10-K 1 tenk.txt TENK.TXT ================================================================================ 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, 2002 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 (IRS Employer Identification No.) of Incorporation or Organization) P.O. Box 303, 119 West Commercial 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 --------------------------------------------------------------------- 11% Senior Secured Notes Due 2003 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 October 4, 2002 is: $0. Shares of Common Stock, $0.001 par value, outstanding as of close of business on October 4, 2002: 1,586,891. 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, 119 W. Commercial Street, Lebanon, Missouri 65536; Telephone (417) 532-3103. 1 PART I 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 39 years. The Company has operations located in Arizona, Arkansas, Colorado, Missouri, and Wyoming. 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 providing of consumer propane storage tanks to residential and commercial customers. (d) the wholesale marketing of propane, administrative services and equipment to dealers of the Company Despite being plagued with five abnormally warm winters during the eight winters since 1994, the Company has successfully increased the average retail service center sales to approximately 840,000 gallons from 494,000. During the fiscal year ended June 30, 2002, All Star Gas supplied propane to approximately 50,000 residential and commercial customers being serviced by 59 service centers which accounted for 44 million gallons of propane. The Company's sales to wholesale customers accounted for an additional 9.3 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. All Star's business mix for fiscal year ended June 30, 2002 was as follows: Residential 60% Commercial 17% Agricultural 4% Other 19% Though 60% of revenues were derived from residential customers, due to higher gross margins, they accounted for 74% of the aggregate gross margin. 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, non-cyclical source of revenues. No single residential or commercial accounts for more than 1.0% of revenue from sales. 2 In July 1999, the Company acquired Tres Hombres, Inc. The Company issued 22,865 shares of stock previously held in treasury in exchange for all of the outstanding common stock of Tres Hombres, Inc. Due to covenant requirements established by its then existing working capital lender, the company sold Tres Hombres, Inc. in December 2000. In May 2000, the Company redeemed 60% of its $127.2 million Senior Secured Notes due 2004 for a purchase price of $60,000,000 or $786 per $1,000 principal amount without any further accrual of interest. The Company accumulated the funds necessary to consummate the partial tender offer, through the sale of 51 of its retail service centers located throughout the United States. The redemption resulted in the Company recording an extraordinary gain of approximately $12.6 million, less income taxes of $4.6 million. Under terms of the amendments consented to by the holders of the Senior Secured Notes in the May 2000 partial tender offer, the maturity date of these Notes was accelerated to July 31, 2000 and the Company was permitted to redeem the remaining $50,880,000 principal amount of the Senior Secured Notes outstanding at $786 per $1000 principal amount without any accrual of interest by that maturity date. The Notes, however, were not redeemed and on February 16, 2002, the Company completed an exchange offer to restructure the Senior Secured Notes. The Senior Secured Notes were exchanged for an aggregate principal amount of $53,063,600 of its 11% Senior Secured Notes due 2003 (the "Senior Notes"). The new principal amount includes the amount of interest accrued from August 1, 2000 to November 30, 2000 on the Senior Secured Notes. The modification of terms has resulted in an effective interest rate of 4.42% and interest expense through 2003 was reduced accordingly. The Company may, at its option, redeem the Senior Notes at any time prior to maturity. The Company has defaulted with respect to its Senior Notes and its Subordinated Debentures. See "Management's Discussion and Analysis and Financial Condition and Results of Operations" for further discussion. Sources of Supply. During fiscal 2002, approximately 94% 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 36% and 19% 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. As financial resources permit, the Company takes advantage of the spot market or prepurchase arrangements provided by suppliers 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 165,000 gallons. The Company is a shipper on all major interstate LPG pipeline systems. The retail service centers owned or leased by the Company and its dealers have an aggregate storage capacity of approximately 4.3 million gallons of propane, and each service center has equipment for transferring the gas into and from the bulk storage tanks. The Company operates 8 over-the-road tractors and 12 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 142 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. 3 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. 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 and fuel oil. 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. The Company's comprehensive general and excess liability policy provides for losses of up to $75.0 million with a $250,000 self-insured retention for general and excess liability losses with a $1 million aggregate cap. The Company's combined auto and workers' compensation coverage is insured through participation in a captive insurance program with other unrelated parties. 4 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, security 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. 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 laws and regulations relating to environmental, safety and security issues. 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. 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 and Gas Check Program. Employees As of September 15, 2002 the Company had 298 employees, none of whom were 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 June 29, 2002. The only matter presented for a vote was the re-election of Kristin L. Lindsey and Bruce M. Withers, Jr. as directors. They were re-elected with 1,586,891 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., Kristin L. Lindsey, Jim J. Shoemake, and Bruce M. Withers, Jr. 5 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. As of October 4, 2002, the Company's Common Stock was held of record by 8 shareholders. There is currently no active trading market in the Company's Common Stock. As of October 4, 2002, there are outstanding warrants to purchase 175,536 shares of the Company's Common Stock. Each warrant represents the right to purchase one share of the Company's Common Stock of $.01 per warrant. The warrants are exercisable currently and will expire July 15, 2004. As of October 4, 2002, there are 447,200 outstanding stock options to purchase Company stock. The options have a weighted-average remaining contractual life of approximately seven years with 341,958 options currently exercisable. No dividends on the Common Stock of the Company were paid during the Company's 2001 or 2002 fiscal years. The indenture relating to the 11% Senior Secured Notes due 2003 contains 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. 6 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, 2002. The financial data of the Company as of and for each of the years in the five-year period ended June 30, 2002 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.

Year Ended June 30, ----------------------------------------------------------------- ~~1997~~ 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- (In thousands except ratios and per share amounts) Operating Data: Operating Revenue $~~94,543~~ $90,963 $ 83,563 $80,617 $57,052 $48,370 Gross Profit (1) ~~41,468~~ 47,124 45,592 34,192 16,918 21,333 Operating Expenses ~~28,853~~ 33,340 32,057 (11,394) 16,288 15,231 Depreciation & Amortization. ~~6,867~~ 9,723 9,776 8,169 4,090 7,215 Operating Income (Loss) ~~5,748~~ 4,061 3,759 37,417 (3,966) (1,071) Interest Expense: Cash Interest ~~10,605~~ 11,577 11,965 18,062 5,489 2,010 Amortization of Debt Discount & Expenses 6,~~140 6,~~796 7,762 2,042 1,563 3,741 Total Interest Expense ~~16,745~~ 18,373 19,727 20,104 7,052 5,751 Income (Loss) Before Extraordinary Items and Cumulative Effect of Change in Accounting Principle ~~2,222~~ (11,092) (10,771) 9,421 (10,705) (4,056) Other Operating Data: Capital Expenditures ~~18,444~~ 19,444 4,563 5,442 3,175 4,439 Proceeds From Sale of Retail Service Centers/ Other ~~5,478~~ 2,821 3,131 91,646 2,929 3,628 EBITDA (3) 13,~~347 13,~~444 12,988 646 (298) 4,206 Basic & Diluted Income (Loss) Per Share Before Extraordinary Items and Cumulative Effect of Change in Accounting Principle $~~1.41 $~~ (6.99) $ (6.79) $5.94 $ (6.74) $(2.56) Year Ended June 30, ----------------------------------------------------------------- ~~1997~~ 1998 1999 2000 2001 2002 ---- ---- ---- ---- ---- Balance sheet data: Total assets $~~110,311 $~~116,529 $106,975 $49,495 $45,965 $38,511 Long-term debt (including current maturities) ~~127,870~~ 143,709 147,710 61,074 71,219 75,579 Stockholders' equity (deficit) (~~42,901) (~~53,963) (63,309) (45,919) (55,684) (59,740)

