1 SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 8-K CURRENT REPORT Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 Date of Report (date of earliest event reported): April 5, 1996 AIRGAS, INC. ______________________________________________________ (Exact name of registrant as specified in its charter) Delaware 1-9344 56-0732648 _______________ _______________________ _____________ (State or other (Commission File Number) (I.R.S. Employer jurisdiction of Identification incorporation) No.) 100 Matsonford Road, Suite 550 Radnor, PA 19087 _______________________________________ (Address of principal executive offices) Registrant's telephone number, including area code: (610) 687-5253 _______________ 2 Item 5. Other Events. ____________ From April 1, 1995 through February 1, 1996, the Registrant has acquired thirty-eight individually insignificant businesses. The Registrant is filing this current report on Form 8-K in order to provide audited financial statements and pro forma information for five individually insignificant business acquisitions in accordance with the requirements set forth in Regulation S-X, Rule 3-05(b)(1)(i). The Registrant applied the conditions set forth in Rule 1-02(w) to determine if the aggregate impact of the acquisitions exceeds 20% of one of the conditions set forth in the rule. The aggregate purchase price for the individually insignificant businesses, including amounts related to non-competition and confidentiality agreements, amounted to $212.8 million plus the assumption of certain liabilities. The purchase prices for the businesses were determined by arms-length negotiations. The Registrant is providing audited financial statements for five of the individually insignificant businesses described below. Effective October 5, 1995, Delta Airgas, Inc. ("Delta"), a 98% owned subsidiary of U.S. Airgas, Inc., a wholly-owned subsidiary of the Registrant, purchased all of the issued and outstanding stock of Langdon Oxygen Company ("Langdon"). Langdon was acquired with the issuance of 210 thousand shares of the Registrant's common stock. Effective November 1, 1995, Trinity Airgas, Inc. ("Trinity"), a 95% owned subsidiary of U.S. Airgas, Inc., purchased all of the issued and outstanding stock of Kennedy Welding Supply Corporation ("Kennedy"). Effective January 1, 1996, Midwest Airgas, Inc. ("Midwest"), a wholly-owned subsidiary of U.S. Airgas, Inc., purchased all of the issued and outstanding stock of Iatech Sales Company ("Iatech"). Effective January 1, 1996, Gateway Airgas, Inc. ("Gateway"), a wholly-owned subsidiary of U.S. Airgas, Inc., purchased all of the issued and outstanding stock of Acetylene Gas Company ("Acetylene"). Effective February 1, 1996, Airgas Texas, Inc. ("Airgas Texas"), a wholly-owned subsidiary of U.S. Airgas, Inc., purchased substantially all of the assets of Welders Equipment Company, Inc. ("Welders Equipment"). The aggregate cash paid for these five acquisitions was approximately $66.6 million plus the assumption of certain liabilities. In addition, non- competition and confidentiality agreements were entered into with the shareholders of these businesses totaling $9.3 million, of which $2.5 million was paid at closing and $6.8 million will be paid over the terms of the individual agreements. Consulting agreements totaling $3.3 million were also entered into, of which $400 was paid at closing and $2.9 million is payable over the terms of the individual agreements. The acquisitions were financed using the Registrant's revolving credit facilities with NationsBank of North Carolina, N.A., the issuance of promissory notes to the sellers, the issuance of the Registrant's common stock and the assumption of certain liabilities. 3 At the time of the acquisitions described above, all of the aforementioned businesses were engaged in the distribution and marketing of industrial gases and related welding equipment and supplies. The Registrant intends to continue to use the acquired assets to operate industrial gas and welding supply businesses. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits __________________________________________________________________ (a) Financial Statements 1. Audited balance sheet of Langdon Oxygen Company as of September 30, 1995 and the related statements of income, retained earnings and cash flows for the nine months then ended. 2. Audited balance sheet of Kennedy Welding Supply Corporation as of October 31, 1995 and the related statements of operations, stockholders' equity and cash flows for the ten months then ended. 3. Audited consolidated balance sheet of IaTech Sales Co. and subsidiary as of December 31, 1995 and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended. 4. Audited consolidated balance sheet of Acetylene Gas Company and subsidiary as of December 31, 1995 and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended. 5. Audited consolidated balance sheet of Welders Equipment Company and subsidiary as of September 30, 1995 and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended. (b) Pro Forma Financial Information The tables on pages five through eleven set forth selected pro forma balance sheet and operating data of the Registrant for the year ended March 31, 1995 and the nine months ended December 31, 1995 as if the acquisitions had been consummated on April 1, 1994 and April 1, 1995, respectively. (c) Exhibits. 23.1 Consent of Bell & Company 23.2 Consent of Cawthron, Wommack & Coker, P.C. 23.3 Consent of Cornwell & Co., P.C. 23.4 Consent of Curry, Lenhardt & Company, LLP 23.5 Consent of KPMG Peat Marwick LLP 4 Signatures __________ Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. AIRGAS, INC. BY: /s/Britton H. Murdoch _____________________ (Britton H. Murdoch) Vice President-Finance Chief Financial Officer DATED: April 5, 1996 5 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS) December 31, 1995 ________________________________________________________ Acetylene Welders Airgas, Inc. IaTech Gas Equipment Notes Pro Balance Sheet Data (Historical) Sales Co. Company Company Ref. Forma __________________ ____________ _________ _________ ________ ___ _____ Accounts Receivable, Net $105,737 $ 758 $2,773 $3,190 (1) $112,458 Inventories 79,796 1,248 1,310 1,780 (1) 84,134 Other Current Assets 15,094 9 3 1,332 (1) 16,438 _______ _____ _____ _____ _______ 200,627 2,015 4,086 6,302 213,030 Property, Plant & Equipment, Net 395,999 4,184 13,336 12,269 (2) 425,788 Goodwill, Net 116,137 1,255 12,248 19,877 (3) 149,517 Investments and Other Noncurrent Assets 52,068 1,380 6,023 978 (4) 60,448 _______ ______ ______ ______ _______ 764,831 8,834 35,693 39,426 848,783 ======= ===== ====== ====== ======= Current Portion of Long-Term Debt 11,715 40 127 205 (1) 12,087 Accounts Payable,Trade 40,737 536 1,455 642 43,370 Accrued Expenses and Other Current Liabilities 62,736 883 1,876 1,478 (1) 66,972 _______ ______ ______ ______ _______ Current Liabilities 115,188 1,459 3,458 2,325 122,429 Long Term Debt 334,176 6,749 25,523 36,941 (5) 403,388 Other Liabilities 17,065 520 3,884 160 21,628 Deferred Income Taxes 76,766 107 2,829 - 79,702 Stockholders' Equity 221,636 - - - 221,636 _______ ______ ______ ______ _______ $764,831 $ 8,835 $35,694 $39,426 $848,783 ======= ====== ====== ====== ======= <FN> (1) Represents the fair value of current assets acquired and current liabilities assumed at the acquisition date. (2) The carrying amount reflects fair market value at the date of acquisition. (3) Represents cost in excess of net assets acquired. (4) Represents the fair market value of a non-competition agreement and other noncurrent assets of the acquired business. (5) Represents debt incurred to finance the business acquisition plus assumption of certain noncurrent liabilities. 6 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Year Ended March 31, 1995 ____________________________________________ Kennedy Langdon Welding Oxygen Supply IaTech Company Corporation Sales Co. Airgas, Inc. (Historical) (Historical) (Historical) Operating Data (Historical) (Note 1) (Note 1) (Note 1) ________________ ____________ ____________ ___________ ____________ Net Sales $687,983 $ 9,109 $ 4,489 $ 8,516 Cost of Products Sold (Excluding Depreciation and Amortization) 342,876 5,382 2,354 5,671 Selling, Distribution & Administrative Expenses 235,639 3,141 1,735 2,265 Depreciation & Amortization 36,868 282 125 159 _______ ______ ______ ______ Total Costs & Expenses 615,383 8,805 4,214 8,095 _______ ______ ______ ______ Operating Income 72,600 304 275 421 Interest Expense, Net (17,625) (66) (19) (57) Other Income, Net 1,067 46 15 - Minority Interest (669) - - - _______ ______ ______ ______ Earnings Before Income Taxes 55,373 284 271 364 Income Taxes 23,894 94 45 90 _______ ______ ______ ______ Net Earnings $ 31,479 $ 190 $ 226 $ 274 ======= ====== ====== ====== Earnings Per Share (3) $ .96 ======= Weighted Average Shares 32,762 ======= (Columns Continued On Next Page) 7 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Year Ended March 31, 1995 _______________________________________________ Welders Acetylene Equipment Gas Company Company Pro Forma (Historical) (Historical) Adjustments Note Pro Operating Data (Note 1) (Note 1) (Note 2) Ref. Forma ________________ ___________ __________ __________ ____ ______ Net Sales $ 18,667 $22,778 $ - $751,542 Cost of Products Sold (Excluding Depreciation and Amortization) 12,501 12,866 - 381,650 Selling, Distribution & Administrative Expenses 4,321 7,352 - 254,453 Depreciation & Amortization 761 567 2,971 a 41,733 ______ _____ ______ _______ Total Costs & Expenses 17,583 20,785 2,971 677,836 ______ ______ ______ _______ Operating Income 1,084 1,993 (2,971) 73,706 Interest Expense, Net (394) (32) (4,782) b (22,975) Other Income, Net 41 (335) 400 c 1,234 Minority Interest - - - (669) ______ _____ ______ _______ Earnings Before Income Taxes 731 1,626 (7,353) 51,296 Income Taxes 278 48 (1,998) d 22,451 ______ _____ ______ _______ Net Earnings $ 453 $1,578 $(5,355) $ 28,845 ====== ===== ===== ======= Earnings Per Share (3) $ .88 ======= Weighted Average Shares 32,972 ======= <FN> Notes: (1) Includes unaudited compiled financial data for the twelve months ended March 31, 1995. (2) See page 10 for explanation of pro forma adjustments. (3) See earnings per share calculations on page 11. 