<PAGE>   1
 
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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
 
                                   FORM 10-K
 
[ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
       ACT OF 1934
 
       For the fiscal year ended June 30, 1997
 
                                       or
 
[   ]  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
       EXCHANGE ACT OF 1934
 
       For the transition period from

       ___________________________ to ___________________________

                       COMMISSION FILE NUMBER 000-29226
 
                       VALLEY NATIONAL GASES INCORPORATED
             -----------------------------------------------------
             (Exact name of registrant as specified in its charter)
 
         PENNSYLVANIA                                            23-2888240
-------------------------------                              -------------------
(State or other jurisdiction of                               (I.R.S. Employer
incorporation or organization)                               Identification No.)
 
                                 67 43RD STREET
                         WHEELING, WEST VIRGINIA 26003
                    ---------------------------------------
                    (Address of principal executive offices)

                                 (304) 232-1541
              ---------------------------------------------------
              (Registrant's telephone number, including area code)
 
     Securities registered pursuant to Section 12(b) of the Act:
 
                                                   NAME OF EXCHANGE
               TITLE OF EACH CLASS               ON WHICH REGISTERED
               --------------------              --------------------
                       None                              None
 
     Securities registered pursuant to Section 12(g) of the Act:
 
                    Common stock, $.001 par value per share
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
 
                            Yes [ X ]      No [   ]
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
 
     The aggregate market value of voting stock held by non-affiliates of the
registrant, computed by reference to the closing sales price of such stock on
August 28, 1997, as reported on the Nasdaq Stock Market, was $25,953,120.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Certain specified portions of the Company's definitive proxy statement for
the annual meeting of shareholders to be held October 28, 1997 are incorporated
by reference in response to Part III.
 
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                       VALLEY NATIONAL GASES INCORPORATED
 
                               TABLE OF CONTENTS
 
                                     PART I
 
<TABLE>
<CAPTION>
ITEM                                                                                     PAGE NO.
----                                                                                     --------
<C>     <S>                                                                              <C>
 1.     Business......................................................................       1
 2.     Properties....................................................................       7
 3.     Legal Proceedings.............................................................       8
 4.     Submission of Matters to a Vote of Security Holders...........................       8
 
                                           PART II
 5.     Market for the Company's Common Stock and Related Stockholder Matters.........       8
 6.     Selected Financial Data.......................................................       9
 7.     Management's Discussion and Analysis of Financial Condition and Results
        of Operations.................................................................      10
 8.     Financial Statements and Supplementary Data...................................      15
 9.     Changes in and Disagreements with Accountants on Accounting and Financial
        Disclosure....................................................................      15
 
                                           PART III
10.     Directors and Executive Officers of the Company...............................      16
11.     Executive Compensation........................................................      17
12.     Security Ownership of Certain Beneficial Owners and Management................      17
13.     Certain Relationships and Related Transactions................................      17
 
                                           PART IV
14.     Exhibits, Financial Statement Schedules and Reports on Form 8-K...............      18
</TABLE>
<PAGE>   3
 
                                     PART I
 
ITEM 1. BUSINESS
 
OVERVIEW
 
     The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, propane and fire protection
equipment in ten states in the mid-Atlantic and midwestern regions of the United
States. The Company's net sales have grown, primarily as a result of
acquisitions, at a compound annual rate of approximately 17% per year since the
Company started business in 1958, increasing from $190,000 in that year to $73.9
million in fiscal 1997. In fiscal 1997, gases accounted for approximately 42% of
net sales, welding equipment and supplies accounted for approximately 44% of net
sales, and cylinder and tank rental accounted for approximately 14% of net
sales.
 
     The Company's gas operations consist primarily of the packaging and mixing
of industrial, medical and specialty gases, such as oxygen, nitrogen and argon,
in pressurized cylinders and the transportation of these cylinders to customers
from one of the Company's 44 distribution and retail locations. The Company also
distributes propane to industrial and residential customers. Customers pay a
rental fee for use of the Company's cylinders. The Company owns approximately
315,000 cylinders, which require minimal maintenance and have useful lives that
the Company expects will extend on average for 50 years or longer. The Company
selectively participates in the small bulk gas market through the delivery of
gases in cryogenic transports and the storage of gases in cryogenic tanks and
propane tanks which are also rented to bulk gas customers. The Company owns
approximately 11,000 bulk propane tanks and 260 bulk cryogenic tanks, which have
useful lives generally less than those of cylinders. In connection with the
distribution of gases, the Company sells welding equipment and supplies,
including welding machines, wire, fluxes and electrodes and a wide variety of
supporting equipment.
 
     The Company's principal business strategy is to aggressively pursue growth
through the acquisition of other independent distributors and also through
internally generated growth. Since the Company was founded, it has completed 42
acquisitions. Since July 1, 1996, the Company has acquired six independent
distributors, adding approximately $25 million in annualized sales. On September
11, 1997 the Company entered into a definitive agreement for the purchase of a
distributor having approximately $7 million in annualized sales. This
transaction is expected to close within 30 days. Management believes there will
continue to be numerous attractive acquisition candidates available to the
Company as a result of the consolidation trend in the industry and that the
Company will be able to successfully integrate acquired operations into its base
business, generating growth and operational synergies. Acquisitions will be
financed primarily with borrowings under the Company's credit facility and
seller financing. While highly focused on external growth, management believes
that the Company's competitive strengths will allow it to increase sales and
improve market share in existing markets, while maintaining acceptable levels of
profitability.
 
INDUSTRY OVERVIEW
 
  GENERAL
 
     Historically, the industrial gas distribution business had a base of
customers engaged primarily in metal fabrication. In order to better serve these
customers, industrial gas distributors have also traditionally sold welding
equipment and supplies. As certain sectors of the economy have grown, such as
the electronics and chemicals industries, and as new applications for gases have
developed, the customer base of the industry has significantly broadened to
include almost every major industry, including health care, electronics,
chemicals, aerospace, beverages, environmental remediation, food processing, oil
and gas, and primary metals, as well as metal fabrication.
 
     The industrial, medical and specialty gas industry consists of two major
segments, the bulk segment and the packaged gas segment. The bulk segment
supplies gases to customers with large volume requirements, generally by truck
or pipeline to a customer's facility, or in some cases by the actual
construction of a gas production plant at a customer's facility. This segment is
primarily supplied by the major gas producers in the United States, although
some large distributors, such as the Company, selectively participate in the
small bulk gas market.
 
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<PAGE>   4
 
     The Company competes primarily in the packaged gas segment, which consists
of the packaging, mixing and distribution of gases to customers with smaller
volume needs or requirements for specially blended or purified gases. This
segment of the industry is estimated to have sales of $6 billion in the United
States, including sales of welding equipment and supplies. Participants in this
segment can be further divided into two groups, large multi-state distributors
with annual sales exceeding $25 million, and smaller, privately owned companies
with few or single locations and annual sales below $25 million. Management
believes that large, multi-state distributors, including the Company, account
for approximately 50% of sales in the packaged gas segment. Management estimates
that the remaining sales are generated by approximately 750 smaller
distributors, many of which it believes are potential candidates for acquisition
by larger distributors in the current wave of industry consolidation.
 
     The Company believes that the following characteristics make the
distribution of packaged gases attractive and different from ordinary industrial
distribution: (i) the production, packaging and mixing of gases, as well as the
logistics of a large distribution network, require significant knowledge and
expertise; (ii) customers expect technical support and assistance in a wide
variety of gas applications; and (iii) the currently existing logistical
framework is unlikely to change significantly because of the economics
associated with the delivery and exchange of cylinders.
 
  INDUSTRY CONSOLIDATION
 
     The industry is undergoing significant consolidation, a trend which began
in the early 1980's. The Company believes there are many reasons for this trend,
including:
 
  - Many of the owners who started welding supply distributors after World War
    II are reaching retirement age without qualified succession.
 
  - Small distributors are facing increasing competition from large distributors
    who generally operate with lower cost structures due to economies of scale.
 
  - Rapid changes in technology in recent years are providing opportunities for
    more efficient order entry, inventory and distribution management. Larger
    distributors are more likely to have the capital and human resources to take
    advantage of these opportunities, thereby creating greater cost and service
    reliability advantages.
 
  - Larger customers are demanding additional services from their suppliers in
    such areas as automated order entry, automated restocking and applications
    technology support. These services require an investment in technology and
    equipment that many smaller distributors are incapable or unwilling to make.
 
  - The number and complexity of government regulations is increasing,
    especially for distributors who produce or package gas products. Complying
    with new regulations requires human resource expertise, which is difficult
    for the smaller distributor to access and maintain.
 
  - The acquisition of a distributor generally requires greater financial
    resources than in the past because the businesses are generally larger,
    sellers often demand full payment in cash, and sellers and major industrial
    gas producers appear to be less willing to provide financing.
 
     The Company believes this consolidation trend will continue, providing
opportunities for those distributors, such as the Company, who have the
financial and human resources to acquire and effectively assimilate acquisitions
into their base business. The Company believes that distributors who fail to
successfully participate in this consolidation trend and achieve a strong or
leading position in their market areas will be at a cost disadvantage in the
long term.
 
     In recent years, the propane industry has also been undergoing
consolidation for many of the same reasons as the industrial gas industry. The
Company has been taking advantage of this consolidation trend through selective
acquisitions. Except for a few large companies, the propane distribution
industry is highly fragmented. Industry sources indicate there are approximately
7,000 retail propane companies operating 13,500 local distribution centers
nationwide. The Company believes that the 50 largest propane distributors have
less than a 50% share of the approximately nine billion gallon annual market.
 
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<PAGE>   5
 
  ECONOMIC CHARACTERISTICS OF THE INDUSTRY
 
     The industrial gas industry is mature with real growth consistent with
growth in the overall economy. Gas sales tend to be less adversely impacted by a
decline in general economic conditions than the sale of welding equipment and
supplies. Management believes that the industrial gas distribution business is
relatively resistant to downturns in the business cycle due to the following
factors: (i) the industry has a broad and diverse customer base; (ii) gases
frequently represent a fixed component of operating costs which does not decline
with production levels; (iii) gases are required for maintenance and renovation
activities, which tend to increase during economic downturns; (iv) industries
less impacted by economic downturns are major purchasers of industrial gases;
and (v) gas purchases represent a small portion of operating expenses and,
therefore, are not a large cost cutting item. The total market for industrial
gases has continued to expand due to strong growth in certain segments, such as
electronics, food processing and health care, and significant growth from new
applications for industrial gases. However, other activities which use
industrial gases, such as metal fabrication, have declined in recent years.
 
BUSINESS STRATEGY
 
     The Company has implemented a strategic plan designed to (i) sustain
profitable growth through the acquisition of key distributors in selected
markets, (ii) achieve and maintain a low-cost supplier position in each market
segment where the Company participates and (iii) build a unified, cohesive
organization, staffed by skilled employees who are responsive to changing
customer requirements.
 
  GROWTH THROUGH ACQUISITIONS
 
     Prior Acquisitions.  Since the formation of the Company in 1958, the
Company has completed the acquisition of the 42 distributors. The Company's
acquisitions historically have been financed, and the Company expects that
future acquisitions will be financed, primarily with borrowings under the
Company's credit facility and seller financing. The Company does not currently
intend to issue shares of its Common Stock or other securities in order to
consummate its acquisitions, but may in the future elect to do so.
 
     Acquisition Strategy.  The Company intends to continue to focus its
acquisition efforts both on market areas where the Company has an existing
presence and on new areas where it believes it can achieve a leading presence.
The Company believes there are many potential acquisition candidates with
operations in these market areas. The Company seeks to achieve operating
efficiencies when it acquires a distributor in an overlapping or contiguous
market area by closing redundant locations, eliminating a significant portion of
the acquired distributor's overhead and consolidating distribution routes.
Acquisitions in new markets allow the Company to achieve operating efficiencies
through volume discounts on purchases, lower administrative and professional
expenses and the purchase of new equipment to replace inefficient equipment and
equipment previously leased at relatively expensive lease rates.
 
     The Company believes that its principal competitive advantages in acquiring
distributors are (i) its flexibility in structuring acquisitions to meet the
concerns of sellers, (ii) its ability to offer sellers a continuing role in
management and (iii) its methodology in assimilating acquisitions. The Company
also believes it has a well organized acquisition program which utilizes
individuals who are well respected in the industry and who have extensive
experience in evaluating and negotiating transactions with distributor owners.
Based upon the Company's experience, price is not always the primary determining
factor in a selling distributor's choice of a buyer. Most owners of independent
distributors are sensitive as to whom they sell their business and have concern
for the well being of their employees after the acquisition. The Company has
found that relationships, existing competitive rivalry and reputation are key
elements in the success of acquiring most small, privately-owned distributors.
The Company believes it has earned an excellent reputation for treating fairly
the employees of businesses it has acquired, providing them with competitive
wages and benefits and opportunities for advancement within the scope of the
Company's operations.
 
     Competition for Acquisitions.  In seeking to acquire distributors, the
Company competes with the major industrial gas producers and national and
regional gas distributors. The largest national distributor is Airgas, Inc.
("Airgas") which has been growing through acquisitions since the mid-1980's. The
Company expects that Airgas will continue to selectively acquire distributors in
the future, and in some situations will compete with the
 
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<PAGE>   6
 
Company for acquisitions. The Company believes that Praxair Inc. ("Praxair") and
AGA Gas, Inc. are the only major industrial gas producers who are actively
soliciting independent distributors for purchase at this time, but that both
have self-imposed size and geographic constraints. The Company also believes
that some major industrial gas producers have limited their acquisition efforts
due primarily to the difficulty of resolving management differences, cultural
differences and cost structure differences between the small, privately-held
business and the large multinational corporation. The smaller independent
distributors with which the Company competes for acquisitions generally do not
seek acquisitions beyond their immediate geographic region.
 
