United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year ended June 30, 1997 COMMISSION FILE NUMBER 1-6537 ALL STAR GAS CORPORATION (Exact Name of Registrant as Specified in Its Charter) MISSOURI 43-1494323 (State or other jurisdiction of (IRS Employer Incorporation or Organization) Identification No.) P.O. BOX 303, 1700 SOUTH JEFFERSON STREET, LEBANON, MISSOURI, 65536 (Address of Principal Executive Offices and Zip Code) (417) 532-3103 (Registrant's Telephone Number, Including Area Code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS 12-7/8% Senior Secured Notes Due 2004 9% Subordinated Debentures Due 2007 SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part II of this Form 10-K or any amendment to this Form 10-K. (X) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No _ The aggregate market value of the voting stock held by non-affiliates of the Registrant as of close of business on September 19, 1997 is: $116,480. Shares of Common Stock, $0.001 par value, outstanding as of close of business on September 19, 1997: 1,564,050. Upon request, All Star Gas Corporation will furnish a copy of an exhibit listed but not contained herein. A fee of $.05 per page, to cover the Company's costs in furnishing exhibits requested will be charged. Please direct all requests to: Corporate Secretary, 1700 South Jefferson, Lebanon, Missouri 65536; Telephone (417) 532-3103. PART 1 Items 1 and 2. Business and Properties Introduction All Star Gas Corporation ("All Star Gas" or the "Company") was founded in 1963 and through its subsidiaries has been in operation for over 34 years. The Company is engaged primarily in (a) the retail marketing of propane to residential, agricultural, and commercial customers, (b) the retail marketing of propane-related appliances, supplies, and equipment, and (c) the rent of consumer propane storage tanks to residential and commercial customers under various brand names, including All Star, Empiregas, and the names of numerous predecessors. During the fiscal year which ended June 30, 1997, All Star Gas supplied propane to approximately 115,000 customers in 21 states from 130 retail service centers and sold approximately 85 million gallons. Propane, a hydrocarbon with properties similar to natural gas, is separated from natural gas at gas processing plants and refined from crude oil at refineries. It is stored and transported in a liquid state and vaporizes into a clean-burning energy source that is recognized for its transportability and ease of use relative to other forms of stand alone energy. Residential and commercial uses include heating, cooking, water heating, refrigeration, clothes drying, and incineration. Commercial uses also include metal cutting, drying, container pressurization and charring, as well as use as a fuel for internal combustion engines, such as over-the-road vehicles, forklifts, and stationary engines. Agricultural uses include brooder heating, stock tank heating, crop drying, tobacco curing, and weed control, as well as use as a motor fuel for farm equipment and vehicles. Propane is recognized as a clean alternative transportation fuel "ATF" by the Federal and state governments and is the most widely used ATF in the United States. The Federal government has enacted certain mandates for use of ATF's by government and private fleets under the Clean Air Act of 1990 and Energy Policy Act of 1992. Federal and state governments have also provided various economic incentives for use of ATF's which will positively impact propane demand. The retail propane business is a "margin-based" business in which gross profits depend on the excess of sales price over propane supply costs. Sales of propane to residential and commercial customers, which account for the vast majority of the Company's revenue, have provided a relatively stable source of revenue for the Company. Sales to residential customers accounted for approximately 63.3% of the Company's aggregate propane sales revenue and 72.0% of its aggregate gross margin from propane sales in fiscal year 1997. Historically, this market has provided higher margins than other retail propane sales. Based on fiscal year 1997 propane sales revenue, the customer base consisted of 23.5% commercial and 13.2% agricultural and other customers. While commercial propane sales are generally less profitable than residential retail sales, the Company has traditionally relied on this customer base to provide a steady, noncyclical source of revenues. No single customer accounts for more than 1.3% of revenue from sales. On June 30, 1994, the Company engaged in a series of transactions (the "Transaction") including the transfer of all of the shares of common stock of Empire Energy Corporation ("Energy") to the Company's former chairman, Robert W. Plaster, and certain departing directors, officers, and employees. Energy held the common stock of 136 subsidiaries of the Company that carried on the business of the Company in ten states, primarily in the Southeast. As part of the Transaction, the Company also acquired the assets of PSNC Propane Corporation ("PSNC"). Except where noted otherwise, all financial information in this report and the financial statements included with this report include the results of operations of Energy through June 30, 1994, and exclude the results of operations of PSNC, but balance sheet data for June 30, 1994, and all financial information from periods beginning thereafter exclude the assets of Energy and include the assets of PSNC. On August 15, 1995, the Company entered into a joint venture with Northwestern Growth Corporation, a subsidiary of Northwestern Public Service Corporation, to acquire the assets of Synergy Group Incorporated, the nation's fifth largest LP gas distributor. The Company acquired, for $30,000, 30% of the common stock of SYN, Inc. ("Synergy"), the acquisition entity. The Company entered into a Management Agreement pursuant to which the Company provides all management of the retail facilities and accounting services at the central office. In exchange for those services, the Company received a $500,000 annual base management fee, an incentive management fee, and $3.25 million annual overhead cost reimbursement (adjusted annually for inflation). Unless specifically referenced, all information contained herein excludes information pertaining to the Synergy operations. On December 7, 1995, the Company entered into a joint venture with Northwestern Growth Corporation, a subsidiary of Northwestern Public Service Company to acquire the stock of Myers Propane Gas Company, a large Ohio LP gas distributor. The Company acquired 49% of the common stock of Myers Acquisition Company (Myers), the acquisition entity. The Company entered into a Management Agreement pursuant to which the Company provided all management and administrative services. In exchange for those services, the Company was entitled to a management fee upon the attainment of certain performance goals. In December, 1996, the Company and Northwestern Growth Corporation (NGC), completed an agreement for the sale of various interests of the Company in Synergy and Myers and the modification and termination of certain agreements between NGC, Synergy and Myers on the one hand and the Company on the other hand. The agreement terminated the management agreements pursuant to which the Company provided management activities for Synergy and Myers effective December, 1996. The agreement resulted in a payment of $18 million to the Company resulting in a gain reflected on the Statement of Operations of $17 million which is net of transaction and other costs and fees. The Company may be entitled to an additional amount based on a third party's indemnification obligations to Synergy. Sources of Supply. During 1997, approximately 90% of the Company's propane purchases of its propane supply were on a contractual basis (generally, one year agreements subject to annual renewal). The Company's two largest suppliers provide 14.0% and 12.5% of the total supply purchased by the Company. Supply contracts do not, generally, lock in prices, but rather provide for pricing in accordance with posted prices at the time of delivery or established by current major storage points, such as Mont Belvieu, TX, and Conway, KS. The Company has established relationships with a number of suppliers and believes it would have ample sources of supply under comparable terms to draw upon to meet its propane requirements if it were to discontinue purchasing from its two major suppliers. The Company takes advantage of the spot market as appropriate. The Company has not experienced a shortage that has prevented it from satisfying its customer's needs and does not foresee any significant shortage in the supply of propane. Distribution. The Company purchases propane at refineries, gas processing plants, underground storage facilities, and pipeline terminals and transports the propane by railroad tank cars and tank trailer trucks to the Company's retail service centers, each of which has bulk storage capacity ranging from 16,000 to 180,000 gallons. The Company is a shipper on all major interstate LPG pipeline systems. The retail service centers have an aggregate storage capacity of approximately 8.24 million gallons of propane, and each service center has equipment for transferring the gas into and from the bulk storage tanks. The Company operates 11 over-the-road tractors and 17 transport trailers to deliver propane and consumer tanks to its retail service centers and also relies on common carriers to deliver propane to its retail service centers. Deliveries to customers are made by means of 373 propane delivery trucks owned by the Company. Propane is stored by the customers on their premises in stationary steel tanks generally ranging in capacity from 25 to 1,000 gallons, with large users having tanks with a capacity of up to 30,000 gallons. Most of the propane storage tanks used by the Company's residential and commercial customers are owned by the Company and leased, rented, or loaned to customers. Operations. The Company has organized its operations in a manner that the Company believes enables it to provide excellent service to its customers and to achieve maximum operating efficiencies. The Company's retail propane distribution business is organized into 9 regions. Each region is supervised by a Regional Manager. The regions are grouped into two divisions, which are supervised by Senior Vice Presidents. Personnel located at the retail service centers in the various regions are primarily responsible for customer service and sales. A number of functions are centralized at the Company's corporate headquarters in order to achieve certain operating efficiencies as well as to enable the personnel located in the retail service centers to focus on customer service and sales. The corporate headquarters and the retail service centers are linked via a computer system. Each of the Company's primary retail service centers is equipped with a computer connected to the central management information system in the Company's corporate headquarters. This computer network system provides retail company personnel with accurate and timely information on pricing, inventory, and customer accounts. In addition, this system enables management to monitor pricing, sales, delivery, and the general operations of its numerous retail service centers and to plan accordingly to improve the operations of the Company. The Company makes centralized purchases of propane through its corporate headquarters for resale to the retail service centers enabling the Company to achieve certain advantages, including price advantages, because of its status as a large volume buyer. The functions of cash management, accounting, taxes, payroll, permits, licensing, asset control, employee benefits, human resources, and strategic planning are also performed on a centralized basis. Factors Influencing Demand. Because a substantial amount of propane is sold for heating purposes, the severity of winter weather and resulting residential and commercial heating usage have an important impact on the Company's earnings. Approximately two-thirds of the Company's retail propane sales usually occur during the five months of November through March. Sales and profits are subject to variation from month to month and from year to year, depending on temperature fluctuations. Competition. The Company encounters competition from a number of other propane distributors in each geographic region