10-Q 1 tenq.txt 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 Form 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2002 Commission File Number 1-6537-3 ALL STAR GAS CORPORATION (Exact Name of Registrant as Specified in its Charter) MISSOURI 43-1494323 ------------------------------- ------------------- (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) P.O. Box 303, 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) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes No X --- --- Number of Shares of outstanding common stock (one class only) as of February 19, 2003 was 1,586,891. ================================================================================ PART I -- FINANCIAL INFORMATION Item 1. Financial Statements ALL STAR GAS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts) December 31, 2002 (Unaudited) June 30, 2002 ----------- ------------- Assets Current Assets Cash $752 $509 Trade receivables - net 3,953 2,488 Current portion of note receivable 146 146 Inventories 2,371 2,158 Prepaid expenses 1,374 589 Refundable income taxes 692 -- Deferred income taxes 172 175 Due from related parties 139 30 ------------------ -------------- Total Current Assets 9,599 6,095 ------------------ -------------- Property, plant and equipment 52,283 51,771 Less accumulated depreciation 25,270 24,691 ------------------ -------------- Fixed Assets - Net 27,013 27,080 ------------------ -------------- Other Assets Debt acquisition costs - net 1,478 1,425 Noncompete agreements - net 355 415 Note receivable 3,760 3,839 Other 1,499 1,189 ------------------ -------------- Total Other Assets 7,092 6,868 ------------------ -------------- Total Assets $43,704 $40,043 ================== ============== 2 ALL STAR GAS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands, Except Per Share Amounts)

See Notes to Condensed Consolidated Financial Statements 3 ALL STAR GAS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001 (Unaudited) (Dollars in Thousands, Except Per Share Amounts)

See Notes to Condensed Consolidated Financial Statements. 4 ALL STAR GAS CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001 (Unaudited) (Dollars in Thousands)

