As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/13/05  Valley National Gases Inc         S-2                    3:1.3M                                   Bowne BCL/FA

Document/Exhibit                   Description                      Pages   Size 

 1: S-2         Valley National Gases Incorporated S-2              HTML   1.10M 
 2: EX-23.1     Consent of Experts or Counsel                       HTML      6K 
 3: EX-23.2     Consent of Experts or Counsel                       HTML      5K 

CALCULATION OF REGISTRATION FEE

        We are offering 400,000 shares of our common stock and Gary E. West, Chairman of our Board of Directors, as the selling shareholder, is offering 1,600,000 shares of our common stock. We will not receive any of the proceeds from the sale of the shares of our common stock by Mr. West. Following this offering, Mr. West will hold 5,479,100 shares of our common stock representing 55% of our outstanding shares of common stock.

      Our common stock is traded on the American Stock Exchange under the symbol “VLG.” On May 11, 2005, the last sale price of our common stock as reported on the American Stock Exchange was $15.10 per share.

      Investing in our common stock involves risks. See “Risk Factors” beginning on page 6 to read about factors you should consider before buying shares of our common stock.

      Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

      To the extent the underwriters sell more than 2,000,000 shares of our common stock, the underwriters may purchase up to an additional 300,000 shares of our common stock from us at the public offering price, less the underwriting discount and commission, within 30 days from the date of this prospectus to cover over-allotments.

      The underwriters expect to deliver the shares on               , 2005.

      You should rely only on the information contained or incorporated by reference in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different or inconsistent information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition and prospects may have changed since that date.

      Unless the context otherwise requires, references in this prospectus, and the documents incorporated by reference in this prospectus, to:

      An investment in our common stock involves a high degree of risk. You should carefully consider the following risks and the other information contained in this prospectus before purchasing our common stock. The risks and uncertainties described below are those that we currently believe may materially affect us. Additional risks and uncertainties not presently known to us or that we currently believe are immaterial also may impair our business operations.

      One of our principal business strategies is to pursue growth through the acquisition of other independent distributors. Because we focus our acquisition efforts on market areas in which we have an existing presence and on bordering market areas, we may not always be able to find suitable acquisition candidates. Even if we are able to identify an attractive acquisition candidate, we may incorrectly judge its value, may not locate and assess all its liabilities and may not be able to negotiate the terms of the acquisition successfully. In addition, we may have difficulty integrating the products, services or technologies of the acquired business into our operations, retaining key employees and retaining customers of the acquired company. Although we believe that we have more carefully controlled customer attrition in our recent acquisitions, loss of customers has had significant adverse consequences in some of our acquisitions and could occur in the future. These difficulties could disrupt our ongoing business, strain our resources, distract our workforce and divert our management’s attention from our day-to-day operations. Acquisitions may also result in lower than expected sales and net income, higher than expected costs and liabilities or a need to allocate resources to manage unexpected operating difficulties.

      Our acquisitions have historically been debt financed, and we expect that future acquisitions will be financed primarily with internally-generated funds supplemented with borrowings under our revolving credit facility and seller financing as necessary. We may not be able to obtain financing when needed or on terms favorable to us. This may limit our ability to execute our growth strategy successfully or require us to accept unfavorable financing terms. We do not currently use shares of our common stock or other securities as consideration for acquisitions, but we may do so in the future and may issue common stock to raise cash that is used in acquisitions. If we decide to acquire businesses through the issuance of equity or convertible debt securities, the percentage ownership of our shareholders would be reduced and these securities might have rights, preferences and privileges senior to those of our current shareholders and purchasers in this offering.

      Acquisitions frequently result in the recording of goodwill and other intangible assets. At March 31, 2005, goodwill represented approximately 25% of our total assets. Goodwill is no longer amortized and is subject to impairment testing at least annually using a fair value-based approach. In testing the impairment of goodwill, we consider and balance a variety of valuation methods, including formal criteria of the Uniform Standards of Professional Appraisal Practice, or USPAP, for assessment of the fair market value of a business as a whole. In accordance with USPAP, we use a discounted cash flow analysis including, where applicable, appropriate market-based deductions and discounts, and take into account any extraordinary assumptions and hypothetical conditions which may have an impact on our determination. In addition to this approach for valuing our business as a whole, we also consider goodwill by location or

      Any future growth will require us to continue to implement and improve operational, financial and management information and control systems and human resources on a timely basis and to maintain effective cost controls. In addition, we have made staff reductions as part of our profit improvement plan. As we grow, implement controls and procedures under the Sarbanes-Oxley Act of 2002 and handle other extraordinary corporate events, our human resources may be strained. For example, we could experience difficulties that could delay or prevent us from upgrading our technology and network infrastructure, which could impede the improvement of such systems. We cannot fully assess our ability to manage our growth successfully in the future. If we are unable to manage our growth effectively, our financial and managerial resources may become overextended and our financial condition and operating results, including our profitability, could be significantly harmed.

      Although we achieved improved operating results in fiscal 2004 and year-to-date in fiscal 2005 that we have attributed to our process improvement plan, many facets of that plan have already been implemented and we cannot predict whether these measures will generate any further benefits. Further, we cannot be certain that the cost savings measures we have implemented, including staff reductions and location consolidation, will not have a longer-term negative impact on our customer relationships or our ability to manage our business.

      Our profitability may be affected by competition, which is based primarily on service, customer loyalty and, to a lesser extent, price. There are several competitors in each of the markets in which we operate, some of which are able to compete with us for larger customers by providing services over a larger geography. Many customers tend to develop long-term relationships with their distributor and it may, therefore, be difficult for us to gain new customers, other than through the acquisition of other distribution businesses. If we are unable to increase or maintain our customer base, our revenues may decline and our profitability may be negatively impacted. In addition, our competitors may seek to maintain or increase their market share by reducing prices. If we reduce the price of our products in response to competition in our industry, our revenues, income and cash flows may be adversely impacted and we may not be able to maintain our current profitability levels, to continue the level of capital expenditure necessary to support our business or to meet our obligations under our debt instruments.

      Our businesses are managed by a small number of management and operating personnel, the loss of certain of whom could have a material adverse effect on our operations. We believe that our ability to manage our planned growth successfully will depend in large part on our continued ability to attract and

      Energy costs, which are to a large extent subject to factors beyond our control, impact our business in several respects. Because the production of industrial gases requires significant amounts of electrical energy, industrial gas prices have historically increased as the cost of electric energy has increased. Shortages of energy may cause energy prices to continue to rise and, as a result, increase the cost of industrial gases. Historically, we have not entered into hedging agreements to protect us from increases in energy costs. In addition, a portion of our distribution costs consists of diesel fuel costs, which have recently increased to record levels. Furthermore, the price of propane is influenced significantly by the cost of crude oil, largely because propane competes with crude oil-based fuels. As the price of propane continues to reflect the rising price of crude oil, our sales of propane may decrease and adversely affect our financial results. Although we have historically been able to pass most of the increases in the above-referenced costs to our customers, we may not be able to continue to do so in the future. Increases in energy costs and other costs that we are unable to pass on to our customers could significantly reduce our profitability.

      Our business is dependent upon a number of factors that may adversely affect our results of operations, many of which are beyond our control. Recessionary economic cycles and downturns in customers’ business cycles, particularly in regions and industries in which our customers operate can adversely affect our business. In addition, economic conditions may adversely affect our customers, many of whom are in businesses that are cyclical in nature. Customers encountering adverse economic conditions represent a greater potential for loss, and we may be required to increase our allowance for doubtful accounts. We are also affected by increases in insurance and transportation costs and interest rates. In addition, we cannot predict the effects of actual or threatened armed conflicts or terrorist attacks, efforts to combat terrorism, military action against any foreign state or group located in a foreign state or heightened security requirements on the economy or consumer confidence in the United States. Any of these events could impair our operating efficiency and productivity or result in increased costs for us due to security measures.

      Much of the distribution and sale of propane is seasonal in nature and sensitive to variations in weather, with consumption as a heating fuel peaking sharply in winter months. Sales of propane may be negatively impacted during periods of warm weather, and sustained periods of weather conditions inconsistent with normal weather patterns can create volatility in our earnings. Significantly warmer weather could decrease the demand for propane and have a material adverse effect on our business, results of operations and financial condition.

      We provide health care benefits to our employees under self-funded programs through which a third-party administrator settles and pays claims by our employees that we fund and for which we accrue costs. We established a reserve for these costs based on our estimate of the level of outstanding claims, including claims incurred but not reported, based upon historical payment patterns, knowledge of individual claims and estimates of health care costs. These estimates are inherently uncertain and may not accurately reflect the actual level of outstanding claims and the resulting costs. Because our employee health care benefit program is self-funded and we assume the risk of health care costs of our employees up to a limit on every individual claim, we may be adversely affected by the rising costs of health care, an increase in the number of such claims or an increase in the value of individual claims.