in which it operates. The Company competes with these distributors primarily on the basis of service, stability of supply, availability of consumer storage equipment, and price. Propane competes primarily with natural gas, electricity and fuel oil principally on the basis of price, availability and portability. The Company also competes with suppliers of electricity. Generally speaking, the cost of propane compares favorably to electricity allowing the Company to enjoy a competitive advantage due to the higher costs of electricity. Fuel oil does not present a significant competitive threat in the Company's primary service areas due to the following factors: (i) propane is a residue-free, cleaner energy source, (ii) environmental concerns make fuel oil relatively unattractive, and (iii) fuel oil appliances are not as efficient as propane appliances. Although propane is generally more expensive than natural gas on an equivalent BTU basis comparison, propane serves as an alternative to natural gas in rural areas where natural gas is not available. Propane is also utilized by natural gas customers on a stand-by basis during peak demand periods. The costs involved in building or connecting to a natural gas distribution system have tempered natural gas growth in most of the Company's trade territory. Risks of Business. The Company's propane operations are subject to all the operating hazards and risks normally incident to handling, storing, and transporting combustible liquids, such as the risk of personal injury and property damages caused by accident or fire. Effective July 1, 1997, the Company's comprehensive general, auto and excess liability policy provides for losses of up to $101.0 million with a $200,000 self insured retention for general and excess liability losses. The company's combined auto and workers' compensation coverage has a $250,000 deductible per occurrence. The amounts on the comprehensive general, auto and worker's compensation mean that the Company is effectively self insured up to these amounts. REGULATION The Company's operations are subject to various federal, state, and local laws governing the transportation, storage and distribution of propane, occupational health and safety, and other matters. All states in which the Company operates have adopted fire safety codes that regulate the storage and distribution of propane. In some states these laws are administered by state agencies, and in others they are administered on a municipal level. Certain municipalities prohibit the below ground installation of propane furnaces and appliances, and certain states are considering the adoption of similar regulations. The Company cannot predict the extent to which any such regulations might affect the Company, but does not believe that any such effect would be material. It is not anticipated that the Company will be required to expend material amounts by reason of environmental and safety laws and regulations, but inasmuch as such laws and regulations are constantly being changed, the Company is unable to predict the ultimate cost to the Company of complying with environmental and safety laws and regulations. All Star Gas currently meets and exceeds Federal regulations requiring that all persons employed in the handling of propane gas be trained in proper handling and operating procedures. All employees have participated, or will participate within 90 days of their employment date, in hazardous materials training. The Company has established ongoing training programs in all phases of product knowledge and safety including participation in the National Propane Gas Association's ("NPGA") Certified Employee Training Program. EMPLOYEES As of September 15, 1997 the Company had approximately 600 employees, none of whom was represented by unions. The Company has never experienced any significant work stoppage or other significant labor problems and believes it has good relations with its employees. ITEM 3. LEGAL PROCEEDINGS. The Company and its subsidiaries are defendants in various routine litigation incident to its business, none of which is expected to have a material adverse effect on the Company's financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. The Company held its annual shareholder meeting on July 23, 1997. The only matter presented for a vote was the re-election of Paul S. Lindsey, Jr., and Douglas A. Brown as directors. Mr. Lindsey and Mr. Brown were re-elected with 1,564,050 votes cast in favor and no votes cast against, withheld or abstaining. The term of office of the following directors continued after the meeting: Paul S. Lindsey, Jr., Douglas A. Brown, Kristin L. Lindsey, Jim J. Shoemake, and Bruce M. Withers, Jr. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. As of September 19, 1997, the Company's Common Stock was held of record by 9 shareholders. There is currently no active trading market in the Company's Common Stock. As of September 19, 1997, there are outstanding warrants to purchase 175,536 shares of the Company's Common Stock. No dividends on the Common Stock of the Company were paid during the Company's 1996 or 1997 fiscal years. The indenture relating to the 12 7/8% Senior Secured Notes due 2004 and the terms of the Company's revolving credit facility each contain dividend restrictions that prohibit the Company from paying common stock cash dividends. As a result, the Company has no current intention of paying cash dividends on the Common Stock. ITEM 6. SELECTED FINANCIAL DATA. The following table presents selected consolidated operating and balance sheet data of All Star Gas as of and for each of the years in the five-year period ended June 30, 1997. The financial data of the Company as of and for each of the years in the five-year period ended June 30, 1997 were derived from the Company's audited consolidated financial statements. The financial and other data set forth below should be read in conjunction with the Company's consolidated financial statements, including the notes thereto, included with this report. Because the operating data for the period ending June 30, 1994 and 1993, do not take into account the effects of the Transaction on the Company, the data for that period are not comparable to the data for the year ended June 30, 1997. YEAR ENDED JUNE 30, ----------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- (In thousands except ratios and per share amounts) Operating data: Operating revenue $ 128,448 $ 124,452 $ 74,090 $ 82,702 $ 94,543 Gross profit (1) 68,246 66,532 38,478 39,384 41,468 Operating expenses 41,892 44,866 29,144 27,987 28,853 Depreciation & amortization 10,351 10,150 6,166 6,770 6,867 Operating income 16,003 11,516 3,168 4,627 5,748 Interest expense: Cash interest 9,826 8,542 10,681 10,657 10,605 Amortization of debt discount 1,686 2,016 4,889 5,476 6,140 & expenses Total interest expense 11,512 10,558 15,570 16,133 16,745 Net income (loss) before 2,228 (1,190) (8,726) (7,897) 2,222 extraordinary items (2) Other operating data: Capital expenditures 4,358 19,979 11,874 8,838 13,340 Cash from sale of retail service 1,088 366 2,956 6,177 5,478 centers and other assets EBITDA (3) 26,307 21,566 8,784 11,002 13,347 Income (loss) per share before extraordinary items $ 0.16 $ (0.08) $ (5.53) $ (5.00) $ 1.41 YEAR ENDED JUNE 30, ----------------------------------------------------------- 1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Balance sheet data: Total assets $148,020 $104,644 $105,128 $102,002 107,832 Long-term debt (including 79,249 105,612 115,647 122,858 126,632 current maturities) Stockholders' equity (deficit) 25,913 (28,220) (36,946) (44,843) (42,720) (1) Represents operating revenue less the cost of products sold. (2) All Star Gas did not declare or pay dividends on its common stock during the five-year period ending June 30, 1997. (3) EBITDA consists of earnings before depreciation, amortization, interest, income taxes, and other non-recurring expenses excluding gains/losses on sales of assets. EBITDA is presented here because it is a widely accepted financial indicator of a highly leveraged company's ability to service and/or incur indebtedness. However, EBITDA should not be construed as an alternative either (i) to operating income (determined in accordance with generally accepted accounting principles) or (ii) to cash flows from operating activities (determined in accordance with generally accepted accounting principles). ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of the Company's results of operations, financial condition and liquidity should be read in conjunction with the historical consolidated financial statements of All Star Gas and the notes thereto included in this Report. RESULTS OF OPERATIONS GENERAL All Star Gas' primary source of revenue is retail propane sales, which accounted for approximately 92% of its revenue in fiscal year 1997 as compared to 91% in fiscal 1996. Other sources of revenue include service labor, sales of gas appliances and rental of customer tanks. The Company's operating revenue is subject to both price and volume fluctuations. Price fluctuations are generally caused by changes in the wholesale cost of propane. The Company is not materially affected by these price fluctuations, inasmuch as it can generally recover any cost increase through corresponding increases in retail prices. Therefore, the Company's gross profit per retail gallon is relatively stable from year to year within each customer class. Gross profit per gallon also varies by geographic region of the United States and the Company will continue to focus expansion in high growth and high margin markets. Volume fluctuations from year to year are generally caused by variations in the winter weather from year to year. The severity of the weather will affect the volume sold because a substantial amount of the propane sold by the Company to residential and commercial customers is used for heating. Volume fluctuations do materially affect the Company's operations because lower volume produces less revenue to cover the Company's fixed costs, including debt service costs. The Company's expenses consist primarily of cost of products sold, general and administrative expense and to a much lesser extent, depreciation, amortization and interest expense. Purchases of propane inventory account for the majority of the cost of products sold. The Company's general and administrative expenses consist mainly of salaries and related employee benefits, vehicle expenses and insurance. The Company's interest expense consists primarily of interest on the 12.7/8% Senior Secured Notes due 2004 (the "Senior Secured Notes") and on its existing credit facility. Through 1999, a significant portion of interest will be non-cash amortization of original issue discount. Fiscal Years Ended June 30, 1997 and June 30, 1996 Operating Revenue. Operating revenue increased $11.8 million, or 14.3%, to $94.5 million in fiscal year 1997 as compared to $82.7 million in fiscal year 1996. The increase was primarily due to an $11.8 million increase in propane sales which was the result of 21% higher propane sales prices and a 4.4% reduction in gallons sold. Propane prices increased an average of 18 cents per gallon over fiscal 1996 which was the result of higher wholesale prices which are discussed in the cost of products sold section. Cost of products sold. Cost of products sold increased $9.8 million, or 22.5%, to $53.1 million in fiscal year 1997 as compared to $43.3 million in fiscal year 1996. This increase was due to the cost of propane increase of $10.2 million due to higher wholesale propane costs of 14 cents per gallon. The increase in wholesale propane costs were due to low propane inventories, as reported by the major supply points for the United States, compared to the five year historical average. The increase of cost of products was offset by a reduction in refined fuel costs of $200,000 due to the disposal of the locations selling refined fuels and reduction in cost of gas systems and appliances of $200,000. Gross profit. The Company's gross profit for the year increased $2.1 million to $41.5 million in fiscal year 1997 as compared to $39.4 million in fiscal year 1996. This increase is primarily due to a $1.6 million improvement in propane sales gross profit to .427 cents per gallon in fiscal 1997 as compared to .39 cents per gallon in fiscal 1996. This increase represents an improvement of $.037 per gallon or 9.3% over fiscal 1996, which is primarily due to the company's