VALLEY NATIONAL GASES INC, 10-K405, 1999-09-28

VALLEY NATIONAL GASES INC
10-K405, 1999-09-28
CHEMICALS & ALLIED PRODUCTS

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

FORM 10-K

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

For the fiscal year ended June 30, 1999
or

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

For the transition period from to
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COMMISSION FILE NUMBER 000-29226

VALLEY NATIONAL GASES INCORPORATED
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
PENNSYLVANIA 23-2888240
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

</TABLE>

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

(304) 232-1541
(Registrant's telephone number, including area code)

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

<TABLE>
<CAPTION>
NAME OF EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
None None
</TABLE>

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

Common stock, $.001 par value per share

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]

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

The aggregate market value of voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price of such stock on
August 31, 1999, as reported on the American Stock Exchange, was $8,883,630.

As of September 17, 1999, the Company had outstanding 9,347,584 shares of
common stock.

DOCUMENTS INCORPORATED BY REFERENCE

Certain specified portions of the Company's definitive proxy statement for
the annual meeting of shareholders to be held October 26, 1999 are incorporated
by reference in response to Part III.

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VALLEY NATIONAL GASES INCORPORATED

TABLE OF CONTENTS

PART I

<TABLE>
<CAPTION>
ITEM PAGE NO.
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<C> <S> <C>
1. Business.................................................... 1
2. Properties.................................................. 8
3. Legal Proceedings........................................... 8
4. Submission of Matters to a Vote of Security Holders......... 8

PART II
5. Market for the Company's Common Stock and Related
Stockholder Matters......................................... 9
6. Selected Financial Data..................................... 10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 11
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 17
8. Financial Statements and Supplementary Data................. 17
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 17

PART III
10. Directors and Executive Officers of the Company............. 18
11. Executive Compensation...................................... 19
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 19
13. Certain Relationships and Related Transactions.............. 20

PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... 20
</TABLE>
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PART I

ITEM 1. BUSINESS

OVERVIEW

The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, propane and fire protection
equipment in eleven 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
$102.3 million in fiscal 1999. In fiscal 1999, gases accounted for approximately
40% of net sales, welding equipment and supplies accounted for approximately 45%
of net sales, and cylinder and tank rental accounted for approximately 15% 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 54 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
424,000 cylinders, which require minimal maintenance and have useful lives that
the Company expects will extend on average for 30 years or longer. The Company
selectively participates in the small bulk gas market through the delivery of
gases in cryogenic transports and the storage of gases in cryogenic tanks and
propane tanks which are also rented to bulk gas customers. The Company owns
approximately 16,000 bulk propane tanks and 360 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 57
acquisitions. Since July 1, 1998, the Company has acquired five independent
distributors, adding approximately $10 million in annualized sales. Management
believes there will continue to be numerous attractive acquisition candidates
available to the Company as a result of the consolidation trend in the industry
and that the Company will be able to successfully integrate acquired operations
into its base business, generating growth and operational synergies.
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.

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

This segment of the industry is estimated to have 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
7,000 retail propane companies operating 13,500 local distribution centers
nationwide. The Company believes that the 50 largest propane distributors have
less than a 50% share of the approximately nine billion gallon annual market.
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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 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 57 distributors. 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. The Company does not currently intend to
issue shares of its Common Stock or other securities in order to consummate its
acquisitions, but may in the future elect to do so.

Acquisition Strategy. The Company intends to continue to focus its
acquisition efforts both on market areas where the Company has an existing
presence and on new areas where it believes it can achieve a leading presence.
The Company believes there are many potential acquisition candidates with
operations in these market areas. The Company seeks to achieve operating
efficiencies when it acquires a distributor in an overlapping or contiguous
market area by closing redundant locations, eliminating a significant portion of
the acquired distributor's overhead and consolidating distribution routes.
Acquisitions in new markets allow the Company to achieve operating efficiencies
through volume discounts on purchases, lower administrative and professional
expenses and the purchase of new equipment to replace inefficient equipment and
equipment previously leased at relatively expensive lease rates.

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

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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.

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
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 1999, the Company sold approximately thirteen million gallons of
propane to approximately 19,000 residential, commercial and industrial users.
Propane sales accounted for approximately 12% of net sales in fiscal 1999.
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 1999, 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, 1997, 1998 and 1999 for each of the
following products and services:

<TABLE>
YEARS ENDED JUNE 30,
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1997 1998 1999
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<S> <C> <C> <C>
Gases.................................................. 39.0% 38.5% 39.8%
Welding equipment and supplies......................... 45.8 46.3 44.5
Cylinder rental and other.............................. 15.2 15.2 15.7
</TABLE>

CUSTOMERS

The Company currently has more than 63,000 customers, none of which
accounted for more than 1% of net sales in fiscal 1999. In fiscal 1999,
approximately 15% of the Company's net sales were to metal production and
fabrication customers. Other major industry categories represented by the
Company's customer base includes manufacturing at 18%, health care at 7%,
construction at 7%, services at 7%, mining at 3%, and oil and chemicals at 2% of
net sales. 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.

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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. The Company solicits and maintains business primarily through a direct
selling effort using an experienced sales force of approximately 90 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. The Company believes that electronic commerce
conducted through the internet, ("e-commerce"), will become an important method
in attracting as well as maintaining some customers in the future. The Company
plans to continue developments in this area.

Smaller accounts are usually served from "walk in" retail locations, where
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 primarily to the residential propane market as
management does not consider advertising to be a significant factor in
generating sales.

COMPETITION

Competition is almost always on a regional market basis and is based
primarily on customer loyalty, service and, to a lesser extent, price. Most
regional markets have between three and six competitors, the majority of whom
are small independent companies, with one or two competitors having a
significantly higher market share than the others. The Company competes in many
markets throughout West Virginia, Pennsylvania, Kentucky, Ohio, Virginia,
Tennessee, Maryland, Delaware, New Jersey, North Carolina and Wisconsin. 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 57% of the
Company's gas purchases in fiscal 1999. If any of these arrangements were
terminated, the Company believes it would be able to readily secure an alternate
source of supply.

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The Company purchases welding equipment and consumable supplies from
approximately 61 primary vendors, of which purchases from the top five vendors
represented approximately 56% of total purchases in fiscal 1999. 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.

EMPLOYEES

At June 30, 1999, the Company employed 589 people, of whom approximately
15% were covered by collective bargaining agreements. Historically, the Company
has not been adversely affected by strikes or work stoppages. Approximately 57%
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.

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. The Company has not suffered any material losses from such lawsuits
in the past.

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ITEM 2. PROPERTIES

The Company owns approximately 424,000 cylinders, 16,000 bulk propane tanks
and 360 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, however, if well maintained their
useful life can be over 30 years.

The Company has 54 industrial gas and welding supply distribution locations
in eleven states, twenty-one 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 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 25,000 cylinders
per month, but has capacity to process approximately 100% 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. All of the Company's major facilities are leased
under long-term arrangements. The Company believes that its facilities are
adequate for its needs and that its properties are generally in good condition,
well maintained and suitable for their intended use.

ITEM 3. LEGAL PROCEEDINGS

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

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

No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended June 30, 1999.

8
<PAGE> 11

PART II

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

The Company's common stock began trading on April 10, 1997 on the Nasdaq
National Market under the symbol "VNGI". As reported by Nasdaq, the high and low
sales prices of the Company's stock for the fiscal year ended June 30, 1999 were
$11.25 and $2.813, respectively. On July 27, 1999, the Company's common stock
began trading on the American Stock Exchange under the symbol "VLG".

The range of daily closing prices per share for the Company's common stock
from July 1, 1997 to June 30, 1999 was:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1999: HIGH LOW
------------------------- ------- ------
<S> <C> <C>
Fourth quarter............................................ $ 4.625 $3.094
Third quarter........................................... $ 6.000 $4.625
Second quarter.......................................... $ 7.250 $5.625
First quarter........................................... $11.250 $7.125
</TABLE>

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30, 1998: HIGH LOW
- --------------------------------------------------------- ------- -------
<S> <C> <C>
Fourth quarter......................................... $12.125 $10.750
Third quarter.......................................... $11.250 $10.625
Second quarter......................................... $11.125 $10.500
First quarter.......................................... $11.250 $10.000
</TABLE>

The reported last sale price of the Company's common stock on the American
Stock Exchange on September 21, 1999 was $4.375.

On September 21, 1999, there were approximately 109 record holders of the
Company's common stock.

The Company has not paid any cash dividends since its initial public
offering, and does not anticipate that it will pay dividends in the foreseeable
future. The Company currently intends to retain future earnings, if any, to
provide funds for the growth and development of the Company's business. In
addition, the Company's existing credit facilities prohibit the payment of cash
or stock dividends on the company's capital stock without the bank's prior
written consent. See Item 7--"Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" and Note 6
of Notes to Consolidated Financial Statements contained in Item 14.

9
<PAGE> 12

ITEM 6. SELECTED FINANCIAL DATA

Selected consolidated financial data for the Company is presented in the
table below and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 and
the Company's consolidated financial statements included in Item 8 herein.

<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
------------------------------------------------
1995 1996 1997(1) 1998 1999
------- ------- ------- ------- --------
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA):
<S> <C> <C> <C> <C> <C>
Operating Results:
Net sales................................. $44,914 $53,612 $73,905 $95,031 $102,271
Depreciation and amortization (2)......... 3,112 4,700 6,673 9,086 8,328
Operating income.......................... 4,183 5,000 4,493 7,848 9,458
Interest expense.......................... 1,072 1,561 2,158 3,116 4,114
Income taxes (3).......................... -- -- 3,655 2,052 2,350
Net income (loss)......................... 3,555 4,101 (845) 2,953 3,245
Basic earnings per share.................. $ 0.31 $ 0.32
Diluted earnings per share................ $ 0.31 $ 0.32
Pro forma basic earnings (loss) per share... $ 0.30 $ 0.35 $ (0.30)
Pro forma diluted earnings (loss) per share
(4)....................................... $ 0.29 $ 0.34 $ (0.27) $ 0.31
Weighted average shares
Basic..................................... 9,620 9,531
Diluted................................... 9,667 9,531
Pro forma weighted average shares (5)
Basic..................................... 7,000 7,000 7,573
Diluted................................... 7,267 7,267 8,506
Balance Sheet Data:
Working capital........................... 6,327 7,218 9,685 7,183 9,613
Total assets.............................. 33,421 45,491 67,806 97,059 108,526
Current portion of long-term debt......... 2,135 2,737 3,928 5,612 6,294
Long-term debt............................ 12,964 19,507 28,787 48,656 56,242
Other non-current liabilities (3)......... 478 590 5,317 7,302 9,528
Shareholders' equity...................... 13,796 16,371 21,230 24,183 27,045
</TABLE>

- ---------------
(1) Fiscal year 1997 includes special noncash charges of $1.9 million ($1.1
million net of taxes) related to the issuance of stock, in conjunction with
the Company's initial public offering, to executives and a director to
satisfy deferred compensation and consulting agreements.

(2) Effective July 1, 1998, the Company changed its estimate of useful lives for
cylinders and tanks for depreciation purposes from 12 years to 30 years.
Depreciation for fiscal year 1999 would have been $2.3 million higher
without this change, resulting in an increase in net earnings of $1.3
million or $0.14 per share.

(3) Until April 10, 1997, the Company was treated as an S Corporation for
federal and state income tax purposes. As a result, the Company was not
subject to federal and state income taxes. The Company terminated its S
Corporation election in connection with the initial public offering of its
common stock and became a C Corporation. Upon termination of the S
Corporation election, the Company was required to recognize $3.9 million of
deferred income taxes in the final quarter of fiscal year 1997.

(4) Reflects pro forma income taxes at 40% for periods prior to April 10, 1997.

(5) Fiscal year 1997 pro forma shares include shares assumed to be issued to
cover the excess of S corporation distributions over current period
earnings.

10
<PAGE> 13

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

OVERVIEW

The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in eleven
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 $102.3 million in
fiscal 1999. In fiscal 1999, gases accounted for approximately 40% of net sales,
welding equipment and supplies accounted for approximately 45% of net sales, and
cylinder and tank rental accounted for approximately 15% of net sales.

The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 40 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions will
have, a dilutive effect upon the Company's income from operations and net income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins and real
sales growth, occur over a period ranging from two to eight quarters, depending
upon the complexity of integrating each acquisition into the Company's existing
operations. The consideration for most acquisitions includes a combination of a
cash payment at closing, seller financing and payments under covenants not to
compete and consulting agreements. In most cases, operating cash flow of an
acquired business is positive in a relatively short period of time. For many
acquisitions, the Company believes that projections of future cash flows justify
payment of amounts in excess of the book or market value of the assets acquired,
resulting in goodwill being recorded.