8 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Nine Months Ended December 31, 1995 _________________________________________________ Kennedy Langdon Welding Oxygen Supply Company Corporation IaTech (Historical) (Historical) Sales Co. Airgas, Inc. (6 Months) (7 Months) (Historical) Operating Data (Historical) (Note 1) (Note 2) (Note 3) ________________ ____________ ____________ ___________ ____________ Net Sales $601,851 $ 5,368 $ 3,048 $ 6,742 Cost of Products Sold (Excluding Depreciation & Amortization) 299,221 3,259 1,603 4,416 Selling, Distribution & Administrative Expenses 201,946 1,805 1,203 1,915 Depreciation & Amortization 33,519 155 74 122 _______ ______ ______ _____ Total Costs & Expenses 534,686 5,219 2,880 6,453 _______ ______ ______ _____ Operating Income 67,165 149 168 289 Interest Expense, Net (17,760) (91) (9) (36) Other Income, Net 656 (28) 9 36 Minority Interest (492) - - - _______ ______ ______ _____ Earnings Before Income Taxes 49,569 30 168 289 Income Taxes 20,963 43 59 181 _______ ______ ______ ______ Net Earnings $ 28,606 $ (13) $ 109 $ 108 ======= ====== ====== ====== Earnings Per Share (6) $ .87 ======= Weighted Average Shares 32,900 ======= <FN> (Columns Continued On Next Page) 9 AIRGAS, INC. UNAUDITED PRO FORMA FINANCIAL INFORMATION (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Nine Months Ended December 31, 1995 _______________________________________________ Welders Acetylene Equipment Gas Company Company Pro Forma (Historical) (Historical) Adjustments Note Pro Operating Data (Note 3) (Note 3) (Note 4) Ref. Forma ________________ ___________ __________ __________ ____ ______ Net Sales $15,691 $17,140 $ - $649,840 Cost of Products Sold (Excluding Depreciation & Amortization) 10,683 9,848 - 329,030 Selling, Distribution & Administrative Expenses 3,973 5,656 - 216,498 Depreciation & Amortization 654 492 1,929 a 36,945 ______ ______ _____ _______ Total Costs & Expenses 15,310 15,996 1,929 582,473 ______ ______ _____ _______ Operating Income 381 1,144 (1,929) 67,367 Interest Expense, Net (342) 20 (3,798) b (22,016) Other Income, Net (3) (23) - c 647 Minority Interest - - - (492) ______ ______ _____ _______ Earnings Before Income Taxes 36 1,141 (5,727) 45,506 Income Taxes -0- 52 (1,824) d 19,474 ______ ______ ______ _______ Net Earnings $ 36 $ 1,089 $ (3,903) $ 26,032 ====== ====== ====== ======= Earnings Per Share (5) $.79 ======= Weighted Average Shares 33,040 ======= <FN> Notes: (1) Includes the unaudited compiled financial data for the six months ended September 30, 1995. (2) Includes the unaudited compiled financial data for the seven months ended October 31, 1995. (3) Includes the unaudited compiled financial data for the nine months ended December 31, 1995. (4) See page 10 for explanations of pro forma adjustments. (5) See earnings per share calculations on page 11. 10 (a) Depreciation and amortization expense, has been increased by $2,971 for the year ended March 31, 1995 and by $1,929 for the nine months ended December 31, 1995. The adjustments were made to reflect the purchase accounting adjustments related to the acquired fixed assets, goodwill, non-competition agreements and the estimated capital improvements necessary to operate the acquired businesses, net of a decrease in depreciation expense related to a prior period adjustment. (b) The pro forma interest expense adjustments of $4,782 and $3,798 for the year ended March 31, 1995 and the nine months ended December 31, 1995, respectively, reflect the debt incurred in financing the business acquisitions at the Registrant's effective interest rates. (c) Other expenses were reduced by $400 for the year ended March 31, 1995 related to the expense incurred from a lawsuit settlement because the Registrant acquired the assets of the business and did not assume any liabilities in the transaction. (d) Income taxes adjustments have been made to reflect the Registrant's effective tax rate and include a provision for income taxes for the businesses which were previously taxed under Subchapter S of the Internal Revenue Code. 11 AIRGAS, INC. EARNINGS PER SHARE CALCULATIONS (DOLLARS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) Year Ended Nine Months Ended March 31, 1995 December 31, 1995 Adjustment of Weighted Average Shares Outstanding Historical Pro Forma Historical Pro Forma ______________________________ ___________ _________ __________ _________ Shares of Common Stock Outstanding - Weighted 31,074 31,284 31,272 31,412 Net Common Stock Equivalents 1,688 1,688 1,628 1,628 ______ ______ ______ ______ Adjusted Shares Outstanding 32,762 32,972 32,900 33,040 ====== ====== ====== ====== Net Earnings $31,479 $28,845 $28,606 $26,032 ====== ====== ====== ====== Earnings Per Share $ .96 $ .88 $ .87 $ .79 ====== ====== ====== ====== <FN> Earnings per share amounts were determined using the treasury stock method. This method assumes the exercise of all outstanding options and warrants and the use of the aggregate proceeds therefrom to acquire the Registrant's outstanding common stock. Net earnings were divided by the average number of shares outstanding adjusted for the assumed exercise of the options and warrants outstanding and repurchase of common stock to calculate per share amounts. 12 LANGDON OXYGEN COMPANY FINANCIAL STATEMENTS with Independent Auditors' Report SEPTEMBER 30, 1995 TEXARKANA, TEXAS 13 TABLE OF CONTENTS Independent Auditors' Report 1 Balance Sheet 2 Statement of Income 3 Statement of Stockholders' Equity 4 Statement of Cash Flows 5 Notes to the Financial Statements 6-11 14 Independent Auditors' Report To the Board of Directors of Langdon Oxygen Company We have audited the accompanying balance sheet of Langdon Oxygen Company as of September 30, 1995, and the related statements of income, retained earnings, and cash flows for the nine months then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Langdon Oxygen Company as of September 30, 1995, and the results of its operations and its cash flows for the nine months then ended in conformity with generally accepted accounting principles. BELL & COMPANY TEXARKANA, TEXAS January 10, 1996 15 Langdon Oxygen Company Balance Sheet September 30, 1995 Assets Current assets Cash $ 188,874 Trade receivables, less allowance for doubtful accounts of $288,816 1,209,402 Inventories 1,262,727 Deferred tax asset 115,197 _________ Total current assets 2,776,200 _________ Plant and equipment Plant and equipment, at cost 5,819,828 Less accumulated depreciation (3,364,321) _________ Plant and equipment, net 2,455,507 _________ Other non-current assets Investment in unconsolidated subsidiary 329,442 Other 73,456 _______ Total other non-current assets 402,898 _______ Total Assets $5,634,605 ========= 16 Liabilities and Stockholders' Equity Current liabilities Notes payable $311,000 Current portion of long-term debt 127,438 Accounts payable, trade 983,160 Income taxes payable 64,203 Accrued expenses and other current liabilities 205,699 _________ Total current liabilities 1,691,500 _________ Long-term debt 1,242,310 _________ Deferred income taxes 51,507 _________ Stockholders' equity Common stock, par value, $1; 10,000 shares authorized and issued 10,000 _________ Retained earnings 3,378,539 _________ 3,388,539 Less treasury stock, 3,484 shares, at cost (739,251) _________ Total stockholders' equity 2,649,288 _________ Total Liabilities and Stockholders' Equity $5,634,605 ========= 17 Langdon Oxygen Company Statement of Income For the Nine Months Ended September 30, 1995 Sales $7,852,935 Costs and expenses Cost of products sold 4,759,826 Selling, distribution and administrative expenses 2,556,234 Depreciation expense 209,127 _________ Total costs and expenses 7,525,187 Operating income 327,748 Other income and expenses Interest expense (118,052) Other expenses, net (21,194) _______ Total other income and expenses (139,246) _______ Income before income taxes 188,502 Income taxes 68,131 _______ Net income $120,371 ======= 18 Langdon Oxygen Company Statement of Stockholders' Equity For the Nine Months Ended September 30, 1995 Common Retained Treasury Stock Earnings Stock Total Balance-January 1, 1995 $ 10,000 $3,258,168 $(739,251) $2,528,917 Net income - 120,371 - 120,371 _______ _________ _______ ________ Balance-December 31, 1995 $ 10,000 $3,378,539 $(739,251) $2,649,288 ======= ========= ======= ========= See accompanying notes. 19 Langdon Oxygen Company Statement of Cash Flows For the Nine Months Ended September 30, 1995 Cash flows from operating activities Net income $120,371 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 209,127 Deferred income taxes (benefit) (49,083) Provision for bad debts 112,760 Gain on sale of equipment (3,734) (Increase) in accounts receivable (306,174) (Increase) in inventories (172,907) Decrease in prepaid expenses & other assets 8,011 (Increase) in other noncurrent assets (14,958) Increase in accounts payable 58,871 Increase in accrued expenses and other current liabilities 150,489 Increase in income tax payable 64,203 _______ Net cash provided by operating activities 176,976 _______ Cash flows from investing activities Proceeds from sale of equipment 18,000 Purchases of plant and equipment (357,202) _______ Net cash used by investing activities (339,202) _______ Cash flows from financing activities Increase in short-term debt 216,000 Proceeds from long-term borrowings 132,464 _______ Net cash used by financing activities 348,464 _______ Net increase in cash 186,238 Cash - beginning of period 2,636 ______ Cash - end of period $ 188,874 ======= Supplementary Disclosures of Cash Flows Information ___________________________________________________ Cash paid during the period for interest $109,720 ======= Cash paid during the period for income taxes $ 45,000 ======= 20 Langdon Oxygen Company Notes to Financial Statements September 30, 1995 1. Summary of Significant Accounting Policies a. Description of Operations - Langdon Oxygen Company (the "Company") is a multi-state distribution company that markets welding equipment, medical supplies and industrial gases. The Company has five locations: Texarkana and Mt. Pleasant, Texas; Texarkana and Hope, Arkansas; and Idabel, Oklahoma. b. Cash and Cash Equivalents - For purposes of the statement of cash flows, the Company considers all highly liquid cash investments with original maturities of 3 months or less to be cash equivalents. c. Inventories - Inventories are stated at the lower of cost or market value by the first-in, first-out (FIFO) method. Inventories consist primarily of industrial gases, welding supplies and equipment. d. Plant and Equipment - Plant and equipment are stated at cost. Depreciation is provided using the straight-line method for financial statement purposes over the useful lives of the related assets. e. Income Taxes - Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. f. Financial Instruments - The carrying amounts for accounts receivable, accounts payable and long-term debt approximate fair value because of the short maturity of these financial instruments. Long-term debt is stated at fair value as these amounts were paid off in connection with the reorganization of the Company as described in Note 10. g. Use of Estimates - Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 21 Langdon Oxygen Company Notes to Financial Statements September 30, 1995 2. Plant and Equipment Plant and equipment by major categories are as follows: Category Useful Lives Amount ________ _____________ ______ Land $425,258 Buildings 25 yrs. 1,288,669 Leasehold improvements 15 yrs. 199,721 Oxygen cylinders 7 yrs. 1,604,864 Acetylene cylinders 7 yrs. 500,521 Furniture & fixtures 7 yrs. 998,806 Vehicles 5 yrs. 801,989 _________ $5,819,828 ========= Depreciation and amortization of plant and equipment charged to operations during the nine months ended September 30, 1995 amounted to $209,127. 