purchasing, hedging and consumer pricing strategy of improved margins as a result of the changes in geographic mix to higher margin areas and improvement of customer base through the marketing focus of value added products and services. Other improvements to gross profit are the result of increased margins on gas system and appliance sales of $300,000 and increased emphasis of selling value added services through a service labor increase of $200,000. General and administrative expense. General and administrative expenses increased slightly by $100,000 to $27.6 million in fiscal 1997 compared to $27.5 million in fiscal 1996. Although general and administrative expenses were flat from 1996 to 1997, there were reductions in many categories due to the elimination of activities required for the management of the Synergy properties in December, 1996. The various reductions in the expense categories were offset by the elimination of the reimbursement of overhead expenses from Synergy of $2.4 million. Insurance and related liability claims expense decreased substantially by $900,000 or 36% to $1.7 million in fiscal 1997 as compared to $2.6 million in fiscal 1996. The decrease is due primarily to an improved claims record and the pooling of coverage with Synergy resulting in reduced premiums. The company self insures the first $250,000 for each and every general liability incident, which is reduced from $500,000 per incident in the prior year. Above this retention is a corridor deductible of $750,000 per occurrence, $1.25 million in aggregate for the combined companies compared to $1 million for the Company in the prior year. For vehicle and worker's compensation programs, the Company has a $250,000 deductible per occurrence with a $2.0 million aggregate stop loss for the combined companies. The Company obtains excess coverage on a claims-made basis. Provisions for self-insured losses are recorded based upon the Company's estimates of the aggregate self-insured liability for claims incurred. The Company and its subsidiaries are defendants in various lawsuits related to the self- insurance program which are not expected to have a material adverse effect on the Company's financial position or results of operations. Most other categories of general and administrative expenses were reduced in fiscal 1997 from fiscal 1996 as a result of the elimination of Synergy managment, as previously discussed, except for salaries which remained fairly stable, decreasing only $200,000, or .9% from $15.8 million in fiscal 1996 to $15.6 million in fiscal 1997. The Company strategically expanded its executive staff and middle management in order to allow for improved succession planning which was offset by the reduction in certain other staffing related to the elimination of Synergy management. Provision for doubtful accounts. The provision for doubtful accounts decreased approximately $400,000, or 46%, from $900,000 in fiscal 1996 to $500,000 in fiscal 1997. The decrease is a result of the enhanced credit and collection efforts established in fiscal 1995 as well as a reflection of the upgrade in customers during the same time frame. The Company has also tied employees' incentive compensation to credit and collection results. Depreciation and Amortization. Depreciation and amortization increased slightly by $100,000 to $6.9 million in fiscal 1997 from $6.8 million in fiscal 1996. The increase is primarily due to fixed asset purchases through acquisitions and capital expenditures during fiscal 1997. Interest Expense. Interest expense was relatively unchanged from fiscal 1996 to 1997. Fiscal Years Ended June 30, 1996 and June 30, 1995 Operating Revenue. Operating revenue increased $8.6 million, or 11.6%, to $82.7 million in fiscal year 1996 as compared to $74.1 million in fiscal year 1995. The increase was due to a $9.2 million increase in gas sales and the addition of the Synergy management fee of $400,000 (prorated for a 10 month period), offset by decreases of $500,000 in gas systems and appliance sales, $200,000 in service labor, and $300,000 in service charges. The increase in gas sales was due to an approximate $.06 per gallon increase in the average net sales price of propane and a net increase of approximately 2.0 million gallons, or 2.3%. Taking into account the acquisitions and disposals of stores in fiscal year 1996, gallonage increased 6.5 million gallons, or 8.1% on a same store basis, as a result of increased demand due to a colder winter than in fiscal year 1995 and new customer growth. Decreases in gas systems and appliance sales and the related service labor were due primarily to divestitures of retail outlets. The decrease in service charges results from improved collection efforts and more stringent credit policies and procedures. Cost of products sold. Cost of products sold increased $7.7 million, or 21.7%, to $43.3 million in fiscal year 1996 as compared to $35.6 million in fiscal year 1995. This increase was due to an increase of approximately $8.0 million in cost of gas sales due to the net 2.0 million gallon volume increase and an approximate $.05 per gallon rise in the wholesale cost of propane offset by a decrease of approximately $300,000 in the cost of gas systems and appliance sales due to the decrease in sales volume. Gross profit. The Company's gross profit for the year increased $900,000, or 2.3%, to $39.4 million in fiscal year 1996 as compared to $38.5 million in fiscal year 1995. The Company's gross profit per gallon increased approximately $.01 to approximately $.39 per gallon in fiscal year 1996, as a result of the increase in sales price of approximately $.06 per gallon offset by the $.05 increase in the cost of propane. The resulting increase in gross profit of $1.2 million from gas sales was offset by a decrease in gross profit of approximately $200,000 from gas systems and appliances due to the decrease in sales volume and the decrease in other revenues of approximately $100,000. General and administrative expense. General and administrative expenses decreased $1.1 million, or 3.8%, to $27.5 million in fiscal year 1996 compared to $28.6 million in fiscal year 1995. This decrease is due primarily to a decrease in insurance and liability claims of $300,000, an increase of $400,000 in rent and maintenance and the net effect of the Management Agreement with SYN, Inc. The decrease in insurance and liability claims was due to improved claim history. The increase in rent and maintenance was due primarily to the addition of new rental agreements entered into as a part of retail service centers acquired during fiscal years 1995 and 1996 and increased tank painting and building maintenance related both to the conversion to a new identity for acquired retail service centers and as part of the Company's modernization program. The decrease that occurred because of the Synergy Management Agreement is due to the impact of increased costs in the other general and administrative cost centers offset by the annual overhead reimbursement made, which was $2.8 million in fiscal year 1996, and an additional one time $1.1 million payment related to the Synergy acquisition. These reimbursements were made to offset the increased costs required for the management of Synergy including additional home office employee salaries and related other costs. Provision for doubtful accounts. The provision for doubtful accounts decreased approximately $250,000, or 22.0%, from approximately $1.1 million in fiscal year 1995 to approximately $900,000 in fiscal year 1996. The decrease is due to the final determination of management regarding an appropriate estimate for the allowance based on historical trends, the aging of accounts receivable, and the enhanced credit and collection efforts in place. Depreciation and amortization. Depreciation and amortization increased by $600,000 or 9.7%, to $6.8 million in fiscal year 1996 from $6.2 million in fiscal year 1995. The increase is due to an increase in amortization of approximately $100,000 due to newly acquired goodwill and intangibles related to the acquisition of certain retail service centers. The remaining increase of $500,000 is due to the effect of increasing depreciable fixed assets through capital expenditures and acquisitions while disposing of partially or fully depreciated assets through disposals of retail service centers and other sales. Interest expense. Interest expense was relatively unchanged from fiscal year 1995 to 1996. LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity requirements have arisen primarily from funding its working capital needs, capital expenditures and debt service obligations. Historically, the Company has met these requirements from cash flows generated by operations and from borrowings under its working capital facility. In fiscal year 1997, cash flows generated from investing activities, specifically the sale of the Company's interests in Synergy and Myers for $18 million, helped to fund the Company's liquidity requirements. Cash flow used in operating activities was $1.7 million in fiscal year 1997 as compared to the cash flow provided in fiscal year 1996, of $300,000. This decrease is due primarily to the Company's ability to reduce certain liabilities and accrued expenses while carrying higher levels of inventory and accounts receivable due to the cash flow provided by the Synergy/Myers transaction. Cash flow provided by investing activities increased to $10.5 million as compared to the cash flow used in fiscal year 1996, of $1.9 million. This increase is due primarily to the $18.0 million provided by the Synergy/Myers transaction discussed above as well as $5.5 million collected from the sale of certain retail service centers. Although expenditures for other property, plant and equipment in conjunction with the Company's modernization plans remained stable at $7.7 million in fiscal year 1997, as compared to $7.0 million in fiscal year 1996, cash expended for retail service center acquisitions increased from $1.1 million in 1996 to $5.2 million in 1997. Pursuant to the indenture for the 12-7/8% Senior Secured Notes, the Company is required to make a $4.5 million, semi-annual interest payment on each July 15 and January 15. Beginning in fiscal year 2000, the semi-annual cash interest payment on the Senior Secured Notes will increase to $8.2 million. The Company met the July 1997, interest payment through the use of operating cash flows and available borrowings on its working capital facility. The Company's high degree of leverage makes it vulnerable to adverse changes in the weather and could limit its ability to respond to market conditions, to capitalize on business opportunities, and to meet its contractual and financial obligations. Fluctuations in interest rates will affect the Company's financial condition inasmuch as the Company's working capital facility bears interest at a floating rate. The Company believes that, based on current levels of operations and assuming winter weather comparable to fiscal year 1997, it will be able to fund its debt service obligations from funds generated from operations and funds available under its working capital facility. The Company's credit facility will mature on June 29, 1998, at which time the Company will have to refinance or replace the facility, and may be required to pay some portion of any outstanding balance. The credit facility will be necessary to fund the Company's seasonal operations and debt service requirements. There can be no assurance that the Company will be able to refinance or replace the credit facility, or the terms upon which any such financing may occur. The seasonal nature of the Company's business will require it to rely on borrowings under its $15.0 million credit facility as well as cash from operations, particularly during the summer and fall months when the Company is building its inventory in preparation for the winter heating season. While approximately two-thirds of the Company's operating revenue is earned in the second and third quarters of each year, certain expense items such as general and administrative expense are recognized on a more annualized basis. Interest expense also tends to be higher during the summer and fall months because the Company relies in part on increased borrowings on its revolving credit line to finance inventory purchases in preparation for the Company's winter heating season. The Company intends to fund its routine capital expenditures and the purchase of assets for new retail service centers with cash from operations, borrowings under its credit facility, or other bank financing subject to borrowing availability covenants. The Company intends to fund acquisitions through seller financing, to the extent allowable under the Senior Secured Note agreement, and with cash from operations or bank financing. The Company's credit facility and the indenture for the Senior Secured Notes impose restrictions on the Company's ability to incur additional indebtedness. Such restrictions, together with the highly leveraged position of the Company, could restrict the ability of the Company to acquire financing for capital expenditures and other corporate activities. These restrictions, as amended, restrict the acquisition activity of the Company based on the availability of working capital borrowing, earnings and certain proceeds less required debt service and capital and certain other expenditures or approval from the lenders. Acquisitions are further restricted to use no more than $15.0 million in cash in a twelve-month period without prior approval. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. See the Consolidated Financial Statements included elsewhere herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The directors and executive officers of the Company are as follows: POSITION HELD WITH THE COMPANY NAME AGE AND PRINCIPAL OCCUPATION ---- --- ------------------------------ Paul S. Lindsey, Jr. 52 Chairman of the Board, Chief Executive Officer, and President since June 1994; previously Vice Chairman of the Board (since February 1987) and Chief Operating Officer (since March 1988); term as director expires 2000 Douglas A. Brown 37 Director since June 1994; Partner ZS Fund since 4/97; previously member Holding Capital Group, Inc. (since 1989); term as director expires 2000 Kristin L. Lindsey 49 Director/Executive Vice President since Oct. 1996; previously Director/Vice President to June 1994; previously pursued charitable and other personal interest; term as director expires 1999 Bruce M. Withers, Jr. 70 Director since June 1994; previously Chairman and Chief Executive Officer of Trident NGL Holding, Inc. (since August 1991) and President of the Transmission and Processing Division of Mitchell Energy Corporation (1979 to 1991); term as director expires 1999 Jim J. Shoemake 59 Director since June 1994; partner of Guilfoil, Petzall & Shoemake (since 1970); term as director expires 1998 Valeria Schall 43 Executive Vice President since October, 1996, previously Vice President since 1992; Corporate Secretary since 1985 and Assistant to the Chairman since 1987 Richard M. Paul, Jr. 51 Vice President/Chief Operating Officer since September 1, 1997, previously Senior Regional Mgr. of Suburban Propane L.P. since 1990. Mark Castaneda 33 Vice President Finance and Administration since August 1995; previously Controller of Skelgas Propane since 1991 and an accountant at Deloitte & Touche since 1986 James M. Trickett 47 Sr. Vice President since September 1997; Chief Operating Officer of All Star Acquisition Co. since September 1997, previously Divisional Manager since June 1996, and Regional Manager since August 1995. Divisional Manager with Synergy Gas Corporation since 1990. Robert C. Heagerty 50 Sr. Vice President since September 1997, previously Divisional Vice President since June 1993; previously Regional Manager since December 1986. Daniel P. Binning 40 Sr. Vice President since September 1997, previously Divisional Vice President since June 1996; previously Divisional Manager since August 1995, and Marketing Representative with Ferrell Gas Corporation since December 1990. Kenneth J. DePrinzio 50 Sr. Vice President-Corporate Development since October 1996, previously Vice President-Corporate Development since June 1996, previously Divisional Vice President Since June 1993, and Regional Manager since May 1992. J. Greg House, Sr. 40 Vice President - Management Information Systems since June, 1996; previously Director-MIS since September 1994 and Manager-MIS Paul Mueller Co. since 1987. After expiration of the initial terms of directors as set forth above, each director will serve for a term of three years. Officers of the Company are elected by the Board of Directors of the Company and will serve at the discretion of the Board, except for Mr. Lindsey who is employed pursuant to an employment agreement that expires June 24, 1999 (subject to extension). ITEM 11. EXECUTIVE COMPENSATION EXECUTIVE COMPENSATION The following table provides compensation information for each of the years ended June 30, 1997, 1996, and 1995 for (i) the Chief Executive Officer of the Company, (ii) the four other executive officers of the Company who are most highly compensated and whose total compensation exceeded $100,000 for the most recent fiscal year (of which there was only one) and (iii) those persons who are no longer executive officers of the Company but were among the four most highly compensated and whose total compensation exceeded $100,000 for the most recent year (of which there were none) SUMMARY COMPENSATION TABLE Annual Compensation Name and Principal Position at End of Fiscal Other Annual All Other Fiscal Year 1997 Year Salary Bonus Compensation Compensation - -------------------- ------ ------ ----- ------------ ------------ Paul S. Lindsey, Jr. 1997 $350,000 $750,000 --- --- Chief Executive 1996 $350,000 --- --- --- Officer, Chairman 1995 $350,000 --- --- of the Board and President Valeria Schall 1997 $71,000 $35,000 --- --- Executive Vice 1996 $59,000 $32,500 --- --- President 1995 $46,000 $27,500 --- --- EMPLOYMENT AGREEMENT On June 24, 1994, the Company entered into an employment agreement with Mr. Lindsey. The agreement has a five-year term and, as amended beginning in fiscal year 1998, provides for the payment of an annual salary of $400,000 and reimbursement for reasonable travel and business expenses. The agreement requires Mr. Lindsey to devote substantially all of his time to the Company's business. The agreement is for a term of five years, but is automatically renewed for one year unless either party elects to terminate the agreement at least four months prior to the end of the term or any extension. The agreement may be terminated by Mr. Lindsey or the Company, but if the agreement is terminated by the Company and without cause, the Company must pay one year's salary as severance pay. INCENTIVE STOCK OPTION PLAN There were no options granted to the named officer nor exercised by him during fiscal year 1997 and no unexercised options held by him as of the end of the 1997 fiscal year. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION A compensation committee was formed in July 1994, consisting of Messrs. Withers, Shoemake, and Brown. Mr. Lindsey makes the initial recommendation concerning executive compensation for the executive officers of the Company, other than recommendations concerning his own and his wife's compensation, which are then approved by the compensation committee. The compensation committee determines the compensation of Mr. Lindsey's wife and, subject to the employment agreement described above, Mr. Lindsey. DIRECTOR COMPENSATION During the last completed fiscal year, the directors of All Star Gas received an annual fee of $25,000, payable quarterly, for their services. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The table below sets forth information with respect to the beneficial ownership of shares of Common Stock of the Company as of September 19, 1997, by persons owning more than five percent of any class, by all directors of the Company, by the individuals named in the Summary Compensation Table owning shares, and by all directors and executive officers of the Company as a group. Number of Shares Name of Beneficial Owner (1) Beneficially Owned Percent - ---------------------------- ------------------ ------- Paul S. Lindsey, Jr. (2) 1,507,610 65.97 Kristin L. Lindsey (2) 753,805 32.99 Douglas A. Brown 144,530 6.3 Valeria Schall 79,603 3.5 Bruce M. Withers, Jr. 39,248 1.72 Jim J. Shoemake 39,248 1.72 All directors and executive officers as a group (13 2,065,168 90.37 persons)(3) - ----------------- (1) The address of each of the beneficial owners is c/o All Star Gas Corporation, P.O. Box 303, 1700 South Jefferson Street, Lebanon, Missouri 65536. (2) Mr. Lindsey's shares consist of 753,805 shares owned by the Paul S. Lindsey, Jr. Trust established January 24, 1992 and 753,805 shares owned by the Kristin L. Lindsey Trust established January 24, 1992. Mr. Lindsey has the power to vote and to dispose of the shares held in the Kristin L. Lindsey Trust. Mrs. Lindsey's shares consist of the shares owned by the Kristin L. Lindsey Trust. Mrs. Lindsey disclaims ownership of the shares held by her husband in the Paul S. Lindsey, Jr. Trust. (3) The amounts shown include the shares beneficially owned by Mr. Lindsey and Mrs. Lindsey as set forth above, and 254,929 shares owned by other executive officers. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Mrs. Kristin L. Lindsey, who beneficially owns approximately 47.7% of the Company's outstanding Common Stock and became a director of the Company upon consummation of the Transaction, is the majority stockholder in a company that supplies paint and labels to the Company. The Company's purchases of paint and labels from this company totaled $285,637 in fiscal year 1997 and $202,598 in fiscal year 1996. The Company has entered into an agreement with each shareholder (all of whom are directors or employees of the Company) providing the Company with a right of first refusal with respect to the sale of any shares by such shareholders. In addition, the Company has the right to purchase from such shareholders all shares they hold at the time of their termination of employment with the Company at the then current fair market value of the shares. The fair market value is determined in the first instance by the Board of Directors and by an independent appraisal (the cost of which is split between the Company and the departing shareholder) if the departing shareholder disputes the board's determination. In addition to purchased product at refineries, gas processing plants, underground storage facilities, and pipeline terminals for use by the Company, the Company also purchased product for use at the Synergy retail locations and Myers Propane until December 30, 1996. From time to time, the Company has also purchased product which has been sold to Red Top Gas, a retail propane distributor owned by a party related to the Chief Executive Officer of the Company. At June 30, 1997, the Company had a receivable balance due from Red Top Gas in the amount of $113,000. The Company entered into an operating lease with its Chief Executive Officer to lease a jet aircraft for use in Company travel. The lease requires $282,981 in annual payments for a term of 3 years beginning in June, 1996, and had a requirement for a $200,000 deposit. During July 1997, the Company advanced $250,000 to the Chief Executive Officer for a period of six days against his annual salary of $400,000. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements Report of Independent Accountants Consolidated Balance Sheets as of June 30, 1997 and 1996 Consolidated Statement of Operations for the Years Ended June 30, 1997, 1996, and 1995 Consolidated Statements of the Stockholders' Equity (Deficit) for the Years Ended June 30, 1997, 1996, and 1995 Consolidated Statements of Cash Flows for the Years Ended June 30, 1997, 1996, and 1995 (a)(2) Financial Statement Schedules Schedule II Valuation and qualifying accounts (a)(3) Exhibits EXHIBIT NO. Description - ------- ----------- 3.1 Articles of Incorporation of the Company (incorporated herein by reference to Exhibit 3.1 to the Company's Registration Statement on Form S-1 (No. 33-53343) 3.2 Certificate of Amendment of the Certificate of Incorporation of the Company, dated April 26, 1994, relating to the change of name (incorporated herein by reference to Exhibit 3.2 to the Company's Registration Statement on Form S-1 (No. 33-53343) 3.3 By-laws of the Company (incorporated herein by reference to Exhibit 3.3 to the Company's Registration Statement on Form S-1 (No. 33-53343) 4.1 Indenture between All Star Gas Corporation and J. Henry Schroder Bank & Trust company, Trustee, relating to the 9% Subordinated Debentures due December 31, 2007, and the form of 9% Subordinated Debentures due December 31, 2007, (incorporated herein by reference to Exhibit 4(a) to the All Star Incorporated and Exco Acquisition Corp. (Commission File No. 2-83683) Registration Statement on Form S- 14 with the Commission on May 11, 1983); and First Supplemental Indenture thereto between All Star Gas Corporation (now known as EGOC) and IBJ Schroder Bank & Trust Co., dated as of December 13, 1989, (incorporated herein by reference to Exhibit 4(c) to All Star Gas Corporation (now known as EGOC) Registration Statement on Form 8-B filed with the Commission on February 1, 1990) 4.2 Indenture between the Company and Shawmut Bank Connecticut, National Association, Trustee, relating to the 12-7/8% Senior Secured Notes due 2004, including the 12-7/8% Senior Secured Notes due 2004, the Guarantee and the Pledge Agreement (incorporated herein by reference to Exhibit 4.2 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994) 4.3 Warrant Agreement (incorporated herein by reference to Exhibit 4.3 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994) 10.1 Shareholder Agreement, dated as of October 28, 1988, by and among All Star Gas Acquisition Corporation and Robert W. Plaster Trust, Robert W. Plaster, Trustee; Paul S. Lindsey, Jr.; Stephen R. Plaster Trust, Lynn C. Hoover, Trustee; Cheryl Plaster Schaefer Trust, Lynn C. Hoover, Trustee; Robert L. Wooldridge; Gwendolyn B. VanDerhoef; Dwight Gilpin; Luther Henry Gill; Valeria Schall; Floyd J. Waterman; Larry W. Bisig; Larry Weis; Robert Heagerty; Murl J. Waterman; Earl L. Noe; Thomas Flak; Michael Kent St. John; James E. Acreman; Carolyn Rein; Dan Weatherly; Nina Irene Craighead; Joyce Sue Kinnett; Edwin H. McMahon; Paul Stahlman; Ralph Wilson; Alan Simer; Ferrell Stamper; and All Star Gas Corporation Employee Stock Ownership Plan, Robert W. Plaster, Trustee (incorporated herein by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (No. 33-53343) 10.2 1995 Stock Option Plan of All Star Gas Company (incorporated herein by reference to Exhibit 10.2 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995) 10.3 Credit Agreement between the Company and Continental Bank, as agent (incorporated herein by reference to Exhibit 10.3 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1994) 10.4 Lease Agreement, dated May 7, 1994, between the Company and Evergreen National Corporation (incorporated herein by reference to Exhibit F of Exhibit 10.1 to the All Star Gas Operating Corporation (Commission File No. 1-6537-3) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994) 10.5 Services Agreement, dated May 7, 1994, between the Company and All Star Service Corporation (incorporated herein by reference to Exhibit G of Exhibit 10.1 to the All Star Gas Operating Corporation (Commission File No. 1-6537-3) Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1994) 10.6 Non-Competition Agreement, dated May 7, 1994, by and among the Company, Energy, Robert W. Plaster, Stephen R. Plaster, Joseph L. Schaefer, Paul S. Lindsey, Jr. (incorporated herein by reference to Exhibit E of Exhibit 10.1 to the All Star Gas Operating Corporation (Commission File No. 1-6537-3) Quarterly Report on Form 10- Q for the fiscal quarter ended March 31, 1994) 10.7 Employment Agreement between the Company and Paul S. Lindsey, Jr. (incorporated herein by reference to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (No. 33-53343) 10.8 Asset Purchase Agreement by and among the Company, All Star Gas, Inc. of North Carolina, PSNC Propane Corporation, and Public Service Company of North Carolina, Incorporated (incorporated herein by reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (No. 33-533343) 10.9 Indemnification Agreement between the Company and Douglas A. Brown (incorporated herein by reference to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (No. 33-53343) 10.10 Tax Indemnification Agreement between the Company and Energy (incorporated herein by reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (No. 33-53343) 10.11 Supply Contract No. 1, dated June 1, 1993, between EGOC and Warren Petroleum Company (incorporated herein by reference to Exhibit 10.11 to the Company's Registration Statement on Form S-1 (No. 33-53343) 10.12 Supply Contract No. 2, dated June 1, 1993, between EGOC and Warren Petroleum Company (incorporated herein by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (No. 33-53343) 10.13 Management Agreement between All Star Gas Company, Northwestern Growth Corporation and SYN, Inc. dated May 17, 1995 (incorporated herein by reference to Exhibit 10.13 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.14 Agreement Among Initial Stockholders and SYN, Inc. dated May 17, 1995 (incorporated herein by reference to Exhibit 10.14 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.15 Waiver Agreement dated April 29, 1995 by and among All Star Gas Corporation, SYN, Inc., Paul S. Lindsey, Jr. Northwestern Growth Corporation, All Star Energy Corporation, Robert W. Plaster, and Stephen R. Plaster (incorporated herein by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995) 10.16+ Propane Sales Agreement dated August 24, 1995, between All Star Gas Corporation and Warren Petroleum Company (incorporated herein by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995) 10.17+ Supply Contract dated April 27, 1995, between All Star Gas Corporation and Phillips 66 Company (incorporated herein by reference to Exhibit 10.17 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995) 10.18+ Dealer Sale Contract dated January 20, 1995, between All Star Gas Corporation and Conoco Inc. (incorporated herein by reference to Exhibit 10.18 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995) 10.19+ Supply Contract dated April 24, 1995 between All Star Gas Corporation and Enron Gas Liquids, Inc. (incorporated herein by reference to Exhibit 10.19 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995) 10.20+ Amendment No. 1 to Supplement A to Loan and Securities Agreement dated June 29, 1995 between All Star Gas Corporation and Bank of America Illinois (incorporated herein by reference to Exhibit 10.20 to the Registrant's Annual Report on Form 10-K for the year ended June 30, 1995) 10.21 9/9/96 Waiver, Amendment No. 2 to Loan and Security Agreement and Amendment No. 4 to Supplement A to Loan and Security Agreement with Bank of America Illinois (incorporated herein by reference to Exhibit 10.21 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.22 7/1/96 Agreement Amending Amended and Restated Agreement Among Initial Stockholders and Syn Inc. (incorporated herein by reference to Exhibit 10.22 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.23 5/15/96 Waiver between Bank of America Illinois and All Star Gas Corporation (incorporated herein by reference to Exhibit 10.23 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.24 2/13/96 Amendment No. 3 to Supplement A to Loan and Security Agreement with Bank of America Illinois (incorporated herein by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.25 11/3/95 Agreement Among Initial Stockholders and Mac Inc. (incorporated herein by reference to Exhibit 10.25 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.26 11/3/95 Management Agreement between NWPS, Myers Acquisition Company and Empire (incorporated herein by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.27 9/28/95 Amendment No. 1 to Loan and Security Agreement and Amendment No. 2 to Supplement A to Loan and Security Agreement with Bank of America Illinois (incorporated herein by reference to Exhibit 10.27 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.28 7/31/95 Agreement Amending Management Agreement (incorporated herein by reference to Exhibit 10.28 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.29 7/31/95 Agreement Amending and Reinstating Agreement Among Initial Stockholders and Syn Inc. (incorporated herein by reference to Exhibit 10.29 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.30+ Propane Sales Agreement dated April 9, 1996, between All Star Gas Corporation and Warren Petroleum Company (incorporated herein by reference to Exhibit 10.30 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.31+ Amendment to Supply Contract dated August 15, 1994, between All Star Gas Corporation and Phillips 66 Company (incorporated herein by reference to Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.32+ Supply Contract dated April 1, 1996, between All Star Gas Corporation and Conoco, Inc. (incorporated herein by reference to Exhibit 10.32 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.33 June 1, 1996, Lease of Aircraft between Paul S. Lindsey, Limited Liability Company and All Star Gas Corporation (incorporated herein by reference to Exhibit 10.33 to the Company's Annual Report on Form 10-K for the year ended June 30, 1996) 10.34+ Liquified Petroleum Gas Contract dated July 1, 1996 between All Star Gas Corporation and Shell Anacortes Refining Company 10.35+ Liquified Petroleum Gas Contract dated July 1, 1996 between All Star Gas Corporation and Shell Oil Company 10.36+ Propane Sales Agreements between All Star Gas Corporation and Warren Petroleum Company 10.37+ Liquified Petroleum Gas Contract, dated, June 1, 1996, between All Star Gas Corporation and Shell Oil Company 10.38 Amendment #3 dated 10/29/96 to Loan and Security Agreement and Amendment #6 to Supplement A to Loan and Security Agreement 10.39 Amendment #4 to Loan and Security Agreement 21.1 Subsidiaries of the Company 27.1 Financial Data Schedules + Confidential treatment has been requested. The copy filed as an exhibit omits the information subject to the confidentiality request. (b) Reports on Form 8-K September 28, 1996 (c) Exhibits See (a)(3) above. (d) Financial Statements See (a)(1) above. Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. All Star Gas Corporation By: /s/ Paul S. Lindsey, Jr. Paul S. Lindsey, Jr. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE Capacity in which Signed Date --------- ------------------------ ---- /s/ Paul S. Lindsey, Jr. Chief Executive Officer September 26, 1997 - ------------------------- and Chairman of the Paul S. Lindsey, Jr. Board of All Star Gas Corporation (principal executive officer) /s/ Mark Castaneda Vice President Finance September 26, 1997 - ------------------------- and Administration Mark Castaneda (principal financial/ accounting officer) /s/ Douglas A. Brown Director of All Star Gas September 26, 1997 - ------------------------- Corporation Douglas A. Brown /s/ Kristin L. Lindsey Director of All Star Gas September 26, 1997 - ------------------------- Corporation Kristin L. Lindsey /s/ Bruce M. Withers, Jr. Director of All Star Gas September 26, 1997 - ------------------------- Corporation Bruce M. Withers, Jr. /s/ Jim J. Shoemake Director of All Star Gas September 26, 1997 - ------------------------- Corporation Jim J. Shoemake Independent Accountants' Report Board of Directors and Stockholders All Star Gas Corporation Lebanon, Missouri We have audited the accompanying consolidated balance sheets of ALL STAR GAS CORPORATION as of June 30, 1997 and 1996, and the related consolidated statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ALL STAR GAS CORPORATION as of June 30, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 1997, in conformity with generally accepted accounting principles. /s/ Baird, Kurtz & Dobson Springfield, Missouri August 14, 1997 CONSOLIDATED BALANCE SHEETS ALL STAR GAS CORPORATION JUNE 30, 1997 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) ASSETS 1997 1996 ---- ---- CURRENT ASSETS Cash $ 965 $ 898 Trade receivables, less allowance for doubtful accounts; 1997 - $899, 1996 - $722 5,101 4,308 Receivable from sale of retail locations -- 2,390 Inventories 6,924 6,039 Prepaid expenses 401 276 Due from related parties 98 1,261 Refundable income taxes 630 -- Deferred income taxes -- 995 ----------- ----------- Total Current Assets 14,119 16,167 ----------- ----------- PROPERTY AND EQUIPMENT, AT COST Land and buildings 9,887 8,868 Storage and consumer service facilities 70,984 66,336 Transportation, office and other equipment 24,473 22,203 ----------- ----------- 105,344 97,407 Less accumulated depreciation 32,118 29,497 ----------- ----------- 73,226 67,910 OTHER ASSETS Debt acquisition costs, net of amortization 3,605 4,228 Excess of cost over fair value of net assets acquired, at amortized cost 14,101 12,357 Other 2,781 1,340 ----------- ----------- 20,487 17,925 $ 107,832 $ 102,002 =========== =========== See Notes to Consolidated Financial Statements LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) 1997 1996 ---- ---- CURRENT