7 (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, 2002. (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 Fiscal Years Ended June 30, 2002 and June 30, 2001 Operating Revenues. Operating revenues decreased $8.7 million, or 15.2% to $48.4 million in fiscal year 2002 as compared to $57.1 million in fiscal 2001. Propane sales decreased $9.0 million in fiscal 2002 compared to fiscal 2001. Propane sales prices decreased approximately $.16 per gallon or 14.7% over fiscal 2001. The Company also experienced a 3% decrease in gallons sold from fiscal 2001 due to the divestiture of retail service centers during fiscal 2002. Comparing stores that were operated by the Company during both 2002 and 2001, volumes decreased less than 1% and heating degree days experienced by the Company decreased 11%. Other sales, including gas systems, appliances and other fuels, increased $441,000, or 27% in fiscal year 2002 compared to fiscal year 2001. During the fiscal years 2002 and 2001, the Company completed forward purchase and sale contracts which resulted in buying and selling 3.2 million gallons and 43.4 million gallons, respectively, of propane to other suppliers. Cost of products sold. Cost of products sold decreased $13.1 million, or 32.6%, to $27.0 million in fiscal year 2002 as compared to $40.1 million in fiscal year 2001. This was due to divestitures of retail service centers during fiscal year 2002 and costs per gallon which decreased $.26 or 32.6% over fiscal year 2001. Gross profit. The Company's gross profit for the year increased $4.4 million or 26.1% to $21.3 million in fiscal year 2002 as compared to $16.9 million in fiscal year 2001. Average propane margins increased $.10 per gallon or 36.8% due to the Company's ability at appropriate times to hedge product purchases for the fixed price, pre-buy and budget plan agreements with customers. General and administrative expense. General and administrative expenses increased approximately $600,000 to $17.0 million in fiscal year 2002 as compared to $16.4 million in fiscal year 2001. Salaries and commissions increased $226,000 in 2002 due to increased expenses at the retail service centers. Insurance and liability claims increased $715,000 in 2002 due to the settling of several claims, reaching the stop-loss limit on one specific claim and the resulting reduction in the liability for expected losses during fiscal year 2001. No other significant changes occurred in any individual expense category. 8 Provision for doubtful accounts. The provision for doubtful accounts decreased $177,000 from $341,000 in fiscal year 2001 to $164,000 in fiscal year 2002 due to the decreased charge-offs as a percentage of accounts receivable compared to fiscal 2001, and the reduction in sales volume. A decrease in the provision was deemed necessary in order to bring the allowance for doubtful accounts to a level considered adequate by the Company to provide for potential losses. Depreciation and amortization. Depreciation and amortization expense increased $3.1 million from $4.1 million in fiscal year 2001 to $7.2 million in fiscal year 2002. The increase is primarily due to the Company's provision for impairment loss of $3.7 recorded on goodwill in 2002. Forward and futures contracts. The Company had a gain of $42,000 for the year ended June 30, 2002 as compared to a loss of $506,000 in 2001. The Company significantly curtailed its utilization of such contracts in 2002. Gains or losses are recognized as a result of the increase or decrease in fair value of the Company's derivative instruments during the year. At July 1, 2000, the initial adoption of SFAS Nos. 133 and 138 resulted in recognition of derivative financial instruments as assets and liabilities in the amounts of $3.1 million and $1.6 million, respectively, and a cumulative effect adjustment of $940,000, net of applicable of income taxes. Interest expense. Interest expense decreased $3.5 million to $2.0 million in fiscal year 2002 from $5.5 million in fiscal year 2001 primarily due to interest on the Senior Notes being a direct principal reduction due to the accounting treatment of the Senior Notes upon restructuring in February 2001. Fiscal Years Ended June 30, 2001 and June 30, 2000 Operating Revenues. Operating revenues decreased $23.5 million, or 29.2% to $57.1 million in fiscal year 2001 as compared to $80.6 million in fiscal 2002. Propane sales decreased $18.7 million in fiscal 2001 compared to fiscal 2000. Propane sales prices increased approximately $.20 per gallon or 22.7% over fiscal 2000. However, the Company experienced a 34.8% decrease in gallons sold from fiscal 2000 due to the divestiture of retail service centers during fiscal 2000. Comparing stores that were operated by the Company during both 2001 and 2000, volumes increased 17.9% due to the colder winter weather experienced. Heating degree days experienced by the Company during fiscal year 2001 increased 25% from fiscal year 2000. Other sales, including gas systems, appliances and other fuels, had no significant impact on the change in revenues. During the fiscal years 2001 and 2000, the Company completed forward purchase and sale contracts which resulted in buying and selling 43.4 million gallons and 12.9 million gallons, respectively, of propane to other suppliers. Cost of products sold. Cost of products sold decreased $6.3 million, or 13.6%, to $40.1 million in fiscal year 2001 as compared to $46.4 million in fiscal year 2000. This was due to divestitures of retail service centers during fiscal year 2000 offset by the costs per gallon that increased approximately $.28 or 53.9% over fiscal year 2000. Gross profit. The Company's gross profit for the year decreased $17.3 million or 50.6% to $16.9 million in fiscal year 2001 as compared to $34.2 million in fiscal year 2000. This is due to the decrease in gallons sold due to divestitures of retail service centers during fiscal year 2000. Average propane margins decreased approximately $.08 per gallon or 22.7% due to the Company's financial inability at appropriate times to hedge product purchases for the fixed price, pre-buy and budget plan agreements with customers and, due to an anomaly in the propane market, to pass along higher product gas costs as rapidly as they were incurred. 9 General and administrative expense. General and administrative expenses decreased $16.7 million to $16.4 million in fiscal year 2001 as compared to $33.1 million in fiscal year 2000. In general, expenses decreased as a result of the divestiture of 66 retail service centers and Tres Hombres, Inc. during fiscal year 2000. The fiscal year 2001 effect from the sales of the retail service centers affected salaries and employee benefits which decreased $7.2 million, office expense and other taxes which decreased $1.7 million and rent and maintenance costs on premises and equipment which decreased $1.2 million. Insurance and liability claims decreased $2.9 million mainly due to the Company settling several claims and reaching the stop-loss limit on one specific claim during fiscal year 2001. No other significant changes occurred in any individual expense category other than those associated with the divestiture of the retail service centers and Tres Hombres, Inc. Provision for doubtful accounts. The provision for doubtful accounts decreased $123,000 from $464,000 in fiscal year 2000 to $341,000 in fiscal year 2001 due to the decreased charge-offs as a percentage of accounts receivable compared to fiscal 2000. A decrease in the provision was deemed necessary in order to bring the allowance for doubtful accounts to a level considered adequate by the Company to provide for potential losses. Depreciation and amortization. Depreciation and amortization expense decreased $4.1 million from $8.2 million in fiscal year 2000 to $4.1 million in fiscal year 2001. The decrease is mainly due to the divestiture of 66 retail service centers during fiscal year 2000. Forward and futures contracts. Loss on forward and futures contracts for fiscal year 2001 was $506,000. The loss is the result of the decrease in fair value of the Company's derivative instruments during fiscal year 2001. At July 1, 2000, the initial adoption of SFAS Nos. 133 and 138 resulted in recognition of derivative financial instruments as assets and liabilities in the amounts of $3.1 million and $1.6 million, respectively, and a cumulative effect adjustment of $940,000, net of applicable of income taxes. Interest expense. Interest expense decreased $12.6 million to $5.5 million in fiscal year 2001 from $18.1 million in fiscal year 2000. The decrease is primarily due to payment in full on the revolving credit facility in February 2000, the partial redemption of the Company's Senior Secured Notes in May 2000 and the elimination of various mortgages related to the divestiture of 66 retail service centers during fiscal year 2000. Liquidity and Capital Resources The Company's liquidity requirements have arisen primarily from funding its working capital needs, capital expenditures, and debt service requirements. Historically, the Company has met these requirements from cash flows generated by operations, borrowings under notes payable to banks and advances from its principal shareholder. Cash flow used in operating activities was $434,000 in fiscal year 2002 compared to cash flow used in operating activities of $1.0 million in fiscal year 2001. This change was due to a number of factors. First, operating loss decreased $2.9 million from fiscal year 2001 to fiscal year 2002 mainly due to the $4.4 million increase in gross profit, an increase of gain on sale of assets of $1.5 million offset by an increase in amortization expense of $5.7 million due to a provision for impairment recorded to charge-off the Company's remaining goodwill. Secondly, the Company has decreased its levels of inventory and decreased accounts payable and certain accrued liabilities. Thirdly, the Company's prepaid product program allows customers to prebuy product at an established price, reducing their risk of winter price fluctuations brought about by changes in demand and allowing the Company to improve its seasonal cash flow and further enhance its hedging of product purchases and marketing programs to its customers. The balance of customer prepayments related to the program, decreased to $6.3 million as of June 30, 2002 compared to $10.2 million as of June 30, 2001. Cash flow used in investing activities was $804,000 in fiscal year 2002 compared to cash flow provided by investing activities of $804,000 in fiscal year 2001. This change is primarily due to a $1.8 million increase in purchases of property and equipment offset by an increase in proceeds from sales of retail service centers and other assets during fiscal 2002. 10 Cash flow provided by financing activities was $1.2 million in fiscal year 2002 compared to cash flow provided by financing activities of $291,000 in fiscal year 2001. This change is mainly due to $1.0 million borrowed from a related party under a financing arrangement related to the transfer of retail service assets. See Note 3 to the Consolidated Financial Statements for further discussion. On October 30, 2001, due to the nonpayment of interest, the Company defaulted with respect to the $53,063,600 principal balance of the 11% Senior Secured Notes due 2003 (the "Senior Notes"). The Company also has not made the interest payments due December 31, 2001, March 31, 2002 and June 30, 2002 on the Senior Notes. Due to the nonpayment of interest, the Company is in default with respect to the $9,729,000 principal balance of the 9% Subordinated Debentures due 2007 (the "Subordinated Debentures"). The Company is prohibited under the terms of the Subordinated Debentures from making any interest payments if such payment shall create a default in the payment of amounts due on any Senior indebtedness. As a result of the defaults, the holders of the Senior Notes and the Subordinated Debentures have the right to accelerate the balance due and require immediate payment in full. Accordingly, the entire balance of the obligations is included in current liabilities at June 30, 2002. The holders of the Senior Notes and the Subordinated Debentures have not accelerated the balance due as of October 4, 2002. In the event that the Company continues to fail to make any interest payment otherwise payable pursuant to the Senior Notes and the Subordinated Debentures, the trustee and the holders of such indebtedness may choose to pursue any and all remedies contained in the indenture or at law relating to such indebtedness. If the holders of the Senior Notes or the Subordinated Debentures accelerate the Company's obligations under such indebtedness, such events would have a material adverse effect on the Company's liquidity and financial position. Under these circumstances, the Company's financial position would necessitate the development of an alternative financial structure. Considering the limited financial resources and the existence of certain defaults, there can be no assurances that the Company would succeed in formulating and consummating an acceptable alternative financial structure. Also, as a result of the Company's significant disposition of retail service centers during fiscal 2000, the Company incurred a $7.7 million federal tax liability that was due September 15, 2000. The Company was unable to pay the obligation when due. The Internal Revenue Service (the "IRS") has placed liens on Company assets. The Company has entered into a workout plan with the IRS for payment of the tax obligation. Subsequent to June 30, 2002, the Company breached the workout plan due to scheduled payments not being made, and the IRS has issued a notice of default. The remaining balance of this liability, including interest and penalties, as of June 30, 2002 is approximately $1.3 million, reduced by a net operating loss carryback of approximately $800,000 relating to fiscal year 2002 taxable income. In February 2002, in order to fund working capital needs, the Company entered into two sale-leaseback transactions whereby the Company sold and leased back the land and buildings at 26 retail service centers. See Note 16 to the Consolidated Financial Statements for further discussion. Critical Accounting Policies The Company follows certain significant accounting policies when preparing its consolidated financial statements. A complete summary of these policies is included in Note 1 to the consolidated financial statements included herein. 11 Certain of the policies require management to make significant and subjective estimates which are sensitive to deviations of actual results from management's assumptions. In particular, management makes estimates regarding the fair value of the Company's reporting units in assessing potential impairment of goodwill or the future use of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of a long-lived asset may not be recoverable. In addition, the Company makes estimates regarding potential losses related to its self-insurance program. Provisions for self-insured losses are recorded based upon the Company's estimates of the aggregate self-insured liability for claims incurred, resulting in a retention for a portion of these expected losses. Changes in underlying factors, assumptions or estimates in any of these areas could have a material impact on the Company's future financial condition and results of operations. Impact of Recent Accounting Pronouncemnts The Financial Accounting Standard Board (FASB) recently issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations. This Statement addresses financial accounting and reporting for business combinations. It eliminates the pooling-of-interests method and requires that all business combinations be accounted for using the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001 and to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. Adoption of the new standard had no initial effect on the Company's financial statements. The FASB also recently issued SFAS 142, Goodwill and Other Intangible Assets. This Statement establishes accounting and reporting standards for acquired goodwill and other intangible assets. The Statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under the new standard, amortization of existing goodwill ceases upon adoption of SFAS 142 and is replaced by periodic evaluation for impairment using specified methodology. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for entities with fiscal years beginning after March 15, 2001. The Company will apply SFAS 142 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements. The FASB recently adopted SFAS 143, Accounting for Asset Retirement Obligations. This Statement requires an entity to record a liability for an obligation associated with the retirement of an asset at the time the liability is incurred by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company will apply SFAS 143 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements. The FASB recently adopted SFAS 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This Statement addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange or distribution to owners. The Statement also requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company will apply SFAS 144 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements. The FASB recently adopted SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item, and amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption permitted. The Company will apply SFAS 145 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements 12 The FASB recently adopted SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires an entity to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effects of adoption of the new standard on the Company's financial statements are not determinable currently. 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 13 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. 5657 Chairman of the Board, Chief Executive Officer, and President since June 1994; previously Vice Chairman of the Board (1987 to 1994) and Chief Operating Officer (1988 to 1994); term as director expires 2003 Kristin L. Lindsey 5354 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 ~~2002~~2005 Bruce M. Withers, Jr. 7475 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 ~~2002~~2005 Jim J. Shoemake 6364 Director since June 1994; partner of Guilfoil, Petzall & Shoemake (since 1970); term as director expires 2004 Valeria Schall 4748 Executive Vice President since October, 1996, Treasurer since July, previously Vice President since 1992; Corporate Secretary since 1985 and Assistant to the Chairman since 1987 Bradley L. Beneke 4748 Senior Vice President - Operations since April 2000; Vice President since April 2000; previously Pricing Director since June 1995; previously Regional Manager since September 1991. Robert C. Heagerty 5455 ~~Sr.~~Senior Vice President since September 1997, previously Divisional Vice President since June 1993; previously Regional Manager since December 1986. J. Greg House, Sr. 4445 Vice President - Management Information Systems since June, 1996; previously Director-MIS since September 1994 and Manager-MIS Paul Mueller Co. since 1987. ~~Willis~~Kirk D.Wiles ~~Green~~42 64Senior Vice President - Chief Financial Officer since ~~July~~September ~~2001~~2002; previously ~~Controller~~Director of Accounting and Financing, Innovative Benefit Concepts (2001-~~Chief~~2002); ~~Financial~~Director ~~Officer~~of ~~since~~Auditing ~~1994~~and Process Improvements, Rollins, Inc. (2000-2001); Principal Consultant, The Hunter Group (1997-2000); Treasurer and Assistant Secretary, Brach and Brock Confections, Inc. (1995-1997)