      Approximately 13% of our employees are currently covered by collective bargaining agreements. We are required to negotiate the wages, salaries, benefits and other terms with these employees collectively. Our results of operations could be adversely affected by labor negotiations and/or labor disputes in the future, particularly if a greater portion of our workforce joins a union.

      There are several competing suppliers of most of the products that we purchase, although for business reasons we have concentrated our purchases with only a few suppliers. We purchase industrial gases pursuant to supply arrangements and open purchase orders with three of the five major gas producers in the United States. The largest such producer accounted for approximately 45% of our gas purchases in fiscal 2004. We purchase welding equipment and consumable supplies from a number of vendors, of which the top five vendors represented approximately 64% of our total purchases in fiscal 2004. We purchased 65% of our propane from a single supplier in fiscal 2004. Although we believe that supplies have historically been readily available, if one or more of these suppliers were to unexpectedly discontinue sales of a product to us, we would have to secure alternate sources of supply, and we could experience decreases in our profit margins if our arrangements with such alternate sources of supply were less favorable than those with our current suppliers and a decrease in our revenue if we were unable to obtain a sufficient supply of product.

      Our credit facility provides for revolving borrowings of up to $75 million maturing on April 30, 2009. The facility is secured by substantially all of our assets and contains various financial covenants applicable to us, including covenants requiring minimum fixed charge coverage and maximum funded debt to earnings before income taxes, depreciation and amortization, or EBITDA. Although we are currently in compliance with these covenants, a failure to comply would constitute a default under the credit facility. A default, if not waived by our lenders, could cause our outstanding indebtedness under the credit facility becoming immediately due and payable, and could also cause cross-defaults under other agreements that results in the indebtedness under those agreements to become immediately due and payable as well. If we were required to obtain waivers of a default or defaults, we could incur significant fees and transaction costs. If waivers of defaults are not obtained, we might have difficulty borrowing sufficient additional funds to repay the debt. Even if new financing is made available to us, it may not be available on acceptable terms.

      Propane is, and many of the other industrial gases we sell are, extremely flammable, explosive products. Serious personal injury, property damage or loss of life can result from improper transportation, storage, production or use of these products. Further, the industrial products we sell often contain or produce toxic substances that may cause injury or damage if improperly formulated or used. For example, some of our competitors have been found liable for alleged injuries and diseases from exposure to asbestos in welding rods and we have been named in suits alleging damages for exposure to both asbestos and manganese fumes from welding rods. Our business entails an inherent risk of liability in the event of product failure or damages resulting from the use of our products and we, therefore, maintain product liability insurance against any such claims in amounts we believe to be adequate. Although we have never been subject to significant liability for product-related issues and believe our liability as a product distributor may be more limited than the liability of manufacturers of such products, we cannot assure you that we will not be subject to a significant claim in the future, that we will be able to successfully defend claims, or that if we were to be found liable on a claim, it would not exceed the limits of our insurance coverage. Furthermore, we can not be certain that we will be able to continue to obtain liability insurance on acceptable terms.

      We have, from time to time, been the subject of suits alleging violations of employment law, vehicular damage, injury and various other actions. These suits often seek punitive damages, attorneys’ fees, injunctive relief and other remedies, and there is management and employee time taken to handle these claims. Some of our insurance policies do not cover punitive damages or provide for the payment of attorneys’ fees in addition to the limits of coverage. There are, for example, currently several actions pending against us alleging damages in connection with employment or termination of employment. There is no assurance that insurance will be available or adequate to protect us from claims. An unfavorable result in these actions could adversely impact our operations during the period decided.

      After this offering, Gary E. West, Chairman of our Board of Directors, will control approximately 55% of the outstanding shares of our common stock, or 53% of the outstanding shares of our common stock if the underwriters exercise their over-allotment option in full. As a result, Mr. West has the ability to exercise effective control over the election of our Board of Directors and the outcome of corporate actions requiring shareholder approval, including the amendment of provisions of our certificate of incorporation and bylaws, the approval of any equity-based compensation plans and the approval of fundamental corporate transactions, including mergers. In light of this control, other companies could be discouraged from initiating a potential merger, takeover or any other transaction resulting in a change of control of the Company that could potentially be beneficial to our business or to our shareholders. This may in turn reduce the price that investors are willing to pay in the future for shares of our common stock. For more information on beneficial ownership of the shares of our common stock, see “Principal and Selling Shareholders.”

      We have entered into a number of transactions with related parties, including variable interest entities in which certain of our directors and executive officers have interests. For example, we lease 32 buildings

      We have been required under recently adopted accounting principles to consolidate in our financial statements the financial results and position of several entities controlled by Gary E. West, Chairman of our Board of Directors and our largest shareholder. Although we do not have any equity interest in these entities, this consolidation causes us to report:

Our financial ratios and our ability to comply with the financial covenants contained in credit and other agreements could be adversely affected by the inclusion of the results of operations of these entities and the asset and liability balances they hold, our financial results could be more volatile and difficult to understand and some forms of financing (such as asset-backed securitization) may become less available or more costly to us because of this consolidation.

      Prior to this offering, Gary E. West owned or controlled approximately 7.1 million shares, and our remaining executive officers and directors controlled approximately 194,000 shares of the approximately 9.5 million shares we had outstanding. Accordingly, there were only approximately 2.2 million shares available for active public trading. Although this offering may increase the amount of this “public float,” our shares may continue to be thinly traded. Without a larger public float and significant stable institutional ownership, our stock price could be more heavily influenced by:

      In connection with one of our acquisitions we entered into a right of first refusal agreement with our largest shareholder Gary E. West, several of Mr. West’s affiliated persons and entities, and Praxair, Inc. The right of first refusal agreement, which is effective through September 29, 2006, provides Praxair the right:

After this offering, Mr. West will be the beneficial owner of approximately 53% of the outstanding shares of our common stock on a fully-diluted basis and of approximately 52% of the outstanding shares of our common stock on a fully-diluted basis if the underwriters exercise their over-allotment option in full. Although there is no limitation under the agreement with Praxair on our ability to issue additional shares of capital stock, as long as Mr. West and his affiliates own 51% or more of our issued and outstanding capital stock, the agreement creates a number of undesirable outcomes if we were to issue shares prior to September 29, 2006 that would result in Mr. West and his affiliates owning less than 51%. In addition, the right of first refusal agreement provides, subject to certain conditions, for certain permitted transfers in the event of Mr. West’s death, including transfers to Mr. West’s spouse and lineal descendants. Mr. West’s will currently provides for the transfer of his shares to his spouse upon his death, but we cannot assure you that it will continue to do so, that Mr. West’s spouse will survive him, or how the shares may be transferred after Mr. West’s or any transferee’s life. Accordingly, it is possible that rights in favor of Praxair could be triggered that would result in Praxair acquiring a controlling interest in our common stock. Further, the right of first refusal agreement likely will cause us difficulty prior to September 29, 2006 in connection with considering and negotiating offers to acquire Valley, because bidders may be unwilling to maintain an offer while the notice periods in the agreement run. Accordingly, the right of first refusal agreement could, until September 29, 2006, limit our ability to raise capital through the sale of capital stock to parties other than Praxair, may delay future offerings, may restrict our ability to consummate strategic transactions involving the issuance of stock, such as mergers, acquisitions, share exchanges and the like, and may limit our flexibility to grant incentives to employees through the issuance of stock options and other convertible securities.

      Our Articles of Incorporation give our Board of Directors the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by the shareholders. The rights of the holders of common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. The issuance of shares of preferred stock, while potentially providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock. The Pennsylvania Business Corporation Law authorizes our directors, in discharging their fiduciary duties, to consider the interests of

      Furthermore, certain provisions of our Articles, our Bylaws and the Pennsylvania Business Corporation Law (including provisions allowing the removal of a director by shareholders only for cause, providing for the Board of Directors to be divided into three classes to serve for staggered three-year terms and setting forth a heightened quorum for certain actions by shareholders) could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control that our shareholders may consider favorable or beneficial. These provisions may also reduce the likelihood of our acquisition at a premium price by another person or entity.

      Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. Section 404 of the Sarbanes-Oxley Act of 2002 will require us to evaluate and report on our internal controls over financial reporting and have our independent registered public accounting firm attest to our evaluation, beginning with our Annual Report on Form 10-K for the fiscal year ending June 30, 2007. The process of strengthening our internal controls and complying with Section 404 will be expensive and time consuming, and will require significant attention of management. We cannot be certain that the measures we take will ensure that we implement and maintain adequate controls over our financial processes and reporting in the future. Failure to implement required new or improved controls, or difficulties encountered in their implementation, could harm our operating results or cause us to fail to meet our reporting obligations. If we or our independent registered public accounting firm discover a material weakness, the disclosure of that fact, even if quickly remedied, would reduce the market’s confidence in our financial statements and harm our stock price. In addition, a delay in compliance with Section 404 could subject us to a variety of administrative sanctions, including the suspension or delisting of our common stock from the American Stock Exchange and the inability of registered broker-dealers to make a market in our common stock, which would further reduce our stock price.