LIABILITIES Checks in process of collection $ 1,366 $ 2,794 Current maturities of long-term debt 2,385 7,358 Accounts payable 2,477 2,715 Accrued salaries 1,517 1,051 Accrued interest 4,081 4,553 Accrued expenses 841 897 Customer prepayments 6,050 2,321 Income taxes payable -- 181 ----------- ----------- Total Current Liabilities 18,717 21,870 ----------- ----------- LONG-TERM DEBT 124,247 115,500 ----------- ----------- DEFERRED INCOME TAXES 7,190 8,935 ----------- ----------- ACCRUED SELF-INSURANCE LIABILITY 398 540 ----------- ----------- STOCKHOLDERS' EQUITY (DEFICIT) Common; $.001 par value; authorized 20,000,000 shares; issued June 30, 1997 and 1996 14,291,020 shares 14 14 Common stock purchase warrants 1,227 1,227 Additional paid-in capital 27,279 27,279 Retained earnings 16,834 14,612 ----------- ----------- 45,354 43,132 Treasury stock, at cost June 30, 1997 - 12,726,970 shares and June 30, 1996 - 12,711,795 shares (88,074) (87,975) ---------- ---------- (42,720) (44,843) ---------- ---------- $ 107,832 $ 102,002 =========== =========== ALL STAR GAS CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 1997 1996 1995 ---- ---- ---- OPERATING REVENUE $ 94,543 $ 82,702 $ 74,090 COST OF PRODUCT SOLD 53,075 43,318 35,612 ------------ ------------ ------------ GROSS PROFIT 41,468 39,384 38,478 ------------ ------------ ------------ OPERATING COSTS AND EXPENSES Provision for doubtful accounts 483 889 1,136 General and administrative ` 27,638 27,493 28,558 Depreciation and amortization 6,867 6,770 6,166 (Gain) loss on sale of assets 732 (395) (550) ------------ ----------- ----------- 35,720 34,757 35,310 ------------ ------------ ------------ OPERATING INCOME 5,748 4,627 3,168 ------------ ------------ ------------ OTHER INCOME (EXPENSE) Interest expense (10,605) (10,657) (10,681) Amortization of debt discount and expense (6,140) (5,476) (4,889) Gain on SYN/Myers Transaction 16,922 -- -- Restructuring proposal costs (1,903) -- -- Write off of carrying value of underground storage facility and closing costs -- (200) (924) ------------ ----------- ----------- (1,726) (16,333) (16,494) ------------ ----------- ----------- INCOME (LOSS) BEFORE EQUITY IN NET INCOME OF AFFILIATES 4,022 (11,706) (13,326) EQUITY IN NET INCOME OF AFFILIATES -- 59 -- ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES 4,022 (11,647) (13,326) PROVISION (CREDIT) FOR INCOME TAXES 1,800 (3,750) (4,600) ------------ ----------- ----------- NET INCOME (LOSS) $ 2,222 $ (7,897) $ (8,726) ============ =========== =========== NET INCOME (LOSS) PER COMMON SHARE $1.41 (5.00) (5.53) ==== ===== ===== See Notes to Consolidated Financial Statements ALL STAR GAS CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS) Common Total Stock Additional Stockholders' Common Purchase Paid-In Retained Treasury Equity Stock Warrants Capital Earnings Stock (Deficit) BALANCE, JUNE 30, 1994 $14 $1,227 $27,279 $31,235 $(87,975) $ (28,220) NET LOSS -- -- -- (8,726) -- (8,726) -- -- -- -- -- -- ---- ------- ------- ------- -------- -------- BALANCE, JUNE 30, 1995 14 1,227 27,279 22,509 (87,975) (36,946) NET LOSS -- -- -- (7,897) -- (7,897) -- -- -- -- -- -- ---- ------- ------- ------- -------- -------- BALANCE, JUNE 30, 1996 14 1,227 27,279 14,612 (87,975) (44,843) TREASURY STOCK PURCHASE -- -- -- -- (99) (99) NET INCOME -- -- -- 2,222 -- 2,222 ---- ------- ------- ------- -------- -------- BALANCE, JUNE 30, 1997 $14 $1,227 $27,279 $16,834 $(88,074) $(42,720) ==== ======= ======= ======= ======== ======== See Notes to Consolidated Financial Statements ALL STAR GAS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS) 1997 1996 1995 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 2,222 $ (7,897) $(8,726) Items not requiring (providing) cash: Depreciation 5,467 5,427 4,971 Amortization 7,540 6,819 6,084 Gain on sale of assets and SYN/Myers transaction (16,190) (395) (550) Loss on underground storage facility -- 200 924 Undistributed earnings of affiliate -- (59) -- Deferred income taxes (750) (3,850) (3,000) Changes in: Trade receivables (982) 191 1,075 Inventories (905) (896) (383) Due from related parties 1,163 (599) -- Accounts payable and customer 2,392 508 289 prepayments Accrued expenses and self insurance (1,015) 1,243 4,682 Prepaid expenses and other (644) (375) (2,262) ---------- ---------- ------- Net cash provided by (used in) operating activities (1,702) 317 3,104 ---------- ----------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of retail service centers and other assets 2,476 6,177 2,956 Receipts on sales of retail outlets previously accrued 3,002 -- -- Proceeds from SYN/Myers transaction 18,000 -- -- Acquisition of retail service centers (5,248) (1,087) (7,047) Purchases of property and equipment (7,733) (7,033) (4,154) ------- ------- ------- Net cash provided by (used in) investing activities 10,497 (1,943) (8,245) -------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Increase (decrease) in working capital facility $ (5,839) $ 1,331 $ 5,058 Principal payments on purchase obligations (1,362) (837) (346) Increase (decrease) in checks in process (1,428) 1,209 (1,677) of collection Purchase of treasury stock (99) -- -- ---------- ---------- -------- Net cash provided by (used in) financing activities (8,728) 1,703 3,035 ---------- ---------- -------- INCREASE (DECREASE) IN CASH 67 77 (2,106) CASH, BEGINNING OF YEAR 898 821 2,927 ----------- ---------- ------- CASH, END OF YEAR $ 965 $ 898 $ 821 =========== =========== ======= See Notes to Consolidated Financial Statements ALL STAR GAS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS The Company's principal operation is the sale of wholesale and retail LP gas. Most of the Company's customers are owners of residential single or multi-family dwellings who make periodic purchases on credit. Such customers are located throughout the United States with the larger number concentrated in the central and western states and along the Pacific coast. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of All Star Gas Corporation and its subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. REVENUE RECOGNITION POLICY Sales and related cost of product sold are recognized upon delivery of the product or service. INVENTORIES Inventories are valued at the lower of cost or market. Cost is determined by the first-in, first-out method for retail operations and specific identification method for wholesale operations. At June 30, the inventories were: 1997 1996 ---- ---- (In Thousands) Gas and other petroleum products $ 3,551 $ 2,835 Gas distribution parts, appliances and equipment 3,373 3,204 ----------- ----------- $ 6,924 $ 6,039 =========== =========== PROPERTY AND EQUIPMENT Depreciation is provided on all property and equipment on the straight-line method over estimated useful lives of 3 to 33 years. INCOME TAXES Deferred tax liabilities and assets are recognized for the tax effects of differences between the financial statement and tax bases of assets and liabilities. A valuation allowance is established to reduce deferred tax assets if it is more likely than not that a deferred tax asset will not be realized. AMORTIZATION Debt acquisition costs are being amortized on a straight-line basis over the terms of the debt to which the costs are related as follows: the 1994 senior secured note costs (originally $5,143,000) are amortized over ten years; and the revolving credit facility costs (originally $341,000) are amortized over three years. Amortization of discounts on debentures and notes (Note 4) is on the effective interest, bonds outstanding method. The excess of cost over fair value of net assets acquired is being amortized on the straight-line basis over 25 years for amounts originating from the June 30, 1994, restructuring transaction. Excess of cost over fair value of net assets on subsequent acquisitions is amortized on the straight-line basis over 5 years. INCOME (LOSS) PER COMMON SHARE Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of common shares and, except where anti-dilutive, common share equivalents outstanding, if any. The weighted average number of common shares outstanding used in the computation of earnings per share was 1,572,902, 1,579,225 and 1,579,225 for each of the periods ended June 30, 1997, 1996 and 1995, respectively. FUTURES CONTRACTS AND PURCHASE COMMITMENTS The Company uses commodity futures contracts to reduce the risk of future price fluctuations for LPG inventories and contracts. Gains and losses on futures contracts purchased as hedges are deferred and recognized in cost of sales as a component of the product cost for the related hedged transaction. In the statement of cash flows, cash flows from qualifying hedges are classified in the same category as the cash flows from the items being hedged. The Company also routinely makes purchase commitments for the delivery of LPG inventories, particularly during its peak winter selling season. As of June 30, 1997, the Company's open positions on futures contracts and outstanding purchase commitments are immaterial. RECLASSIFICATION Certain reclassifications have been made to the 1996 and 1995 financial statements to conform to the 1997 financial statement presentation. These reclassifications had no effect on net earnings. NOTE 2: RESTRUCTURING TRANSACTION On June 30, 1994, the Company implemented a change in ownership and management by repurchasing 12,004,430 shares of Company common stock from its former principal shareholder (Former Shareholder) and certain other departing officers in exchange for all of the shares of a subsidiary, Empire Energy Corporation (Energy), that owned 133 retail service centers located principally in the Southeast plus certain home office assets and liabilities. Certain departing officers and employees received $7.00 per share net of the stock option exercise price for the remaining 377,865 shares of common stock that they held. The Company retained ownership of 158 retail service centers located in 20 states plus certain home office assets and liabilities. In connection with the stock purchase, the Former Shareholder terminated his employment with the Company as well as terminated certain lease and use agreements with the Company (see Note 3). Following the stock purchase, the Company's previous chief operating officer became the Company's president, chairman of the board and principal shareholder (Principal Shareholder). The Company has received a private letter ruling from the Internal Revenue Service which provides that, based on certain representations contained in the ruling, neither income nor gain for federal income tax purposes will be recognized by the Company as a result of the stock purchase. NOTE 3: RELATED-PARTY TRANSACTIONS During 1997, 1996 and 1995, the Company has purchased $285,637, $202,598 and $157,842, respectively, of paint from a corporation owned by the spouse of the Principal Shareholder of the Company. Beginning July 1, 1994, the Company entered into a seven-year services agreement with a subsidiary of Energy to provide data processing and management information services to the Company. The services agreement provides for payments by the Company to be based on an allocation of the subsidiary's actual costs based on the gallons of LP gas sold by the Company as a percentage of the gallons of LP gas sold by the Company and Energy. For the periods ended June 30, 1997, 1996 and 1995, total expenses related to this services agreement were $500,000, $600,000 and $1.1 million, respectively. Beginning July 1, 1994, the Company entered into a new lease agreement with a corporation owned principally by the Former Shareholder to lease a portion of its corporate office space. The lease requires annual payments of $75,000 for a period of seven years, with two three-year renewal options. On August 15, 1995, the Company entered into a joint venture with Northwestern Growth Corporation (NGC), a subsidiary of Northwestern Public Service Corporation, to acquire the assets of Synergy Group, Incorporated ("Synergy"), the nation's fifth largest LP gas distributor at that time. The Company acquired 30% of the common stock of SYN Inc., the acquisition entity, and entered into a Management Agreement pursuant to which the Company provided management services for SYN Inc. During 1996, the Company acquired 49% of the common stock of Myers Acquisition Company (Myers) through another joint venture with NGC. Myers acquired the stock of a retail LP distributor in Ohio. In December 1996, the Company and NGC completed