     Acquisition Process.  The Company has established formal procedures for
locating, investigating and valuing potential distributor acquisitions. Criteria
used by the Company in evaluating potential acquisitions include (i) a history
of profitability, (ii) realistic projections of future performance, (iii) a
sales mix which is or has the potential to become weighted towards the sale of
gases, which generally have higher profit margins than welding equipment and
supplies, (iv) a cylinder gas market which is serviced primarily by independent
distributors, as opposed to industrial gas producers and (v) availability of
qualified management and key personnel.
 
     Assimilation of Acquired Businesses.  The Company believes that the
effective assimilation of acquired businesses into the Company's existing
operations is critical to the success of the Company's acquisition strategy. The
Company has established a transition team comprised of selected personnel with
technical expertise in various areas, such as purchasing, accounting, operations
and sales. This team has primary responsibility for converting the acquired
business from its existing methods and practices to those used by the Company. A
primary goal of the assimilation process is to instill the Company's culture
into the new operations. The Company believes the ability to instill its culture
provides a distinct and key competitive advantage. This is partly accomplished
by requiring the adoption of uniform policies and procedures which support the
Company's operational strategies.
 
  ACHIEVE AND MAINTAIN POSITION AS A LOW-COST SUPPLIER
 
     The Company strives to produce, package and market the Company's products
and services at costs which are lower than its local market competitors. This is
achieved by optimizing branch size and location, requiring adherence to the
Company's uniform policies and procedures, taking advantage of volume discount
purchases not available to smaller competitors and utilizing the Company's
management information systems. Where branch size is suboptimal, the Company has
developed alternatives to increase size or profitability through growth or
product diversification. The Company has implemented a "best practices" program
involving the identification of the most effective method of performing a
specific activity, such as inventory control, and has adopted procedures and
training to implement the practice as a standard throughout the Company's
operations.
 
     The Company has made a significant investment in its management information
systems as part of its strategy to be a low cost supplier. The Company has
installed an integrated company-wide point-of-sale data entry system that
provides current information on inventory levels and account status. The Company
believes significant costs savings have resulted from the increased ability to
efficiently manage inventory levels and accounts payable.
 
     The Company believes the selective addition of complementary product
offerings will enable it to better serve its diverse, expanding customer base,
reach new customers, increase sales in existing locations and leverage its
distribution system. For this reason, the Company has focused in recent years on
expanding its propane business. The addition of propane distribution at existing
Company locations has proven to be advantageous by providing the opportunity to
leverage fixed costs at existing locations, thereby creating economies of scale.
Certain Company locations are more attractive than others for propane
distribution, due primarily to residential growth potential and existing branch
size. In addition to propane, the Company believes that fire safety equipment,
currently a very small component of total sales, may be suitable for
distribution to portions of the Company's existing customer base.
 
  ENHANCE ORGANIZATIONAL STRENGTH
 
     The Company believes that to be competitive in attracting and maintaining
customers it must have a skilled and responsive work force dedicated to
providing excellent service. The Company works to instill a service
 
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culture through various operational policies. The Company places special
emphasis on customer service, including the ability to quickly respond to
technical questions on products and applications. The Company believes this is a
key value provided to its customers. The Company commits significant resources
to the training and education of its employees through various programs.
 
     The Company strives to utilize to the fullest extent its existing
management resources. The Company recently restructured certain management
reporting relationships and areas of responsibility to place operating and
financial responsibility at the local market level, thereby eliminating a layer
of management and improving communication. These changes also allowed the
Company to redirect the focus of certain key management members on important
operating issues, such as system logistics, training, budgeting and overall
operating performance, that are vital to managing the Company's growth.
 
PRODUCTS
 
     Gases packaged and distributed by the Company include oxygen, nitrogen,
hydrogen, argon, helium, acetylene, carbon dioxide, nitrous oxide, specialty
gases and propane. Specialty gases include rare gases, high-purity gases and
blended, multi-component gas mixtures. In connection with the distribution of
gases, the Company sells welding equipment and supplies, including welding
machines, wire, fluxes and electrodes and a wide variety of supporting
equipment.
 
     In fiscal 1997, the Company sold approximately eight million gallons of
propane to approximately 2,000 residential, commercial and industrial users.
Propane sales accounted for approximately 8% of net sales in fiscal 1997.
Typical residential and commercial uses include conventional space heating,
water heating and cooking. Typical industrial uses include engine fuel for fork
lifts and other vehicles, metal cutting, brazing and heat treating. The
distribution of propane is seasonal in nature and sensitive to variations in
weather with consumption as a heating fuel peaking sharply in winter months.
 
     While primarily a packager and distributor of gases, the Company also
manufactures a portion of its acetylene requirements at its facility in West
Mifflin, Pennsylvania. Acetylene is produced through a combination of calcium
carbide and water at relatively high temperatures. The reaction of these
elements also produces lime as a by-product, which is sold in bulk to customers
for a variety of applications. In fiscal 1997, acetylene accounted for
approximately 3% of net sales.
 
     The following table sets forth the percentage of the Company's net sales
for the fiscal years ended June 30, 1994, 1995, 1996 and 1997 for each of the
following products and services:
 
<TABLE>
<CAPTION>
                                                                YEARS ENDED JUNE 30,
                                                        -------------------------------------
                                                        1994       1995       1996       1997
                                                        ----       ----       ----       ----
    <S>                                                 <C>        <C>        <C>        <C>
    Gases............................................   47.5%      47.2%      45.9%      42.2%
    Welding equipment and supplies...................   37.5       38.0       39.7       44.4
    Cylinder rental..................................   15.0       14.8       14.4       13.4
</TABLE>
 
CUSTOMERS
 
     The Company currently has more than 46,000 customers, none of which
accounted for more than 1% of net sales in fiscal 1997. In fiscal 1997,
approximately 18% of the Company's net sales were to metal production and
fabrication customers. Other major industry categories represented by the
Company's customer base includes manufacturing at 13%, health care at 8%,
construction at 7%, services at 8%, mining at 5%, and oil and chemicals at 4% of
net sales. The customer base also includes smaller distributors who are in close
proximity to one of the Company's larger packaging facilities and find it
economically advantageous to source certain products from the Company.
 
     The Company believes the industry has been characterized by relatively high
customer loyalty because of the importance of quality service and personal
relations. This characteristic has made it difficult for new entrants in a
market to acquire existing customers. However, service requirements for certain
large customers are
 
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becoming more demanding and sophisticated and the Company expects that this will
result in more account turnover in the future.
 
     For some larger volume customers, bulk cryogenic products are delivered in
transports to cryogenic tanks at the customer location. The Company serves small
bulk customers only where it can compete effectively with producers, primarily
on the basis of service and the supply of other products, such as cylinder gases
and hard goods.
 
SALES AND MARKETING
 
     The distribution of most packaged gases is most economically performed
within approximately a thirty-mile radius of the product packaging or inventory
location due primarily to the costs associated with the delivery of cylinders.
Therefore, the aggregate national market of $6 billion consists of hundreds of
regional markets with an estimated size of $5 million to $100 million in annual
sales. The Company believes the average market size is approximately $20
million. The Company solicits and maintains business primarily through a direct
selling effort using an experienced sales force of approximately 60 sales
representatives. Sales representatives receive continuous training so that they
are knowledgeable about gas and product performance characteristics and current
application technology. On average, the Company's sales representatives have
more than ten years of industry experience. Sales representatives are paid a
base salary and commissions based upon account profit margin. Efforts are
focused on accounts generating sales of high margin products. Occasionally,
sales representatives make joint sales calls with the Company's suppliers to
address difficult or innovative customer application requirements. The Company
has been testing both telemarketing and catalog solicitation at selected
locations to attract new accounts.
 
     Smaller accounts are usually served from "walk in" retail locations, where
the gases and hard goods are picked up rather than delivered. Each retail
location contains a showroom to allow the customer easy access to equipment and
supplies. Branch locations are chosen on the basis of local market distribution
logistics rather than suitability for "walk in" retail sales. The Company's
advertising efforts are limited as management does not consider advertising to
be a significant factor in generating sales.
 
COMPETITION
 
     Competition is almost always on a regional market basis and is based
primarily on customer loyalty, service and, to a lesser extent, price. Most
regional markets have between three and six competitors, the majority of whom
are small independent companies, with one or two competitors having a
significantly higher market share than the others. The Company competes in many
markets throughout West Virginia, Pennsylvania, Kentucky, Ohio, Virginia,
Tennessee, Maryland, Delaware, New Jersey and North Carolina. The Company
believes it has a strong or leading position in most of the markets it serves.
 
     While the Company competes with the distribution subsidiaries of the major
industrial gas producers, the Company does not believe that the production of
industrial gas provides these producers with a significant competitive advantage
because in most cases, the cost for base gases represents a relatively minor
component of the total selling price in comparison to the packaging and
distribution expenses.
 
SUPPLIERS
 
     The Company purchases industrial gases pursuant to short-term supply
arrangements and open purchase orders with three of the five major gas producers
in the United States. One such producer accounted for approximately 80% of the
Company's gas purchases in fiscal 1997. If any of these arrangements were
terminated, the Company believes it would be able to readily secure an alternate
source of supply.
 
     The Company purchases welding equipment and consumable supplies from
approximately 82 primary vendors, of which purchases from the top five vendors
represented approximately 56% of total purchases in fiscal 1997. Purchases from
major vendors are made pursuant to purchase orders that are cancelable by the
Company upon minimal notice. With supplier overcapacity in most product lines
and high competitive rivalry for volume purchasers, large distributors such as
the Company are generally able to purchase welding equipment and
 
                                        6
<PAGE>   9
 
supplies from the vendor of their choice. This enables the Company to
participate in vendor discount and rebate programs and obtain products at
competitive costs.
 
     The Company purchases propane from pipeline sources at various supply
points in its market areas, generally on a short-term basis at prevailing market
prices. The Company historically has been able to adjust prices to customers to
reflect changes in product cost, which varies with season and availability. The
Company is not dependent upon any single supplier for propane and supplies have
historically been readily available. A significant portion of the Company's
propane sales are made to industrial customers. As a result, the Company's sales
are less seasonal than those of many competitors in the propane market who focus
on the residential segment. Because of the Company's off-peak season demand, the
Company believes that it would be less likely than some distributors to be
placed on allocation by suppliers during a period of tight supply and
accordingly would receive adequate supplies to meet customer demand.
 
EMPLOYEES
 
     At June 30, 1997, the Company employed 462 people, of whom approximately
12% were covered by collective bargaining agreements. Historically, the Company
has not been adversely affected by strikes or work stoppages. Approximately 61%
of the Company's employees are hourly workers. The Company believes it has a
skilled and motivated work force and that its relationship with employees is
good. The Company believes that its wages and benefits, which reflect local
conditions, are competitive with those provided by major competitors. All of the
Company's hourly employees are currently paid wages at a rate that exceeds the
current, and federally mandated increases in, the minimum wage. The Company
believes it would not be materially impacted by future increases in the minimum
wage.
 
     The Company believes that continuing education is necessary for its
employees to achieve and maintain the skills required to be effective in today's
competitive environment. At its Wheeling, West Virginia training center, the
Company provides a variety of programs and courses covering all phases of
operations, sales, safety and distribution. Key suppliers also provide employees
product training relating primarily to welding and gas application technology.
 
REGULATORY MATTERS
 
     The Company is subject to federal and state laws and regulations adopted
for the protection of the environment, and the health and safety of employees
and users of its products. In addition, the Company voluntarily complies with
applicable industry safety standards. Management believes that the Company is in
substantial compliance with all such laws, regulations and standards currently
in effect and that the cost of compliance with such laws, regulations and
standards will not have a material adverse effect on the Company.
 
PRODUCT LIABILITY AND INSURANCE
 
     The Company maintains insurance coverage which it believes to be adequate.
The nature of the Company's business may subject it to product liability
lawsuits. To the extent that the Company is subject to claims which exceed its
liability insurance coverage, such suits could have a material adverse effect on
the Company. The Company has not suffered any material losses from such lawsuits
in the past.
 
ITEM 2. PROPERTIES
 
     The Company owns approximately 315,000 cylinders, 11,000 bulk propane tanks
and 260 bulk cryogenic tanks, generally ranging in size from 250 gallons to
11,000 gallons. Most cylinders and storage tanks are located at customer sites.
Cylinders require minimal maintenance and have useful lives that the Company
expects will extend on average for 50 years or longer. Bulk tanks have useful
lives generally less than those of cylinders.
 
     The Company has 44 industrial gas and welding supply distribution locations
in ten states, fifteen 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
 
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<PAGE>   10
 
feet of space used for a retail showroom. The Company's headquarters are located
in 20,000 square feet of space located in Wheeling, West Virginia.
 
     Most of the specialty gas products sold by the Company are purified,
packaged and mixed at a facility operated by the Company in Evans City,
Pennsylvania. This facility normally processes approximately 30,000 cylinders
per month, but has capacity to process approximately 50% more volume, which the
Company believes would be sufficient to meet increased volume requirements in
the future.
 
     All of the Company's facilities are leased on terms which the Company
believes are consistent with commercial rental rates prevailing in the
surrounding rental market. The Company believes that its facilities are adequate
for its needs and that its properties are generally in good condition, well
maintained and suitable for their intended use.
 
ITEM 3. LEGAL PROCEEDINGS
 
     Some industrial gases and propane are flammable, explosive products.
Serious personal injury and property damage can occur in connection with its
transportation, storage, production or use. The Company, in the ordinary course
of business, is threatened with or is named as a defendant in various lawsuits
which, among other items, seek actual and punitive damages for product
liability, personal injury and property damage. There is currently one such
lawsuit pending against the Company. The Company maintains liability insurance
policies with insurers in such amounts and with such coverages and deductibles
as the Company believes is reasonable and prudent. However, there can be no
assurance that such insurance will be adequate to protect the Company from
material expenses related to such personal injury or property damage or that
such levels of insurance will continue to be available in the future at
economical prices. It is not possible to determine the ultimate disposition of
the pending matter discussed above; however, management is of the opinion that
there are no known claims or known contingent claims that are likely to have a
material adverse effect on the results of operations or financial condition of
the Company.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of the fiscal
year ended June 30, 1997.
 