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, Ms. Lindsey and Ms. Schall who are employed pursuant to Employment Agreements that expire June 24, 2004, September 24, 2004, and September 24, 2004, respectively. 14 Item 11. Executive Compensation Executive Compensation The following table provides compensation information for each of the years ended June 30, 2002, 2001, and 2000 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 were only two) 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 ------------------------- Fiscal Other Annual All Other Year ~~2001~~1998 Year Salary Bonus Compensation Compensation ---------~~----------------~~ ---- ------ ----- ------------ ------------ Paul S. Lindsey, Jr. ~~2001~~2002 $400,000 ----- ----- ----- Chief Executive Officer, ~~2000~~2001 $400,000 ----- ----- ----- Chairman of the Board ~~1999~~2000 $400,000 ----- ----- ~~And~~----- and President Valeria Schall ~~2001~~2002 $100,000 $30,000 ----- ----- Executive Vice President ~~2000~~2001 $100,000 $30,000 ----- ----- ~~1999~~2000 $100,000 $30,000 ----- ----- Kristin L. Lindsey ~~2001~~2002 $100,000 $30,000 ----- ----- Executive Vice President ~~2000~~2001 $100,000 $30,000 ----- ----- ~~And~~and Director ~~1999~~2000 $100,000 $30,000 ----- -----

Employment Agreement On June 24, 1999, the Company entered into an employment agreement with Mr. Lindsey. The agreement has a five-year term and 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 Paul S. Lindsey nor exercised by him during fiscal year 2002 and no unexercised options held by him as of the end of the 2002 fiscal year. 15 Compensation Committee Interlocks and Insider Participation A compensation committee was formed in July 1994, consisting of Messrs. Withers and Shoemake. 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 28, 2002, 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.

~~2001~~Number ~~2000~~of ~~----~~Shares ~~----~~Name ~~CURRENT ASSETS Cash $ 509 $ 432 Trade receivables, less allowance for doubtful accounts; 2001 - $250, 2000 - $300 2,549 2,226 Current maturities~~ of ~~note~~Beneficial ~~receivable~~Owner --(1) 45Beneficially ~~Inventories~~Owned ~~2,783~~Percent ~~4,121 Forward sales contracts 115~~ -- ~~Prepaid expenses 198 91 Deferred income taxes 200 150~~ -------- -------- ~~Total Current Assets 6,354 7,065~~ -------- --~~------~~ ~~PROPERTY AND EQUIPMENT, At Cost Land and buildings 4,496 4,568 Storage and consumer service facilities 35,716 37,134 Transportation, office and other equipment 16,381 16,393~~ -------- -------- ~~56,593 58,095 Less accumulated depreciation 25,742 24,777~~ --~~------~~ -------- ~~30,851~~Paul ~~33,318~~S. ~~-------- -------- OTHER ASSETS Debt acquisition costs~~Lindsey, ~~net~~Jr. of(2) ~~accumulated amortization~~ 1,~~174~~546,548 ~~823~~76.0 ~~Excess~~Kristin ofL. ~~cost~~Lindsey ~~over~~(2) ~~fair~~762,125 ~~value~~37.5 ofValeria ~~net~~Schall ~~assets acquired~~97,927 at4.8 ~~amortized~~All ~~cost~~Directors ~~5,016~~and ~~6,176~~Executive ~~Note~~Officers ~~receivable~~as ~~942~~a ~~927~~group ~~Other~~ 1,~~628 1~~918,~~186~~404 ~~--------~~94.3 ~~--------~~ (8~~,760~~ ~~9,112 -------- -------- $ 45,965 $ 49,495 ======== ========~~persons)(3)

----------------- (1) The address of each of the beneficial owners is c/o All Star Gas Corporation, P.O. Box 303, 119 W. Commercial Street, Lebanon, Missouri 65536. (2) Mr. Lindsey's shares consist of 784,423 shares owned by the Paul S. Lindsey, Jr. Trust established January 24, 1992 and 762,125 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 34,044 shares owned by other executive officers. Item 13. Certain Relationships and Related Transactions. Paul S. Lindsey and Kristin L. Lindsey, who beneficially own approximately 76% of the Company's outstanding Common Stock and are Directors of the Company, are the majority stockholders in a company that supplies paint to the Company. The Company's purchases of paint from this company totaled $56,000 in fiscal year 2002 and $172,500 in fiscal year 2001. During 2002, the Company received advances bearing interest at a rate of 12% from its Chief Executive Officer and principal stockholder in the amount of $1.8 million which have a remaining balance at June 30, 2002 of $67,000. 16 In July 2001, the Company sold three retail service centers to a related party wholly owned by the son of the Company's principal stockholder at a loss of approximately $130,000. In December 2001, the Company entered into a financing transaction whereby the assets of three retail service centers in Missouri were transferred to this same related party for approximately $1 million. The nature of the transaction was such that it was not recorded as a sale but as a financing liability to the related party. During June 2002, the assets of the service centers were transferred back to the Company, subject to a security interest in favor of a third party lending institution. This related party also entered into a management agreement during 2002 pursuant to which the Company provides all management and accounting services. During 2002, the Company sold its interest in a real estate limited liability company (LLC) to a related party owned by the principal stockholder at a loss of approximately $70,000. The Company retained the available tax credits for the 2001tax year. The acquisition of the Company's interest in the LLC had been financed and the sale of this interest was required as a result of the demand of the lender for payment in full of the loan amount as a result of the February 2002 sale-leaseback transaction described in Note 16 to the Consolidated Financial Statements. The Company was not able to obtain the necessary financing to pay off the note. 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. See Note 3 to the Consolidated Financial Statements for further discussion regarding the Company's related party transactions. 17 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, 2002 and 2001 Consolidated Statement of Operations for the Years Ended June 30, 2002, 2001, and 2000 Consolidated Statements of Stockholders' Equity (Deficit) for the Years Ended June 30, 2002, 2001, and 2000 Consolidated Statements of Cash Flows for the Years Ended June 30, 2002, 2001, and 2000 (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) 18 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) 10.2 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 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) 10.4 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) 10.5 2/16/01 Indenture between the Company and State Street Bank and Trust Company relating to the 11% Senior Secured Notes Due 2003. 21.1 Subsidiaries of the Company 99.1 CEO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 CFO certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 + 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 November 2, 2001 August 27, 2002 (c) Exhibits See (a)(3) above. (d) Financial Statements See (a)(1) above. 19 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. All Star Gas Corporation By: /s/ Paul S. Lindsey, Jr. ------------------------- Paul S. Lindsey, Jr. Dated: October 10, 2002 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.