an agreement for the sale of the Company's interest in SYN Inc. and Myers and the modification and termination of certain agreements between NGC, SYN Inc. and Myers. The agreement resulted in the termination of the Management Agreement and a payment of $18 million to the Company resulting in a gain reflected in the statement of operations of $16.9 million which is net of transaction and other costs and fees. The Company received payments of $1.7 million and $3.3 million related to management fees and overhead reimbursement from SYN Inc. for the periods ended June 30, 1997 and 1996, respectively. In addition, $1.1 million was reimbursed during 1996 to the Company for initial costs incurred related to the Synergy acquisition. During the periods ended June 30, 1997 and 1996, the Company purchased $20.8 million and $42.0 million, respectively, of LP gas on behalf of SYN Inc. and Myers which was transferred at cost. In December 1996, the Company acquired a 10% ownership interest in Propane Resources Transportation, Inc. (PRT). In December 1996, the Company issued a long-term mortgage obligation of $1.1 million for the purchase of certain transport equipment from SYN Inc. This equipment was then sold to PRT for a $1.1 million long-term note receivable. PRT provided transport services for a portion of the Company's propane delivery needs resulting in freight charges paid to PRT during 1997 of $1.4 million. During the period ended June 30, 1997, the Company acquired a 39% interest in Propane Resources Supply and Marketing, LLC (PRSM) for $262,500. The Company sells LP gas to PRSM on a regular basis. The Company paid consulting fees of $117,000 to PRSM during 1997. The Company also sells LP gas to Red Top Gas, a retail LP distributor owned by a party related to the Principal Shareholder. At June 30, 1997, the amount due from this related party was $113,000. The Company has invested $73,500 along with certain key employees in real estate partnerships as special limited partners for tax credit allocation purposes. In 1996 the Company entered into an operating lease with the Principal Shareholder for a jet aircraft. The lease requires $282,981 in annual payments for a term of three years beginning in June 1996. The lease also requires a $200,000 deposit which was paid in June 1996. The Company also leases from the Principal Shareholder certain real estate property at an annual cost of $18,000. NOTE 4: LONG-TERM DEBT Long-term debt at June 30 consisted of (In Thousands): 1997 1996 ---- ---- Working capital facility (A) $ 550 $ 6,389 12-7/8% Senior Secured Notes, due 2004 (B) 113,139 107,758 9% Subordinated Debentures, due 2007 (C) 5,334 5,203 Purchase contract obligations and capital leases (D) 7,609 3,508 ----------- ----------- 126,632 122,858 Less current maturities 2,385 7,358 ----------- ----------- $ 124,247 $ 115,500 =========== =========== (A) The working capital facility was provided to the Company in June 1994 in conjunction with the offering of the 12-7/8% Senior Secured Notes, due 2004. All of the Company's receivables and inventories are pledged to the agreement which contains tangible net worth, capital expenditures, interest coverage ratio, debt and certain dividend restrictions. These dividend restrictions prohibit the Company from paying common stock cash dividends. At June 30, 1996, the Company was not in compliance with the original capital expenditures, tangible net worth and interest coverage ratio covenants. The bank has waived and amended the covenants, and the Company is in compliance with the amended covenants. The facility provides for borrowings up to $15 million, subject to a sufficient borrowing base. The borrowing base generally limits the Company's total borrowings to 85% of eligible accounts receivable and 52% of eligible inventory. The facility bears interest at either 1.0% over prime or 2.5% over the LIBOR rate. The agreement provides for a commitment fee of .375% per annum of the unadvanced portion of the commitment. The Company's available revolving credit line amounted to $5.9 million at June 30, 1997, after considering $1.7 million of outstanding letters of credit. The letters of credit are principally related to the Company's self-insurance program (Note 6). The working capital facility is due on June 29, 1998. (B) The notes were issued June 1994 at a discount and require interest payments at 7% through July 15, 1999, and at 12-7/8% thereafter. The notes are redeemable at the Company's option. Prior to July 15, 1999, only 35% of the original principal issued may be redeemed, as a whole or in part, at 110% of the principal amount through July 15, 1997, and at declining percentages thereafter. The notes are guaranteed by the subsidiaries of the Company and secured by the common stock of the subsidiaries of the Company. The original principal amount of the notes issued ($127,200,000) was adjusted ($27,980,000) to give effect for the original issue discount and the common stock purchase warrants (effective interest rate of 13.0%). The discount on these notes is being amortized over the remaining life of the notes using the effective interest, bonds outstanding method. The face value of notes outstanding at June 30, 1997 and 1996, is $127,200,000. The proceeds from this offering were used to repay existing debt; fund an acquisition; repurchase Company stock and for working capital as part of the Restructuring Transaction (Note 2). Separate financial statements of the guarantor subsidiaries are not included because such subsidiaries have jointly and severally guaranteed the notes on a full and unconditional basis; the aggregate assets and liabilities of the guarantor subsidiaries are substantially equivalent to the assets and liabilities of the parent on a consolidated basis; and the separate financial statements and other disclosures concerning the subsidiary guarantors are not deemed to be material. The guarantor subsidiaries are restricted from paying dividends to the Company during any periods of default under the respective debt agreements. (C) The debentures, issued June 1983, are redeemable at the Company's option, as a whole or in part, at par value. A sinking fund payment sufficient to retire $191,000 of principal outstanding is required on December 31, 2005. In June 1994, the Company used proceeds from the issuance of the 12-7/8% Senior Secured Notes, due 2004, to repurchase $16,201,200 face value of these debentures at a discount which resulted in an extraordinary charge. The original principal amount of debentures issued ($27,313,000) was adjusted to market at issuance (effective interest rate of 16.5%). The remaining discount on these debentures is being amortized over the remaining life of the debentures using the effective interest, bonds outstanding method. The face value of debentures outstanding at June 30, 1997 and 1996, is $23,215,000 of which $13,469,200 are registered in the name of the Company. (D) Purchase contract obligations arise from the purchase of operating businesses and are collateralized by the equipment and real estate acquired in the respective acquisitions. Capital leases include leases covering data processing equipment expiring in 1998. At June 30, 1997 and 1996, these obligations carried interest rates from 7% to 11% and are due periodically through 2006. Aggregate annual debt service requirements (in thousands) of the long-term debt outstanding at June 30, 1997, are: Total Principal Interest Debt Service 1998 $ 2,385 $ 10,316 $ 12,701 1999 1,444 10,185 11,629 2000 1,272 17,550 18,822 2001 1,074 17,456 18,530 2002 708 17,385 18,093 Thereafter 138,222 37,329 175,551 ----------- ----------- ----------- $ 145,105 $ 110,221 $ 255,326 =========== =========== =========== NOTE 5: INCOME TAXES The provision for income taxes includes these components. 1997 1996 1995 ---- ---- ---- (In Thousands) Taxes currently payable (refundable) $ 2,550 $ 100 $ (1,600) Deferred income taxes (750) (3,850) (3,000) ---------- ---------- ---------- $ 1,800 $ (3,750) $ (4,600) =========== ========== ========== The tax effects of temporary differences at June 30 related to deferred taxes were: 1997 1996 ---- ---- (In Thousands) Deferred Tax Assets Allowance for doubtful accounts $ 330 $ 271 Accounts receivable advance collections 29 380 Self-insurance liabilities and 601 534 contingencies Original issue discount 5,252 3,341 Net operating loss carryforwards -- 1,769 Alternative minimum tax credit 1,803 1,200 ----------- -------- 8,015 7,495 Deferred Tax Liability Accumulated depreciation and tax cost differences $ (15,205) $ (15,435) Net deferred tax liability $ (7,190) $ (7,940) ========= ========= The above net deferred tax liability is presented on the June 30 balance sheets as follows: 1997 1996 ---- ---- (In Thousands) Deferred Tax Assets (Liabilities) Deferred tax asset - current $ -- $ 995 Deferred tax liability - long-term (7,190) (8,935) -------- -------- Net deferred tax liability $(7,190) $ (7,940) ======== ======== A reconciliation of income tax expense at the statutory rate to the Company's actual income tax expense is shown below: 1997 1996 1995 ---- ---- ---- (In Thousands) Computed at the statutory rate (34%) $ 1,367 $ (3,960) $ (4,531) Increase (decrease) resulting from: Amortization of excess of cost over fair value of assets acquired 268 279 303 State income taxes - net of federal tax benefit 90 (347) (411) Nondeductible travel costs and other expenses 87 112 39 Other (12) (84) -- Additional accruals -- 250 -- -------- -------- -------- Actual tax provision $ 1,800 $ (3,750) $ (4,600) ======== ======== ======== At June 30, 1997, the Company had approximately $2.0 million of alternative minimum tax credits available to offset future federal income taxes. NOTE 6: SELF-INSURANCE AND RELATED CONTINGENCIES Under the Company's current insurance program, coverage for comprehensive general liability, workers' compensation and vehicle liability is obtained for catastrophic exposures as well as those risks required to be insured by law or contract. The Company retains a portion of certain expected losses related primarily to comprehensive general and vehicle liability. Effective fiscal 1997, the Company and SYN Inc. pooled their risks and acquired joint coverage. The Company self insures the first $250,000 for each and every general liability incident, which is reduced from $500,000 per incident in the prior year. Above this retention is a corridor deductible of $750,000 per occurrence, $1.25 million in aggregate for the combined companies compared to $1 million for the Company in the prior year. For the vehicle and workers' compensation programs, the Company has a $250,000 deductible per occurrence with a $2.0 million aggregate stop loss for the combined companies. The Company obtains excess coverage on claims-made basis policies. Provisions for self-insured losses are recorded based upon the Company's estimates of the aggregate self-insured liability for claims incurred. For the fiscal year ended June 30, 1996, the Company's policy required a $500,000 deductible for each and every general liability incident. Prior to July 1, 1995, the Company's excess coverage for comprehensive general liability provided a loss limitation that limits the Company's aggregate of self-insured losses to $1 million per policy period. For the policy periods prior to July 1, 1991 and July 1, 1992, through June 30, 1994, the Company has provided for aggregate comprehensive general liability losses through the policies' $1 million loss limit. Additional losses, if any, are insured by the excess carrier and should not result in additional expense to the Company. As of June 30, 1997, the Company estimates losses for the comprehensive general liability policy periods July 1, 1991, through June 30, 1992; July l, 1994, through June 30, 1995; and July 1, 1996, through June 30, 1997, will not reach the loss limits and has provided accordingly. Effective July 1, 1993, the Company self-insured the first $500,000 of workers' compensation coverage (per incident). The Company purchased excess coverage from carriers for workers' compensation claims in excess of the self-insured coverage. Provisions for losses expected under this program were recorded based upon the Company's estimates of the aggregate liability for claims incurred. The Company provided letters of credit aggregating approximately $2.3 million in connection with this program of which $856,000 is outstanding at June 30, 1997. Effective July 16, 1994, the Company changed its policy so