                                    PART II
 
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
 
     The Company's Common Stock began trading on April 10, 1997 on the Nasdaq
National Market under the symbol "VNGI". As reported by Nasdaq, the high and low
sales prices of the Company's stock for the fourth quarter ended June 30, 1997
were $10.50 and $8.00, respectively.
 
     On September 16, 1997, there were 98 record holders of the Company's common
stock.
 
     The Company has not paid any cash dividends since its initial public
offering, and does not anticipate that it will pay dividends in the foreseeable
future. The Company currently intends to retain future earnings, if any, to
provide funds for the growth and development of the Company's business. The
payment of dividends is prohibited by certain covenants in the Company's credit
facility.
 
                                        8
<PAGE>   11
 
ITEM 6. SELECTED FINANCIAL DATA
 
     Selected consolidated financial data for the Company is presented in the
table below and should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7 and
the Company's consolidated financial statements included in Item 8 herein.
 
<TABLE>
<CAPTION>
                                                             YEARS ENDED JUNE 30,
                                            -------------------------------------------------------
                                             1993        1994        1995        1996       1997(1)
                                            -------     -------     -------     -------     -------
                                                 (AMOUNTS IN THOUSANDS EXCEPT PER SHARE DATA):
<S>                                         <C>         <C>         <C>         <C>         <C>
Operating Results:
  Net sales..............................   $35,251     $39,166     $44,914     $53,612     $73,905
  Depreciation and amortization..........     2,324       2,790       3,112       4,700       6,673
  Operating income.......................     3,281       3,828       4,183       5,000       4,493
  Interest expense.......................     1,204       1,038       1,072       1,561       2,158
  Income taxes (2).......................        --          --          --          --       3,655
  Net income (loss)......................     2,419       3,061       3,555       4,101        (845)
Pro forma earnings per share (3).........     $0.20       $0.25       $0.29       $0.34      $(0.27)
Pro forma weighted average shares
  outstanding (4)........................     7,267       7,267       7,267       7,267       8,501
Balance Sheet Data:
  Working capital........................     4,376       5,116       6,327       7,218       9,685
  Total assets...........................    25,268      27,133      33,421      45,491      67,806
  Current portion of long-term debt......     2,340       1,852       2,135       2,737       3,928
  Long-term debt.........................    10,494      10,079      12,964      19,507      28,787
  Other non-current liabilities (2)......       353         355         478         590       5,317
  Shareholders' equity...................     9,529      11,648      13,796      16,371      21,230
</TABLE>
 
---------
 
(1) Fiscal year 1997 includes special noncash charges of $1.9 million ($1.1
    million net of taxes) related to the issuance of stock, in conjunction with
    the Company's initial public offering, to executives and a director to
    satisfy deferred compensation and consulting agreements.
 
(2) Until April 10, 1997, the Company was treated as an S Corporation for
    federal and state income tax purposes. As a result, the Company was not
    subject to federal and state income taxes. The Company terminated its S
    Corporation election in connection with the initial public offering of its
    common stock and become a C Corporation. Upon termination of the S
    Corporation election, the Company was required to recognize $3.9 million of
    deferred income taxes in the final quarter of fiscal year 1997.
 
(3) Reflects pro forma income taxes at 40% for periods prior to April 10, 1997.
 
(4) Fiscal year 1997 pro forma shares include shares assumed to be issued to
    cover the excess of S corporation distributions over current period
    earnings.
 
                                        9
<PAGE>   12
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS
 
OVERVIEW
 
     The Company is a leading packager and distributor of industrial, medical
and specialty gases, welding equipment and supplies, and propane in ten states
in the mid-Atlantic and midwestern regions of the United States. The Company's
net sales have grown, primarily as a result of acquisitions, at a compound
annual rate of approximately 17% per year since the Company started business in
1958, increasing from $190,000 in that year to $73.9 million in fiscal 1997. In
fiscal 1997, gases accounted for approximately 42% of net sales, welding
equipment and supplies accounted for approximately 44% of net sales, and
cylinder and tank rental accounted for approximately 14% of net sales.
 
     The Company believes it has been successful in executing its strategy of
growth through acquisitions, having completed 26 acquisitions since 1990. Some
acquisitions have had, and the Company expects some future acquisitions will
have, a dilutive effect upon the Company's income from operations and net income
before tax for a short period following consummation. This temporary dilution
occurs because some of the benefits of acquisitions, such as leveraging of
operating and administrative expenses, improved product gross margins and real
sales growth, occur over a period ranging from two to eight quarters, depending
upon the complexity of integrating each acquisition into the Company's existing
operations. The consideration for most acquisitions includes a combination of a
cash payment at closing, seller financing and payments under covenants not to
compete and consulting agreements. In most cases, operating cash flow of an
acquired business is positive in a relatively short period of time. For many
acquisitions, the Company believes that projections of future cash flows justify
payment of amounts in excess of the book or market value of the assets acquired,
resulting in goodwill being recorded.
 
     The Company's results are subject to moderate seasonality, primarily due to
fluctuations in the demand for propane, which is highest during winter months
falling in the Company's second and third fiscal quarters.
 
     Operating and administrative expenses are comprised primarily of salaries,
benefits, transportation equipment operating costs, facility lease expenses and
general office expenses. These expenses are generally fixed on a
quarter-to-quarter basis. The Company believes that changes in these expenses as
a percentage of sales should be evaluated over the long term rather than on a
quarter-to-quarter basis due to the moderate seasonality of sales mentioned
above and the generally fixed nature of these expenses.
 
     Historically, the Company's gross profit margins as a percentage of sales
have been higher on the sale of gases than on the sale of welding equipment and
supplies ("hard goods"). As a result of recent acquisitions of some distributors
with a higher proportion of hard goods to gas sales, the Company's average gross
profit as a percentage of sales has decreased in comparison to prior years.
Future acquisitions may affect this pattern depending upon the product mix of
the acquired businesses.
 
     Until April 10, 1997, the Company was treated as an S Corporation for
federal and state income tax purposes. As a result, the Company was not subject
to federal and state income taxes. The Company terminated its S Corporation
election in connection with the initial public offering of its common stock and
become a C Corporation. Upon termination of the S Corporation election, the
Company was required to recognize $3.9 million of deferred income taxes in the
final quarter of fiscal year 1997.
 
                                       10
<PAGE>   13
 
RESULTS OF OPERATIONS
 
     The following table sets forth, for the periods indicated, certain items in
the Company's statements of operations as a percentage of net sales. Results for
any one or more periods are not necessarily indicative of annual results or
continuing trends.
 
<TABLE>
<CAPTION>
                                                                AS A PERCENTAGE OF NET SALES
                                                                    YEARS ENDED JUNE 30,
                                                           --------------------------------------
                                                           1994       1995       1996       1997
                                                           -----      -----      -----      -----
<S>                                                        <C>        <C>        <C>        <C>
Net sales...............................................   100.0%     100.0%     100.0%     100.0%
Cost of products sold, excluding depreciation and
  amortization..........................................    43.0       44.4       44.1       46.5
                                                           -----      -----      -----      -----
Gross profit............................................    57.0       55.6       55.9       53.5
Operating and administrative expenses...................    40.1       39.4       37.8       35.9
Depreciation and amortization...........................     7.1        6.9        8.8        9.0
Special charges (1).....................................      --         --         --        2.5
                                                           -----      -----      -----      -----
Income from operations..................................     9.8        9.3        9.3        6.1
Interest expense........................................     2.7        2.4        2.9        2.9
Other income............................................     0.7        1.0        1.2        0.6
                                                           -----      -----      -----      -----
Net income before taxes.................................     7.8        7.9        7.6        3.8
Provision for income taxes
  Deferred income taxes.................................      --         --         --      (0.3)
  Termination of S corporation status (1)...............      --         --         --        5.2
                                                           -----      -----      -----      -----
  Total provision for income taxes (2)..................      --         --         --        4.9
                                                           -----      -----      -----      -----
Net income..............................................     7.8%       7.9%       7.6%      (1.1)%
                                                           =====      =====      =====      =====
</TABLE>
 
---------
 
(1) Special one-time noncash charges were recorded in conjunction with the
    initial public offering of the Company's common stock of (i) $1.9 million
    ($1.1 million net of taxes) for shares issued to executives and a director
    to satisfy deferred compensation and consulting agreements, and (ii) $3.9
    million for recognition of the deferred tax liability related to termination
    of the S corporation status.
 
(2) For all periods prior to April 10, 1997, the Company elected to be treated
    as an S Corporation. As a result, the income of the Company was taxed for
    federal and state purposes directly to the Company's shareholders rather
    than to the Company.
 
  COMPARISON OF YEARS ENDED JUNE 30, 1997 AND 1996
 
     Net sales increased 37.9%, or $20.3 million, to $73.9 million from $53.6
million for the years ended June 30, 1997 and 1996, respectively. Acquisitions
made during the preceding twelve months contributed $17.5 million of the
increase in net sales, while same store sales growth contributed $2.8 million of
the increase. Gases and cylinder income represented 55.6% of net sales for the
year, with hard goods representing the remaining 44.4%. In comparison, net sales
for the prior year reflected gases and cylinder income as 60.3% and hard goods
as 39.7%. This change in sales mix reflects the effect of acquisitions made
during the preceding twelve months that as a consolidated group have had a sales
mix of 40.2% gases and cylinder income and 59.8% hard goods. The Company
believes that the base of hard good customers related to these acquisitions
provides it the opportunity to build gas and cylinder business in the future.
 
     Gross profit, which excludes depreciation and amortization, increased
31.9%, or $9.6 million, to $39.6 million for the year, compared to $30.0 million
for the prior year. Acquisitions made during the preceding twelve months
contributed $8.1 million of the increase in gross profit, while same stores
contributed $1.5 million of the increase. Gross profit as a percentage of net
sales was 53.5% for the year, compared to 55.9% for the prior year. This change
reflects an increase in the proportion of hard good sales, which have a lower
gross profit margin as a percentage of net sales than gases, primarily related
to acquisitions made during the year.
 
                                       11
<PAGE>   14
 
     Operating and administrative expenses increased 30.6%, or $6.2 million, to
$26.5 million for the year, compared to $20.3 million for the prior year. Of
this increase, $5.1 million was related to acquired businesses, with the balance
of the change attributable to increased facility lease costs and normal
inflation of wages, benefits, repairs and operating supplies. Depreciation and
amortization expense increased $2.0 million for the year, primarily as a result
of acquisitions made during the last twelve months. Special one-time noncash
charges of $1.9 million ($1.1 million net of taxes) were recorded during the
final quarter reflecting the issuance of stock at the time of the initial public
offering to executives and a director to satisfy obligations under certain
deferred compensation and consulting agreements.
 
     Interest expense increased 38.2%, or $0.6 million, to $2.2 million for the
year, compared to $1.6 million for the prior year. This increase reflects the
impact of additional borrowings related to acquisitions, partially offset by
reduced average interest rates resulting from the refinancing of the Company's
credit facility.
 
     A net loss of $0.8 million was recorded for the fiscal year ended June 30,
1997, which included one-time charges of $1.9 million ($1.1 million net of
taxes) and $3.9 million for the recording of the noncash compensatory charges
and the recognition of the deferred tax liability resulting from the termination
of the S corporation status. Assuming a 40% tax rate for the period prior to
April 10, 1997, the Company had a pro forma loss of $2.3 million for the year
compared to pro forma earnings of $2.5 million for the prior year. Pro forma
earnings for the current year, before the effect of the $5.0 million in one-time
charges, were $2.7 million.
 
     Earnings before interest, taxes, depreciation, amortization and other
noncash charges increased 30.6%, or $3.1 million, to $13.5 million for the year,
compared to $10.4 million for the prior year. Earnings before interest, taxes,
depreciation, amortization and other noncash charges is an important measurement
of the Company's ability to repay debt through operations and provides the
Company with the ability to pursue investment alternatives.
 
  COMPARISON OF YEARS ENDED JUNE 30, 1996 AND 1995
 
     Net sales increased 19.4%, or $8.7 million, to $53.6 million from $44.9
million in fiscal 1996 and fiscal 1995, respectively. Acquisitions contributed
$7.7 million of the increase in net sales, while base business growth
contributed $1.0 million of the increase. The fiscal 1996 sales mix of 60.3%
gases and cylinder income and 39.7% hard goods compared to fiscal 1995 sales mix
of 62.0% gases and cylinder income and 38.0% hard goods, reflecting the effect
of acquisitions made during fiscal 1996 that had a sales mix of 42.2% gases and
cylinder income and 57.8% hard goods.
 
     Gross profit, which excludes depreciation and amortization, increased
20.1%, or $5.0 million, to $30.0 million from $25.0 million in fiscal 1996 and
fiscal 1995, respectively. Acquisitions contributed $4.7 million of the increase
in gross profit, while the base business contributed $0.3 million of the
increase. Gross profit as a percentage of net sales improved to 55.9% in fiscal
1996, compared to 55.6% in fiscal 1995, with improvements in gross profit as a
percentage of sales for each of the product groups being partially offset by
sales of hard goods increasing to 39.7% of net sales compared to 38.0% of net
sales in fiscal 1995.
 
     Operating and administrative expenses increased 14.7%, or $2.6 million, to
$20.3 million from $17.7 million in fiscal 1996 and fiscal 1995, respectively.
Acquisitions contributed substantially all of this increase. Operating and
administrative expenses as a percentage of net sales improved to 37.8% in fiscal
1996, compared to 39.4% in fiscal 1995, reflecting the leveraging of general and
administrative costs as net sales were added from acquisitions. Depreciation and
amortization expense increased $1.6 million in fiscal 1996 compared to fiscal
1995, reflecting increased spending for acquisitions and capital expenditures.
Interest expense increased $0.5 million in fiscal 1996 compared to fiscal 1995
reflecting increased borrowings to finance acquisitions.
 
     Net income increased 15.4%, or $0.5 million, to $4.1 million from $3.6
million in fiscal 1996 and fiscal 1995, respectively. Earnings before interest,
taxes, depreciation and amortization increased 33.9%, or $2.7 million, to $10.4
million from $7.7 million in fiscal 1996 and fiscal 1995, respectively.
 