See Notes to Condensed Consolidated Financial Statements 5 ALL STAR GAS CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS THREE AND SIX MONTHS ENDED DECEMBER 31, 2002 AND 2001 (Unaudited) (1) BASIS OF PRESENTATION All Star Gas Corporation (the "Company") was founded in 1963 and through its subsidiaries has been in operation for over 39 years. The Company is engaged primarily in the retail marketing of propane and propane related appliances, supplies and equipment to residential, agricultural and commercial customers. The accompanying unaudited condensed consolidated financial statements contain, in the opinion of Management, all adjustments necessary to present fairly the Company's consolidated financial position as of December 31, 2002, and the consolidated results of its operations and cash flows for the periods ended December 31, 2002 and 2001. All such adjustments are of a normal recurring nature. These financial statements should be read in conjunction with the Company's audited consolidated financial statements as of June 30, 2002, and the notes thereto included in the Form 10-K as filed with the United States Securities and Exchange Commission as disclosure which would substantially duplicate the disclosure contained in that document has been omitted. The condensed consolidated balance sheet of the Company as of June 30, 2002 has been derived from the audited consolidated balance sheet of the Company as of that date. Certain reclassifications have been made to the condensed consolidated balance sheet as of June 30, 2002 to conform to the balance sheet presentation as of December 31, 2002. These reclassifications had no effect on net earnings. Due to the seasonal nature of the Company's business, the results of operations for the three and six months ended December 31, 2002 and 2001 are not necessarily indicative of the results to be expected for the full year. The report of BKD, LLP commenting upon their review accompanies the condensed consolidated financial statements included in Item 1 of Part I. (2) MANAGEMENT'S CONSIDERATION OF GOING CONCERN MATTERS The Company has suffered recurring losses from operations and 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 9% Subordinated Debentures due 2007. The Company has made cash deposits with some of its major propane suppliers to maintain them as supply sources. 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 previously entered 6 into a workout plan with the IRS for payment of the tax obligation. At December 31, 2002, the remaining balance of this liability, which consists of only penalties and interest charges, is approximately $255,000. The Company has stopped making scheduled payments and has recently requested that the IRS waive these amounts. The IRS has issued a notice of default. The Company is waiting for a decision on the request for waiver. 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 strategies involving debt and equity restructurings, securing additional financing and asset sales 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. (3) SELF-INSURANCE AND CONTINGENCIES Under the Company's current insurance program, the Company's comprehensive general and employers liability coverage and excess liability policy provides for losses of up to $75 million. The primary 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 Company and its subsidiaries are defendants in various lawsuits related to the self-insurance program, which presently are not expected to have a material adverse effect on the Company's financial position or results of operations. The Company and its subsidiaries are involved in other various federal and state tax audits, which presently are not expected to have a material adverse effect on the Company's financial position or results of operations. (4) FUTURES AND FORWARD CONTRACTS The Company routinely makes 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 December 31, 2002, the Company had outstanding commitments to purchase approximately 2.5 million gallons of liquefied propane (LP) gas for approximately $1.1 million. The Company had no outstanding commitments to sell LP gas at December 31, 2002. The Company periodically uses commodity futures contracts to reduce the risk of price fluctuations for liquefied propane (LP) gas purchase and sale commitments. As of December 31, 2002 the Company had no open positions on commodity futures contracts. 7 (5) LOSS PER COMMON SHARE Loss per common share is computed by dividing the net loss for the three and six month periods by the average number of common shares and, except where anti-dilutive, common share equivalents outstanding, if any. Common share equivalents outstanding as of December 31, 2002 and 2001 consisted of stock options and common stock purchase warrants which are anti-dilutive at those dates and were excluded from the computation of loss per share. The weighted average number of common shares outstanding used in the computation of loss per common share was 1,586,891 for each of the periods ended December 31, 2002 and 2001, respectively. (6) ADDITIONAL CASH FLOW INFORMATION (In Thousands) Additional Cash Payment Information 2002 2001 ----------------------------------- ---- ---- Interest Paid $289 $1,888 Income Taxes Paid $96 $1,302 Noncash Investing and Financing Activities ------------------------------------------ Purchase contract obligations incurred on the acquisition of retail service centers -- $1,792 Notes receivables from sale of retail service centers -- $1,234 Mortgage and lease obligations incurred for purchase of property and equipment $539 $364 (7) SENIOR SECURED NOTES AND SUBORDINATED DEBENTURES 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"). 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 are included in current liabilities at December 31, 2002. 8 (8) SUBSEQUENT EVENT On February 3, 2003, the Company completed a short-term financing agreement with lenders represented by Madeleine LLC, as Agent, which provided $3 million in funds to the Company for the purchase of propane from specified suppliers and payment of costs of issuance of the debt. The agreement bears interest at 12.25% per annum, payable monthly, and matures on April 30, 2003. Providing no events of default occur, a portion of the interest equal to 2.5% per annum on the debt, will be capitalized and added to the outstanding principal balance and the interest otherwise payable in cash will be reduced by the amount of interest capitalized. The debt is secured by a first or second collateral interest in substantially all of the assets of the Company and is guaranteed by the Company's principal stockholder. In connection with the agreement, the Company is required to maintain certain financial and other conditions and covenants. Concurrent with execution of the financing agreement, the Company's majority stockholders entered into a voting agreement with the Company and the Agent. The voting agreement restricts the ability of the stockholders to transfer or encumber their stock and to vote their stock in other than a specified manner with respect to certain matters specified in the agreement without the prior written consent of the Agent. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition, Liquidity and Capital Resources ---------------------------------------------------- The following table is presented as a measure of the Company's liquidity and financial condition (in thousands).

During the six months ended December 31, 2002, the Company's incurred $750,000 of additional bank debt for working capital purposes and $1.4 in amortization of debt discounts which was offset by principal repayments on its mortgage obligations and other notes payable to banks. The changes in working capital and the resulting effects on the current ratio are due principally to the balance of the Senior Notes and the Subordinated Debentures and their classification as current at December 31, 2002 and 2001 and June 30, 2002. 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 commitments to product purchases program and marketing programs to its customers. Customer prepayments related to the program decreased $715,000 for the six months ended December 31, 2002 compared to the same period in 2001. 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"). 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 are included in current liabilities at December 31, 2002. The holders of the Senior Notes and the Subordinated Debentures have not accelerated the balance due as of February 19, 2003. 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 10 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. As described in Note 8 to the condensed consolidated financial statements, on February 3, 2003, the Company completed a short term financing agreement with lenders represented by Madeleine LLC, as Agent, which provided $3 million in funds to the Company. 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 previously entered into a workout plan with the IRS for payment of the tax obligation. At December 31, 2002, the remaining balance of this liability, which consists of only penalties and interest charges, is approximately $255,000. The Company has stopped making scheduled payments and has recently requested that the IRS waive these amounts. The IRS has issued a notice of default. The Company is waiting for a decision on the request for waiver. Results of Operations Due to the seasonal nature of its business, the Company usually realizes an operating loss the first quarter and operating income for the second quarter. Operating revenues for a particular quarter are not necessarily indicative of a full fiscal year's operations because of the seasonal element. Other expense items such as depreciation and general and administrative expenses, however, generally continue on a more annualized basis. The following table presents additional operating data for the periods ended December 31, 2002 and 2001 and the year ended June 30, 2002 (in thousands).