~~2001~~Signature ~~2000~~Capacity in which Signed Date ---- ----- ~~CURRENT LIABILITIES Checks in process of collection $ 1,243 $ 1,028 Notes payable to banks 3,979~~ ------------------------ ~~Current maturities of long~~-~~term~~--- ~~debt~~/s/ ~~14,493~~Paul ~~57,897~~S. ~~Accounts payable 1~~Lindsey,~~551~~ ~~3,460~~Jr. ~~Accrued~~Chief ~~salaries~~Executive ~~712~~Officer ~~723~~and ~~Accrued~~October ~~interest 1,339 8,034 Accrued expenses 832 1,480 Customer prepayments~~ 10,~~208~~ ~~5,008~~2002 ~~Due to related parties 394~~ -- ~~Income taxes payable 3,705 9,948 Forward purchase contracts 200~~ -- -------- ---------------- ~~Total~~Chairman ~~Current~~of ~~Liabilities~~the 38Board of Paul S. Lindsey,~~656~~ 87Jr. /s/ Kirk Wiles Senior Vice President and October 10,~~578~~ 2002 -------- -------- ~~LONG~~-~~TERM DEBT 56,726 3,177~~ -------- ---~~-----~~ ~~DEFERRED~~Chief ~~INCOME~~Financial ~~TAXES~~Officer ~~5,738~~Kirk 2Wiles /s/ Kristin L. Lindsey Director October 10,~~788~~ 2002 -------- -------- ~~ACCRUED SELF~~-~~INSURANCE LIABILITY 529 1,871~~ -------- ---~~-----~~ ~~STOCKHOLDERS'~~Kristin ~~EQUITY (DEFICIT) Common; $~~L.~~001~~ ~~par~~Lindsey ~~value;~~/s/ ~~authorized~~Bruce ~~20,000,000~~M. ~~shares; issued June 30~~Withers, ~~2001~~Jr. ~~and~~Director ~~2000,~~October 1410,~~291,020~~ ~~shares~~2002 ~~14 14 Common stock purchase warrants 1,227 1,227 Additional paid~~-~~in capital 28,574 28,574 Retained earnings 2,415 12,180~~ -------- ------------------- ~~32,230~~Bruce ~~41,995~~M. ~~Treasury stock~~Withers, atJr. ~~cost;~~/s/ ~~2001~~Jim -J. ~~12,704,129~~Shoemake ~~shares,~~Director ~~2000~~October ~~- 12~~10,~~704,105~~ ~~shares~~2002 ~~(87,914) (87,914)~~ -------- -------- ~~(55,684) (45,919)~~ -------- ----~~----~~ $Jim ~~45,965~~J. ~~$ 49,495 ======== ========~~Shoemake

20 I, Paul S. Lindsey, certify that: 1. I have reviewed this annual report on Form 10-K of All Star Gas Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 10, 2002 /s/ Paul S. Lindsey -------------------------------------- Paul S. Lindsey President and Chief Executive Officer I, Kirk Wiles, certify that: 1. I have reviewed this annual report on Form 10-K of All Star Gas Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report. Date: October 10, 2002 /s/ Kirk Wiles -------------------------------------- Kirk Wiles Senior Vice President and Chief Financial Officer 21 All Star Gas Corporation Accountants' Report and Consolidated Financial Statements June 30, 2002, 2001 and 2000 All Star Gas Corporation June 30, 2002, 2001 and 2000 Contents Independent Accountants' Report............................................1 Consolidated Financial Statements Balance Sheets.........................................................2 Statements of Operations ..............................................3 Statements of Stockholders' Equity (Deficit)...........................5 Statements of Cash Flows...............................................6 Notes to Financial Statements..........................................8 Independent Accountants' Report on Supplementary Information..............26 Supplementary Information Consolidated Schedules of Sales and Gross Profit......................27 Consolidated Schedules of General and Administrative Expenses.........28 Independent Accountants' Report Board of Directors and Stockholders All Star Gas Corporation Lebanon, Missouri We have audited the accompanying balance sheets of All Star Gas Corporation as of June 30, 2002 and 2001, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the three years in the period ended June 30, 2002. 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 auditing standards generally accepted in the United States of America. 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 financial statements referred to above present fairly, in all material respects, the financial position of All Star Gas Corporation as of June 30, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended June 30, 2002, in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, the Company has suffered recurring losses and negative cash flows from operations and has a net working capital and stockholders' equity deficiencies at June 30, 2002. As also discussed in Note 2, the Company is in default with respect to its Senior Secured Notes due 2003 and its Subordinated Debentures due 2007, and has incurred a significant federal tax liability as a result of retail service center dispositions in fiscal 2000 that it was unable to pay when due. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. As discussed in Note 13, the Company changed its method of accounting for derivative instruments in 2001. /s/ BKD, LLP Springfield, Missouri September 6, 2002, except for Notes 3 and 6 as to which the date is October 4, 2002 All Star Gas Corporation Consolidated Balance Sheets June 30, 2002 and 2001 (In Thousands, Except Share Amounts)

~~2001~~Assets ~~2000~~2002 ~~1999~~2001 ---- ---- ------- ~~OPERATING~~Current ~~REVENUE~~Assets Cash $ ~~57,052~~509 $ ~~80,617~~509 $Trade 83receivables,~~563~~ ~~COST~~less OFallowance ~~PRODUCT~~for ~~SOLD~~doubtful ~~40,134~~accounts; ~~46,425~~2002 37- $158,~~971~~ ~~--------~~2001 -~~--------~~ ~~---------~~$250 ~~GROSS~~956 ~~PROFIT 16~~2,~~918~~549 ~~34,192~~Current ~~45,592~~maturities ~~--------~~of ~~---------~~notes receivable 146 --~~-------~~ ~~Loss~~Inventories on2,158 ~~forward~~2,783 ~~and~~Forward ~~futures~~sales contracts ~~506~~ -- --115 ~~--------~~Prepaid ~~---------~~expenses ~~---------~~589 ~~OPERATING~~198 ~~COSTS~~Deferred ~~AND~~income ~~EXPENSES~~taxes ~~Provision~~175 ~~for~~200 ~~doubtful~~Due ~~accounts~~from ~~341~~related ~~464~~parties ~~227~~30 ~~General and administrative 16,369 33,082 32,377 Depreciation and amortization 4,090 8,169 9,776 Gain on sale of assets (422) (44,940) (547)~~ --~~------~~ --------- --------- ~~20,378~~Total (3current assets 4,~~225)~~563 416,~~833~~354 -------- --------- ~~---------~~Property ~~OPERATING~~and ~~INCOME~~Equipment, ~~(LOSS)~~At ~~(3,966)~~Cost ~~37,417~~Land ~~3,759~~and ~~--------~~buildings ~~---------~~2,492 ~~---------~~4,496 ~~OTHER~~Storage ~~EXPENSE~~and ~~Interest~~consumer ~~expense~~service 5facilities 33,~~489~~516 1835,~~062~~716 11Transportation,~~965~~ ~~Amortization~~office ofand ~~debt~~other ~~discount~~equipment 115,~~563~~763 216,~~042~~381 ~~7,762~~ -------- --------- ~~---------~~51,771 756,~~052~~593 20Less accumulated depreciation 24,~~104~~691 1925,~~727~~742 -------- --------- ~~--------- INCOME (LOSS) BEFORE INCOME TAXES (11~~27,~~018)~~080 1730,~~313~~851 ~~(15,968) PROVISION (CREDIT) FOR INCOME TAXES (313) 7,892 (5,197)~~ -------- --------- ~~---------~~Other ~~INCOME~~Assets ~~(LOSS)~~Debt ~~BEFORE~~acquisition ~~EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (10~~costs,~~705)~~ ~~9,421 (10,771) EXTRAORDINARY ITEM Gain on extinguishment of debt,~~ net of ~~income~~accumulated ~~taxes~~amortization of1,425 $41,~~630~~174 Goodwill -- 74,~~969~~366 --Noncompete ~~CHANGE~~agreements, INat ~~ACCOUNTING~~amortized ~~PRINCIPLE~~cost ~~Cumulative~~415 ~~effect~~650 ofNotes ~~change~~receivable ~~in accounting principle~~3,839 ~~net~~942 ofOther ~~income~~1,189 ~~taxes~~1,628 ~~of $546 940~~ -- -- --- ----- -- 6,868 8,760 ------- --------- ~~NET INCOME (LOSS)~~ $ (938,~~765)~~511 $ 1745,~~390~~965 ~~$ (10,771)~~ ======== =======~~== =========~~

See Notes to Consolidated Financial Statements

~~Common~~Liabilities ~~Total~~and ~~Stock Additional Retained~~ Stockholders' ~~Common Purchase Paid-In Earnings Treasury~~ Equity ~~Stock Warrants Capital~~ (Deficit) ~~Stock~~2002 ~~(Deficit)~~2001 --------- -------- ~~-----------~~Current ~~-----------~~Liabilities ~~---------~~Checks ~~------------~~in ~~BALANCE,~~process ~~JULY~~of 1,collection ~~1998~~ $ 141,684 $ 1,~~227~~243 $Notes ~~27,149~~payable $to 5banks 4,~~561~~672 ~~$ (87~~3,~~914)~~979 $Current ~~(53,963)~~maturities ~~CAPITAL~~of ~~CONTRIBUTED~~long-term TOdebt ~~TRES~~70,642 ~~HOMBRES~~14,493 ~~INC.~~Accounts --payable --1,552 1,~~425~~551 --Accrued --salaries 556 712 Accrued interest 2,294 1,~~425~~339 ~~NET~~Accrued ~~LOSS~~expenses --741 --832 --Customer (prepayments 6,277 10,~~771)~~208 Due to related parties 67 394 Income taxes payable 652 3,705 Forward purchase contracts -- ~~(10,771)~~200 -------- -------- Total current liabilities 89,137 38,656 --------- -------- Long-Term Debt 4,937 56,726 --------- --------- ~~BALANCE,~~Deferred ~~JUNE~~Income ~~30,~~Taxes ~~1999 14 1~~3,~~227~~984 ~~28,574 (~~5,~~210)~~738 ~~(87,914) (63,309) NET INCOME~~ -- -- -- ~~17,390~~ -- ~~17,390~~ ------- -~~-------~~ ~~---------~~Accrued Self-~~--------~~Insurance Liability 193 529 --------- --------- ~~BALANCE~~Stockholders' Equity (Deficit) Common; $.001 par value; authorized 20,000,000 ~~JUNE~~shares; 30issued 14,291,020 ~~2000~~shares 14 14 Common stock purchase warrants 1,227 281,~~574~~227 ~~12,180~~Additional ~~(87~~paid-in capital 28,~~914)~~574 ~~(45~~28,~~919)~~574 ~~NET~~Retained ~~LOSS~~earnings ~~-- -- --~~ (~~9,765~~deficit) -- (91,~~765~~641) 2,415 -------- -------- 28,174 32,230 Treasury stock; 12,704,129 shares, at cost (87,914) (87,914) --------- --------- (59,740) (55,684) --------- --------- ~~BALANCE, JUNE 30, 2001~~ $ ~~14 $ 1~~38,~~227~~511 $ 2845,~~574~~965 ~~$ 2,415 $ (87,914) $ (55,684)~~ ======= =~~=======~~ ========~~= ========= ========= =========~~