                                       12
<PAGE>   15
 
LIQUIDITY AND CAPITAL RESOURCES
 
     Historically, the Company has financed its operations, capital expenditures
and debt service with funds provided from operating activities. Acquisitions
have been financed by a combination of seller financing, bank borrowings and
funds generated from operations.
 
     At June 30, 1997, the Company had working capital of $9.7 million and long
term debt of $28.8 million, compared to $7.3 million and $19.5 million,
respectively, at June 30, 1996. In conjunction with the Company's initial public
offering of its common stock, $1.9 million of long term debt was retired with
shares of common stock, but remains subject to a put right by the holders to
convert the shares back to debt, plus accrued interest, for a period of three
years.
 
     Net cash provided by operating activities increased $1.6 million, to $9.0
million for fiscal year 1997, compared to $7.4 million for the prior year. Cash
used for acquisitions was approximately $10.2 million and $6.4 million for
fiscal 1997 and 1996, respectively. Capital expenditures, made primarily for the
purchase of cylinders, tanks and delivery trucks, were approximately $4.0
million and $3.6 million for fiscal 1997 and 1996, respectively. Net proceeds,
after related expenses, from the initial public offering in April 1997 of
approximately $15.7 million were used to pay the Company's estimated S
corporation distribution of $11.1 million with the balance of $4.6 million used
to reduce outstanding borrowings.
 
     On October 4, 1996, the Company entered into a new credit facility totaling
$38.0 million, consisting of a $13.0 million term loan, which matures in seven
years and is amortized in equal monthly payments, and a $25.0 million revolving
loan with a $15.0 million sublimit for letters of credit, which matures in
October 1999. The revolving loan is used primarily to fund acquisitions. The
Company is not required to make principal payments on outstanding balances of
the revolving loan as long as certain covenants are satisfied. Interest is
charged on both the term loan and the revolving loan at either the lender's
prime rate or various LIBOR rates, at the Company's discretion, plus an
applicable spread. The weighted average interest rate for substantially all of
the borrowings under the credit facility was 7.4% as of June 30, 1997. The
Company pays a fee for the unused portion of the revolving loan. As of June 30,
1997, availability under the revolving loan was approximately $10.0 million,
with outstanding borrowings of approximately $9.1 million and outstanding
letters of credit of approximately $5.9 million. The credit facility is secured
by all of the Company's assets.
 
     The loan agreement for the credit facility contains various financial
covenants applicable to the Company, including covenants requiring minimum fixed
charge coverage, maximum funded debt to EBITDA, and minimum net worth. The
Company is in compliance with these covenants and believes that it will continue
to be in compliance through at least the next twelve months.
 
     The Company is obligated under various promissory notes related to the
financing of acquisitions that have various rates of interest, ranging from 3.0%
to 10.0% per annum, and maturities through 2010. The outstanding balance of
these notes as of June 30, 1997 and 1996 was $12.2 million and $3.8 million,
respectively. Some of these notes are secured by assets related to the
applicable acquisition, some are unsecured, and some are backed by bank letters
of credit issued under the Company's credit facility. Outstanding letters of
credit as of June 30, 1997 and 1996 were $5.9 million and $1.9 million,
respectively.
 
     The Company believes that cash generated from operations, borrowing
availability under its credit facility and the ability to obtain financing with
sellers of businesses will be sufficient to satisfy the Company's requirements
for operating funds, capital expenditures and future acquisitions for at least
the next twelve months. The Company has no plans at this time to issue
additional shares of common stock.
 
FLUCTUATIONS IN QUARTERLY RESULTS
 
     The Company generally has experienced higher sales activity during its
second and third quarters as a result of seasonal sales of propane, with
corresponding lower sales for the first and fourth quarters. As a result, income
from operations and net income typically are higher for the second and third
quarters than for the first and fourth quarters of the fiscal year.
 
                                       13
<PAGE>   16
 
INFLATION
 
     The impact of inflation on the Company's operating results has been
moderate in recent years, reflecting generally low rates of inflation in the
economy and the Company's historical ability to pass purchase price increases to
its customers in the form of sales price increases. While inflation has not had,
and the Company does not expect that it will have, a material impact upon
operating results, there is no assurance that the Company's business will not be
affected by inflation in the future.
 
SUBSEQUENT EVENTS
 
     On July 1, 1997 the Company acquired all of the stock of an industrial gas
and welding supply distributor having approximately $2 million in annualized
sales. The purchase was financed with a combination of cash, borrowings under
the credit facility and long-term notes with the sellers. On September 11, 1997
the Company entered into an agreement for the purchase of all of the stock of an
industrial gas and welding distributor having approximately $7 million in
annualized sales. The Company expects this transaction to close within 30 days
and to be financed with borrowings under the credit facility and notes with the
sellers.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
     Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
of, was issued in March 1995. SFAS No. 121 requires that the carrying value of
long-lived operating assets, when determined to be impaired, be adjusted so as
not to exceed the estimated undiscounted cash flows provided by such assets.
SFAS No. 121 also addresses the accounting for long-lived assets that are to be
disposed of in future periods. The Company adopted the provisions of SFAS No.
121 in the first quarter of fiscal 1997. The adoption of SFAS No. 121 did not
have any effect on the Company's financial position or results of operations.
 
     Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, was issued in October 1995. The Company adopted the
new standard in fiscal 1997. This standard establishes the fair value based
method (the "SFAS 123 Method") rather than the intrinsic value based method as
the preferred accounting methodology for stock-based compensation arrangements.
Entities are allowed to either (i) continue to use the intrinsic value based
methodology in their basic financial statements and provide in the footnotes pro
forma net income and earnings per share information as if the SFAS 123 Method
had been adopted or (ii) adopt the SFAS 123 Method. The Company provided the
required disclosures in the notes to its financial statements.
 
     Financial Accounting Standard Board Statement No. 128, "Earnings Per Share"
(SFAS No. 128) was issued in February 1997 and is effective for periods ending
after December 15, 1997. This statement, upon adoption, will require all
prior-period earnings per share (EPS) data to be restated, to conform to the
provisions of the statement. This statement's objective is to simplify the
computation of EPS and to make the U.S. standard for EPS computations more
compatible with that of the International Accounting Standards Committee. The
Company will adopt SFAS No. 128 in fiscal 1998 and does not anticipate that the
statement will have a significant impact on its reported EPS.
 
     Financial Accounting Standard Board Statement No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) was issued in February 1997
and is effective for periods ending after December 15, 1997. This statement,
upon adoption, will require all companies to provide specific disclosure
regarding the entities capital structure. SFAS No. 129 will specify the
disclosures, for all companies, including descriptions of the securities
comprising the capital structure and the contractual rights of the holders of
such securities. The Company will adopt SFAS No. 129 in fiscal 1998 and does not
anticipate that the statement will have a significant impact on its disclosure.
 
FORWARD LOOKING STATEMENTS AND RISK FACTORS
 
     This report includes statements that are forward-looking as that term is
defined by the Private Securities Litigation and Reform Act of 1995 or by the
Securities and Exchange Commission in its rules, regulations and releases. The
Company intends that such forward-looking statements be subject to the safe
harbors created
 
                                       14
<PAGE>   17
 
thereby. All forward-looking statements are based upon current expectations
regarding important risk factors. Accordingly, actual results may differ
materially from those expressed in forward-looking statements and the making of
such statements should not be regarded as a representation by the Company or any
other person that the results expressed will be achieved. Important risk factors
include, but are not limited to, the Company's ability to make and assimilate
acquisitions, continued availability of financing, managing rapid growth,
competition, dependence on key personnel, dependence on key suppliers, control
by principal shareholder, uncertainties regarding accidents or litigation which
may arise in the normal course of business and effects of changes in the
economy, monetary and fiscal policies, laws and regulations, inflation and
fluctuations in interest rates.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
     The consolidated financial statements of the Company and the Independent
Accountants' report thereon listed in the accompanying Index to Financial
Statements are incorporated herein by reference.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURES
 
     There has been no change in the Company's accountants during the two most
recent years or any subsequent interim period.
 
                                       15
<PAGE>   18
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
 
     The directors and executive officers of the Company are as follows:
 
<TABLE>
<CAPTION>
                                          YEARS
                                        EXPERIENCE
                                            IN
             NAME                AGE     INDUSTRY                       POSITION
------------------------------   ---    ----------    ---------------------------------------------
<S>                              <C>    <C>           <C>
Gary E. West..................   60         27        Chairman of the Board of Directors
Lawrence E. Bandi.............   43         23        President, Chief Executive Officer, Director
John R. Bushwack..............   46         21        Executive Vice President, Chief Operating
                                                      Officer, Director
Robert D. Scherich............   37          1        Chief Financial Officer
Ben Exley, IV.................   50          1        Director
James P. Hart.................   43          1        Director
William A. Indelicato.........   58         28        Director
R. Bruce Kraemer..............   52         30        Director
August E. Maier...............   68         14        Director
</TABLE>
 
     GARY E. WEST, CHAIRMAN OF THE BOARD. Mr. West has served as Chairman of the
Board of Directors of the Company since 1984. From 1970, when he purchased the
Company, to March 1995, Mr. West served as President of the Company. Mr. West is
primarily responsible for the growth and success of the Company. Mr. West has
also served as President of West Rentals, Inc. and Equip Lease Corp. and Vice
President of Acetylene Products Corp. since 1992, 1988 and 1985, respectively.
Since June 1993, he has served as a director of WesBanco Wheeling, and since
June 1990 he has served as a director of H.E. Newmann Co., a plumbing, heating
and mechanical contracting company. Mr. West received his Bachelor of Science
degree in Business Administration from West Liberty State College.
 
     LAWRENCE E. BANDI, PRESIDENT AND CHIEF EXECUTIVE OFFICER. Mr. Bandi has
served as President and Chief Executive Officer of the Company since March 1995
and April 1991, respectively, and as a director of the Company since March 1984.
Mr. Bandi has held various positions with the Company since joining it in 1974.
Mr. Bandi is a Director of the Ohio Valley Industrial and Business Development
Corporation, a private corporation established for the purpose of attracting
various business entities to West Virginia. Mr. Bandi received his Bachelor of
Science degree in Accounting from Wheeling College and his Masters in Business
Administration degree from Wheeling Jesuit College.
 
     JOHN R. BUSHWACK, EXECUTIVE VICE PRESIDENT AND CHIEF OPERATING OFFICER. Mr.
Bushwack has served as the Executive Vice President, Chief Operating Officer and
a director of the Company since January 1997. From 1991 to 1996, Mr. Bushwack
served in various positions with the Company, including Executive Vice President
of Sales and Acquisitions, Vice President of Sales and Acquisitions, Vice
President of Sales and General Manager. From 1987 to 1990, Mr. Bushwack served
as President of the Harvey Company, a gas distributor, and from 1990 to 1991 he
served as Vice President and director of Linde Gases of the Great Lakes, also a
gas distributor. In addition, Mr. Bushwack has been a director of Convenient
Care Products Group, Ltd., a division of Westmoreland Health System, since 1991.
 
     ROBERT D. SCHERICH, CHIEF FINANCIAL OFFICER. Mr. Scherich has served as the
Company's Chief Financial Officer since May 1996. From January 1993 to April
1996, he served as Controller and General Manager of Wheeling Pittsburgh Steel
Corporation, a subsidiary of WHX Corporation, and from January 1988 to December
1993 he served as Division Controller of such corporation. Mr. Scherich was an
accountant with Ernst & Whinney from 1981 to 1984. Mr. Scherich received his
Bachelor of Science degree in Accounting from Pennsylvania State University and
is a Certified Public Accountant.
 
                                       16
<PAGE>   19
 
     BEN EXLEY, IV, DIRECTOR. Mr. Exley was elected a Director of the Company in
January 1997. He has served as the President of Ohio Valley Clarksburg, Inc.
since 1990 and Bailey Drug Company since 1993, both of which are pharmaceutical
distributors and wholly-owned subsidiaries of Cardinal Health Inc. Mr. Exley has
also served on the board of directors of several companies, including BankOne
West Virginia N.A. since 1994, BankOne Wheeling-Steubenville N.A. since 1991 and
Stone & Thomas, a chain of clothing department stores, since 1991. Mr. Exley is
a graduate of West Virginia Wesleyan with a Bachelor of Science degree in
Business Administration. He also holds a Masters in Business Administration
degree from Northern Illinois University.
 
     JAMES P. HART, DIRECTOR. Mr. Hart was elected a director of the Company in
January 1997. He has been Vice President and Chief Financial Officer of
Industrial Scientific Corporation ("ISC"), a manufacturer of portable
instruments used for detecting and monitoring a variety of gases, since August
1994. From March 1984 to August 1994, Mr. Hart was Treasurer and Controller of
ISC. Mr. Hart holds a Bachelor of Science degree in Accounting from the
University of Scranton.
 
     WILLIAM A. INDELICATO, DIRECTOR. Mr. Indelicato was elected a director of
the Company in January 1997. Mr. Indelicato has been President of ADE Vantage,
Inc., a business consulting firm which provides certain services to the Company,
since July 1992. From 1988 to 1991, Mr. Indelicato served as General Business
Director of Union Carbide Industrial Gases Inc. Mr. Indelicato is also an
associate professor of strategic management at Pace University in New York. Mr.
Indelicato received his Bachelor of Science degree in Electrical Engineering
from the University of Notre Dame and his Masters in Business Administration
degree from Pace University.
 
     R. BRUCE KRAEMER, DIRECTOR. Mr. Kraemer was elected a Director of the
Company in January 1997. Mr. Kraemer was the owner of Reading Supplies Inc., a
distributor of pipe, valves and fittings, until June 1997 and was President of
Weldco from 1985 to 1996 and a sales representative of Weldco from 1966 to 1985.
Mr. Kraemer received a degree from the Ohio College of Applied Sciences.
 
