thereunder and has been filed with the
Commission under the Act. Copies of such
registration statement, including any
amendments thereto, each related
preliminary prospectus (meeting the
requirements of Rule 430 or 430A of the
Rules and Regulations) contained therein,
the exhibits, financial statements and
schedules have heretofore been delivered
by the Company to you. If such
registration statement has not become
effective under the Act, a further
amendment to such registration statement,
including a form of final prospectus,
necessary to permit such registration
statement to become effective will be
filed promptly by the Company with the
Commission. If such registration
statement has become effective under the
Act, a final prospectus containing
information permitted to be omitted at the
time of effectiveness by Rule 430A of the
Rules and Regulations will be filed
promptly by the Company with the
Commission in accordance with Rule 424(b)
of the Rules and Regulations. The term
"Registration Statement" as used herein
means the registration statement as
amended at the time it becomes or became
effective under the Act (the "Effective
Date"), including financial statements and
all exhibits and, if applicable, the
information deemed to be included by Rule
430A of the Rules and Regulations. The
term "Prospectus" as used herein means (i)
the prospectus as first filed with the
Commission pursuant to Rule 424(b) of the
Rules and Regulations, or (ii) if no such
filing is required, the form of final
prospectus included in the Registration
Statement at the Effective Date, or (iii)
if a Term Sheet or Abbreviated Term Sheet
(as such terms are defined in Rules 434(b)
and 434(c), respectively, of the Rules and
Regulations) is filed with the Commission
pursuant to Rule 424(b)(7) of the Rules
and Regulations, the Term Sheet or
Abbreviated Term Sheet and the last
Preliminary Prospectus filed with the
Commission prior to the time the
Registration Statement became effective,
taken together. The term "Preliminary
Prospectus" as used herein shall mean a
preliminary prospectus as contemplated by
Rule 430 or 430A of the Rules and
Regulations included at any time in the
Registration Statement.
(ii) The Commission has not issued, and is not
to the knowledge of the Company
threatening to issue, an order preventing
or suspending the use of any Preliminary
Prospectus or the Prospectus nor
instituted proceedings for that purpose.
Each Preliminary Prospectus at its date of
issue, the Registration Statement and the
Prospectus and any amendments or
supplements thereto contains or will
contain, as the case may be, all
statements which are required to be stated
therein by, and in all material respects
conform or will conform, as the case may
be, to the requirements of, the Act and
the Rules and Regulations. Neither the
Registration Statement nor any amendment
thereto, as of the applicable effective
date, and neither the Prospectus nor any
supplement thereto contains or will
contain, as the case may be, any untrue
statement of a material fact or omits or
will omit to state any material fact
required to be stated therein or
3
<PAGE> 4
necessary to make the statements therein, in the
light of the circumstances under which
they were made, not misleading; provided,
however, that the Company makes no
representation or warranty as to
information contained in or omitted from
the Registration Statement or the
Prospectus, or any such amendment or
supplement, in reliance upon, and in
conformity with, written information
furnished to the Company by or on behalf
of the Underwriters specifically for use
in the preparation thereof.
(iii) The filing of the Registration Statement
and the execution and delivery of this
Agreement have been duly authorized by the
Board of Directors of the Company; this
Agreement constitutes a valid and legally
binding obligation of the Company
enforceable in accordance with its terms
(except to the extent the enforceability
of the indemnification and contribution
provisions of Section 7 hereof may be
limited by public policy considerations as
expressed in the Act as construed by
courts of competent jurisdiction, and
except as enforceability may be limited by
bankruptcy, insolvency, reorganization,
moratorium and other laws affecting
creditors' rights generally and by general
principles of equity); the issue and sale
of the Shares by the Company and the
performance of this Agreement and the
consummation of the transactions herein
contemplated will not result in a
violation of the Company's Articles of
Incorporation or Bylaws or result in a
breach or violation of any of the terms
and provisions of, or constitute a default
under, or result in the creation or
imposition of any lien, charge or
encumbrance upon any properties or assets
of the Company or its subsidiaries under
any statute, or under any indenture,
mortgage, deed of trust, note, loan
agreement, sale and leaseback arrangement
or other agreement or instrument to which
the Company or any of its subsidiaries is
a party or by which they are bound or to
which any of the properties or assets of
the Company is subject, or any order, rule
or regulation of any court or governmental
agency or body having jurisdiction over
the Company or its subsidiaries or their
properties, except to such extent in each
such case as does not materially adversely
affect the business of the Company and its
subsidiaries taken as a whole; no consent,
approval, authorization, order,
registration or qualification of or with
any court or governmental agency or body
is required for the consummation of the
transactions herein contemplated, except
such as may be required by the National
Association of Securities Dealers, Inc.
(the "NASD") or under the Act or Rules and
Regulations or any state securities laws.
(iv) Except as described in the Prospectus,
neither the Company nor any of its
subsidiaries has sustained since the date
of the latest audited financial statements
included in the Prospectus any material
loss or interference with its business
from fire, explosion, flood or other
calamity, whether or not covered by
insurance, or from any labor dispute or
court or governmental action, order or
decree. Except as contemplated in the
Prospectus, subsequent to the respective
dates as of which information is given in
the Registration Statement and the
Prospectus, the Company and its
subsidiaries taken as a whole have not
incurred any material liabilities or
material obligations, direct or
contingent, other than in the ordinary
course of business, or entered into any
material transactions not in the ordinary
course of business, and there has not been
any material change in the capital stock
or long-term debt of the Company and its
subsidiaries taken as a whole or
4
<PAGE> 5
any material adverse change in the condition
(financial or other), net worth, business,
affairs, management, prospects or results
of operations of the Company and its
subsidiaries taken as a whole. The
Company and its subsidiaries have filed
all necessary federal, state and foreign
income and franchise tax returns, other
than returns the filing of which are being
contested in good faith, and paid all
taxes shown as due thereon, other than
those being contested in good faith and
for which adequate reserves have been
provided or those currently payable
without penalty or interest; all tax
liabilities are adequately provided for on
the books of the Company and its
subsidiaries except to such extent as
would not materially adversely affect the
business of the Company and its
subsidiaries taken as a whole; the Company
and its subsidiaries have made all
necessary payroll tax payments as of the
date of this Agreement; and the Company
and its subsidiaries have no knowledge of
any tax proceeding or action pending or
threatened against the Company or its
subsidiaries which might materially
adversely affect their business or
property taken as a whole.
(v) Except as described in the Prospectus,
there is not now pending or, to the
knowledge of the Company or its
subsidiaries, threatened or contemplated,
any action, suit or proceeding to which
the Company or its subsidiaries is a party
before or by any court or public,
regulatory or governmental agency or body
which might be expected to result
(individually or in the aggregate) in any
material adverse change in the condition
(financial or other), business or
prospects of the Company and its
subsidiaries taken as a whole, or might be
expected to materially and adversely
affect (individually or in the aggregate)
the properties or assets thereof.
(vi) The Company has duly and validly
authorized capital stock as described in
the Prospectus; all outstanding shares of
Common Stock of the Company and the Shares
conform, or when issued will conform, to
the description thereof in the
Registration Statement and the Prospectus
and have been, or, when issued and paid
for will be, duly authorized, validly
issued, fully paid and nonassessable; and
the issuance of the Shares to be purchased
from the Company hereunder is not subject
to preemptive rights. All offers and
sales by the Company and its subsidiaries
of their securities during the past three
(3) years were at all relevant times duly
registered or exempt from the registration
requirements of the Act and were duly
registered or the subject of an exemption
from the registration requirements of
applicable state securities laws. Except
as set forth in the Prospectus, the
Company does not have outstanding, and at
the Closing Date, will not have
outstanding, any options to purchase, or
any rights or warrants to subscribe for,
or any securities or obligations
convertible into, or any contracts, or
commitments to issue or sell any shares of
Common Stock or any such warrants,
convertible securities or obligations.
Except as disclosed in the Prospectus,
there are no contracts, agreements or
understandings between the Company and any
person granting such person the right to
require the Company to file a registration
statement under the Act with respect to
any securities of the Company owned or to
be owned by such person or to require the
Company to include such securities in the
securities registered pursuant to the
Registration Statement or in any
securities being registered pursuant to
any other registration statement filed by
the Company under the Act.
5
<PAGE> 6
(vii) The Company and its subsidiaries have been
duly incorporated and are validly existing
as corporations in good standing under the
laws of the states or jurisdictions in
which they are incorporated, with full
power and authority (corporate and other)
to own, lease and operate their properties
and conduct their business as described in
the Registration Statement; the Company
and its subsidiaries are duly qualified to
do business as foreign corporations and
are in good standing in each state or
other jurisdiction in which their
ownership or leasing of property or
conduct of business legally requires such
qualification, except where the failure to
be so qualified would not have a material
adverse effect on the ability of the
Company and its subsidiaries taken as a
whole to conduct its or their business as
described in the Registration Statement;
the outstanding shares of capital stock of
the Company's subsidiaries have been duly
authorized and validly issued, are fully
paid and nonassessable and are owned by
the Company or a subsidiary of the Company
free and clear of any mortgage, pledge,
lien, encumbrance, charge or adverse claim
and are not the subject of any agreement
or understanding with any person; and no
options, warrants or other rights to
purchase, agreement or other obligations
to issue or other rights to convert any
obligations into shares of capital stock
or ownership interests in the subsidiaries
are outstanding.
(viii) Arthur Andersen LLP, the accounting firm
which has certified the financial
statements filed with the Commission as a
part of the Registration Statement, is an
independent public accounting firm within
the meaning of the Act and the Rules and
Regulations.
(ix) 1) The consolidated financial
statements (including the condensed
financial statements) and schedules,
including the notes thereto,
included in the Registration
Statement and the Prospectus with
respect to the Company and its
subsidiaries comply in all material
respects with the Act and the
Regulations thereunder and present
fairly the consolidated financial
position of the Company and its
subsidiaries as of the dates
indicated and the related statements
of operations, cash flows and
stockholders' equity of the Company
and its subsidiaries for the periods
specified and have been prepared in
conformity with generally accepted
accounting principles applied on a
consistent basis. The selected and
summary consolidated financial
information with respect to the
Company and its subsidiaries
included in the Registration
Statement and the Prospectus present
fairly the information set forth
therein in compliance with the
applicable regulations of the
Commission and have been compiled on
a basis consistent with that of the
audited consolidated financial
statements of the Company and its
subsidiaries in the Registration
Statement and the Prospectus.
2) The financial statements and
schedules of Weldco, Inc., including
the notes thereto, included in the
Registration Statement and the
Prospectus comply in all material
respects with the Act and the
Regulations thereunder and present
fairly the financial position of
Weldco, Inc. as of the dates
indicated and the related statements
of operations, cash flows and
stockholders' equity for the periods
specified and have been prepared in
conformity with generally
6
<PAGE> 7
accepted accounting principles applied on a
consistent basis. The selected and
summary financial information with
respect to Weldco, Inc. included in
the Registration Statement and the
Prospectus present fairly the
information set forth therein and in
compliance with the applicable
regulations of the Commission and
have been compiled on a basis
consistent with that of the audited
financial statements of Weldco, Inc.
in the Registration Statement and
the Prospectus.
3) The pro forma condensed financial
statements combining financial
statements for the Company, its
subsidiaries and Weldco, Inc.
included in the Registration
Statement and the Prospectus comply
in form in all material respects
with the applicable accounting
requirements of Article 11 of
Regulation S-X of the commission and
the pro forma adjustments have been
properly applied to the historical
amounts in the compilation of those
statements. The selected and
summary information included in the
Registration Statement and the
Prospectus present fairly the
information set forth therein and
have been compiled on a basis
consistent with that of the pro
forma combined condensed financial
statements in the Registration
Statement and Prospectus.
(x) Neither the Company nor any of its
subsidiaries is in default with respect to
any contract or agreement to which it is a
party; provided that this representation
shall not apply to defaults which in the
aggregate are not materially adverse to
the condition, financial or other, or the
business or prospects of the Company and
its subsidiaries taken as a whole.
(xi) Neither the Company nor any of its
subsidiaries is in violation of any laws,
ordinances or governmental rules or
regulations to which it is subject, and
neither the Company nor any of its
subsidiaries has failed to obtain any
other license, permit, franchise,
easement, consent, or other governmental
authorization necessary to the ownership,
leasing and operation of its properties or
to the conduct of its business, which
violation or failure would materially
adversely affect the business, operations,
affairs, properties, prospects, profits or
condition (financial or other) of the
Company and its subsidiaries taken as a
whole. Neither the Company nor any of its
subsidiaries has, at any time during the
past five (5) years, (a) made any unlawful
contributions to any candidate for any
political office, or failed fully to
disclose any contribution in violation of
law, or (b) made any payment to any state,
federal or foreign government official, or
other person charged with similar public
or quasi-public duty (other than payment
required or permitted by applicable law).
(xii) Except as described in the Prospectus, the
Company or its subsidiaries own or
possess, or can acquire on reasonable
terms, adequate patents, patent licenses,
trademarks, service marks and trade names
necessary to conduct the business now
operated by it, and neither the Company
nor its subsidiaries has received any
notice of infringement of or conflict with
asserted rights of others with respect to
any patents, patent licenses, trademarks,
service marks or trade names which, singly
or in the aggregate, if the subject of an
unfavorable decision, ruling or finding,
would have a
7
<PAGE> 8
material adverse effect on the conduct of the
business, operations, financial condition or income of
the Company and its subsidiaries taken as a whole.
(xiii) Neither the Company nor any of its
subsidiaries own any real estate. The
Company and its subsidiaries have good and
marketable title to all other property
owned by them, free and clear of all
liens, encumbrances, restrictions and
defects except such as are described in
the Registration Statement or do not
interfere with the use made and proposed
to be made of such property; and any
property held under lease or sublease by
the Company or its subsidiaries is held
under valid, subsisting and enforceable
leases or subleases with such exceptions
as are not material and do not interfere
with the use made and proposed to be made
of such property by the Company or its
subsidiaries and neither the Company nor
any of its subsidiaries has notice or
knowledge of any material claim of any
sort which has been, or may be, asserted
by anyone adverse to the Company's or any
subsidiary's rights as lessee or sublessee
under any lease or sublease described
above, or affecting or questioning the
Company's or any of its subsidiaries'
rights to the continued possession of the
leased or subleased premises under any
such lease or sublease in conflict with
the terms thereof.
(xiv) Except as described in the Prospectus,
there is no factual basis for any action,
suit or other proceeding involving the
Company or any of its subsidiaries or any
of their material assets for any failure
of the Company or any of its subsidiaries,
or any predecessor thereof, to comply with
any requirements of federal, state or
local regulation relating to air, water,
solid waste management, hazardous or toxic
substances, or the protection of health or
the environment. Except as described in
the Prospectus, none of the property
leased by the Company or any of its
subsidiaries is, to the best knowledge of
the Company, contaminated with any waste
or hazardous substances, and neither the
Company nor any of its subsidiaries may be
deemed an "owner or operator" of a
"facility" or "vessel" which owns,
possesses, transports, generates or
disposes of a "hazardous substance" as
those terms are defined in Section 9601 of
the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, 42
U.S.C. Section 9601 et seq.
------
(xv) No labor disturbance with the employees of
the Company or its subsidiaries exists or,
to the knowledge of the Company or its
subsidiaries, is imminent which would have
a material adverse effect on the Company
and its subsidiaries taken as a whole.
(xvi) The Company has not taken and will not
take, directly or indirectly, any action
designed to or which might reasonably be
expected to cause or result in
stabilization or manipulation of the price
of the Company's Common Stock, and the
Company is not aware of any such action
taken or to be taken by affiliates of the
Company.
(xvii) Neither the Company nor any of its
subsidiaries is an "investment company" or
a company "controlled" by an "investment
company" within the meaning of the
Investment Company Act of 1940, as
amended.
8
<PAGE> 9
(xviii) The Company's and its subsidiaries'
systems of internal accounting controls
are sufficient to meet the broad
objectives of internal accounting control
insofar as those objectives pertain to the
prevention or detection of errors or
irregularities in amounts that would be
material in relation to the Company's or
its subsidiaries' financial statements;
and, except as disclosed in the
Prospectus, the Company, its subsidiaries,
or any employee or agent of the Company or
its subsidiaries has not made any payment
of funds of the Company or any of its
subsidiaries or received or retained any
funds in violation of any law, rule or
regulation, the receipt or payment of
which could have a material adverse effect
on the Company and its subsidiaries as a
whole.
(xix) There is no document or contract of a
character required to be described in the
Registration Statement or the Prospectus
or to be filed as an exhibit to the
Registration Statement that is not
described or filed as required. All such
contracts to which the Company or any of
its subsidiaries is a party has been duly
authorized, executed and delivered by the
Company or its subsidiaries, constitute
valid and binding agreements of the
Company or its subsidiaries and are
enforceable by the Company or its
subsidiaries in accordance with the terms
thereof.
(xx) Other than as contemplated by this
Agreement, there is no broker, finder or
other party that is entitled to receive
from the Company or any of its
subsidiaries any brokerage or finder's fee
or other fee or commission as a result of
any of the transactions contemplated by
this Agreement.
(xxi) The Company conducts its business in the
State of Pennsylvania through VNG Holding
Company, a Pennsylvania business trust
(the "Trust"); the Trust has been duly
organized, is validly existing and is in
good standing under the laws of
Pennsylvania and is not required to
qualify to do business under the laws of
any other jurisdiction; the Company holds
a 99% beneficial interest in the Trust
free and clear of any mortgage, pledge,
lien, encumbrance, charge or adverse
claim; no options or other rights to
purchase, agreement or other obligations
to issue or other rights to convert any
obligations into beneficial interests in
the Trust are outstanding; and the
representations and warranties contained
in (v) and (x) through (xv) above are true
and correct with respect to the Trust.
(xxii) The Company conducts no operations and
holds no assets other than 1,000 shares of
common stock of Valley National Gases
Delaware, Inc., a Delaware corporation
("VNG(DE)"). VNG(DE) conducts no
operations and holds no assets other than
30.6 shares of Valley National Gases,
Inc., a West Virginia corporation
("VNG(WV)"). Other than VNG(DE) and
VNG(WV), the Company has no subsidiaries
(as used herein, the term "subsidiary" or
"subsidiaries" means wholly-owned direct
or indirect subsidiaries of the Company,
and therefore excludes the Trust). Other
than its subsidiaries and the Trust, the
Company has no direct or indirect interest
in over 5% of the outstanding securities
or interests of any other entity.
(b) Each Selling Shareholder severally represents and
warrants to and agrees with each Underwriter and
the Company that:
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<PAGE> 10
(i) All authorizations and consents necessary
for the execution and delivery by such
Selling Shareholder of this Agreement and
the sale and delivery of the Shares to be
sold by such Selling Shareholder hereunder
have been given and are in full force and
effect on the date hereof and will be in
full force and effect on the Closing Date.
(ii) Such Selling Shareholder has, and on the
Closing Date will have good and valid
title to the Shares to be sold by such
Selling Shareholder, free and clear of all
liens, mortgages, pledges, encumbrances,
claims, equities and security interests
whatsoever, and will have, full right,
power and authority to enter into this
Agreement and to sell, assign, transfer
and deliver the Shares to be sold by such
Selling Shareholder hereunder.
(iii) Upon delivery of and payment for such
Shares hereunder, the several Underwriters
(assuming they are bona fide purchasers
under the Uniform Commercial Code) will
acquire valid and unencumbered title to
such Shares to be sold by such Selling
Shareholder hereunder, free and clear of
all liens, mortgages, pledges,
encumbrances, claims, equities and
security interests whatsoever.
(iv) The consummation by such Selling
Shareholder of the transactions
contemplated herein and the fulfillment by
such Selling Shareholder of the terms
hereof will not result in a violation or
breach of any terms or provisions of, or
constitute a default under, any indenture,
mortgage, deed of trust, note, loan
agreement, sale and leaseback arrangement
or other agreement or instrument to which
such Selling Shareholder is a party, or of
any order, rule or regulation applicable
to such Selling Shareholder of any court
or of any regulatory body of an
administrative agency or other
governmental body having jurisdiction over
such Selling Shareholder, except as to
such extent as does not prohibit or in any
way limit the ability of the Selling
Shareholder to comply with the terms of
this Agreement.
(v) Such Selling Shareholder has not taken and
will not take, directly or indirectly, any
action designed to or which might be
reasonably expected to cause or result in
stabilization or manipulation of the price
of the Company's Common Stock, and such
Selling Shareholder is not aware of any
such action taken or to be taken by
affiliates of such Selling Shareholder.
(vi) When the Registration Statement becomes
effective and at all times subsequent
thereto, such information in the
Registration Statement and Prospectus and
any amendments or supplements thereto as
specifically refers to such Selling
Shareholder will not contain any untrue
statement of a material fact or omit to
state any material fact required to be
stated therein or necessary to make the
statements therein not misleading.
(vii) Certificates in negotiable form
representing all of the Shares to be sold
by such Selling Shareholder hereunder have
been placed in the custody of Gary E. West
and Lawrence E. Bandi (the "Custodians")
under a Custody Agreement (the "Custody
Agreement"), duly executed and delivered
by such Selling Shareholder, with the
Custodians having the authority to deliver
the Shares to be sold by such Selling
Shareholder hereunder, and that such
Selling Shareholder has duly executed and
delivered a Power of Attorney
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<PAGE> 11
(the "Power of Attorney") appointing Gary E. West and
Lawrence E. Bandi as such Selling
Shareholder's attorneys-in-fact (the
"Attorneys-in-Fact") with the Attorneys-
in-Fact having authority to execute and
deliver this Agreement on behalf of such
Selling Shareholder, to determine the
purchase price to be paid by the
Underwriters to the Selling Shareholders
as provided in Section 2, to authorize the
delivery of the Shares to be sold by such
Selling Shareholder hereunder and
otherwise to act on behalf of such Selling
Shareholder in connection with the
transactions contemplated by this
Agreement and such Custody Agreement.
(viii) The Shares represented by the certificates
held in custody for such Selling
Shareholder under the Custody Agreement
are subject to the interests of the
Underwriters hereunder, and the
arrangements made by such Selling
Shareholder for such custody, and the
appointment by such Selling Shareholder of
the Custodians under the Custody Agreement
and of the Attorneys-in-Fact by the Power
of Attorney, are to that extent
irrevocable.
(ix) The obligations of such Selling
Shareholder hereunder shall not be
terminated by operation of law, whether by
the death or incapacity of any individual
Selling Shareholder or by the occurrence
of any other event, and if any Selling
Shareholder should die or become
incapacitated, or if any other such event
should occur before the delivery of the
Shares hereunder, certificates
representing the Shares shall be delivered
by or on behalf of each Selling
Shareholder in accordance with the terms
and conditions of this Agreement and of
the Custody Agreement, and actions taken
by the Custodians pursuant to the Custody
Agreement or by the Attorneys-in-Fact
pursuant to the Power of Attorney shall be
as valid as if such death, incapacity or
other event had not occurred, regardless
of whether or not the Custodians or
Attorneys-in-Fact, or any of them, shall
have received notice of such death,
incapacity or other event.
(x) Such Selling Shareholder is not prompted
to sell shares of Common Stock by any
information concerning the Company or any
of its subsidiaries which is not included
in the Registration Statement.
(c) Any certificate signed by any officer of the
Company and delivered to you or to counsel for the
Underwriters shall be deemed a representation and
warranty by the Company to each Underwriter as to
the matters covered thereby; and any certificate
signed by or on behalf of any Selling Shareholder
as such and delivered to you or to counsel for the
Underwriters shall be deemed a representation and
warranty by such Selling Shareholder to each
Underwriter as to the matters covered thereby.
5. ADDITIONAL COVENANTS. The Company and, where expressly
indicated, the Selling Shareholders, covenant and agree with the
several Underwriters that:
(a) If the Registration Statement is not effective
under the Act, the Company will use its best
efforts to cause the Registration Statement to
become effective as promptly as possible, and it
will notify you, promptly after it shall receive
notice thereof, of the time when the Registration
Statement has become effective. The Company (i)
will prepare and timely file with the Commission
under Rule 424(b) of the Rules and Regulations, if
required, a Prospectus containing information
previously omitted at the time of effectiveness of
the Registration Statement in reliance on Rule 430A of
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<PAGE> 12
the Rules and Regulations or otherwise or a Term
Sheet or Abbreviated Term Sheet, as applicable;
(ii) will not file any amendment to the
Registration Statement or supplement to the
Prospectus of which the Underwriters shall not
previously have been advised and furnished with a
copy or to which the Underwriters shall have
reasonably objected in writing or which is not in
compliance with the Rules and Regulations; and
(iii) will promptly notify you after it shall have
received notice thereof of the time when any
amendment to the Registration Statement becomes
effective or when any supplement to the Prospectus
has been filed.
(b) The Company will advise the Underwriters promptly,
after it shall receive notice or obtain knowledge
thereof, of any request of the Commission for
amendment of the Registration Statement or for
supplement to the Prospectus or for any additional
information, or of the issuance by the Commission
of any stop order suspending the effectiveness of
the Registration Statement or the use of the
Prospectus or of the institution or threatening of
any proceedings for that purpose, and the Company
will use its best efforts to prevent the issuance
of any such stop order preventing or suspending the
use of the Prospectus and to obtain as soon as
possible the lifting thereof, if issued.