The Company's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months
falling in the Company's second and third fiscal quarters. Seasonality of total
sales has increased as propane sales as a percentage of total sales have
increased.

Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a
quarter-to-quarter basis. The Company believes that changes in these expenses as
a percentage of sales should be evaluated over the long term rather than on a
quarter-to-quarter basis due to the 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.
Future acquisitions may affect this pattern depending upon the product mix of
the acquired businesses.

Effective July 1, 1998, the Company changed its estimate of the useful
lives of its cylinders and tanks from 12 to 30 years. This change was made to
better reflect the estimated periods during which these assets will remain in
service. The change had the effect of reducing depreciation expense in 1999 by
approximately $2.3 million and increasing net earnings by $1.3 million or $.14
per share.

Until April 10, 1997, the Company was treated as an S Corporation for
federal and state income tax purposes. As a result, the Company was not subject
to federal and state income taxes. The Company terminated its S Corporation
election in connection with the initial public offering of its common stock and
become a C Corporation. Upon termination of the S Corporation election, the
Company was required to recognize $3.9 million of deferred income taxes in the
final quarter of fiscal year 1997.

11
<PAGE> 14

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
YEARS ENDED JUNE 30,
-----------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Net sales........................................... 100.0% 100.0% 100.0%
Cost of products sold, excluding depreciation and
amortization...................................... 46.5 46.7 45.3
----- ----- -----
Gross profit........................................ 53.5 53.3 54.7
Operating and administrative expenses............... 35.9 35.4 37.3
Depreciation and amortization (1)................... 9.0 9.6 8.2
Special charges (2)................................. 2.5 -- --
----- ----- -----
Income from operations.............................. 6.1 8.3 9.2
Interest expense.................................... 2.9 3.3 4.0
Other income........................................ 0.6 0.3 0.3
----- ----- -----
Net income before taxes............................. 3.8 5.3 5.5
Provision for income taxes (3)...................... 4.9 2.2 2.3
----- ----- -----
Net income.......................................... (1.1)% 3.1% 3.2%
===== ===== =====
</TABLE>

- ---------------
(1) Effective July 1, 1998, the Company changed its estimate of useful lives for
cylinders and tanks for depreciation purposes from 12 years to 30 years.
Depreciation for fiscal year 1999 would have been $2.3 million higher
without this change, the change resulted in an increase in net earnings of
$1.3 million or $0.14 per share.

(2) Special one-time noncash charges were recorded in conjunction with the
initial public offering of the Company's common stock of (i) $1.9 million
($1.1 million net of taxes) for shares issued to executives and a director
to satisfy deferred compensation and consulting agreements, and (ii) $3.9
million for recognition of the deferred tax liability related to termination
of the S corporation status.

(3) For all periods prior to April 10, 1997, 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.

COMPARISON OF YEARS ENDED JUNE 30, 1999 AND 1998

Net sales increased 7.6%, or $7.3 million, to $102.3 million from $95.0
million for the years ended June 30, 1999 and 1998, respectively. Acquisitions
contributed $11.5 million of the increase in net sales, while same store sales
declined $4.2 million. Same store sales for the year were negatively impacted as
compared to the same period last year reflecting reduced sales to steel related
businesses, reflecting reduced capacity utilization in the steel industry as a
result of the high level of imports and reduced sales at its branches in
Southwest Ohio impacted by the actions of former employees who, in the Company's
opinion acted in violation of covenants not to compete. Gases and cylinder
income represented 55.5% of net sales for the year, with hard goods representing
the remaining 44.5%. In comparison, net sales for the prior year reflected gases
and cylinder income as 53.7% and hard goods as 46.3%.

Gross profit, which excludes depreciation and amortization, increased
10.5%, or $5.3 million, to $55.9 million for the year, compared to $50.6 million
for the prior year. Acquisitions made during the preceding twelve months
contributed $5.4 million of the increase in gross profit, while same stores
declined $0.1 million. Gross profit as a percentage of net sales was 54.7% for
the year, compared to 53.3% for the prior year. This change reflects an increase
in the proportion of gases and cylinder rent sales, which have a higher gross
profit margin as a percentage of net sales than hard goods.

12
<PAGE> 15

Operating and administrative expenses increased 13.3%, or $4.5 million, to
$38.2 million for the year, compared to $33.7 million for the prior year. Of
this increase, $3.5 million was related to acquired businesses, with the balance
of the change, or $1.0 million, attributable to same store expenses.
Depreciation and amortization expense decreased $.8 million for the year,
primarily as a result of a decrease of $2.3 million due to the Company's change
in its estimate of useful lives related to cylinders and tanks from twelve to
thirty years offset by acquisitions made during the last twelve months.

Interest expense increased 32.0%, or $1.0 million, to $4.1 million for the
year, compared to $3.1 million for the prior year. This increase reflects the
impact of additional borrowings related to acquisitions and the purchase of
treasury stock.

Net earnings for the year were $3.2 million, compared to $3.0 million for
the fiscal year ended June 30, 1998. The change in the estimate of useful lives
related to cylinders and tanks had the effect of increasing net earnings by $1.3
million in 1999.

Earnings before interest, taxes, depreciation, amortization and other
noncash charges increased 4.5%, or $0.8 million, to $18.0 million for the year,
compared to $17.2 million for the prior year. Earnings before interest, taxes,
depreciation, amortization and other noncash charges is an important measurement
of the Company's ability to repay debt through operations and provides the
Company with the ability to pursue investment alternatives.

COMPARISON OF YEARS ENDED JUNE 30, 1998 AND 1997

Net sales increased 28.6%, or $21.1 million, to $95.0 million from $73.9
million for the years ended June 30, 1998 and 1997, respectively. Acquisitions
made during the preceding twelve months contributed $20.6 million of the
increase in net sales, while same store sales growth contributed $0.5 million of
the increase. Same store sales for the year were negatively impacted by the
effect of a warmer than usual winter on the Company's propane sales and the
performance at three of the company's branches. Gases and cylinder income
represented 53.7% of net sales for the year, with hard goods representing the
remaining 46.3%. In comparison, net sales for the prior year reflected gases and
cylinder income as 55.6% and hard goods as 44.4%. This change in sales mix
reflects the effect of acquisitions made during the preceding twelve months. The
Company believes that the base of hard good customers acquired in these
acquisitions provides it the opportunity to build gas and cylinder business in
the future.

Gross profit, which excludes depreciation and amortization, increased
28.0%, or $11.1 million, to $50.6 million for the year, compared to $39.6
million for the prior year. Acquisitions made during the preceding twelve months
contributed $10.6 million of the increase in gross profit, while same stores
contributed $0.5 million of the increase. Gross profit as a percentage of net
sales was 53.3% for the year, compared to 53.5% for the prior year. This change
reflects an increase in the proportion of hard good sales, which have a lower
gross profit margin as a percentage of net sales than gases, primarily related
to acquisitions made during the year, partially offset by improved gross margins
for gas products.

Operating and administrative expenses, before prior year special charges,
increased 27.1%, or $7.2 million, to $33.7 million for the year, compared to
$26.5 million for the prior year. Of this increase, $6.4 million was related to
acquired businesses, with the balance of the change, or $0.8 million,
attributable to same store expenses. Depreciation and amortization expense
increased $2.4 million for the year, primarily as a result of acquisitions made
during the last twelve months. Special one-time noncash charges of $1.9 million
($1.1 million net of taxes) were recorded during the final quarter of the prior
year reflecting the issuance of stock at the time of the initial public offering
to executives and a director to satisfy obligations under certain deferred
compensation and consulting agreements.

Interest expense increased 44.4%, or $1.0 million, to $3.1 million for the
year, compared to $2.2 million for the prior year. This increase reflects the
impact of additional borrowings related to acquisitions, partially offset by
reduced average interest rates resulting from the refinancing of the Company's
credit facility.

Earnings before interest, taxes, depreciation, amortization and other
noncash charges increased 27.2%, or $3.7 million, to $17.2 million for the year,
compared to $13.5 million for the prior year. Earnings before interest,
13
<PAGE> 16

taxes, depreciation, amortization and other noncash charges is an important
measurement of the Company's ability to repay debt through operations and
provides the Company with the ability to pursue investment alternatives.

YEAR 2000 COMPLIANCE

The Company's work on the Year 2000 ("Y2K") computer compliance issue began
in 1996. The Company's Y2K compliance program consists of five parts: inventory,
assessment, renovation, testing and implementation. The Company completed its
testing of its business-critical information technology applications during the
quarter ended June 30, 1999. The Company also completed a Company-wide
inventory, assessment and remediation project plans for business-critical
personal computers and software, user applications and embedded-chip systems.

The Company continues to investigate the Y2K compliance status of its
vendors, suppliers and affiliates via the Company's own internal vendor
compliance effort. The Company will carry out this task through a Company-wide
effort to address internal issues, and jointly with industry trade groups, to
address issues related to third parties which are common to the industry.

The Company estimates that expenses incurred for programming, internal
staff costs and other expenses related to its Y2K efforts were less than
$100,000 and expects no significant additional costs related to these efforts.

While the Company believes it is taking all appropriate steps to achieve
Y2K compliance, its Y2K issues and any potential future business interruptions,
costs, damages or losses related thereto, are dependent, to a significant
degree, upon the Y2K compliance of third parties, both domestic and
international, such as government agencies, customers, vendors and suppliers.
The Y2K problem is pervasive and complex, as virtually every computer operation
will be affected in some way. Consequently, no assurance can be given that Y2K
compliance can be achieved without significant additional costs.

LIQUIDITY AND CAPITAL RESOURCES

Historically, the Company has financed its operations, capital expenditures
and debt service with funds provided from operating activities. Acquisitions
have been financed by a combination of seller financing, bank borrowings and
funds generated from operations.

At June 30, 1999, the Company had working capital of $9.6 million and long
term debt of $56.2 million, compared to $7.2 million and $48.7 million,
respectively, at June 30, 1998. In conjunction with the Company's initial public
offering of its common stock during fiscal year 1997, $1.9 million of long term
debt was retired with shares of common stock and was subject to a put right by
the holders to convert the shares back to debt, plus accrued interest, for a
period of three years. These holders exercised their right in 1999 and the
Company placed the shares into treasury.

Net cash provided by operating activities decreased $2.7 million, to $10.9
million for fiscal year 1999, compared to $13.6 million for the prior year. Cash
used for acquisitions was approximately $7.6 million and $25.5 million for
fiscal 1999 and 1998, respectively. Capital expenditures, made primarily for the
purchase of cylinders, tanks and delivery trucks, were approximately $7.5
million and $5.3 million for fiscal 1999 and 1998, respectively. Net proceeds,
after related expenses, from the initial public offering in April 1997 of
approximately $15.7 million were used to pay the Company's estimated S
corporation distribution of $11.1 million with the balance of $4.6 million used
to reduce outstanding borrowings.

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 6.9% as of June 30, 1999. As of June 30, 1999, availability under the
revolving loan was approximately $29.9 million, with outstanding borrowings of
approximately $36.8 million and outstanding letters of credit of approximately
$8.6 million. The credit facility is secured by all of the Company's assets.

The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum fixed
charge coverage, maximum funded debt to EBITDA, and minimum net worth. As of
June 30, 1999, the Company was not in compliance with the fixed charge coverage
covenant and has obtained a waiver for the noncompliance. The Company has
subsequently amended the covenant requirements contained in the credit facility
with its banks.

The Company is obligated under various promissory notes related to the
financing of acquisitions that have various rates of interest, ranging from 3.7%
to 10.0% per annum, and maturities through 2010. The outstanding balance of
these notes as of June 30, 1999 and 1998 was $15.1 million and $14.2 million,
respectively. 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, 1999 and 1998 were $8.6 million and $7.7 million,
respectively.