      This prospectus and the information incorporated by reference in this prospectus include statements that are “forward-looking statements.” These forward-looking statements can be identified by the use of words and phrases such as “will likely result,” “are expected to,” “anticipate,” “believe,” “estimate,” “project,” “may,” “intend,” “expect,” “seeks,” and words of similar effect. The forward-looking statements reflect assumptions and projections we have made about our business based on our current expectations. The accuracy of these assumptions and projections, however, is subject to risks and uncertainties, including the risks identified in the “Risk Factors” section of this prospectus. These risks and uncertainties could cause our assumptions and projections to be wrong, and cause our actual results to differ materially from those discussed in the forward-looking statements.

      You are cautioned not to place undue reliance on these forward-looking statements, all of which speak as of the date of this prospectus. Except for special circumstances in which a duty to update arises, we do not intend to update the forward-looking statements to reflect events or circumstances after the date of this prospectus.

      We estimate that we will receive net proceeds from the sale of the 400,000 shares of our common stock offered by us, at an estimated public offering price of $              per share and after deducting estimated underwriting discounts and commissions and offering expenses, of $              ($              if the underwriters’ over-allotment option to purchase additional shares from us is exercised in full).

      We will use the net proceeds from this offering to reduce our borrowings under our revolving credit facility, although we may then reborrow the funds to support our working capital needs or for acquisitions. We will not receive any of the proceeds from the sale of the shares of our common stock by the selling shareholder.

      Our credit facility provides for borrowings, secured by substantially all of our assets, of up to $75 million maturing on April 30, 2009. Outstanding borrowings under the credit facility bore interest at 2.94% at March 31, 2005.

      We expect to acquire during the fourth quarter of fiscal 2005 a distributor of packaged industrial gases with whom we previously entered into a put/call option agreement. The option was exercised by the distributor on May 9, 2005. Depending on the timing of both the acquisition and this offering, we may use approximately $5.8 million of the net proceeds from this offering to purchase this distributor and apply the balance of the net proceeds to reduce our borrowings under our revolving credit facility as described above.

      Our common stock is traded on the American Stock Exchange under the symbol “VLG.” The following table sets forth, for the periods indicated, the high and low closing prices for our common stock, as reported by the American Stock Exchange.

      On May 11, 2005, the last sale price of our common stock as reported on the American Stock Exchange was $15.10 per share and there were 77 holders of record of our common stock.

      Our revolving credit facility permits us to pay cash dividends on our capital stock to the extent the dividends we pay, and any redemptions or repurchases we make, do not exceed $2 million annually. For the year ended June 30, 2004, we authorized a $.09 dividend per share (approximately $0.9 million in total), which was paid on October 1, 2004 to shareholders of record as of September 1, 2004. This was the first dividend we paid. Dividend payments in the future will depend upon several factors, including earnings, acquisition opportunities and debt level. Our Board and management have indicated that they will place precedence on using available cash to grow the business through acquisitions over payment of dividends.

      The following table sets forth our capitalization as of March 31, 2005. We present capitalization:

      Our capitalization information set forth above excludes 359,460 shares outstanding under options that have been granted under our 1997 Stock Option Plan, and an additional 63,875 shares reserved under that plan for options that may be granted in the future.

      We derived the following selected consolidated financial data as of and for each of the five years in the period ended June 30, 2004 from our audited consolidated financial statements. We derived the selected consolidated financial data as of and for the nine months ended March 31, 2004 and 2005 from our unaudited consolidated financial statements. You should read this data with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes included elsewhere in this prospectus. Results of operations for the nine month periods are not necessarily indicative of results of operations that may be expected for the full fiscal year.

      You should read the following discussion and analysis together with the “Selected Consolidated Financial Data” and the consolidated financial statements and related notes included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those expressed or implied in these forward-looking statements as a result of various factors, including those discussed under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements.”

      We are a leading distributor of industrial, medical and specialty gases, and related welding equipment and supplies, in 11 states in the eastern United States. We also have a growing presence in the distribution of propane in our geographic markets.

      We generate revenue through the sale of packaged industrial, medical and specialty gases and the rental and delivery charges for the cylinders and tanks in which they are delivered, as well as through sale of related welding equipment and supplies. We sell packaged gases to customers for manufacturing, industrial, metal production and fabrication, construction, health care, mining, oil and chemicals and other applications. Sale of our packaged gases is generally not seasonal. We also sell propane to the residential, commercial and industrial markets. Typical residential and commercial uses include conventional space heating, water heating and cooking. Typical industrial uses include engine fuel for forklifts and other vehicles, metal cutting, brazing and heat treating. The distribution of propane is seasonal in nature and sensitive to variations in weather with consumption as a heating fuel peaking sharply in winter months. In fiscal 2004, packaged gases and rental, together with related equipment and supplies, accounted for approximately 74% of our net sales, while propane accounted for approximately 26% of our net sales.

      Our cost of products sold includes the direct cost of industrial, medical and specialty gases pursuant to supply arrangements and open purchase orders with three of the five major gas producers in the United States, the purchase of hard goods from a number of vendors and the purchase of propane from one of the three major propane suppliers. Although the cost of the gases we sell is subject to formula pricing and variation based on market prices for such gases, because packaging, delivery and other service constitutes a substantial portion of the cost and the value of the packaged gases we provide our customers, we believe that we are not significantly exposed to decreased margins because of those variations.

      Our operating, distribution and administrative expenses primarily are composed of delivery expenses, salaries, benefits, professional fees, transportation equipment operating costs, facility lease expenses and general office expenses. We believe 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. We also incur depreciation expense related to our fixed assets, including approximately 500,000 cylinders which are depreciated over a period of 12 to 30 years. We also own approximately 200 delivery vehicles that we depreciate over a period of 3 to 7 years.

      We believe that we have been successful in executing our strategy of growth through acquisitions, having completed over 30 acquisitions since 1997, the year of our initial public offering. 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. For many acquisitions, we believe 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. Some acquisitions have had, and we expect that some future acquisitions could have, a dilutive effect upon our income from operations and income before tax for

      In part to manage our operations independent of the effect of acquisitions, we monitor the results of each of our 63 locations separately. Although each location is therefore a separate segment, because no single store generates an amount of revenue or income, or maintains assets, in excess of the thresholds in accounting releases that would require us to report them as separate segments, and because all stores offer similar products and services, we report their results on an aggregate basis. We do maintain records of “same store sales,” which are sales from those stores that have been operated by us for the full two-year comparison period. The value of sales increase related to acquisitions is determined by the specific sales of each acquired location. New stores would be considered in same store sales once we have operated them for the entire comparison period.

      We lease buildings and equipment and rent cylinders from West Rentals, Inc., G.E.W. Real Estate LLC, RealEquip-Lease LLC, Equip-Lease Co. and Acetylene Products Corp., entities that are engaged primarily in the purchase, development, sale and/or lease of real estate and that are controlled by Gary E. West, our Chairman and principal shareholder. Under accounting interpretations that were effective for us on March 31, 2004, and because we are under common control with these entities, we must consolidate in our financial statements, the financial statements of these related entities. In consolidation, the rent expense we pay to these entities is eliminated, resulting in us reporting slightly less operating, distribution and administrative expense and slightly more income from operations. Because some of the properties held by the variable interest entities are financed, and because of the amount of depreciable assets these entities hold, the consolidation results in us reporting slightly more interest and depreciation expense. Further, because we classify the rental income that these entities generate as “other income” for our purposes, these entities result in our reporting more other income. All of the effect of these entities on our net income is eliminated when we deduct the net effect as a minority interest The real property and equipment held by these entities results in our reporting significantly higher balances of buildings and equipment on our balance sheet, and because some of these properties are subject to mortgage loans, higher indebtedness. Although these entities are controlled by related parties, we have no equity interest in any of them and the creditors and beneficial interest holders of these entities have no recourse to our general credit.

      The preparation of our financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts we report in our consolidated financial statements and accompanying notes. We describe the significant accounting policies and methods that we use to prepare our consolidated financial statements in Note 3 to the financial statements for the year end June 30, 2004. The most critical accounting matters in which we use estimates include our determination of the net carrying value of our trade receivables, our inventories, our goodwill, our other intangible assets and our employee health care benefit reserves. If our estimates have to be revised, we may be required to adjust the carrying value of these assets, affecting our results of operations during the period when the adjustment is recorded, and affecting our net assets and equity. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the consolidated financial statements.

      We estimate the collectability of our trade receivables on a monthly basis. We have established an allowance for doubtful accounts to adjust the carrying value of trade receivables to fair value based on the amount of trade receivables that we estimate are uncollectible. We establish the allowance for doubtful

      Our inventories are stated at the lower of cost or market, with cost determined by the first-in, first-out method. We write down our inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon its physical condition, as well as assumptions about future demand and market conditions. If actual demand or market conditions in the future are less favorable than those estimated, additional inventory write-downs may be required. Estimates of physical losses of inventory are made on a quarterly basis based upon historical results.