(c) The Company will cooperate with the Underwriters
and their counsel in endeavoring to qualify the
Shares for sale under the securities laws of such
jurisdictions as they may have designated and will
make such applications, file such documents, and
furnish such information as reasonably may be
necessary for that purpose, provided the Company
shall not be required to qualify as a foreign
corporation or to file a general consent to service
of process in any jurisdiction where it is not now
so qualified or required to file such a consent or
to subject itself to taxation as doing business in
any jurisdiction where it is not now so taxed. The
Company will, from time to time, file such
statements, reports, and other documents, as are or
may reasonably be required to continue such
qualifications in effect for so long a period as
the Underwriters may reasonably request.
(d) The Company will deliver to, or upon the order of,
the Underwriters, without charge from time to time,
as many copies of any Preliminary Prospectus as
they may reasonably request. The Company will
deliver to, or upon the order of, the Underwriters
without charge as many copies of the Prospectus, or
as it thereafter may be amended or supplemented, as
they may from time to time reasonably request. The
Company consents to the use of such Prospectus by
the Underwriters and by all dealers to whom the
Shares may be sold, both in connection with the
offering or sale of the Shares and for such other
purposes and for such period of time thereafter as
the Prospectus is required by law to be delivered
in connection with the offering or sale of the
Shares. The Company will deliver to the
Underwriters at or before the Closing Date two (2)
signed copies of the Registration Statement and all
amendments thereto including all exhibits filed
therewith, and will deliver to the Underwriters
such number of copies of the Registration
Statement, without exhibits, and of all amendments
thereto, as they may reasonably request.
(e) If, during the period in which a prospectus is
required by law to be delivered by an Underwriter
or dealer, any event shall occur as a result of
which, in the reasonable judgment of the Company or
in your reasonable judgment or in the opinion of
counsel for the Underwriters, it becomes necessary
to amend or supplement the prospectus in order to
make the statements therein, in light of the
circumstances existing at the time the prospectus
is delivered to a purchaser, not misleading, or,
12
<PAGE> 13
if it is necessary at any time to amend or supplement
the prospectus to comply with any law, the Company
promptly will prepare and file with the Commission
an appropriate amendment to the Registration
Statement or supplement to the prospectus so that
the prospectus as so amended or supplemented will
not, in the light of the circumstances when it is
so delivered, be misleading, or so that the
prospectus will comply with law.
(f) The Company will make generally available to its
shareholders and will file as an exhibit in a
report pursuant to the Securities and Exchange Act
of 1934, as amended (the "1934 Act"), as soon as it
is practicable to do so, but in any event not later
than fifteen (15) months after the effective date
of the Registration Statement, an earnings
statement in reasonable detail, covering a period
of at least twelve (12) consecutive months
beginning after the effective date of the
Registration Statement, which earnings statement
shall satisfy the requirements of Section 11(a) of
the Act and Rule 158 of the Rules and Regulations
and will advise the Underwriters in writing when
such statement has been so made available.
(g) The Company will, for a period of five (5) years
from the Closing Date, deliver to the Underwriters
at their principal executive offices a reasonable
number of copies of annual reports, quarterly
reports, current reports and copies of all other
documents, reports and information furnished by the
Company to its stockholders or filed with any
securities exchange pursuant to the requirements of
such exchange or with the Commission pursuant to
the Act or the 1934 Act. The Company will deliver
to the Underwriters similar reports with respect to
any significant subsidiaries, as that term is
defined in the Rules and Regulations, which are not
consolidated in the Company's financial statements.
Any report, document or other information required
to be furnished under this paragraph (g) shall be
furnished as soon as practicable after such report,
document or information becomes available.
(h) The Company will apply the proceeds from the sale
of the Shares as set forth in the description under
"Use of Proceeds" in the Prospectus, which
description complies in all respects with the
requirements of Item 504 of Regulation S-K.
(i) The Company will supply you with copies of all
correspondence to and from, and all documents
issued to and by, the Commission in connection with
the registration of the Shares under the Act.
(j) Prior to the Closing Date (and, if applicable, the
Option Closing Date), the Company will furnish to
you, as soon as they have been prepared, copies of
any unaudited interim financial statements of the
Company and its subsidiaries for any periods
subsequent to the periods covered by the financial
statements appearing in the Registration Statement
and the Prospectus.
(k) Prior to the Closing Date (and, if applicable, the
Option Closing Date), the Company, its
subsidiaries, or any Selling Shareholder will not
issue any press releases or other communications
directly or indirectly and will hold no press
conferences with respect to the Company or any of
its subsidiaries the financial condition, results
of operations, business, properties, assets or
liabilities of the Company or any of its
subsidiaries, or the offering of the Shares,
without your prior written consent.
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<PAGE> 14
(l) The Company will use its best efforts to obtain
approval for, and maintain the quotation of the
Shares on, the National Association of Securities
Dealers, Inc. Automated Quotation/National Market
(the "NNM").
(m) Except pursuant to this Agreement or with the prior
written consent of A.G. Edwards & Sons, Inc., the
Company will not, and the Company has provided
agreements executed by Gary E. West, as trustee of
The Gary E West Grantor Retained Annuity Trust #1,
Gary E. West, as trustee of The Gary E West Grantor
Retained Annuity Trust #2, Gary E. West, as trustee
of The Gary E West Grantor Retained Annuity Trust
#3, Gary E. West, as trustee of The Gary E West
Grantor Retained Annuity Trust #4, Gary E. West, as
trustee of The Gary E West Grantor Retained Annuity
Trust #5, Gary E. West, as trustee of The Gary E
West Grantor Retained Annuity Trust #6, R. Bruce
Kraemer and the personal representative of the
estate of Linda Bott providing that none of them
will, and the Company will use its best efforts to
cause its other directors and officers to not, for
a period of 180 days from the Effective Date,
directly or indirectly sell, contract to sell or
otherwise dispose of any shares of the Company's
Common Stock, any securities exchangeable for
Common Stock or any other rights to acquire such
shares without your prior written consent, except
for the Shares sold hereunder and except for sales
of shares of Common Stock to the Company's
employees pursuant to the exercise of options under
the Company's 1997 Stock Option Plan.
(n) For a period of 180 days from the Effective Date,
the Selling Shareholders will not directly or
indirectly sell, contract to sell or otherwise
dispose of any shares of the Company's Common Stock
or rights to acquire such shares without your prior
written consent, except for the Shares sold
hereunder.
(o) The Company and its subsidiaries will maintain and
keep accurate books and records reflecting their
assets and maintain internal accounting controls
which provide reasonable assurance that (i)
transactions are executed in accordance with
management's authorization, (ii) transactions are
recorded as necessary to permit the preparation of
the Company's consolidated financial statements and
to maintain accountability for the assets of the
Company and its subsidiaries, (iii) access to the
assets of the Company and its subsidiaries is
permitted only in accordance with management's
authorization, and (iv) the recorded accounts of
the assets of the Company and its subsidiaries are
compared with existing assets at reasonable
intervals.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several
obligations of the Underwriters to purchase and pay for the Shares,
as provided herein, shall be subject to the accuracy in all
material respects, as of the date hereof and as of the Closing Date
(and, if applicable, the Option Closing Date), of the
representations and warranties of the Company and the Selling
Shareholders contained herein, to the performance in all material
respects by the Company and the Selling Shareholders of their
covenants and obligations hereunder, and to the following
additional conditions:
(a) All filings required by Rule 424 and Rule 430A of
the Rules and Regulations shall have been made. No
stop order suspending the effectiveness of the
Registration Statement, as amended from time to
time, shall have been issued and no proceeding for
that purpose shall have been initiated or, to the
knowledge of the Company or any Underwriter,
threatened or contemplated by the Commission, and
any request of the Commission for additional
information (to be included in the Registration
14
<PAGE> 15
Statement or the Prospectus or otherwise) shall
have been complied with to the reasonable
satisfaction of the Underwriters.
(b) No Underwriter shall have disclosed in writing to
the Company on or prior to the Closing Date (and,
if applicable, the Option Closing Date), that the
Registration Statement or Prospectus or any
amendment or supplement thereto contains an untrue
statement of fact which, in the opinion of counsel
to the Underwriters, is material, or omits to state
a fact which, in the opinion of such counsel, is
material and is required to be stated therein or is
necessary to make the statements therein, in light
of the circumstances under which they were made,
not misleading.
(c) On the Closing Date (and, if applicable, the Option
Closing Date), you shall have received the opinion
of counsel for the Company, addressed to you and
dated the Closing Date (and, if applicable, the
Option Closing Date), to the effect that:
(i) The Company and its subsidiaries have been
duly incorporated and are validly existing
as corporations in good standing under the
laws of the states or jurisdictions in
which they are incorporated with the
corporate power and authority to own,
lease and operate their properties and
conduct their business as described in the
Registration Statement; the Company and
each of its subsidiaries are duly
qualified to do business as foreign
corporations in good standing in the
states listed on Schedule IV attached
hereto and to such counsel's knowledge
such states are the only states or other
jurisdictions in which their ownership or
leasing of property or conduct of business
legally requires such qualification,
except where the failure to be so
qualified would not have a material
adverse effect on the ability of the
Company and its subsidiaries to conduct
their business as described in the
Registration Statement; and the
outstanding shares of capital stock of the
Company's subsidiaries have been duly
authorized and validly issued, are fully
paid and nonassessable and, so far as is
known to such counsel, are owned by the
Company or a subsidiary of the Company
free and clear of any mortgage, pledge,
lien, encumbrance, charge or adverse claim
and are not the subject of any agreement
or understanding with any person; no
options, warrants or other rights to
purchase, agreement or other obligations
to issue or other rights to convert any
obligations into shares of capital stock
or ownership interests in the subsidiaries
are outstanding.
(ii) The Company has duly and validly
authorized capital stock as set forth
under the heading "Capitalization" in the
Prospectus; all outstanding shares of
Common Stock of the Company and the Shares
conform to the description thereof in the
Prospectus under the heading "Description
of Capital Stock", and the outstanding
shares of Common Stock have been duly
authorized and are validly issued, fully
paid and non-assessable; the Shares to be
sold by the Company have been duly
authorized and, when delivered and paid
for in accordance with this Agreement,
will be validly issued, fully paid and
non-assessable, and the shareholders of
the Company have no preemptive rights with
respect to the Shares.
(iii) Such counsel has been advised by the staff
of the Commission that the Registration
Statement has become effective under the
Act and, to the knowledge of such counsel
no stop order suspending the effectiveness
of the
15
<PAGE> 16
Registration Statement has been issued and no
proceedings for that purpose have been instituted or
are pending or contemplated under the Act.
(iv) The Registration Statement and the
Prospectus, and each amendment or
supplement thereto, as of their respective
effective or issue dates, comply as to
form and appear on their face to be
appropriately responsive in all material
respects to the requirements of the Act
and the applicable rules and regulations
(except that such counsel need express no
opinion as to the financial statements or
other financial data).
(v) The descriptions in the Registration
Statement and Prospectus of contracts and
other documents filed as exhibits to the
Registration Statement are accurate in all
material respects.
(vi) No authorization, approval, consent,
order, registration or qualification of or
with of any court or governmental body,
authority or agency is required with
respect to the Company in connection with
the transactions contemplated by this
Agreement, except such as may be required
under the Act or the Rules and Regulations
or as may be required by the NASD or under
state securities laws in connection with
the purchase and distribution of the
Shares by the Underwriters.
(vii) The filing of the Registration Statement
has been duly authorized by the Board of
Directors of the Company. This Agreement
has been duly authorized, executed and
delivered by the Company. The performance
of this Agreement and the consummation of
the transactions herein contemplated will
not result in a violation of the Company's
Articles of Incorporation or Bylaws or
result in a breach or violation of any of
the terms and provisions of, or constitute
a default under, or result in the creation
or imposition of any lien, charge or
encumbrance upon any properties or assets
of the Company or any of its subsidiaries
under any statute or under any indenture,
mortgage, deed of trust, note, loan
agreement, sale and leaseback arrangement,
or any other agreement or instrument known
to such counsel to which the Company or
any of its subsidiaries is a party or by
which they are bound or to which any of
the properties or assets of the Company or
any of its subsidiaries is subject, or any
order, rule or regulation known to such
counsel of any court or governmental
agency or body having jurisdiction over
the Company or any of its subsidiaries or
their properties, except, in the case of
any such violation, breach, default,
creation or imposition, to such extent as
does not materially adversely affect the
business of the Company and its
subsidiaries taken as a whole.
(viii) To the knowledge of such counsel, (a)
there are no material (individually, or in
the aggregate) legal, governmental or
regulatory proceedings pending or
threatened to which the Company or any of
its subsidiaries is a party or of which
the business or properties of the Company
or any of its subsidiaries is the subject
which are not disclosed in the
Registration Statement and Prospectus; (b)
there are no contracts or documents of a
character required to be described in the
Registration Statement or the Prospectus
or to be filed as an exhibit to the
Registration Statement which are not
described or filed as required; and
(c) there are no statutes or regulations
required to be
16
<PAGE> 17
described in the Registration Statement or Prospectus
which are not described as required.
(ix) To the knowledge of such counsel, the
Company and each of its subsidiaries hold
all licenses, certificates, permits and
approvals from all state, federal and
other regulatory authorities, and have
satisfied in all material respects the
requirements imposed by regulatory bodies,
administrative agencies or other
governmental bodies, agencies or
officials, that are required for the
Company and its subsidiaries lawfully to
own, lease and operate its properties and
conduct its business as described in the
Prospectus, and, to the knowledge of such
counsel, the Company and each of its
subsidiaries are conducting their business
in compliance in all material respects
with all of the laws, rules and
regulations of each jurisdiction in which
they conduct their business.
(x) The statements made in the Registration
Statement under the captions "Dividend
Policy", "Capitalization", and
"Description of Capital Stock", to the
extent that they constitute summaries of
documents referred to therein or matters
of law or legal conclusions, have been
reviewed by such counsel and are accurate
summaries and fairly present the
information disclosed therein.
(xi) The Company and each of its subsidiaries
are not, and will not become as a result
of the consummation of the transactions
contemplated by this Agreement and
application of the net proceeds therefrom
as described in the Prospectus, required
to register as an investment company under
the Investment Company Act of 1940.
(xii) Except as described in the Registration
Statement, there are no contracts,
agreements or understanding known to such
counsel between the Company or any of its
subsidiaries and any person granting such
person the right to require the Company or
any of its subsidiaries to file a
registration statement under the Act with
respect to any securities of the Company
or any of its subsidiaries owned or to be
owned by such person or to require the
Company or any of its subsidiaries to
include such securities in the securities
registered pursuant to the Registration
Statement or in any securities being
registered pursuant to any other
registration statement filed by the
Company under the Act.
(xiii) The Trust is duly organized, validly
existing and in good standing under the
laws of Pennsylvania, and, to the
knowledge of counsel, is not required to
register to do business under the laws of
any other jurisdiction. The Company holds
a 99% beneficial interest in the Trust
free and clear of any mortgage, lien,
encumbrance, charge or adverse claim. No
options or other rights to purchase,
agreement or other obligations to issue or
other rights to convert any obligations
into beneficial interests in the Trust are
outstanding.
(xiv) VNG(DE) is a wholly-owned subsidiary of
the Company. VNG(WV) is a wholly-owned
subsidiary of VNG(DE). Other than VNG(WV)
and VNG(DE), the Company has no
subsidiaries.
17
<PAGE> 18
Such counsel also shall confirm that in the course of its
duties in connection with the preparation of the Registration
Statement and Prospectus, nothing came to such counsel's attention
that would lead them to believe that either the Registration
Statement or Prospectus or any amendment or supplement thereto
(other than the financial statements or other financial data as to
which such counsel need express no opinion) contains any untrue
statement of a material fact or omits to state a material fact
required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were
made, not misleading.
In rendering the foregoing opinion, such counsel may
rely, provided that the opinion shall state that you and they are
entitled to so rely, (a) as to matters involving laws of any
jurisdiction other than Missouri, the United States or the Business
Corporation Law of the Commonwealth of Pennsylvania, upon opinions
addressed to the Underwriters of other counsel satisfactory to them
and Peper, Martin, Jensen, Maichel and Hetlage, and (b) as to all
matters of fact, upon certificates and written statements of the
executive officers of, and accountants for, the Company.
(d) On the Closing Date (and, if applicable, the Option
Closing Date), you shall have received the opinion
of counsel to the Selling Shareholders, addressed
to you and dated the Closing Date (and, if
applicable, the Option Closing Date), to the effect
that:
(i) Each Selling Shareholder has duly
authorized, executed and delivered the
Custody Agreement and Power of Attorney,
appointing Gary E. West and Lawrence E.
Bandi as such Selling Shareholder's
Custodians with authority to take custody
of and deliver the Shares as represented
by certificates on behalf of such Selling
Shareholder in connection with the
transactions contemplated by this
Agreement and the Custody Agreement and
appointing Gary E. West and Lawrence E.
Bandi as such Selling Shareholder's
attorneys-in-fact with authority to
execute and deliver this Agreement on
behalf of such Selling Shareholder and
otherwise to act on behalf of such Selling
Shareholder in connection with the
transactions contemplated by this
Agreement and the Power of Attorney.
(ii) This Agreement has been duly authorized,
executed and delivered on behalf of the
Selling Shareholders.
(iii) Each Selling Shareholder has full legal
right, power and authority to sell,
assign, transfer and deliver the Shares to
be sold by such Selling Shareholder.
(iv) Each Selling Shareholder (assuming the
underwriters are bona fide purchasers
within the meaning of the Uniform
Commercial Code) has transferred to the
Underwriters good and valid title to the
Shares being sold by such Selling
Shareholder on the Closing Date (and, if
applicable, the Option Closing Date), free
and clear of all liens, mortgages,
pledges, encumbrances, claims, equities
and security interests whatsoever.
In rendering the foregoing opinion, such counsel may
rely, provided that the opinion shall state that you and they are
entitled to so rely, (a) as to matters involving laws of any
jurisdiction other than Missouri or the United States, upon
opinions addressed to the Underwriters of other counsel
satisfactory to them and Peper, Martin, Jensen, Maichel and
Hetlage, and (b) as to all matters of fact, upon certificates and
written statements of the Selling Shareholders.
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<PAGE> 19
(e) You shall have received on the Closing Date (and,
if applicable, the Option Closing Date), from
Peper, Martin, Jensen, Maichel and Hetlage, counsel
to the Underwriters, such opinion or opinions,
dated the Closing Date (and, if applicable, the
Option Closing Date) with respect to the
incorporation of the Company, the validity of the
Shares, the Registration Statement, the Prospectus
and other related matters as you may reasonably
require; the Company and Selling Shareholders shall
have furnished to such counsel such documents as
they reasonably request for the purpose of enabling
them to pass on such matters.
(f) You shall have received at or prior to the Closing
Date from Peper, Martin, Jensen, Maichel and
Hetlage a memorandum or memoranda, in form and
substance satisfactory to you, with respect to the
qualification for offering and sale by the
Underwriters of the Shares under state securities
laws of such jurisdictions as the Underwriters may
have designated to the Company.
(g) On the date of this Agreement and on the Closing
Date (and, if applicable, the Option Closing Date),
you shall have received from Arthur Andersen LLP, a
letter or letters, dated the date of this Agreement
and the Closing Date (and, if applicable, the
Option Closing Date), respectively, in form and
substance satisfactory to you, confirming that they
are independent public accountants with respect to
the Company within the meaning of the Act and the
published Rules and Regulations, and the answer to
Item 509 of Regulation S-K set forth in the
Registration Statement is correct insofar as it
relates to them, and addressing the matters set
forth in Schedule III hereto.
(h) Except as contemplated in the Prospectus,
(i) neither the Company nor any of its subsidiaries
shall have sustained since the date of the latest
audited financial statements included in the
Prospectus any loss or interference with its
business from fire, explosion, flood or other
calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental
action, order or decree; and (ii) subsequent to the
respective dates as of which information is given
in the Registration Statement and the Prospectus,
neither the Company nor any of its subsidiaries
shall have incurred any liability or obligation,
direct or contingent, or entered into transactions,
and there shall not have been any change in the
capital stock or long-term debt of the Company or
any of its subsidiaries or any change in the
condition (financial or other), net worth,
business, affairs, management, prospects or results
of operations of the Company or any of its
subsidiaries, the effect of which, in any such case
described in clause (i) or (ii), is in your
judgment so material or adverse as to make it
impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares being
delivered on such Closing Date (and, if applicable,
the Option Closing Date) on the terms and in the
manner contemplated in the Prospectus.
(i) On or after the date hereof, there shall not have
occurred any of the following: (i) a suspension or
material limitation in trading in securities
generally on the New York Stock Exchange or the
American Stock Exchange; (ii) a general moratorium
on commercial banking activities in New York
declared by either federal or state authorities;
(iii) the outbreak or escalation of hostilities
involving or affecting the United States or the
declaration by the United States of a national
emergency or war, if the effect of any such event
specified in this clause (iii) in your judgment
makes it impracticable or inadvisable to proceed
with the public offering or the delivery of the
Shares in the manner contemplated in the
Prospectus; (iv) any substantial
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<PAGE> 20
calamity or crisis, change in national, international or world
affairs, act of God, material change in the
international or domestic markets, or adverse
change in the existing financial, political or
economic conditions in the United States or
elsewhere, if the effect of any such event
specified in this clause (iv) makes it
impracticable or inadvisable to proceed with the
public offering or the delivery of the Shares in
the manner contemplated in the Prospectus; or
(v) the enactment, publication, decree, or other
promulgation of any federal or state statute,
regulation, rule, or order of any court or other
governmental authority, or the taking of any action
by any federal, state or local government or agency
in respect of fiscal or monetary affairs, if the
effect of any such event specified in this
clause (v) in your judgment makes it impracticable
or inadvisable to proceed with the public offering
or the delivery of the Shares in the manner
contemplated in the Prospectus.
(j) You shall have received certificates, dated the
Closing Date (and, if applicable, the Option
Closing Date) and signed by the President and the
Chief Financial Officer of the Company stating that
(i) they have carefully examined the Registration
Statement and the Prospectus as amended or
supplemented and nothing has come to their
attention that would lead them to believe that
either the Registration Statement or the
Prospectus, or any amendment or supplement thereto
as of their respective effective or issue dates,
contained, and the Prospectus as amended or
supplemented at such Closing Date, contains any
untrue statement of a material fact, or omits to
state a material fact required to be stated therein
or necessary in order to make the statements
therein, in light of the circumstances under which
they were made, not misleading, and, that (ii) all
representations and warranties made herein by the
Company are true and correct in all material
respects at such Closing Date, with the same effect
as if made on and as of such Closing Date, and all
agreements herein to be performed by the Company on
or prior to such Closing Date have been duly
performed in all material respects.
(k) The Company and the Selling Shareholders shall have
furnished to you at the Closing Date (and, if
applicable, the Option Closing Date) such other
certificates as you may have reasonably requested
as to the accuracy, on and as of such Closing Date,
of the representations and warranties of the
Company and the Selling Shareholders herein and as
to the performance by the Company and the Selling
Shareholders of their obligations hereunder.
(l) The Shares shall have been approved for trading
upon official notice of issuance on the NNM.
(m) The NASD shall not have raised any objection with
respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(n) The agreements mentioned in Section 5(m) shall be
in full force and effect.
All such opinions, certificates, letters and documents
will be in compliance with the provisions hereof only if they are
reasonably satisfactory to you and to Peper, Martin, Jensen,
Maichel and Hetlage, counsel for the several Underwriters. The
Company and Selling Shareholders will furnish you with such
conformed copies of such opinions, certificates, letters and
documents as you may request.
If any of the conditions specified above in this Section
6 shall not have been satisfied at or prior to the Closing Date
(and, if applicable, the Option Closing Date) or waived by you in
writing, this Agreement may be terminated by you on notice to the
Company and the Selling Shareholders.
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<PAGE> 21
7. INDEMNIFICATION.
(a) The Company will indemnify and hold harmless each
Underwriter and each person, if any, who controls
any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or such
controlling person may become subject, under the
Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect
thereof) arise out of or are based upon an untrue
statement or alleged untrue statement of a material
fact contained in the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any
amendment or supplement thereto, or arise out of or
are based upon the omission or alleged omission to
state therein a material fact required to be stated
therein or necessary to make the statements
therein, in light of the circumstances under which
they were made, not misleading; and will reimburse
each Underwriter and each such controlling person
for any reasonable legal or other expenses incurred
by such Underwriter or such controlling person in
connection with investigating or defending any such
loss, claim, damage, liability or action; provided,
however, that the Company shall not be liable in
any such case to the extent that any such loss,
claim, damage or liability arises out of or is
based upon an untrue statement or alleged untrue
statement or omission or alleged omission made in
the Registration Statement, such Preliminary
Prospectus or the Prospectus, or such amendment or
supplement, in reliance upon and in conformity with
written information furnished to the Company by you
or by any Underwriter through you, specifically for
use in the preparation thereof; and provided,
further, that if any Preliminary Prospectus or the
Prospectus contained any alleged untrue statement
or allegedly omitted to state therein a material
fact required to be stated therein or necessary to
make the statements therein not misleading and such
statement or omission shall have been corrected in
a revised Preliminary Prospectus or in the
Prospectus or in an amended or supplemented
Prospectus, the Company shall not be liable to any
Underwriter or controlling person under this
subsection (a) with respect to such alleged untrue
statement or alleged omission to the extent that
any such loss, claim, damage or liability of such
Underwriter or controlling person results from the
fact that such Underwriter sold Shares to a person
to whom there was not sent or given, at or prior to
the written confirmation of such sale, such revised
Preliminary Prospectus or Prospectus or amended or
supplemented Prospectus. This indemnity agreement
shall be in addition to any liabilities which the
Company may otherwise have.