3. Investment in Unconsolidated Subsidiary The Company holds a 39% interest in American Oxygen Company, Inc., a Texas Corporation. The investment is accounted for using the equity method. Market values are not available for the privately held company and the carrying value of the investment on the accompanying balance sheet is based on the financial statements of American Oxygen Company, Inc., as of December 31, 1994. No interim earnings information for 1995 was available at September 30, 1995. 4. Notes Payable Notes payable consist of the following: Non-interest bearing advance from a share- holder, no stated repayment terms,unsecured $ 30,000 9.75% line of credit from a bank, interest due monthly, principle due August, 1996, secured by accounts receivable and inventories 281,000 _______ $311,000 ======= 22 Langdon Oxygen Company Notes to Financial Statements September 30, 1995 5. Long-term Debt Long-term debt consists of the following: 8% note payable to a former shareholder in monthly installments of $7,774, including interest, secured by shares of Langdon Oxygen Company common stock held in treasury $ 684,252 8% note payable to an individual in monthly installments of $386, including interest, secured by land 8,482 8.5% note payable to a bank in monthly installments of $395, including interest, secured by a vehicle 2,378 8.5% note payable to Coyne Cylinder in monthly installments of $497, including interest, secured by cylinders 3,032 8% note payable to a bank in monthly installments of $467, including interest, secured by a vehicle 2,725 5.5% note payable to a bank in monthly installments of $343, including interest, secured by land 2,935 2.9% note payable to a credit corporation in monthly installments of $394, including interest, secured by a vehicle 9,364 6.65% note payable to a credit corporation in monthly installments of $614, including interest, secured by a vehicle 11,717 23 Langdon Oxygen Company Notes to Financial Statements September 30, 1995 5. Long-term Debt (continued) 8.75% note payable to a bank in monthly installments of $9,500, including interest, secured by inventories, cylinders, and certain real estate $644,863 _________ Total long-term debt 1,369,748 Less current maturities (127,438) _________ Long-term debt, less current maturities $1,242,310 ========= Annual aggregate maturities of long-term debt are as follows: Year Ending September 30: Amount ____________ ______ 1996 $127,438 1997 119,834 1998 119,799 1999 128,621 2000 425,861 Thereafter 448,195 _______ $1,369,748 6. Income Taxes The provision for income taxes is composed of the following: Current provision $117,214 Deferred benefit (49,083) ______ $ 68,131 ====== 24 Langdon Oxygen Company Notes to Financial Statements September 30, 1995 6. Income Taxes (continued) A reconciliation of income taxes at statutory rates and the actual income tax provision is as follows: Tax at statutory rates $ 64,091 Effect of non-deductible expenses 4,040 ______ $ 68,131 ====== Components of deferred tax balances as of September 30, 1995 are as follows: Deferred tax liabilities: Property plant and equipment $ 35,700 Unconsolidated subsidiary 15,807 ______ Total deferred tax liabilities 51,507 ______ Deferred tax assets Allowance for doubtful accounts 98,197 Accrued liabilities (including amounts subject to compromise) 17,000 ______ Total deferred tax assets 115,197 _______ Net deferred tax assets $ 63,690 ====== The Company is not required to record valuation allowances for deferred tax assets where management believes it is more likely than not that the benefit will be realized. Management has assessed the need for a valuation allowance and believes the asset is recoverable more likely than not. 7. Lease Commitments The Company leases two of its operating facilities under non-cancelable lease agreements from a former stockholder. At September 30, 1995, future minimum rental commitments under these non-cancelable operating leases were as follows: 25 Langdon Oxygen Company Notes to Financial Statements September 30, 1995 9. Lease Commitments (continued) Year Ending September 30: Amount ____________ ______ 1996 $ 27,600 1997 27,600 1998 27,600 1999 27,600 Thereafter 160,500 _______ $270,900 ======= 8. Related Party Transactions During 1995 the Company rented certain cylinders under a cancelable rental agreement with G.P. Leasing, a company having substantial common ownership with Langdon Oxygen Company. The amount paid to G. P. Leasing pursuant to this operating rental agreement for the nine months ended September 30, 1995 was $116,136. 9. Contingencies The Company is involved in various legal and regulatory proceedings which have arisen in the ordinary course of its business and have not been finally adjudicated. These actions, when ultimately concluded or determined, will not, in the opinion of management, have a material adverse impact upon the Company's consolidated financial position, results of operations or liquidity. 10.Subsequent Events and Commitments On October 5, 1995 shareholders of the Company unanimously approved an agreement and plan of reorganization calling for the merger of the Company with U.S. Airgas, Inc. (a Delaware corporation), a wholly-owned subsidiary of Airgas, Inc. ("Airgas"). Each issued and outstanding share of common stock of the Company was converted into shares of Airgas common stock. 26 KENNEDY WELDING SUPPLY CORPORATION Financial Statements October 31, 1995 Together With Independent Auditors' Report Thereon 27 C O N T E N T S Page Independent Auditors' Report 1 Balance Sheet 2 Statement of Operations 3 Statement of Stockholders' Equity 4 Statement of Cash Flows 5 Notes to Financial Statements 6-9 28 INDEPENDENT AUDITORS' REPORT The Stockholders and Board of Directors Kennedy Welding Supply Corporation We have audited the accompanying balance sheet of Kennedy Welding Supply Corporation as of October 31, 1995, and the related statements of operations, stockholders' equity and cash flows for the ten months then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Kennedy Welding Supply Corporation as of October 31, 1995, and the results of its operations and its cash flows for the ten months then ended in conformity with generally accepted accounting principles. CAWTHORN, WOMMACK & COKER, P.C. Waco, Texas December 7, 1995 29 KENNEDY WELDING SUPPLY CORPORATION Balance Sheet October 31, 1995 ASSETS Current Assets Cash $ 240,929 Trade accounts receivable - less allowance for doubtful accounts of $ 37,699 566,844 Inventories 457,388 Federal income tax receivable 2,752 Deferred tax asset 12,818 Prepaid expenses 33,150 _________ Total Current Assets 1,313,881 Property and Equipment, net 393,843 Other Assets 6,000 _________ Total Assets $ 1,713,724 ========= LIABILITIES Current Liabilities Current portion of long-term debt $ 73,451 Trade accounts payable 138,824 Other accrued liabilities 94,287 ________ Total Current Liabilities 306,562 Long-Term Debt, net of current portion 45,912 Customer Deposits 23,727 Deferred Tax Liability 2,129 ________ Total Liabilities 378,330 STOCKHOLDERS' EQUITY Common stock - $ 1 par, 100,000 shares authorized, 38,638.5 shares issued and outstanding 38,639 Retained earnings 1,296,755 _________ Total Stockholders' Equity 1,335,394 _________ Total Liabilities and Stockholders' Equity $ 1,713,724 ========= The accompanying notes are an integral part of these financial statements. -2- 30 KENNEDY WELDING SUPPLY CORPORATION Statement of Operations For the Ten Months Ended October 31, 1995 Sales $ 4,338,593 Cost of Goods Sold 2,292,473 _________ Gross Profit 2,046,120 Operating Expenses 1,781,528 _________ Operating Income 264,592 Other Income 13,094 ________ Income Before Income Taxes 277,686 Income Taxes Current 94,591 Deferred (benefit) (2,467) _______ Total Income Taxes 92,124 _______ Net Income $ 185,562 ========= The accompanying notes are an integral part of these financial statements. -3- 31 KENNEDY WELDING SUPPLY CORPORATION Statement of Stockholders' Equity For the Ten Months Ended October 31, 1995 Total Common Retained Stockholders' Stock Earnings Equity Balance - December 31, 1994 $ 38,639 $ 1,111,193 $ 1,149,832 Net income 185,562 185,562 __________ __________ __________ Balance - October 31, 1995 $ 38,639 $ 1,296,755 $ 1,335,394 ========== ========== ========== The accompanying notes are an integral part of these financial statements. -4- 32 KENNEDY WELDING SUPPLY CORPORATION Statement of Cash Flows For the Ten Months Ended October 31, 1995 Cash flows provided by operating activities: Net income $ 185,562 Adjustments to reconcile net income to net cash provided by operating activities Bad debt provision 64,797 Depreciation expense 103,753 Gain on sale of property and equipment (5,564) Deferred tax benefit (2,467) (Increase) decrease in: Trade accounts receivable (140,597) Inventories (8,114) Federal income tax receivable (2,752) Prepaid expenses 11,714 Increase (decrease) in: Trade accounts payable 16,586 Federal income tax payable (2,079) Other accrued liabilities 42,612 Customer deposits (8,268) ________ Net cash provided by operating activities 255,183 ________ Cash flows provided by investing activities: Purchase of property and equipment (23,302) Proceeds from sale of property and equipment 5,750 Proceeds from collection of notes receivable 32,544 _______ Net cash provided by investing activities 14,992 _______ Cash flows used for financing activities: Repayment of long-term debt (96,979) _______ Net cash used for financing activities (96,979) _______ Net increase in cash 173,196 Cash at beginning of period 67,733 _______ Cash at end of period $ 240,929 ======= Supplemental disclosures: Interest paid during the period $ 14,117 Federal income taxes paid during the period 99,422 The accompanying notes are an integral part of these financial statements. -5- 33 KENNEDY WELDING SUPPLY CORPORATION Notes to Financial Statements 1. Nature of the Company and Significant Accounting Policies Financial Statement Presentation Kennedy Welding Supply Corporation (the Company) distributes and markets welding equipment and supplies and industrial gases in the north-central Texas area. The following is a summary of certain significant accounting policies followed in the preparation of these financial statements. Inventories Inventories are stated at the lower of cost, determined by the first-in, first-out (FIFO) method, or market. Property and Equipment Property and equipment are recorded at cost and depreciated using the straight-line method. When assets are retired or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in income for the period. The cost of maintenance and repairs is charged to expense as incurred; significant renewals and betterments are capitalized. Income Taxes Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of allowance for doubtful accounts and accumulated depreciation for financial and income tax reporting. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. There is no income tax in the State of Texas. Cash and Cash Equivalents For the purpose of presentation in the statement of cash flows, cash and cash equivalents are defined as those amounts in the balance sheet caption "cash" which includes petty cash on hand and demand deposit checking accounts held at banks. Use of Estimates The preparation of financial statements in conformity with generally accepted 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. -6- 34 KENNEDY WELDING SUPPLY CORPORATION Notes to Financial Statements (Continued) 1. Nature of the Company and Significant Accounting Policies (Continued) Use of Estimate (Continued) The material estimate that is particularly susceptible to significant change relates to the determination of the allowance for doubtful accounts. A majority of the company's accounts receivable are from entities in the Dallas - Fort Worth Metroplex area. Accordingly, the ultimate collectibility of the Company's account receivable is susceptible to changes in local market conditions. While management uses available information to recognize losses on accounts receivable, future additions to the allowance may be necessary based on changes in local economic conditions. Therefore, it is reasonably possible that the allowance for doubtful accounts may change materially in the near term. Fair Value of Financial Instruments The carrying amounts for accounts receivable, accounts payable, and long-term debt approximate fair value because of the short maturity of these financial instruments. Long-term debt is stated at fair value as these amounts were paid in full in connection with the sale of the Company's stock as discussed at footnote ten. 2. Inventories At October 31, 1995, inventories consisted of: Welding products $ 371,974 Gases 18,853 Cylinders 66,561 _________ Total Inventories $ 457,388 ========= 3. Property and Equipment At October 31, 1995, property and equipment consisted of the following: Estimated Useful Life Land - $ 51,161 Building and leasehold improvements 6 - 35 years 181,280 Vehicles 6 years 321,128 Cylinders 6 years 462,876 Furniture and fixtures 6 years 389,089 Rental equipment 2 - 4 years 29,098 __________ 1,434,632 Accumulated depreciation (1,040,789) __________ Total Property and Equipment, net $ 393,843 ========== Depreciation charged to expense was $ 103,753 for the ten months ended October 31, 1995. -7- 35 KENNEDY WELDING SUPPLY CORPORATION Notes to Financial Statements (Continued) 4. Long-Term Debt The Company's long-term debt at October 31, 1995, was comprised of the following: Note to a company bearing interest at 9.75%, due in monthly installments of $ 590 through August 20, 1996, secured by 225 cylinders $ 5,082 Notes to a financial institution, bearing interest from base rate plus .50% (9.25% at October 31, 1995) to 9.75% due in monthly installments through October 30, 1997, secured by certain real estate, equipment, cylinders and vehicles 98,281 $ 200,000 line of credit with a financial institution, bearing interest at base rate plus .50% (9.25% at October 31, 1995), maturing April 30, 1996, secured by accounts receivable and inventory 16,000 119,363 _______ Less: current portion (73,451) Long-Term Debt, net $ 45,912 ============ 5. Federal Income Tax The effective income tax rate is different than would be expected if the statutory rate were applied to income from continuing operations primarily because of nondeductible expenses. At October 31, 1995, the Company's deferred tax asset and liability are composed of the following: Current Noncurrent Gross deferred tax assets $ 12,818 $ - Gross deferred tax liabilities - (2,129) Valuation allowance - - _________ _________ Deferred Tax Asset (Liability) $ 12,818 $ (2,129) ========= ========= Management has assessed the need for a valuation allowance and believes the deferred tax asset is recoverable more likely than not. The tax effect of each type of significant item that gave rise to deferred taxes are: Current Noncurrent Allowance for doubtful accounts $ 12,818 $ - Accumulated depreciation - (2,129) _________ _________ Deferred Tax Asset (Liability) $ 12,818 $ (2,129) ========= ========= -8- 36 KENNEDY WELDING SUPPLY CORPORATION Notes to Financial Statements (Continued) 6. Related Party Transactions During the ten months ended October 31, 1995, the Company leased cylinders and a building from entities owned by stockholders of the Company. The Company made lease payments of approximately $ 229,500 to these entities during the period. 7. Leases The Company is leasing buildings and cylinders under month-to-month operating lease agreements. Rental payments for the ten months ended October 31, 1995, totaled approximately $ 303,300. 8. Concentrations of Credit Risk The Company distributes and markets welding equipment and supplies and industrial gases to customers primarily in north-central Texas. The customers' ability to repay is dependent upon the area's economy. At October 31, 1995, the Company has approximately $ 140,000 deposited in a financial institution which exceeded the insurance provided by the Federal Deposit Insurance Corporation. 9. Commitments and Contingencies The Company is involved in various legal and regulatory proceedings which have arisen in the ordinary course of its business, and have not been finally adjudicated. These actions, when ultimately concluded or determined, will not, in the opinion of management, have a material adverse impact upon the Company's financial position, results of operations or liquidity. 10. Subsequent Event Subsequent to October 31, 1995, the Company entered into an agreement to sell 100% of the Company's stock to Trinity Airgas, Inc., a Delaware corporation and subsidiary of US Airgas, Inc., a wholly-owned subsidiary of Airgas, Inc., a Delaware corporation. -9- 37 IATECH SALES CO. AND SUBSIDIARY CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 38 TABLE OF CONTENTS Page ____ Independent Auditors' Report 1 Financial Statements: Consolidated Balance Sheet 2-3 Consolidated Statement of Earnings 4 Consolidated Statement of Stockholders' Equity 5 Combined Statement of Cash Flows 6 Notes to Consolidated Financial Statements 7-11 39 Independent Auditors' Report To the Board of Directors of Iatech Sales Co.: We have audited the accompanying consolidated balance sheet of Iatech Sales Co. and Subsidiary as of December 31, 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Iatech Sales Co. and subsidiary as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. CORNWELL & CO., P.C. CERTIFIED PUBLIC ACCOUNTANTS Fort Dodge, Iowa February 12, 1996 -1- 40 IATECH SALES CO. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 Assets ______ Current assets Cash $ 544,969 Accounts receivable, trade 783,296 Inventory 1,377,624 Prepaid expenses 8,502 Other current assets 700 _________ Total current assets 2,715,091 Fixed Assets: Land 92,927 Leasehold improvements 183,009 Building and improvements 467,905 Machinery and equipment 464,053 Cylinders 1,557,553 Furniture and fixtures 170,131 Vehicles 539,283 Computers 158,057 _________ Total gross fixed assets 3,632,918 Less: accumulated depreciation (2,626,594) _________ Total net fixed assets 1,006,324 Non-current Assets: Other non-current assets 9,267 Cash surrender value of life insurance 590,726 _________ Total non-current assets 599,993 ________ Total assets $4,321,408 ========= See accompanying notes to consolidated financial statements. -2- 41 IATECH SALES CO. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 Liabilities and Stockholders' Equity Current liabilities Accounts payable, trade $535,627 Federal income tax payable 71,539 Accrued expenses 69,563 Current portion of long-term debt 78,136 _______ Total current liabilities 754,865 Non-current Liabilities: Long-term debt, less current portion 505,451 Deferred income taxes payable 107,014 _______ Total non-current liabilities 612,465 _________ Total liabilities 1,367,330 Stockholders' Equity Common stock, par value $1.00 per share, 3,000,000 shares authorized, 2,000,000 issued and outstanding 2,400,000 Additional paid-in capital 51,172 Retained earnings 502,906 _________ Total stockholders' equity 2,954,078 _________ Total liabilities and stockholders' equity $4,321,408 ========= See accompanying notes to consolidated financial statements. -3- 42 IATECH SALES CO. AND SUBSIDIARY CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1995 Net Sales $8,953,482 Cost of goods sold 5,840,291 _________ Gross profit 3,113,191 Operating expenses: Salaries, wages and benefits 1,617,001 Distribution expense 258,825 Selling, general and administrative 377,096 Occupancy expense 224,082 Depreciation and amortization (Note 2) 157,817 ________ Total operating expenses 2,634,821 _________ Operating income 478,370 Interest expense (53,524) Other income, net 38,099 ________ Earnings before taxes 462,945 Income taxes (Note 8) 181,058 ________ Net earnings $ 281,887 ======== See accompanying notes to consolidated financial statements. -4- 43 IATECH SALES CO. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1995 Additional Common Paid-in Retained Stock Capital Earnings _______ __________ ________ Balance - beginning $2,400,000 $ 51,172 $ 221,019 Additions: Net income - - 281,887 _________ _______ ________ Balance - ending $2,400,000 $ 51,172 $ 502,906 ========= ======= ======== See accompanying notes to consolidated financial statements. -5- 44 IATECH SALES CO. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 Cash Flows From Operating Activities: Net earnings $281,887 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 157,817 Deferred income taxes 8,923 Gain on sale of equipment (6,516) Increase in cash surrender value of life insurance (21,555) Changes in assets and liabilities: Trade receivables, net 69,378 Inventories (20,857) Prepaid expenses and other current assets 66,468 Accounts payable, trade 51,593 Accrued expenses and other current liabilities 19,679 _______ Net cash provided by operating activities 606,817 Cash Flows From Investing Activities: Capital expenditures (147,944) Proceeds from sale of equipment 6,925 Premiums paid for officers' life insurance (11,816) _______ Net cash used in investing activities (152,835) Cash Flows From Financing Activities: Repayment of debt (139,615) _______ Net cash used in financing activities (139,615) _______ Cash increase 314,367 Cash - Beginning of year 230,602 _______ Cash - End of year $544,969 ======= See accompanying notes to consolidated financial statements. -6- 45 IATECH SALES CO. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. Nature of Business __________________ The Company's operations consist of the sale of welding supplies and industrial gases and the manufacture of acetylene gas, all in the state of Iowa. 2. Summary of Significant Accounting Policies __________________________________________ A) Basis of Presentation - The consolidated financial statements include the accounts of Iatech Sales Co. and its wholly-owned subsidiary, Iowacetylene Co. All significant intercompany balances and transactions have been eliminated in consolidation. B) Inventories - Inventories are stated at the lower of cost or market with cost determined by the average cost method. C) Property and Equipment - Property and equipment are stated at cost. Depreciation is provided primarily by the straight-line method for building and improvements. For the remaining classes, depreciation is provided using the straight-line method for assets acquired after January 1, 1994 and the double-declining balance method for assets acquired prior to January 1, 1994. Depreciation is provided over the following estimated useful lives: Years ______ Leasehold improvements 7-39 Building and improvements 7-31.5 Machinery and equipment 7-10 Cylinders 7-10 Furniture and fixtures 7-10 Vehicles 4-7 Computers 5-7 The total depreciation expense for 1995 was $156,447. D) Non-current Assets - Costs related to the acquisition of long term debt are deferred and amortized over the term of the related debt. E) Income Taxes - The provision for income taxes includes federal and state income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. The Company adopted the Statement of Accounting Standards No. 109, "Accounting for Income Taxes," (Statement No. 109) as of December 31, 1994. Statement No. 109 requires the use of the liability method of accounting for deferred income taxes. The adoption of Statement No. 109 had no material impact on the Company's results of operations or retained earnings. F) Bad Debts - Bad debts are recorded by use of the direct charge off method. The difference between the reserve and direct charge off methods is not material. -7- 46 IATECH SALES CO. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 G) Concentrations of Credit Risk - Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables and cash. The Company grants credit to customers, substantially most of whom are commercial enterprises whose operations are located primarily in the state of Iowa. The Company performs ongoing credit evaluation of its customers' financial condition and generally, requires no collateral from its customers. At December 31, 1995, the Company had no significant concentrations of credit risk. The Company maintains its cash in bank deposit accounts at several financial institutions which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk on cash. At December 31, 1995, the Company's uninsured cash balance was approximately $220,000. H) Revenue Recognition - Sales are recorded upon shipment to the customer. I) Financial Instruments - The carrying amounts for accounts receivable, accounts payable and current portion of long-term debt approximate fair value because of the short-term maturity of these financial instruments. J) Estimates - The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosures 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. K) Cash - For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash. 3. Inventories ___________ Inventories consist of the following components: Gases $ 76,820 Welding supplies 707,543 Tools and abrasives 471,967 Cylinders 3,427 Safety equipment 117,867 _________ $1,377,624 ========= -8- 47 IATECH SALES CO. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 4. Indebtedness ____________ Long term debt consists of the following: Balance ________ Promissory note payable to Brenton Bank bearing interest at 8.5%, due in monthly payments of $744, including interest through December, 2008 and secured by a commercial mortgage on real property located in Des Moines, Iowa with a book value of $135,093 as of December 31, 1995. $ 69,788 Stock redemption agreement payable to Warren Metheny bearing interest at 7%, due in annual payments of $20,000, excluding interest, through January, 1997. $ 40,000 Installment promissory note payable to Norwest Bank dated May 31, 1994 bearing interest at 8.75%, due in monthly payments of $4,000 including interest through May 30, 1999 at which time a balloon payment is required. The note is secured by gas cylinders located in Mason City, Iowa with a book value of $74,968 as of December 31, 1995. $ 92,434 Life insurance policy loans to Northwestern Mutual Life bearing interest at 6% and 8% and secured by the cash value of the life insurance policies. The interest rate is variable. $155,073 Industrial Development Revenue Bond, Ankeny, Iowa Series 1985 due in monthly payments of $2,693 including interest based on 85% of the monthly Morgan Guaranty Trust prime rate (7.23% at December 31, 1995) and secured by property, plant and equipment. $226,292 _______ 583,587 Current portion of long-term debt (78,136) _______ Long-term debt, less current portion $505,451 ======= The aggregate maturities of long-term debt for the five years ending December 31, 2000 and thereafter are as follows: Year Ending December 31, Aggregate Maturity _______________________ __________________ 1996 $ 78,136 1997 84,588 1998 26,413 1999 22,619 2000 24,518 2001 and thereafter 347,313 _______ $583,587 ======= -9- 48 IATECH SALES CO. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 The fair value of long term debt as of December 31, 1995 was approximately $584,000. 5. Income Taxes ____________ Income tax expense consisted of: Current: Federal $135,539 State 36,596 Deferred: Federal 3,125 State 5,798 _______ $181,058 ======= Significant differences between taxes computed at the federal statutory rate and the provision for income taxes were: Taxes at U.S. federal statutory rate 34.0% State income taxes, net of federal benefit 7.9 Increase in cash surrender value of life insurance, nontaxable (4.7) Other, Net 1.9 ____ 39.1% ==== The tax effects of cumulative temporary differences that gave rise to the significant portion of the deferred tax liability is as follows: Deferred Tax Liability ______________________ Property and equipment $107,014 ======= 6. Benefit Plans _____________ The Company has a defined contribution 401(K) Plan covering substantially all full-time employees who elect to participate. Under the terms of the plan, the Company makes matching contributions up to 3.75% of participants' wages. Amounts expensed under the plan for 1995 was $41,762. -10- 49 IATECH SALES CO. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 7. Leases ______ The Company leased certain buildings and distribution equipment from related parties for the year ended December 31, 1995. Significant items leased were buildings in Fort Dodge, Spencer and Mason City, a liquid oxygen system and gas cylinders. Total lease payments made to related parties, which consisted of the three shareholders and their family members, was $244,918. The equipment leases were terminated January 2, 1996. The three buildings will be leased by a major industrial gas distribution company. (see Note 9) There is no future minimum lease payments. The Company also leased two cars during 1995 from non-related parties. Total payments made for these leases were $10,335. These leases were terminated in early 1996, so there is no future minimum lease payments. 8. Cash Flows __________ Cash paid for interest expense and income taxes was as follows: Interest $51,549 Income taxes 14,310 9. Subsequent Event ________________ Effective January 1, 1996, Midwest Airgas, Inc., a subsidiary of U.S. Airgas, Inc., a wholly-owned subsidiary of Airgas, Inc. purchased 100% of the stock of Iatech Sales Co. and Subsidiary. For subsequent years, the Company's financial information will be included with the parent company. 10. Commitments and Contingencies _____________________________ The Company is involved in various legal and regulatory proceedings which have arisen in the ordinary course of its business and have not been finally adjudicated. These actions, when ultimately concluded and determined, will not, in the opinion of management, have a material adverse effect upon the Company's consolidated financial position, results of operations or liquidity. -11- 50 ACETYLENE GAS COMPANY CONSOLIDATED FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1995 51 C O N T E N T S PAGE INDEPENDENT AUDITORS' REPORT ........................... 1 FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEET ........................... 2 CONSOLIDATED STATEMENT OF EARNINGS ................... 3 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY ....... 4 CONSOLIDATED STATEMENT OF CASH FLOWS ................. 5 CONSOLIDATED NOTES TO FINANCIAL STATEMENTS ............. 6-13 52 INDEPENDENT AUDITORS' REPORT To the Board of Directors ACETYLENE GAS COMPANY St. Louis, Missouri We have audited the consolidated balance sheet of ACETYLENE GAS COMPANY and subsidiary as of December 31, 1995, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ACETYLENE GAS COMPANY and subsidiary as of December 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. As explained in Note 9 to the financial statements, ACETYLENE GAS COMPANY and subsidiary retroactively changed its method of accounting for cylinder leases as of January 1, 1995. CURRY, LENHARDT & COMPANY, LLP Certified Public Accountants St. Louis, Missouri February 13, 1996 Page 1 53 ACETYLENE GAS COMPANY CONSOLIDATED BALANCE SHEET DECEMBER 31, 1995 ______________________________________________________________________________ ASSETS Current Assets Cash ............................................................ $ 6,812 Accounts receivable less allowance for doubtful accounts of $150,000 ........................................... 2,773,931 Inventories ...................................................... 1,311,585 Prepaid expenses and other current assets ....................... 285,548 _________ Total Current Assets .............................................. 4,377,876 _________ Property, Plant and Equipment .........................$ 13,335,544 Less: Accumulated depreciation and amortization ....... 5,685,012 __________ Total Property, Plant and Equipment, Net ......................... 7,650,532 Other non-current assets .......................................... 79,518 _________ Total Assets ................................................... $12,107,926 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current portion of long-term debt .............................$ 1,843,938 Accounts payable .............................................. 1,475,041 Accrued expenses and other liabilities ......................... 151,500 _________ Total Current Liabilities ........................................ 3,470,479 Long-term debt ................................................... 3,569,150 Cylinder deposits ................................................ 