11 Volumes. Retail volumes of propane sold increased 7% and 4% in the three and six months ended December 31, 2002, respectively, compared to the same periods ended December 31, 2001. Revenues. Operating revenues increased 7% and 3% during the three and six months ended December 31, 2002 compared to the same periods in 2001. Retail sales prices per gallon decreased 2% in the six months ended December 31, 2002 compared to 2001. Other sales increased while gas systems, appliances and other fuels, decreased as indicated in the table above. Cost of product and gross profit. Cost of product sold increased in the three and six month periods compared to the same periods in 2001 due to the increase in volumes discussed above. There was also a 1% increase in the average cost per gallon sold for the six months ended December 31, 2002 compared to the same period in 2001. The Company's gross profit decreased in the three months ended December 31, 2002 and increased in the six months ended December 31, 2002 compared to the same periods in 2001. This is primarily due to the changes in margins per gallon experienced by the Company. General and administrative expense. General and administrative expense for the three and six months ended December 31, 2002 increased $101,000 and $391,000, respectively, over the same periods in 2001. Occupancy expenses increased $128,000 and $285,000, respectively, for the three and six months ended December 31, 2002 compared to the same periods in 2001 primarily due to the increased rent expense in conjunction with a sale-lease back transaction agreement entered into by the Company in February 2002. There were no other significant changes occurring in any individual expense category. Depreciation and amortization. Depreciation and amortization expense for the three and six months ended December 31, 2002 decreased over the same periods in 2001 mainly due to the divestiture of six retail service centers during the six months ended December 31, 2001. Interest expense. Interest expense for the three and six months ended December 31, 2002 decreased $3,000 and $139,000, respectively, primarily due to the reduction or elimination of certain mortgages. Impact of Recent Accounting Pronouncements The Financial Accounting Standards Board (FASB) 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. The Company adopted SFAS 142 during the quarter ended September 30, 2002. The adoption of SFAS 142 had no initial effect on the Company's financial statements. The FASB also 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 12 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 adopted SFAS 144 during the quarter ended September 30, 2002. The adoption of SFAS 144 had no initial effect on the Company's financial statements. Item 3. Controls and Procedures (a) The Company maintains disclosure controls and procedures as defined in Rule 13a - 14(c) of the Securities and Exchange Act of 1934 that are designed to ensure that information required to be disclosed in the Company's Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on the foregoing, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. (b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date the Company completed its evaluation. 13 PART II -- OTHER INFORMATION Item 1. Legal Proceedings Reference is made to Note 3 of the Condensed Consolidated Financial Statements. Items 2, 3, 4 No information is reportable under these sections Item 5. Other Information During the month of January 2003, the Company's two outside directors and Kristin L. Lindsey resigned from the Board of Directors. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- 10.6 First Supplement to the Indenture and Financing Agreement 99.1 CEO certification pursuant to Section to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 CFO certification pursuant to Section to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K ------------------- None Reviewed by Independent Certified Public Accountants The December 31, 2002 financial statements included in this filing on Form 10-Q have been reviewed by BKD, LLP, Independent Certified Public Accountants, in accordance with established professional standards and procedures for such a review. The report of BKD, LLP commenting upon their review is appended hereto. 14 SIGNATURE Pursuant to the requirements 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 Signature and Title Date /s/ Paul S. Lindsey, Jr. February 19, 2003 ------------------------- ----------------- Paul S. Lindsey, Jr. President and Chief Executive Officer /s/ Kirk Wiles February 19, 2003 --------------- ----------------- Kirk Wiles Chief Financial Officer 15 Certification of the Principal Executive Officer (Section 302 of the Sarbanes-Oxley Act of 2002) I, Paul S. Lindsey, certify that: 1. I have reviewed this quarterly report on Form 10-Q of All Star Gas Corporation (the "registrant"); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Paul S. Lindsey, Jr. February 19, 2003 ------------------------- ----------------- Paul S. Lindsey, Jr. President and Chief Executive Officer 16 Certification of the Principal Financial Officer (Section 302 of the Sarbanes-Oxley Act of 2002) I, Kirk Wiles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of All Star Gas Corporation (the "registrant"); 2. Based on my knowledge, this quarterly 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 quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly 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 quarterly report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Kirk Wiles February 19, 2003 --------------- ----------------- Kirk Wiles Chief Financial Officer 17

ALL STAR GAS CORP 10-Q