      We adopted SFAS No. 142, “Goodwill and Other Intangible Assets,” as of July 1, 2001. SFAS No. 142 requires goodwill and intangible assets with indefinite useful lives not to be amortized, but instead to be tested for impairment at least annually. We have elected to perform our annual test for indications of goodwill impairment as of June 30th of each year. In testing the impairment of goodwill, we consider and balance a variety of valuation methods, including formal criteria of the USPAP for assessment of the fair market value of a business as a whole. In accordance with USPAP, we use a discounted cash flow analysis including, where applicable, appropriate market-based deductions and discounts, and take into account any extraordinary assumptions and hypothetical conditions which may have an impact on our determination. In addition to this approach for valuing our business as a whole, we also consider goodwill by location or groups of locations based upon our operating segments. The application of each of these methods involves a number of estimates and assumptions, and the weighting and balancing of the methods and their results also involves assumptions and the application of considerable judgment. We may be required to adjust our assumptions and estimates when events or changes in circumstances indicate that the carrying amount of goodwill may not be recoverable. To the extent we make this determination, we would be required to reduce the carrying value of our goodwill by taking a charge that will reduce our earnings in the period taken and reduce our equity at the end of the period. We cannot be certain that the assumptions and judgments we have made regarding the carrying value of our goodwill will prove accurate and that we will not be required to take impairment charges in the future.

      We have self-funded health care benefit programs in place through which a third party administrator settles and pays claims by our employees on an on-going basis. We estimate the level of outstanding claims, at any point in time, including claims incurred but not reported, based upon historical payment patterns, knowledge of individual claims and estimates of health care costs. We have stop-loss insurance coverage in place to limit the extent of individual claims.

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

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

      The following table presents information about our results of operations as a percentage of net sales.

      Our net sales increased $10.4 million or 8.7% to $129.9 million for the nine months ended March 31, 2005, from $119.5 million for the nine months ended March 31, 2004. Packaged gases and cylinder rental revenue represented 35.0% of net sales for the nine months ended March 31, 2005, with hard goods representing 35.1% of net sales and total revenue from our packaged gas business representing 70.1% of net sales. In comparison, packaged gases and cylinder rental revenue represented 37.4% of net sales for the nine months ended March 31, 2004, with hard goods representing 33.2% of net sales and total revenue from our packaged gas business representing 70.6% of net sales. Sales of hard goods increased $5.9 million or 14.9% from the 2004 nine month period to the 2005 nine month period, reflecting increased demand from the improved economy, increased prices resulting from increased steel costs and increased sales volume. Propane sales represented 29.9% of net sales in the 2005 nine month period, compared to 29.5% of net sales in the nine month 2004 period. Propane sales increased $3.6 million or 10.3% in the 2005 nine month period compared to the 2004 period due to price increases. Propane gallons sold were down 6.5% year to date reflecting reduced demand due to conservation resulting from higher prices of all energy sources and warmer temperatures compared to the prior nine month period.

      Our cost of products sold increased $4.9 million or 8.8% to $60.9 million for the nine months ended March 31, 2005, compared to $55.9 million for the nine months ended March 31, 2004. Cost of products sold as a percentage of net sales was 46.9% and 46.8% for the nine month periods ended March 31, 2005 and 2004, respectively. Increased prices in hard goods, packaged gases and cylinder rental resulting from our efforts to standardize our product offerings and pricing were offset by higher propane costs as a percentage of net sales.

      Operating, distribution and administrative expenses decreased $0.8 million or 1.8% to $42.4 million in the nine months ended March 31, 2005, compared to $43.1 million for the 2004 nine month period. Consolidation of the variable interest entities resulted in a decrease of $1.0 million in building rent expense. Although personnel costs and equipment rent were also reduced, these reductions were partially offset by increased legal and professional fees, vehicle fuel and repairs and operating supplies. Operating, distribution and administrative expenses as a percentage of net sales were 32.6% for the nine months ended March 31, 2005, compared to 36.1% for the nine months ended March 31, 2004.

      Depreciation expense increased $0.7 million to $5.0 million in the nine months ended March 31, 2005, from $4.3 million in the nine months ended March 31, 2004, reflecting depreciation related to the variable interest entities and increased depreciation resulting from increased capital expenditures.

      Amortization of intangibles decreased $0.4 million to $0.9 million in the nine months ended March 31, 2005, compared to $1.3 million in the nine months ended March 31, 2004. This decrease was primarily the result of certain intangibles becoming fully amortized during the current interim period.

      Interest expense decreased $1.0 million or 23.2% to $3.4 million for the nine months ended March 31, 2005, compared to $4.4 million in the nine months ended March 31, 2004, reflecting primarily reduced outstanding debt balances and lower interest rates due to improved financial performance. Interest expense for the nine months ended March 31, 2005 included $0.2 million related to the variable interest entities which were not consolidated in the prior year quarter.

      Other income increased $0.1 million to $0.3 million in the nine months ended March 31, 2005, compared to $0.2 million in the nine months ended March 31, 2004, due primarily to income earned by the variable interest entities.

      Minority interest earnings reflect the elimination of net pre-tax income earned by the variable interest entities. The amount eliminated is primarily the reduction in operating expense noted above, partially offset by expenses incurred by the entities.

      Our effective tax rate decreased from 39.0% for the nine months ended March 31, 2004 to 37.6% for the nine months ended March 31, 2005.

      For the reasons stated above, our net earnings increased $4.1 million or 63.9% to $10.6 million for the nine months ended March 31, 2005, compared to $6.5 million for the nine months ended March 31, 2004. Diluted earnings per share were $1.10 for the nine months ended March 31, 2005, compared to $0.69 for the nine months ended March 31, 2004.

      Our net sales increased $3.2 million, or 2.1%, to $154.5 million in fiscal 2004 from $151.3 million in fiscal 2003. Acquisitions made during the preceding twelve months contributed $0.1 million of the increase in net sales for fiscal 2004, while same-store sales increased $3.1 million or 2.1%. Packaged gases and cylinder rental revenue represented 38.6% of our net sales in fiscal 2004, with hard goods representing 35.0% of net sales and total revenue from our packaged gas business represented 73.6% of net sales. In comparison, packaged gases and cylinder rental revenue represented 39.2% of our net sales in fiscal 2003, with hard goods representing 36.3% of net sales and total revenue from our packaged gases business representing 75.5% of net sales. Sales of hard goods decreased $0.8 million in fiscal 2004 from fiscal 2003 on a same-store basis, reflecting the effect of the decline in the economy during the period and our decision to reduce activity with selective low margin accounts. Propane sales represented 26.4% of net sales

      Our cost of products sold decreased $1.5 million, or 2.2%, to $71.6 million for fiscal 2004, from $73.1 million for fiscal 2003. Cost of products sold as a percentage of net sales improved from 48.4% during fiscal 2003 to 46.3% during fiscal 2004. The decreased costs reflect the non-recurrence during fiscal 2004 of a $1.4 million charge for disposal of slow-moving hard goods inventory in fiscal 2003, as well as improvements in costs for hard goods that we achieved by standardizing our product offerings.

      Operating, distribution and administrative expenses decreased $5.1 million, or 8.2%, to $57.2 million in fiscal 2004 from $62.4 million in fiscal 2003. Approximately $0.7 million of this decrease is due to a net reduction in expenses resulting from the consolidation under FIN 46R of variable interest entities. The reduced expenses also reflected, the results of our cost reduction initiatives. The majority of these expense reductions were in the areas of wages, benefits, legal, professional and other general expenses. These cost savings were partially offset by the cancellation of related party lease obligations of $0.5 million. Lastly, the fiscal 2003 results included charges associated with our cost reduction initiatives totaling $2.6 million for the year. Operating, distribution and administrative expenses as a percentage of net sales were 37% for fiscal 2004, compared to 41.2% for fiscal 2003.

      Depreciation and amortization expense decreased $1.4 million, or 15.7% to $7.5 million in fiscal 2004, from $8.9 million in fiscal 2003. The decrease was primarily a result of certain intangibles becoming fully amortized, partially offset by $0.1 million of increased depreciation expense related to the variable interest entities.

      Interest expense decreased $1.0 million, or 15.2%, to $5.6 million in fiscal 2004, from $6.6 million in fiscal 2003, reflecting primarily the effect of reduced outstanding debt balances and lower interest rates due to improved financial performance. Included in interest expense was a decrease of $189,630 and $4,711 for the years ended June 30, 2004 and 2003, respectively, to record changes in the fair market value of our interest rate swap agreements under SFAS No. 133. Interest expense also included $0.1 million related to the variable interest entities since the March 31, 2004 consolidation.

      Other income increased $0.4 million in fiscal 2004 compared to fiscal 2003 due to income earned by the variable interest entities. This income is not derived from any properties that we own.

      Minority interest earnings reflect the elimination of net pre-tax income earned during the quarter by the variable interest entities. The amount eliminated is primarily the reduction in rent expense and other income noted above, partially offset by expenses incurred by the entities.

      Our effective tax rate decreased from 39.0% for fiscal 2003 to 37.0% for fiscal 2004 due to a tax benefit of approximately $0.2 million relating to the donation of inventory to a qualified charitable entity, which resulted in a tax deduction for the fair market value of the inventory.