411,442 Deferred tax liability ........................................... 601,605 _________ Total Liabilities ................................................ 8,052,676 Stockholders' Equity Capital stock $100 par, 4,000 shares common authorized, and 2,000 shares issued ...............$ 200,000 Retained earnings .................................... 3,855,250 _________ Total stockholders' equity ....................................... 4,055,250 __________ Total Liabilities and Stockholders' Equity ......................$12,107,926 ========== See accompanying notes to consolidated financial statements Page 2 54 ACETYLENE GAS COMPANY CONSOLIDATED STATEMENT OF EARNINGS YEAR ENDED DECEMBER 31, 1995 ______________________________________________________________________________ Sales ...........................................................$ 20,933,164 Costs and Expenses Cost of products sold (excluding depreciation) ............... 14,291,452 Selling, distribution and administrative expenses ............ 4,988,091 Depreciation and amortization ................................ 940,671 __________ Total costs and expenses ....................................... 20,220,214 __________ Operating income ............................................... 712,950 Interest expense, net .......................................... (454,266) Other income, net .............................................. 2,989 ________ Earnings before income tax and cumulative effect of accounting changes ......................................... 261,673 Income taxes ................................................... 85,340 _________ Net earnings before cumulative effects of accounting changes ... 176,333 Cumulative effect of accounting change on years prior to 1995 (net of income tax of $1,027,659) ..................... (1,793,440) _________ Net loss ....................................................... $ (1,617,107) ========= See accompanying notes to consolidated financial statements Page 3 55 ACETYLENE GAS COMPANY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY YEAR ENDED DECEMBER 31, 1995 ______________________________________________________________________________ Common Retained Stock Earnings Balance January 1, 1995 as previously reported ....... $ 200,000 $ 7,290,350 Prior period adjustments ............................. - (1,817,993) _______ _________ Balance January 1, 1995 as restated .................. 200,000 5,472,357 Net loss ............................................. - (1,617,107) _______ _________ Balance December 31, 1995 ............................ $ 200,000 $ 3,855,250 ======= ========= See accompanying notes to consolidated financial statements Page 4 56 ACETYLENE GAS COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1995 ______________________________________________________________________________ Cash Flows From Operating Activities: Net earnings (loss) ........................................... $(1,617,107) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization .........................$ 940,671 Increase in cash surrender value of officers life insurance ....................................... (7,940) Loss on sale of fixed assets .......................... 39,384 Deferred income taxes ................................. 30,299 Cumulative effect of accounting change ................ 1,793,440 Changes in operating assets and liabilities: Receivables ......................................... (338,681) Inventories ......................................... (141,081) Prepaid expenses and other current assets ........... (88,135) Accounts payable .................................... 174,774 Accrued expenses and other current liabilities ...... (5,403) _________ 2,397,328 _________ Net Cash Provided By Operating Activities ........... 780,221 _________ Cash Flows From Investing Activities: Acquisition of fixed assets ............................. (1,316,032) Proceeds from the sale of fixed assets .................. 338,134 _________ Net Cash Used In Investing Activities .............. (977,898) _______ Cash Flows From Financing Activities: Proceeds from long-term borrowings ...................... 820,000 Net overdraft ........................................... (15,949) Payments on long-term debt .............................. (607,162) ________ Net Cash Provided By Financing Activities ......... 196,889 _______ Net increase (decrease) in cash ........................... (788) Cash at the beginning of the year ......................... 7,600 _____ Cash at the end of the year ................................. $ 6,812 ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the year for: Interest ..................................................$ 452,487 Income taxes ..............................................$ 174,969 See accompanying notes to consolidated financial statements Page 5 57 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following is a summary of certain significant accounting policies followed in the preparation of the financial statements. Nature of Business The Company's primary operation is the sale of industrial gases and gas-related equipment in various markets throughout Missouri, Illinois and Kentucky. Principles of Consolidation The consolidated financial statements include those of the company and its wholly-owned subsidiary, Atlas Redevelopment, with intercompany balances and transactions eliminated. Property, Plant and Equipment Property, plant and equipment are recorded at cost and depreciated and amortized over the estimated useful lives, using the straight-line method for financial reporting, and straight-line and accelerated cost recovery system methods for tax purposes. Upon sale or retirement, the cost and related accumulated depreciation and amortization are eliminated from the respective accounts and the resulting gain or loss included in current income. Repair and maintenance charges which do not increase the useful lives of the assets are charged to expense as incurred. Inventories All inventories are stated at cost computed on the first-in, first out (FIFO) basis. Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Concentrations of credit risk are limited due to the Company's large number of customers and their dispersion across many industries. In addition, the Company maintains its cash in bank deposit accounts at a high credit quality financial institution. The balances, at times, may exceed federally insured limits. Management 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 at December 31, 1995, and revenues and expenses during the year then ended. The outcome of the estimates could differ from the estimates made in the preparation of the financial statements. Page 6 58 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (continued) Deferred Income Taxes Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities. Cash Equivalents For purposes of the statement of cash flows, the Company considers all highly liquid financial instruments with a maturity of less than three months to be cash equivalents. NOTE 2 - INVENTORIES Inventories at December 31, 1995 consisted of the following: Gases ........................................................$ 272,444 Hardgoods .................................................... 1,039,141 _________ Total ........................................................$ 1,311,585 ========= NOTE 3 - PREPAID EXPENSES AND OTHER CURRENT ASSETS Prepaid expenses and other current assets include: Prepaid insurance ............................................$ 60,710 Deferred income tax .......................................... 190,339 Income tax refunds in excess of deposits ..................... 31,799 Other current assets ......................................... 2,700 ______ Total prepaid expenses and other current assets ..............$ 285,548 ======= NOTE 4 - PROPERTY, PLANT AND EQUIPMENT The major classes of property, plant and equipment, at cost, are as follows: Land ........................................................$ 446,678 Building & improvements ..................................... 3,742,982 Machinery and equipment, including cylinders ................ 5,915,526 Office furniture & equipment ................................ 366,332 Transportation equipment .................................... 2,864,026 __________ $13,335,544 ========== Page 7 59 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 4 - PROPERTY, PLANT AND EQUIPMENT - (continued) Depreciation and amortization for property, plant and equipment included in costs and expenses at December 31, 1995 were computed using the methods previously described and aggregated $872,569. NOTE 5 - OTHER ASSETS Other assets at December 31, 1995 consisted of the following: Cash surrender value officers' life insurance, net of policy loans of $46,582 ....................................... $ 71,791 Note receivable from Roe Machine Co., Inc. on sale of equipment due in equal installments of $250, including interest at 12%. .................................... 7,727 ______ Total other assets ............................................. $ 79,518 ====== NOTE 6 - INDEBTEDNESS Long-term debt at December 31, 1995 consisted of the following: Note payable to Barnett Mortgage Co., due in quarterly installments of $1,036 including interest at 8%, final payment due January, 2014; the note is secured by Florida property .............. $ 118,136 Note payable to Jerry Bartles, due in annual installments of $25,000, including interest at 6%, final payment of $50,000 due in January, 1997. The note is secured by land and building in Rolla, MO .................................................. 68,085 Note payable to Clark Credit Corporation, due in monthly installments of $363, including interest at 10.25%, final payment due October, 1998. The note is secured by a 1993 Clark forklift truck ......... 10,665 Note payable Robert E. Bird, a majority stockholder of the Company, due on demand, interest paid monthly at prime ................................................... 425,000 Note payable to Southwest Bank, due in monthly installments of $47,800 plus interest fluctuating at prime, balloon payment due November, 1999. The note is secured by accounts receivable, inventory, equipment, and real estate at the Company's St. Louis location ....................... 3,971,202 Page 8 60 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6 - INDEBTEDNESS - (continued) Revolving $1,000,000 line of credit agreement with Southwest Bank, maturing April, 1996, interest is payable monthly fluctuating at prime. The agreement is secured by accounts receivable, inventory, equipment, and real estate at the Company's St. Louis location ........... 820,000 _________ 5,413,088 Less: Current installments ............................... 