(b) Each Selling Shareholder will indemnify and hold
harmless each Underwriter and each person, if any,
who controls any Underwriter within the meaning of
the Act, against any losses, claims, damages or
liabilities, joint or several, to which such
Underwriter or controlling person may become
subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue
statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus,
the Prospectus, or any amendment or supplement
thereto, or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission
was made in the Registration Statement, such
Preliminary Prospectus or the Prospectus, or such
amendment or supplement, in reliance upon and in
conformity with written information furnished to
the Company or any Underwriter by such Selling
Shareholder specifically for use in the preparation
thereof; and will reimburse any
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<PAGE> 22
reasonable legal or other expenses incurred by each Underwriter
and each person, if any, who controls any Underwriter
within the meaning of the Act, in connection with
investigating or defending any such loss, claim,
damage, liability or action; provided, however,
that the indemnity contained in this subsection (b)
with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter (or to
the benefit of any person controlling such
Underwriter) in respect of any action or claim
asserted by a person who purchased any Shares from
such Underwriter, if, within the time required by
the Act such person was not sent or given a copy of
the Prospectus, as then amended or supplemented.
In no event, however, shall the liability of any
Selling Shareholder for indemnification under this
Section 7(b) exceed the proceeds received by such
Selling Shareholder from the Underwriters in the
offering. This indemnity agreement shall be in
addition to any liabilities which the Selling
Shareholders may otherwise have.
(c) Each Underwriter will indemnify and hold harmless
the Company, each of its directors, each of its
officers who have signed the Registration Statement
and, each person, if any, who controls the Company
within the meaning of the Act, and each Selling
Shareholder, against any losses, claims, damages or
liabilities, joint or several, to which the Company
or any such director, officer or controlling person
or any such Selling Shareholder may become subject,
under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any
material fact contained in the Registration
Statement, any Preliminary Prospectus, the
Prospectus, any amendment or supplement thereto, or
arise out of or are based upon the omission or the
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statements therein, in light of the
circumstances under which they were made, not
misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged
untrue statement or omission or alleged omission
was made in the Registration Statement, such
Preliminary Prospectus or the Prospectus, such
amendment or supplement, in reliance upon and in
conformity with written information furnished to
the Company by any such Underwriter specifically
for use in the preparation thereof; and will
reimburse any reasonable legal or other expenses
incurred by the Company or any such director,
officer or controlling person or any such Selling
Shareholder in connection with investigating or
defending any such loss, claim, damage, liability
or action. The Company and each Selling
Shareholder acknowledge that the statements set
forth under the heading "Underwriting" in any
Preliminary Prospectus and the Prospectus
constitute the only information relating to the
Underwriters furnished in writing to the Company by
the Underwriters expressly for inclusion in the
Registration Statement, any Preliminary Prospectus
or the Prospectus. This indemnity agreement shall
be in addition to any liabilities which the
Underwriters may otherwise have.
(d) Any party which proposes to assert the right to be
indemnified under this Section 7 shall, within ten
(10) days after receipt of notice of commencement
of any action, suit or proceeding against such
party in respect of which a claim is to be made
against an indemnifying party under this Section 7,
notify each such indemnifying party of the
commencement of such action, suit or proceeding,
enclosing a copy of all papers served, but the
omission so to notify such indemnifying party of
any such action, suit or proceeding shall not
relieve such indemnifying party from any liability
which it may have to any indemnified party
otherwise than under this Section 7. In case any
such action, suit or proceeding shall be brought
against any indemnified
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<PAGE> 23
party and it shall notify the indemnifying party of the
commencement thereof, the indemnifying party shall be entitled
to participate in, and, to the extent that it shall
wish, jointly with any other indemnifying party,
similarly notified, to assume the defense thereof,
with counsel reasonably satisfactory to such
indemnified party, and after notice from the
indemnifying party to such indemnified party of its
election so to assume the defense thereof, the
indemnifying party shall not be liable to such
indemnified party for any legal or other expenses,
other than reasonable costs of investigation,
subsequently incurred by such indemnified party in
connection with the defense thereof. The
indemnified party shall have the right to employ
its own counsel in any such action, but the fees
and expenses of such counsel shall be at the
expense of such indemnified party unless (i) the
employment of counsel by such indemnified party at
the expense of the indemnifying party has been
authorized by the indemnifying party, (ii) the
indemnified party shall have been advised by such
counsel in a written opinion that there may be a
conflict of interest between the indemnifying party
and the indemnified party in the conduct of the
defense, or certain aspects of the defense, of such
action (in which case the indemnifying party shall
not have the right to direct the defense of such
action with respect to those matters or aspects of
the defense on which a conflict exists or may exist
on behalf of the indemnified party) or (iii) the
indemnifying party shall not in fact have employed
counsel to assume the defense of such action, in
any of which events such fees and expenses to the
extent applicable shall be borne by the
indemnifying party. An indemnifying party shall
not be liable for any settlement of any action or
claim effected without its consent, provided that
such consent in not unreasonably withheld or
delayed. Each indemnified party, as a condition of
such indemnity, shall cooperate in good faith with
the indemnifying party in the defense of any such
action or claim. In no event shall an indemnifying
party be liable for the fees and expenses of more
than one counsel (in addition to any local counsel,
not more than one per state), apart from counsel to
such indemnifying party, for all indemnified
parties in connection with any one action or
separate by similar or related actions arising out
of the same general allegations or circumstances.
(e) If the indemnification provided for in this Section
7 is for any reason, other than pursuant to the
terms thereof, judicially determined (by the entry
of a final judgment or decree by a court of
competent jurisdiction and the expiration of time
to appeal or the denial of the last right to
appeal) to be unavailable to an indemnified party
under subsections (a), (b) or (c) above in respect
of any losses, claims, damages or liabilities (or
actions in respect thereof) referred to therein,
then each indemnifying party shall, in lieu of
indemnifying such indemnified party, contribute to
the amount paid or payable by such indemnified
party as a result of such losses, claims, damages
or liabilities (or actions in respect thereof) in
such proportion as is appropriate to reflect the
relative benefits received by the Company, the
Selling Shareholders and the Underwriters from the
offering of the Shares. If, however, the
allocation provided by the immediately preceding
sentence is not permitted by applicable law or the
indemnified party failed to give notice under
Section 7(d), then each indemnifying party shall
contribute to such amount paid or payable by such
indemnified party in such proportion as is
appropriate to reflect not only such relative
benefits but also the relative fault, as
applicable, of the Company, the Selling
Shareholders and the Underwriters in connection
with the statements or omissions which resulted in
such losses, claims, damages or liabilities (or
actions in respect thereof), as well as other
relevant equitable considerations. The relative
benefits received by, as applicable, the Company,
the Selling Shareholders and the Underwriters shall
be deemed to be in the same proportion as the total
net proceeds
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<PAGE> 24
from the offering (before deducting expenses) received by the
Company and the Selling Shareholders bear to the total
underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the
table on the cover page of the Prospectus. The
relative fault shall be determined by reference to,
among other things, whether the untrue statement of
a material fact or the omission or alleged omission
to state a material fact relates to information
supplied by the Company, the Selling Shareholders
or the Underwriters and the parties' relative
intent, knowledge, access to information and
opportunity to correct or prevent such statement or
omission. The Company, the Selling Shareholders
and the Underwriters agree that it would not be
just and equitable if contributions pursuant to
this subsection (e) were determined by pro rata
allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other
method of allocation which does not take account of
the equitable considerations referred to above in
this subsection (e). The amount paid or payable by
an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in
respect thereof) referred to above in this
subsection (e) shall be deemed to include any legal
or other expenses reasonably incurred by such
indemnified party in connection with investigating
or defending any such action or claim.
Notwithstanding the provisions of this subsection
(e): no Underwriter shall be required to contribute
any amount in excess of the underwriting discounts
and commissions applicable to the Shares purchased
by such Underwriter; no Selling Shareholder shall
be required to contribute any amount in excess of
the proceeds received by such Selling Shareholder
from the Underwriters in the offering; and, no
person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person
who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations
in this subsection (e) to contribute are several in
proportion to their respective underwriting
obligations and not joint.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. All
representations, warranties, and agreements of the Company and the
Selling Shareholders contained in Sections 7 and 11 herein or in
certificates delivered pursuant hereto, and the agreements of the
Underwriters contained in Section 7 hereof, shall remain operative
and in full force and effect regardless of any termination or
cancellation of this Agreement or any investigation made by or on
behalf of any Underwriter or any controlling person, the Company or
any of its officers, directors or any controlling persons, or the
Selling Shareholders, and shall survive delivery of the Shares to
the Underwriters hereunder.
9. SUBSTITUTION OF UNDERWRITERS.
(a) If any Underwriter shall default in its obligation
to purchase the Shares which it has agreed to
purchase hereunder, you may in your discretion
arrange for you or another party or other parties
to purchase such Shares on the terms contained
herein. If within thirty-six (36) hours after such
default by any Underwriter you do not arrange for
the purchase of such Shares, then the Company and
the Selling Shareholders shall be entitled to a
further period of thirty-six (36) hours within
which to procure another party or parties
reasonably satisfactory to you to purchase such
Shares on such terms. In the event that, within
the respective prescribed periods, you notify the
Company and the Selling Shareholders that you have
so arranged for the purchase of such Shares, or the
Company and the Selling Shareholders notify you
that they have so arranged for the purchase of such
Shares, you or the Company and the Selling
Shareholders shall have the right to postpone the
Closing Date for a period of not more than seven
(7) days, in order to effect whatever changes may
thereby be made necessary in the Registration
Statement or the Prospectus, or in any
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<PAGE> 25
other documents or arrangements, and the Company agrees
to file promptly any amendments to the Registration
Statement or the Prospectus which in your opinion
may thereby be made necessary. The term
"Underwriter" as used in this Agreement shall
include any persons substituted under this Section
9 with like effect as if such person had originally
been a party to this Agreement with respect to such
Shares.
(b) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter
or Underwriters made by you or the Company and the
Selling Shareholders as provided in subsection (a)
above, the aggregate number of Shares which remains
unpurchased does not exceed one tenth (1/10) of the
total Shares to be sold on the Closing Date, then
the Company and the Selling Shareholders shall have
the right to require each non-defaulting
Underwriter to purchase the Shares which such
Underwriter agreed to purchase hereunder and, in
addition, to require each non-defaulting
Underwriter to purchase its pro rata share (based
on the number of Shares which such Underwriter
agreed to purchase hereunder) of the Shares of such
defaulting Underwriter or Underwriters for which
such arrangements have not been made; but nothing
herein shall relieve a defaulting Underwriter from
liability for its default.
(c) If, after giving effect to any arrangements for the
purchase of the Shares of a defaulting Underwriter
or Underwriters made by you or the Company and the
Selling Shareholders as provided in subsection (a)
above, the number of Shares which remains
unpurchased exceeds one tenth (1/10) of the total
Shares to be sold on the Closing Date, or if the
Company and the Selling Shareholders shall not
exercise the right described in subsection (b)
above to require the non-defaulting Underwriters to
purchase Shares of the defaulting Underwriter or
Underwriters, then this Agreement shall thereupon
terminate, without liability on the part of any
non-defaulting Underwriter or the Company and the
Selling Shareholders except for the expenses to be
borne by the Company and the Underwriters as
provided in Section 11 hereof and the indemnity and
contribution agreements in Section 7 hereof; but
nothing herein shall relieve a defaulting
Underwriter from liability for its default.
10. EFFECTIVE DATE AND TERMINATION.
(a) This Agreement shall become effective at 1:00 p.m.,
St. Louis time, on the first business day following
the effective date of the Registration Statement,
or at such earlier time after the effective date of
the Registration Statement as you in your
discretion shall first release the Shares for
offering to the public; provided, however, that the
provisions of Section 7 and 11 shall at all times
be effective. For the purposes of this Section
10(a), the Shares shall be deemed to have been
released to the public upon release by you of the
publication of a newspaper advertisement relating
to the Shares or upon release of telegrams,
facsimile transmissions or letters offering the
Shares for sale to securities dealers, whichever
shall first occur.
(b) This Agreement may be terminated by you at any time
before it becomes effective in accordance with
Section 10(a) by notice to the Company and the
Selling Shareholders; provided, however, that the
provisions of this Section 10 and of Section 7 and
Section 11 hereof shall at all times be effective.
In the event of any termination of this Agreement
pursuant to Section 9 or this Section 10(b) hereof,
the Company and the Selling Shareholders shall not
then be under any liability to any Underwriter
except as provided in Section 7 or Section 11
hereof.
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<PAGE> 26
(c) This Agreement may be terminated by you at any time
at or prior to the Closing Date by notice to the
Company and the Selling Shareholders if any
condition specified in Section 6 hereof shall not
have been satisfied on or prior to the Closing
Date. Any such termination shall be without
liability of any party to any other party except as
provided in Sections 7 and 11 hereof.
(d) This Agreement also may be terminated by you, by
notice to the Company and the Selling
Shareholders, as to any obligation of the
Underwriters to purchase the Option Shares, if any
condition specified in Section 6 hereof shall not
have been satisfied at or prior to the Option
Closing Date or as provided in Section 9 of this
Agreement.
If you terminate this Agreement as provided in Sections
10(b), 10(c) or 10(d), you shall notify the Company and the Selling
Shareholders by telephone or telegram, confirmed by letter.
11. COSTS AND EXPENSES. The Company will bear and pay the
costs and expenses incident to the registration of the Shares and
public offering thereof, including, without limitation, (a) the
fees and expenses of the Company's accountants and the fees and
expenses of counsel for the Company and the Selling Shareholders,
(b) the preparation, printing, filing, delivery and shipping of
the Registration Statement, each Preliminary Prospectus, the
Prospectus and any amendments or supplements thereto (except as
otherwise expressly provided in Section 5(d) hereof) and the
printing, delivery and shipping of this Agreement, the Agreement
Among Underwriters, the Selected Dealer Agreement, Underwriters'
Questionnaires and Powers of Attorney and Blue Sky Memoranda,
(c) the furnishing of copies of such documents (except as otherwise
expressly provided in Section 5(d) hereof) to the Underwriters,
(d) the qualification of the Shares for offering and sale under the
securities laws of the various states and in connection with
qualification under NASD regulations, (e) the fees payable to the
NASD and the Commission in connection with their review of the
proposed offering of the Shares, (f) all printing and engraving
costs related to preparation of the certificates for the Shares,
including transfer agent and registrar fees, (g) all initial
transfer taxes, if any, imposed on the sale of the Shares to the
Underwriters, (h) all fees and expenses relating to the
authorization of the Shares for trading on NNM, (i) all travel
expenses, including air fare and accommodation expenses, of
representatives of the Company in connection with the offering of
the Shares and (j) all of the other costs and expenses incident to
the performance by the Company and Selling Shareholders of the
registration and offering of the Shares; provided, however, that
the Underwriters will bear and pay the fees and expenses of the
Underwriters' counsel (other than fees and disbursements relating
to the qualification of the Shares for offering and sale under the
securities laws of the various states and qualifications under NASD
regulations), the Underwriters' out-of-pocket expenses, and any
advertising costs and expenses incurred by the Underwriters
incident to the public offering of the Shares.
If this Agreement is terminated by you in accordance with
the provisions of Section 10(c), the Company shall reimburse the
Underwriters for all of their out-of-pocket expenses, including the
reasonable fees and disbursements of counsel to the Underwriters.
12. DEFAULT OF SELLING SHAREHOLDERS. Failure or refusal by
any of the Selling Shareholders to sell and deliver on the Closing
Date the Shares agreed to be sold and delivered by such Selling
Shareholder shall in no manner relieve the other Selling
Shareholders or the Company of their respective obligations under
this Agreement. If any Selling Shareholder should fail or refuse
to sell and deliver his Shares, the remaining Selling Shareholders
shall have the right hereby granted to increase, pro rata or
otherwise, the number of Shares to be sold by them hereunder to the
total number of Shares to be sold by all Selling Shareholders as
set forth in Schedule I. If the remaining Selling Shareholders do
not fully exercise the right to increase the number of Shares to be
sold by them, the Underwriters, at your option, will have the right
to elect to purchase or not to purchase the Shares to be sold by
the Company and the remaining Selling Shareholders. In the event
the Underwriters purchase the Shares of the Company and such other
Selling Shareholders pursuant to this Section 12, the Closing Date
shall be postponed for a period of not more than seven days in
order that the
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<PAGE> 27
Registration Statement and Prospectus or other documents may be amended or
supplemented to the extent necessary under the provisions of the Act and the
Rules and Regulations or under the securities laws of any jurisdiction. If
the Underwriters determine not to purchase the Shares of the Company and the
other Selling Shareholders, if any, this Agreement shall terminate and
neither the Company nor the Underwriters nor any other Selling
Shareholder shall be under any obligation under this Agreement
except as provided in Section 7 hereof and except for the
obligation of the Company to pay for such expenses as are set forth
in Section 11 hereof. Nothing herein shall relieve a defaulting
Selling Shareholder from liability for his default or from
liability under Section 7 hereof or for expenses imposed by this
Agreement upon such Selling Shareholder.
13. NOTICES. All notices or communications hereunder, except
as herein otherwise specifically provided, shall be in writing and
if sent to the Underwriters shall be mailed, delivered, sent by
facsimile transmission, or telegraphed and confirmed c/o A.G.
Edwards & Sons, Inc. at One North Jefferson Avenue, St. Louis,
Missouri 63103, Attention: Syndicate, facsimile number (314) 955-
7387, or if sent to the Company shall be mailed, delivered, sent by
facsimile transmission, or telegraphed and confirmed to the Company
at 67 43rd Street, Wheeling, West Virginia 26003, Attention:
Lawrence E. Bandi, facsimile number (304) 232-1558, or if sent to
any Selling Shareholder shall be mailed, delivered, sent by
facsimile transmission or telegraphed and confirmed to such Selling
Shareholder, c/o the Attorney-in-Fact at the Company's address set
forth above. Notice to any Underwriter pursuant to Section 7 shall
be mailed, delivered, sent by facsimile transmission, or
telegraphed and confirmed to such Underwriter's address as it
appears in the Underwriters' Questionnaire furnished in connection
with the offering of the Shares or as otherwise furnished to the
Company and the Selling Shareholder.
14. PARTIES. This Agreement shall inure to the benefit of
and be binding upon the Underwriters and the Selling Shareholders,
and the Company and their respective successors and assigns.
Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, corporation or other entity,
other than the parties hereto and their respective successors and
assigns and the controlling persons, officers and directors
referred to in Section 7, any legal or equitable right, remedy or
claim under or in respect of this Agreement or any provision herein
contained; this Agreement and all conditions and provisions hereof
being intended to be and being for the sole and exclusive benefit
of the parties hereto and their respective successors and assigns
and said controlling persons and said officers and directors, and
for the benefit of no other person, corporation or other entity.
No purchaser of any of the Shares from any Underwriter shall be
construed a successor or assign by reason merely of such purchase.
In all dealings with the Company and the Selling
Shareholders under this Agreement you shall act on behalf of each
of the several Underwriters. The Company and the Selling
Shareholders shall be entitled to act and rely upon any statement,
request, notice or agreement on behalf of the Underwriters, made or
given by you on behalf of the Underwriters, as if the same shall
have been made or given in writing by the Underwriters.
15. COUNTERPARTS. This Agreement may be executed by any one
or more of the parties hereto in any number of counterparts, each
of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same instrument.
16. PRONOUNS. Whenever a pronoun of any gender or number is
used herein, it shall, where appropriate, be deemed to include any
other gender and number.
17. APPLICABLE LAW. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Missouri.
27
<PAGE> 28
If the foregoing is in accordance with your
understanding, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding
agreement among the Company, each of the Selling Shareholders and
the Underwriters.
VALLEY NATIONAL GASES INCORPORATED
By:------------------------------------
Title: President
Selling Shareholders Named in
Schedule I Hereto
By:------------------------------------
Attorney-in-Fact
Accepted in St. Louis, Missouri as
of the date first above written, on behalf
of ourselves and each of the several
Underwriters named in Schedule II hereto.
A.G. EDWARDS & SONS, INC.
OPPENHEIMER & CO., INC.
By: A.G. Edwards & Sons, Inc.
By:--------------------------------
Title: Senior Vice President
28
<PAGE> 29
<TABLE>
SCHEDULE I
<CAPTION>
Number of
Selling Shareholders Firm Shares
- -------------------- -----------
<S> <C>
Lawrence E. Bandi 37,000
John R. Bushwack 15,000
William A. Indelicato 30,000
Total 82,000
======
</TABLE>
29
<PAGE> 30
<TABLE>
SCHEDULE II
<CAPTION>
Name Number of Shares
- ---- ----------------
<S> <C>
A.G. Edwards & Sons, Inc. ----------
Oppenheimer & Co., Inc. ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
- --------------------------- ----------
Total ----------
</TABLE>
30
<PAGE> 31
SCHEDULE III
Pursuant to Section 6(g) of the Underwriting Agreement, Arthur
Andersen LLP shall furnish letters to the Underwriters to the
effect that:
1. In their opinion, the financial statements and any
supplementary financial information and schedules audited
(including pro forma financial information examined) by them and
included in the Prospectus or the Registration Statement comply as
to form in all material respects with the applicable accounting
requirements of the Act and the applicable Rules and Regulations
thereunder; and, if applicable, they have made a review in
accordance with standards established by the American Institute of
Certified Public Accountants of the unaudited interim financial
statements, selected financial data, pro forma financial
information, or condensed financial statements derived from audited
financial statements of the Company and its subsidiaries for the
periods specified in such letter, as indicated in their reports
thereon, copies of which have been furnished to the Representatives
of the Underwriters (the "Representatives").
2. On the basis of limited procedures, not constituting an
audit in accordance with generally accepted auditing standards,
consisting of a reading of the unaudited financial statements and
other information referred to below, performing the procedures
specified by the AICPA for a review of interim financial
information as discussed in SAS No. 71, Interim Financial
Information, on the latest available interim financial statements
of the Company, its subsidiaries and Weldco, Inc., inspection of
the minute books of the Company, its subsidiaries and Weldco, Inc.
since the date of the latest audited financial statements included
in the Prospectus, inquiries of officials of the Company, its
subsidiaries and Weldco, Inc. responsible for financial and
accounting matters and such other inquiries and procedures as may
be specified in such letter, nothing came to their attention that
caused them to believe that:
(a) any material modifications should be made to the
unaudited balance sheet statements of operations,
statements of cash flows, and statements of changes
in Shareholder's equity included in the Prospectus
for them to be in conformity with generally
accepted accounting principles, or such unaudited
statements, included in the Prospectus do not
comply as to form in all material respects with the
applicable accounting requirements of the Act and
the related published Rules and Regulations
thereunder.
(b) any other unaudited income statement data and
balance sheet items included in the Prospectus do
not agree with the corresponding items in the
unaudited consolidated financial statements from
which such data and items were derived, and any
such unaudited data and items were not determined
on a basis substantially consistent with the basis
for the corresponding amounts in the audited
consolidated financial statements included in the
Prospectus.
(c) the unaudited financial statements which were not
included in the Prospectus but from which were
derived any unaudited condensed financial
statements referred to in Clause (a) and any
unaudited income statement data and balance sheet
items included in the Prospectus and referred to in
Clause (b) were not determined on a basis
substantially consistent with the basis for the
audited consolidated financial statements included
in the Prospectus.
(d) any unaudited pro forma condensed financial
statements included in the Prospectus do not comply
as to form in all material respects with the
applicable accounting requirements of the Act and
the published rules and regulations thereunder or
the pro
31
<PAGE> 32
forma adjustments have not been properly applied to the
historical amounts in the compilation of those statements.
(e) as of a specified date not more than five (5) days
prior to the date of such letter, there have been
any changes in the capital stock or any increase in
the long-term debt of the Company or any of its
subsidiaries, or any decreases in working capital,
net current assets or net assets or other items
specified by the Representatives, or any changes in
any items specified by the Representatives, in each
case as compared with amounts shown in the latest
balance sheet included in the Prospectus, except in
each case for changes, increases or decreases which
the Prospectus discloses have occurred or may occur
or which are described in such letter.
(f) for the period from the date of the latest
financial statements included in the Prospectus to
the specified date referred to in Clause (e) there
were any decreases in net sales or income from
operations or the total or pro forma per share
amounts of net income or any other changes in any
other items specified by the Representatives, in
each case as compared with the comparable period of
the preceding year and with any other period of
corresponding length specified by the
Representatives, except in each case for changes,
decreases or increases which the Prospectus
discloses have occurred or may occur or which are
described in such letter.