On December 23, 1997, the Company entered into two interest rate swap
agreements with Bank One to reduce the impact of changes in interest rates. The
first agreement was for a period of seven years, cancelable by the bank at the
end of five years, whereby the Company agreed to pay the bank a fixed rate of
5.90% per annum on the notional principal amount of $5.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
The second agreement was for a period of five years, cancelable by the bank at
the end of three years, whereby the Company agreed to pay the bank a fixed rate
of 5.80% per annum on the notional principal amount of $5.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
On January 15, 1998, the Company entered into two interest rate swap agreements
with Bank One to reduce the impact of changes in interest rates. The first
agreement was for a period of seven years, cancelable by the bank at the end of
five years, whereby, the Company agreed to pay the bank a fixed rate of 5.43%
per annum on the notional principal amount of $10.0 million and the bank agreed
to pay the Company the one month LIBOR rate on the same notional amount. The
second agreement was for a period of five years, cancelable by the bank at the
end of three years, whereby, the Company agreed to pay the bank a fixed rate of
5.29% per annum on the notional principal amount of $10.0 million and the bank
agreed to pay the Company the one month LIBOR rate on the same notional amount.
The Company is exposed to credit loss in the event of nonperformance by the
bank. However, the Company does not anticipate nonperformance by the bank.

The Company has entered into a put/call option agreement with an
independent distributor for the purchase of its business. This option becomes
exercisable beginning in the year 2002 and ending in the year 2008. The Company
believes that it will have adequate capital resources available to fund this
acquisition at such time that the option is exercised.

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

FLUCTUATIONS IN QUARTERLY RESULTS

The Company generally has experienced higher sales activity during its
second and third quarters as a result of seasonal sales of propane, with
corresponding lower sales for the first and fourth quarters. As a result, income
from operations and net income typically are higher for the second and third
quarters than for the first and fourth quarters of the fiscal year. The timing
of acquisitions may also have an appreciable effect on quarter to quarter
earnings.

15
<PAGE> 18

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 July 27, 1999, the Company's common stock began trading on the American
Stock Exchange under the symbol VLG. Prior to that date, the Company's stock was
traded on the Nasdaq Stock Market under the symbol VNGI.

On September 3, 1999, the Company entered into a purchase and sale
agreement to acquire an industrial gas and welding supply distributor with sales
of approximately $2.5 million. The Company expects this transaction to be
completed within 30 days. This transaction is expected to be financed with
borrowings under the credit facility and notes with the Seller.

On September 15, 1999, the Company entered into an amendment to its credit
agreement with the participating banks, whereby covenants were adjusted for the
periods ending September 30 and December 31, 1999.

RECENT ACCOUNTING PRONOUNCEMENTS

On June 15, 1998, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The Statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met.

In June 1999, the FASB issued Financial Accounting Standards No. 137,
Accounting for Derivative Instruments and Hedging Activities--Deferral of the
effective date of SFAS No 133." Both statements are effective for years
beginning after June 15, 2000.

The Company has not yet quantified the impacts of adopting Statement 133 on
our financial statements and have not determined the timing of or method of our
adoption of Statement 133. However, the Statement could increase volatility in
earnings and other comprehensive income.

FORWARD LOOKING STATEMENTS AND RISK FACTORS

This report includes statements that are forward-looking as that term is
defined by the Private Securities Litigation and Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases. The
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. All forward-looking statements are based upon current
expectations regarding important risk factors. Accordingly, actual results may
differ materially from those expressed in forward-looking statements and the
making of such statements should not be regarded as a representation by the
Company or any other person that the results expressed will be achieved.
Important risk factors include, but are not limited to, the Company's ability to
make and assimilate acquisitions, continued availability of financing, managing
rapid growth, competition, dependence on key personnel, dependence on key
suppliers, control by principal shareholder, uncertainties regarding accidents
or litigation which may arise in the normal course of business and effects of
changes in the economy, monetary and fiscal policies, laws and regulations,
inflation and fluctuations in interest rates.

16
<PAGE> 19

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including interest rate swaps and debt obligations.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates. For interest rate
swaps, the table presents notional amounts and weighted average interest rates
by expected (contractual) maturity dates. Notional amounts are used to calculate
the contractual payments to be exchanged under the contract. Weighted average
variable rates are based on the one month LIBOR rate in effect at the reporting
date. No assumptions have been made for future changes in the one month LIBOR
rate. The Company's market risk is substantially the same as it was in 1998.

<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
FOR PERIODS ENDING JUNE 30,
----------------------------------------------- THERE FAIR
2000 2001 2002 2003 2004 AFTER TOTAL VALUE
---- ---- ---- ---- ---- ----- ----- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long term debt
Fixed rate............ $ 3,736 $ 3,229 $ 3,012 $ 1,973 $ 1,569 $ 1,389 $ 14,907 $ 11,905
Average interest
rate................ 4.38% 4.74% 5.09% 5.55% 6.31% 6.31%
Variable rate......... $ 2,558 $39,315 $ 2,558 $ 2,558 $ 640 -- $ 47,630 $ 47,630
Average interest
rate................ 6.92% 6.88% 6.88% 6.88% 6.88% --
Interest rate swaps
Fixed to variable..... $30,000 $30,000 $30,000 $15,000 $15,000 -- $ 486
Average pay rate...... 5.52% 5.52% 5.52% 5.59% 5.59% --
Average receive
rate................ 5.21% 5.21% 5.21% 5.21% 5.21% --
</TABLE>

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The consolidated financial statements of the Company and the Independent
Accountants' report thereon listed in the accompanying Index to Financial
Statements are incorporated herein by reference.

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

There has been no change in the Company's accountants during the two most
recent years or any subsequent interim period.

17
<PAGE> 20

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY

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

<TABLE>
<CAPTION>
YEARS
EXPERIENCE
NAME AGE IN INDUSTRY POSITION
---- --- ------------ --------
<S> <C> <C> <C>
Gary E. West......................... 62 29 Chairman of the Board of Directors
Lawrence E. Bandi.................... 45 25 President, Chief Executive Officer, Director
John R. Bushwack..................... 48 23 Executive Vice President, Chief Operating
Officer, Director
Robert D. Scherich................... 39 3 Chief Financial Officer
Ben Exley, IV........................ 52 3 Director
James P. Hart........................ 45 3 Director
William A. Indelicato................ 60 30 Director
August E. Maier...................... 70 6 Director
F. Walter Riebenack.................. 60 0 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.
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 AND CHIEF OPERATING OFFICER. 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
and Westmoreland Holding Company, Inc., since 1999.

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

18
<PAGE> 21

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

JAMES P. HART, DIRECTOR. Mr. Hart was elected a director of the Company in
January 1997. He 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 the
University of Scranton.

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 Industrial 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.

AUGUST E. MAIER, DIRECTOR. Mr. Maier was elected a Director of the Company
in January 1997. In September, 1997, Mr. Maier became an employee of the Company
and served as Corporate Director of Field Operations until his retirement in
July 1999. He served as Chief Executive Officer of Houston Fearless 79, a
manufacturer of film processing equipment, from May 1995 until August 1997. 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
Technology and his Masters in Business Administration degree from the Harvard
Business School.

F. WALTER RIEBENACK, DIRECTOR. Mr. Riebenack was elected a Director of the
Company in January 1999. He has served as the Chief Financial Officer, General
Counsel and as a member of the Board of Site-Blauvelt, Engineers, Inc. since
1993, a multi-disciplinary consulting engineering firm offering transportation
design, geotechnical engineering, subsurface exploration, construction
inspection and materials testing services to a wide range of clients in both the
public and private sectors of the marketplace, with offices in New Jersey,
Pennsylvania, New York, Delaware, Virginia, South Carolina and West Virginia.
Mr. Riebenack received his law degree along with his Bachelor of Business
Administration degree in Finance and Accounting from the University of Notre
Dame. Mr. Riebenack has served as an instructor of Business Law at Indiana
University and St. Francis College in Fort Wayne, Indiana.

ITEM 11. EXECUTIVE COMPENSATION

The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 26, 1999, in the section titled "Executive Compensation" and is
incorporated herein by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 26, 1999, in the section titled "Common Stock Ownership of
Directors, Nominees and Officers" and is incorporated herein by reference.

19
<PAGE> 22

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 26, 1999, in the section titled "Certain Relationships and Related
Transactions" and is incorporated herein by reference.

PART IV

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

(a)(1) Financial Statements

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

(a)(2) Financial Statements Schedules

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

(a)(3) Exhibits

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

(b) Reports on Form 8-K

The Company did not file any reports on Form 8-K during the fourth quarter
of the year ended June 30, 1999.

20
<PAGE> 23

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.

VALLEY NATIONAL GASES INCORPORATED
September 28, 1999
/s/ LAWRENCE E. BANDI
--------------------------------------
Lawrence E. Bandi
President and Chief Executive Officer

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

<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>

/s/ GARY E. WEST Chairman of the Board September 28, 1999
- -----------------------------------
(Gary E. West)

/s/ LAWRENCE E. BANDI President, Chief Executive Officer, September 28, 1999
- ----------------------------------- Director
(Lawrence E. Bandi)

/s/ JOHN R. BUSHWACK Executive Vice President, Chief September 28, 1999
- ----------------------------------- Operating Officer, Secretary,
(John R. Bushwack) Director

/s/ ROBERT D. SCHERICH Chief Financial Officer September 28, 1999
- -----------------------------------
(Robert D. Scherich)

/s/ BEN EXLEY, IV Director September 28, 1999
- -----------------------------------
(Ben Exley, IV)

/s/ JAMES P. HART Director September 28, 1999
- -----------------------------------
(James P. Hart)

/s/ WILLIAM A. INDELICATO Director September 28, 1999
- -----------------------------------
(William A. Indelicato)

/s/ AUGUST E. MAIER Director September 28, 1999
- -----------------------------------
(August E. Maier)

/s/ F. WALTER RIEBENACK Director September 28, 1999
- -----------------------------------
(F. Walter Riebenack)
</TABLE>

21
<PAGE> 24

VALLEY NATIONAL GASES INCORPORATED

INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of the Independent Public Accountants................ F-1
Consolidated Balance Sheets as of June 30, 1998 and 1999.... F-2
Consolidated Statements of Operations for the years ended
June 30, 1997, 1998 and 1999.............................. F-3
Consolidated Statements of Changes in Shareholders' Equity
for the years ended June 30, 1997, 1998 and 1999.......... F-4
Consolidated Statements of Cash Flows for the years ended
June 30, 1997, 1998 and 1999.............................. F-5
Consolidated Notes to Financial Statements.................. F-6
</TABLE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors,
Valley National Gases Incorporated:

We have audited the accompanying consolidated balance sheets of Valley
National Gases Incorporated (a Pennsylvania corporation) and subsidiary as of
June 30, 1998 and 1999, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for each of the three years in
the period ended June 30, 1999. 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
National Gases Incorporated and subsidiary as of June 30, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally accepted accounting
principles.

/s/ Arthur Andersen LLP

Pittsburgh, Pennsylvania,
July 31, 1999
(except with respect to the matter discussed
in Note 16, as to which the date
is September 15, 1999)

F-1
<PAGE> 25

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED BALANCE SHEETS

JUNE 30, 1998 AND 1999

<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 589,170 $ 224,708
Accounts receivable, net of allowance for doubtful
accounts of $345,000 and $454,981, respectively......... 11,657,659 11,960,059
Inventory................................................. 8,731,834 11,173,995
Prepaids and other........................................ 1,242,799 1,965,966
------------ ------------
Total current assets................................. 22,221,462 25,324,728
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land...................................................... 49,786 49,786
Buildings and improvements................................ 3,957,774 4,413,900
Equipment................................................. 49,212,815 56,906,554
Transportation equipment.................................. 8,520,471 10,172,945
Furniture and fixtures.................................... 3,341,977 4,102,422
------------ ------------
Total property, plant and equipment.................. 65,082,823 75,645,607
Accumulated depreciation.................................... (26,580,317) (29,857,130
------------ ------------
Net property, plant and equipment.................... 38,502,506 45,788,477
------------ ------------
OTHER ASSETS:
Intangibles, net of amortization of $6,888,902 and
$10,268,270, respectively............................... 34,706,927 35,773,717
Deposits and other assets................................. 1,628,161 1,638,801
------------ ------------
Total other assets................................... 36,335,088 37,412,518
------------ ------------
TOTAL ASSETS................................................ $ 97,059,056 $108,525,723
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 5,611,714 $ 6,294,130
Bank overdraft............................................ 393,530 --
Accounts payable, trade................................... 4,584,388 4,418,974
Accrued compensation and employee benefits................ 3,177,180 3,198,918
Other current liabilities................................. 1,271,817 1,799,297
------------ ------------
Total current liabilities............................ 15,038,629 15,711,319
LONG-TERM DEBT, less current maturities..................... 48,655,869 56,242,003
DEFERRED TAX LIABILITY...................................... 5,933,192 7,864,661
OTHER LONG-TERM LIABILITIES................................. 1,368,766 1,663,096
------------ ------------
Total liabilities.................................... 70,996,456 81,481,079
------------ ------------
REDEEMABLE COMMON STOCK, par value, $.001 per share, issued
235,000 shares............................................ 1,880,000 --
STOCKHOLDERS' EQUITY:
Common stock, par value, $.001 per share--
Authorized, 30,000,000 shares
Issued, 9,385,084 and 9,620,084 shares,
respectively......................................... 9,385 9,620
Paid-in-capital........................................... 17,162,396 19,269,338
Retained earnings......................................... 7,010,819 10,029,114
Treasury stock at cost, 0 and 272,500 shares,
respectively............................................ -- (2,263,428)
------------ ------------
Total stockholders' equity.............................. 24,182,600 27,044,644
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 97,059,056 $108,525,723
============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 26