      For the reasons stated above, our net income increased to $7.7 million for fiscal 2004, compared to $0.2 million for fiscal 2003. Diluted earnings per share were $0.81 for fiscal 2004, compared to $0.03 for fiscal 2003.

      Net sales increased $6.7 million, or 4.6%, to $151.2 million in fiscal 2003 from $144.5 million in fiscal 2002. Acquisitions made during the preceding twelve months contributed $3.2 million of the increase in net sales, while same-store sales increased $3.5 million or 2.4% (5.1% decrease without propane). Propane sales increased $9.7 million, or 38.1%, on a same-store basis, reflecting $3.1 million in price inflation and a $6.6 million increase in the volume due to colder than normal temperatures during the past heating season and internal growth. Packaged gases and cylinder rent represented 39.2% of net sales for the year, with hard goods representing the remaining 36.3%. In comparison, packaged gases and cylinder rent represented 41.4% of net sales in fiscal 2002 and hard goods represented 41.0% of net sales.

      Our cost of products sold increased $5.2 million, or 7.7%, to $73.1 million in fiscal 2003, from $67.9 million in fiscal 2002. Cost of products sold as a percentage of sales also increased from 47.0% in fiscal 2002 to 48.4% in fiscal 2003. The increase in magnitude of cost of products sold, as well as cost of products sold as a percentage of sales, reflects in part a $1.4 million non-recurring charge for disposal of slow-moving hard goods inventory during fiscal 2003. The increased cost of products sold as a percentage of sales also reflects a decrease in same store sales, where our standardization normally results in lower costs, and the contribution of newly acquired stores.

      Operating, distribution and administrative expenses increased $6.2 million, or 11.0%, to $62.4 million for fiscal 2003, compared to $56.2 million for fiscal 2002. Of this increase, $1.4 million was related to acquired businesses, with the balance of the change, or $4.8 million, attributable to same-store expenses. The increase in same-store operating expenses included $1.9 million of non-recurring charges relating to severance of personnel, termination of an airplane lease, conversion of company-provided vehicles to employee-owned vehicles and unclaimed property audits. These charges resulted from our repositioning and upgrade initiatives that were undertaken late in fiscal 2003 to reduce our on-going cost structure, upgrade personnel and improve efficiency. Operating expenses also increased as a result of increased bad debt, settlement of sales and use tax audits with several states, increased liability insurance expense and an increase in estimated health insurance claims including claims incurred but not reported. We increased our accrual for estimated unpaid claims by $0.7 million, in the fourth quarter of fiscal 2003 as a result of this change.

      Depreciation and amortization expense increased $1.2 million for fiscal 2003, compared to fiscal 2002. This increase was attributable to non-recurring charges relating to write-off of non-compete agreements held with former executives, which we determined to no longer be of value, based upon a review of each individual’s circumstances and the probability of effect on our performance and accelerated depreciation associated with leasehold improvements at facilities being closed by us. For each of the facilities being closed, we determined the expected date for operations to cease and revised the estimated useful lives for applicable assets accordingly. We implemented these initiatives during the fourth quarter of fiscal 2003 in order to reduce our cost structure and to improve our operating efficiency.

      Interest expense increased $0.7 million, or 11.4%, to $6.6 million for fiscal 2003, compared to $5.9 million for fiscal 2002. This increase reflected higher interest rates and fees associated with the amendment of our credit facility, and was partially offset by lower average debt balances.

      Our effective tax rate decreased from 41.5% for fiscal 2002 to 39.0% for fiscal 2003 as a result primarily of changes in estimates for federal and state accrued taxes.

      Net income for fiscal 2003 was $0.2 million, compared to $4.2 million for fiscal 2002. Diluted earnings per share were $0.03 for fiscal 2003, compared to $0.45 for fiscal 2002.

      The following table presents summary information about our sales, income from operations, net earnings and earnings per share on a quarterly basis for each of the last eleven quarters:

     As illustrated in the table above, we generally have experienced higher sales activity during our second and third quarters as a result of seasonal sales of propane, with corresponding lower sales for the first and fourth quarters. Superimposed on this seasonal fluctuation in sales is a favorable year to year trend in both net sales and earnings. The following table sets forth, for the periods indicated, our quarterly sales as a percentage of the respective fiscal year’s sales. Results for any one or more periods are not necessarily indicative of continuing trends.

      As illustrated, income from operations and net earnings 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.

      Historically, we have financed our 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 March 31, 2005, we had working capital of approximately $12.2 million, compared to $9.9 million as of June 30, 2004, reflecting primarily an increase in accounts receivable and available cash. Funds provided by operations for the nine months ended March 31, 2005 were approximately $18.0 million, compared to $15.3 million for the nine months ended March 31, 2004. This increase of $2.7 million is attributable to the $4.1 million increase in net income offset by increased income taxes paid of $3.5 million and positive cash flow from other operating assets and liabilities. Funds used for investing activities were approximately $7.7 million for the nine months ended March 31, 2005, consisting primarily of capital spending, compared to $5.1 million for nine months ended March 31, 2004. We anticipate capital expenditures of approximately $8.4 million for fiscal year June 30, 2005. Funds used for financing activities for the nine months ended March 31, 2005 were approximately $10.1 million as net borrowings of $41.4 million were more than offset by debt repayment of $49.5 million and the repayment of prior year bank overdraft of $0.7 million. In addition, dividend payments of $0.9 million and a distribution by the variable interest entities of $1.2 million were partially offset by funds received through the exercise of stock options totaling $0.7 million. Our cash balance increased $0.2 million during the nine months ended March 31, 2005 to $0.7 million.

      At June 30, 2004, we had working capital of approximately $9.9 million, compared to $10.7 million as of June 30, 2003, reflecting primarily the reduction in inventory of $0.6 million and the reduction of accounts receivable of $0.3. Funds provided by operations for the year ended June 30, 2004 were approximately $20.5 million, compared to $16.5 million for the year ended June 30, 2003. This increase of $4.0 million is primarily attributable to the $7.4 million increase of net income, receipt of an income tax refund of $1.2 million, the non-recurrence of inventory write offs of $1.2 million and reduction in inventory of $3.8 million. Funds used in investing activities were approximately $7.1 million for the year ended June 30, 2004, consisting primarily of capital spending, compared to $7.3 million for the year ended June 30, 2003. Funds used in financing activities for the year ended June 30, 2004 were approximately $14.7 million from net payments of debt, compared to $8.6 million for the year ended June 30, 2003. Our cash balance decreased $1.2 million during the year ended June 30, 2004 to $0.5 million.

      At June 30, 2003, we had working capital of approximately $10.7 million, compared to $15.4 million as of June 30, 2002, reflecting primarily the reduction in inventory levels. Funds provided by operations for the year ended June 30, 2003 were approximately $16.5 million, compared to $16.7 million for fiscal 2002. Funds used in investing activities were approximately $7.3 million for the year ended June 30, 2003, consisting primarily of capital spending and acquisitions, compared to $12.7 million in fiscal 2002. Funds used in financing activities for the year ended June 30, 2003 were approximately $8.6 million from net payments of debt, compared to $3.4 million for 2002. Our cash balance increased $0.6 million during the year to $1.8 million.

      At March 31, 2005, we had the following contractual obligations:

      Some of these obligations, including interest rate swaps and debt obligations, are sensitive to changes in interest rates. For debt obligations, the table provides contractually obligated payment amounts, including estimated interest, by period due. For interest rate swaps, payments and receipts are calculated based upon notional amounts at weighted average rates by expected (contractual) maturity dates. 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. In January 2005, we entered into swap agreements for notional value of $25 million effective July 2005 and January 2006. Purchase obligations represent the total value of all open purchase orders for the purchase of inventory and distribution vehicles. Other long-term liabilities at March 31, 2005 and June 30, 2004 consist primarily of deferred revenue related to cylinder rentals with an average term of seven to ten years, which has been excluded from the table above.

      Our credit facility provides for a $75 million revolving loan, which we may draw down from time to time. The maturity date is April 30, 2009. We may draw down funds as a revolving loan or a swing-line loan or obtain letters of credit. Each draw may, at our discretion be either a Eurodollar loan or a floating rate loan. In the case of Eurodollar loans, interest is calculated as the sum of (i) the quotient of (a) LIBOR, divided by (b) one minus a specific reserve requirement expressed as a decimal, plus (ii) an applicable margin set forth in the pricing schedule to the credit facility. In the case of floating rate loans, interest is calculated as the sum of (i) the higher of (a) the prime rate and (b) the sum of the federal funds effective rate plus 0.5%, plus (ii) the same applicable margin applied to Eurodollar loans. Subject to certain exceptions, we can draw on the credit facility in minimum amounts of $1 million in the case of floating rate loans or $2 million in the case of Eurodollar loans.