1,843,938 _________ Total Long-Term Debt ...................................... $ 3,569,150 ========= Estimated maturities of long-term debt are as follows: Year Amount 1996 .................................................. $ 1,843,938 1997 .................................................. $ 625,585 1998 .................................................. $ 578,121 1999 .................................................. $ 2,251,488 2000 .................................................. $ 1,116 Thereafter ............................................ $ 112,840 As described in Note 16, the Company entered into a sale agreement and was sold to Gateway Airgas, Inc., effective January 1, 1996. In connection with the agreement, the majority of the obligations described above were repaid by Gateway Airgas, Inc. NOTE 7 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities include: Accrued salaries ......................................... $ 16,012 Accrued interest ......................................... 22,160 Accrued taxes ............................................ 53,667 Accrued pension .......................................... 59,661 _______ Total accrued expenses and other current liabilities ..... $ 151,500 ======= NOTE 8 - INCOME TAXES The provision for income taxes for the year ended December 31, 1995 consisted of: Current: Federal ................................................ $ 52,191 State .................................................. 2,850 ______ 55,041 ______ Page 9 61 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 8 - INCOME TAXES - (continued) Deferred Federal ................................................ 23,388 State .................................................. 6,911 ______ 30,299 ______ Total provision for income taxes ......................... $ 85,340 ====== Deferred income taxes are provided for certain income and expenses which are recognized in different periods for tax and financial reporting purposes. The tax effects of cumulative temporary differences that give rise to the significant portions of deferred tax liability and deferred tax asset were as follows: Deferred Tax Assets: Allowance for doubtful accounts ........................ $ 57,000 Cylinder deposits ...................................... 156,348 AMT credit carryforwards ............................... 105,953 Investment tax credit carryforwards .................... 268,817 Other .................................................. 8,339 _______ Total deferred tax assets .............................. 596,457 _______ Deferred Tax Liabilities: Property and equipment ................................. (1,007,723) _________ Total deferred tax liabilities ......................... (1,007,723) _________ Net deferred tax liability ............................. $ (411,266) ========= Management has assessed the need for a valuation allowance and believes the deferred tax assets are recoverable more likely than not. The Company has investment tax credit carryforwards of $268,817 available to be offset against federal income tax in future years. These carryforwards are subject to limitations imposed by the Tax Reform Act of 1986, and portions expire, if unused, each year through December, 2000. In addition, the Company has unused alternative minimum tax credits of $105,953. NOTE 9 - CHANGE IN METHOD OF ACCOUNTING FOR CYLINDER LEASES During 1995, the Company changed its method of accounting for cylinder leases from operating to sales type leases. The Company believes the new method is preferable, as it more accurately reflects the substance of the Company's cylinder lease arrangements. The effect of this change was to decrease net earnings for 1995 by $13,345. The cumulative effect of the change on prior years of $1,793,440 is a one-time charge to earnings. Page 10 62 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 10 - PRIOR PERIOD ADJUSTMENTS Retained earnings at the beginning of 1995 has been adjusted for the following prior period adjustments: Refundable lease deposits Retained earnings at the beginning of 1995 has been decreased $255,094 (net of income tax of $156,348) to correctly reflect refundable lease deposits not recorded in prior years. The error had no effect on net earnings for 1994. Deferred income tax Retained earnings at the beginning of 1995 has been decreased $1,064,312 to correct the calculation of deferred income taxes to accurately conform with the requirements of the Financial Accounting Standards Board. The correction had no material effect on net earnings for 1994. Prior impairment of long-lived asset Retained earnings at the beginning of 1995 has been decreased $498,538 (net of income tax of $305,555) to record the write-down for the permanent impairment of an unused air separation plant in Benton, Illinois. Had the write-down been recorded in the year management determined the asset to be permanently impaired, net earnings for 1994 would have been increased $126,463 (net of income tax of $77,510). NOTE 11 - INTEREST EXPENSE, NET Interest expense, net, consists of: Interest expense .......................................... $ 455,556 Finance charge income ..................................... (1,290) _______ Total interest expense, net ............................... $ 454,266 ======= NOTE 12 - OTHER INCOME, NET Other income, net, consists of: Net loss on disposal of fixed assets ...................... $ (39,384) Discounts earned .......................................... 39,573 Other income .............................................. 2,800 ______ Total other income, net ................................... $ 2,989 ====== Page 11 63 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 13 - LEASES The Company leases vehicles, computer and telephone equipment under leases expiring in various years through 1999. Rent expense included in selling, distribution and administrative expenses for 1995 is $142,174. Minimum future lease payments under non-cancelable operating leases for each of the next years until expiration are as follows: Year ended Amount 1996 ............................................ $ 113,955 1997 ............................................ 40,190 1998 ............................................ 16,065 1999 ............................................ 10,802 _______ Total minimum future lease payments ............. $ 181,012 ======= The Company rented cylinders on a month to month basis throughout the year. Total cylinder rent included in cost of products sold for 1995 is $74,037. NOTE 14 - BENEFIT PLANS The Company has a defined contribution 401(k) plan covering substantially all employees not covered under union plans. Under the terms of the plan, the Company makes matching contributions of 50% of the participants' contributions up to 3% of the participants' wages. Total expense under the plan for 1995 was $51,402. The Company participates in 4 multi-employer pension plans which provide defined benefits to 20 union employees in Missouri, Illinois and Kentucky. Contributions are made to the plans in accordance with negotiated labor contracts. Except as noted in Note 15, the Company has not taken any action to terminate or withdrawal from these plans. Total expense under these plans for 1995 was $71,029, exclusive of the withdrawal liability described in Note 15. NOTE 15 - CONTINGENCIES Substantially all of the Company's facilities are subject to federal, state and local regulations relating to the discharge of materials into the environment. Compliance with these provisions has not had, nor does the Company expect such compliance to have, any material effect upon the capital expenditures, net earnings, financial condition or competitive position of the Company. Management believes that its current practices and procedures for the control of such wastes comply with applicable federal, state and local requirements. Page 12 64 ACETYLENE GAS COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 15 - CONTINGENCIES - (continued) The Company could be identified as a potentially responsible party by the United States Environmental Protection Agency ("USEPA") as owners of land known as the Bonifield Bros. Superfund Site. Environmental cleanup at the site has been completed, and the Company has received notification from the USEPA that it has recommended that the Department of Justice provide the Company with a covenant not to sue for any civil liability it has with regard to this site for reimbursement of cleanup costs. Department of Justice approval has not yet been obtained. In addition, the Company has incurred liability for a partial withdrawal of certain employees from the Central States Southeast And Southwest Areas Pension Fund, as Teamster employees of the Company at the West Frankfort, Illinois plant voted to decertify the union as their bargaining representative. The exact liability cannot be computed until 1997 pursuant to ERISA Section 4206. Pension fund trustees estimate the incurred liability to be $59,661. The Company has included this liability in accrued expenses and other current liabilities at December 31, 1995. NOTE 16 - SUBSEQUENT EVENT In January, 1996, the stockholders of the Company entered into an agreement to sell 100% of the Company's stock to Gateway Airgas, Inc., a Delaware corporation and subsidiary of US Airgas, Inc., a wholly-owned subsidiary of Airgas, Inc., a Delaware corporation. The ownership change may substantially limit the availability of certain income tax credits described in Note 8. Page 13 65 WELDERS EQUIPMENT COMPANY, INC. AND SUBSIDIARY Consolidated Financial Statements September 30, 1995 With Independent Auditors' Report Thereon 66 Independent Auditors' Report The Board of Directors Welders Equipment Company, Inc.: We have audited the accompanying consolidated balance sheet of Welders Equipment Company, Inc. and subsidiary as of September 30, 1995, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Welders Equipment Company, Inc. and subsidiary as of September 30, 1995 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. KPMG PEAT MARWICK LLP San Antonio, Texas March 14, 1996 67 WELDERS EQUIPMENT COMPANY, INC. AND SUBSIDIARY Consolidated Balance Sheet September 30, 1995 Assets Current assets: Cash and cash equivalents $3,202,113 Certificate of deposit 100,000 Trade accounts and notes receivable, less allowance for doubtful accounts of $32,000 2,929,820 Inventories 2,228,430 Prepaid expenses 79,792 Deferred income taxes (note 6) 25,000 _________ Total current assets 8,565,155 Net property, plant and equipment (notes 2 and 4) 5,103,336 Long-term notes receivable 125,636 Noncompete agreements, net of accumulated amortization of $165,917 89,083 Cash surrender value of life insurance, net of loans of $1,656,845 49,394 Deposits and other 209,644 __________ $14,142,248 ========== Liabilities and Stockholders' Equity Current liabilities: Trade accounts payable 1,245,399 Accrued expenses 496,270 Note payable to bank (note 3) 195,000 Bonuses payable 189,845 Dividends payable 136,000 Note payable (note 4) 130,526 Cylinder deposits (note 8) 92,996 Current installments of deferred revenue 90,000 Income taxes payable (note 6) 30,015 _________ Total current liabilities 2,606,051 Deferred revenue, excluding current installments 160,000 Deferred income taxes (note 6) 112,000 _________ Total liabilities 2,878,051 _________ Minority interest 2,958 _________ Stockholders' equity (note 9): Common stock, $75 par value. Authorized, issued and outstanding 10,000 shares 750,000 Additional paid-in capital 19,000 Retained earnings 10,492,239 __________ Total stockholders' equity 11,261,239 __________ Contingencies and commitments (notes 5 and 7) $14,142,248 ========== See accompanying notes to consolidated financial statements. 