3. In addition to the audit referred to in their report(s)
included in the Prospectus and the limited procedures, inspection
of minute books, inquiries and other procedures referred to in
paragraph (3) above, they have carried out certain specified
procedures, not constituting an audit in accordance with generally
accepted auditing standards, with respect to certain amounts,
percentages and financial information specified by the
Representatives, which are derived from the general accounting
records of the Company and its subsidiaries for the periods covered
by their reports and any interim or other periods since the latest
period covered by their reports, which appear in the Prospectus, or
in Part II of, or in exhibits and schedules to, the Registration
Statement specified by the Representatives, and have compared
certain of such amounts, percentages and financial information with
the accounting records of the Company and its subsidiaries and have
found them to be in agreement.
32
<PAGE> 33
SCHEDULE IV
States in which Valley National Gases Incorporated is duly
qualified to do business as a foreign corporation:
NONE
States in which Valley National Gases Delaware, Inc. is duly qualified
to do business as a foreign corporation:
NONE
State in which Valley National Gases, Inc. is duly qualified to do
business as a foreign corporation:
Delaware
Kentucky
Maryland
North Carolina
Ohio
Pennsylvania
Tennessee
Virginia
33
<PAGE> 1
ARTICLES OF AMENDMENT
________________________
In compliance with the requirements of the Pennsylvania Business
Corporation Law of 1988 ("BCL") Section 1915 (relating to articles of
amendment), the undersigned business corporation, Valley National Gases
Incorporated, desires to amend its Articles of Incorporation and hereby
certifies that:
1. The name of the corporation is Valley National Gases
Incorporated and its current registered office in the Commonwealth of
Pennsylvania is located at 1640 Jefferson Avenue, in the city of Washington,
county of Washington, Pennsylvania 15301.
2. The Corporation was incorporated in the Commonwealth of
Pennsylvania under the provisions of the Business Corporation Law of 1988,
on February 25, 1997.
3. The amendment shall be effective upon the filing of these
Articles of Amendment in the Department of State.
4. The amendment was adopted by the Board of Directors pursuant to
BCL Section 1914(c).
5. The Articles of Incorporation, as amended and restated herein,
supersede the original Articles of Incorporation that were filed on February
25, 1997.
6. The amendment adopted by the corporation set forth in full, is as
follows:
RESOLVED, that the Amended and Restated Articles of Incorporation
of Valley National Gases Incorporated be amended and restated in their
entirety so that the same shall read in full as follows:
ARTICLE ONE - NAME
The name of the corporation is Valley National Gases Incorporated.
ARTICLE TWO - REGISTERED OFFICE
The Corporation's current registered office in the Commonwealth of
Pennsylvania is located at 1640 Jefferson Avenue, in the city of Washington,
county of Washington, Pennsylvania 15301.
<PAGE> 2
ARTICLE THREE - BUSINESS CORPORATION LAW
The Corporation is incorporated under the provisions of the Business
Corporation Law of 1988.
ARTICLE FOUR - AUTHORIZED SHARES
A. Classes and Number of Shares. The aggregate number of shares of
----------------------------
stock which the Corporation shall have authority to issue is 35,000,000
shares divided into classes and with par values as follows:
<TABLE>
<CAPTION>
Number of Shares Par Value
Class in Class Per Share
----- ---------------- ---------
<S> <C> <C>
Common Stock 30,000,000 $0.001
Preferred Stock 5,000,000 $0.01
</TABLE>
B. Terms of the Common Stock. The voting rights, preferences,
-------------------------
qualifications, limitations, restrictions and special rights, of the shares
of the Common Stock that may be issued are as follows:
1. Voting Rights. The holders of Common Stock shall be entitled
-------------
to vote on the basis of one vote for each share held on all matters
to be voted on by the shareholders, except as may be otherwise
provided in these Articles of Incorporation or by law.
2. Dividends. The holders of the outstanding shares of Common
---------
Stock shall be entitled to receive, when and as declared by the Board
of Directors out of funds legally available for the purpose,
dividends at such rate as shall be determined by the Board of
Directors. The dividends authorized by this paragraph shall not be
cumulative, and the holders of Common Stock shall not have any rights
to dividends for any year or other period of time for which no
dividends are declared by the Board of Directors.
3. Liquidation Rights. In the event of any liquidation,
------------------
dissolution or winding up of this Corporation, whether voluntary or
involuntary, the assets of the Corporation, if any, remaining for
legal distribution to holders of Common Stock shall be distributed to
the holders of Common Stock.
C. Terms of the Preferred Stock. The Board of Directors is hereby
----------------------------
expressly authorized, subject to any limitations prescribed by law, to
provide for the issuance of shares of Preferred Stock into classes or series,
to establish from time to time the number of shares to be included in each
such class series, voting rights, preferences, limitations and special
rights, if any, and to set the designation of the class or series and to fix
and determine the relative rights and
2
<PAGE> 3
preferences of the shares of each such class or series and any
qualifications, limitations or restrictions thereof.
D. Preemptive Rights. No holder or owner of Common Stock or Preferred
-----------------
Stock, if any, or any other security or securities of the Corporation, shall
have any preferential or preemptive right to acquire any additional shares of
stock of any class or series or any other security of the Corporation.
E. Cumulative Voting Rights. No holder or owner of Common Stock or
------------------------
Preferred Stock, if any, or any other security or securities of the
Corporation, shall have any right to vote cumulatively in the election of
directors or for any other purpose.
ARTICLE FIVE - INCORPORATOR
The name and address of the incorporator of the Corporation is as
follows:
Name Address
---- -------
Valley National Gases, Inc. 67 43rd Street
Wheeling, West Virginia 26003
ARTICLE SIX - DURATION
The duration of the Corporation is perpetual.
ARTICLE SEVEN - DIRECTORS
A. Number of Directors. The business and affairs of the Corporation
-------------------
shall be managed and controlled by a Board of Directors consisting of not
less than three (3) nor more than ten (10) persons. The exact number of
directors within the minimum and maximum limitations shall be determined
exclusively from time to time by the Board of Directors pursuant to a
resolution adopted by a majority of the entire Board of Directors.
B. Classification of Directors. The directors of the Corporation,
---------------------------
other than those who may be elected by the holders of any class or series of
Preferred Stock, shall be divided into three classes: Class I, Class II and
Class III. Membership in such classes shall be as nearly equal as possible
and any increase or decrease in the number of directors shall be apportioned
by the Board of Directors among the classes to maintain the number of
directors as nearly equal as possible and any additional director of any
class elected to fill a vacancy resulting from an increase in such class
shall hold office for a term that shall coincide with the remaining term of
that class. The initial Class I directors shall hold office until the annual
meeting of shareholders of the Corporation in 1998, the initial Class II
directors shall hold office until the annual meeting of shareholders of the
Corporation in 1999, and the initial Class III directors shall hold office
until the annual meeting of shareholders of the Corporation in 2000 or, in
each case, until their successors are elected and qualified and subject to
such director's prior death, resignation, retirement or removal from office.
3
<PAGE> 4
Beginning in 1998, and continuing annually thereafter, at each annual meeting
of shareholders of the Corporation, the directors elected to succeed those
whose terms then expire shall belong to the same class as the directors they
succeed and shall hold office until the third succeeding annual meeting of
shareholders or until their successors are elected and qualified and subject
to such director's prior death, resignation, retirement or removal from
office. No decrease in the number of directors constituting the Board of
Directors shall reduce the term of any incumbent director.
C. Vacancies. Subject to the rights of the holders of any series or
---------
class of Preferred Stock then outstanding, if any, newly created
directorships resulting from any increase in the authorized number of
directors or any vacancies of any type in the Board of Directors including
those resulting from death, resignation, retirement, disqualification,
removal from office or other cause may be filled by a majority vote of the
directors then in office, though less than a quorum, and directors so chosen
shall hold office for a term expiring at the annual meeting of shareholders
of the Corporation at which the term of office of the class to which such
director has been elected expires, and until such director's successor shall
have been duly elected and qualified.
D. Removal of Directors. Subject to the rights of the holders of any
--------------------
series or class of Preferred Stock then outstanding, any director, or the
entire Board of Directors, may be removed from office at any time, only for
cause and only by the affirmative vote of two-thirds or more of the then
currently outstanding shares of the capital stock of the Corporation entitled
to vote generally in the election of directors (the "Voting Stock").
E. Nomination By Shareholders. Advance notice of shareholder
--------------------------
nominations for the election of directors and of business to be brought by
shareholders before any meeting of the shareholders of the Corporation shall
be given in the manner provided in the Bylaws of the Corporation.
ARTICLE EIGHT - AMENDMENT OF BYLAWS
The Bylaws of the Corporation may be adopted, amended or repealed by
the affirmative vote of a majority of the entire Board of Directors of the
Corporation, subject to the restrictions, if any, under Pennsylvania Law.
ARTICLE NINE - SPECIAL MEETINGS
Special meetings of the shareholders for any lawful purpose or purposes
may be called at any time only by a majority of the entire Board of
Directors, by the Chairman of the Board of Directors or by the President,
except as provided by BCL Section 2521(b) currently in effect or as amended
hereafter. Each call for a special meeting of the shareholders shall state
the purpose or purposes of such special meeting, and shall be in writing and
delivered to the Secretary of the Corporation. The Secretary shall, not more
than sixty (60) days after receipt of a request for a special meeting, call
such special meeting of the shareholders and fix the time, date and place of
such special meeting. If the Secretary shall neglect to issue such call for
a special meeting, the person or persons making the request may issue the
call for such meeting. No business shall be
4
<PAGE> 5
conducted at any special meeting of the shareholders of the Corporation other
than the business stated in the call for such meeting. The shareholders of
the Corporation shall not be entitled, as a matter of right, to require the
Board of Directors to call a special meeting of the shareholders or to bring
any business before a special meeting of the shareholders.
ARTICLE TEN - INDEMNIFICATION
A. Indemnification. Except as prohibited by law, each person who was
---------------
or is made a party or is threatened to be made a party to any threatened,
pending or completed action or proceeding, whether civil criminal,
administrative or investigative (hereinafter a "proceeding"), by reason of
the fact that he or she, or a person of whom he or she is the legal
representative, is or was a director or officer, of the Corporation or is or
was serving at the request of the Corporation as a director, officer,
employee or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an employee
benefit plan, whether the basis of such proceeding is alleged action in an
official capacity as a director, officer, employee or agent or in any other
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by Pennsylvania law, as the same exists or may hereafter be
amended (but, in the case of any such amendment, only to the extent that such
amendment permits the Corporation to provide broader indemnification rights
than said law permitted the Corporation to provide prior to such amendment),
against all expense, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes or penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in
connection therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure
to the benefit of the heirs or personal representatives of that person. The
Corporation may, by action of its Board of Directors, provide indemnification
to employees and agents of the Corporation with the same scope and effect as
the foregoing indemnification of directors and officers.
B. Determination of Right to Indemnification. Unless ordered by the
-----------------------------------------
Court, any indemnification under Section A of this Article Ten shall be made
by the Corporation unless a determination is made reasonably and promptly
that indemnification of the director, officer, employee or agent is not
proper under the circumstances because he or she has not met the applicable
standard of conduct set forth in or established pursuant to this Article Ten.
Such determination shall be made (1) by the Board of Directors by a majority
vote of a quorum consisting of directors who are not parties to such action
or proceeding, or (2) if such quorum is not obtainable, or even if obtainable
if a quorum of disinterested directors so directs, by independent legal
counsel in a written opinion, or (3) by majority vote of the shareholders.
C. Advance Payment of Expenses. Expenses incurred by a person who is
---------------------------
or was a director or officer of the Corporation in defending a civil or
criminal action or proceeding shall be paid by the Corporation in advance of
the final disposition of an action or proceeding, and expenses incurred by a
person who is or was an employee or agent of the Corporation in defending a
civil or criminal action or proceeding may be paid by the Corporation in
advance of the final disposition of such action or proceeding as authorized
by the Board of Directors, in either case upon receipt of an undertaking by
or on behalf of the director, officer, employee or agent to repay such amount
if it shall ultimately be determined that he or she is not entitled to be
indemnified by the Corporation as authorized in or pursuant to this Article
Ten.
5
<PAGE> 6
D. Article Ten Provisions Not Exclusive Right. The indemnification or
------------------------------------------
advancement of expenses provided by this Article Ten shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled, whether under the Bylaws of the
Corporation or any statute, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office.
E. Indemnification Agreements Authorized. Without limiting the other
-------------------------------------
provisions of this Article Ten, the Corporation is authorized from time to
time, without further action by the shareholders of the Corporation, to enter
into agreements with any director, officer, employee or agent of the
Corporation providing such rights of indemnification as the Corporation may
deem appropriate, up to the maximum extent permitted by law.
F. Insurance. The Corporation may purchase and maintain insurance on
---------
behalf of any person who is or was a director, officer, employee or agent of
the Corporation, or who is or was otherwise serving on behalf or at the
request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by him or her
in any such capacity, or arising out of his or her status as such, whether or
not the Corporation would have the power to indemnify him or her against such
liability under the provisions of this Article Ten.
ARTICLE ELEVEN - LIMITATION OF DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its shareholders or to any other person for monetary damages
for any action taken, or for any failure to take any action, as a director,
unless (i) the director has breached or failed to perform the duties of his
or her office under applicable law; and (ii) the breach or failure to perform
constitutes self-dealing, willful misconduct or recklessness. The limitation
on liability in this Article Eleven shall not apply, however, to the
responsibility or liability of a director pursuant to any criminal statute or
the liability of a director for the payment of taxes pursuant to Federal,
State or local law. If Pennsylvania law is hereafter amended after February
25, 1997 to further eliminate or limit the personal liability of directors,
then the liability of a director of the Corporation shall be eliminated or
limited to the fullest extent permitted by Pennsylvania law, as so amended.
ARTICLE TWELVE - ANTI-TAKEOVER PROVISIONS
Each of Subchapters E, F, G and H of Chapter 25 of the Pennsylvania
Business Corporation Law shall not be applicable to the Corporation.
ARTICLE THIRTEEN - AMENDMENT OF ARTICLES OF INCORPORATION
The Corporation reserves the right to amend or repeal any provisions
contained in these Articles in the manner prescribed by the laws of the
Commonwealth of Pennsylvania and all rights conferred upon shareholders are
granted subject to this reservation; provided, however, the affirmative vote
-------- -------
of the holders of at least two-thirds of the Voting Stock, voting together as
a single class, shall be required to amend or repeal Article SEVEN, Article
EIGHT, Article NINE, Article TEN, Article ELEVEN, Article TWELVE and this
Article THIRTEEN; provided further, however, that the preceding proviso shall
be inapplicable at any time at which the holders of at least a majority of
the Voting Stock shall be Praxair, Inc. and/or subsidiaries and/or
affiliates thereof (and in each case permitted successors and assigns
thereof) if they shall have acquired such Voting Stock pursuant to a
transaction required or permitted by the Amended and Restated Right of First
Refusal Agreement dated as of March 12, 1997 among the Corporation, certain
subsidiaries and shareholders thereof and Praxair, Inc.
Dated this 12th day of March, 1997.
VALLEY NATIONAL GASES INCORPORATED
By_________________________________________
6
<PAGE> 1
BYLAWS
OF
VALLEY NATIONAL GASES INCORPORATED
(ADOPTED -------- ---, 1997)
ARTICLE I
OFFICES
-------
SECTION 1.1 REGISTERED OFFICE. The registered office of the
-----------------
Corporation in Pennsylvania shall be located at 1640 Jefferson,
Washington, Pennsylvania, 15301 or at such other address within the
Commonwealth of Pennsylvania as may be determined from time to time
by the Board of Directors.
SECTION 1.2 OTHER OFFICES. The Corporation may maintain such other
-------------
offices both within and without the Commonwealth of Pennsylvania as
the business of the Corporation may from time to time require or as
the Board of Directors may determine.
ARTICLE II
MEETINGS OF SHAREHOLDERS
------------------------
SECTION 2.1 PLACE OF MEETINGS. All shareholders meetings shall
-----------------
be held at such place within or without the Commonwealth of
Pennsylvania as determined from time to time by the Board of
Directors.
SECTION 2.2 ANNUAL MEETINGS. The annual shareholders meeting
---------------
for the election of directors and transaction of such other
business as may properly be brought before the meeting, shall be
held at 9:00 a.m., Eastern Time, on the first Tuesday in August of
each year or at such other date, place and time as may be
designated from time to time by the Board of Directors. In the
event such annual shareholders meeting shall fall upon a legal
holiday, the meeting shall be held on the next succeeding business day.
To be properly brought before the annual shareholders
meeting, business must be either (i) specified in the notice of the
meeting (or any supplement thereto) given by or at the direction of
the Board of Directors, (ii) otherwise properly brought before the
meeting by or at the direction of the Board of Directors,
(iii) otherwise properly brought before the meeting by a
shareholder. In addition to any other applicable requirements, for
business to be properly brought before the meeting by a
shareholder, the shareholder must have given timely notice thereof
in writing to the Secretary of the Corporation (the "Shareholders
Business Notice"). To be timely, the Shareholder Business Notice
must be delivered to or mailed and received at the principal
executive
<PAGE> 2
offices of the Corporation, not less than sixty (60) days
nor more than ninety (90) days prior to the meeting; provided,
--------
however, that in the event that the meeting is designated by the
- -------
Board of Directors to be held at a date other than the first
Tuesday in August and less than sixty (60) days' notice or prior
public disclosure of the date of the meeting is given or made to
shareholders, to be timely, the Shareholder Business Notice must be
received no later than the close of business on the fifteenth
(15th) day following the day on which such notice of the date of
the annual shareholder meeting was mailed or such public disclosure
was made, whichever first occurs. The Shareholder Business Notice
delivered to the Secretary shall set forth as to each matter the
shareholder proposes to bring before the meeting (i) a brief
description of the business desired to be brought before the
meeting and the reasons for conducting such business at the
meeting, (ii) the name and address of the shareholder proposing
such business, (iii) the class, series and number of shares of
capital stock of the Corporation which are beneficially owned by
the shareholder and the name and address of record under which such
stock is held and (iv) any material interest of the shareholder in
such business.
Notwithstanding anything in these Bylaws to the contrary,
no business shall be conducted at the annual shareholder meeting
except in accordance with the procedures set forth in this
Section 2.2, provided, however, that nothing in this Section 2.2
-------- -------
shall be deemed to preclude discussion by any shareholder of any
business properly brought before the annual shareholder meeting.
The Chairman of the annual shareholders meeting, in their
sole discretion, shall have the power to determine whether or not
business was properly brought before the meeting in accordance with
the provisions of this Section 2.2, and, if the Chairman should
determine that any such business was not properly brought before
the meeting, the Chairman shall so declare to the meeting and any
such business shall not be transacted.
SECTION 2.3 SPECIAL MEETINGS. Special meetings of the
----------------
shareholders for any lawful purpose or purposes may be called at
any time only by a majority of the entire Board of Directors, by
the Chairman of the Board of Directors or by the President. Each
call for a special meeting of the shareholders shall state the
purpose or purposes of such meeting and shall be in writing, signed
by the person or persons making the same and delivered to the
Secretary of the Corporation. The Secretary shall, not more than
sixty (60) days after receipt of a request for a special meeting,
call such special meeting of the shareholders and fix the time,
date and place of such special meeting. If the Secretary shall
neglect to issue such call for the meeting, the person or persons
making the request may issue the call for such meeting. No
business shall be conducted at any special meeting of the
shareholders of the Corporation other than the business stated in
the call for such meeting. The shareholders of the Corporation
shall not be entitled, as a matter of right, to require the Board
of Directors to call a special meeting of the shareholders or to
bring any business before a special meeting of the shareholders.
SECTION 2.4 NOTICE OF MEETINGS. Written notice of the
------------------
shareholder meeting shall be given to each shareholder of record
entitled to vote at such meeting stating the time, date and place
of the meeting and, in the case of a special meeting, the general
nature of the business to be transacted. The written notice of any
meeting shall be given not less than fifteen (15) days nor more
than forty-five (45) days prior to the date of the meeting.
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SECTION 2.5 ADJOURNMENTS. Any meeting of shareholders, annual
------------
or special, may adjourn from time to time to reconvene at the same
or some other place, and notice need not be given of any such
adjourned meeting if the time and place thereof are announced at
the meeting at which the adjournment is taken. At the adjourned
meeting, the Corporation may transact any business which might have
been transacted at the original meeting.
SECTION 2.6 QUORUM. At each meeting of shareholders, except
------
where otherwise provided by law or the Corporation's Articles or
these Bylaws, the holders of a majority of the outstanding shares
of each class of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum. In the
absence of a quorum, the shareholders so present may, by majority
vote, adjourn the meeting from time to time in the manner provided
by Section 2.5 of these Bylaws until a quorum is present.
SECTION 2.7 ORGANIZATION; JUDGES OF ELECTION. Meetings of
--------------------------------
shareholders shall be presided over by the Chairman of the Board,
if any, or in his or her absence, by the President, or in his or
her absence, by any of the Vice Presidents, or in the absence of
the foregoing persons by a chairman appointed by the Board of
Directors. The Secretary shall act as secretary of the meeting,
but in his or her absence the chairman of the meeting may appoint
any person to act as secretary of the meeting. In advance of any
meeting of shareholders, the Board of Directors may appoint judges
of election, who need not be shareholders, to act at such meeting
or any adjournment thereof. If judges of election are not
appointed, the chairman of any such meeting may, and on the request
of any shareholder or his or her proxy shall, make such appointment
at the meeting of shareholders. The number of judges shall be one
or three and no person who is a candidate for office shall act as
a judge. The judges of election shall do all such acts as may be
proper to conduct the election or vote with fairness to all
shareholders, and shall make a written report of any matter
determined by them and execute a certificate of any fact found by
them, if requested by the chairman of the meeting or any
shareholder or his proxy. In the event there are three judges of
election, the decision, act or certificate of a majority, shall be
effected in all respects as the decision, act or certificate of all.
SECTION 2.8 VOTING; PROXIES. Unless otherwise provided by law
---------------
or in the Articles, the holders of voting stock shall be entitled
to vote on the basis of one vote for each Share held on all matters
to be voted on by shareholders and the majority vote of the quorum
present entitled to vote thereon shall constitute a valid action of
the shareholders and, if any shareholders are entitled to vote
thereon as a class, upon receiving the affirmative vote of a
majority of the vote cast by the shareholders entitled to vote as
a class, shall constitute a valid action of the shareholders. The
holders of any series or class of Preferred Stock, if any, shall
have such voting rights as may be determined by resolution of the
Board of Directors. Each shareholder entitled to vote at a meeting
of shareholders may authorize another person or persons to act for
them by proxy. A proxy, unless coupled with an interest, shall be
revocable at will, notwithstanding any other agreement or any
provision in the proxy to the contrary, but the revocation of a
proxy shall not be effective until written notice thereof has been
given to the Secretary of the Corporation. An unrevoked proxy
shall not be valid after three years from the date of its execution
unless a longer time is expressly provided therein. A proxy shall
not be revoked by the death or incapacity of the maker unless,
before the vote is counted or the authority is exercised, written
notice of the death or incapacity is given to the Secretary of the
Corporation. Voting at meetings of shareholders need not be by
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written ballot unless the holders of a majority of the outstanding
shares of all classes of stock entitled to vote thereon present in
person or by proxy at such meeting shall so determine. At all
meetings of shareholders for the election of directors, a plurality
of the votes cast shall be sufficient to elect. All other
elections and questions shall, unless otherwise provided by law or
by the Articles or these Bylaws, be decided by the vote of the
holders of a majority of the outstanding shares of all classes of
stock entitled to vote thereon present in person or by proxy at the
meeting.
SECTION 2.9 LIST OF SHAREHOLDERS ENTITLED TO VOTE. The
-------------------------------------
Secretary shall prepare and make a complete list of the
shareholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each shareholder and
the number of shares registered in the name of each shareholder.
Such list shall be kept open at the time and place of the meeting
during the whole time thereof and may be inspected by any
shareholder who is present.
SECTION 2.10 SHAREHOLDER NOMINATION OF DIRECTORS. Not less than
-----------------------------------
sixty (60) days nor more than ninety (90) days prior to the date of
any meeting of the shareholders at which directors are to be
elected ("the Election Meeting") any shareholder intending to
nominate a director for election to the Corporation's Board of
Directors at the Election Meeting shall deliver a notice in writing
(the "Nominating Notice") to the Secretary of the Corporation
setting forth (a) as to each nominee whom the shareholder proposes
to nominate for election as a director, (i) the name, age, business
address and residence address of the nominee, (ii) the principal
occupation or employment of the nominee, (iii) the class, series
and number of shares of capital stock of the Corporation which are
beneficially owned by the nominee and (iv) any other information
concerning the nominee that would be required to be disclosed
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended; and (b) as to the shareholder giving the
Nominating Notice, (i) the name and address of the shareholder and
(ii) the class and number of shares of capital stock of the
Corporation which are beneficially owned by the shareholder and the
name and address of record under which such stock is held. The
Nominating Notice shall include a signed consent of each such
nominee to serve as a director of the Corporation, if elected. The
Corporation may require any proposed nominee or shareholder
proposing a nominee to furnish such other information as may
reasonably be required by the Corporation to determine the
eligibility of such proposed nominee to serve as a director of the
Corporation or to properly complete any proxy or information
statement used for the solicitation of proxies in connection with
such Election Meeting.