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
NET SALES.......................................... $73,904,526 $95,030,926 $102,270,600
COST OF PRODUCTS SOLD, excluding depreciation and
amortization..................................... 34,350,052 44,413,606 46,332,129
----------- ----------- ------------
Gross profit................................ 39,554,474 50,617,320 55,938,471
----------- ----------- ------------
EXPENSES:
Operating and administrative..................... 26,508,220 33,683,926 38,152,200
Depreciation and amortization.................... 6,673,004 9,085,611 8,328,309
Special charges.................................. 1,879,887 -- --
----------- ----------- ------------
Total expenses.............................. 35,061,111 42,769,537 46,480,059
----------- ----------- ------------
Income from operations...................... 4,493,363 7,847,783 9,457,962
----------- ----------- ------------
INTEREST EXPENSE................................... 2,157,691 3,115,927 4,113,823
----------- ----------- ------------
OTHER INCOME/(EXPENSE):
Interest and dividend income..................... 290,657 166,879 135,101
Gain (loss) on disposal of assets................ 58,474 (20,977) (37,750)
Other income..................................... 135,598 127,335 154,153
----------- ----------- ------------
Total other income.......................... 484,729 273,237 251,504
----------- ----------- ------------
EARNINGS BEFORE INCOME TAXES....................... 2,820,401 5,005,093 5,595,643
PROVISION FOR INCOME TAXES......................... 3,665,298 2,052,088 2,350,170
----------- ----------- ------------
NET EARNINGS (LOSS)................................ $ (844,897) $ 2,953,005 $ 3,245,473
=========== =========== ============
Accretion of redeemable common stock............... -- 227,178
NET EARNINGS (LOSS) AVAILABLE FOR COMMON STOCK..... 2,953,005 3,018,295
=========== ============
BASIC EARNINGS PER SHARE........................... 0.31 0.32
DILUTED EARNINGS PER SHARE......................... 0.31 0.32
WEIGHTED AVERAGE SHARES:
Basic............................................ 9,620,084 9,530,961
Diluted.......................................... 9,667,088 9,530,961

PRO FORMA INFORMATION (UNAUDITED)
NET EARNINGS (LOSS)................................ $ (844,897)
PRO FORMA INCOME TAXES............................. 1,430,302
-----------
PRO FORMA EARNINGS (LOSS).......................... $(2,275,199)
===========
PRO FORMA BASIC EARNINGS (LOSS) PER SHARE.......... $ (0.30)
PRO FORMA DILUTED EARNINGS (LOSS) PER SHARE........ $ (0.27)
===========
WEIGHTED AVERAGE SHARES
Basic............................................ 7,573,005
Diluted.......................................... 8,506,093
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 27

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
COMMON STOCK TREASURY STOCK TOTAL
---------------------- ------------------------- PAID-IN- RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ------ ------ ------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, June 30, 1996.... 18,300,653 $ 18,301 11,300,653 $(3,705,000) $ 95,914 $ 19,961,877 $ 6,371,092
Net loss................ -- -- -- -- -- (844,897) (844,897)
Issuance of common
stock................. 2,218,000 2,218 -- -- 15,730,059 -- 15,732,277
Issuance of stock
pursuant to
compensation
agreements............ 267,084 267 -- -- 2,136,323 -- 2,136,590
Conversion of debt to
equity................ 135,000 135 -- -- 1,079,865 -- 1,080,000
Reclassification of
redeemable common
stock outside of
shareholders'
equity................ (235,000) (235) -- -- (1,879,765) -- (1,880,000)
Retirement of treasury
stock................. (11,300,653) (11,301) (11,300,653) 3,705,000 -- (3,693,699) --
Dividends paid.......... -- -- -- -- -- (11,365,467) (11,365,467)
----------- -------- ----------- ----------- ----------- ------------ ------------
BALANCE, June 30, 1997.... 9,385,084 9,385 -- -- 17,162,396 4,057,814 21,229,595
Net income............ -- -- -- -- -- 2,953,005 2,953,005
----------- -------- ----------- ----------- ----------- ------------ ------------
BALANCE, June 30, 1998.... 9,385,084 9,385 -- -- 17,162,396 7,010,819 24,182,600
Net income............ -- -- -- -- -- 3,245,473 3,245,473
Purchase of treasury
shares.................. -- -- 272,500 (2,263,428) -- -- (2,263,428)
Retirement of redeemable
common stock............ 235,000 235 -- -- 2,106,942 (227,178) 1,879,999
----------- -------- ----------- ----------- ----------- ------------ ------------
BALANCE, June 30, 1999.... 9,620,084 $ 9,620 272,500 $(2,263,428) $19,269,338 $ 10,029,114 $ 27,044,644
=========== ======== =========== =========== =========== ============ ============
</TABLE>

The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 28

VALLEY NATIONAL GASES INCORPORATED

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net earnings (loss)............................. $ (844,897) $ 2,953,005 $ 3,245,473
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation............................... 4,324,563 5,530,670 4,093,826
Amortization............................... 2,348,441 3,554,941 4,234,368
Special charges............................ 1,879,887 -- --
Loss (gain) on disposal of assets.......... (58,474) 20,977 37,750
Change in deferred taxes................... 3,665,298 2,667,894 1,931,469
Other long-term assets and liabilities..... 888,802 (2,343,445) (565,043)
Changes in operating assets and
liabilities--
Accounts receivable..................... 116,617 824,165 700,360
Inventory............................... 2,002 (639,639) (1,443,161)
Prepaids and other...................... (478,841) 460,317 (797,498)
Accounts payable, trade................. (1,959,827) 562,416 (785,546)
Accrued compensation and employee
benefits.............................. (1,103,723) 148,060 (73,578)
Other current liabilities............... 187,163 (116,185) 369,520
------------ ------------ ------------
Net cash provided by operating
activities......................... 8,967,011 13,623,176 10,947,940
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from disposal of assets................ 108,480 775,709 72,222
Purchases of property and equipment............. (3,993,969) (5,326,294) (7,471,569)
Business acquisitions, net of cash acquired..... (10,168,931) (25,501,498) (7,553,299)
Change in restricted cash....................... 400,000 -- --
------------ ------------ ------------
Net cash used by investing
activities......................... (13,654,420) (30,052,083) (14,952,646)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock...... 15,732,277 -- --
Proceeds from borrowings........................ 27,805,155 23,716,037 19,688,470
Principal payments on loans..................... (28,361,153) (8,249,909) (13,784,798)
Prepayment of promissory note................... (1,720,000) -- --
Dividends paid.................................. (11,365,467) -- --
Purchase of treasury shares..................... -- -- (2,263,428)
Net cash provided by financing activities.... 2,090,812 15,466,128 3,640,244
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS........... (2,596,597) (962,779) (364,462)
CASH AND CASH EQUIVALENTS, beginning of period.... 4,148,546 1,551,949 589,170
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period.......... $ 1,551,949 $ 589,170 $ 224,708
============ ============ ============
</TABLE>

The accompanying notes are an integral part of these financiaL statements.
F-5
<PAGE> 29

VALLEY NATIONAL GASES INCORPORATED

NOTES TO FINANCIAL STATEMENTS

JUNE 30, 1998 AND 1999

1. ORGANIZATION:

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

The Company completed its initial public offering on April 10, 1997. Before
the initial public offering, Valley National Gases Incorporated operated as a
subchapter S corporation. In connection with the initial public offering, the
Company terminated its subchapter S status.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

CASH EQUIVALENTS

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

INVENTORY

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

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

<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Hardgoods.......................................... $7,651,443 $ 9,753,794
Gases.............................................. 1,080,391 1,420,201
---------- -----------
$8,731,834 $11,173,995
========== ===========
</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 their useful life
or the term of the lease as follows:

<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings and improvements.................................. 10-25
Cylinders................................................... 12-30
Equipment other than cylinders.............................. 5-7
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.

Effective July 1, 1998, the Company changed its estimate of the useful
lives of its acetylene and high pressure cylinders from 12 to 30 years. This
change was made to better reflect the estimated periods during which these
assets will remain in service. The change had the effect of reducing
depreciation expense in 1999 by approximately $2.3 million and increasing net
earnings by $1.3 million or $.14 per share.

The Company changed the estimated useful life of cylinders as a result of
thorough studies and analyses. The studies considered technological advances in
cylinders, empirical data obtained from cylinder manufacturers

F-6
<PAGE> 30

and other industry experts and experience gained from the Company's maintenance
of a cylinder population of approximately four hundred thousand cylinders.

INTANGIBLES

Intangibles consist of non-competition agreements, goodwill, consulting
agreements and deferred loan origination costs. Costs pursuant to
non-competition agreements entered into in connection with business acquisitions
are amortized over the terms of the arrangements. Goodwill represents costs in
excess of net assets of businesses acquired and is amortized on a straight-line
basis over 15 to 20 years. The Company assesses the recoverability of goodwill
by determining whether it can be recovered through projected undiscounted cash
flows. Consulting agreements are entered into with the owners of various
businesses acquired by the Company and require such owners to be available to
perform services upon the Company's request. Consulting payments are made
regardless of the number of hours of service performed and are payable to the
consultant's successor upon death. Consulting costs are amortized over the term
of the agreement. Deferred loan origination costs are amortized over the term of
the related debt.

INCOME TAXES

Prior to its initial public offering, the Company had elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code of 1986, as
amended ("S corporation"), for income tax purposes. Accordingly, the financial
statements prior to the closing of the initial public offering do not include a
provision for income taxes because the Company did not incur federal or state
income taxes. Instead, its earnings and losses during these periods were
included in the shareholders personal income tax return and were taxed based on
the shareholders personal tax strategy.

The Company's S corporation status terminated in connection with the
Company's initial public offering, thereby subjecting the Company's 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"
resulted in the recognition of deferred tax liabilities (and a corresponding
one-time charge to expense) of $3.9 million as of the date the S corporation
status was terminated.

EARNINGS PER SHARE

In accordance with the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" basic earnings per share is computed by
dividing net income by the number of weighted-average common shares outstanding
during the year. Diluted earnings per share is computed by dividing net income
by the number of weighted-average common and common equivalent shares
outstanding during the year (See Note 8).

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

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

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

F-7
<PAGE> 31

The estimated fair values of the Company's financial instruments as of June
30, 1999 are as follows:

<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
-------- -----
<S> <C> <C>
Cash and cash equivalents......................... $ 224,708 $ 224,708
Long-term debt.................................... 62,536,133 59,535,077
</TABLE>

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

The Company utilizes interest rate swap agreements to reduce the potential
impact of increases in interest rates on floating-rate long-term debt. At June
30, 1999 and 1998 the Company had four interest rate swap agreements outstanding
that effectively convert a notional amount of $30.0 million from floating rates
to fixed rates. These agreements mature from December 2002 through January 2005.
The Company would have received $486,265 and $135,814 to settle its interest
rate swap agreements at June 30, 1999 and 1998, respectively, representing the
excess of fair value over the carrying cost of these agreements. Fair value was
estimated by obtaining quotes from brokers.

The net payments or receipts under interest rate swap agreements are
recorded as part of interest expense and are not significant.

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

USE OF ESTIMATES

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

SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>
FOR THE YEAR ENDED JUNE 30,
--------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash paid for certain items--
Cash payments for interest........... $2,008,482 $3,480,336 $3,143,083
Cash payments for income taxes....... -- 1,927,755 1,323,545
Noncash financing activities--
Conversion of debt to equity......... 1,080,000 -- --
</TABLE>

PRINCIPLES OF CONSOLIDATION

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

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.