that it will obtain workers' compensation coverage from carriers and state insurance pools. Provisions for self-insured losses are recorded based upon the Company's estimates of the aggregate self-insured liability for claims incurred. A summary of the self-insurance liability, general, vehicle and workers' compensation liabilities (in thousands) for the periods ended June 30, 1997, 1996 and 1995 are: Beginning Self- Ending Self- Self- Insured Self- Insurance Insurance Claims Insurance Liability Expenses Paid Liability June 30, 1995 $1,872 $668 $1,129 $1,411 June 30, 1996 $1,411 $252 $623 $1,040 June 30, 1997 $1,040 $(65) $77 $898 The ending accrued liability includes $150,000 for incurred but not reported claims at June 30, 1997, $175,000 at June 30, 1996, and $350,000 at June 30, 1995. The current portion of the ending liability of $500,000 at June 30, 1997, and 1996, is included in accrued expenses in the consolidated balance sheets. The noncurrent portion at the end of each period is included in accrued self-insurance liability. The Company and its subsidiaries are also defendants in various lawsuits related to the self-insurance program and other business related lawsuits which are not expected to have a material adverse effect on the Company's financial position or results of operations. The Company currently self insures health benefits provided to the employees of the Company and its subsidiaries subject to a $75,000 cap per claim. Provisions for losses expected under this program are recorded based upon the Company's estimate of the aggregate liability for claims incurred. The aggregate cost of providing the health benefits was $492,000, $547,000 and $240,000 for the periods ended June 30, 1997, 1996 and 1995, respectively. In conjunction with the restructuring transaction (Note 2), the Company and Energy have agreed to share on a percentage basis the self-insured liabilities and other business related lawsuits incurred prior to June 30, 1994, including both reported and unreported claims. The self-insured liabilities included under this agreement include general, vehicle, workers' compensation and health insurance liabilities. Under the agreement, the Company assumed 52.3% of the liability with Energy assuming the remaining 47.7%. NOTE 7: CONTINGENCIES The state of Missouri has assessed the Company approximately $1,400,000 for additional state income tax for the years ended June 30, 1992 and 1993. An amount approximating one-half of the above assessment could be at issue for the year ended June 30, 1994. The Company has protested these assessments and is currently waiting for a response from the Missouri Department of Revenue. It is likely that this matter will have to be settled in litigation. The Company believes that it has a strong position on this matter and intends to vigorously contest the assessment. In conjunction with the restructuring transaction, the Company and Energy agreed to share on a percentage basis amounts incurred related to federal and state tax audits for fiscal years June 30, 1994, and prior. The Company and its subsidiaries are presently involved in other various state tax audits which are not expected to have a material adverse effect on the Company's financial position or results of operations. NOTE 8: STOCK OPTIONS AND WARRANTS STOCK OPTIONS The Company has established a Stock Option Plan for the benefit of its employees, consultants and directors. Stock options may be either incentive stock options or nonqualified stock options, with an option price no less than the fair value of the Company's common stock on the date of the grant. Options are granted for no more than a ten-year term and are exercisable based on a written agreement between the administrator and optionee. The table below summarizes transactions under the Company's stock option plan: Number of Shares Balance, June 30, 1994 0 Granted ($7.00 per share) 416,926 --------- Balance, June 30, 1995 and 1996 416,926 Granted ($7.00 per share) 276,200 Forfeited (21,000) --------- Balance, June 30, 1997 672,126 ========= Options outstanding at June 30, 1997, have a weighted-average remaining contractual life of approximately 8 years with 166,370 options currently exercisable at a price of $7.00 per share. In 1996, the Financial Accounting Standards Board adopted Financial Accounting Standards No. 123 (FAS 123), "Accounting for Stock-Based Compensation." This statement establishes an alternative fair value-based method of accounting for stock-based compensation plans. The Company applies APB Opinion 25 and related Interpretations in accounting for the plan, and no compensation cost has been recognized. No fair value disclosures with respect to stock options are presented because in the opinion of management such values do not have a material effect. COMMON STOCK PURCHASE WARRANTS In connection with the Company's restructuring, the Company attached warrants to purchase common stock to the new issuance of 12-7/8% Senior Secured Notes, due 2004. Each warrant represents the right to purchase one share of the Company's common stock for $.01 per warrant. The warrants are exercisable after January 15, 1995, and will expire on July 15, 2004. The table below summarizes warrant activity of the Company: Number of Shares Exercise Price Issued 175,536 $.01 --------- Balance at June 30, 1997 and 1996 175,536 $.01 ========= NOTE 9: ADDITIONAL CASH FLOW INFORMATION (IN THOUSANDS) 1997 1996 1995 ---- ---- ---- NONCASH INVESTING AND FINANCING ACTIVITIES Related party receivable from sale of retail service center $-- $662 $-- Note receivable from sale of retail $-- $148 $-- service center Receivable from sale of retail service centers $-- $2,390 $-- Purchase contract obligations incurred $(5,463) $(1,111) $(1,433) Capitalization of leases $-- $(757) $-- ADDITIONAL CASH PAYMENT INFORMATION Interest paid $11,156 $10,216 $7,196 Income taxes paid (refunded), net $(3,361) $(1,647) $(2,321) NOTE 10: EMPLOYEE BENEFIT PLAN The Company formed in fiscal year 1995 a defined contribution retirement plan eligible to substantially all employees. Employees who elect to participate may contribute a percentage of their salaries to the plan. The Company may make contributions to the plan at the discretion of its Board of Directors. No contributions to the plan were made by the Company during the periods ended June 30, 1997, 1996 or 1995. NOTE 11: OPERATING LEASES Noncancellable operating leases for the Company expire in various years through 2004. These leases generally contain renewal options for periods ranging from 1 to 5 years and require the Company to pay all executory costs (property taxes, maintenance and insurance). Future minimum lease payments (in thousands) at June 30, 1997, were: 1998 $ 585 1999 527 2000 235 2001 207 2002 62 Thereafter 91 Future minimum lease payments $ 1,707 ========== NOTE 12: RESTRUCTURING PROPOSAL COSTS During the year ended June 30, 1997, the Company was considering a proposal to restructure the debt and equity of the Company. The Company abandoned the proposal and expensed the related costs of $1.9 million. NOTE 13: UNDERGROUND STORAGE FACILITY The Company owned salt cavern LPG underground storage facilities which are not in use and are subject to a consent agreement with the state of Kansas. Under the agreement, the Company was to submit a plan to the state for resuming use of the facilities or permanently closing them. During 1996 and 1995, charges of $200,000 and $924,000, respectively, were taken against earnings to accrue the costs of abandonment and to reduce the carrying value of the facilities to zero. As of June 30, 1997, the Company has materially completed the closing and abandonment of the facilities. NOTE 14: SIGNIFICANT ESTIMATES AND CONCENTRATIONS Generally accepted accounting principles require disclosure of certain significant estimates and current vulnerabilities due to certain concentrations. Those matters include the following: ESTIMATES Significant estimates related to self-insurance, goodwill amortization, litigation, collectibility of receivables and income tax assessments are discussed in Notes 3, 6 and 7. Actual losses related to these items could vary materially from amounts reflected in the financial statements. NOTE 15: FUTURE ACCOUNTING PRONOUNCEMENTS IMPACT OF SFAS NO. 128 The Financial Accounting Standards Board recently adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The Company must adopt this standard effective with periods ending after December 15, 1997. The Company does not expect that the adoption of this standard will have a material impact on its financial statements. NOTE 16: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS At June 30, 1997 and 1996, the Company's financial instruments consist of cash, trade receivables and payables, receivables from related parties and long-term debt. The following methods were used to estimate the fair value of financial instruments: RECEIVABLES FROM RELATED PARTIES It was not practicable to estimate the fair value of receivables from related parties. The amounts reflected in the balance sheet at June 30, 1997 and 1996, are short-term receivables generated from transactions between the Company and various related parties. LONG-TERM DEBT Fair value of long-term debt is estimated based on the trading prices of the Company's primary debt issuance. The fair value of the other debt approximates carrying value as other debt consists of multiple mortgage obligations and debentures with interest rates approximating rates currently available to the Company. The carrying amounts and fair values of these financial instruments at June 30 are as follows (in thousands): 1997 1996 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- ------- ----- Financial Assets: Cash $965 $965 $898 $898 Financial Liabilities: Senior Secured Notes due 2004 $113,139 $121,476 $107,758 $106,212 Other long-term debt $13,493 $13,493 $15,100 $15,100 NOTE 17: BUSINESS ACQUISITIONS During the year ended June 30, 1997, the Company acquired six LPG operations through five asset purchases, and one stock purchase transaction for a total of $9.5 million, of which $5.2 million was paid in cash with the remainder in mortgage obligations and the assumption of certain liabilities. These acquisitions have been accounted for as a purchase by recording the assets and, for the stock purchase, the liabilities assumed, at their estimated market values at the acquisition date. Amounts paid above these market values are recorded as excess of cost over fair value of net assets acquired on the face of the balance sheets. The consolidated operations of the Company include the operations of the acquirees from the acquisition dates. Unaudited Pro Forma consolidated operations assuming the purchases were made at the beginning of the previous and current years are shown below: 1997 1996 ---- ---- (In Millions) Net sales $98.9 $89.4 Net income (loss) $2.6 $(7.4) The Pro Forma results are not necessarily indicative of what would have occurred had the acquisitions been on those dates, nor are they necessarily indicative of future operations. Independent Accountants' Report on Financial Statement Schedules Board of Directors and Stockholders All Star Gas Corporation Lebanon, Missouri In connection with our audit of the consolidated financial statements of ALL STAR GAS CORPORATION for each of the three years in the period ended June 30, 1997, we have also audited the following financial statement schedules. These financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits of the basic financial statements. The schedules are presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and are not a required part of the consolidated financial statements. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ Baird, Kurtz & Dobson Springfield, Missouri August 14, 1997 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED JUNE 30, 1997, 1996 AND 1995 (IN THOUSANDS) Balance at Charges to Amount Balance at Beginning Costs and Written End of Description of Year Expenses Off Other Year Valuation accounts deducted from assets to which they apply - - for doubtful accounts receivable: June 30, 1997 $722 $483 $369 $83(A) $899 $(20)(B) June 30, 1996 $800 $889 $820 $(147)(B) $722 June 30, 1995 $1,620 $1,136 $1,973 $17(A) $800 (A) Allowance for doubtful accounts receivable established with respect to the acquisition of retail service centers. (B) Related to accounts receivable which were sold in conjunction with the disposition of retail service centers.