      The weighted average interest rate for substantially all of the borrowings under the credit facility was 2.94% as of March 31, 2005. As of March 31, 2005, availability under the revolving loan was approximately $25.2 million, with outstanding borrowings of approximately $48.5 million and outstanding letters of credit of approximately $1.3 million. The credit facility is secured by substantially all of our assets. We expect to use the revolving loan in the future primarily to fund acquisitions. We are not required to make principal payments on outstanding balances of the revolving loan as long as certain covenants are satisfied.

      The credit facility contains various financial covenants applicable to us, including covenants requiring minimum fixed charge coverage and maximum funded debt to EBITDA. As of March 31, 2005, we were in compliance with these covenants and believe that we will continue to be in compliance through at least the next twelve months. The credit facility permits the payment of cash dividends on our capital stock so long as the aggregate amount of cash dividends paid to shareholders who are not parties to the credit facility during any fiscal year and the aggregate purchase price paid by us for any shares of our common stock redeemed in the same fiscal year does not exceed $2 million.

      The variable interest entities had outstanding debt, consisting primarily of asset-backed mortgages for real estate, of $8.4 million at March 31, 2005. The carrying value of the land and buildings that secure this debt was approximately $5.5 million at March 31, 2005. This debt carries various interest rates ranging from 3.5% to 6.0% and various maturities from 2005 to 2016. Some of the mortgages on which the variable interest entities are obligated are personally guaranteed by our Chairman.

      We are also obligated under various promissory notes related to the financing of acquisitions that have various rates of interest ranging from 3.75% to 10.0% per annum and maturities through 2010. The outstanding balance of these notes as of March 31, 2005 was $1.9 million. Some of these notes are secured by assets related to the applicable acquisition, some are unsecured and some are backed by bank letters of credit issued under our credit facility.

      The schedule of maturities of our debt for the next five years and thereafter is as follows:

      We enter into contractual agreements in the ordinary course of business to hedge our exposure to interest rate risks. Counterparties to these agreements are major financial institutions. We believe that the risk of incurring losses related to credit risk of the counterparty is remote and any losses would be immaterial.

      Interest rate swap agreements are used to reduce interest rate risks and costs inherent in our debt portfolio. We enter into these agreements to change the variable/fixed interest rate mix of our debt portfolio in order to maintain the percentage of fixed and variable debt within parameters that we have established. Accordingly, we enter into agreements to effectively convert variable-rate debt to fixed-rate debt. As of March 31, 2005, we had $40.0 million in notional amounts outstanding under interest rate swap agreements. These swaps have an average pay rate of 6.3% versus a receive rate of 2.8%.

      We anticipate capital expenditures of approximately $7.0 million for fiscal 2005. We have committed $1.9 million of the $7.0 million for the purchase of distribution vehicles to be delivered in fiscal 2005. We also anticipate applying approximately $10 million during the year to acquire a distributor pursuant to put/call agreement that was exercised by the distributor on May 9, 2005. We believe that we will have adequate capital resources available to fund this acquisition and be in compliance with our debt covenant requirements at such time as the option is exercised.

      We believe that cash generated from operations, borrowing availability under our credit facility and the ability to obtain financing with sellers of businesses will be sufficient to satisfy our requirements for operating funds, capital expenditures and future acquisitions for at least the next twelve months. We

      The impact of inflation on our operating results has been moderate in recent years, reflecting generally low rates of inflation in the economy and our historical ability to pass purchase price increases to our customers in the form of sales price increases. While inflation has not had, and we do not expect that it will have, a material impact upon operating results, there is no assurance that our business will not be affected by inflation or that we will continue to be able to pass price increases to our customers in the future.

      In January 2003, the Financial Accounting Standards Board (FASB) issued FIN 46. A variable interest entity is one where the contractual or ownership interests in an entity change with changes in the entity’s net asset value. This interpretation requires the consolidation of a variable interest entity by the primary beneficiary, and also requires disclosure about variable interest entities where an enterprise has a significant variable interest but is not the primary beneficiary. FIN 46 was effective as of the second quarter of fiscal 2004 for variable interest entities existing prior to February 1, 2003. The required disclosure provisions of FIN 46 were adopted in fiscal 2003.

      In December 2003, the FASB issued FIN 46R to further clarify the above standard. As required under the most recent deferral, we adopted FIN 46R as of March 31, 2004. We analyzed FIN 46R and its impact on the financial statements with regard to the put/call option agreement, as well as related party lease agreements discussed in Note 7 to our consolidated financial statements for the year ended June 30, 2004. We concluded that the put/call option agreement meets the scope exception requirements of FIN 46R for an entity deemed to be a business. In addition, we concluded that we would need to consolidate the variable interest entities in our financial statements as of March 31, 2004 pursuant to the common control provisions under FIN 46R. See Note 1 to our consolidated financial statements for the year ended June 30, 2004.

      In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” that requires that items such as idle facility expense, excessive spoilage, double freight and handling costs be recognized as current period charges. In addition, it requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The standard will be effective in fiscal years beginning after June 2006. We do not anticipate any significant charge or expense from the adoption of this standard.

      In December 2004, the FASB issued Staff Position (FSP) No. 109-1 providing guidance on accounting for the manufacturing tax deduction provided for in the American Jobs Creation Act of 2004. The staff position calls for the tax deduction to be accounted for as a special deduction, beginning with our 2006 tax year. The adoption of this position is not expected to materially affect our financial statements.

      In December 2004, the FASB issued SFAS No. 123R, “Share Based Payments” (SFAS No. 123R), and in March 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 107 (SAB 107) regarding the SEC Staff’s interpretation of SFAS No. 123R. SAB 107 provides the Staff’s views regarding interactions between SFAS No. 123R and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. This standard requires companies to measure and recognize the cost of employee services received in exchange for an award of equity instruments based upon the grant-date fair value. We will be required to record this expense beginning in the first quarter of fiscal year 2006 and are currently evaluating the impact on our financial statements.

      In December 2004, the FASB issued FSP FIN 46R-5, “Implicit Variable Interests under FASB Interpretation No. 46” to further clarify the accounting for implied variable interest entities. This Staff position had no effect on the Company’s financial statements at March 31, 2005.

      In February 2005, the FASB issued Emerging Issues Task Force (EITF) No. 04-10 “Determining Whether to Aggregate Segments That Do Not Meet the Quantitative Thresholds.” This statement clarifies the aggregation criteria of operating segments as defined in SFAS No. 131. The effective date of this statement is not yet determined, but likely to occur in 2005. We believe that our current segment reporting complies with EITF No. 04-10 and anticipate no significant changes upon adoption.

      The table below provides information as of March 31, 2005 about our 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.

      We are one of the largest independent distributors in the estimated $9 billion U.S. market for industrial, medical and specialty gases delivered in “packaged” or cylinder form, and related welding equipment and supplies. We also have a growing presence in the approximately $12 billion U.S. market for non-pipeline residential, commercial and industrial propane. We serve a diversified base of more than 159,000 industrial, commercial and residential customers throughout our 11-state territory in the eastern United States. We focus on providing excellent service to local accounts, an approach that we believe allows us to enjoy a strong position in the markets we serve.

      Sales of packaged industrial, medical and specialty gases and related products accounted for approximately 74% of our revenue in fiscal 2004. In these operations, we mix and package industrial, medical and specialty gases, such as oxygen, nitrogen and argon, in pressurized cylinders and distribute these cylinders to customers, primarily through our network of 63 locations. As an additional service to customers, we also sell welding equipment and supplies, or “hard goods,” such as welding machines, wire, fluxes and electrodes. Most of our customers also rent cylinders from us. We own approximately 500,000 cylinders which require minimal maintenance and have useful lives that industry experience has determined to average 50 years or longer.

      Propane sales accounted for approximately 26% of our revenue in fiscal 2004. We distribute the majority of our propane directly to customer locations. We own approximately 32,000 propane tanks, most of which are maintained at customer locations. We believe that the propane business provides a favorable platform because propane requires a low incremental investment in tanks and distribution vehicles while offering a relatively stable customer base.

      Starting in fiscal 2003, we adopted a process improvement strategy designed to enhance our operating efficiency. During that time, we developed and began implementing marketing, customer service, staffing and pricing objectives and devised technical programs to support our field personnel. We believe that the success of our process improvement strategy has been reflected in our improved operating results during recent fiscal periods and that we are now well positioned to resume our strategy of growth primarily through acquisitions.

      Prior to fiscal 2003, acquisitions were the principal means of our growth. From 1997, the year of our initial public offering, through 2002, we completed over 30 acquisitions and grew from approximately $74 million in annual revenue to approximately $141 million in annual revenue. We believe our size and geographic reach, along with the fragmented competition in both the packaged gas and propane markets, position us well for continued growth.

      Industrial, Medical and Specialty Gases. Gases are an essential component of a broad array of industrial, commercial and medical processes. As the economy has grown and as new applications for gases have developed, the customer base of the industry has significantly broadened to include almost every major industry. These customers have widely varying requirements for type and volume of gases and have effectively caused segmentation of the industrial, medical and specialty gas market based on volume requirements.