F-8
<PAGE> 32

During fiscal 1999, the Company purchased five businesses. The largest of
these acquisitions and their effective dates included Altoona Welding Supply,
Inc. (September 1998), Keen Welding Supply, Inc (January 1999), Dlouhy Welding
Supply, Inc. (January 1999) and Holshoy Welding Supply, Inc. (March 1999). The
aggregate purchase price for all acquisitions amounted to approximately
$7,777,000.

During fiscal 1998, the Company purchased nine businesses. The largest of
these acquisitions and their effective dates included Goss Brothers Welding
Supply, Inc. (September 1997), Buckeye Welder Services, Inc (December 1997) and
Miller's LP Gas, Inc. (May 1998). The aggregate purchase price for all
acquisitions amounted to approximately $25,508,000.

During fiscal 1997, the Company purchased five businesses. The largest of
these acquisitions and their effective dates included Weldco, Inc. (October
1996), Flame Welding, Inc (April 1997) and Toledo Oxygen and Supply Company
(June 1997). The aggregate purchase price for all acquisitions amounted to
approximately $21,499,000.

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>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash paid................................... $10,676,499 $22,779,806 $ 5,578,952
Notes issued to sellers..................... 10,822,187 2,727,800 2,198,360
Notes payable and capital leases assumed.... 405,674 847,530 7,027
Other liabilities assumed and acquisition
costs..................................... 6,511,927 6,867,803 2,368,857
----------- ----------- -----------
Total purchase price allocated to assets
acquired.................................. $28,416,287 $33,222,939 $10,153,196
=========== =========== ===========
</TABLE>

The following summarized unaudited pro forma results of operations for the
fiscal years ended June 30, 1998 and 1999, illustrate the estimated effects of
the 1998 and 1999 acquisitions, as if the transactions were consummated as of
the beginning of each fiscal year presented. These pro forma results have been
prepared for comparable purposes only and do not purport to be indicative of
what would have occurred had the acquisitions been made as of the beginning of
each fiscal year, or of results which may occur in the future.

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------
1998 1999
---- ----
<S> <C> <C>
Net sales............................................... $104,510,000 $107,205,000
Net income before income taxes.......................... 4,636,000 5,130,000
Pro forma net income.................................... 2,735,000 2,975,000
Pro forma net income per share.......................... 0.28 0.31
</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 1997, 1998
and 1999.

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, 1999 JUNE 30, 1998
------------ -------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Non-competition
agreements................ 2-7 years $13,413,291 $ 5,155,868 $ 8,257,423 $ 8,055,827
Consulting agreements....... 1-5 years 2,721,136 2,014,453 706,683 1,260,972
Goodwill.................... 15-20 years 28,914,864 2,913,898 26,000,966 24,799,936
Other....................... 2-15 years 992,696 184,051 808,645 590,192
----------- ----------- ----------- -----------
$46,041,987 $10,268,270 $35,773,717 $34,706,927
=========== =========== =========== ===========
</TABLE>

F-9
<PAGE> 33

6. LONG-TERM DEBT:

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

<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Revolving note, interest at LIBOR plus 1.875% payable
monthly through January 2001. Secured by the assets of
the Company............................................. $26,831,036 $36,756,726
Term note, interest at LIBOR plus 1.875% payable monthly
through October 2003. Secured by the assets of the
Company................................................. 13,431,245 10,872,905
Note payable, interest at 6.6% payable annually through
October 2003. Secured by certain assets of the
Company................................................. 4,098,447 3,415,372
Individuals and corporations, mortgages and notes,
interest at 3.7% to 10.00%, payable at various dates
through 2010............................................ $10,087,261 $11,648,116
----------- -----------
54,447,989 62,693,119
Original issue discount................................... (180,406) (156,986)
Current maturities........................................ (5,611,714) (6,294,130)
----------- -----------
Total long-term debt.................................... $48,655,869 $56,242,003
=========== ===========
</TABLE>

Prime rate was 8.50% at June 30, 1998 and 7.75% at 1999, respectively.
LIBOR rate was 5.656% and 5.21% at June 30, 1998 and 1999, respectively.

On February 5, 1998 the Company entered into an amended and restated credit
facility with Bank One, as agent. The credit facility increased the maximum
revolving note borrowings to $75.3 million, including a letter of credit
sublimit of $25.0 million, and refinanced the term note at the existing balance
of $14.7 million. The new scheduled maturity date of the term note is October 4,
2003. The scheduled maturity date of the revolving note is January 16, 2001. The
Company pays a fee for the unused portion of the revolving loan. The revolving
loan is used primarily to fund acquisitions. The Company is not required to make
principal payments on outstanding balances of the revolving loan as long as
certain covenants are satisfied. Interest is charged on both the term loan and
the revolving loan at either the lender's prime rate or various LIBOR rates, at
the Company's discretion, plus an applicable spread. The weighted average
interest rate for substantially all of the borrowings under the credit facility
was 6.9% as of June 30, 1999. As of June 30, 1999, availability under the
revolving loan was approximately $29.9 million, with outstanding borrowings of
approximately $36.8 million and outstanding letters of credit of approximately
$8.6 million. The credit facility is secured by all of the Company's assets.

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, 1999:

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30,
---------------------------
<S> <C>
2000.............................................. $ 6,294,130
2001.............................................. 42,543,728
2002.............................................. 5,569,988
2003.............................................. 4,531,440
2004.............................................. 2,208,285
Thereafter........................................ 1,388,562
-----------
Total............................................. $62,536,133
===========
</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

F-10
<PAGE> 34

plan are based on a percentage of employees' compensation. Pension expense for
this plan was $467,028, $532,345 and $624,272 respectively, in fiscal year 1997,
1998 and 1999.

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 1997, 1998 and 1999, the amount of additional contributions to be distributed
to the employees' pension plan amounted to $111,155, $49,180 and $55,964
respectively.

Certain management employees were covered by unfunded deferred compensation
agreements. These deferred compensation agreements were terminated in connection
with the initial public offering. Additionally, certain management employees are
also provided supplemental retirement benefits. The cost of these contracts is
being accrued over the period of active employment of the covered employees. The
costs of the deferred compensation and supplemental retirement benefits plans
charged to expense were $33,143, $34,929 and $32,000 respectively, in fiscal
year 1997, 1998 and 1999.

8. EARNINGS PER SHARE:

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

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net earnings (loss) available for common stock
for per common share computation (1997 pro
forma--see Note 15)......................... $(2,275,199) $2,953,005 $3,018,295
=========== ========== ==========
Basic earnings (loss) per common share:
Weighted average common shares................ 7,573,005 9,620,084 9,530,961
=========== ========== ==========
Basic earnings (loss) per common share........ $ (0.30) $ 0.31 $ 0.32
=========== ========== ==========
Diluted earnings (loss) per common share:
Weighted average common shares................ 7,573,005 9,620,084 9,530,961
Shares issuable from assumed conversion of
common stock Equivalents.................... 2,681 47,004 --
Shares assumed outstanding to support S
distribution................................ 930,407 -- --
----------- ---------- ----------
Weighted average common and common equivalent
shares...................................... 8,506,093 9,667,088 9,530,961
=========== ========== ==========
Diluted earnings (loss) per common share...... $ (0.27) $ 0.31 $ 0.32
=========== ========== ==========
</TABLE>

9. 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 2009, with
options to renew for periods of three to five years. Lease expenses charged to
operations were $ 2,140,442, $3,077,938 and $3,416,233 respectively, in fiscal
year 1997, 1998 and 1999.

F-11
<PAGE> 35

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

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30, REAL ESTATE EQUIPMENT TOTAL
- --------------------------- ----------- --------- -----
<S> <C> <C> <C>
2000..................................... $ 2,756,794 $136,584 $ 2,893,378
2001..................................... 2,664,979 136,584 2,801,563
2002..................................... 2,621,949 136,584 2,758,533
2003..................................... 2,493,323 135,684 2,629,007
2004..................................... 2,335,260 125,784 2,461,044
----------- -------- -----------
Totals................................... $12,872,305 $671,220 13,543,525
=========== ======== ===========
</TABLE>

10. RELATED PARTY TRANSACTIONS:

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

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Transactions--
Lease of buildings and equipment............. $1,623,390 $2,111,633 $2,212,887
Rental of aircraft........................... 87,100 98,402 87,432
Purchases of acetylene and services............ 104,616 -- --
Sales of material and services................. 193 1,821 --
Balances--
Notes payable................................ 4,781,521 4,098,447 --
</TABLE>

The Company has entered into a master lease agreement for virtually all of
its operating properties with a related party. The term of this master lease
agreement is ten years with annual minimum lease payments of $2,027,811 with
renewal options and have been accounted for as operating leases in the
accompanying financial statements.

The Company entered into a consulting agreement (the "Consulting
Agreement") with William A. Indelicato, a director of the Company, whereby Mr.
Indelicato provided consulting services concerning all aspects of the Company's
acquisition program. In return for his services, the Company accrued "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
could redeem accrued credits for cash at any time within seven years from the
date of accrual. The amount of the accrued, unredeemed credits was 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 had 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. Mr. Indelicato exercised this
option in connection with the initial public offering and exchanged accrued
credits for 96,366 shares of Common Stock.

Pursuant to the Consulting Agreement, the Company also retained 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 $4,000, reimburses for out-of-pocket
expenses, retains ADE for related acquisition services and provides a variable
payment for each acquisition completed based on the purchase price and the
annual sales of the acquired business. Payments to Mr. Indelicato and ADE during
fiscal year 1998 and 1999 totaled $339,346 and $239,984, respectively. This
agreement has a one year term and can be renewed upon the agreement of both
parties.

F-12
<PAGE> 36

As of June 30, 1997 and 1998, the Company had a note payable to a former
owner of an acquired company who served as a member of the board of directors of
the Company.

11. STOCK OPTIONS:

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

The following summarizes the activity under the 1997 Plan:

<TABLE>
<CAPTION>
EXERCISE PRICE NUMBER OF
PER SHARE SHARES OUTSTANDING
-------------- ------------------
<S> <C> <C>
Outstanding, June 30, 1996............................ $ -- --
------- --------
Granted............................................. 8.00 175,000
Vested.............................................. -- --
------- --------
Exercised........................................... -- --
------- --------
Expired or terminated............................... -- --
------- --------
Outstanding, June 30, 1997............................ 8.00 175,000
======= ========
Granted............................................. 10.375 2,500
Vested.............................................. -- --
Exercised........................................... -- --
Expired or terminated............................... 8.00 500
------- --------
Outstanding, June 30, 1998............................ 8.03 177,000
======= ========
Granted............................................. 5.625 66,400
Vested.............................................. -- --
Exercised........................................... -- --
Expired or terminated............................... 7.78 11,000
Outstanding, June 30, 1999............................ $ 7.36 232,400
------- --------
Exercisable, June 30, 1999............................ 8.00 25,000
------- --------
</TABLE>

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

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

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Net income (loss)
As reported................................. $(2,275,199) $2,953,005 $3,018,295
Pro forma................................... (2,327,627) 2,714,048 2,747,208
Earnings (loss) per share assuming dilution
As reported................................. $ (0.27) $ 0.31 $ 0.32
Pro forma................................... $ (0.27) $ 0.28 $ 0.29
</TABLE>

F-13
<PAGE> 37

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

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Risk-Free Interest Rate................................. 6.85% 6.00% 4.75%
Expected Lives.......................................... 7 years 7 years 7 years
Expected Dividend Yield................................. 0.00% 0.00% 0.00%
Expected Volatility..................................... 34.00% 31.00% 41.00%
</TABLE>

12. INCOME TAXES:

The Company's S corporation status terminated in connection with the
initial public offering, thereby subjecting the Company's income to federal and
state income taxes at the corporate level. The Company accounts for income taxes
in accordance with the provisions of SFAS No. 109. Although there can be no
assurance that the Company will generate any earnings or specific level of
continuing earnings in future periods, management believes that it is more
likely than not that the net deductible differences will reverse during periods
when the Company generates sufficient net taxable income.

Prior to the initial public offering, the Company elected Subchapter S
corporation status for income tax purposes. Accordingly, the income of the
Company was reported on the individual income tax return of its shareholder. The
financial statements, therefore, do not include a provision for income taxes
prior to the initial public offering.