SECTION 2.11 DEFECTIVE NOMINATIONS. No person nominated by a
---------------------
shareholder shall be eligible to serve as a director of the
Corporation unless nominated in accordance with the procedures set
forth in Section 2.10 of these Bylaws. The Chairman of the meeting
shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, and may declare to the meeting that the
defective nomination be disregarded.
ARTICLE III
BOARD OF DIRECTORS
------------------
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<PAGE> 5
SECTION 3.1 GENERAL POWERS; QUALIFICATIONS. The business and
------------------------------
affairs of the Corporation shall be managed by the Board of
Directors, except as may be otherwise provided by law or in the
Articles. Directors need not be shareholders of the Corporation.
SECTION 3.2 NUMBER OF DIRECTORS; CLASSIFICATION; TERM OF OFFICE.
---------------------------------------------------
The business and affairs of the Corporation shall be managed and
controlled by a Board of Directors consisting of not less than
three (3) nor more than ten (10) persons. The exact number of
directors within the minimum and maximum limitations shall be
determined exclusively from time to time by the Board of Directors
pursuant to a resolution adopted by a majority of the entire Board
of Directors.
The directors of the Corporation, other than those who may
be elected by the holders of any class or series of Preferred
Stock, shall be divided into three classes: Class I, Class II and
Class III. Membership in such classes shall be as nearly equal as
possible and any increase or decrease in the number of directors
shall be apportioned by the Board of Directors among the classes to
maintain the number of directors as nearly equal as possible and
any additional director or any class elected to fill a vacancy
resulting from an increase in such class shall hold office for a
term that shall coincide with the remaining term of that class.
The initial Class I directors shall hold office until the annual
meeting of shareholders of the Corporation in 1998, the initial
Class II directors shall hold office until the annual meeting of
the shareholders of the Corporation in 1999, and the initial Class
III directors shall hold office until the annual meeting of
shareholders of the Corporation in 2000 or, in each case, until
their successors are elected and qualified and subject to such
director's prior death, resignation, retirement or removal from
office. Beginning in 1998, and continuing annually thereafter, at
each annual meeting of shareholders of the Corporation, the
directors elected to succeed those whose terms then expire shall
belong to the same class as the directors they succeed and shall
hold office until the third succeeding annual meeting of
shareholders or until their successors are elected and qualified
and subject to such director's prior death, resignation, retirement
or removal from office. No decrease in the number of directors
constituting the Board of Directors shall reduce the term of any
incumbent director.
SECTION 3.3 RESIGNATION; REMOVAL; VACANCIES. Any director may
-------------------------------
resign at any time upon written notice to the Board of Directors or
to the President or the Secretary of the Corporation. Such
resignation shall take effect at the time specified therein, and
unless otherwise specified therein no acceptance of such
resignation shall be necessary to make it effective. Any director,
or the entire Board of Directors or any class of the Board of
Directors may be removed from office at any time, only for cause
and only by the affirmative vote of two-thirds or more of the then
outstanding capital stock entitled to vote generally in the
election of directors. Unless otherwise provided in the Articles
or these Bylaws, vacancies and newly created directorships
resulting from any increase in the authorized number of directors
or from any other cause may be filled by a majority of the
directors then in office, although less than a quorum, and
directors so chosen shall hold office for a term expiring at the
annual meeting of shareholders of the Corporation at which the term
of office of the class to which they have been elected expires, and
until such directors successor shall have been duly elected and
qualified.
SECTION 3.4 REGULAR MEETINGS; NOTICE. Regular meetings of the
------------------------
Board of Directors may be held at such places within or without the
Commonwealth of Pennsylvania and at
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<PAGE> 6
such times as the Board may from time to time determine. Notice of such
regular meetings of the Board of Directors shall be given at least 24 hours
before such meeting date.
SECTION 3.5 SPECIAL MEETINGS; NOTICE. Special meetings of the
------------------------
Board of Directors may be held at any time or place within or
without the Commonwealth of Pennsylvania whenever called by the
Chairman of the Board, by the President or in their absence by the
Secretary, or by any two directors. Notice of such special meeting
of the Board of Directors shall be given by the person or persons
calling the meeting at least five (5) days before the meeting date.
By unanimous consent of the entire Board of Directors, a special
meeting of the Board may be held without notice. A notice of
meeting shall specify the place, date and hour of such meeting.
SECTION 3.6 TELEPHONIC MEETINGS PERMITTED. Unless otherwise
-----------------------------
restricted by the Articles or these Bylaws, members of the Board of
Directors, or any committee designated by the Board, may
participate in a meeting of the Board or of such committee, as the
case may be, by means of conference telephone or similar
communications equipment by means of which all persons
participating in the meeting can hear each other, and participation
in a meeting pursuant to this Section 3.6 shall constitute presence
in person at such meeting.
SECTION 3.7 QUORUM; VOTE REQUIRED FOR ACTION. A majority of the
--------------------------------
members of the Board of Directors shall constitute a quorum for the
purpose of transacting business. The vote of a majority of the
directors present at a meeting at which a quorum is present shall
be the act of the Board unless the Articles or these Bylaws shall
require a vote of a greater number. In the event at any meeting of
the Board a quorum shall not be present, the members of the Board
present may adjourn the meeting from time to time until a quorum
shall attend.
SECTION 3.8 ORGANIZATION. Meetings of the Board of Directors
------------
shall be presided over by the Chairman of the Board, or in their
absence by the President, or in their absence by a chairman chosen
at the meeting. The Secretary shall act as secretary of the
meeting, but in their absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
SECTION 3.9 COMPENSATION. The directors may receive reasonable
------------
fees to be determined from time to time by the Board of Directors
for services actually performed in attending meetings and for other
services actually performed and the expenses of attendance, if any,
may be allowed for attendance at each regular or special meeting of
the Board of Directors. Nothing herein contained shall be
construed to preclude any director from serving the Corporation in
any other capacity and receiving compensation for such service.
SECTION 3.10 CONSENT OF DIRECTORS IN LIEU OF MEETING. Unless
---------------------------------------
otherwise restricted by the Articles or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of
Directors, or of any committee thereof, may be taken without a
meeting if all the members of the Board of Directors or committee,
as the case may be, consent thereto in writing and the writing or
writings are filed with the minutes of proceedings of the Board of
Directors or committee.
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<PAGE> 7
SECTION 3.11 DIRECTOR'S DUTIES AND OBLIGATIONS. A director of
---------------------------------
the Corporation shall stand in a fiduciary relation to the
Corporation and shall perform his duties as a director, including
his duties as a member of any committee of the Board of Directors
upon which he may serve, in good faith, in a manner he reasonably
believes to be in the best interests of the Corporation, and with
such care, including reasonable inquiry, skill and diligence, as a
person of ordinary prudence would use under similar circumstances.
In performing his duties, a director shall be entitled to rely in
good faith on information, opinions, reports or statements,
including financial statements and other financial data, in each
case prepared or presented by any of the following: (1) one or
more officers or employees of the Corporation whom the director
reasonably believes to be reliable and competent in the matters
presented; (2) counsel, public accountants or other persons as to
matters which the director reasonably believes to be within the
professional or expert competence of such person; or (3) a
committee of the Board of Directors upon which he does not serve,
duly designated in accordance with law, as to matters within its
designated authority, which committee the director reasonably
believes to merit confidence. A director shall not be considered
to be acting in good faith if he has knowledge concerning the
matter in question that would cause his reliance to be unwarranted.
SECTION 3.12 LIMITATION ON DIRECTORS' LIABILITY. A director of
----------------------------------
the Corporation shall not be personally liable to the Corporation
or its shareholders or to any other person for monetary damages for
any action taken, or for any failure to take any action, as a
director, unless (i) the director has breached or failed to perform
the duties of his or her office under applicable law; and (ii) the
breach or failure to perform constitutes self-dealing, willful
misconduct or recklessness. The limitation on liability shall not
apply, to the responsibility or liability of a director pursuant to
any criminal statute or the liability of a director for payment of
taxes pursuant to Federal, State or local law.
ARTICLE IV
COMMITTEES
----------
SECTION 4.1 GENERAL. The Board of Directors may, by resolution
-------
adopted by a majority of the whole Board, designate an Executive
Committee, a Nominating and Compensation Committee, an Audit and
Finance Committee and such other committees as it may determine
from time to time, with the powers, duties and requirements set
forth in this Article IV or such other powers, duties and
requirements as the Board may determine from time to time. Each
Committee shall consist of two (2) or more members of the Board,
the number of which shall be determined from time to time and
adopted by a majority of the whole Board of Directors. One member
of such Committee shall be elected Chairman by a majority vote of
the whole Board. The Board may designate one or more directors as
alternate members of any Committee, who may replace any absent or
disqualified member at any meeting of the Committee. Any such
Committee, to the extent provided in such resolution or in these
Bylaws, shall have and exercise the authority of the Board of
Directors in the management of the business and affairs of the
Corporation, except that a Committee shall not have any power or
authority as to the following: (1) the submission to shareholders
of any action requiring approval of shareholders under this
subpart; (2) the creation or filling of vacancies in the Board of
Directors; (3) the adoption, amendment or repeal of the Bylaws; (4)
the amendment or repeal of any resolution of the Board
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<PAGE> 8
that by its terms is amendable or repealable only by the Board; and (5) action
on matters committed by the Bylaws or resolution of the Board of Directors to
another Committee of the Board. The Committees shall keep regular minutes of
the proceedings and report the same to the Board in the manner determined by
the Board.
SECTION 4.2 EXECUTIVE COMMITTEE. The Board of Directors may
-------------------
designate an Executive Committee to consist of two (2) or more
members of the Board, the number of which shall be fixed from time
to time by resolution adopted by the majority of the whole Board of
Directors. The Board of Directors shall elect the members of the
Executive Committee by vote of a majority of the whole Board of
Directors and one member of the Executive Committee shall be
elected as Chairman by the vote of a majority of the whole Board of
Directors. When the Board of Directors is not in session, the
Executive Committee shall have and may exercise all the powers of
the Board of Directors in the management of the business and
affairs of the Corporation as permitted under Pennsylvania law in
all cases in which specific direction shall not have been given by
the Board of Directors including, but not limited to, the power to
declare dividends on the Common Stock and Preferred Stock of the
Corporation. The members of the Executive Committee shall be
elected annually at the Board's organizational meeting or as soon
thereafter as possible. The members of the Executive Committee
shall act only as a committee and individual members shall have no
power as such.
SECTION 4.3 NOMINATING AND COMPENSATION COMMITTEE. The Board
-------------------------------------
of Directors may designate a Nominating and Compensation Committee to consist
of two (2) or more members of the Board, the number of which shall be
fixed from time to time by a resolution adopted by the majority of
the whole Board, comprised of directors who are not officers or
employees of the Corporation, each of whom shall be a
"disinterested person" within the meaning described thereto under
Rule 16b-3 promulgated under the Securities Exchange Act of 1934,
as amended, from time to time and interpreted by the Securities and
Exchange Commission. The Nominating and Compensation Committee
shall establish salaries, incentives, and other forms of
compensation for directors, officers and other employees of the
Corporation, shall administer the Corporation benefit plans and make
recommendations regarding policies relating to such plans, and shall
administer the issuance of stock options and other awards under any of the
Corporation's stock option plans then in place to all Corporation employees
and directors, other than the members of such committee, and recommend
to the Board of Directors nominees for election as directors to
fill any vacancies or newly created directorships which shall
occur, periodically review potential candidates, including
incumbent directors, and such other matters as the Board of
Directors may delegate to such Committee. The members of the
Nominating and Compensation Committee shall be elected annually at
the Board's organizational meeting or as soon thereafter as
possible. The members of the Nominating and Compensation Committee
shall act only as a committee and individual members shall have no
power as such.
SECTION 4.4 AUDIT AND FINANCE COMMITTEE. The Board of Directors
---------------------------
may designate an Audit and Finance Committee to consist of two (2)
or more members of the Board, the number of which shall be fixed
from time to time by a resolution adopted by the majority of the
whole Board, comprised of directors who are not officers or
employees of the Corporation. The Audit and Finance Committee
shall have the power and the duty to meet with and consider
suggestions from members of management and the Corporation's
internal audit staff, as well as
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<PAGE> 9
with the corporation's independent accountants, concerning the financial
operations of the Corporation. The audit committee shall additionally have
the power to review audited financial statements of the Corporation and
consider and recommend the employment of, and approve the fee
arrangement with, independent accountants for both audit functions
and for advisory and other consulting services and review the
sufficiency of the Corporation's accounting practices and internal
controls, and such other matters as the Board of Directors may
delegate to such Committee. The members of the Audit and Finance
Committee shall act only as a committee and individual members
shall have no power as such.
ARTICLE V
OFFICERS
--------
SECTION 5.1 ELECTION AND TERM. The officers of the Corporation
-----------------
shall be a Chairman of the Board, a President, a Secretary and a
Treasurer. The Board of Directors may also choose one or more Vice
Presidents, one or more Assistant Secretaries and Assistant
Treasurers and such other officers as the Board of Directors may
deem appropriate. All officers elected shall serve a one year term
unless otherwise prescribed by the Board. Officers of the
Corporation may be given distinctive designations such as Executive
Vice President, Group Vice President, Senior Vice President, Chief
Operating Officer, Chief Administrative Officer and Chief Financial
Officer. Any officer or agent elected or appointed by the Board of
Directors may be removed by the Board of Directors with or without
cause whenever, in its judgment, the best interests of the
Corporation will be served thereby, by a majority vote in favor of
removal by the entire Board but such removal shall be without
prejudice to the contract rights, if any, of the person so removed.
Any vacancy occurring in any such office of the Corporation may be
filled only by the Board of Directors. Any number of offices may
be held by the same person.
SECTION 5.2 DUTIES. The officers of the Corporation shall have
------
the following duties:
CHAIRMAN OF THE BOARD
The Chairman of the Board shall preside at all Board of
Directors and shareholders meetings. The Chairman of the Board
shall have full power and authority to perform all executive acts
for and on behalf of the Corporation and, in the absence of
disability of the President, shall exercise all of the powers and
discharge all of the duties of the President. Unless otherwise
determined by the Board of Directors, the Chairman of the Board
shall also be, ex officio, a member of all standing Committees of
the Board of Directors, if any, shall preside at all meetings of
the shareholders and Directors at which such Chairman of the Board
is present and shall perform any other duties prescribed by the
Board of Directors or these Bylaws.
PRESIDENT
In the absence of the Chairman of the Board of Directors,
the President shall preside at all Board of Directors meetings and
all meetings of the shareholders at which such President is
present. The President shall be the Chief Executive Officer and
shall be responsible for the general and active management of the
business and affairs of the Corporation, subject only to the
control of
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<PAGE> 10
the Board of Directors, shall have full authority in respect to the signing
and execution of deeds, bonds, mortgages, contracts and other instruments of
the Corporation and shall perform any duties prescribed by the Chairman or the
Board of Directors and shall see that all orders and resolutions of the
Board of Directors are carried into effect. The President shall
have equal authority with the Chairman to execute bonds, mortgages
and other contracts requiring a seal, under the seal of the
Corporation, except where permitted by law to be otherwise signed
and executed and except where the signing and execution thereof
shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation.
VICE PRESIDENT
The Vice Presidents, if any, in the order of their
seniority shall, in the absence or disability of the President,
perform the duties and exercise the powers of the President, and
shall perform any other duties prescribed by the Chairman, the
President or the Board of Directors.
SECRETARY AND ASSISTANT SECRETARIES
The Secretary shall keep or cause to be kept a record of
all meetings of the shareholders and the Board of Directors and
record all votes and the minutes of all proceedings in a book to be
kept for that purpose. The Secretary shall give, or cause to be
given, notice of all meetings of the shareholders and the Board of
Directors, and shall perform any other duties prescribed by the
Board of Directors or the President. The Secretary shall keep in
safe custody the seal of the Corporation and shall affix the same
to any instrument requiring the corporate seal.
The Assistant Secretaries, if any, in order of their
seniority shall, in the absence or disability of the Secretary,
perform the duties and exercise the powers of the Secretary and
shall perform any other duties prescribed by the Chairman, the
President or the Board of Directors.
TREASURER AND ASSISTANT TREASURERS
The Treasurer shall have the custody of the corporate
funds and securities, shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation,
shall deposit all monies and other valuable effects in the name and
to the credit of the Corporation in such depositories as may be
designated by the Board of Directors and shall perform any other
duties prescribed by the Chairman, the President or the Board of
Directors. The Treasurer shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking
proper vouchers for such disbursements, and shall render to the
President and Directors, at the regular meetings of the Board of
Directors, or whenever required, an account of all transactions and
of the financial condition of the Corporation.
The Assistant Treasurers, if any, in the order of their
seniority shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and
shall perform any other duties prescribed by the Board of
Directors.
ARTICLE VI
CAPITAL STOCK
-------------
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<PAGE> 11
SECTION 6.1 CERTIFICATES. The shares of the Corporation shall
------------
be represented by a certificate exhibiting the name of the registered
holder and the number and class of shares and the series, if any,
represented thereby, the par value of each share or a statement
that such shares are without par value as the case may be and that
the Corporation is incorporated under the laws of the Commonwealth
of Pennsylvania. If more than one class or series of shares is
authorized, the certificate shall state that the Corporation will
furnish to any shareholder, upon request and without charge, a full
or summary statement of the designations, preferences, limitations,
and relative rights of the shares of each class authorized to be
issued, and the variations thereof between the shares of each
series, and the authority of the Board of Directors to fix and
determine the relative rights and preferences of subsequent series.
Every share certificate shall be signed by the President or Vice-
President and the Secretary or an Assistant Secretary or the
Treasurer or an Assistant Treasurer and shall be sealed with the
corporate seal, which may be facsimile, engraved or printed. Where
a certificate is signed by a transfer agent or an assistant
transfer agent or a registrar, the signature of any such President,
Vice-President, Treasurer, Assistant Treasurer, Secretary or
Assistant Secretary may be facsimile. In case any officer or
officers who have signed, or whose facsimile signature or
signatures have been used on, any such certificate or certificates
shall cease to be such officer or officers of the Corporation,
whether because of death, resignation or otherwise, before such
certificate or certificates have been delivered by the Corporation,
such certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or
persons who signed such certificate or certificates or whose
facsimile signature or signatures have been used thereon had not
ceased to be such officer or officers of the Corporation.
SECTION 6.2 LOST OR DESTROYED CERTIFICATES. The Board of
------------------------------
Directors shall direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofor issued by the
Corporation alleged to have been lost, destroyed or wrongfully
taken, upon the making of an affidavit of that fact by the person
claiming the share certificate to be lost, destroyed or wrongfully
taken. If the Corporation shall have a transfer agent and
registrar, the Board of Directors may cause or authorize such
substitute certificate to be countersigned by the appropriate
transfer agent and registered by the appropriate registrar. In
each such case, the applicant for a substitute certificate shall
furnish to the Corporation, and to such of its transfer agents and
registrars as may require the same, evidence to their satisfaction,
in their discretion, of the loss, theft or destruction of such
certificate and of the ownership thereof, and also such security or
indemnity as may by them be required.
SECTION 6.3 TRANSFER OF STOCK. The shares of stock of the
-----------------
Corporation shall be transferable only upon its books by the
holders thereof in person or by their duly authorized attorneys or
legal representatives. Upon transfer, the old certificates shall
be surrendered to the Corporation by the delivery thereof to the
person in charge of the stock and transfer books and ledgers, or to
such other persons as the Board of Directors may designate, by whom
they shall be cancelled and new certificates shall thereupon be
issued. Except as otherwise expressly provided by the statutes of
the Commonwealth of Pennsylvania, the Corporation shall be entitled
to treat the holder of record of any share or shares of stock as
the absolute owner thereof for all purposes and, accordingly, shall
not be bound to recognize any legal, equitable or other claim to or
interest in such
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<PAGE> 12
share or shares on the part of any other person whether or not it or they
shall have express or other notice thereof.
SECTION 6.4 RECORD DATE. The Board of Directors may fix a time,
-----------
not more than sixty (60) days nor less than ten (10) days prior to
the date of any meeting of shareholders or the date fixed for the
payment of any dividend or distribution or the date for the
allotment of rights or the date when any change or conversion or
exchange of shares will be made or go into effect, as a record date
for the determination of the shareholders entitled to notice of and
to vote at any such meeting or entitled to receive payment of any
such dividend or distribution or to receive any such allotment of
rights or to exercise the rights in respect to any such change,
conversion or exchange of shares. In such case only such
shareholders as shall be shareholders of record on the record date
shall be entitled to notice of and to vote at such meeting or to
receive payment of such dividend or to receive such allotment of
rights or to exercise such rights, as the case may be,
notwithstanding any transfer of any shares on the books of the
Corporation after any record date so fixed.
SECTION 6.5 REGISTERED SHAREHOLDERS. The Corporation shall
-----------------------
be entitled to treat the holder of record of any share or shares as
the holder in fact thereof and shall not be bound to recognize any
equitable or other claim to or interest in such share on the part
of any other person, and shall not be liable for any registration
or transfer of shares which are registered or to be registered in
the name of a fiduciary or the nominee of a fiduciary unless made
with actual knowledge that a fiduciary or nominee of a fiduciary is
committing a breach of trust in requesting such registration or
transfer or with knowledge of such facts that its participation
therein amounts to bad faith.
SECTION 6.6 TRANSFER AGENTS AND REGISTRARS. The Board of
------------------------------
Directors may appoint one or more transfer agents or transfer
clerks and one or more registrars which may be banks, trust
companies or other financial institutions located within or without
the Commonwealth of Pennsylvania. The Corporation may define the
authority of such transfer agents and registrars of transfers, may
require all stock certificates to bear the signature of a transfer
agent or a registrar of transfers, or both, and may change or
remove any such transfer agent or registrar of transfer.
SECTION 6.7 DIVIDENDS. Subject to the provisions of the Articles
---------
of Incorporation, the Board of Directors may, out of funds legally
available therefor, at any regular or special meeting declare
dividends upon the capital stock of the Corporation as and when
they deem expedient. Before declaring any dividend there may be
set apart, out of any funds of the Corporation available for
dividends, such sum or sums as the directors, from time to time, in
their discretion deem proper for working capital or as a reserve
fund to meet contingencies or for equalizing dividends or for such
other purpose as the directors shall deem conducive to the
interests of the Corporation, and in its discretion, the Board of
Directors may decrease or abolish any such reserve.
-12-
<PAGE> 13
ARTICLE VII
INDEMNIFICATION
---------------
SECTION 7.1 INDEMNIFICATION.
---------------
A. Indemnification. Except as prohibited by law, each
---------------
person who was or is made a party or is threatened to be made a
party to any threatened, pending or completed action or proceeding,
whether civil criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she,
or a person of whom he or she is the legal representative, is or
was a director or officer, of the Corporation or is or was serving
at the request of the Corporation as a director, officer, employee
or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to an
employee benefit plan, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer,
employee or agent or in any other capacity while serving as a
director, officer, employee or agent, shall be indemnified and held
harmless by the Corporation to the fullest extent authorized by
Pennsylvania law, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that
such amendment permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to
provide prior to such amendment), against all expense, liability
and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection
therewith and such indemnification shall continue as to a person
who has ceased to be a director, officer, employee or agent and
shall inure to the benefit of the heirs or personal representatives
of that person. The Corporation may, by action of its Board of
Directors, provide indemnification to employees and agents of the
Corporation with the same scope and effect as the foregoing
indemnification of directors and officers.
B. Determination of Right to Indemnification. Unless
-----------------------------------------
ordered by the Court, any indemnification under Section A of this
Section 7 shall be made by the Corporation unless a determination
is made reasonably and promptly that indemnification of the
director, officer, employee or agent is not proper under the
circumstances because he or she has not met the applicable standard
of conduct set forth in or established pursuant to this Article
Seven. Such determination shall be made (1) by the Board of
Directors by a majority vote of a quorum consisting of directors
who are not parties to such action or proceeding, or (2) if such
quorum is not obtainable, or even if obtainable if a quorum of
disinterested directors so directs, by independent legal counsel in
a written opinion, or (3) by majority vote of the shareholders.
C. Advance Payment of Expenses. Expenses incurred by
---------------------------
a person who is or was a director or officer of the Corporation in
defending a civil or criminal action or proceeding shall be paid by
the Corporation in advance of the final disposition of an action or
proceeding, and expenses incurred by a person who is or was an
employee or agent of the Corporation in defending a civil or
criminal action or proceeding may be paid by the Corporation in
advance of the final disposition of such action or proceeding as
authorized by the Board of Directors, in either case upon receipt
of an undertaking by or on behalf of the director, officer,
employee or agent to repay such
-13-
<PAGE> 14
amount if it shall ultimately be determined that he or she is not entitled to
be indemnified by the Corporation as authorized in or pursuant to this Article
Seven.