      The higher volume, or “bulk,” gas segment of the industrial gas market consists of customers who require large volumes of gases to be delivered by truck using cryogenic containers, by direct pipeline to the customer’s facility and in some cases, by producing gas at an on-site production plant. We do not compete in the on-site or large bulk segment of the market. Typically, the major gas producers supply these customers directly.

      We compete primarily in the market for industrial, medical and specialty gases delivered in mixed “packaged” or cylinder form. Participants serving this market segment package, mix and distribute gases to customers with smaller volume needs or requirements for specially blended or purified gases. We believe that this market generates total annual sales of approximately $9 billion, including the related hard goods. Large, multi-state distributors, including Valley, account for approximately 45% of sales in this market. The remaining sales are generated by approximately 800 smaller distributors, many of which we believe to be potential candidates for acquisition by larger distributors or industrial gas producers.

      The distribution of packaged industrial, medical and specialty gases is a service-intensive business where competition is based in large part on building customer relationships through frequent emergency or priority service, technical support and assistance in a wide variety of applications and the capacity and flexibility to mix small quantities of custom blended gases. To compete effectively in the packaged gases market, we believe that a distributor must establish a local business presence and offices where customers have ready access to both product and assistance.

      The packaged industrial, medical and specialty gas industry is expected to achieve 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. We believe that the industrial gas distribution business is somewhat resistant to downturns in the business cycle due to the following factors:

      Propane. We also compete in the propane market in the United States, which consists of the packaging and distribution of propane gas to residential, commercial and industrial customers. Propane competes with other forms of energy in heating applications and the degree of competition from these alternate sources is primarily a function of geography, with the most important factor being the proximity to natural gas pipelines. We believe that the non-pipeline residential, commercial and industrial propane market generates total annual sales of approximately $12 billion, with the 25 largest distributors accounting for approximately 50% of all sales. According to LPGas Magazine, we rank 21st, with approximately 28 million gallons sold annually. Approximately 8,000 independent marketers of propane serve the balance of the market, many of which, we believe, could be suitable acquisition candidates for us in the future.

      The majority of propane sold within the industry by distributors is used for residential and commercial heating. Most distributors own the majority of the tanks and containers which dispense propane at a customer’s location. Unlike the industrial gas market segment, no separate rental fee is charged for the container. Rather, this rental fee is included in the price of the propane.

      We believe that as in the packaged industrial gases market, service rather than price plays the dominant role in the supplier-customer relationship in the propane market. Customers served both on a “will call” and on an automatic delivery basis expect timely delivery, especially during the winter months. As a result, customer satisfaction with a particular distributor is often based more on such distributor’s timely, reliable delivery of propane than on the price which such distributor charges for such propane. Annual account turnover in the propane market is low and our annual turnover generally represents less than 2% of customers.

      The propane distribution industry is also a mature industry with growth consistent primarily with housing starts, energy consumption and replacement of alternate fuels. The cost of propane per British Thermal Unit, or BTU, compares favorably with heating oil and natural gas but is much less costly than electricity. Although there are commercial and industrial applications for propane, which include forklift

      The packaged gases industry is fragmented but has been undergoing consolidation. We believe that there are many reasons for this trend, including the following:

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

      In recent years, the propane industry has also been undergoing consolidation for many of the same reasons as the packaged gas industry. We have been taking advantage of this consolidation trend through selective acquisitions. Except for several large companies, the propane distribution industry is also highly fragmented. Industry sources indicate there are approximately 8,000 independent marketers of propane operating 13,500 local distribution centers nationwide. We believe that the 25 largest propane distributors, of which we are one, have a 50% share of the approximately nine billion gallon annual market.

      We intend to capitalize on the trend toward consolidation in both the packaged gases and propane industries. Our improved financial position and operating efficiency, achieved through the earnings and operations improvement plan we implemented two years ago, position us to resume the acquisition strategy that has, throughout our history, been our primary growth vehicle. The key elements of our growth strategy include the following:

      The gases that we package and distribute 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, we sell welding equipment and supplies, including welding machines, wire, fluxes and electrodes and a wide variety of supporting equipment.

      While primarily a packager and distributor of gases, we also manufacture a portion of our acetylene requirements at our facilities in West Mifflin, Pennsylvania and Eddystone, Pennsylvania. Acetylene is produced through a combination of calcium carbide and water at relatively high temperatures. The reaction of these elements also produces lime as a by-product, which is sold in bulk to customers for a variety of applications. In fiscal 2004, acetylene accounted for approximately 3.0% of net sales.

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

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

      We currently have more than 159,000 customers, none of which accounted for more than 1.0% of net sales in fiscal 2004. We serve the manufacturing, industrial, metal production and fabrication, construction, healthcare and mining, oil and chemicals, and other industries, as well as the propane needs of our residential customers. The following chart illustrates the percentage of our net sales represented by each of these industries:

      The customer base also includes smaller distributors in close proximity to our larger facilities, making it economically advantageous for them to purchase certain products from us.

      We believe that the packaged gas industry has been characterized by relatively high customer loyalty because of the importance of quality service and personal relationships. We believe this customer focus on service and relationship has made it difficult for new entrants in our geographic markets to acquire existing customers.

      The distribution of most packaged gases is most economically performed within approximately a thirty-mile radius of the product packaging or inventory location due primarily to costs associated with delivery of cylinders. Therefore, the estimated national market of $9 billion consists of hundreds of regional markets. We solicit and maintain business primarily through a direct selling effort using an experienced sales force of approximately 64 account and area managers. Account managers receive ongoing training so that they are knowledgeable about gas and product performance characteristics and current application

      In addition to delivering packaged gases to our customers, we also serve “walk-in” customers from our branches, where gases and hard goods may be picked up. Each branch location contains a showroom to allow customers access to equipment and supplies. Branch locations are chosen on the basis of local market distribution logistics. Our advertising efforts are limited as management does not consider advertising to be a significant factor in generating sales.

      Competition is almost always on a regional market basis and for packaged gases is based primarily on customer loyalty, service and, to a lesser extent, price. Customer loyalty can be lessened when businesses are acquired. Most regional markets have between three and six competitors, the majority of whom are small independent companies, with one or two competitors having a significantly higher market share than the others. We compete in many markets throughout West Virginia, Pennsylvania, Kentucky, Ohio, Virginia, Tennessee, Maryland, Delaware, New Jersey, Wisconsin and Florida. We believe that we enjoy a strong position in most of the markets that we serve.

      As stated above under “— Our Industry,” while we compete with the distribution subsidiaries of the major industrial gas producers, we do not believe that the production of industrial gas provides these producers with a significant competitive advantage. In most cases, the cost for base gases represents a relatively minor component of the total cost in comparison to the packaging, selling and distribution expenses.

      We purchase industrial gases pursuant to supply arrangements having no minimum commitments and open purchase orders with three of the five major gas producers in the United States. One such producer accounted for approximately 45.0% of our gas purchases in fiscal 2004. If any of these arrangements were terminated, we believe that we would be able to readily secure an alternate source of supply.

      We purchase welding equipment and consumable supplies from a number of vendors. Of these purchases, the top five vendors represented approximately 61.0% of total purchases in fiscal 2004. Purchases from major vendors are made pursuant to purchase orders that are cancelable by us upon minimal notice. Large volume purchasers, such as Valley, are generally able to participate in vendor discount and rebate programs and obtain products at competitive costs. We are able to purchase welding supplies from vendors of our choosing.

      We purchase propane from pipeline sources at various supply points in our market areas from approximately five primary vendors. One such vendor accounted for 65.0% of total propane purchases in fiscal 2004, generally on a short-term basis at prevailing market prices. We have historically been able to adjust prices to reflect changes in product cost, which varies with season and availability. We are not dependent upon any single supplier for propane and supplies have historically been readily available. Unlike small residential distributors of propane, we also supply propane to commercial customers who purchase propane throughout the year, and we believe the year-round demand this creates causes us to be less susceptible to allocation during periods of tight supply, which occurs from time to time.

      At March 31, 2005 we employed 640 people, compared to 647 at June 30, 2004. At March 31, 2005, approximately 13.0% of our employees were covered by collective bargaining agreements. Historically, we have not been adversely affected by strikes or work stoppages. We believe that we have a skilled and motivated work force and that our relationship with employees is good.

      We believe that continuing education is necessary for our employees to achieve and maintain the skills required to be effective in today’s competitive environment. Our process improvement strategy includes ongoing technical training in an environment emphasizing a high level of customer service. We provide a variety of training programs to our employees through modules maintained on the Internet. This provides consistent, low-cost training across the entire organization. Key suppliers also provide employees product training relating primarily to welding and gas application technology at our various locations.

      We are subject to federal and state laws and regulations adopted for the protection of the environment, the health and safety of employees and users of our products and various other matters. Management believes that we are in substantial compliance with all such laws and regulations currently in effect and that the cost of compliance with such laws and regulations has not had a material adverse effect on our results of operations.