     AUGUST E. MAIER, DIRECTOR. Mr. Maier was elected a Director of the Company
in January 1997. In September, 1997, Mr. Maier became an employee of the Company
and now serves as Corporate Director of Field Operations. He served as Chief
Executive Officer of Houston Fearless 79, a manufacturer of film processing
equipment, from May 1995 until August 1997. From October 1987 to May 1995, Mr.
Maier was Chief Executive officer of Holox, Inc., a manufacturer and distributor
of industrial gases and welding equipment, which is wholly owned by Hoeklos Ltd.
of Holland. Mr. Maier received his Bachelor of Science degree in Mechanical
Engineering from the Indiana Institute of Engineering and his Masters in
Business Administration degree from the Harvard Business School.
 
ITEM 11. EXECUTIVE COMPENSATION.
 
     The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 28, 1997, in the section titled "Executive Compensation" and is
incorporated herein by reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 28, 1997, in the section titled "Common Stock Ownership of
Directors, Nominees and Officers" and is incorporated herein by reference.
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information called for by this item is contained in the Company's
definitive proxy statement relating to the annual meeting of shareholders to be
held October 28, 1997, in the section titled "Certain Relationships and Related
Transactions" and is incorporated herein by reference.
 
                                       17
<PAGE>   20
 
                                    PART IV
 
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
 
  (a)(1) Financial Statements
 
     The consolidated financial statements of the Company required by this item
are listed in the Index to Financial Statements set forth on page F-1.
 
  (a)(2) Financial Statements Schedules
 
     The financial statement schedules required by this item are set forth
beginning on page S-1. Schedules not filed herewith have been omitted as
inapplicable, or not required, or the information is included in the Company's
consolidated financial statements or the notes thereto.
 
  (a)(3) Exhibits
 
     The exhibits required by this item are listed in the Index to Exhibits set
forth on page E-1.
 
  (b) Reports on Form 8-K
 
     The Company did not file any reports on Form 8-K during the fourth quarter
of the year ended June 30, 1997.
 
                                       18
<PAGE>   21
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
 
                                          VALLEY NATIONAL GASES INCORPORATED
September 26, 1997
                                          /s/ LAWRENCE E. BANDI
 
                                          --------------------------------------
                                          Lawrence E. Bandi
                                          President and Chief Executive Officer
 
     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
             SIGNATURE                                TITLE                         DATE
-----------------------------------    -----------------------------------   -------------------
<C>                                    <S>                                   <C>
 
         /s/ GARY E. WEST              Chairman of the Board                 September 26, 1997
-----------------------------------
          (GARY E. WEST)
 
       /s/ LAWRENCE E. BANDI           President, Chief Executive Officer,   September 26, 1997
-----------------------------------    Director
        (LAWRENCE E. BANDI)
 
       /s/ JOHN R. BUSHWACK            Executive Vice President,             September 26, 1997
-----------------------------------    Chief Operating Officer,
        (JOHN R. BUSHWACK)             Secretary, Director
 
      /s/ ROBERT D. SCHERICH           Chief Financial Officer               September 26, 1997
-----------------------------------
       (ROBERT D. SCHERICH)
 
         /s/ BEN EXLEY, IV             Director                              September 26, 1997
-----------------------------------
          (BEN EXLEY, IV)
 
         /s/ JAMES P. HART             Director                              September 26, 1997
-----------------------------------
          (JAMES P. HART)
 
     /s/ WILLIAM A. INDELICATO         Director                              September 26, 1997
-----------------------------------
      (WILLIAM A. INDELICATO)
 
       /s/ R. BRUCE KRAEMER            Director                              September 26, 1997
-----------------------------------
        (R. BRUCE KRAEMER)
 
        /s/ AUGUST E. MAIER            Director                              September 26, 1997
-----------------------------------
         (AUGUST E. MAIER)
</TABLE>
 
                                       19
<PAGE>   22
 
                       VALLEY NATIONAL GASES INCORPORATED
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
Report of the Independent Public Accountants.........................................   F-2
 
Consolidated Balance Sheets as of June 30, 1996 and 1997.............................   F-3
 
Consolidated Statements of Operations for the years ended June 30, 1995, 1996 and
  1997...............................................................................   F-4
 
Consolidated Statements of Changes in Shareholders' Equity for the years ended
  June 30, 1995, 1996 and 1997.......................................................   F-5
 
Consolidated Statements of Cash Flows for the years ended June 30, 1995, 1996 and
  1997...............................................................................   F-6
 
Consolidated Notes to Financial Statements...........................................   F-7
</TABLE>
 
                                       F-1
<PAGE>   23
 
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To the Board of Directors,
Valley National Gases Incorporated:
 
     We have audited the accompanying consolidated balance sheets of Valley
National Gases Incorporated (a Pennsylvania corporation) and subsidiary as of
June 30, 1996 and 1997, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows each of the three years in the
period ended June 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
 
     We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
 
     In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Valley
National Gases Incorporated and subsidiary as of June 30, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended June 30, 1997, in conformity with generally accepted accounting
principles.
 
/s/ Arthur Andersen LLP
 
Pittsburgh, Pennsylvania,
  July 30, 1997 (except for
  the matter discussed in
  Note 15 as to which the
  date is September 11, 1997)
 
                                       F-2
<PAGE>   24
 
                       VALLEY NATIONAL GASES INCORPORATED
 
                          CONSOLIDATED BALANCE SHEETS
 
                             JUNE 30, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                                                 1996            1997
                                                                              -----------     -----------
<S>                                                                           <C>             <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents................................................   $ 4,148,546     $ 1,551,949
  Restricted cash..........................................................       400,000              --
  Accounts receivable, net of allowance for doubtful accounts of $140,000
    and $200,750, respectively.............................................     6,701,939      10,299,100
  Inventory................................................................     4,157,906       6,822,171
  Prepaids and other.......................................................       832,899       1,604,181
                                                                              -----------     -----------
      Total current assets.................................................    16,241,290      20,277,401
                                                                              -----------     -----------
PROPERTY, PLANT AND EQUIPMENT:
  Land.....................................................................         7,000          70,842
  Buildings and improvements...............................................     2,664,460       3,578,332
  Equipment................................................................    30,788,676      38,946,506
  Transportation equipment.................................................     5,758,581       6,670,016
  Furniture and fixtures...................................................     1,937,110       2,590,373
                                                                              -----------     -----------
      Total property, plant and equipment..................................    41,155,827      51,856,069
Accumulated depreciation...................................................   (18,029,419)    (21,786,762)
                                                                              -----------     -----------
      Net property, plant and equipment....................................    23,126,408      30,069,307
                                                                              -----------     -----------
OTHER ASSETS:
  Intangibles, net of amortization of $1,745,353 and $3,666,793,
    respectively...........................................................     5,902,885      17,130,777
  Deposits and other assets................................................       220,265         328,610
                                                                              -----------     -----------
      Total other assets...................................................     6,123,150      17,459,387
                                                                              -----------     -----------
TOTAL ASSETS...............................................................   $45,490,848     $67,806,095
                                                                              ===========     =========== 
 
                   LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
  Current maturities of long-term debt.....................................   $ 2,736,814     $ 3,928,387
  Accounts payable, trade..................................................     2,835,920       2,984,658
  Accrued compensation and employee benefits...............................     2,970,987       2,965,676
  Other current liabilities................................................       479,126         713,684
                                                                              -----------     -----------
      Total current liabilities............................................     9,022,847      10,592,405
LONG-TERM DEBT, less current maturities....................................    19,506,728      28,787,064
DEFERRED TAX LIABILITY.....................................................            --       3,665,298
OTHER LONG-TERM LIABILITIES................................................       590,181       1,651,733
                                                                              -----------     -----------
      Total liabilities....................................................    29,119,756      44,696,500
                                                                              -----------     -----------
REDEEMABLE COMMON STOCK, par value, $.001 per share,
  issued 235,000 shares....................................................            --       1,880,000
STOCKHOLDERS' EQUITY:
  Common stock, par value, $.001 per share--
    Authorized, 30,000,000 shares
    Issued, 18,300,653 and 9,385,084 shares, respectively..................        18,301           9,385
  Paid-in-capital..........................................................        95,914      17,162,396
  Treasury stock, 11,300,653 and -0- shares, respectively, at cost.........    (3,705,000)             --
  Retained earnings........................................................    19,961,877       4,057,814
                                                                              -----------     -----------
      Total stockholders' equity...........................................    16,371,092      21,229,595
                                                                              -----------     -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................................   $45,490,848     $67,806,095
                                                                              ===========     =========== 
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-3
<PAGE>   25
 
                       VALLEY NATIONAL GASES INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
 
                FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                         1995            1996            1997
                                                      -----------     -----------     -----------
<S>                                                   <C>             <C>             <C>
NET SALES..........................................   $44,914,252     $53,611,979     $73,904,526
COST OF PRODUCTS SOLD, excluding depreciation and
  amortization.....................................    19,931,377      23,617,062      34,350,052
                                                      -----------     -----------     -----------
       Gross profit................................    24,982,875      29,994,917      39,554,474
                                                      -----------     -----------     -----------
EXPENSES:
  Operating and administrative.....................    17,688,338      20,295,254      26,508,220
  Depreciation and amortization....................     3,111,516       4,699,608       6,673,004
  Special charges..................................            --              --       1,879,887
                                                      -----------     -----------     -----------
       Total expenses..............................    20,799,854      24,994,862      35,061,111
                                                      -----------     -----------     -----------
       Income from operations......................     4,183,021       5,000,055       4,493,363
                                                      -----------     -----------     -----------
INTEREST EXPENSE...................................     1,071,794       1,561,081       2,157,691
                                                      -----------     -----------     -----------
OTHER INCOME/(EXPENSE):
  Interest and dividend income.....................       268,313         332,133         290,657
  Rental income (expense)..........................        61,460          81,565          (9,130)
  Gain (loss) on disposal of assets................        25,211          (5,095)         58,474
  Other income (expense)...........................        88,753         253,351         144,728
                                                      -----------     -----------     -----------
       Total other income..........................       443,737         661,954         484,729
                                                      -----------     -----------     -----------
EARNINGS BEFORE INCOME TAXES.......................     3,554,964       4,100,928       2,820,401
 
PROVISION FOR INCOME TAXES:
  Current provision................................            --              --              --
  Deferred provision...............................            --              --        (234,702)
  Termination of S corporation status..............            --              --       3,900,000
                                                      -----------     -----------     -----------
       Total provision for income taxes............            --              --       3,665,298
                                                      -----------     -----------     -----------
NET EARNINGS (LOSS)................................   $ 3,554,964     $ 4,100,928     $  (844,897)
                                                      ===========     ===========     ===========
         PRO FORMA INFORMATION (UNAUDITED)
NET EARNINGS (LOSS)................................   $ 3,554,964     $ 4,100,928     $  (844,897)
PRO FORMA INCOME TAXES.............................     1,421,986       1,640,371       1,430,302
                                                      -----------     -----------     -----------
PRO FORMA EARNINGS (LOSS)..........................   $ 2,132,978     $ 2,460,557     $(2,275,199)
                                                      ===========     ===========     ===========
PRO FORMA EARNINGS (LOSS) PER SHARE................   $      0.29     $      0.34     $     (0.27)
                                                      ===========     ===========     ===========
WEIGHTED AVERAGE SHARES............................     7,267,074       7,267,074       8,500,641
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-4
<PAGE>   26
 
                       VALLEY NATIONAL GASES INCORPORATED
 
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
 
                FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                 COMMON STOCK                TREASURY STOCK                                             TOTAL
                            -----------------------    --------------------------     PAID-IN-        RETAINED      STOCKHOLDERS'
                              SHARES        AMOUNT       SHARES         AMOUNT         CAPITAL        EARNINGS         EQUITY
                            -----------    --------    -----------    -----------    -----------    ------------    -------------
<S>                         <C>            <C>         <C>            <C>            <C>            <C>             <C>
BALANCE, June 30, 1994...    18,300,653     $18,301     11,300,653    $(3,705,000)   $        --     $15,334,679     $11,647,980
  Net income.............            --          --             --             --             --       3,554,964       3,554,964
  Dividends paid.........            --          --             --             --             --      (1,407,165)     (1,407,165)
                             ----------     -------     ----------    -----------    -----------     -----------     ----------- 
BALANCE, June 30, 1995...    18,300,653      18,301     11,300,653     (3,705,000)            --      17,482,478      13,795,779
  Net income.............            --          --             --             --             --       4,100,928       4,100,928
  Contribution of
    capital..............            --          --             --             --         95,914              --          95,914
  Dividends paid.........            --          --             --             --             --      (1,621,529)     (1,621,529)
                             ----------     -------     ----------    -----------    -----------     -----------     ----------- 
BALANCE, June 30, 1996...    18,300,653      18,301     11,300,653     (3,705,000)        95,914      19,961,877      16,371,092
  Net loss...............            --          --             --             --             --        (844,897)       (844,897)
  Issuance of common
    stock................     2,218,000       2,218             --             --     15,730,059              --      15,732,277
  Issuance of stock
    pursuant
    to compensation
    agreements...........       267,084         267             --             --      2,136,323              --       2,136,590
  Conversion of debt to
    equity...............       135,000         135             --             --      1,079,865              --       1,080,000
  Reclassification of
    redeemable common
    stock outside of
    shareholders'
    equity...............      (235,000)       (235)            --             --     (1,879,765)             --      (1,880,000)
  Retirement of treasury
    stock................   (11,300,653)    (11,301)   (11,300,653)     3,705,000             --      (3,693,699)             --
  Dividends paid.........            --          --             --             --             --     (11,365,467)    (11,365,467)
                             ----------     -------     ----------    -----------    -----------     -----------     ----------- 
BALANCE, June 30, 1997...     9,385,084     $ 9,385             --    $        --    $17,162,396     $ 4,057,814     $21,229,595
                             ==========     =======     ==========    ===========    ===========     ===========     ===========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-5
<PAGE>   27
 
                       VALLEY NATIONAL GASES INCORPORATED
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
 