D. Section 7 Provisions Not Exclusive Right. The
----------------------------------------
indemnification or advancement of expenses provided by this Section
7 shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled, whether under
the Bylaws of the Corporation or any statute, agreement, vote of
shareholders or disinterested directors or otherwise, both as to action in
an official capacity and as to action in another capacity while
holding such office.
E. Indemnification Agreements Authorized. Without
-------------------------------------
limiting the other provisions of this Article Seven, the
Corporation is authorized from time to time, without further action
by the shareholders of the Corporation, to enter into agreements
with any director, officer, employee or agent of the Corporation
providing such rights of indemnification as the Corporation may
deem appropriate, up to the maximum extent permitted by law.
F. Insurance. The Corporation may purchase and
---------
maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or who is
or was otherwise serving on behalf or at the request of the
Corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him or her and incurred by
him or her in any such capacity, or arising out of his or her
status as such, whether or not the Corporation would have the power
to indemnify him or her against such liability under the provisions
of this Article Seven.
ARTICLE VIII
MISCELLANEOUS
-------------
SECTION 8.1 FISCAL YEAR. The fiscal year of the Corporation
-----------
shall be determined by resolution of the Board of Directors.
SECTION 8.2 SEAL. The Corporation may have a corporate seal
----
which shall have the name of the Corporation inscribed thereon and shall
be in such form as may be approved from time to time by the Board
of Directors. The corporate seal may be used by causing it or a
facsimile thereof to be impressed or affixed or in any other manner
reproduced.
SECTION 8.3 NOTICE; WAIVER OF NOTICE. Unless otherwise provided
------------------------
in the Articles or these Bylaws, written notice may be given in
person, or by first class or express mail, postage prepaid, or by
telegram (with messenger service specified), telex or TWX (with
answer back received) or by prepaid courier service, or by
facsimile transmission, to such person's address (or telex, TWX or
facsimile number, if applicable) appearing on the books of the
Corporation or, in the case of directors, such other address made
available to the Corporation for the purpose of receiving notice.
If the notice is sent by mail, telegraph or courier service, it
shall be deemed to have been given to the person entitled thereto
when deposited in the United States mail or with a telegraph office
or courier service for delivery to that person or in the case of
telex or TWX, when
-14-
<PAGE> 15
dispatched. A notice of meeting shall specify the place, date and time of the
meeting and any other information required by law. When a meeting of
shareholders is adjourned, it shall not be necessary to give any notice of the
adjourned meeting or of the business to be transacted at an adjourned meeting,
other than by announcement at the meeting at which the adjournment is
taken, unless the Board fixes a new record date for the adjourned
meeting. Whenever any written notice is required to be given under
the provisions of law or the Articles or Bylaws, a waiver thereof
in writing, signed by the person or persons entitled to the notice,
whether before or after the time stated therein, shall be deemed
equivalent to the giving of the notice. Except as otherwise
required by this section, neither the business to be transacted at,
nor the purpose of, a meeting need be specified in the waiver of
notice of the meeting. In the case of a special meeting of
shareholders, the waiver of notice shall specify the general nature
of the business to be transacted. Attendance of a person at any
meeting shall constitute a waiver of notice of the meeting, except
where a person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of
any business because the meeting was not lawfully called or
convened.
SECTION 8.4 AMENDMENT OF BYLAWS. These Bylaws may be altered,
-------------------
amended or repealed by, either: (1) a majority vote of the
shareholders entitled to vote thereon at any regular or special
meeting duly convened after notice to the shareholders of that
purpose, or (2) with respect to those matters under Pennsylvania
law that are not committed expressly to the shareholders, by a
majority vote of the whole Board at any regular or special meeting
duly convened after notice to the directors of that purpose, if
required, subject to the shareholder's right to change such action
by the directors.
-15-
<PAGE> 1
[STOCK CERTIFICATE - FRONT]
- ------- ---------
NUMBER SHARES
VALLEY NATIONAL GASES INCORPORATED
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN
OF THE STATE OF PENNSYLVANIA DEFINITIONS
CUSIP 919792 10 1
This Certifies that
SPECIMEN
is the owner of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE
$.001, OF
VALLEY NATIONAL GASES INCORPORATED
(herein referred to as the "Corporation"), transferable on the
books of the Corporation by the holder hereof in person or by
duly authorized attorney, upon surrender of this Certificate
properly endorsed. This Certificate and the shares represented
hereby are issued and shall be subject to all of the terms,
conditions and limitations of the Articles of Incorporation
and Bylaws of the Corporation, including all amendments
heretofore or hereafter made to such Articles of Incorporation
or Bylaws, to all of which reference is made hereby and to all of
which the holder asserts by acceptance hereof.
This Certificate is not valid unless countersigned by the
transfer agent and registered by the registrar of the
Corporation.
IN WITNESS WHEREOF, the Corporation has caused facsimile
signatures of its duly authorized officers and its facsimile seal
to be hereunto affixed.
Dated:
[Corporate Seal]
- ----------------------------- ------------------------
President Secretary
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
<PAGE> 2
[STOCK CERTIFICATE - BACK]
The Corporation will furnish without charge to each shareholder who so
requests a full statement of the powers, designations, preferences,
limitations and relative rights of each class of stock or series thereof of
the Corporation, and the qualifications, limitations or restrictions of
such preferences and/or rights. Such requests may be made to the
Corporation or to the transfer agent.
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in
full according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ------- Custodian -------
TEN ENT - as tenants by the (Cust) (Minor)
entireties Under Uniform Gifts to Minors
JT TEN - as joint tenants with Act -----------------------------------------
rights of survivorship (State)
and not as tenants in common
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, --------------------------------------- hereby sell,
assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------
- ----------------------------------- -----------------------------------------
- ------------------------------------------------------------------------------
PLEASE PRINT OR TYPE NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
- ------------------------------------------------------------------------------
to transfer the said Shares on the books of the within named Corporation
with full power of substitution in the premises.
Dated----------------------------- Signature(s):
--------------------------------
--------------------------------
NOTICE: THE SIGNATURE OF THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME AS WRITTEN UPON THE FACE
OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed:
By
THE SIGNATURE(S) MUST BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION, (BANKS,
STOCK BROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN
APPROVED SIGNATURE GUARANTEE PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
BRYAN CAVE LLP
245 Park Avenue
New York, NY 10167
March 13, 1997
Valley National Gases Incorporated
67 43rd Street
Wheeling, WV 26003
Re: Public Offering pursuant to Registration Statement
on Form S-1 Filing No. 333-19973
--------------------------------
Ladies and Gentlemen:
We have acted as counsel for Valley National Gases
Incorporated (the "Company"), in connection with the registration
under the Securities Act of 1933, as amended (the "Act"), of
3,105,000 shares ("Shares") of the common stock of the Company,
$.001 par value per share, of which 2,618,000 Shares are being issued
by the Company (the "Initial Shares"), 82,000 Shares are being sold by
selling shareholders and 405,000 Shares may be sold by the Company
solely to cover over-allotments in connection with the offering of the
Initial Shares. The Shares are proposed to be sold on the terms and
conditions to be set forth in an underwriting agreement by and
among the Company, A.G. Edwards & Sons, Inc. and Oppenheimer &
Co., Inc. as representatives of the several underwriters named
therein (the "Underwriting Agreement"). In connection with this
opinion, we have examined such corporate records, certificates
and other documents as we have considered necessary or
appropriate for the purposes of this opinion. In such
examination, we have assumed the genuineness of all signatures
and the authenticity of all documents submitted to us as
originals, and the conformity of the originals of all documents
submitted to us as copies.
Based on such examination, we are of the opinion that:
1. The Company has been duly incorporated and is in good
standing under the laws of the State of Pennsylvania.
2. When the registration statement (the "Registration
Statement") on Form S-1 (File No. 333-19973) relating to the
Shares has become effective under the Act and the sale of the
Shares has been consummated pursuant to the Underwriting
Agreement, the Shares will be duly authorized, validly issued,
fully paid and non-assessable.
We hereby consent to be named in the Registration Statement,
and in the Prospectus that constitutes a part thereof, as the
<PAGE> 2
Valley National Gases Incorporated
March 13, 1997
Page 2
attorneys who will pass upon the validity of the Shares, and to
the filing of this opinion as an exhibit to the Registration
Statement.
Very truly yours,
/s/ Bryan Cave LLP
Bryan Cave LLP
<PAGE> 1
AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AGREEMENT
-----------------------------------------------------
THIS AMENDED AND RESTATED RIGHT OF FIRST REFUSAL AGREEMENT (the "Amended
and Restated Agreement") is dated this 12th day of March 1997, among VALLEY
NATIONAL GASES INCORPORATED, a Pennsylvania corporation ("Holdings"), VALLEY
NATIONAL GASES DELAWARE, INC., a Delaware corporation ("Valley-Delaware"),
VALLEY NATIONAL GASES, INC. (formerly VALLEY WELDING SUPPLY CO.), a West
Virginia Corporation, having an office at 67 43rd Street, Wheeling, West
Virginia 26003 ("Valley"); WEST RENTALS, INC., a West Virginia Corporation,
having an office at 67 - 43rd Street, Wheeling, West Virginia 26003 ("West");
GARY E. WEST ("Gary West" or the "Valley Shareholder"); and PHYLLIS J. WEST
(referred to herein with Gary E. West as the "West Shareholders"); THE GARY
E. WEST GRANTOR RETAINED ANNUITY TRUST #1 ("Trust #1"), THE GARY E. WEST
GRANTOR RETAINED ANNUITY TRUST #2 ("Trust #2"), THE GARY E. WEST GRANTOR
RETAINED ANNUITY TRUST #3 ("Trust #3"), THE GARY E. WEST GRANTOR RETAINED
ANNUITY TRUST #4 ("Trust #4"), THE GARY E. WEST GRANTOR RETAINED ANNUITY
TRUST #5 ("Trust #5") and THE GARY E. WEST GRANTOR RETAINED ANNUITY TRUST #6
("Trust #6") (each a "Trust" and collectively the "Trusts"); and PRAXAIR,
INC. (formerly UNION CARBIDE INDUSTRIAL GASES INC.), a Delaware corporation
with an office at 39 Old Ridgebury Road, Danbury, Connecticut 06810-5113
("Praxair").
W I T N E S S E T H
-------------------
WHEREAS, Valley, West, the Valley Shareholder, the West Shareholders and
Praxair are parties to that certain Right of First Refusal Agreement dated as
of September 30, 1991 (the "Agreement");
WHEREAS, Valley, West and Linde Gases of the Great Lakes, Inc. ("Linde"),
a wholly-owned subsidiary of Praxair, were parties to an Asset Purchase
Agreement dated as of August 16, 1991, (the "Purchase Agreement") pursuant to
which, among other things, Valley and West acquired substantially all of the
assets of Linde's retail and wholesale packaged gas business located in
Western Pennsylvania ("Business"). The Valley Shareholders and the West
Shareholders benefited substantially from the transactions contemplated by
the Purchase Agreement. It was a condition precedent to the obligations of
Linde and Praxair to proceed with the transactions contemplated by the
Purchase Agreement that Valley, West, the Valley Shareholders and the West
Shareholders grant to Praxair certain Rights of First Refusal and Rights of
First Discussion rights with respect to proposed future transfers of certain
business and assets or stock of Valley and West. In order to induce Praxair
to consummate the transactions
<PAGE> 2
contemplated by the Purchase Agreement, each of Valley, West, the Valley
Shareholders and the West Shareholders agreed to enter into the Agreement
affording to Praxair certain rights of first refusal or first discussion;
WHEREAS, the Valley Shareholder has with the consent of Praxair
transferred 6.12 Valley Shares (as defined herein) to each of Trust #1 and
Trust #2 and has transferred 4.59 Valley Shares to each of Trust #3, Trust
#4, Trust #5 and Trust #6 as of January 31, 1997 and the Trusts have agreed
with Praxair to be legally bound by the provisions of the Agreement;
WHEREAS, Valley has informed Praxair that it wishes to restructure its
organization in such a manner that Valley will be a wholly owned subsidiary
of Valley-Delaware, that Valley-Delaware will be a wholly owned subsidiary of
Holdings and that Holdings will, immediately prior to the completion of an
initial public offering currently contemplated by Holdings (the "IPO"), be
wholly owned by the Trusts, except for 5.4% of Holdings common stock (the
"Common Stock") held in the aggregate by certain directors and officers of
Holdings and by the Estate of Linda Bott (the "Reorganization");
WHEREAS, in order to effectuate the Reorganization (i) each of the Trusts
will transfer and convey to Holdings all of the Valley Shares owned by them
respectively in exchange for the issuance to them by Holdings of an aggregate
of 7,000,000 shares of Common Stock immediately prior to the IPO and (ii)
Holdings will contribute all the issued and outstanding Valley Shares owned
by it to Valley-Delaware in exchange for the issuance by Valley-Delaware to
Holdings of all the issued and outstanding shares of the capital stock of
Valley-Delaware (together, the "Reorganization Transactions");
WHEREAS, the transfers contemplated in the Reorganization Transactions
would, but for Praxair's waiver contained herein, be subject to the right of
first refusal set forth in the Agreement; and
WHEREAS, each of Holdings, Valley-Delaware and the Trusts will benefit
from the Reorganization Transactions.
NOW, THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Defined Terms
-------------
"Affiliate" means, with respect to any party, any Person or entity acting
---------
on behalf of such party or which is controlled,
2
<PAGE> 3
directly or indirectly, by such party and, in the case of an individual, any
member of such party's "immediate family" within the meaning of the rules
promulgated under the Securities Exchange Act of 1934, as amended.
"Asset Sale" means any sale, transfer, conveyance, exchange or other
----------
disposition by West of any material assets used in the business of Holdings
and its direct and indirect subsidiaries.
"Average Price Per Share" means, with respect to any Second-Step
-----------------------
Transaction (defined below), the weighted average cash price and/or other
consideration (valued at its fair market value), per share, paid or delivered
by Praxair or its Affiliates in connection with such Second-Step Transaction.
"Capital Transaction" means any (a) merger, consolidation, combination,
-------------------
reorganization or issuance, grant or sale of Equity Securities, or other
similar transaction involving Holdings or any other Persons, that would
result in a Change In Control (as defined herein) or (b) any sale, transfer,
conveyance, exchange or other disposition of assets (including Equity
Securities of subsidiaries) of Holdings, Valley-Delaware and Valley other
than (i) sales of assets in the ordinary course of business and (ii) sales of
assets of up to 10% of the asset value (based on fair value) of Holdings, on
a consolidated basis, per year.
"Change In Control" means any transaction which would result in Gary West,
-----------------
the Trusts and the Permitted Transferees (as defined herein) owning, in the
aggregate, less than (i) fifty-one percent (51%) of the Holdings Shares, on a
Fully Diluted Basis or (ii) fifty-one percent (51%) of the combined voting
power of all outstanding Equity Securities of Holdings.
"Equity Security" of a Person means (i) any capital stock of or equity
---------------
interests in such Person, (ii) any option, warrant or other right to acquire
any Equity Security and (iii) any security issued by such Person or any
Affiliate of such Person that is convertible into or exchangeable for any
Equity Security.
"Fully Diluted Basis" means, with respect to the Holdings Shares, the
-------------------
number of Holdings Shares issued and outstanding, at the relevant time, after
giving effect to the assumed exercise or conversion, if applicable, of all
Equity Securities of Holdings (including, without limitation, any Equity
Securities issued in connection with the relevant transaction with respect to
which the determination of Fully Diluted Basis is being made).
"Market Price" means, with respect to any trading day, (i) if the Holdings
------------
Shares are then listed or admitted for trading on any United States
securities exchange or, if not so listed or admitted
3
<PAGE> 4
for trading, are listed or admitted for trading on the National Association of
Securities Dealers, Inc. Automated Quotation System ("Nasdaq") National Market
or SmallCap Market, the last sale price of the Holdings Shares, regular way, or
the mean of the bid and asked prices thereof for any trading day on which no
such sale occurred, in each case as officially reported on the principal
securities exchange on which the Holdings Shares are listed or admitted for
trading or on the Nasdaq National Market or SmallCap Market, as the case may be,
or (ii) if not so listed or admitted for trading on a United States securities
exchange or the Nasdaq National Market or SmallCap Market, the mean between
the closing high bid and low asked quotations for the Holdings Shares in the
over-the-counter market as reported by Nasdaq, or any similar system for the
automated dissemination of securities prices then in common use, if so
quoted, as reported by any member firm of the New York Stock Exchange
selected by Holdings; provided, however, that if, by reason of extended or
-------- -------
continuous trading hours on any exchange or in any market or for any other
reason, the time, with respect to any trading day, of the close of trading
for the purpose of determining the "last sale price" or the "closing" bid and
asked prices is not objectively determinable, the time on such trading day
used for the purpose of reporting any compilation of last sale prices or
closing bid and asked prices in The Wall Street Journal shall be the time on
-----------------------
such trading day as of which the "last sale price" or "closing" bid and asked
prices are determined for purposes of this definition. If the Holdings
Shares are quoted on a United States securities or central market system in
lieu of a market or quotation system described above, the closing price shall
be determined in the manner set forth in clause (i) of the preceding sentence
if actual transactions are reported, and in the manner set forth in clause
(ii) of the preceding sentence if bid and asked quotations are reported but
actual transactions are not.
"Person" means any individual, corporation, partnership (general or
------
limited), firm, joint venture, association, joint-stock company, trust,
unincorporated organization, government or regulatory body, limited liability
company, or other entity.
"Transfer" means any transaction, including, without limitation, any sale,
--------
transfer, conveyance, issuance or other disposition, whether by sale of
stock, merger, consolidation, reorganization, exchange or conversion of
securities, gift or otherwise, which would result in a Change In Control.
All comparisons between per share amounts herein shall take into account as
appropriate intervening stock splits, reverse stock splits, stock dividends,
stock subdivisions and the like.
2. Representation and Warranties.
-----------------------------
4
<PAGE> 5
(A) Holdings, Valley-Delaware, Valley, West, Gary West, the Trusts
and the West Shareholders hereby jointly and severally represent and warrant
to Praxair that:
(i) Each of Holdings, Valley-Delaware, Valley and West is a
corporation duly organized, validly existing and in good standing under the
laws of its state of incorporation, with full corporate power to enter into
and perform this Amended and Restated Agreement; each of Holdings,
Valley-Delaware, Valley and West has taken all corporate action necessary to
authorize the execution and performance of this Amended and Restated
Agreement and the transactions contemplated hereby by it; each of the Trusts
has the necessary authority to execute and perform this Amended and Restated
Agreement; the execution, delivery and performance of this Agreement by each
of Holdings, Valley-Delaware, Valley and West does not violate any provision
of the respective charters or bylaws (and in the case of each of the Trusts,
does not violate any provision of its instrument of formation, hereinafter
the "Trust Agreements"), or any other agreement to which it is a party or by
which any of its assets are bound; and this Agreement is enforceable against
each of Holdings, Valley-Delaware, Valley, West and the Trusts in accordance
with its terms.
(ii) The execution, delivery and performance of this
Amended and Restated Agreement by Gary West and the West Shareholders does
not violate any provision of any agreement to which either is a party or by
which any of their respective assets are bound.
(iii) Exhibit A attached hereto and made a part hereof, correctly
---------
describes Holdings' capitalization immediately after the Reorganization and
correctly identifies each subsidiary of Holdings (Holdings' issued and
outstanding shares of capital stock, at any given time, are hereinafter
referred to as the "Holdings Shares"). The Holdings Shares issued and
outstanding immediately after the Reorganization will be owned beneficially
and of record by the Trusts, certain directors and officers of Holdings and
by the Estate of Linda Bott, as set forth in Exhibit A, and all such
---------
outstanding Holdings' Shares are validly issued, fully paid and
nonassessable. No agreements of any type exist which provide for the
issuance, sale, redemption, exchange or other transfer of Holdings' Shares
other than as set forth in the Trust Agreements and other than as described
in the registration statement number 333-19973 (the "Registration Statement")
filed with the United States Securities and Exchange Commission (the "SEC")
on January 17, 1997, as such may be amended, a copy of which has been
delivered to Praxair. Holdings shall cause a copy of the final Registration
Statement to be delivered to Praxair promptly after such shall have been
declared effective by the SEC. Also set forth on Exhibit A hereto is a pro
---------
5
<PAGE> 6
forma capitalization of Holdings immediately after the closing of the IPO.
Upon the consummation of the Reorganization, the IPO and the other
transactions described in the Recitals to this Amended and Restated
Agreement, Persons who are subject to the transfer and other prohibitions of
this Amended and Restated Agreement will at that time own in the aggregate
issued and outstanding Holdings Shares representing not less than 60% of the
Holdings Shares on a Fully Diluted Basis.
(iv) Exhibit B attached hereto and made a part hereof, correctly
---------
describes Valley-Delaware's capitalization immediately after the
Reorganization and correctly identifies each subsidiary of Valley-Delaware
(Valley-Delaware's issued and outstanding shares of capital stock, at any
given time, are hereinafter referred to as the "Valley-Delaware Shares").
The Valley-Delaware Shares issued and outstanding immediately after the
Reorganization will be owned beneficially and of record by Holdings, as set
forth in Exhibit B, and all such outstanding Valley-Delaware Shares are
---------
validly issued, fully paid and nonassessable. No agreements of any type
exist which provide for the issuance, sale, redemption, exchange or other
transfer of Valley-Delaware Shares.
(v) Exhibit C attached hereto and made a part hereof,
---------
correctly describes Valley's capitalization immediately after the
Reorganization and correctly identifies each subsidiary of Valley (Valley's
issued and outstanding shares of capital stock, at any given time, are
hereinafter referred to as the "Valley Shares"). The Valley Shares issued
and outstanding immediately after the Reorganization will be owned
beneficially and of record by Valley-Delaware, as set forth in Exhibit C, and
---------
all such outstanding Valley Shares are validly issued, fully paid and
nonassessable. No agreements of any type exist which provide for the
issuance, sale, redemption, exchange or other transfer of Valley Shares.
(vi) Exhibit D attached hereto and made a part hereof,
---------
correctly describes West's capitalization immediately after the
Reorganization and correctly identifies each subsidiary of West (West's
issued and outstanding shares of capital stock, at any given time, are
hereinafter referred to as the "West Shares"). The West Shares issued and
outstanding after the Reorganization will be owned beneficially and of record
by the West Shareholders, as set forth in Exhibit D hereto, and all such
---------
outstanding West Shares are validly issued, fully paid and nonassessable. No
agreements of any type exist which provide for the issuance, sale,
redemption, exchange or other transfer of West Shares.
(vii) Gary West and the West Shareholders have full power to
enter into and perform this Amended and Restated
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<PAGE> 7
Agreement; this Amended and Restated Agreement constitutes a valid and binding
agreement of each of Gary West and the West Shareholders enforceable against
each in accordance with its terms. All of the Holdings Shares, the
Valley-Delaware Shares, the Valley Shares and the West Shares are free of any
liens, claims, encumbrances or rights of others under any redemptions, option,
shareholders' or similar agreement other than as set forth in the Trust
Agreements and in the Registration Statement.
(B) Praxair hereby represents and warrants to Holdings,
Valley-Delaware, Valley, West, Gary West, the Trusts and the West
Shareholders that:
(i) Praxair is a corporation duly organized, validly existing
and in good standing under the laws of its state of incorporation, with full
corporate power to enter into and perform this Amended and Restated
Agreement; Praxair has taken all corporate action necessary to authorize the
execution and performance of this Amended and Restated Agreement and the
transactions contemplated hereby by it; the execution, delivery and
performance of this Agreement by Praxair does not violate any provision of
its charters or bylaws or any other agreement to which it is a party; and
this Amended and Restated Agreement is enforceable against Praxair in
accordance with its terms.
(ii) The execution, delivery and performance of this
Amended and Restated Agreement by Praxair does not violate any provision of
any agreement to which it is a party.
3. Right of First Refusal.
----------------------
(A) (i) In addition to any other limitations contained herein,
neither Gary West, the Trusts nor the Permitted Transferees will, at any time
during the term hereof, sell, transfer, convey, assign, exchange, gift or
otherwise dispose of any Holdings Shares, except (i) pursuant to transactions
authorized by this Section, (ii) pursuant to one or more registered public
offerings and (iii) pursuant to transactions which conform with the volume
limitation and the manner of sale restrictions contained in Rule 144, as
currently in effect, of the Securities Act of 1933, as amended,
notwithstanding whether such volume limitation and sales restriction are
applicable to such transaction and provided that all such Persons shall be
deemed to be one Person for purposes of the volume limitation contained in
that rule.
(ii) In addition to the limitations contained in paragraph
3(A)(i), during the term of this Amended and Restated Agreement, (a) neither
Gary West, the Trusts nor the Permitted Transferees will effect any Transfer,
(b) Holdings will
7
<PAGE> 8
not, and will not permit any of its direct or indirect subsidiaries to, effect
any Capital Transaction or Transfer and (c) West will not effect any Asset Sale,
without, in each case, the consent of Praxair, unless otherwise permitted by
this Section 3.