All Star Gas Corporation Consolidated Statements of Operations Years Ended June 30, 2002, 2001 and 2000 (In Thousands, Except Per Share Amounts)

2002 2001 2000 ~~1999~~ -------- -------- -------- ~~CASH~~Operating ~~FLOWS~~Revenue ~~FROM OPERATING ACTIVITIES Net income (loss)~~ $ (948,~~765)~~370 $ 1757,~~390~~052 $ ~~(10~~80,~~771)~~617 ~~Items~~Cost ~~not~~of ~~requiring~~Product ~~(providing)~~Sold ~~cash: Depreciation 3~~27,~~107~~037 640,~~406~~134 746,~~643~~425 ~~Amortization 2,546 3,423 9,895 Gain on sale of assets (422) (44,940) (547) Extraordinary gain on extinguishment of debt~~ -- ~~(7,969)~~ -- ~~Cumulative effect of change in accounting principle (940)~~ -- -- ~~Loss on forward and futures contracts 506~~ -------- -------- ~~Deferred~~Gross ~~income~~Profit ~~taxes 2~~21,~~354~~333 216,~~144~~918 (434,~~099)~~192 Changes in: Trade receivables 8 (563) 583 Inventories 1,256 (2,085) 2,099 Prepaid expenses and other 330 1,228 (1,541) Accounts payable and customer prepayments 3,341 (4,265) 352 Accrued expenses and self-~~insurance (3,339) 11,151 355~~ -------- --------- --------- ~~Net~~(Gain) ~~cash~~Loss ~~provided~~on byForward ~~(used~~and ~~in)~~Futures ~~operating~~Contracts ~~activities~~ (~~1,018~~42) ~~(18,080)~~506 ~~3,969~~-- -------- --------- --------- ~~CASH~~Operating ~~FLOWS~~Costs ~~FROM~~and ~~INVESTING~~Expenses ~~ACTIVITIES~~Provision ~~Proceeds~~for ~~from~~doubtful ~~sales~~accounts of164 ~~retail~~341 ~~service~~464 ~~centers~~General and ~~other~~administrative ~~assets 2~~17,~~929~~005 9116,~~646~~369 333,~~131~~082 ~~Acquisition~~Depreciation ~~of retail service centers (110) (601) (601) Purchases of property~~ and ~~equipment~~amortization (27,~~148)~~215 (4,~~120)~~090 (38,~~655)~~169 ~~Advances~~Gain ~~from~~on ~~(to)~~sale ~~related~~of ~~parties~~assets ~~394~~ (1,~~430~~938) ~~770~~(422) ~~Purchase of interest in limited liability company~~ (~~261~~44,940) -- -- ----~~----~~ --------- --------- ~~Net~~22,446 ~~cash provided by (used in) investing activities 804 85~~20,~~495~~378 (~~355~~3,225) -------- --------- --------- ~~CASH~~Operating ~~FLOWS~~Income ~~FROM~~(Loss) ~~FINANCING ACTIVITIES Decrease in working capital facility --~~ (41,~~756~~071) (~~294~~3,966) ~~Proceeds from issuance of notes payable to banks 6~~37,~~184~~417 -- ------ ~~Principal payments on notes payable to banks (2,853)~~ -------- -------- ~~Principal~~Other ~~payments~~Expense onInterest ~~purchase~~expense ~~obligations (3~~2,~~505)~~010 (25,~~812)~~489 (318,~~810)~~062 ~~Proceeds~~Amortization ~~from issuance~~ of ~~long-term~~ debt ~~obligations~~discount ~~250~~3,741 ~~118~~1,563 ~~695~~2,042 ~~Increase (decrease) in checks in process of collection 215 (856) 202 Principal payment on subordinated debentures~~ -------- -------- ~~(13) Principal payment on senior secured notes~~ -------- ~~(60~~5,~~000)~~751 --7,052 20,104 -------- --------- --------- ~~Net~~Income ~~cash~~(Loss) ~~provided~~Before byIncome Taxes (~~used~~6,822) in(11,018) ~~financing~~17,313 ~~activities~~Provision ~~291~~(Credit) for Income Taxes (682,~~306~~766) (~~3,220~~313) 7,892 -------- --------- --------- ~~INCREASE~~Income (~~DECREASE~~Loss) INBefore ~~CASH~~Extraordinary 77Item and Cumulative Effect of Change in Accounting Principle (~~891~~4,056) ~~394~~(10,705) ~~CASH~~9,421 ~~BEGINNING~~Extraordinary OFItem ~~YEAR~~Gain ~~432~~on 1extinguishment of debt,~~323~~ ~~929~~net of income taxes of $4,630 -- -- 7,969 Change in Accounting Principle Cumulative effect of change in accounting principle, net of income taxes of $546 -- 940 -- --------- -------- -------- ~~CASH,~~Net ~~END~~Income OF(Loss) ~~YEAR~~ $ ~~509~~(4,056) $ ~~432~~(9,765) $ 117,~~323~~390 ======== ========= =========

See Notes to Consolidated Financial Statements 3 All Star Gas Corporation Consolidated Statements of Operations (Continued) Years Ended June 30, 2002, 2001 and 2000 (In Thousands, Except Per Share Amounts)

2002 2001 2000 ~~1999~~ ------------- ------------- ------------ ~~(In~~Basic ~~Thousands)~~and ~~Computed~~Diluted atIncome ~~the statutory rate~~ (~~34%~~Loss) $Per ~~(3,746)~~Common $Share ~~5,886~~Before $Extraordinary ~~(5,429)~~Item ~~Increase~~and ~~(decrease)~~Cumulative ~~resulting~~Effect ~~from: Amortization~~ of ~~excess~~Change ofin ~~cost~~Accounting ~~over~~Principle ~~fair~~$ ~~value of net assets acquired 173 210 389 State income taxes - net of federal tax benefit~~ (~~333~~2.56) ~~1,323~~$ (~~280~~6.74) ~~Nondeductible~~$ ~~goodwill~~5.94 ~~amortization~~Basic onand ~~sold~~Diluted ~~retail~~Income ~~service~~Per ~~centers~~Common ~~101~~Share ~~895~~on Extraordinary Item -- ~~Interest~~-- 5.02 Basic and ~~penalties~~Diluted onIncome ~~tax~~Per ~~obligations~~Common ~~1,311~~Share --on --Cumulative ~~Reduction~~Effect of ~~tax~~Change ~~basis~~in onAccounting ~~retail~~Principle ~~service~~-- ~~centers~~.59 ~~2,584~~ -- -- ~~Other (403) (422) 123~~ ----------- ------------- ------------ ~~Actual~~Basic ~~tax~~and ~~provision~~Diluted Income (~~credit~~Loss) Per Common Share $ (~~313~~2.56) $ ~~7,892~~(6.15) $ ~~(5,197)~~10.96 ============ ============= ============

See Notes to Consolidated Financial Statements 4 All Star Gas Corporation Consolidated Statements of Stockholders' Equity (Deficit) Years Ended June 30, 2002, 2001 and 2000 (In Thousands)

~~June~~Common 30Total Stock Additional Retained Stockholders' Common Purchase Paid-in Earnings Treasury Equity Stock Warrants Capital (Deficit) Stock (Deficit) --------------- --------------- --------------- --------------- ~~2001 2000~~ -------------- ------------ ------- Balance, July 1, 1999 $ 14 $ 1,227 $ 28,574 $ (5,210) $(87,914) $(63,309) Net income -- -- -- 17,390 -- 17,390 -------- -------- ~~Carrying Fair Carrying Fair Amount Value Amount Value~~ -------- -------- -------- -------- ~~Financial~~Balance, ~~Assets:~~June ~~Cash~~30, ~~$509~~2000 ~~$509~~14 ~~$432~~1,227 ~~$432~~28,574 ~~Note~~12,180 ~~receivable~~(87,914) ~~$942~~(45,919) ~~$942~~Net ~~$972~~loss ~~$972~~-- ~~Forward~~-- ~~sales~~-- ~~contracts~~(9,765) ~~$115~~-- ~~$115~~(9,765) -------- -------- ~~Financial~~-------- ~~Liabilities:~~-------- ~~Notes payable to banks $3,979 $3,979~~ -------- -------- ~~Senior~~Balance, ~~Secured~~June ~~Notes~~30, ~~due~~2001 ~~2003~~14 ~~$60~~1,~~459~~227 $28,~~620~~574 2,415 (87,914) (55,684) Net loss -- -- ~~Senior~~-- ~~Secured~~(4,056) ~~Notes~~-- (4,056) ~~due~~-------- ~~2004~~-------- -------- -------- ~~$50,535~~-------- ~~$40~~-------- Balance,~~000~~ ~~Subordinated~~June ~~Debentures~~30, ~~due~~2002 ~~2007~~ $~~6,171~~ ~~$2,919~~14 $~~5,896~~ $51,~~843~~227 ~~Other long-term debt~~ $4 28,~~589~~574 $4 (1,~~589~~641) $4(87,~~643~~914) $4(59,~~643~~740) ~~Forward~~======== ~~purchase~~======== ~~contracts~~======== ~~$200~~======== ~~$200~~======== ~~-- --~~========