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

<TABLE>
<CAPTION>
1997
--------------------
AMOUNT RATE
------ ----
<S> <C> <C>
Loss for the period as a C corporation...................... $ (586,755) (100.0)%
========== ======
Benefit at federal statutory rate........................... $ (199,497) (34.0)%
State income benefit, net of federal tax benefit............ (35,205) (6.0)%
---------- ------
(234,702) (40.0)%
======
Provision for change in tax status to C Corporation......... 3,900,000
----------
Provision for income taxes.................................. $3,665,298
==========
</TABLE>

<TABLE>
<CAPTION>
1998
------------------
AMOUNT RATE
------ ----
<S> <C> <C>
Federal statutory rate...................................... $1,701,732 34.0%
State taxes, net of federal benefit......................... 300,306 6.0%
Nondeductible goodwill...................................... 86,907 1.8%
Other....................................................... (36,357) (0.8)%
---------- ----
Provision for income taxes.................................. $2,052,088 41.0%
========== ====
</TABLE>

<TABLE>
<CAPTION>
1999
------------------
AMOUNT RATE
------ ----
<S> <C> <C>
Federal statutory rate...................................... $1,902,969 34.0%
State taxes, net of federal benefit......................... 335,818 6.0%
Nondeductible goodwill...................................... 114,870 2.05%
Other....................................................... (3,487) (.05)%
---------- ----
Provision for income taxes.................................. $2,350,170 42.0%
========== ====
</TABLE>

F-14
<PAGE> 38

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

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Current provision--
Federal...................................... $ -- $ 896,295 $ 512,027
State........................................ -- 73,904 90,358
---------- ---------- ----------
Total current provision........................ $ -- $ 970,199 $ 602,385
========== ========== ==========
Deferred (benefit) provision Federal (benefit)
provision.................................... (199,497) 919,606 1,485,618
State (benefit) provision.................... (35,205) 162,283 262,167
---------- ---------- ----------
Total deferred (benefit) provision........... (234,702) 1,081,889 1,747,785
Provision for change in tax status to C
corporation.................................. 3,900,000 -- --
---------- ---------- ----------
Provision for income taxes..................... $3,665,298 $2,052,088 $2,350,170
========== ========== ==========
</TABLE>

The components of the deferred tax assets and liabilities recorded in the
accompanying balance sheets at June 30, 1997, 1998 and 1999 were as follows:

<TABLE>
<CAPTION>
1997 1998 1999
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets.......................... $ 1,339,835 $ 1,499,920 $ 1,968,781
Deferred tax liabilities..................... (5,005,133) (7,433,112) (9,833,442)
----------- ----------- -----------
Net deferred tax liability................... $(3,665,298) $(5,933,192) $(7,864,661)
=========== =========== ===========
Consisting of--
Basis difference of property............... $(4,543,174) $(6,829,178) $(9,466,506)
Basis difference of inventory.............. 114,044 138,645 190,321
Financial reserves not currently deductible
for tax purposes........................ (52,907) (110,290) 182,929
Amortization of intangibles................ 381,187 630,476 874,453
Unearned revenue........................... 200,850 237,155 354,142
Net operating loss carryforward............ 234,702 -- --
----------- ----------- -----------
$(3,665,298) $(5,933,192) $(7,864,661)
=========== =========== ===========
</TABLE>

13. CONTINGENCIES AND COMMITMENTS

F-15
<PAGE> 39

14. INITIAL PUBLIC OFFERING AND REORGANIZATION:

In connection with the initial public offering by the Company, the
following transactions occurred:

a. Initial Public Offering and Reorganization

1. The Company had elected S corporation status for income tax
purposes. As a result, the Company's net income was attributed for
income tax purposes directly to the Company's shareholder. The Company's
S corporation status terminated in connection with the initial public
offering.

In connection with the initial public offering, the Company's Board
of Directors declared an S corporation dividend to the former S
corporation shareholder in an aggregate amount representing all
undistributed earnings of the Company taxed or taxable to the
shareholder through the initial public offering date. The S corporation
dividend totaled approximately $11.4 million.

2. The Company reorganized, whereby Valley National Gases, Inc., a
West Virginia corporation, became an indirect wholly owned subsidiary of
Valley National Gases Incorporated, a Pennsylvania corporation by
exchange of stock. Valley National Gases Incorporated authorized common
stock of 30,000,000 shares, par value $.001 and authorized preferred
stock of 5,000,000 shares, par value $.01.

3. The Company issued 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 incurred
an expense of approximately $1.9 million which is included as special
charges in the accompanying statement of operations for the year ended
June 30, 1997.

4. The cancellation of treasury stock of Valley National Gases,
Inc.

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 had 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 had the
right to receive 350,000 shares of the common stock in exchange for the
cancellation of indebtedness in the amount of $2,800,000. The Company and
Weldco shareholders agreed that rather than issuing 350,000 shares, the
Company would prepay $1,720,000 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. In addition, certain Weldco
shareholders purchased 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 235,000 shares subject to the above mentioned provisions of the
Weldco Purchase Agreement have been classified as redeemable common stock
in the accompanying balance sheet as of June 30, 1998. The Company redeemed
and placed into treasury subject to these provisions 222,500 shares during
fiscal year 1999. There were no shares outstanding subject to these
provisions as of June 30, 1999.

c. Right of First Refusal

In September 1991, in connection with the purchase by the Company of
certain assets of Praxair, Inc. (Praxair), the Company, the former
shareholder 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 the
former shareholder and his affiliates wish to accept an offer to purchase
shares of capital stock of the

F-16
<PAGE> 40

Company (the Capital Stock) owned by them in a transaction that would
result in the former shareholder and his affiliates collectively owning
less than 51% of the Company's issued and outstanding shares of Capital
Stock on a fully diluted basis or owning less than 51% of the combined
voting power of all outstanding voting securities of the Company, Praxair
will have a right of first refusal to match the offer. In addition, in the
absence of a third party offer, if (a) the former shareholder 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 the former shareholder
and his affiliates collectively owning less than 51% of all the issued
outstanding shares of Common Stock, then Praxair will have the right to
purchase from the former shareholder and his affiliates up to all of the
issued and outstanding shares of Common Stock held by them (but not less
than 51% of all of the issued and outstanding shares of the Company's
Common Stock on a fully diluted basis) at the then prevailing market price.
If Praxair does purchase shares of Capital Stock from the former
shareholder and his affiliates as described in this paragraph, then the
former shareholder and his affiliates will be bound by certain non-compete
provisions, as described in the Right of First Refusal Agreement, for a
period of three years from such purchase.

15. 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 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 the offering price of $8 per
share as adjusted to reflect (i) the issuance of shares to fund the excess of
dividends (including the estimated S Corporation Distribution) over net income
for the period in fiscal 1997 prior to initial public offering, (ii) the
issuance of 170,718 shares of common stock to two executive officers in
connection with the termination of certain deferred compensation agreements, and
(iii) the issuance of 96,366 shares of common stock to a director, pursuant to a
right under a consulting agreement to convert deferred consulting payments to
common stock.

16. SUBSEQUENT EVENTS:

F-17
<PAGE> 41

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------
SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
------------ ----------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fiscal 1999--
Net sales................................. $23,209 $24,617 $28,027 $26,417
Gross profit.............................. 12,939 13,413 15,316 14,271
Net earnings.............................. 841 732 1,065 380
Basic earnings per share.................. 0.09 0.08 0.08 0.11
Diluted earnings per share................ 0.09 0.08 0.11 0.04

Fiscal 1998--
Net sales................................. 20,621 23,890 25,795 24,724
Gross profit.............................. 11,147 12,901 13,977 12,592
Net earnings.............................. 824 1,019 1035 75
Basic earnings per share.................. 0.09 0.11 0.11 0.01
Diluted earnings per share................ 0.09 0.11 0.11 0.01
</TABLE>

F-18
<PAGE> 42

VALLEY NATIONAL GASES INCORPORATED

OPERATING BRANCHES

<TABLE>
<CAPTION>
CITY STATE
---- -----
<S> <C>
Dover....................................................... Delaware
New Castle.................................................. Delaware
Ashland..................................................... Kentucky
Prestonsburg................................................ Kentucky
Easton...................................................... Maryland
Glen Burnie................................................. Maryland
Salisbury................................................... Maryland
Leland...................................................... North Carolina
Thorofare................................................... New Jersey
Cambridge................................................... Ohio
Cincinnati.................................................. Ohio
Columbus.................................................... Ohio
Dayton...................................................... Ohio
Girard...................................................... Ohio
Hamilton.................................................... Ohio
Lima........................................................ Ohio
Marietta.................................................... Ohio
Massillon................................................... Ohio
Sharonville................................................. Ohio
Steubenville................................................ Ohio
Plain City.................................................. Ohio
Toledo...................................................... Ohio
Zanesville.................................................. Ohio
Altoona..................................................... Pennsylvania
Chambersburg................................................ Pennsylvania
Charleroi................................................... Pennsylvania
Clarion..................................................... Pennsylvania
Clearfield.................................................. Pennsylvania
Conshohocken................................................ Pennsylvania
Cranberry................................................... Pennsylvania
Croydon..................................................... Pennsylvania
Falls Creek................................................. Pennsylvania
Greensburg.................................................. Pennsylvania
Indiana..................................................... Pennsylvania
Johnstown................................................... Pennsylvania
New Castle.................................................. Pennsylvania
Philipsburg................................................. Pennsylvania
Pittsburgh.................................................. Pennsylvania
Punxsutawney................................................ Pennsylvania
St. Marys................................................... Pennsylvania
Uniontown................................................... Pennsylvania
Washington.................................................. Pennsylvania
West Mifflin................................................ Pennsylvania
Johnson City................................................ Tennessee
</TABLE>
<PAGE> 43

<TABLE>
<CAPTION>
CITY STATE
---- -----
<S> <C>
Bluefield................................................... Virginia
Beckley..................................................... West Virginia
Charleston.................................................. West Virginia
Fairmont.................................................... West Virginia
Friendly.................................................... West Virginia
Huntington.................................................. West Virginia
Parkersburg................................................. West Virginia
Wheeling.................................................... West Virginia
Wilkenson................................................... West Virginia
Milwaukee................................................... Wisconsin
</TABLE>

Specific information on location of branches and their telephone numbers
is available at the Company's website WWW.VNGAS.COM.
<PAGE> 44

INDEX TO EXHIBITS

<TABLE>
<S> <C>
3.1 Articles of Amendment.*
3.2 Bylaws.*
4.1 Form of Certificate for Common Stock.*
10.1 Amended and Restated Credit Agreement dated January 23, 1998 between
the Company and Bank One, Indiana NA, as agent.**
10.2 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 Deferred Compensation Agreement dated April 3, 1995 by and between the Company and
Lawrence E. Bandi.*+
10.5 Deferred Compensation Agreement dated April 3, 1995 by and between the Company and
John R. Bushwack.*+
10.6 Agreement dated October 5, 1992 between the Company and Lawrence E. Bandi providing
for death, disability and retirement benefits.*+
10.7 Agreement dated October 5, 1992 between the Company and John R. Bushwack providing
for death, disability and retirement benefits.*+
10.8 Agreement dated March 16, 1994 between the Company and William A. Indelicato
providing for certain consulting payments.*+
10.9 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 Lease Agreement dated as of November 1, 1995 between the Company and Acetylene
Products, Inc.*
10.11 1997 Stock Option Plan.*
10.12 Real Estate Sale Agreement dated April 24, 1996 between the Company and West
Rentals, Inc.*
10.13 Trailer Lease Agreement dated November 20, 1995 between the Company and West
Rentals, Inc.*
10.14 Trailer Lease Agreement dated September 8, 1992 between the Company and West
Rentals, Inc.*
10.15 Trailer Lease Agreement dated May 29, 1996 between the Company and West Rentals,
Inc.*
10.16 Agreement dated July 1, 1999 between the Company and William A. Indelicato providing
for certain consulting payments.+
10.17 First Amendment to Amended and Restated Credit Agreement dated September 15, 1999,
between the Company and Bank One, Indiana NA, as agent.
21.1 Subsidiaries of Registrant.*
27.1 Financial Data Schedule for the year ended June 30, 1999.
</TABLE>

- ---------

* Incorporated by reference to the same numbered exhibit to the Company's
Registration Statement on Form S-1, Reg. No. 333-19973.

** Incorporated by reference to the same numbered exhibit on the Company's
Quarterly Report on form 10-Q filed February 13, 1998.

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

E-1
<PAGE> 45

SCHEDULE II

VALLEY NATIONAL GASES, INC.

VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
Balance at Charged to Balance at
beginning costs and end of
Period Ending Description of period expenses Deductions period
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
June 30, 1997 Allowance for uncollectible accounts $140,000 $426,507 $(365,757) $200,750
June 30, 1998 Allowance for uncollectible accounts $200,750 $516,591 $(372,341) $345,000
June 30, 1999 Allowance for uncollectible accounts $345,000 $379,053 $ 269,072 $454,981
</TABLE>

S-1

<PAGE> 1

Exhibit 10.16

FIRST AMENDMENT TO AMENDED AND RESTATED
CREDIT AGREEMENT

THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT
("FIRST AMENDMENT") is executed as of the 15th day of September, 1999 (the
"FIRST AMENDMENT EFFECTIVE DATE"), among VALLEY NATIONAL GASES, INC., a West
Virginia corporation (the "Company"), VALLEY NATIONAL GASES INCORPORATED, a
Pennsylvania corporation ("VNGI"), VALLEY NATIONAL GASES DELAWARE, INC., a
Delaware corporation ("VNGDI"), THE TOLEDO OXYGEN AND EQUIPMENT COMPANY, and
BANK ONE, INDIANA, NATIONAL ASSOCIATION, a national banking association ("Bank
One"), LASALLE BANK NATIONAL ASSOCIATION, a national banking association
("LaSalle"), FIRST STAR BANK, N.A., a national banking association ("Star"), PNC
BANK, NATIONAL ASSOCIATION, a national banking association ("PNC"), BANK OF
AMERICA NATIONAL ASSOCIATION, a national banking association, and successor in
interest to Nationsbank, N.A. ("BofA"), NATIONAL CITY BANK, a national banking
association("National City"), THE HUNTINGTON NATIONAL BANK, a national banking
association ("Huntington") (collectively, the "Initial Banks") and Bank One, as
agent for the Initial Banks and any other Banks (in such capacity, the "Agent").

RECITALS

1. The Company, VNGI, VNGDI, the Initial Banks and the Agent
are parties to an Amended and Restated Credit Agreement, dated as of January 23,
1998 (the "ORIGINAL CREDIT AGREEMENT").

2 The Company, VNGDI and VNGI (referred to herein collectively
as the "Credit Parties") have requested the Initial Banks to modify the Original
Credit Agreement to modify certain covenants and terms relating to Fixed Charge
Coverage Ratio I and Fixed Charge Coverage Ratio II. Subject to the terms and
conditions stated in this First Amendment, the Initial Banks are willing to
modify and amend the Original Credit Agreement as provided in this First
Amendment.
AGREEMENT

NOW, THEREFORE, in consideration of the premises, the mutual
covenants and agreements herein, and each act performed and to be performed
hereunder, the Initial Banks, the Agent and the Credit Parties and the
Guarantors agree as follows:

1. Definitions. Terms used in the Recitals and in this First
Amendment that are defined in the Credit Agreement, as amended hereby, and that
are not otherwise defined herein shall have the same meanings in this First
Amendment as are ascribed to them in the Original Credit Agreement, as amended
by this First Amendment.

2. Amendment to Definitions.

(a) New Definitions. Section 1.01 of the Original Credit
Agreement is amended as of the First Amendment Effective Date
by the addition of each of the following new definitions:

<PAGE> 2

""CAPITAL STOCK" means all classes of capital stock
of VNGI which from time to time may be outstanding,
including its Common Stock and any preferred stock
which may from time to time be issued and
outstanding.

"EXCLUDED STOCK PURCHASE" means the purchase by VNGI
of 222,500 of the Common Stock of VNGI during January
through March, 1999, from former shareholders of
Weldco, Inc. for a total purchase price of
$2,007,178.

"FIRST AMENDMENT" means the First Amendment to
Amended and Restated Credit Agreement, dated as of
the First Amendment Effective Date, executed by the
Initial Banks, the Agent and the Credit Parties.

"FIRST AMENDMENT EFFECTIVE DATE" means September 13,
1999.

"STOCK PURCHASE" means any purchase or other
acquisition of any of the Capital Stock of VNGI,
excepting only the Excluded Stock Purchase."

(b) Amended Definitions. Each of the following definitions,
as set forth in Section 1.01 of the Original Credit
Agreement, is amended and restated in its entirety as of
the First Amendment Effective Date to read as follows:

""AGREEMENT" means this Amended and Restated Credit
Agreement, as amended by the First Amendment and as
further amended, modified, supplemented and/or
restated from time to time and at any time.

"FIXED CHARGE COVERAGE RATIO I" means, with respect
to the Credit Parties and their respective
Subsidiaries for any period, a ratio of EBITDA to the
sum of the following for the Credit Parties and their
respective Subsidiaries, computed on a consolidated
basis and determined in accordance with GAAP: (i) the
amount of interest which was due and payable in cash
or was paid in cash during such period, plus (ii) the
amount of Cash Capital Expenditures made during such
period, plus (iii) the amount of scheduled principal
payments of Debt which were due and payable in cash
or were paid during such period, plus (iv) the amount
of income taxes which were due or paid during such
period, plus (v) the amount of dividends that were
paid by VNGI in cash during such period, plus (vi)
the total amount of cost or expense incurred by the
Credit Parties and their respective Subsidiaries
during such period for Stock Purchases, all as
determined in accordance with GAAP.

2
<PAGE> 3

"FIXED CHARGE COVERAGE RATIO II" means, with respect
to the Credit Parties and their respective
Subsidiaries for any period, a ratio of EBITDA to the
sum of the following for the Credit Parties and their
respective Subsidiaries, computed on a consolidated
basis and determined in accordance with GAAP: (i) the
amount of interest which was due and payable in cash
or was paid in cash during such period, plus (ii) the
amount of scheduled principal payments of Debt which
were due and payable in cash or were paid during such
period, plus (iii) the amount of income taxes which
were due or paid during such period, plus (iv) the
amount of dividends that were paid by VNGI in cash
during such period, plus (v) the amount of dividends
that were paid by VNGI in cash during such period,
plus (vi) the total amount of cost or expense
incurred the Credit Parties and their respective
Subsidiaries during such period for Stock Purchases,
all as determined in accordance with GAAP.

3. Amendment of Section 5.01(g)(2)(a). Section 5.01(g)(2)(a)
of the Original Credit Agreement is amended and restated in it entirety as of
the First Amendment Effective Date to read as follows:

"(a) As of the close of the fiscal quarter
of the Company ending September 30, 1999, for the period of
the four consecutive fiscal quarters which end on such close,
the Credit Parties and their respective Subsidiaries shall
have a Fixed Charge Coverage Ratio I of not less than 0.90:1;
and as of the close of the fiscal quarter of the Company
ending December 31, 1999, for the period of the four
consecutive fiscal quarters which end on such close, the
Credit Parties and their respective Subsidiaries shall have a
Fixed Charge Coverage Ratio I of not less than 1.0:1; and as
of the close of each fiscal quarter of the Company ending
after December 31, 1999, the Credit Parties and their
respective Subsidiaries, for the period of the four
consecutive fiscal quarters which end on such close, shall
have a Fixed Charge Coverage Ratio I of not less than 1.1:1."

4. Conditions. The obligation of the Initial Banks and the
Agent to execute and to perform this First Amendment shall be subject to full
satisfaction by the Company and the other Credit Parties of the following
conditions precedent on or before the First Amendment Effective Date:

(a) The Company shall have delivered to the Bank copies,
certified as of the First Amendment Effective Date, of such
corporate documents of the Company and the other Credit
Parties as the Agent may request evidencing necessary
corporate action by each of the Credit Parties with respect to
this First Amendment and all other agreements or documents
delivered pursuant hereto as the Bank may request.

3
<PAGE> 4

(b) This First Amendment shall have been duly executed by each
of the Credit Parties.

(c) The Company shall have paid all costs and expenses
incurred by the Agent in connection with the negotiation,
preparation and closing of this First Amendment, including the
reasonable fees and out-of-pocket expenses of Messrs. Baker &
Daniels, special counsel to the Agent. By execution of this
First Amendment, the Company authorizes and directs Bank One
to debit any deposit account maintained by the Company with
Bank One on the First Amendment Effective Date or thereafter
for the purpose of paying all amounts due and payable to Agent
and Messrs. Baker & Daniels in connection with the preparation
and closing of this First Amendment and related documents.

(d) Opinion of counsel for the Credit Parties respecting this
First Amendment.

5. Representations and Warranties. The Company represents and
warrants to the Initial Banks and the Agent that:

(a)(i) The execution, delivery and performance of this First
Amendment and all agreements and documents delivered pursuant hereto by the
Credit Parties and the Guarantors has been duly authorized by all necessary
corporate action and do not and will not violate any provision of any law, rule,
regulation, order, judgment, injunction presently in effect applying to any of
the Credit Parties or the Guarantors, or of the articles of incorporation or
by-laws of any of the Credit Parties or Guarantors or result in a breach of or
constitute a default under any material agreement, lease or instrument to which
the Company or any other Credit Party or any Guarantor is a party or by which
the any of the properties of any of the Credit Parties or Guarantors may be
bound or affected; (ii) no authorization, consent, approval, license, exemption
or filing of a registration with any court or governmental department, agency or
instrumentality is or will be necessary for the valid execution, delivery or
performance by the Company or any of the other Credit Parties or the Guarantors
of this First Amendment and all agreements and documents delivered pursuant
hereto; and (iii) this First Amendment is the legal, valid and binding
obligations of the Company and the other Credit Parties and the Guarantors and
enforceable against the Company and the other Credit Parties and the Guarantors
as a signatory thereto in accordance with the terms thereof.

(b) No Event of Default has occurred and is continuing or will
exist under the Agreement as of the First Amendment Effective Date.

4
<PAGE> 5

6. Consent. Guarantors, by their respective execution of this
First Amendment, expressly consent to the execution, delivery and performance by
the Company, VNGI, VNGDI, the Initial Banks and the Agent of this First
Amendment and each of the other documents, instruments and agreements to be
executed pursuant hereto. Each of the Guarantors expressly affirms that the
Guaranty executed by such Guarantor remains in full force and effect. Each of
the Guarantors agrees that neither the provisions of this First Amendment nor
any action taken or not taken in accordance with the terms of this First
Amendment shall constitute a termination, extinguishment, release or discharge
of any of the Obligations or provide a defense, set-off, or counter-claim to any
of them with respect to any of its obligations under any of the Loan Documents
to which it is a party.

5
<PAGE> 6

7. Binding on Successors and Assigns. All of the terms and
provisions of this First Amendment shall be binding upon and inure to the
benefit of the parties hereto, their respective successors, assigns and legal
representatives.

8. Waiver/Governing Law/Entire Agreement/Survival. Each of the
Initial Lenders hereby waives non-compliance by the Credit Parties with the
minimum Fixed Charge Coverage Ratio I to be achieved for the four consecutive
fiscal quarters ending June 30, 1999, as set by Section 5.01(g)(2)(a) of the
Original Credit Agreement. This First Amendment is a contract made under, and
shall be governed by an construed in accordance with, the laws of the State of
Indiana applicable to contracts made and to be performed entirely with such
state and without giving effect to the choice of law principals of such state.
This First Amendment constitutes and expresses the entire understanding between
the parties hereto with respect to the subject matter hereof, and supersedes all
prior agreements and understandings, commitments, inducements or conditions,
whether expressed or implied, oral or written. All covenants, agreements,
undertakings, representations and warranties made in this First Amendment shall
survive the execution and delivery of this First Amendment, and shall not be
affected by any investigation made by any party. This First Amendment may be
executed by original or facsimile signatures, in two or more counterparts, each
of which shall constitute an original, but all of which when taken together
shall constitute but one agreement.

IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to be duly executed and delivered as of the First Amendment Effective
Date.

VALLEY NATIONAL GASES, INC.,
a West Virginia corporation

By: /s/ Lawrence E. Bandi
-------------------------------------
Lawrence E. Bandi, President
(the "Company")

VALLEY NATIONAL GASES INCORPORATED,
a Pennsylvania corporation

By: /s/ Lawrence E. Bandi
-------------------------------------
Lawrence E. Bandi, President
("VNGI")

VALLEY NATIONAL GASES DELAWARE, INC.,
a Delaware corporation

By: /s/ Lawrence E. Bandi
-------------------------------------
Lawrence E. Bandi, President
("VNGDI")

<PAGE> 7

THE TOLEDO OXYGEN AND EQUIPMENT
COMPANY

By: /s/ Lawrence E. Bandi
--------------------------------------

Printed: Lawrence E. Bandi
------------------------------
Title: President
--------------------------------

BANK ONE, INDIANA, NATIONAL
ASSOCIATION, for itself and as Agent

By: /s/ Robert McElwain
--------------------------------------
Robert McElwain, Senior Vice President

<PAGE> 8

FIRST STAR BANK, N. A.