(B) Notwithstanding anything contained in Section 3(A) of this Amended
and Restated Agreement, the following transactions may be consummated without
Praxair's consent:
(i) Any and all assets of Holdings, Valley-Delaware, Valley and
any direct or indirect subsidiaries of Valley may be transferred among
Holdings, Valley-Delaware, Valley and any subsequently formed direct or
indirect wholly-owned subsidiaries of Holdings.
(ii) Any or all of the shares of Common Stock held by Gary
West and the Trusts or any of them may, from time to time, be sold or
transferred (a) to Gary West's or West Shareholder's parents, children,
grandchildren, spouse, siblings, any of the above's respective spouse, the
Trusts (or any other trusts, family limited partnerships or the like formed
for the benefit of any of the foregoing) (b) to any Person listed in
paragraph 3(B)(ii)(a) hereto, by Gary West's or any of the West
Shareholder's, as applicable, last will and testament duly admitted to
probate, or pursuant to applicable laws of intestacy (the "Permitted
Transferees"), but only to the extent that such Permitted Transferees have
executed and delivered to Praxair an instrument, pursuant to which such
Permitted Transferees agree to be bound by the terms, covenants and
conditions of this Amended and Restated Agreement.
(iii) The Trusts will transfer to Gary West, if he is living,
shares of Common Stock in accordance with the terms of the Trust Agreements
without first offering Praxair a right of first refusal. Such shares of
Common Stock transferred by the Trusts to Gary West shall automatically
remain subject to this Amended and Restated Agreement.
(iv) (a) In the event that at any time prior to the expiration
of the term hereof, Gary West, the Trusts or the Permitted Transferees
(individually, "Seller" and collectively, "Sellers") receive an offer (the
"Offer") to acquire any or all of their Holdings Shares in a transaction that
would result in a Change In Control, they shall, as a condition precedent to
undertaking such transaction, by not less than 30 days prior written notice
given to Praxair (the "Praxair Notice"), offer to sell all of their Holdings
Shares subject to the Offer to Praxair (the "Praxair Offer") as provided in
paragraph (b) below.
(b) The notice required pursuant to
8
<PAGE> 9
Sections 3(B)(iv)(a) shall (i) set forth the price and all the terms and
conditions of the Offer, and identify the proposed offeror (the "Prospective
Purchaser"); (ii) contain an offer on behalf of Sellers to sell to Praxair the
securities which are the subject of the Offer, all upon the same terms and
conditions offered by the Prospective Purchaser and acceptable by Sellers;
provided, however, that if the consideration proposed to be paid by the
- -------- -------
Prospective Purchaser is not payable all in cash, the offer to Praxair shall
also afford Praxair an option to accept such offer by paying all cash to Seller
in an amount which is the economic equivalent of the consideration proposed to
be paid by such Prospective Purchaser or, if some portion of the non-cash
consideration offered by the Prospective Purchaser does not have an
ascertainable cash equivalent, by providing to Seller cash or other
consideration acceptable to Seller which is the substantial economic equivalent
of the non-cash or deferred consideration offered by the Prospective Purchaser;
(iii) contain a true and complete copy of the Offer acceptable to Seller from
Prospective Purchaser which offer must be bona fide; (iv) contain a copy of all
financial, business or other information and material furnished the
Prospective Purchaser (or its representatives) by Seller; and (v) disclose
the terms of each brokerage, sales consultant, finders and other similar
arrangements applicable to the offer (or any portion thereof).
(c) Praxair shall elect, within thirty (30) days after
delivery of the Praxair Notice (the "Option Period"), by written notice to
the Sellers, either to accept or reject the Praxair Offer. If Praxair fails
to make any election within the Option Period, it shall be deemed to have
elected to reject the Praxair Offer.
(d) If Praxair rejects or is deemed to have rejected the
Praxair Offer as described above, the Sellers shall be free, for a period of
100 days after the expiration of the Option Period, to consummate the Offer
with the Prospective Purchaser substantially as described in the Praxair
Notice, it being understood by Praxair that if the Offer constitutes a
proposal to purchase Common Stock at the Market Price or some other formula
based on trading prices in common stock, then any subsequent sale by the
Sellers to the Prospective Purchaser may not be at the same price as set
forth in the Praxair Notice. If the Offer is consummated within such 100 day
period, this Amended and Restated Agreement will terminate automatically on
the date the Offer is consummated. However, if the Sellers are unable to
consummate, in whole or in part, the Offer within the referenced 100 day
period, they shall once again be required to comply with the procedure set
forth in this Section prior to consummating the Offer or any other Transfer.
(v) (a) In the event that at any time after
9
<PAGE> 10
Holdings becomes a public company and prior to the expiration of the term
hereof, Sellers or Holdings shall desire in good faith to effect a Capital
Transaction or Transfer (other than under any of the circumstances described in
Paragraphs 3(B)(i)-(iv) or (vi), Sellers shall, as a condition precedent to
undertaking, or causing Holdings to undertake, such transaction, by written
notice given to Praxair (the "Clause (v) Notice"), grant Praxair the option (the
"Clause (v) Option") to purchase up to all of the shares of Common Stock then
owned by them (but in no event less than that number of shares constituting 51%
of the then issued and outstanding shares of Common Stock on a Fully Diluted
Basis), at a price per share equal to the Market Price of a share of Common
Stock on the date that the Clause (v) Notice is given, payable in cash or, if
agreed to by the Sellers and Praxair, in shares of capital stock of Praxair
having an equivalent economic value and which are registered for resale under
the federal securities laws effective as of the Closing Date (defined below),
or are subject to a binding commitment of Praxair to register upon customary
terms, subject to post-closing adjustments as provided below (the aggregate
purchase price hereunder is referred to as the "Clause (v) Purchase Price").
The Clause (v) Notice shall describe the Capital Transaction or Transfer
proposed to be undertaken (the "Proposed Transaction"), recite the Market
Price of the Common Stock on the date of the Clause (v) Notice and set forth
the number of shares which are subject to the Clause (v) Option. Within
thirty (30) days after delivery of the Clause (v) Notice (the "Response
Period"), Praxair shall elect, by written notice to Gary West, the Trusts and
the Permitted Transferees, either to exercise or reject the Clause (v)
Option. If Praxair fails to make any election within the Response Period, it
shall be deemed to have elected to reject the Clause (v) Option.
(b) If Praxair elects to exercise the Clause (v) Option
within the Response Period, then the closing shall occur on the date which is
ten (10) days after the latest to occur of (i) the date of Praxair's delivery
of its acceptance, (ii) the first date as of which all applicable bulk
transfer laws have been complied with (unless such compliance has been waived
by Praxair), or (iii) the expiration of any applicable waiting period under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, or any
similar law all in accordance with the offer terms and conditions.
(c) If Praxair rejects or is deemed to have rejected the
Clause (v) Option as described above, the Sellers and/or Holdings, as the
case may be, shall be free, for a period of 100 days after the expiration of
the Response Period, to consummate the Proposed Transaction substantially as
described in the Clause (v) Notice. If the Proposed Transaction is
consummated within such 100 day period, this Amended and Restated Agreement
will terminate automatically on the date such Proposed Transaction
10
<PAGE> 11
is consummated (unless the Proposed Transaction consists solely of a sale of
assets comprising, in the aggregate, less than 40% of the asset value (based
on fair value) of Holdings, on a consolidated basis, in which case this
Agreement shall continue). However, if the Sellers and/or Holdings are
unable to consummate the Proposed Transaction within the referenced 100 day
period, they shall once again be required to comply with the procedure set
forth in this Section prior to consummating the Proposed Transaction or any
other Capital Transaction or Transfer.
(d) In the event that Praxair exercises the Clause (v)
Option, the Clause (v) Purchase Price shall be adjusted, after the closing of
the Clause (v) Option (the "Closing Date") under either or both of the
following circumstances:
(1) If (a) at any time within two (2) years after the
Closing Date, Praxair, or any of its Affiliates (including Holdings or any of
its Affiliates, if such Persons are at such time subsidiaries of Praxair),
acquires, by way of merger, tender offer, going-private transaction, share
exchange, redemption, consolidation, reorganization, conversion of
securities, or similar transaction, in one transaction or a series of related
transactions (a "Second-Step Transaction"), in excess of fifty percent (50%)
of the shares of Holdings not acquired by Praxair on the Closing Date and (b)
the Average Price Per Share paid or delivered in connection with the Second-Step
Transaction exceeds the price per share paid by Praxair in connection
with the Clause (v) Option, then, Praxair shall, simultaneously with the
closing of the last tranche of the Second-Step Transaction, pay to the
Sellers, in cash or, if the consideration tendered in connection with the
Second-Step Transaction consists, in whole or in part, of value other than
cash, then in kind, as additional purchase price, an amount calculated as
follows:
(X-Y) x Z
where "X" means the Average Price Per Share, "Y" means the price per share
paid or delivered by Praxair in connection with the Clause (v) Option and "Z"
means the number of shares of Common Stock that were acquired by Praxair
pursuant to the Clause (v) Option. By way of illustration, if (i) Praxair
exercises the Clause (v) Option on May 1 for the price per share of $10.00,
(ii) within two years thereafter it acquires the balance of the shares of
Common Stock by way of a tender offer at an Average Price Per Share of $15.00
in cash and (iii) Praxair acquired 2 million shares of Common Stock pursuant
to the Clause (v) Option, then the amount payable as additional purchase
price pursuant to this paragraph would be $10,000,000, calculated as follows:
11
<PAGE> 12
($15-10) x 2,000,000 = $10,000,000
(2) If (i) at any time within two (2) years after the
Closing Date, Praxair or any of its Affiliates, transfers, or causes, permits
or suffers, the transfer, for value, by way of sale, merger, tender offer,
going-private transaction, share exchange, redemption, consolidation,
reorganization, conversion of securities, or similar transaction, of all or
substantially all of the shares acquired by it in connection with the Clause
(v) Option, or a block of shares representing the same proportional interest
in Holdings or any successor thereof that Praxair acquired in connection with
the Clause (v) Option, in one transaction or series of related transactions,
whether standing alone or as part of a larger transaction, and (ii) the
aggregate value of the consideration received by Praxair and its Affiliates
in respect of such shares exceeds the aggregate value of the consideration
received by the Sellers in connection with the Clause (v) Option (including
any additional purchase price paid pursuant to paragraph 3(B)(v)(d)(1)(a)
above), then Praxair shall pay, or cause to be paid, simultaneously with the
closing of such transaction, as additional purchase price, 50% of the excess
to the Sellers, at Sellers' option, in cash or in kind. The provisions of
the immediately preceding sentence shall not be applicable to any such
transfer to a Person who is, or after giving effect to the applicable
transfer and any contemporaneous transactions would be, an Affiliate of
Praxair.
(vi) (a) In the event that at any time prior to the expiration
of the term hereof, West receives an offer to sell any or all of its assets,
in a transaction which would constitute an Asset Sale, or Holdings receives
an offer to sell any or all of its assets, on a consolidated basis, in a
transaction that would constitute a Capital Transaction (in any such case, a
"Sale Offer"), West or Holdings, as they case may be, shall, as a condition
precedent to undertaking such transaction, by not less than 30 days prior
written notice given to Praxair (the "Sale Notice"), offer to sell the assets
that are the subject of the Sale Offer to Praxair on the same terms or
substantially the same terms as the Sale Offer.
(b) The notice required pursuant to Sections 3(B)(vi)(a)
shall (i) set forth the price, payable in cash, and all the terms and
conditions of the Sale Offer, and identify the proposed offeror (the "Sale
Offeror"), (ii) contain an offer on behalf of West or Holdings, as the case
may be, to sell to Praxair the assets which are the subject of the Sale
Offer, all upon the same terms and conditions offered by the Sale Offeror and
acceptable by West or Holdings, as the case may be, (iii) contain a true and
complete copy of the Sale Offer
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<PAGE> 13
acceptable to West or Holdings, as the case may be, from the Sale Offeror which
offer must be bona fide.
(c) Praxair shall elect, within thirty (30) days after
delivery of the Sale Notice (the "Sale Period"), by written notice to West or
Holdings, as the case may be, either to exercise or reject the Sale Offer.
If Praxair fails to make any election within the Sale Period, it shall be
deemed to have elected to reject the Sale Offer.
(d) If Praxair rejects or is deemed to have rejected the
Sale Offer as described above, West or Holdings, as the case may be, shall be
free, for a period of 100 days after the expiration of the Sale Period, to
consummate the Sale Offer with the Sale Offeror, substantially as described
in the Sale Notice. If West or Holdings, as the case may be, is unable to
consummate, in whole or in part, the West Offer within the referenced 100 day
period, it shall once again be required to comply with the procedure set
forth in this Section prior to consummating the transactions contemplated by
the Sale Offer. If the transaction contemplated by the Sale Notice is a sale
of more than 40% of the asset value (based on fair value) of Holdings, on a
consolidated basis, and Holdings consummates such sale within the referenced
100 day period, then this Amended and Restated Agreement shall terminate
immediately upon the closing of such sale.
(C) Holdings hereby agrees to give Praxair prompt written notice of
the consummation of any asset sale outside of the ordinary course which does
not constitute a Capital Transaction, which notice shall contain a brief
description of the transaction undertaken and a certification signed by an
executive officer of Holdings that the transaction does not constitute a
Capital Transaction within the meaning of this Amended and Restated
Agreement.
4. Consent to Reorganization. Praxair, by executing this Amended and
-------------------------
Restated Agreement does hereby consent to the Reorganization.
Notwithstanding anything to the contrary herein, for purposes of applying and
interpreting this Amended and Restated Agreement, until such time, if ever,
as the Reorganization occurs, all references in Sections 1, 3, 5, 7 and 9 to
the term "Holdings" shall be deemed to refer to the term "Valley", all
references in such Sections to the "Holdings Shares" and correlative concepts
shall be deemed to refer to the Equity Securities of Valley and all
references in such Sections to the Common Stock shall be deemed to refer to
the common stock of Valley, and other corresponding changes shall be deemed
made. The parties hereto shall enter into such reasonable documentation as
any of them may request to confirm the foregoing with more specificity.
13
<PAGE> 14
5. Agreement Not To Purchase Stock. In further consideration of all of
-------------------------------
the terms and conditions hereof, Praxair hereby covenants and agrees that,
until such time, if ever, as Praxair acquires pursuant to the procedures set
forth in this Amended and Restated Agreement, at least 51% of the shares of
Common Stock, neither it nor any of its Affiliates (regardless of whether
such Person or entity is an Affiliate as of the date hereof) will at any
time, (A) except pursuant to the procedures set forth in this Amended and
Restated Agreement, acquire, offer to acquire, or agree to acquire, directly
or indirectly, by purchase or otherwise, any Equity Securities or direct or
indirect rights or options to acquire any securities of Holdings or its
Affiliates, (B) make, or in any way participate, directly or indirectly, in any
"solicitation" of "Proxies" to vote (as such terms are used in the proxy rules
of the Securities and Exchange Commission), or seek to advise or influence any
person or entity with respect to, the voting of any voting securities of
Holdings or any of its Affiliates, provided, that nothing contained herein is
intended to prevent Praxair from exercising its voting rights with respect to
any Equity Securities of Holdings acquired by it pursuant to this Agreement, or
(C) form, join or in any way participate in a "group" within the meaning of
Section 3(d)(3) of the Securities Exchange Act of 1934 with respect to any
voting securities of Holdings or its Affiliates, or (D) otherwise act, alone or
in concert with others, to seek to control or influence the management, board of
directors or policies of Holdings or its Affiliates.
6. Term. The term of this Amended and Restated Right Agreement shall
----
expire at midnight (EDT) on September 29, 2006, unless earlier terminated as
provided above.
7. Access to Information. Upon Praxair's receipt of a notice pursuant to
---------------------
Section 3(B)(iv) or (v) or (vi) of this Amended and Restated Agreement,
Praxair shall have the right to request from each Seller, and each Seller
shall promptly provide Praxair with access to (and permit Praxair to copy)
Holding's books and records. All such information, materials and documents
provided or made available to Praxair shall, unless and until conveyed to
Praxair, be treated by Praxair as proprietary and confidential information of
Holding's and, except to the extent such information is or becomes generally
available to the public through no fault of Praxair, shall not at any time be
used in any manner or disclosed or revealed to any third party (other than
for purposes of having Praxair and its agents and representatives evaluate
the Praxair Offer, the Sale Offer or the Clause (v) Option or as may be
required by law). The provision of this Section 7 shall terminate
immediately upon the expiration of the term hereof, as same may be earlier
terminated as provided above (the "Termination Date"), unless Praxair has not
on or prior to
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<PAGE> 15
that date exercised the Praxair Offer, the Sale Offer or the Clause (v) Option,
in which case, this Section 7 shall terminate on the later to occur of (i) the
Termination Date or (ii) the date which is two (2) years after the latest
disclosure made to Praxair pursuant to this Section 7.
8. Conduct of Business. During the Option Period and, until the closing
-------------------
held pursuant to Praxair's acceptance of the Praxair Offer, the Sale Offer or
the Clause (v) Option, Holdings, Valley-Delaware or Valley, as applicable,
shall conduct their respective businesses diligently and in the ordinary
course and will not make or institute any unusual or novel methods of
business operations or declare or pay any dividends on, or make any other
distribution in respect of, its capital stock.
9. Voting Control. Gary West, the Trusts and the Permitted Transferees
--------------
do hereby agree and covenant that they will not vote their shares of Common
Stock in favor of any action and Holdings agrees and covenants that it will
not take any action, including without limitation, by way of the adoption or
amendment of any provision of the Articles of Incorporation or Bylaws of
Holdings, the adoption of or any amendment of any provision of a rights plan
or other similar plan of Holdings, that would or could prevent any holder of
51% or more of the Common Stock outstanding at any time from having voting
rights sufficient to approve any matter requiring shareholder approval under
applicable law or under Holdings' respective Articles of Incorporation or
By-Laws, or that would or could otherwise frustrate Praxair's ability to
enjoy the rights and benefits contemplated by this Amended and Restated
Agreement.
10. Restrictive Covenants. (A) In the event of any purchase by
---------------------
Praxair pursuant to this Amended and Restated Agreement:
(i) No Seller shall, directly or indirectly, except at the request
of Praxair, use or disclose to any third party any of the technical, financial,
operational, marketing or similar or different information pertaining to the
assets and the business which are the subject of the sale, except when, after
and to the extent such information is or becomes generally available to the
public through no fault of the Seller.
(ii) For a period of three (3) years from and after the date of any
such purchase by Praxair, no Seller shall, directly or indirectly, engage in
any business which sells or engages in the sale of any industrial gas and/or
welding products in any county which an office or retail outlet then sold to
Praxair is located or in any other county contiguous with any such county,
except that this restriction shall not apply to any
15
<PAGE> 16
Seller's sale of industrial gas and/or welding products in any such counties or
counties contiguous thereto where Seller has an established business operation
(including retail outlet or other branch) which Seller retains after date of
such purchase by Praxair (all such sales to be made solely through such
business operations), or to the sale by Seller to customers (wherever
located) with whom such Seller has established industrial gas and/or welding
products customers which Seller retains after any such sale or transfer to
Praxair. In applying the preceding sentence to a sale of stock which results
in Praxair becoming a majority shareholder of Holdings, Valley-Delaware,
Valley, West and/or any subsidiary thereof, Praxair shall be deemed to have
acquired all the offices and retail outlets of the entity for which a change
of control has occurred and/or of each subsidiary of such entity. To the
extent that the obligations of a Seller (or any of them) provided in this
clause (ii) are invalid or unenforceable because they are not sufficiently
limited in respect of duration, geographic area or otherwise, they shall be
deemed to be limited so that they are enforceable to the maximum extent
permitted by law. This sub-paragraph (B) shall survive any termination of
this Amended and Restated Agreement .
(B) Holdings, Valley, Gary West, the Trusts and the Permitted Transferees
hereby agree and covenant that for eighteen months from the date hereof, they
shall not cause or permit a transaction or other event within their control
to occur that would result in a Change In Control.
11. Releases. (A) Each of Holdings, Valley-Delaware, Valley, West,
--------
the West Shareholders and the Trusts (the "Valley Parties"), on their own
behalf and on behalf of each of their Affiliates (collectively, the "Valley
Releasors"), hereby releases and forever discharges (i) Praxair and each of
its Affiliates, (ii) each of the stockholders, directors, officers, agents,
employees, successors, predecessors, assigns and attorneys of Praxair and
each such Affiliate and (iii) each of the heirs, representatives, successors,
predecessors and assigns of each Person described in clause (ii)
(collectively, the "Praxair Releasees") from all actions (including
derivative actions), causes of action, suits, debts, dues, sums of money,
accounts, reckonings, attorneys' fees, bonds, bills, specialties, covenants,
contracts, controversies, agreements, promises, variances, trespasses,
damages, judgments, extents, executions, claims (including counter-claims and
cross-claims) and demands whatsoever, in law, admiralty or equity, whether or
not arising from fraud in the inducement or any matter unknown as of the date
hereof, which against the Praxair Releasees, the Valley Releasors, their
successors and assigns, or any of them, ever had, now have or hereafter can,
shall or may, have for, upon or by reason of or relating to any matter,
action, transaction, omission, practice, conduct, cause or thing whatsoever
from the beginning of the world
16
<PAGE> 17
to date hereof, including, without limitation, any claims, rights or liabilities
which may arise pursuant to, by reason of or in connection with, any matter,
cause or thing whatsoever relating to the Agreement.
(b) Praxair, on its own behalf and on behalf of each of its
Affiliates (collectively, the "Praxair Releasors"), hereby releases and
forever discharges (i) the Valley Parties and each of its Affiliates, (ii)
each of the stockholders, directors, officers, agents, employees, successors,
predecessors, assigns and attorneys of the Valley Parties and each such
Affiliate and (iii) each of the heirs, representatives, successors,
predecessors and assigns of each Person described in clause (ii)
(collectively, the "Valley Releasees") from all actions (including derivative
actions), causes of suits, debts, dues, sums of money, accounts, reckonings,
attorneys' fees, bonds, bills, specialties, covenants, contracts,
controversies, agreements, promises, variances, trespasses, damages,
judgments, extents, executions, claims (including counter-claims and cross
claims) and demands whatsoever, in law, admiralty or equity, whether or not
arising from fraud in the inducement or any matter unknown as of the date
hereof, which against the Valley Releasees, the Praxair Releasors, their
successors and assigns, or any of them, ever had, now have or hereafter can,
shall or may, have for, upon, or by reason of any matter, action transaction,
omission, practice, conduct, cause or thing whatsoever from the beginning of
the world to the date hereof, including, without limitation, any claims,
rights or liabilities which may arise pursuant to, by reason of, or in
connection with, any matter, cause or thing whatsoever relating to the
Agreement.
(c) The releases provided for this Section 11 shall not apply to
claims arising solely under this Amended and Restated Agreement or in respect
of commercial relationships by and among the parties hereto, in the ordinary
course, or claims arising under the various representations, warranties and
indemnities contained in the Purchase Agreement and the documents ancillary
thereto (other than the Agreement), to the extent that such provisions
continue to survive as of the date hereof. Furthermore, the releases
provided for in this Section 11 shall not, notwithstanding anything to the
contrary contained therein, run to the benefit of any stockholder, solely in
its, his or her capacity as a stockholder, of any releasee hereunder which is
a public company, unless such Person is also (i) an Affiliate, director,
officer, agent or attorney of such releasee or (ii) an Affiliate, heir,
representative, successor, predecessor or assign of any Person referred to in
clause (i).
12. Integration; Amendments; etc. This Amended and Restated
----------------------------
Agreement supersedes the Agreement and contains the entire understanding of
the parties with respect to the subject
17
<PAGE> 18
matter contained herein and may be amended only by a written instrument executed
by Sellers, Holdings and Praxair.
13. Notices. Notices and other communications from a party hereto to
-------
another party hereto relating hereto shall be in writing, shall be delivered
by hand or overnight courier service of recognized standing or sent by
telecopy or first class mail, postage prepaid, shall be deemed given when
actually received and shall be addressed in the case of each party as follows
or to such other address as shall be specified by notice to the other party:
NOTICE ADDRESS FOR PRAXAIR:
Praxair, Inc.
39 Old Ridgebury Road
Danbury, Connecticut 06810-5113
Attention: Secretary
Telecopy: 203-837-2545
Telephone: 203-837-2000
NOTICE ADDRESS FOR HOLDINGS, ITS SUBSIDIARIES, WEST,
GARY WEST AND HIS AFFILIATES:
Valley National Gases Incorporated
67 43rd Street
Wheeling, West Virginia 26003
Telecopy: 304-232-1558
Telephone: 304-232-1541
14. Expenses. Each party to this Amended and Restated Agreement
--------
shall bear its own expenses incurred in the performances hereof, irrespective
of whether the transactions contemplated herein are consummated. This
Amended and Restated Agreement, however, shall not be deemed to include
expenses of any Seller whose expenses of any proposed transaction, in whole
or in part, are to be paid by a Prospective Purchaser as part of an offer or
transfer agreement.
15. Counterparts. This Amended and Restated Agreement may be signed
------------
in any number of counterparts, each of which shall be deemed an original.