                FOR THE YEARS ENDED JUNE 30, 1995, 1996 AND 1997
 
<TABLE>
<CAPTION>
                                                          1995            1996            1997
                                                       -----------     -----------     -----------
<S>                                                    <C>             <C>             <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Net earnings (loss)...............................    $3,554,964      $4,100,928      $ (844,897)
  Adjustments to reconcile net income to net cash
     provided by operating activities--
       Depreciation.................................     2,737,188       3,437,208       4,324,563
       Amortization.................................       374,328       1,262,400       2,348,441
       Special charges..............................            --              --       1,879,887
       Loss (gain) on disposal of assets............       (25,211)          5,095         (58,474)
       Change in deferred taxes.....................            --              --       3,665,298
       Other long-term liabilities..................        67,571         111,725         888,115
       Changes in operating assets and liabilities--
          Accounts receivable.......................      (256,165)       (527,257)        116,617
          Inventory.................................      (353,250)       (151,906)          2,002
          Prepaids and other........................      (468,183)       (308,617)       (478,841)
          Accounts payable, trade...................       233,207         421,667      (1,959,827)
          Accrued compensation and employee
            benefits................................       437,852        (462,280)     (1,103,723)
          Other current liabilities.................      (103,541)         45,073         187,163
          Deposits and other assets.................       118,620        (511,465)            687
                                                        ----------      ----------      ----------
            Net cash provided by operating
               activities...........................     6,317,380       7,422,571       8,967,011
                                                        ----------      ----------      ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Proceeds from disposal of assets..................        66,230         903,621         108,480
  Purchases of property and equipment...............    (4,426,384)     (3,646,899)     (3,993,969)
  Business acquisitions, net of cash acquired.......    (2,806,545)     (6,435,879)    (10,168,931)
  Change in restricted cash.........................            --              --         400,000
                                                        ----------      ----------      ----------
            Net cash used by investing activities...    (7,166,699)     (9,179,157)    (13,654,420)
                                                        ----------      ----------      ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from issuance of common stock........            --              --      15,732,277
  Proceeds from borrowings..........................     4,996,063       6,530,000      27,805,155
  Principal payments on loans.......................    (1,965,495)     (2,458,228)    (28,361,153)
  Prepayment of promissory note.....................            --              --      (1,720,000)
  Dividends paid....................................    (1,407,165)     (1,621,529)    (11,365,467)
                                                        ----------      ----------      ----------
            Net cash provided by financing
               activities...........................     1,623,403       2,450,243       2,090,812
                                                        ----------      ----------      ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS.............       774,084         693,657      (2,596,597)
CASH AND CASH EQUIVALENTS, beginning of period......     2,680,805       3,454,889       4,148,546
                                                        ----------      ----------      ----------
CASH AND CASH EQUIVALENTS, end of period............    $3,454,889      $4,148,546      $1,551,949
                                                        ==========      ==========      ==========
</TABLE>
 
   The accompanying notes are an integral part of these financial statements.
 
                                       F-6
<PAGE>   28
 
                       VALLEY NATIONAL GASES INCORPORATED
 
                         NOTES TO FINANCIAL STATEMENTS
 
                             JUNE 30, 1996 AND 1997
 
1. ORGANIZATION:
 
     Valley National Gases Incorporated, a Pennsylvania corporation (the
Company), produces, packages and resells industrial gases, specialty gases and
propane; and resells welding hardgoods and equipment. The Company, through its
consolidated subsidiaries has been in operation since 1958 and currently
operates in ten states.
 
     The Company completed its initial public offering on April 10, 1997. Before
the initial public offering, Valley National Gases Incorporated operated as a
subchapter S corporation. In connection with the initial public offering, the
Company terminated its subchapter S status.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
CASH EQUIVALENTS
 
     For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
 
     The Company held a certificate of deposit of $400,000 which was restricted
cash as shown in the accompanying balance sheet as of June 30, 1996. This
certificate of deposit was pledged as collateral for a bank loan (original
amount $1,250,000) and was released as collateral when the principal balance of
the loan was reduced to $850,000 in the year ended June 30, 1997.
 
     The Company invested in certain repurchase agreements during the year ended
June 30.
 
<TABLE>
<CAPTION>
                                                                 1996           1997
                                                              ----------     ----------
        <S>                                                   <C>            <C>
        WesBanco Bank--
          Principal........................................   $3,038,249     $       --
          Accrued interest.................................       74,607             --
                                                              ----------     ----------
                                                              $3,112,856             --
                                                              ==========     ==========
          Weighted average maturity........................     133 days             --
        Bank One--
          Principal........................................   $  476,479     $       --
          Accrued interest.................................          216             --
                                                              ----------     ----------
                                                              $  476,695     $       --
                                                              ==========     ==========
          Weighted average maturity........................        1 day             --
        Balance as of June 30..............................   $3,589,551     $       --
                                                              ==========     ==========
        Average amount outstanding.........................   $2,554,678     $1,746,346
                                                              ==========     ==========
        Maximum amount outstanding.........................   $3,589,551     $3,788,281
                                                              ==========     ==========
</TABLE>
 
     Securities underlying the agreements exceeded the repurchase liability and
consisted primarily of certificates of deposit and U.S. government securities
held on behalf of the Company. These agreements were collectible upon demand by
the Company.
 
INVENTORY
 
     Inventory is carried at the lower of cost or market using the first-in,
first-out (FIFO) method.
 
                                       F-7
<PAGE>   29
 
     The components of inventory for the year ended June 30 were as follows:
 
<TABLE>
<CAPTION>
                                                                 1996           1997
                                                              ----------     ----------
        <S>                                                   <C>            <C>
        Hardgoods..........................................   $3,529,294     $6,043,962
        Gases..............................................      628,612        778,209
                                                              ----------     ----------
                                                              $4,157,906     $6,822,171
                                                              ==========     ==========
</TABLE>
 
PROPERTY, PLANT AND EQUIPMENT
 
     Property, plant and equipment are carried at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the properties
while leasehold improvements are amortized over the shorter of their useful life
or the term of the lease as follows:
 
<TABLE>
<CAPTION>
                                                                                YEARS
                                                                                ------
        <S>                                                                     <C>
        Buildings and improvements...........................................   10-25
        Cylinders............................................................      12
        Equipment other than cylinders.......................................    5-7
        Transportation equipment.............................................    3-7
        Furniture and fixtures...............................................    3-7
</TABLE>
 
     The cost of maintenance and repairs is charged to operations as incurred.
Major renewals and betterments are capitalized.
 
INTANGIBLES
 
     Intangibles consist of noncompetition agreements, goodwill, consulting
agreements and deferred loan origination costs. Costs pursuant to noncompetition
agreements entered into in connection with business acquisitions are amortized
over the terms of the arrangements. Goodwill represents costs in excess of net
assets of businesses acquired and is amortized on a straight-line basis over 15
to 20 years. The Company assesses the recoverability of goodwill by determining
whether it can be recovered through projected undiscounted cash flows.
Consulting agreements are entered into with the owners of various businesses
acquired by the Company and require such owners to be available to perform
services upon the Company's request. Consulting payments are made regardless of
the number of hours of service performed and are payable to the consultant's
successor upon death. Consulting costs are amortized over the term of the
agreement. Deferred loan origination costs are amortized over the term of the
related debt.
 
INCOME TAXES
 
     Prior to its initial public offering, the Company had elected to be taxed
under the provisions of Subchapter S of the Internal Revenue Code of 1986, as
amended ("S corporation"), for income tax purposes. Accordingly, the financial
statements prior to the closing of the initial public offering do not include a
provision for income taxes because the Company did not incur federal or state
income taxes. Instead, its earnings and losses during these periods were
included in the shareholders personal income tax return and were taxed based on
the shareholders personal tax strategy.
 
     The Company's S corporation status terminated in connection with the
Company's initial public offering, thereby subjecting the Company's income to
federal and state income taxes at the corporate level. Due to temporary
differences in recognition of revenue and expenses, income for financial
reporting purposes has exceeded income for income tax purposes. Accordingly, the
application of the provisions of SFAS No. 109, "Accounting for Income Taxes"
resulted in the recognition of deferred tax liabilities (and a corresponding
one-time charge to expense) of $3.9 million as of the date the S corporation
status was terminated.
 
                                       F-8
<PAGE>   30
 
REVENUE RECOGNITION
 
     Revenues are recognized for product sales when such goods are received by
the customer. Additionally, revenues from cylinder leases are reported ratably
over the terms of the leases.
 
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
 
     The Company adopted the provisions of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
during fiscal 1996.
 
     The following methods and assumptions were used to estimate fair value of
each class of financial instrument for which it is practicable to estimate that
value:
 
        Cash and Cash Equivalents--The carrying amount approximates fair value
        because of the short maturity of those instruments.
 
        Long-Term Debt--The fair value of long-term debt bearing interest at
        floating rates is estimated based on the quoted market prices for the
        same or similar issues or on the current rates offered to the Company
        for debt of the same remaining maturities. The fair value of the term
        notes are not practical to estimate due to a lack of a ready market and
        certain restrictions associated with these instruments.
 
     The estimated fair values of the Company's financial instruments as of June
30, 1997 are as follows:
 
<TABLE>
<CAPTION>
                                                             CARRYING          FAIR
                                                              AMOUNT           VALUE
                                                            -----------     -----------
        <S>                                                 <C>             <C>
        Cash and cash equivalents........................   $ 1,551,949     $ 1,551,949
        Long-term debt for which it is--
          Practicable to estimate fair value.............    20,682,297      20,682,297
          Not practicable to estimate fair value.........    12,237,940              --
</TABLE>
 
     The fair values and carrying amounts of the Company's term notes and
revolving note are deemed to be approximately equivalent as they bear interest
at floating rates which are based upon current market rates.
 
     It is not practicable to estimate the fair value of the notes payable of
the Company as no ready market exists for these instruments and comparable
instruments available from outside the Company are not available.
 
USE OF ESTIMATES
 
     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
<TABLE>
<CAPTION>
                                                       FOR THE YEAR ENDED JUNE 30,
                                                 ----------------------------------------
                                                    1995           1996           1997
                                                 ----------     ----------     ----------
        <S>                                      <C>            <C>            <C>
        Cash paid for certain items--
          Cash payments for interest..........   $1,082,625     $1,503,680     $2,008,482
          Cash payments for income taxes......           --             --             --
        Noncash financing activities--
          Conversion of debt to equity........           --             --      1,080,000
</TABLE>
 
PRINCIPLES OF CONSOLIDATION
 
     The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiary. All significant intercompany balances have been
eliminated.
 
                                       F-9
<PAGE>   31
 
RECLASSIFICATIONS
 
     Certain reclassifications have been made to prior period amounts to conform
to the current period presentation.
 
3. ACQUISITIONS:
 
     The Company acquires businesses engaged in the distribution of industrial,
medical and specialty gases and related welding supplies and accessories.
Acquisitions have been recorded using the purchase method of accounting and,
accordingly, results of their operations have been included in the Company's
financial statements since the effective dates of the respective acquisitions.
 
     During fiscal 1997, the Company purchased five businesses. The largest of
these acquisitions and their effective dates included Weldco, Inc. (October
1996), Flame Welding, Inc (April 1997) and Toledo Oxygen and Supply Company
(June 1997). The aggregate purchase price for all acquisitions amounted to
approximately $21,499,000.
 
     During fiscal 1996, the Company purchased four businesses. The largest of
these acquisitions and their effective dates included Quest Welding Supply
(September 1995) and Wootten Industries, Inc. (December 1995). The aggregate
purchase price for all acquisitions amounted to approximately $6,695,000.
 
     During fiscal 1995, the Company purchased six businesses. The largest of
these acquisitions and their effective dates included Evans Welding Supply Co.
(December 1994), Allegheny LP Gas (February 1995). The aggregate purchase price
for all acquisitions amounted to approximately $3,776,000.
 
     In connection with these acquisitions, the total purchase price, fair value
of assets acquired, cash paid and liabilities assumed for the year ended June 30
were as follows:
 
<TABLE>
<CAPTION>
                                                   1995           1996           1997
                                                ----------     ----------     -----------
        <S>                                     <C>            <C>            <C>
        Cash paid............................   $2,806,545     $6,435,879     $10,676,499
        Notes issued to sellers..............      969,298        259,417      10,822,187
        Notes payable and capital leases
          assumed............................      132,274        176,678         405,674
        Other liabilities assumed and
          acquisition costs..................      337,482        682,142       6,511,927
                                                ----------     ----------     -----------
        Total purchase price allocated to
          assets acquired....................   $4,245,599     $7,554,116     $28,416,287
                                                ==========     ==========     ===========
</TABLE>
 
     The following presents unaudited estimated pro forma operating results as
if the 1996 and 1997 acquisitions had been consummated on July 1, 1995. These
pro forma results have been prepared for comparable purposes only and do not
purport to be indicative of what would have occurred had the acquisitions been
made as of July 1, 1995, or of results which may occur in the future. Pro forma
net income includes an adjustment for income taxes as if the Company had been
taxed as a C Corporation in the applicable periods it was an S Corporation.
 
<TABLE>
<CAPTION>
                                                                YEAR ENDED JUNE 30,
                                                            ---------------------------
                                                               1996            1997
                                                            -----------     -----------
        <S>                                                 <C>             <C>
        Net sales.......................................    $81,511,000     $83,672,000
        Net income before income taxes..................      2,368,000       2,334,000
        Pro forma net income............................      1,421,000      (2,567,000)
        Pro forma net income per share..................           0.20           (0.30)
</TABLE>
 
4. MAJOR CUSTOMERS AND CONCENTRATIONS OF CREDIT RISK:
 
     The Company markets its products to a diverse customer base in unrelated
industries and, as such, does not have any significant concentrations of credit
risk. No one customer accounted for greater than 10% of revenues in 1995, 1996
and 1997.
 