By:______________________________________

Printed:_________________________________

Title:___________________________________

<PAGE> 9

PNC BANK, NATIONAL ASSOCIATION

By:______________________________________

Printed:_________________________________

Title:___________________________________

<PAGE> 10

BANK OF AMERICA NATIONAL ASSOCIATION

By:______________________________________

Printed:_________________________________

Title:___________________________________

<PAGE> 11

NATIONAL CITY BANK

By:______________________________________

Printed:_________________________________

Title:___________________________________

<PAGE> 12

THE HUNTINGTON NATIONAL BANK

By:______________________________________

Printed:_________________________________

Title:___________________________________

<PAGE> 1

AGREEMENT

This Agreement, made as of the 1st day of July, 1999 between Valley
National Gases, Inc., a Corporation, ("VALLEY") and William A. Indelicato
("INDELICATO").

WHEREAS, Indelicato, individually and by and through his consulting
corporation ADE Vantage, Inc. ("CORPORATION") have an arrangement with Valley
National Gases, Inc., which expires June 30, 1999, for the expansion of Valley's
industrial gas and welding supply business, through acquisition and expansion of
industrial gas and welding supply distributors ("ACQUISITION PROGRAM"); and,

WHEREAS, Valley and Indelicato desire to enter into this Agreement
setting forth Indelicato's continuing relationship with Valley in the execution
of the Acquisition Program including compensation therefore.

WITNESSETH in consideration the mutual promises hereinafter contained
Valley and Indelicato agree as follows:

1. Duties. Indelicato will identify, investigate and develop industrial
gas and welding supply business distributors as prospective acquisition
candidates. Indelicato together with Valley will qualify all potential
distributors for acquisition and jointly target distributors for acquisition
solicitation ("TARGET DISTRIBUTORS"). Indelicato will assist Valley in the
solicitation, preparation of offering memoranda, contract negotiation, due
diligence and/or any other matters necessary to assist Valley to consummate
Target Distributor acquisitions in accordance with the Acquisition Program.
Indelicato will also provide general management consulting services as may be
requested by Valley Management from time to time. Compensation for such services
will be provided as part of the management service fee covered in Paragraph 10.

1
<PAGE> 2

2. Term. The term of this Agreement shall be one (1) year from the
execution and delivery of this Agreement.

3. Independent Contractor Status. It is understood that Indelicato is an
independent contractor, representing Valley pursuant to this Agreement, and he
shall not otherwise hold himself out to the public as employee, or partner of
Valley. As such Indelicato is responsible, where necessary, to secure at his
sole cost, worker's compensation, insurance, disability, benefits and any other
insurance as may be requires by law. Valley will not provide, nor will it be
responsible to pay for benefits for Indelicato. Any benefits, if provided by
Indelicato for himself and/or his staff, including by not limited to, health
insurance, paid vacation, paid holidays, sick leave or disability insurance
coverage of whatever nature, shall be secured and paid for by Indelicato.

4. Tax Duties and Responsibilities. Indelicato is responsible for the
payment of all required payroll taxes, whether federal, state or local in
nature, including, but not limited to, income taxes, social security taxes,
federal unemployment compensation taxes, and any other fees, charges, licenses
or other payments required by law.

5. Employee's of Independent Contractor. Indelicato may employ as many
employees as he requires, such matter resting entirely with his own discretion.
Valley need not be advised to the employment of such individuals. Such persons
are employed of Indelicato, and he shall be deemed employer of such persons. As
such, Indelicato shall be responsible for compensation as well as all necessary
insurance and payroll deductions for such persons, including but not limited to,
federal, state and local income taxes, social security taxes, unemployment
compensation taxes, workers compensation coverage, etc.

2
<PAGE> 3

6. ADE Vantage, Inc. Indelicato may at his sole cost and expense (except
for reimbursement support service costs as provided in Paragraph 11
hereinafter), in his execution of the Acquisition Program engage Corporation,
ADE Vantage, Inc., his consulting firm, as his agent and contractor to provide
support services and any other services executed pursuant to the Acquisition
Program or otherwise required of Indelicato hereunder. At all times, Corporation
shall solely be the contractual agent of Indelicato and not Valley.

7. Indemnification. Indelicato shall not be liable for the acts,
negligence or defaults of any employee, agent or representative of Valley, nor
shall he be liable for anything done or not done in good faith, including errors
of judgment, acts done or committed on the advise of counsel, or mistakes of
fact or law. Indelicato shall, without prejudice to any other rights which he
may have, be indemnified by Valley against all liability and expense reasonably
incurred by him in connection with any claim, action, suit or proceeding of
whatever nature in which he may be involved as a party or otherwise by reason of
having entered into this Agreement and the execution of the duties assumed
hereunder relative to his execution of the Acquisition Program. Indemnification
hereunder, shall not, however, extend to any liability, loss, damage claim or
expense to the extent occasioned by or arising out of Indelicato's default
hereunder or any willful misconduct or grossly negligent act by Indelicato, his
agents and employees in his capacity as an Independent Contractor in the
execution of his duties hereunder. Further, Valley agrees that ADE Vantage, Inc.
shall not be liable and shall be held harmless for any damage or injury caused
by its negligent mistakes, errors and omissions in and about providing financial
services under this Agreement.

3
<PAGE> 4

8. Business of Independent Contractor. During the term of this Agreement,
Indelicato may engage in any other business which does not conflict with his
duties hereunder, conflict with Valley's business, or otherwise impair the
successful execution and implementation of the Acquisition Program.
Notwithstanding, Valley and Indelicato agree that approximately sixty seven
percent (67%) of Indelicato's time will be spent on the Acquisition Program.

9. Supervision. Indelicato shall not be subject to the provisions of any
personnel handbook or the rules and regulations of applicable employees to
Valley since Indelicato shall fulfill his responsibilities independent of any
without supervision or control by Valley.

10. Compensation. Indelicato's compensation hereunder shall be set forth as
follows:

a. Indelicato will be paid a management service fee of $4,225 per month
by cash payment to be paid, (1) for the first six months $1,500 per
month and a lump sum payment of $16,350 paid between January 1, 2000
and January 7, 2000 and (2) for the last six months $4,225 per month.
If however, Indelicato's time in any single calendar month exceeds 75%,
then the $4,225 per month management service fee will be prorated
upward based upon the actual time spent on behalf of Valley but in no
case exceed $6,000 per month. Also, if Indelicato's time in any single
calendar month is less than 60%, then the $4,100 per month management
service fee will be prorated downward based upon the actual time spent
on behalf of Valley, but in no case will be less than $3,500 per month.
Adjustments to the monthly management service fee will be made
quarterly in arrears and invoiced or credit to Valley.

4
<PAGE> 5

b. For each acquisition which closes during the term of this Agreement
Valley will provide Indelicato with a bonus payment based upon the following
calculation:

Payment = 80(3090(S) + 5250)/V

Where P = Payment in Dollars for each closed transaction

S = Size of transaction (annual sales) in $ millions

V = Percent of Strategic Value, where if V is between values of
75 and 85 then for the purpose of this calculation V will be
set at 80. If V is at a value above or below the range of 75
to 85, then the actual value of V will be used.

Strategic Value will be determined by the method consistent with past
practices used by Indelicato and the Company as presented to Valley.
The methodology involves ten year financial projections and a terminal
value using agreed upon assumptions and cost savings recognized by
Valley management as being achievable over a reasonable period of time.
Calculations will be on a debt free basis and will be adjusted for
assets held outside by related parties and will be further adjusted for
all non recurring costs or income items which would not exist under
Valley ownership.

Strategic Value will be based upon information available immediately
after completion of due diligence as documented by letter to L.E.
Bandi, President, which is also used to communicate transaction
specific information to Bank One (the "Letter").

Percent of Strategic Value is determined as follows:

(Actual Payment/Strategic Value) 100

5
<PAGE> 6

The Actual Payment made for the business is on a net present value
basis including all interest bearing debt, as historically documented
in the Letter.

c. Valley shall reimburse Indelicato by cash payment for all out of
pocket expenses reasonably incurred by him, while rendering services in
support of the Acquisition Program, excluding office rent but including
cellular phone monthly charges and charges for phone service which is
exclusively for Valley's benefit.

11. Reimbursable Support Service.

a. Financial. Indelicato shall be entitled for financial support
services for financial projections, evaluations as well as other
necessary and required analyses prepared for Indelicato by Corporation
or by independent professional agents obtained for this specific
purpose, at the rate of seventy seven ($81.25) per hour as such support
service costs are incurred during the term of this Agreement. Valley
and Indelicato agree that they intend to use ADE Vantage, Inc. for
financial services.

b. Approval of Valley. All such financial support services shall be
incurred on a case by case basis, only upon the notice to and agreement
of Valley as to the proposed nature and extent thereof.

12. Assignment. Indelicato shall not sell, assign or transfer this
Agreement, however, he shall have the limited right to assign the Agreement to
the Corporation.

13. Governing Law. This Agreement shall be subject to and governed by the
laws of the State of West Virginia.

14. Renewal. This Agreement may be renewed for one year periods upon
written acknowledgment by both parties 30 days prior to expiration.

6
<PAGE> 7

15. Termination of Agreement. This Agreement may be terminated at will by
either party, at any time, by at least one hundred and eighty (180) days prior
notice to the other party as provided hereinunder in Paragraph "15. Notices." In
the event Indelicato dies, then in such event his estate would be entitled to
all payments due under this Agreement for acquisitions not yet closed, and the
same if Valley terminated the Agreement other than for just cause. Termination
of this Agreement will in no event cause forfeiture of Indelicato's right to
payment hereunder, which shall survive any and all such termination.

16. Notices. All notices required to be given hereunder shall be in writing
and shall be sent by certified mail, postage prepaid, to Valley and/or to
Indelicato at the addresses indicated below, unless written notice of change of
address is provided to other party as the address indicated.

To Valley: Valley National Gases, Inc., 67-43rd Street,
Wheeling, WV 26003; Attention: Lawrence E. Bandi

To Indelicato: William A. Indelicato, 72 Park Street, Suite
105, New Canaan, Connecticut 06840

17. Waiver. The waiver by either party of a breach of any provision in the
Agreement shall not operate or be construed to operate as a waiver of any
subsequent breach.

18. Modification. No change, modification or waiver of any term of this
Agreement shall be valid unless it is in writing and signed by both parties.

19. Entire Agreement. This Agreement constitutes the entire Agreement
between the parties and supersedes all prior Agreements or understandings
between Valley and

7
<PAGE> 8

Indelicato, with the exception of the letter agreements pertaining to deferred
compensation on future acquisitions.

20. Captions. The captions are inserted for convenience only and shall not
be considered when interpreting any provision or terms hereof.

IN WITNESS WHEREOF, the parties have executed this Agreement as of this day of
June, 1999.

VALLEY NATIONAL GASES, INC.

By /s/ Lawrence E. Bandi
----------------------------------------
Lawrence E. Bandi, President

By /s/ William A. Indelicato
----------------------------------------

Its
---------------------------------------

-------------------------------------------
WILLIAM A. INDELICATO

<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
financial statements for Valley National Gases Incorporated and is qualified in
its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001030715
<NAME> VALLEY NATIONAL GASES INCORPORATED

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 224,708
<SECURITIES> 0
<RECEIVABLES> 12,415,040
<ALLOWANCES> 454,981
<INVENTORY> 11,173,995
<CURRENT-ASSETS> 25,324,728
<PP&E> 75,645,607
<DEPRECIATION> 29,857,130
<TOTAL-ASSETS> 108,525,723
<CURRENT-LIABILITIES> 15,711,319
<BONDS> 56,242,003
0
0
<COMMON> 9,620
<OTHER-SE> 27,035,024
<TOTAL-LIABILITY-AND-EQUITY> 108,525,723
<SALES> 102,270,600
<TOTAL-REVENUES> 102,270,600
<CGS> 46,332,129
<TOTAL-COSTS> 46,332,129
<OTHER-EXPENSES> 46,480,059
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,113,823
<INCOME-PRETAX> 5,595,643
<INCOME-TAX> 2,350,170
<INCOME-CONTINUING> 3,245,473
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,245,473
<EPS-BASIC> 0.32
<EPS-DILUTED> 0.32

</TABLE>