16. No Restriction on Valley or West Financing. Nothing in this
------------------------------------------
Amended and Restated Agreement shall impair or restrict present or future
bona fide financing arrangements (including all financing collateral
requirements) with unaffiliated third parties of either Holdings,
Valley-Delaware or Valley. Praxair expressly agrees that any power, right or
option granted it in this Amended and Restated Agreement shall be subordinate to
any and all collateral security rights and interests in and to Holdings,
Valley-Delaware and Valley's assets,
18
<PAGE> 19
which are or may be, either now or in the future, required by any and all of
Holdings, Valley-Delaware and/or Valley's sources of business financing.
17. Legend. (A) Gary West, Holdings and the Trusts hereby covenant
------
and agree that at all times during the term of this Amended and Restated
Agreement, they shall cause certificates evidencing shares of Common Stock
held by Gary West, the Trusts and Permitted Transferees and representing not
less than 51% of the issued and outstanding Common Stock, on a Fully Diluted
Basis, to contain the following legend:
"The shares represented by this certificate are subject to the
terms and conditions of an Amended and Restated Right of First
Refusal Agreement with Praxair, Inc., dated as of March ---, 1997,
and may be transferred only in accordance with the provisions thereof."
(B) As a condition precedent to the issuance by Holdings of any Equity
Securities after the Reorganization and during the term of this Amended and
Restated Agreement, Gary West, Holdings and the Trusts hereby covenant and
agree (i) to cause that number of additional certificates evidencing shares
of Common Stock held by Gary West, the Trusts and the Permitted Transferees
to be so legended such that, after giving effect to such issuance, such
Persons remain in compliance with the provisions of Paragraph (A) above and
(ii) to notify Praxair promptly as to such issuance and as to the steps taken
to effectuate such compliance.
18. Further Assurances. At any time and from time to time upon the
------------------
request of a party hereto, the other parties shall execute, deliver and
acknowledge or cause to be executed, delivered and acknowledged, such further
documents and instruments and do such other acts and things as the requesting
party may reasonably request in order to fully effect the purpose of this
Amended and Restated Agreement and to validly transfer or confirm the
transfer of any business, assets, shares and/or securities sold to Praxair
pursuant to this Amended and Restated Agreement.
19. Public Disclosure of Amended and Restated Agreement. Each of
---------------------------------------------------
Praxair and Holdings and its subsidiaries hereby agrees to provide the other
with a reasonable opportunity to review and comment upon (but not approve)
any written public disclosure or description of or relating to this Amended
and Restated Agreement.
19
<PAGE> 20
20. Waiver. Except as expressly provided herein, no failure or delay
------
on the part of any party hereto in exercising any power, right or option
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or option preclude any other, further or
subsequent exercise thereof or an exercise of any other power, right or
option hereunder; it being understood that the powers, rights and options of
all parties hereto under this Amended and Restated Agreement are cumulative,
repetitive and in addition to any rights and remedies now or hereafter
existing in law or in equity. Nothing herein contained shall be construed to
extend the option period or rights except as specifically provided herein.
21. Governing Law. This Amended and Restated Agreement and the
-------------
rights and obligations of the parties hereunder shall be construed and
interpreted in accordance with the laws of the State of Connecticut.
22. Severability. The provisions of this Amended and Restated
------------
Agreement are severable, and if any provision shall be held invalid or
unenforceable in whole or in part, then such invalidity or unenforceability
shall not effect any other provision of this Amended and Restated Agreement,
which shall remain in full force and effect.
23. Successors and Assigns. This Amended and Restated Agreement
----------------------
shall be binding upon and inure to the benefit of Praxair, Holdings,
Valley-Delaware, Valley, West, Gary West, the Trusts, the West Shareholders
and their respective heirs, personal representatives, successors and assigns.
The powers, rights and options of Praxair under this Amended and Restated
Agreement are personal to it and are not assignable or otherwise
transferable; provided, however that Praxair may transfer and assign such
powers, rights and options under this Amended and Restated Agreement to any
subsidiary, of which Praxair is the record and beneficial holder of not less
than one hundred percent (100%) of the issued and outstanding capital stock,
and which subsidiary, for the purposes of this Amended and Restated Agreement
shall be subject to all such Praxair prohibitions against assignment and
transfer.
20
<PAGE> 21
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as
of the day and year first above written.
PRAXAIR, INC. /s/ Phyllis J. West
-------------------------------------
Phyllis J. West,
as Shareholder of
WEST RENTALS, INC.
By /s/ Jose R. Rivero
------------------------------
Its Vice President The Gary E. West Grantor
--------------------------- Retained Annuity Trust
#1, The Gary E. West
VALLEY NATIONAL GASES HOLDINGS Grantor Retained Annuity
INCORPORATED Trust #2, The Gary E.
West Grantor Retained
Annuity Trust #3, The
By /s/ Gary E. West Gary E. West Grantor
------------------------------ Retained Annuity Trust,
Gary E. West #4, The Gary E. West
Its Chairman Grantor Retained Annuity
Trust #5, The Gary E.
VALLEY NATIONAL GASES DELAWARE, West Grantor Retained
INC. Annuity Trust #6
By /s/ Gary E. West
By /s/ Gary E. West -----------------------------------
------------------------------ Gary E. West, Trustee
Gary E. West
Its Chairman
VALLEY NATIONAL GASES, INC.
By /s/ Gary E. West
------------------------------
Gary E. West
Its Chairman
WEST RENTALS, INC.
By /s/ Gary E. West
------------------------------
Gary E. West
Its President
/s/ Gary E. West
- --------------------------------
Gary E. West, as Shareholder
of WEST RENTALS, INC.
<PAGE> 22
EXHIBIT A
---------
1. CAPITALIZATION OF VALLEY NATIONAL GASES INCORPORATED ("HOLDINGS").
Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares
issued and outstanding.
Common Stock, $.001 par value, 30,000,000 shares authorized, 7,402,084
shares issued and outstanding owned beneficially and of record by the Trusts,
except for 5.4% of Holdings stock held in the aggregate by certain directors
and officers of Holdings and by the Estate of Linda Bott.
2. SUBSIDIARIES OF HOLDINGS.
Valley National Gases Delaware, Inc.
Valley National Gases, Inc.
3. PRO FORMA CAPITALIZATION GIVING EFFECT TO THE TRANSACTIONS
CONTEMPLATED IN THE REGISTRATION STATEMENT.
Preferred Stock, $.01 par value, 5,000,000 shares authorized, no shares
issued and outstanding.
Common stock, $.001 par value, 30,000,000 shares authorized,
10,020,084<F*> shares issued and outstanding.
[FN]
- ---------------------
<F*> Does not include 405,000 shares issuable pursuant to an over-allotment
option granted to the underwriters in the initial public offering.
<PAGE> 23
EXHIBIT B
---------
1. CAPITALIZATION OF VALLEY NATIONAL GASES DELAWARE, INC.
("VALLEY-DELAWARE").
Preferred Stock, no shares authorized.
Common Stock, $.01 par value, 1,000 shares authorized, 1,000 shares
issued and outstanding owned beneficially and of record by Valley National
Gases Incorporated.
2. SUBSIDIARIES OF VALLEY-DELAWARE.
Valley National Gases, Inc.
<PAGE> 24
EXHIBIT C
---------
1. CAPITALIZATION OF VALLEY NATIONAL GASES, INC. ("VALLEY").
Preferred Stock, no shares authorized.
Common Stock, $100.00 par value, 80 shares authorized, 30.6 shares issued
and outstanding owned beneficially and of record by Valley National Gases
Delaware, Inc., 49.4 shares held in Treasury.
2. SUBSIDIARIES OF VALLEY
None
<PAGE> 25
EXHIBIT D
---------
1. CAPITALIZATION OF WEST RENTALS, INC. ("WEST").
Preferred Stock, no shares authorized.
Common Stock, $1.00 par value, 5,000 shares authorized, 1,000 shares
issued and outstanding, 4,000 shares held in treasury.
2. Gary E. West and Phyllis J. West each own 500 shares of the issued and
outstanding shares of Common Stock.
3. SUBSIDIARIES OF WEST
None
<PAGE> 1
VALLEY NATIONAL GASES INCORPORATED
1997 STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
The Valley National Gases Incorporated 1997 Stock Option Plan
(the "Plan") is intended as an incentive to, and to encourage
ownership of the stock of Valley National Gases Incorporated
("Company") by, certain key management employees, officers and
directors of the Company and its subsidiaries. The Plan has been
adopted in connection with a proposed initial public offering (the
"Offering") of the Company's Common Stock, par value $.001 per
share (the "Common Stock"). Certain options granted hereunder may
qualify as incentive stock options ("Incentive Stock Options")
within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and other options granted hereunder
may not qualify as Incentive Stock Options, as determined in each
instance by the Committee referred to in Paragraph 4 (the
"Committee").
2. STOCK SUBJECT TO THE PLAN.
Six hundred fifty thousand (650,000) shares of the authorized
but unissued Common Stock of the Company have been allocated to the
Plan and will be reserved for issue upon the exercise of options
granted under the Plan. The Company may, in its discretion, use
shares held in the treasury in lieu of authorized but unissued
shares. If any such option shall expire or terminate for any
reason without having been exercised in full, the unpurchased
shares subject thereto shall again be available for the purposes of
the Plan. Any shares of Common Stock which are used by an optionee
as full or partial payment to the Company of the purchase price of
shares of Common Stock upon exercise of a stock option shall again
be available for the purposes of the Plan. The number of shares
with respect to which options may be granted to any individual
during any calendar year may not exceed fifty thousand (50,000)
shares.
3. ADMINISTRATION.
The Plan shall be administered by the Committee. Subject to
the express provisions of the Plan, the Committee shall have
plenary authority, in its discretion, to determine the individuals
to whom, and the time or times at which, options shall be granted
and the number of shares to be subject to each option. In making
such determinations, the Committee may take into account the nature
of the services rendered by the respective individuals, their
present and potential contributions to the Company's success and
such other factors as the Committee, in its discretion, shall deem
relevant. Subject to the express provisions of the Plan, the
Committee shall also have plenary authority to interpret the Plan,
to prescribe, amend and rescind rules and regulations relating to
it, to determine the terms and provisions of the respective stock
option agreements (which need not be identical) and to make all
other determinations necessary or
1
<PAGE> 2
advisable for the administration of the Plan. The Committee's determinations
on the matters referred to in this Paragraph 3 shall be conclusive.
4. THE COMMITTEE.
The Committee shall be the Nominating and Compensation
Committee of the Board of Directors and shall at all times be
constituted to comply with Rule 16b-3 under the Securities Exchange
Act of 1934, or any successor to such Rule. In addition, in order
for options to qualify for the exemption from the one million
dollar limitation on deduction for executive compensation under
Section 162(m) of the Code, such Committee would also have to
consist solely of two or more Outside Directors. For this purpose,
an Outside Director shall mean a director of the Company who:
(1) is not an employee of the Company or any subsidiary
while he is a member of the Committee;
(2) is not a former employee of the Company or a subsidiary
who receives compensation for prior services (other than
benefits under a tax-qualified retirement plan) during
the taxable year;
(3) has not been an Officer of the Company or a subsidiary; and
(4) shall not receive Remuneration from the Company or a
subsidiary either directly or indirectly in any capacity
other than as a director.
"Remuneration" and "Officer" as used herein shall be
determined in accordance with Treas. Reg. Section 1.162-27(e)(3) or
any successor thereto.
The Committee shall be appointed by the Board of Directors,
which may from time to time appoint members of the Committee in
substitution for members previously appointed and may fill
vacancies, however caused, in the Committee. The Board shall
select the Chairman. The Committee shall hold its meetings at such
times and places as it may determine. A majority of its members
shall constitute a quorum. All determinations of the Committee
shall be made by a majority of its members present at any meeting
at which there is a quorum. Any decision or determination reduced
to writing and signed by all of the members shall be fully as
effective as if it had been made by a majority vote at a meeting
duly called and held. The Committee may appoint a secretary, shall
keep minutes of its meetings and shall make such rules and
regulations for the conduct of its business as it shall deem
advisable.
5. ELIGIBILITY.
2
<PAGE> 3
Options may be granted only to key employees, officers and
directors of the Company or its subsidiaries. The term
"subsidiary" shall mean any corporation (other than the Company)
in an unbroken chain of corporations beginning with the Company if,
at the time of the granting of the option, each of the corporations
other than the last corporation in the unbroken chain owns stock
possessing 50% or more of the total combined voting power of all
classes of stock in one of the other corporations in such chain, or
such other meaning as may be hereafter ascribed to it in
Section 424 of the Code. Incentive Stock Options may only be
granted to key employees and officers of the Company or its
subsidiaries.
6. OPTION PRICES.
The purchase price of the Common Stock under each option
shall not be less than 100% of the fair market value of the stock
at the time of the granting of the option. Such fair market value
shall generally be considered to be the closing price of the
Company's Common Stock on the Nasdaq Stock Market (formerly known
as the NASDAQ/National Market System) on the day the option is
granted (or if such closing price is not reported on the date of
grant, the last reported closing price); provided, however, that
the Committee may adopt any other criterion for the determination
of such fair market value as it may determine to be appropriate.
The purchase price is to be paid in full upon the exercise of the
option, either (i) in cash, (ii) in the discretion of the
Committee, by the tender to the Company of shares of the Common
Stock of the Company, owned by the optionee and registered in his
name, having a fair market value equal to the cash exercise price
of the option being exercised, with the fair market value of such
stock to be determined in such appropriate manner as may be
provided for by the Committee or as may be required in order to
comply with, or to conform to the requirements of, any applicable
laws or regulations, or (iii) in the discretion of the Committee,
by any combination of the payment methods specified in clauses
(i) and (ii) hereof; provided that, no shares of Common Stock may
be tendered in exercise of an option if such shares were acquired
by the optionee through the exercise of an Incentive Stock Option
unless (i) such shares have been held by the optionee for at least
one year and (ii) at least two years have elapsed since such
Incentive Stock Option was granted. The proceeds of sale of stock
subject to option are to be added to the general funds of the
Company or to the shares of the Common Stock of the Company held in
its Treasury, and used for its corporate purposes as the Board of
Directors shall determine.
7. OPTION AMOUNTS.
The maximum aggregate fair market value (determined at the
time an option is granted in the same manner as provided for in
Paragraph 6 hereof) of the Common Stock of the Company with respect
to which Incentive Stock Options are exercisable for the first
time by any optionee during any calendar year (under all plans of
the Company and its subsidiaries) shall not exceed $100,000.
8. EXERCISE OF OPTIONS.
3
<PAGE> 4
The term of each option shall be not more than ten (10) years
from the date of granting thereof or such shorter period as is
prescribed in Paragraph 9 following. Within such limit, options
will be exercisable at such time or times, and subject to such
restrictions and conditions, as the Committee shall, in each
instance, approve, which need not be uniform for all optionees;
provided, however, that no option may be exercised (i) at any time
prior to three (3) years from the date of granting, and, (ii)
except as provided in Paragraphs 9 and 10 following, unless the
optionee is then an employee or director of the Company or a
subsidiary and has been so employed or engaged continuously since
the granting of the option. The holder of an option shall have
none of the rights of a shareholder with respect to the shares
subject to option until such shares shall be issued to him upon the
exercise of his option. Upon exercise of an option the Committee
shall withhold a sufficient number of shares to satisfy the
Company's withholding obligations for any taxes incurred as a
result of such exercise; provided, that in lieu of all or part of
such withholding, the optionee may pay an equivalent amount of cash
to the Company.
9. TERMINATION OF EMPLOYMENT OR SERVICE AS A DIRECTOR.
The holder of any option issued hereunder must exercise the
option prior to his termination of employment or service as a
director. However, the Committee in its absolute discretion may
permit the optionee to exercise his option, to the extent that he
was entitled to exercise it at the date of such termination of
employment or service at any time within three (3) months after
such termination, but not after ten (10) years from the date of the
granting thereof. If the optionee terminates employment or service
on account of disability or retirement, he may exercise such option
to the extent he was entitled to exercise it at the date of such
termination at any time within one (1) year of the termination of
his employment or service but not after ten (10) years from the
date of the granting thereof. For this purpose a person shall be
deemed to be disabled if he is permanently and totally disabled
within the meaning of Section 422(c)(6) of the Code, which, as of
the date hereof, shall mean that he is unable to engage in any
substantial gainful activity by reason of any medically
determinable physical or mental impairment which can be expected to
result in death or which has lasted or can be expected to last for
a continuous period of not less than 12 months. A person shall be
considered disabled only if he furnishes such proof of disability
as the Committee may require. Options granted under the Plan shall
not be affected by any change of employment so long as the holder
continues to be an employee of the Company or a subsidiary thereof.
The option agreements may contain such provisions as the Committee
shall approve with reference to the effect of approved leaves of
absence. Nothing in the Plan or in any option granted pursuant to
the Plan shall confer on any individual any right to continue in
the employ or service of the Company or any subsidiary or interfere
in any way with the right of the Company or any subsidiary thereof
to terminate an employee's employment at any time.
10. DEATH OF HOLDER OF OPTION.
In the event of the death of an individual to whom an option
has been granted under the Plan, while he is employed by, or serves
as a director of, the Company (or a subsidiary), the option
theretofore granted to him may be exercised, to the extent that he
was entitled to exercise it at the date of such death, by a legatee
or legatees of the option holder under his last will, or by
4
<PAGE> 5
his personal representatives or distributees, at any time within a
period of one (1) year after his death, but not after ten (10)
years from the date of granting thereof, and only if and to the
extent that he was entitled to exercise the option at the date of
his death.
11. NON-TRANSFERABILITY OF OPTIONS.
Each option granted under the Plan shall, by its terms, be
non-transferable otherwise than by will or the laws of descent and
distribution and an option may be exercised, during the lifetime of
the holder thereof, only by him.
12. SUCCESSIVE OPTION GRANTS.
Successive option grants may be made to any holder of options
under the Plan.
13. INVESTMENT PURPOSE.
Each option under the Plan shall be granted only on the
condition that all purchases of stock thereunder shall be for
investment purposes, and not with a view to resale or distribution,
except that the Committee may make such provision with respect to
options granted under this Plan as it deems necessary or advisable
for the release of such condition upon the registration with the
Securities and Exchange Commission of stock subject to the option,
or upon the happening of any other contingency warranting the
release of such condition.
14. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR CORPORATE
ACQUISITIONS.
Notwithstanding any other provisions of the Plan, the option
agreements may contain such provisions as the Committee shall
determine to be appropriate for the adjustment of the number and
class of shares subject to each outstanding option and the option
prices and exercise amounts in the event of changes in the
outstanding Common Stock by reason of stock dividends,
recapitalization, mergers, consolidations, split-ups, combinations
or exchanges of shares and the like, and, in the event of any such
change in the outstanding Common Stock, the aggregate number and
class of shares available under the Plan and the maximum number of
shares as to which options may be granted to any individual shall
be appropriately adjusted by the Committee, whose determination
shall be conclusive. In the event the Company or a subsidiary
enters into a transaction described in Section 424(a) of the Code
with any other corporation, the Committee may grant options to
employees or former employees of such corporation in substitution
of options previously granted to them upon such terms and
conditions as shall be necessary to qualify such grant as a
substitution described in Section 424(a) of the Code. In the event
of a special, non-recurring distribution with respect to the
Company's Common Stock, the Committee may adjust the number of
shares subject to each option and the option price per share in
such manner as the Committee deems just and equitable to reflect
such distribution, but in no event shall the total number of shares
used under the Plan exceed the number authorized under Paragraph 2.
5
<PAGE> 6
15. AMENDMENT AND TERMINATION.
Either the Board of Directors or the Committee may at any
time terminate the Plan, or make such modifications of the Plan as
it shall deem advisable; provided, however, that neither the Board
of Directors nor the Committee may, without further approval by the
holders of Common Stock, increase the maximum numbers of shares as
to which options may be granted under the Plan (except under the
anti-dilution provisions hereof), or change the class of persons to
whom options or may be granted, or withdraw the authority to
administer the Plan from a committee whose members satisfy the
requirements of Paragraph 4. No termination or amendment of the
Plan may, without the consent of the optionee to whom any option
shall theretofore have been granted, adversely affect the rights of
such optionee under such option.
16. EFFECTIVENESS OF THE PLAN.
The Plan shall become effective upon adoption by the Board
of Directors, subject, however, to its further approval by the
shareholders of the Company given within twelve (12) months of the
date the Plan is adopted by the Board of Directors at a regular
meeting of the shareholders or at a special meeting duly called and
held for such purpose. Grants of options may be made prior to such
shareholder approval but all option grants made prior to
shareholder approval shall be subject to the obtaining of such
approval and if such approval is not obtained such options shall
not be effective for any purpose.
17. TIME OF GRANTING OF OPTIONS.
An option grant under the Plan shall be deemed to be made on
the date on which the Committee, by formal action of its members
duly recorded in the records thereof, makes an award of an option
or to an eligible employee or director of the Company or its
subsidiaries (but in no event prior to the adoption of the Plan by
the Board of Directors), provided that such option is evidenced by
a written option agreement duly executed on behalf of the Company
and on behalf of the optionee within a reasonable time after the
date of the Committee action.
18. TERM OF PLAN.
This Plan shall terminate ten (10) years after the date on
which it is approved and adopted by the Board of Directors or the
Committee, and no option shall be granted hereunder after the
expiration of such ten-year period. Options outstanding at the
termination of the Plan shall continue in full force and effect and
shall not be affected thereby.
* * *
The foregoing Plan was approved and adopted by the Board of
Directors of the Company on January 16, 1997.
6
<PAGE> 1
<TABLE>
Exhibit 11.1
CALCULATION OF PRIMARY NET INCOME PER SHARE
<CAPTION>
Six months
Year ended Year ended Year ended ended
June 30, 1994 June 30, 1995 June 30, 1996 December 31, 1996
------------- ------------- ------------- -----------------
<S> <C> <C> <C> <C>
Net income $3,061,137 $3,554,964 $4,100,928 $1,928,745
Pro forma income taxes 1,224,455 1,421,986 1,640,371 771,498
---------- ---------- ---------- ----------
Pro forma net income $1,836,682 $2,132,978 $2,460,557 $1,157,247
Weighted average shares outstanding
during the period 7,000,000 7,000,000 7,000,000 7,000,000
Shares issuable under consulting
agreement 96,366 96,366 96,366 96,366
Shares issuable under compensation
arrangement 170,708 170,708 170,708 170,708
Shares assumed outstanding to
support S Corporation distribution -- -- 854,567 854,567
---------- ---------- ---------- ----------
Weighted average common and common
equivalent shares outstanding
during the period 7,267,074 7,267,074 8,121,641 8,121,641
========== ========== ========== ==========
Pro forma net income per share $ 0.25 $ 0.29 $ 0.30 $ 0.14
========== ========== ========== ==========
</TABLE>
<PAGE> 1
Subsidiaries of Registrant
1. Valley National Gases Delaware, Inc.
2. Valley National Gases, Inc.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania
March 11, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FISCAL 1996 VALLEY NATIONAL GASES, INC. STATEMENT OF OPERATIONS AND BALANCE
SHEET FILED WITH THE COMPANY'S REGISTRATION ON FORM S-1 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-START> JUL-01-1995
<PERIOD-END> JUN-30-1996
<CASH> 4,548,546
<SECURITIES> 0
<RECEIVABLES> 6,841,939
<ALLOWANCES> 140,000
<INVENTORY> 4,157,906
<CURRENT-ASSETS> 16,241,290
<PP&E> 41,155,827
<DEPRECIATION> 18,029,419
<TOTAL-ASSETS> 45,490,848
<CURRENT-LIABILITIES> 9,022,847
<BONDS> 19,506,728
<COMMON> 18,301
0
0
<OTHER-SE> 16,352,791
<TOTAL-LIABILITY-AND-EQUITY> 45,490,848
<SALES> 53,611,979
<TOTAL-REVENUES> 53,611,979
<CGS> 23,617,062
<TOTAL-COSTS> 23,617,062
<OTHER-EXPENSES> 24,994,862
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,561,081
<INCOME-PRETAX> 4,100,928
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,100,928
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,100,928
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
VALLEY NATIONAL GASES, INC. CONDENSED STATEMENT OF OPERATIONS AND
CONDENSED BALANCE SHEET AS OF AND FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
FILED WITH THE COMPANY'S REGISTRATION STATEMENT ON FORM S-1 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,406,886
<SECURITIES> 0
<RECEIVABLES> 10,213,583
<ALLOWANCES> 259,423
<INVENTORY> 7,108,020
<CURRENT-ASSETS> 21,266,785
<PP&E> 47,528,805
<DEPRECIATION> 21,782,406
<TOTAL-ASSETS> 62,470,727
<CURRENT-LIABILITIES> 11,557,370
<BONDS> 31,534,974
<COMMON> 18,301
0
0
<OTHER-SE> 17,892,493
<TOTAL-LIABILITY-AND-EQUITY> 62,470,727
<SALES> 33,777,288
<TOTAL-REVENUES> 33,777,288
<CGS> 15,504,275
<TOTAL-COSTS> 15,504,275
<OTHER-EXPENSES> 15,501,433
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 992,851
<INCOME-PRETAX> 1,928,745
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,928,745
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,928,745
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