                                      F-10
<PAGE>   32
 
5. INTANGIBLE ASSETS:
 
     Intangible assets were recorded at the date of acquisition at their
allocated cost. Amortization is provided over the estimated useful lives of the
assets as disclosed below:
 
<TABLE>
<CAPTION>
                                 AMORTIZATION   ORIGINAL    ACCUMULATED    BALANCE AT     BALANCE AT
                                    PERIOD        COST      AMORTIZATION  JUNE 30, 1997  JUNE 30, 1996
                                 ------------  -----------  ------------  -------------  -------------
<S>                              <C>           <C>          <C>           <C>            <C>
Noncompetition agreements.......   2-7 years   $ 5,622,627   $1,570,032    $ 4,052,595    $ 3,146,377
Consulting agreements...........   1-5 years     3,196,719    1,520,202      1,676,517      1,052,390
Goodwill........................ 15-20 years    11,616,799      514,640     11,102,159      1,525,778
Deferred financing and
  organization costs............  2-15 years       361,425       61,919        299,506        178,340
                                               -----------   -----------   ------------   ------------
                                               $20,797,570   $3,666,793    $17,130,777    $ 5,902,885
                                               ===========   ==========    ===========    ===========
</TABLE>
 
6. LONG-TERM DEBT:
 
     Long-term debt consists of the following as of June 30:
 
<TABLE>
<CAPTION>
                                                                         1996           1997
                                                                      -----------    -----------
<S>                                                                   <C>            <C>
Revolving note, interest at LIBOR plus 1.75% payable monthly
  through October 1999. Secured by the assets of the Company.......   $        --    $ 9,075,154
Term note, interest at LIBOR plus 1.75% payable monthly through
  October 2003. Secured by the assets of the Company...............            --     11,607,143
Acquisitions offering revolving line of credit, interest at prime
  rate minus .125%, as defined, payable in full on November 1997 or
  if notified by the bank in equal monthly installments. Secured by
  the assets of the Company........................................     9,748,696             --
Term note, interest at prime rate, as defined, payable in monthly
  installments through November 2000. Secured by the assets of the
  Company..........................................................     7,000,010             --
Term note, interest at prime rate minus .125%, as defined, payable
  in monthly installments through April 2002. Secured by the assets
  of the Company...................................................       833,330             --
Term note, interest at prime rate plus 1%, as defined, payable in
  monthly installments through April 2005. Secured by the assets of
  the Company......................................................     1,048,184             --
Note payable, interest at 6.6% payable annually through October
  2003. Secured by certain assets of the Company...................            --      4,781,521
Individuals and corporations, mortgages and notes, interest at
  2.978% to 10.00%, payable at various dates through 2010..........   $ 3,843,591    $ 7,456,419
                                                                      -----------    -----------
                                                                       22,473,811     32,920,237
Original issue discount............................................      (230,269)      (204,786)
Current maturities.................................................    (2,736,814)    (3,928,387)
                                                                      -----------    -----------
Total long-term debt...............................................   $19,506,728    $28,787,064
                                                                      ===========    ===========
</TABLE>
 
     Prime rate was 8.25% and 8.50% at June 30, 1996 and 1997, respectively.
LIBOR rate was 5.375% and 5.625% at June 30, 1996 and 1997, respectively.
 
     On October 4, 1996, the Company executed a three year revolving credit
agreement with Bank One for the purpose of refinancing the then existing
revolving credit agreement with NationsBank and to provide additional
acquisition capital. This agreement provides for a term note of $13,000,000 at a
variable interest rate based upon prime or LIBOR, depending on the Company's
funded debt to EBITDA ratio, payable monthly through September of 2003. The
agreement also provides for a revolving note with a maximum of $25,000,000 at a
variable interest rate equal to that of the term note payable monthly through
September of 1999. A commitment fee of $32,500 was paid upon acceptance of the
agreement. These notes are secured by the Company's accounts
 
                                      F-11
<PAGE>   33
 
receivable, equipment, inventory, and general intangibles, and the proceeds
thereof. The agreement also contains various financial covenants including
minimum fixed charge coverage, maximum of funded debt to EBITDA, and minimum net
worth level.
 
     The schedule of maturities as amended for the new credit agreements for the
next five years and thereafter is as follows as of June 30, 1997:
 
<TABLE>
<CAPTION>
                         FISCAL YEAR ENDING JUNE 30,
        --------------------------------------------------------------
        <S>                                                               <C>
                  1998................................................    $ 3,928,387
                  1999................................................      3,858,141
                  2000................................................     12,701,800
                  2001................................................      3,400,822
                  2002................................................      3,238,598
                  Thereafter..........................................      5,587,703
                                                                          -----------
        Total.........................................................    $32,715,451
                                                                          ===========
</TABLE>
 
7. PENSION PLANS:
 
     The Company sponsors a defined contribution pension plan for employees. All
employees are eligible to participate in the Company-sponsored plan after
meeting the age and service requirements. Contributions to the plan are based on
a percentage of employees' compensation. Pension expense for this plan was
$337,139, $413,077 and $467,028, respectively, in fiscal year 1995, 1996 and
1997.
 
     The Company also maintains a profit sharing plan for its employees. Profit
sharing payments are based on a discretionary amount determined annually by the
Board of Directors and are paid as additional contributions to the pension plan.
In 1995, 1996 and 1997, the amount of additional contributions to be distributed
to the employees' pension plan amounted to $83,506, $91,961 and $111,155,
respectively.
 
     Certain management employees were covered by unfunded deferred compensation
agreements. These deferred compensation agreements were terminated in connection
with the initial public offering. Additionally, certain management employees are
also provided supplemental retirement benefits. The cost of these contracts is
being accrued over the period of active employment of the covered employees. The
costs of the deferred compensation and supplemental retirement benefits plans
charged to expense were $83,206, $78,203 and $33,143, respectively, in fiscal
year 1995, 1996 and 1997.
 
8. LEASE OBLIGATIONS:
 
     The Company leases real estate at several locations for use as branch
stores and warehouses. Certain equipment is also leased. All of the leases,
which are with related and unrelated parties, are classified as operating
leases. The lease terms expire at various dates through the year 2007, with
options to renew for periods of three to five years. Lease expenses charged to
operations were $1,330,394, $1,541,898, and $ 2,140,442, respectively, in fiscal
year 1995, 1996 and 1997.
 
     Minimum future rental payments under noncancelable operating leases for
each of the next five years are as follows:
 
<TABLE>
<CAPTION>
             FISCAL YEAR ENDING JUNE 30,        REAL ESTATE     EQUIPMENT        TOTAL
        -------------------------------------   -----------     ---------     -----------
                 <S>                           <C>             <C>           <C>
                  1998.......................   $ 2,101,914     $147,288      $ 2,249,202
                  1999.......................     2,048,064      131,568        2,179,632
                  2000.......................     2,030,562      115,092        2,145,654
                  2001.......................     2,013,060       51,478        2,064,538
                  2002.......................     2,011,860       36,900        2,048,760
                                                -----------     --------      -----------
                  Totals.....................   $10,205,460     $482,326      $10,687,786
                                                ===========     ========      ===========
</TABLE>
 
                                      F-12
<PAGE>   34
 
9. RELATED PARTY TRANSACTIONS:
 
     The Company leases buildings and equipment, rents cylinders and has sales
and purchase transactions with related parties, including the sole shareholder
prior to the initial public offering and corporations owned by such sole
shareholder and officers of the Company. These transactions and balances for the
year ended June 30 are summarized as follows:
 
<TABLE>
<CAPTION>
                                                      1995         1996          1997
                                                    --------     --------     ----------
        <S>                                         <C>          <C>          <C>
        Transactions--
          Lease of buildings and equipment.......   $857,205     $932,624     $1,623,390
          Rental of aircraft.....................     26,100       18,800         87,100
        Purchases of acetylene and services......    267,657      159,915        104,616
        Sales of material and services...........        533          379            193
        Balances--
          Notes payable..........................         --           --      4,781,521
</TABLE>
 
     During fiscal year 1996, the Company realized a gain of $95,914 on the sale
of various operating properties to a related party for a total sale price of
$850,000. This gain was reflected as additional paid-in-capital in the
accompanying financial statements.
 
     The Company has entered into a master lease agreement for virtually all of
its operating properties, including those sold in 1996, with this related party.
The terms of this master lease agreement are ten years with annual minimum lease
payments of $1,751,724 with renewal options and have been accounted for as
operating leases in the accompanying financial statements.
 
     The Company entered into a consulting agreement (the "Consulting
Agreement") with William A. Indelicato, a director of the Company, whereby Mr.
Indelicato provided consulting services concerning all aspects of the Company's
acquisition program. In return for his services, the Company accrued "credits"
for Mr. Indelicato in amounts based upon hours worked and hourly rates that vary
depending upon criteria related to each particular acquisition. Mr. Indelicato
could redeem accrued credits for cash at any time within seven years from the
date of accrual. The amount of the accrued, unredeemed credits was adjusted
proportionately following the end of each fiscal year based upon the increase
(but not any decrease) in the Company's net worth since the end of the last
fiscal year. In addition, Mr. Indelicato had the right, in connection with a
public offering of the Common Stock, to exchange all or a portion of his accrued
credits (excluding credits accrued for annual adjustments) for shares of Common
Stock based on the book value per share of Common Stock as of the end of the
fiscal year for which the credits were accrued, in which case the accrued
credits for annual adjustments are cancelled. Mr. Indelicato exercised this
option in connection with the initial public offering and exchanged accrued
credits for 96,366 shares of Common Stock.
 
     Pursuant to the Consulting Agreement, the Company also retained ADE
Vantage, Inc. ("ADE"), a consulting company wholly-owned by Mr. Indelicato, to
support Mr. Indelicato in providing consulting services. The Company paid Mr.
Indelicato a monthly retainer fee of $1,000 and reimburses his out-of-pocket
expenses related to the performance of services. Payments to Mr. Indelicato and
ADE for fiscal year 1996 and 1997 totaled $76,000 and $183,986, respectively.
The Consulting Agreement was terminated effective June 30, 1997 and was replaced
by a new consulting agreement which pays a monthly retainer fee of $4,000,
reimburses for out-of-pocket expenses, retains ADE for related acquisition
services and provides a variable payment for each acquisition completed based on
the purchase price and the annual sales of the acquired business. This agreement
has a one year term and can be renewed upon the agreement of both parties.
 
     As of June 30, 1997, the Company has a note payable to a former owner of an
acquired company who currently serves as a member of the board of directors of
the Company.
 
10. STOCK OPTIONS:
 
     The Company adopted a stock option plan during fiscal year 1997 (the 1997
Plan). A total of 650,000 shares are authorized and have been reserved for
issuance under the 1997 Plan. These options are incentive stock options
 
                                      F-13
<PAGE>   35
 
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended. The 1997 Plan is administered by the Nominating and Compensation
Committee of the Board of Directors who determines, among other things, those
individuals who shall receive options, the time period during which the options
may be exercised, the number of shares of common stock that may be purchased
under each option, and the option price.
 
     The following summarizes the activity under the 1997 Plan:
 
<TABLE>
<CAPTION>
                                         EXERCISE PRICE       NUMBER OF          NUMBER OF
                                           PER SHARE        SHARES GRANTED     SHARES VESTED
                                         --------------     --------------     -------------
        <S>                              <C>                <C>                <C>
        Outstanding, June 30, 1996....       $   --                  --                --
          Granted.....................       $ 8.00             175,000                --
          Vested......................           --                  --                --
          Exercised...................           --                  --                --
          Expired or terminated.......           --                  --                --
                                             ------             -------            ------   
        Outstanding, June 30, 1997....       $ 8.00             175,000                --
                                             ======             =======            ======  
</TABLE>
 
     The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
No. 123) in October 1995. This statement establishes a fair value based method
of financial accounting and related reporting standards for stock-based employee
compensation plans. SFAS No. 123 became effective for fiscal year 1997 and
provides for adoption in the income statement or through footnote disclosure
only. The Company has continued to account for the 1997 Plan under APB No. 25,
"Accounting for Stock Issued to Employees", as permitted by SFAS No. 123.
 
     Had compensation cost of the 1997 Plan been determined based on the fair
value at the grant dates for awards consistent with the method of SFAS No. 123,
the Company's net income would have remained unchanged for the year ended June
30, 1997. The fair value of the option grant was estimated on the date of grant
using an option pricing model with the following assumptions:
 
<TABLE>
        <S>                                                                   <C>
        Risk-Free Interest Rate...........................................       6.85%
        Expected Lives....................................................    7 years
        Expected Dividend Yield...........................................       0.00%
        Expected Volatility...............................................      34.00%
</TABLE>
 
11. INCOME TAXES:
 
     The Company's S corporation status terminated in connection with the
initial public offering, thereby subjecting the Company's income to federal and
state income taxes at the corporate level. The Company accounts for income taxes
in accordance with the provisions of SFAS No. 109. Although there can be no
assurance that the Company will generate any earnings or specific level of
continuing earnings in future periods, management believes that it is more
likely than not that the net deductible differences will reverse during periods
when the Company generates sufficient net taxable income.
 
     Prior to the initial public offering, the Company elected Subchapter S
corporation status for income tax purposes. Accordingly, the income of the
Company was reported on the individual income tax return of its shareholder. The
financial statements, therefore, do not include a provision for income taxes
prior to the initial public offering.
 
                                      F-14
<PAGE>   36
 
     The reconciliation of income taxes computed using the statutory U.S. income
tax rate and the provision for income taxes follows:
 
<TABLE>
<CAPTION>
                                                                  AMOUNT         RATE
                                                                ----------     --------
        <S>                                                     <C>            <C>
        Loss for the period as a C corporation...............   $ (586,755)     (100.0%)
                                                                ==========      =======
        Benefit at federal statutory rate....................   $ (199,497)       (34.0)%
        State income benefit, net of federal tax benefit.....      (35,205)        (6.0)%
                                                                ----------      -------
                                                                  (234,702)       (40.0)%
                                                                                =======
        Provision for change in tax status to C
          corporation........................................    3,900,000
                                                                ----------
        Provision for income taxes...........................   $3,665,298
                                                                ==========
</TABLE>
 
     The provision for income taxes as shown in the accompanying statement of
operations, including the following components for the year ended June 30.
 