See Notes to Consolidated Financial Statements 5 All Star Gas Corporation Consolidated Statements of Cash Flows Years Ended June 30, 2002, 2001 and 2000 (In Thousands)

2002 2001 2000 -------- -------- -------- Operating Activities Net income (loss) $ (4,056) $ (9,765) $ 17,390 Items not requiring (providing) cash Depreciation 2,729 3,107 6,406 Amortization 8,227 2,546 3,423 Gain on sale of assets (1,938) (422) (44,940) Extraordinary gain on extinguishment of debt -- -- (7,969) Cumulative effect of change in accounting principle -- (940) -- (Gain) loss on forward and futures contracts (42) 506 -- Deferred income taxes (1,729) 2,354 2,144 Changes in Trade receivables 1,059 8 (563) Inventories 491 1,256 (2,085) Prepaid expenses and other 145 330 1,228 Accounts payable and customer prepayments (2,510) 3,341 (4,265) Accrued expenses and self---insurance (2,810) (3,339) 11,151 -------- -------- -------- Net cash used in operating activities (434) (1,018) (18,080) --------~~-----~~ ~~Gross Profit Gross Profit~~ -------- -------- Investing Activities Proceeds from sales of retail service centers and other assets 3,628 2,929 91,646 Acquisition of retail service centers (123) (110) (601) Purchases of property and equipment (3,952) (2,148) (4,120) Advances from (to) related parties (357) 394 (1,430) Purchase of interest in limited liability company -- (261) --~~---~~ -------- -------- -------- ~~Percentage~~Net ~~Percentage~~cash ~~Sales~~provided ~~Amount~~by of(used ~~Revenue~~in) ~~Sales~~investing ~~Amount~~activities of(804) ~~Revenue~~804 ~~-----~~85,495 ------ --~~--------~~ ----- ---~~---~~ ---------- ~~Gas~~Financing ~~Sales~~Activities ~~Bulk~~Decrease -in ~~retail~~working $capital ~~51,952~~facility $-- 13-- (4,~~376~~756) ~~25.7%~~Proceeds $from ~~64,529~~issuance $of ~~26,696~~notes ~~41.4%~~payable ~~Bulk~~to -banks ~~industrial~~3,444 ~~accounts~~6,184 -- --Principal --payments ~~5,529~~on ~~910~~notes ~~16.5~~payable ~~Bottle~~to banks (2,751) (2,853) -- ~~retail~~Principal ~~and~~payments ~~wholesale~~on ~~968~~purchase ~~565~~obligations ~~58.4~~(3,689) 1(3,~~593~~505) ~~975 61.~~(2,812) ~~--------~~Proceeds ~~--------~~from ~~--------~~issuance of long-~~-------~~term ~~52,920~~debt ~~13,941~~obligations ~~26.3 71~~2,~~651~~748 ~~28,581~~250 ~~39.9~~118 ~~Gas~~Increase ~~Systems~~(decrease) ~~and~~in ~~Appliances~~checks ~~1,639~~in ~~578~~process ~~35.3~~of ~~3,424~~collection ~~677~~441 ~~19.8~~215 ~~Fuel~~(856) ~~Oil~~Principal &payment ~~Gas~~on ~~148~~senior 54secured ~~36.5~~notes -- -- (60,000) Net borrowings from related parties 1,045 -- --~~------~~ -------- -------- -------- ~~54,707~~Net ~~14,573~~cash ~~75,075~~provided ~~29,258~~by ~~Other~~(used ~~Revenue~~in) ~~Food~~financing activities 1,238 ~~liquor~~291 ~~and~~(68,306) ~~other~~-------- -------- -------- ~~1,860~~Increase ~~1,252~~(Decrease) ~~Rental,~~in ~~storage~~Cash ~~and~~0 ~~leases~~77 ~~777~~(891) ~~777 1~~Cash,~~607~~ ~~1,607~~Beginning ~~Service~~of ~~labor~~Year ~~860~~509 ~~860~~432 1,~~453~~323 ~~1,453 Service charges 227 227 280 280 Miscellaneous 481 481 342 342~~ -------- -------- -------- ~~-------- $ 57~~Cash,~~052~~ $End ~~16,918~~of ~~29.7~~Year $ ~~80,617~~509 $ ~~34,192~~509 ~~42.4~~$ ~~========~~432 ======== ======== ========

See Notes to Consolidated Financial Statements 6 All Star Gas Corporation Consolidated Statements of Cash Flows Years Ended June 30, 2002, 2001 and 2000 (In Thousands)

~~Balance~~2002 at2001 ~~Charges~~2000 ~~to Amount Balance at Beginning Costs and Written End of Description of Year Expenses Off Other Year~~ -------~~----~~ -------~~----~~ -------~~---~~ ~~---------~~Supplemental ~~-----~~Cash ~~--------~~Flows ~~Valuation~~Information ~~accounts~~Interest ~~deducted~~paid ~~from~~$ ~~assets~~2,211 to$ ~~which~~2,529 ~~they~~$14,199 ~~apply~~Income -taxes ~~for~~paid ~~doubtful~~$ ~~accounts~~2,318 ~~receivable:~~$ ~~June 30~~3,633 ~~2001~~ $~~300~~ 552 Income taxes refunded $~~341~~ 305 $~~391~~ 417 $~~1(A)~~ 869 Notes receivable from sale of retail service centers $~~250~~ 3,931 -- $( 1~~)(B)~~,350 ~~June~~Purchase ~~30,~~contract ~~2000~~obligations ~~$526~~incurred ~~$464~~for ~~$369~~property and equipment $ 1~~(A)~~,792 $~~300~~ 591 $~~(322)(B)~~ ~~June~~389 ~~30,~~Capital ~~1999~~lease ~~$844~~obligations ~~$227~~incurred for property and equipment $~~545~~ 364 $~~3(A)~~ 326 $~~526~~ 332 Long-term obligations incurred for investment in Missouri Investment Partner I, LLC, a purchaser of Missouri low-income housing tax credits -- $~~(3)(B)~~ 870 --