68 WELDERS EQUIPMENT COMPANY, INC. AND SUBSIDIARY Consolidated Statement of Income Year ended September 30, 1995 Sales $ 23,000,911 Cost of sales 13,107,050 __________ Gross profit 9,893,861 Operating expenses (note 5) 7,983,880 _________ 1,909,981 _________ Other income (deductions): Interest income 126,072 Interest expense (136,811) Other 48,794 _________ 38,055 _________ Income before income taxes and minority interest 1,948,036 _________ Income tax expense (note 6): Current 53,000 Deferred 26,000 _________ 79,000 _________ Income before minority interest 1,869,036 Minority interest 392 _________ Net income $ 1,869,428 ========= 69 WELDERS EQUIPMENT COMPANY, INC. AND SUBSIDIARY Consolidated Statement of Stockholders' Equity Year ended September 30, 1995 Additional Total Common paid-in Retained stockholders stock capital earnings equity ______ _________ _________ _____________ Balances at September 30, 1994 $ 750,000 19,000 9,770,311 10,539,311 Net income - - 1,869,428 1,869,428 Dividends declared - - (1,147,500) (1,147,500) ________ ______ __________ __________ Balances at September 30, 1995 $ 750,000 19,000 10,492,239 11,261,239 ======== ====== ========== ========== 70 WELDERS EQUIPMENT COMPANY, INC. AND SUBSIDIARY Consolidated Statement of Cash Flows Year ended September 30, 1995 Cash flows from operating activities: Net income $1,869,428 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of property, plant and equipment 577,583 Allowance for doubtful accounts 30,000 Other amortization 51,000 Deferred income taxes 26,000 Increase in cash surrender value of life insurance (35,666) Minority interest in loss of subsidiary (392) Changes in assets and liabilities: Trade accounts and notes receivable (243,242) Inventories (391,772) Prepaid expenses (15,712) Deposits and other (9,274) Trade accounts payable (140,006) Accrued expenses (366,515) Bonuses payable 46,195 Cylinder deposits 4,279 Deferred revenue (13,000) Income taxes payable (16,891) _________ Net cash provided by operating activities 1,372,015 _________ Cash flows from investing activities: Capital expenditures (796,071) Life insurance premiums paid (6,632) _________ Net cash used in investing activities (802,703) ________ Cash flows from financing activities: Proceeds from issuance of loans on cash surrender value of life insurance 23,631 Proceeds from issuance of notes payable to bank 195,000 Minority interest 3,350 Principal payments on note payable (25,409) Dividends paid (1,196,500) ___________ Net cash used by financing activities (999,928) __________ Net decrease in cash and cash equivalents (430,616) Cash and cash equivalents at beginning of year 3,632,729 _________ Cash and cash equivalents at end of year $3,202,113 ========= Supplemental disclosures of cash flow information: Interest paid $ 136,811 ========= State income taxes paid $ 70,174 ========= Supplemental schedule of non-cash financing transactions: Life insurance premium financed with loans $ 157,973 ======== 71 WELDERS EQUIPMENT COMPANY, INC. AND SUBSIDIARY Notes to Consolidated Financial Statements September 30, 1995 (1) Summary of Significant Accounting Policies and Practices (a)Description of Business Welders Equipment Company, Inc. (Company) is a distributor of welding equipment, supplies and related gases. Most of the Company's customers are located in South Texas. The Company is not dependent on a single supplier or a few suppliers. (b) Principles of Consolidation The consolidated financial statements include the financial statements of Welders Equipment Company, Inc. and its 79% owned subsidiary. The remaining 21% is owned by a shareholder of the Company. All significant intercompany balances and transactions have been eliminated in consolidation. (c) Cash Equivalents Cash equivalents at September 30, 1995 consist of $3,000,000 invested in mutual funds. For the purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. (d) Inventories Inventories consist principally of finished goods and are stated at the lower of cost or market. Cost is determined using the first-in, first-out method for all inventories. (e) Property, Plant and Equipment Property, plant and equipment are stated at cost. Depreciation is calculated on the straight-line method over the following estimated useful lives: Buildings and leasehold improvements 40 years Machinery and equipment 3 to 10 years Furniture and fixtures 5 to 10 years Vehicles 3 to 15 years Maintenance and repairs are charged to expense as incurred. Expenditures for improvements are capitalized. (f)Non-Compete Agreements The Company secured three noncompete agreements in connection with the acquisition of three branch operations. These costs are amortized straight-line over the terms of the respective agreements. 72 (g) Deferred Revenue Deferred revenue represents the portion of long-term operating lease payments received in advance from customers. Lease revenue is recognized straight-line over the period of the respective lease. (h) Income Taxes Management of the Company elected Subchapter S Corporation federal income tax status in 1987. Under the Subchapter S provisions, the Company does not pay federal corporate income taxes on its taxable income. Instead, the stockholders are liable for such taxes. The Company is subject to the Texas franchise tax which is based, in part, on taxable income. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." State income tax expense is computed based on the Texas statutory tax rate of 4.5% applied to taxable income for Texas state tax purposes, less the portion of the Texas franchise tax based on capital. (i) Commitments and Contingencies Liabilities for loss contingencies arising from claims, assessments, litigation and other sources are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated. (j) Use of Estimates Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (k) Disclosures about Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, trade accounts and notes receivable, and trade accounts payable and notes payable approximate their respective fair value because of the short-term maturity of those instruments. (2) Property, Plant and Equipment Property, plant and equipment consists of the following at September 30, 1995: Land $ 91,367 Buildings and leasehold improvements 2,506,038 Machinery and equipment 4,856,977 Vehicles 1,041,993 Furniture and fixtures 811,578 _________ 9,307,953 Less accumulated depreciation and amortization 4,204,617 _________ $5,103,336 ========= 73 (3) Note Payable to Bank Note payable to bank at September 30, 1995 consists of an unsecured line of credit established at a bank by the Company's subsidiary under which the subsidiary may borrow at the bank's prime rate (9.25% at September 30, 1995) up to $300,000. The line of credit expires on August 16, 1996. At September 30, 1995, there was $195,000 outstanding under the line of credit. (4) Note Payable The note payable at September 30, 1995 is due to a corporation in monthly installments of $3,018, including principal and interest at 7.83%. The note is due in March 1996 and is secured by certain machinery and equipment. (5) Leases The Company leases facilities and equipment from stockholders under various lease agreements. Total rent expense associated with these leases was approximately $885,000 for the year ended September 30, 1995. Minimum lease payments under these leases over the next five years will be approximately $885,000 annually. (6) Income Taxes Income tax expense differed from the amounts computed by applying the Texas statutory tax rate of 4.5% to income before income taxes and minority interest as a result of the following: Computed "expected" tax expense $ 87,662 Reduction in income taxes resulting from: Interest income not subject to income tax (4,404) Increase in cash surrender value of life insurance not subject to income tax (2,286) Other, net (1,972) ________ $ 79,000 ======== 74 (6) Income Taxes, continued The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 1995 are presented below: Deferred tax assets: Trade accounts receivable, principally due to allowance for doubtful accounts $ 1,440 Inventories, principally due to allowance for obsolescence 1,935 Other assets, principally due to differences in amortization 1,103 Accrued expenses deducted for financial reporting purpose 7,875 Deferred revenue, accrued for financial reporting purposes 11,250 Other, net 1,397 _______ Total gross deferred tax assets 25,000 Deferred tax liabilities: Property and equipment, principally due to differences in depreciation (114,280) Other, net 2,280 _______ Total gross deferred liabilities (112,000) _______ Net deferred tax liability $ (87,000) ======= In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon taxes paid in prior periods which could be recovered through the carryback provision of the tax law or the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the carryback availability, projected future taxable income and tax planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences at September 30, 1995. (7) Retirement Plans Effective October 1, 1991, the Company established a qualified 401(k) plan for its employees. Eligible employees may contribute up to 6% of their compensation with the Company matching 75% of the employee's first 3% contribution and 25% of the employee's second 3% contribution. The Company's matching contributions were $78,980 for the year ended September 30, 1995. The Company also maintains a discretionary, non-contributory profit-sharing plan covering all employees meeting certain age and length of service requirements. Contributions to the plan were $71,020 for the year ended September 30, 1995. 75 (8) Business and Credit Concentrations Most of the Company's customers are located in South Texas. No single customer accounted for more than five percent of the Company's sales in 1995. At September 30, 1995, the Company had two customers with accounts receivable balances greater than $100,000 which in the aggregate, represented 8% of trade accounts receivable. The Company holds deposits on certain gas cylinders leased to customers. Such deposits are refunded upon return of the cylinders. (9) Subsequent Event Effective February 1, 1996, Airgas, Inc. acquired for cash substantially all of the Company's assets and 100% of its subsidiary's common stock.