<TABLE>
<CAPTION>
                                                                              1997
                                                                           ----------
        <S>                                                                <C>
        Current provision--
          Federal......................................................    $       --
          State........................................................            --
                                                                           ----------
        Total current provision........................................    $       --
                                                                           ==========
        Deferred benefit--
          Federal benefit..............................................    $ (199,497)
          State benefit................................................       (35,205)
                                                                           ----------
        Total deferred benefit.........................................      (234,702)
        Provision for change in tax status to C corporation............     3,900,000
                                                                           ----------
        Provision for income taxes.....................................    $3,665,298
                                                                           ==========
</TABLE>
 
     The components of the deferred tax assets and liabilities recorded in the
accompanying balance sheets at June 30, 1997, were as follows:
 
<TABLE>
        <S>                                                               <C>
        Deferred tax assets...........................................    $ 1,339,835
        Deferred tax liabilities......................................     (5,005,133)
                                                                          -----------
        Net deferred tax liability....................................    $(3,665,298)
                                                                          ===========
        Consisting of--
          Basis difference of property................................    $(4,543,174)
          Basis difference of inventory...............................        114,044
          Financial reserves not currently deductible for tax
             purposes.................................................        (52,907)
          Amortization of intangibles.................................        381,187
          Unearned revenue............................................        200,850
          Net operating loss carryforward.............................        234,702
                                                                          -----------
                                                                          $(3,665,298)
                                                                          ===========
</TABLE>
 
     The Company's net operating loss carry forwards expire in 2012.
 
12. CONTINGENCIES
 
     Some industrial gases and propane are flammable, explosive products.
Serious personal injury and property damage can occur in connection with its
transportation, storage, production or use. The Company, in the ordinary course
of business, is threatened with or is named as a defendant in various lawsuits
which, among other items, seek actual and punitive damages for product
liability, personal injury and property damage. There is currently one such
lawsuit pending against the Company. The Company maintains liability insurance
policies with insurers in such amounts and with such coverages and deductibles
as the Company believes is reasonable and prudent.
 
                                      F-15
<PAGE>   37
 
However, there can be no assurance that such insurance will be adequate to
protect the Company from material expenses related to such personal injury or
property damage or that such levels of insurance will continue to be available
in the future at economical prices. It is not possible to determine the ultimate
disposition of the pending matter discussed above; however, management is of the
opinion that there are no known claims or known contingent claims that are
likely to have a material adverse effect on the results of operations or
financial condition of the Company.
 
13. INITIAL PUBLIC OFFERING AND REORGANIZATION:
 
     In connection with the initial public offering by the Company, the
following transactions occurred:
 
          a. Initial Public Offering and Reorganization
 
             1. The Company had elected S corporation status for income tax
        purposes. As a result, the Company's net income was attributed for
        income tax purposes directly to the Company's shareholder. The Company's
        S corporation status terminated in connection with the initial public
        offering.
 
             In connection with the initial public offering, the Company's Board
        of Directors declared an S corporation dividend to the former S
        corporation shareholder in an aggregate amount representing all
        undistributed earnings of the Company taxed or taxable to the
        shareholder through the initial public offering date. The S corporation
        dividend totaled approximately $11.4 million.
 
             2. The Company reorganized, whereby Valley National Gases, Inc., a
        West Virginia corporation, became an indirect wholly owned subsidiary of
        Valley National Gases Incorporated, a Pennsylvania corporation by
        exchange of stock. Valley National Gases Incorporated authorized common
        stock of 30,000,000 shares, par value $.001 and authorized preferred
        stock of 5,000,000 shares, par value $.01.
 
             3. The Company issued 267,084 shares of common stock as part of
        compensation agreements with certain executive officers and directors.
        In connection with these compensation arrangements, the Company incurred
        an expense of approximately $1.9 million which is included as special
        charges in the accompanying statement of operations for the year ended
        June 30, 1997.
 
             4. The cancellation of treasury stock of Valley National Gases,
        Inc.
 
          b. Weldco Purchase Agreement
 
          On October 10, 1996, the Company purchased substantially all of the
     assets of Weldco Inc. (Weldco) pursuant to a Purchase and Sale Agreement
     (the Weldco Purchase Agreement) for approximately $11.1 million.
     Approximately $7.9 million of the purchase price was paid by promissory
     notes from the Company. Under the Weldco Purchase Agreement, Weldco
     shareholders had the right, in the event of an initial public offering of
     the Company's common stock, to convert a portion of the Company's
     promissory notes to shares of the Company's common stock at the initial
     public offering price. Under this provision, Weldco shareholders had the
     right to receive 350,000 shares of the common stock in exchange for the
     cancellation of indebtedness in the amount of $2,800,000. The Company and
     Weldco shareholders agreed that rather than issuing 350,000 shares, the
     Company would prepay $1,720,000 under the Company's promissory notes and
     issue 135,000 shares of common stock to Weldco shareholders immediately
     prior to the closing of the Offering. In addition, certain Weldco
     shareholders purchased 100,000 shares of common stock in the Offering. The
     Weldco Purchase Agreement further grants Weldco shareholders the right to
     cause the Company to purchase shares of common stock issued to Weldco
     shareholders pursuant to the conversion of indebtedness for a period of
     three years following the closing of the Offering at the initial public
     offering price plus interest from the date of issuance at the rate of 6.6%
     per annum.
 
          The 235,000 shares subject to the above mentioned provisions of the
     Weldco Purchase Agreement have been classified as redeemable common stock
     in the accompanying balance sheet as of June 30, 1997. The Company's
     payment obligation is secured by a letter of credit.
 
                                      F-16
<PAGE>   38
 
          c. Right of First Refusal
 
          In September 1991, in connection with the purchase by the Company of
     certain assets of Praxair, Inc. (Praxair), the Company, the former
     shareholder and certain of his affiliates entered into a Right of First
     Refusal Agreement with Praxair. In March 1997, the parties to such
     agreement entered into an Amended and Restated Right of First Refusal
     Agreement (the Right of First Refusal Agreement) in connection with the
     Company's reorganization. Pursuant to this agreement, if at any time during
     the term of the agreement the Company wishes to accept a third party offer
     to purchase all or a material part of the assets of the Company, or the
     former shareholder and his affiliates wish to accept an offer to purchase
     shares of capital stock of the Company (the Capital Stock) owned by them in
     a transaction that would result in the former shareholder and his
     affiliates collectively owning less than 51% of the Company's issued and
     outstanding shares of Capital Stock on a fully diluted basis or owning less
     than 51% of the combined voting power of all outstanding voting securities
     of the Company, Praxair will have a right of first refusal to match the
     offer. In addition, in the absence of a third party offer, if (a) the
     former shareholder and his affiliates wish to sell shares of Common Stock
     which would result in their owning collectively less than 51% or more of
     the Company's issued and outstanding shares of Common Stock, (b) the
     Company wishes to sell all or a material part of its assets, or (c) the
     Company wishes to issue additional shares or options or securities
     exercisable or convertible into shares of Common Stock, pursuant to
     employee stock options, a public offering, private placement, merger, share
     exchange or otherwise, which in the aggregate on a fully diluted basis
     would result in the former shareholder and his affiliates collectively
     owning less than 51% of all the issued outstanding shares of Common Stock,
     then Praxair will have the right to purchase from the former shareholder
     and his affiliates up to all of the issued and outstanding shares of Common
     Stock held by them (but not less than 51% of all of the issued and
     outstanding shares of the Company's Common Stock on a fully diluted basis)
     at the then prevailing market price. If Praxair does purchase shares of
     Capital Stock from the former shareholder and his affiliates as described
     in this paragraph, then the former shareholder and his affiliates will be
     bound by certain non-compete provisions, as described in the Right of First
     Refusal Agreement, for a period of three years from such purchase.
 
14. PRO FORMA INFORMATION (UNAUDITED):
 
     The pro forma adjustments for income taxes included in the accompanying
income statements are based upon the statutory rates in effect for C
Corporations during the periods presented. Pro forma earnings per share were
calculated by dividing pro forma net income by the weighted average shares
outstanding for each period. The weighted average number of shares outstanding
used to calculate the pro forma net income per share is based on the historical
weighted average number of shares outstanding using the offering price of $8 per
share as adjusted to reflect (i) the issuance of shares to fund the excess of
dividends (including the estimated S Corporation Distribution) over net income
for the period in fiscal 1997 prior to initial public offering, (ii) the
issuance of 170,718 shares of common stock to two executive officers in
connection with the termination of certain deferred compensation agreements, and
(iii) the issuance of 96,366 shares of common stock to a director, pursuant to a
right under a consulting agreement to convert deferred consulting payments to
common stock.
 
15. SUBSEQUENT EVENT:
 
     As of July 1, 1997, the Company consummated the acquisition of a business
engaged in the distribution of industrial, medical and specialty gases and
related welding supplies and accessories. Sales for the past fiscal year of the
acquired business approximated 2.0% of the Company's net sales.
 
     On September 11, 1997, the Company entered into a purchase agreement for
the stock of a business engaged in the distribution of industrial, medical and
specialty gases and related welding supplies and accessories. Sales for the past
fiscal year of the acquired business approximated 9.6% of the Company's net
sales.
 
                                      F-17
<PAGE>   39
 
16. QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
 
<TABLE>
<CAPTION>
                                                                QUARTER ENDED
                                            -----------------------------------------------------
                                            SEPTEMBER 30     DECEMBER 31     MARCH 31     JUNE 30
                                            ------------     -----------     --------     -------
                                                                (IN THOUSANDS)
<S>                                         <C>              <C>             <C>          <C>
Fiscal 1997--
  Net sales..............................     $ 14,514         $19,263       $20,272      $19,856
  Gross profit...........................        8,183          10,090        10,850       10,431
  Pro forma net earnings (loss)..........          437             721           904       (4,337)
  Pro forma earnings (loss) per share....         0.06            0.10          0.12        (0.46)
Fiscal 1996--
  Net sales..............................       11,323          12,815        14,934       14,540
  Gross profit...........................        6,381           7,078         8,336        8,200
  Pro forma net earnings.................          638             500           737          585
  Pro forma earnings per share...........         0.09            0.07          0.10         0.08
</TABLE>
 
                                      F-18
<PAGE>   40
 
                               INDEX TO EXHIBITS
 
<TABLE>
<S>      <C>
 3.1     Articles of Amendment.*
 3.2     Bylaws.*
 4.1     Form of Certificate for Common Stock.*
10.1     Credit Agreement dated October 4, 1996 between the Company and Bank One,
         Indianapolis, National Association, as amended January 3, 1997.*
10.2     Master Lease Agreement dated as of November 1, 1996 between the Company and West
         Rentals, Inc.*
10.3     Amended and Restated Right of First Refusal Agreement dated March 12, 1997 among the
         Company, Valley National Gases Delaware, Inc., Valley National Gases, Inc., West
         Rentals, Inc., Gary E. West, Phyllis J. West, The Gary E. West Grantor Retained
         Annuity Trust #1, The Gary E. West Grantor Retained Annuity Trust #2, The Gary E.
         West Grantor Retained Annuity Trust #3, The Gary E. West Grantor Retained Annuity
         Trust #4, The Gary E. West Grantor Retained Annuity Trust #5, The Gary E. West
         Grantor Retained Annuity Trust #6 and Praxair, Inc.*
10.4     Deferred Compensation Agreement dated April 3, 1995 by and between the Company and
         Lawrence E. Bandi.*+
10.5     Deferred Compensation Agreement dated April 3, 1995 by and between the Company and
         John R. Bushwack.*+
10.6     Agreement dated October 5, 1992 between the Company and Lawrence E. Bandi providing
         for death, disability and retirement benefits.*+
10.7     Agreement dated October 5, 1992 between the Company and John R. Bushwack providing
         for death, disability and retirement benefits.*+
10.8     Agreement dated March 16, 1994 between the Company and William A. Indelicato
         providing for certain consulting payments.*+
10.9     Purchase and Sale Agreement made as of September 27, 1996 by and between Weldco,
         Inc., R.H. Kraemer, R. Bruce Kraemer, William Bott, Linda Bott, Krabo Limited, Ltd.,
         the Company and West Rentals, Inc.*
10.10    Lease Agreement dated as of November 1, 1995 between the Company and Acetylene
         Products, Inc.*
10.11    1997 Stock Option Plan.*
10.12    Real Estate Sale Agreement dated April 24, 1996 between the Company and West
         Rentals, Inc.*
10.13    Trailer Lease Agreement dated November 20, 1995 between the Company and West
         Rentals, Inc.*
10.14    Trailer Lease Agreement dated September 8, 1992 between the Company and West
         Rentals, Inc.*
10.15    Trailer Lease Agreement dated May 29, 1996 between the Company and West Rentals,
         Inc.*
10.16    Agreement dated July 1, 1997 between the Company and William A. Indelicato providing
         for certain consulting payments.+
11.1     Computation of Earnings Per Share.
21.1     Subsidiaries of Registrant.*
27.1     Financial Data Schedule for the year ended June 30, 1997.
</TABLE>
 
---------
 
* Incorporated by reference to the same numbered exhibit to the Company's
  Registration Statement on Form S-1, Reg. No. 333-19973.
 
+ A management or compensatory plan or arrangement required to be filed as an
  exhibit pursuant to Item 14(c) of Form 10-K.
 
                                       E-1
<PAGE>   41

                                  SCHEDULE II

                          VALLEY NATIONAL GASES, INC.

                       VALUATION AND QUALIFYING ACCOUNTS


<TABLE>
<CAPTION>
                                                         Balance at    Charged to                  Balance at
                                                          beginning     costs and                    end of
 Period Ending                 Description                of period     expenses      Deductions      period  
--------------------------------------------------------------------------------------------------------------
<S>               <C>                                     <C>           <C>           <C>           <C>
June 30, 1995     Allowance for uncollectible accounts    $120,000      $333,228      $(313,228)    $140,000
June 30, 1996     Allowance for uncollectible accounts    $140,000      $210,246      $(210,246)    $140,000
June 30, 1997     Allowance for uncollectible accounts    $140,000      $426,507      $(365,757)    $200,750
</TABLE>


                                      S-1