See Notes to Consolidated Financial Statements 7 All Star Gas Corporation Notes to Consolidated Financial Statements June 30, 2002, 2001 and 2000 Note 1: Nature of Operations and Summary of Significant Accounting Policies Nature of Operations The Company's principal operation is the sale of liquefied propane (LP) gas to residential, agricultural and commercial customers to whom credit is extended principally on an unsecured basis. Such customers are located throughout the United States with the larger number concentrated in the central states. Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 wholly owned 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: 2002 2001 (In Thousands) --------------- Gas and other petroleum products $ 948 $1,529 Gas distribution parts, appliances and equipment 1,210 1,254 ------ ------ $2,158 $2,783 ====== ====== 8 Property and Equipment Depreciation is provided on 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) were amortized over ten years; the costs of the 1999 revolving credit facility (originally $1,279,000) were amortized over three years; and the 2001 senior secured note costs (originally $1,369,000) are amortized over 28 months. Amortization of discounts on debentures and notes (Note 6) is on the effective interest, bonds outstanding method. The majority of the goodwill acquired relates to a transaction originating prior to July 1, 1994, and was being amortized on the straight-line basis over 25 years. Goodwill purchased in other transactions was being amortized on the straight-line basis over five years. An impairment loss was recorded during 2002 (Note 4). 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 1,586,891 for each of the periods ended June 30, 2002, 2001 and 2000. Common stock warrants and options outstanding were excluded from the June 30, 2002, 2001 and 2000, calculations of the weighted average number of common shares outstanding used in the computation of earnings per share as they were anti-dilutive. 9 Impact of Recent Accounting Pronouncements The Financial Accounting Standard Board (FASB) recently issued Statement of Financial Accounting Standards (SFAS) 141, Business Combinations. This Statement addresses financial accounting and reporting for business combinations. It eliminates the pooling-of-interests method and requires that all business combinations be accounted for using the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001, and to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. Adoption of the new standard had no initial effect on the Company's financial statements. The FASB also recently issued SFAS 142, Goodwill and Other Intangible Assets. This Statement establishes accounting and reporting standards for acquired goodwill and other intangible assets. The Statement addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. It also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. Under the new standard, amortization of existing goodwill ceases upon adoption of SFAS 142 and is replaced by periodic evaluation for impairment using specified methodology. SFAS 142 is effective for fiscal years beginning after December 15, 2001. Early adoption is permitted for entities with fiscal years beginning after March 15, 2001. The Company will apply SFAS 142 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements. The FASB recently adopted SFAS 143, Accounting for Asset Retirement Obligations. This Statement requires an entity to record a liability for an obligation associated with the retirement of an asset at the time the liability is incurred by capitalizing the cost as part of the carrying value of the related asset and depreciating it over the remaining useful life of that asset. SFAS 143 is effective for fiscal years beginning after June 15, 2002. The Company will apply SFAS 143 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements. The FASB recently adopted SFAS 144, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of. This Statement addresses how and when to measure impairment on long-lived assets and how to account for long-lived assets that an entity plans to dispose of either through sale, abandonment, exchange or distribution to owners. The Statement also requires expected future operating losses from discontinued operations to be recorded in the period in which the losses are incurred rather than the measurement date. SFAS 144 is effective for fiscal years beginning after December 15, 2001. The Company will apply SFAS 144 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements. 10 The FASB recently adopted SFAS 145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. This Statement rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and classified as an extraordinary item and amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for as such. SFAS 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption permitted. The Company will apply SFAS 145 beginning with the first quarter of its fiscal year ending June 30, 2003, on a prospective basis. Adoption of the new standard will have no initial effect on the Company's financial statements. The FASB recently adopted SFAS 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires an entity to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS 146 is effective for exit or disposal activities initiated after December 31, 2002. The effects of adoption of the new standard on the Company's financial statements are not determinable currently. Segment Information The principal business of the Company is the sale of LP gas. During the first half of 2000, the Company also operated a restaurant chain (Note 17). The Company has no significant assets other than those used in its principal business. The LP gas operation is the Company's only reportable segment. Selected information is not presented separately for the Company's reportable segment, as there is no material difference between that information and the corresponding information in the consolidated financial statements. Delivery Costs The costs related to the delivery of the product to the customer are included in operating expenses. Year-End Adjustments The Company recorded a provision for impairment on its recorded goodwill during the quarter ended June 30, 2002 (Note 4). Note 2: Management's Consideration of Going Concern Matters The Company reported income from operations during fiscal 2000 primarily due to the gains recognized on the sale of certain retail service centers (Note 16). The Company has otherwise suffered recurring losses and negative cash flows from operations, continues to have net working capital and net stockholders' equity deficiencies, which have existed since June 30, 1994, and is in default with respect to its outstanding Senior Secured Notes due 2003 and its Subordinated Debentures due 2007 (Note 6). The Company has recently been required to make additional cash deposits with various major propane suppliers to maintain current terms. 11 Also, as a result of the Company's significant disposition of retail service centers during fiscal 2000, the Company has incurred a $7.7 million federal tax liability that was due September 15, 2000. The Company was unable to pay the obligation when due. The Internal Revenue Service (the "IRS") has placed liens on Company assets. The Company has entered into a workout plan with the IRS for payment of the tax obligation. Subsequent to June 30, 2002, the Company breached the workout plan due to scheduled payments not being made and the IRS has issued a notice of default. The remaining balance of this liability, including interest and penalties, as of June 30, 2002, is approximately $1.3 million. The total balance of income taxes payable as of June 30, 2002, net of loss carrybacks relating to fiscal year 2002, is approximately $652,000. The financial statements have been prepared assuming the Company will continue as a going concern, realizing assets and liquidating liabilities in the ordinary course of business. Management is exploring several strategies involving additional debt and equity restructurings for mitigating these conditions during the coming year. Although not currently planned, realization of assets in other than the ordinary course of business to meet liquidity needs could incur losses not reflected in these financial statements. Note 3: Related Party Transactions During 2002, 2001 and 2000, the Company has purchased $56,000, $172,500 and $225,000, respectively, of paint from a corporation owned by the spouse of the Company's principal stockholder. In July 2001, the Company sold for cash and notes three retail service centers in Missouri to a related party wholly owned by the son of the Company's principal stockholder at a loss of approximately $130,000. In December 2001, the Company entered into a financing transaction whereby the assets of three retail service centers in Missouri were transferred to a related party wholly owned by the son of the Company's principal stockholder for approximately $1 million. The nature of the transaction was such that it has been recognized as a financing liability to the related party rather than as a sale. During June 2002, the assets of the service centers were transferred back to the Company, subject to a security interest in favor of a third-party lending institution. At June 30, 2002, the amount due to the related party is approximately $1 million with interest at 8.64% payable monthly and due on demand. In 2002, the Company entered into a management agreement pursuant to which the Company provides all management and accounting services for a related party wholly owned by the son of the Company's principal stockholder. Servicing income totaled approximately $72,000 for 2002. The Company also sells propane gas to this related party. Total sales to the related party were approximately $1.4 million for 2002. 12 During 2002, the Company sold for cash the majority of its interest in a real estate limited liability company to a related party owned by the principal stockholder at a loss of approximately $70,000. In 2002 and 2001, the principal stockholder loaned the Company amounts totaling $1.8 million and $2.5 million, respectively, bearing interest at a rate of 12%, with terms ranging from seven days to six months. At June 30, 2002 and 2001, the balance of these obligations was $67,000 and $394,000, respectively. In 2001, the Company's principal stockholder pledged his stock in the Company as collateral for the Senior Secured Notes, due 2003 (Note 6) and guaranteed various notes payable (Note 7). In February 2001, the principal stockholder assumed a note payable to the Company with a balance of $942,000 (Note 5). The note principal is due in August 2012 and interest is payable monthly. Note 4: Goodwill The changes in the carrying amount of goodwill for the years ended June 30, 2002 and 2001, were:

Because of the decline in the economic conditions of the propane and energy industry during fiscal year 2002, the Company's recurring losses from operations, net working capital, net stockholders' equity and operating cash flow deficiencies, the remaining goodwill amount of $3,739,000 was charged to operations and is included in depreciation and amortization expense for the year ended June 30, 2002. 13 Note 5: Notes Receivable Notes receivable consist of the following: 2002 2001 --------------------------- Note receivable (A) $ 942 $ 942 Note receivable (B) 381 -- Note receivable (C) 2,662 -- ------------ ----------- 3,985 942 Less current maturities 146 -- ------------ ----------- $ 3,839 $ 942 ============ =========== (A) The note receivable is secured primarily by three deeds of trust on real property located in the counties of Laclede, Camden and Crawford in the state of Missouri. In 2000, the note was due in monthly installments of $11,000, including interest at 9.3745%, until August 2012. In February 2001, the note receivable was assumed by the principal shareholder (Note 3). The note principal is now due in August 2012 and interest is payable monthly. (B) Notes receivable issued in the sale of two retail service centers in South Carolina (Note 16). The notes are payable in quarterly installments, including interest at 6%, and mature in November 2005. (C) Notes receivable issued in conjunction with two sale-leaseback transactions whereby the Company sold and leased back the land and buildings at 26 retail service centers (Note 16). The notes are payable in monthly installments of $23,495, including interest at 6.5%, and mature in March 2017. Note 6: Long-Term Debt Long-term debt at June 30 consisted of (in thousands):

14 (A) The notes were issued in conjunction with an exchange offer for the Company's Senior Secured notes, due 2004. The notes were issued February 2001 at a discount and require interest payments at 11%. The notes are due June 30, 2003, and are redeemable at the Company's option, in whole or from time to time in part, until maturity, upon not less than 30 or more than 60 days' notice, at a reduced redemption price of the principal amount of the notes being redeemed equal to a predetermined percentage at specific future dates, plus accrued and unpaid interest thereon to the redemption date: On or Prior To Redemption Percentage -------------------------- ---------------------- June 30, 2002 93.59% December 31, 2002 96.79% June 30, 2003 100.00% The balance outstanding of the Senior Notes includes the original principal amount of the notes issued $(53,064,000) plus the amount of interest accrued from August 1, 2000, to November 30, 2000, on the remaining 40% of the Senior Secured Notes, due 2004. The original principal amount was adjusted to give effect for the original issue discount and accrued interest at February 23, 2001, on the Senior Secured Notes, due 2004 (effective interest rate of 4.42%). The discount on these notes is being amortized over the remaining life of the notes using the effective interest method. The outstanding balance of the notes as of June 30, 2002, is as follows:

The notes are guaranteed by the restricted subsidiaries of the Company and secured by the common stock of the restricted subsidiaries and the Company's principal stockholder's common stock in the Company. 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. On October 30, 2001, due to the nonpayment of interest, the Company defaulted with respect to the $53,063,600 principal balance of the 11% Senior Secured Notes due 2003 15 (the "Senior Notes"). The Company also has not made the interest payments due December 31, 2001, March 31, 2002, and June 30, 2002, on the Senior Notes. As a result of the default, the note holders have the right to accelerate the balance due and require immediate payment in full. Accordingly, the entire balance of the obligation is included in current liabilities at June 30, 2002. The debenture holders have not accelerated the balance due under the notes as of October 4, 2002. (B) The debentures, issued June 1983, are redeemable at the Company's option, as a whole or in part, at par value. The original principal amount of debentures issued 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 method. Due to the nonpayment of interest due since June 30, 2000, the Company is in default with respect to the debentures. As a result of the default, the debenture holders have the right to accelerate the balance due and require immediate payment in full. Accordingly, the entire balance of the obligation is included in current liabilities at June 30, 2002 and 2001. The debenture holders have not accelerated the balance due under the notes as of October 4, 2002. (C) 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 trucks and data processing equipment. At June 30, 2002 and 2001, these obligations carried interest rates from 7% to 12% and are due periodically through 2007. Aggregate annual maturities (in thousands) of the long-term debt outstanding at June 30, 2002, are: 2003 $ 70,642 2004 1,034 2005 981 2006 742 2007 2,137 Thereafter 43 ---------- $ 75,579 ========== Note 7: Notes Payable to Banks Notes payable to banks aggregating $4,672,000 at June 30, 2002, and $3,979,000 at June 30, 2001, are comprised of short-term borrowings secured by accounts receivable, inventory and property and equipment. The borrowings bear interest at a weighted average interest rate of approximately 8.0% and are due periodically in fiscal year 2003. 16 Note 8: Income Taxes The provision (credit) for income taxes on income before extraordinary item and cumulative effect of change in accounting principle includes these components:

The tax effects of temporary differences at June 30, 2002 and 2001, related to deferred taxes were:

17 The above net deferred tax liability is presented on the June 30 balance sheets as follows:

A reconciliation of income tax expense (credit) at the statutory rate to the Company's actual income tax expense (credit) is shown below:

18 Note 9: Self-Insurance and Contingencies Under the Company's current insurance program, the Company's comprehensive general and employer's liability coverage and excess liability policy provides for losses of up to $75.0 million. The general liability coverage has a $250,000 self-insured retention with a $1 million cap on total claims. The Company's combined auto and workers' compensation coverage is insured through participation in a captive insurance program with other unrelated parties. The Company obtains excess coverage on occurrence basis policies. Provisions for self-insured losses are recorded based upon the Company's estimates of the aggregate self-insured liability for claims incurred, resulting in a retention for a portion of these expected losses. The ending accrued liability includes $150,000 for incurred but not reported claims at June 30, 2002 and 2001. The current portion of the ending liability of $500,000 at June 30, 2002, and $400,000 at June 30, 2002 and 2001, 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, 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 $530,000, $770,000 and $1,079,000 for the years ended June 30, 2002, 2001 and 2000, respectively. In conjunction with a restructuring transaction involving the Company and Empire Energy Corporation, the parties 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 Empire Energy Corporation assuming the remaining 47.7%. The Company and its subsidiaries are presently involved in various federal and state tax audits, which are not expected to have a material adverse effect on the Company's financial position or results of operations. 19 Note 10: Stock Options and Warrants Stock Options The Company has established a Stock Option Plan for the benefit of its employees 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 10-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, July 1, 1999 500,700 Granted ($1.00 per share) 10,000 Forfeited (75,000) ------------ Balance, June 30, 2000 435,700 Granted ($1.00 per share) 74,000 Forfeited (35,000) ------------ Balance, June 30, 2001 474,700 Granted ($1.00 per share) -- Forfeited (27,500) ------------ Balance, June 30, 2002 447,200 ============ Options outstanding at June 30, 2002, have a weighted average remaining contractual life of approximately six years with 341,958 options currently exercisable. The exercise price was $7.00 per share until May 2000 when it was reduced to $1.00 per share. The Company applies Accounting Principles Board 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 The Company issued detachable warrants to purchase common stock in connection with the issuance of 127/8% Senior Secured Notes in 1994. Each warrant represents the right to purchase one share of the Company's common stock for $.01 per warrant. The warrants are exercisable currently and will expire on July 15, 2004. No warrants were issued or exercised in 2002, 2001 and 2000. Warrants to purchase 175,536 shares were outstanding at June 30, 2002 and 2001. 21 Note 11: Employee Benefit Plan The Company has a defined contribution retirement plan covering 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 years ended June 30, 2002, 2001 or 2000. Note 12: Operating Leases Noncancelable operating leases, which cover office space and various equipment, expire in various years through 2017. These leases generally contain renewal options for periods ranging from one to five years and require the Company to pay all executory costs (property taxes, maintenance and insurance). Future minimum lease payments (in thousands) at June 30, 2002, were: 2003 $ 1,118 2004 1,072 2005 934 2006 915 2007 878 Thereafter 6,239 ----------- Future minimum lease payments $ 11,156 =========== Note 13: Futures and Forward Contracts and Change in Accounting Principle The Company enters into purchase and sale commitments under supply contracts and similar agreements with other parties that typically have a term of less than one year. As of June 30, 2002 and 2001, the Company had approximately $2.2 million and $5.5 million, respectively, in outstanding commitments to purchase LP gas for inventory. The Company also had outstanding commitments to sell approximately 0 gallons and 2.1 million gallons of LP gas at June 30, 2002 and 2001, respectively. The Company also uses commodity futures contracts to reduce the risk of price fluctuations for liquefied propane (LP) gas purchase and sale commitments. As of June 30, 2002 and 2001, the Company had no open positions on commodity futures contracts for LP gas. On July 1, 2000, the Company adopted the provisions of Financial Accounting Standards Board Statements (SFAS) Nos. 133 and 138, which establish accounting and reporting standards for derivative instruments. SFAS 133 and 138 require most derivative instruments to be reflected as assets or liabilities in the balance sheet at their fair values with changes in fair values reflected in net income (or accumulated other comprehensive income if the criteria for cash flow hedge accounting are met). An exception to application of the requirements is provided for derivative instruments that meet the criteria of normal purchases/normal sales set forth in the new standards and are, therefore, not recognized. 21 Derivative financial instruments held by the Company consist of the forward purchase and sales contracts and the commodity futures contracts discussed above. Certain of the forward purchase and sales contracts meet the normal purchases/normal sales criteria and are not recognized in the financial statements. The remainder of the forward purchase and sales contracts and all of the commodity futures contracts are recognized in the financial statements as the Company has elected not to apply the hedge accounting provisions of the new standards to those instruments. At July 1, 2000, initial adoption of the new standards resulted in recognition of derivative financial instruments as assets and liabilities in the amounts of $3.1 million and $1.6 million, respectively, and a cumulative effect adjustment of $940,000, net of applicable income taxes. No disclosure of the pro forma effects as if the new standards had been applied retroactively to prior periods is made as such effects are immaterial. Application of the new standards have resulted in recognition of a gain of $42,000 on forward and futures contracts for 2002 and a loss of $506,000 for 2001. 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 1, 4 and 9. Actual losses related to these items could vary materially in the near term from amounts reflected in the financial statements. Note 15: Disclosures About Fair Value of Financial Instruments The following methods were used to estimate the fair value of financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which method involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be acquired or sold individually or in the aggregate. 22 Notes Receivable Fair value is estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities. Forward Purchase and Forward Sale Contracts Fair value is based on quoted market prices. Notes Payable to Banks and Long-Term Debt Fair value of the Senior Secured Notes is estimated based on trading prices of this debt issuance. The fair value of the Subordinated Debentures is estimated by discounting the future cash flows using the rates at which similar notes would be written for the same remaining maturities. The fair value of notes payable to banks and other debt approximates carrying value as other debt consists of obligations with interest rates approximating rates currently available to the Company. The following table presents estimated fair values of the Company's financial instruments.

23 Note 16: Acquisitions and Dispositions of Retail Service Centers During the year ended June 30, 2002, the Company entered into two sale-leaseback transactions whereby the Company sold for cash and notes the land and buildings at 26 retail service centers and recognized a gain of approximately $2 million using the full accrual method. The resulting leases are for a term of 15 years and are being accounted for as operating leases with combined monthly payments of approximately $38,000. During the year ended June 30, 2002, the Company sold three retail service centers to a related party (Note 3). During the year ended June 30, 2002, the Company sold for cash and notes three retail service centers located in Illinois and South Carolina to nonrelated parties at a gain. During the year ended June 30, 2002, the Company acquired five retail service centers through an asset purchase transaction for a total of $3.2 million of which $123,000 was paid in cash with the remainder in mortgage obligations and the assumption of certain liabilities. Pro forma results of these operations as if the transactions had been completed at the beginning of the period would not be materially different from actual results due to the size and timing of the transactions and the seasonal nature of the business. During the year ended June 30, 2001, the Company acquired one LP gas operation through an asset purchase transaction for a total of $600,000, of which $110,000 was paid in cash with the remainder in mortgage obligations and the assumption of certain liabilities. During the year ended June 30, 2000, the Company acquired one LP gas operation through an asset purchase transaction for a total of $545,000, of which $5,500 was paid in cash with the remainder in mortgage obligations and the assumption of certain liabilities. Each of these acquisitions has been accounted for as a purchase by recording the assets acquired and the liabilities assumed at their estimated fair values at the acquisition date. Amounts paid above these fair values are recorded as excess of cost over fair value of net assets acquired. The consolidated operations of the Company include the operations of the acquirees from the acquisition dates. The pro forma effects of the acquisitions as if they had been completed at the beginning of the year would not be materially different from actual results. During the year ended June 30, 2001, the Company sold three retail service centers. The Company received $929,000 in cash from the sale. The pro forma effects of the disposition as if it had been completed at the beginning of the year would not be materially different from actual results. During the year ended June 30, 2000, the Company sold 66 retail service centers. The Company received $91.1 million in cash from these sales. Unaudited pro forma consolidated operations, assuming the dispositions were made at the beginning of the current and previous years, are shown below: 24 2001 2000 ------- ------- (In Millions) Operating revenue $ 57.1 $ 55.7 Net income (loss) $ (9.8) $ 14.9 The pro forma results are not necessarily indicative of what would have occurred had the retail service center dispositions been on those dates, nor are they necessarily indicative of future operations. Note 17: Business Acquisition and Disposition On July 2, 1999, the Company acquired Tres Hombres, Inc., a restaurant chain controlled by the Company's principal stockholder, in a transaction that was accounted for in a manner similar to a pooling of interests. The Company issued 22,865 shares of stock previously held in treasury in exchange for all of the outstanding common stock of Tres Hombres, Inc. Due to covenant requirements established by its then working capital lender, the Company sold Tres Hombres, Inc. in December 1999, recognizing a loss of approximately $363,000. The sale was consummated through receipt of a promissory note and assumption of certain liabilities by the buyer. Unaudited pro forma consolidated operations, assuming the disposition was made at the beginning of the current and previous years, are shown below: 2001 2000 ------- ------- (In Millions) Operating revenue $ 57.1 $ 78.7 Net income (loss) $ (9.8) $ 18.3 25 Independent Accountants' Report on Supplementary Information Board of Directors and Stockholders All Star Gas Corporation Lebanon, Missouri Our audits were made for the purpose of forming an opinion on the basic consolidated financial statements taken as a whole. The nature of our audit procedures is more fully described in our report on the basic consolidated financial statements. Our report on the basic consolidated financial statements includes an emphasis paragraph discussing substantial doubt about the Company's ability to continue as a going concern. The accompanying supplementary information is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such information has been subjected to the procedures applied in the audits of the basic consolidated financial statements and, in our opinion, is fairly stated, in all material respects, in relation to the basic consolidated financial statements taken as a whole. /s/ BKD, LLP Springfield, Missouri September 6, 2002 All Star Gas Corporation Consolidated Schedules of Sales and Gross Profit Years Ended June 30, 2002 and 2001 (In Thousands)

All Star Gas Corporation Consolidated Schedules of General and Administrative Expenses Years Ended June 30, 2002 and 2001 (In Thousands)

Independent Accountants' Report on Financial Statement Schedule 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, 2002, we have also audited the accompanying financial statement schedule of valuation and qualifying accounts. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits of the basic consolidated financial statements. The schedule is presented for purposes of complying with the Securities and Exchange Commission's rules and regulations and is not a required part of the consolidated financial statements. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ BKD, LLP Springfield, Missouri September 6, 2002 Schedule II - Valuation and Qualifying Accounts Years Ended June 30, 2002, 2001 and 2000 (In Thousands)

(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.

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