      The nature of our business may subject us to product liability and other lawsuits. To the extent that we are subject to claims which exceed or are outside of our liability insurance coverage, such suits could have a material adverse effect on our results of operations. See “Risk Factors — Risks Related to Our Business.” We have not suffered any material losses from such lawsuits in the past.

      We own approximately 500,000 cylinders, 32,000 bulk propane tanks and 400 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 we expect will extend on average for 50 years or longer.

      We have 63 industrial gas and welding supply distribution locations in 11 states, 31 of which also package and distribute propane. A typical location has two acres of property, 5,000 square feet of space used to warehouse hard goods, 5,000 square feet of space used for gas filling and cylinder storage and 2,000 square feet of space used for a retail showroom. Our corporate operations are located in 20,000 square feet of leased space in Wheeling, West Virginia and our executive offices are located in 3,000 square feet of leased space in Washington, Pennsylvania.

      Our facilities are leased on terms that we believe are consistent with commercial rental rates prevailing in the surrounding rental market. All of our major facilities are leased under long-term arrangements. We believe that our facilities are adequate for our needs and that our properties are generally in good condition, well maintained and suitable for their intended use.

      Some industrial gases and propane are flammable, explosive products. Serious personal injury and property damage can occur in connection with their transportation, storage, production or use. We also have employment claims arising from time to time. In the ordinary course of our business, we are threatened with or are named as a defendant in various lawsuits which, among other items, seek actual and punitive damages, attorneys’ fees, injunctive relief and other remedies for product liability, personal injury, property damage and employment matters. We have also been named in suits alleging injury from exposure to asbestos from welding rods and to fumes from manganese welding rods. To date, we have not

      In early 2004, our management concluded that the adoption of FIN 46R, which became effective as of March 31, 2004, required us to consolidate into our financial statements the financial position and results of operations of West Rentals, Inc., G.E.W. Real Estate LLC, RealEquip-Lease LLC, Equip-Lease Co. and Acetylene Products Corp., entities controlled by Gary West, our Chairman and principal shareholder. We lease buildings and equipment and rent cylinders under operating leases from these variable interest entities. Since we have begun consolidating these entities, we have reported in two business segments: our core business segment and the segment represented by these variable interest entities. Because these are two separate and distinct businesses, and because we do not have any direct interest in the variable interest entities, the financial information for each company is maintained and managed separately. The results of operations and assets for each of these segments are derived from each company’s respective financial reporting system. All inter-company activity is eliminated in consolidation.

      Valley. Our core business consists of the sale of packaged gases, welding equipment and supplies from 63 locations, as described above. All locations generally sell to the same types of customers, such as metal fabrication, construction, general industrial, research and laboratory, hospital and other medical, commercial, agricultural and residential. We consider each of the locations to be an operating segment as defined in SFAS No. 131, although none of these locations individually meet the quantitative thresholds stated in SFAS No. 131 of 10% of revenue (or profits or assets). In addition, these operating segments are similar in economic characteristics, long-term gross margin averages, products sold, types of customers, methods of distribution and regulatory environment and they are therefore aggregated into one reporting segment in accordance with SFAS No. 131.

      Variable Interest Entities. The variable interest entities segment is not a core business or operating segment but is considered a “reportable business segment” as a result of the application of FIN 46R, as described above. It consists of four related entities controlled by our Chairman and his affiliates that lease real estate and equipment to Valley and other third party entities and that are engaged primarily in the purchase, development, sale and/or lease of real estate. Other than our Chairman, none of our current or former directors or executive officers have interests in these entities. Our Chairman, who is currently the beneficial owner of approximately 75% of our common stock, also beneficially owns more than 50% of each of these entities, and we have historically entered into these leases to preserve our capital to support our growth through acquisition strategy. These arrangements are supported by a master lease agreement, as well as certain individual lease agreements, that do not contain a bargain purchase option, fixed renewal option or residual value guarantee. Although these entities are controlled by related parties, we have no equity interest in any of these variable interest entities and the creditors and beneficial interest holders of these entities have no recourse to our general credit. See “Certain Transactions With the Selling Shareholder or Companies Controlled by Him” and Notes 1 and 14 to our consolidated financial statements for the year ended June 30, 2004.

      Our directors and executive officers are listed below:

      Gary E. West, Chairman of the Board of Directors. Mr. West has served as Chairman of our Board of Directors since 1984. From 1970, when he purchased Valley, to March 1995, Mr. West served as President of Valley. Mr. West has also served as President of West Rentals, Inc. and Equip Lease Corp. and Vice President of Acetylene Products Corp. since 1992, 1988 and 1985, respectively. From June 1993 to 2002, he served as a director of WesBanco Wheeling, and since June 1990 he has served as a director of H.E. Neumann Co., a plumbing, heating and mechanical contracting company. Mr. West received his Bachelor of Science degree in Business Administration from West Liberty State College.

      William A. Indelicato, Vice Chairman of the Board of Directors and Chief Executive Officer. Mr. Indelicato was elected a director of Valley in January 1997 and was appointed as our Vice Chairman and Acting Chief Executive Officer in February 2002. Mr. Indelicato served as Acting Chief Executive Officer from February 2002 to October 2002 and was appointed Chief Executive Officer in June 2003. Mr. Indelicato has been President of ADE Vantage, Inc., a business consulting firm, which provides certain services to us, since July 1992. From 1988 to 1991, Mr. Indelicato served as General Business Director of Union Carbide Industrial Gases Inc. Mr. Indelicato has also been an associate professor of strategic management at Pace University in New York. Mr. Indelicato received his Bachelor of Science degree in Electrical Engineering from the University of Notre Dame and his Masters in Business Administration degree from Pace University.

      James P. Hart, President, Chief Financial Officer and Director. Mr. Hart was elected a director of Valley in January 1997. Mr. Hart was appointed as President of Valley in June 2003 and as Chief Financial Officer in February 2005. From June 2004 to February 2005 he served as Acting Chief Financial Officer of Valley. He served as Vice President and Chief Financial Officer of Industrial Scientific Corporation (ISC), a manufacturer of portable instruments used for detecting and monitoring a variety of gases, from August 1994 through September 2002. From March 1984 to August 1994, Mr. Hart was Treasurer and Controller of ISC. Mr. Hart holds a Bachelor of Science degree in Accounting from the University of Scranton.

      Gerald W. Zehala, Executive Vice President and Chief Operating Officer. Mr. Zehala has served as our Chief Operating Officer since June 2003. From 2001 to 2003 he managed our Florida operations. During the five preceding years, Mr. Zehala served as our Vice President of Acquisitions and Assimilations. Mr. Zehala has also served in various other management positions during his 27 years in the industry. Before joining Valley in 1991, Mr. Zehala spent fifteen years with the Harvey Company and the Linde Division of Union Carbide.

      August E. Maier, Director. Mr. Maier was elected a Director of Valley in January 1997 and served as our Acting President from February 2002 to October 2002. In September 1997, Mr. Maier became an

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

      F. Walter Riebenack, Director. Mr. Riebenack was elected a Director of Valley in January 1999. He is presently the Managing Member of U.S. Capital Advisors, L.L.C., a management consulting firm. From 1990 until December, 2002, Mr. Riebenack served as the Chief Financial Officer, General Counsel and as a member of the Board of Site-Blauvelt Engineers, Inc., a multi-disciplinary consulting engineering firm offering transportation design, geotechnical engineering, subsurface exploration, construction inspection and materials testing services to a wide range of clients in both the public and private sectors of the marketplace, with offices in New Jersey, Pennsylvania, New York, Delaware, Virginia, Ohio, Maryland, South Carolina and West Virginia. Mr. Riebenack also serves as a consultant to Site-Blauvelt Engineers, Inc., and serves on the Board of Members of Harbor Investments, L.L.C. and Harbor Investments II, L.L.C., two private equity funds. Mr. Riebenack received his law degree along with his Bachelor of Business Administration degree in Finance and Accounting from the University of Notre Dame. Mr. Riebenack has served as an instructor of Business Law at Indiana University in Fort Wayne, Indiana and has also served as an instructor of Business Law, Principles of Insurance and Seminars in Business at the University of St. Francis in Fort Wayne, Indiana.

      The following table sets forth information with respect to the beneficial ownership of our shares of common stock as of May 10, 2005, and as adjusted to reflect the sale of our common shares offered hereby, by:

      The percentages shown prior to this offering are based on 9,574,999 shares of common stock outstanding at May 10, 2005, and the percentages shown after the offering give effect to the sale of 400,000 shares of common stock by us and 1,600,000 shares of common stock by the selling shareholder in this offering. A person is deemed to have “beneficial ownership” of any security that he or she has a right to acquire within sixty (60) days after such date. Shares that a person has the right to acquire under stock options are deemed outstanding for the purpose of computing the percentage ownership of that person and all executive officers and directors as a group, but not for the percentage ownership of any other person or entity. As a result, the denominator used in calculating the beneficial ownership among our stockholders may differ. Except as indicated by footnotes, and subject to community property laws where applicable, the persons named in the table have sole voting and investment power for all shares as beneficially owned by them.