As filed with the Securities and Exchange Commission on November __, 1997
Registration No. 333-35083
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
AMENDMENT NO. 2
to
FORM S-4
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------------
UNITED REFINING COMPANY
-----------------------
(Exact Name of Registrant as Specified in its Charter)
Pennsylvania 2911 25-1411751
------------ ---- ----------
(State or Other Jurisdiction (Primary Standard (Employer
of Incorporation or Industrial Classification Identification No.)
Organization) Code Number
See Table of
Additional Registrants
15 Bradley Street
Warren, Pennsylvania
16365
(814-723-1500)
--------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Myron L. Turfitt
15 Bradley Street
Warren, Pennsylvania 16365
(814-723-1500)
--------------------------
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
Copy to:
Martin R. Bring, Esq.
Lowenthal, Landau, Fischer & Bring, P.C.
250 Park Avenue
New York, New York 10177
(212) 986-1116
Facsimile No. (212) 986-0604
Approximate Date of Proposed Sale to the Public: As soon as practicable after
this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. |_|
<PAGE>
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
2
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
TABLE OF ADDITIONAL REGISTRANTS
- -----------------------------------------------------------------------------------------------------------------------------
State of Other Jurisdiction Primary Standard Industrial IRS Employer
Name of Incorporation Classification Number Identification Number
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Kiantone Pipeline New York 4612 25-1211902
Corporation
- -----------------------------------------------------------------------------------------------------------------------------
Kiantone Pipeline Company Pennsylvania 4600 25-1416278
- -----------------------------------------------------------------------------------------------------------------------------
United Refining Company Pennsylvania 5541 25-0850960
of Pennsylvania
- -----------------------------------------------------------------------------------------------------------------------------
United Jet Center, Inc. Delaware 4500 52-1623169
- -----------------------------------------------------------------------------------------------------------------------------
Kwik-Fill, Inc. Pennsylvania 5541 25-1525543
- -----------------------------------------------------------------------------------------------------------------------------
Independent Gasoline and New York 5170 06-1217388
Oil Company of Rochester,
Inc.
- -----------------------------------------------------------------------------------------------------------------------------
Bell Oil Corp. Michigan 5541 38-1884781
- -----------------------------------------------------------------------------------------------------------------------------
PPC, Inc. Ohio 5541 31-0821706
- -----------------------------------------------------------------------------------------------------------------------------
Super Test Petroleum, Inc. Michigan 5541 38-1901439
- -----------------------------------------------------------------------------------------------------------------------------
Kwik-Fil, Inc. New York 5541 25-1525615
- -----------------------------------------------------------------------------------------------------------------------------
Vulcan Asphalt Refining Delaware 2911 23-2486891
Corporation
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE>
SUBJECT TO COMPLETION DATED NOVEMBER __, 1997
PROSPECTUS
UNITED REFINING COMPANY
Offer to Exchange up to $200,000,000 in aggregate
principal amount of its 10 3/4% Series B Senior Notes
due 2007, which have been registered under
the Securities Act, for any and all of its outstanding
$200,000,000 in aggregate principal amount of its
10 3/4% Series A Senior Notes due 2007.
The Exchange Offer will expire at 5:00
P.M. New York City time, on , 199__,
unless extended.
United Refining Company, a Pennsylvania corporation (the "Company"), hereby
offers to exchange (the "Exchange Offer") up to $200,000,000 in aggregate
principal amount of the Company's 10 3/4% Series B Senior Notes due 2007 (the
"New Notes") for $200,000,000 in aggregate principal amount of the Company's
outstanding 10 3/4% Series A Senior Notes due 2007 (the "Original Notes") (the
Original Notes and the New Notes are collectively referred to herein as the
"Notes").
The terms of the New Notes are substantially identical in all respects
(including principal amount, interest rate and maturity) to the terms of the
Original Notes for which they may be exchanged pursuant to this Exchange Offer,
except that the New Notes will be freely transferable by holders thereof (other
than as provided in the next paragraph) and issued free of any covenant
regarding registration. The New Notes will evidence the same debt as the
Original Notes and contain terms which are substantially identical to the terms
of the Original Notes for which they are to be exchanged. For a complete
description of the terms of the New Notes, see "Description of the Notes". There
will be no cash proceeds to the Company from the Exchange Offer.
The Original Notes are and the New Notes will be senior unsecured obligations of
the Company and will be fully and unconditionally guaranteed on a senior
unsecured basis by the Subsidiary Guarantors (as hereinafter defined). For the
names of each Subsidiary Guarantor, see "Description of the Notes-- Subsidiary
Guarantees." The Notes and each Subsidiary Guarantee (as hereinafter defined)
will rank pari passu with all other unsecured and unsubordinated indebtedness
and senior to all subordinated indebtedness of the Company and the applicable
Subsidiary Guarantor, respectively. At August 31, 1997, the Company and the
Subsidiary Guarantors had approximately $1.3 million of indebtedness outstanding
other than the Original Notes, of which approximately $0.5 million was secured.
The Original Notes were sold on June 9, 1997, in a transaction not registered
under the Securities Act of 1933, as amended (the "Securities Act"), in reliance
upon the exemption provided in Section 4(2) of the Securities Act. Accordingly,
the Original Notes may not be offered, resold or otherwise pledged, hypothecated
or transferred in the United States unless registered under the Securities Act
or unless an applicable exemption from the registration requirements of the
Securities Act is available. The New Notes are being offered to satisfy the
obligations of the Company under a Registration Rights Agreement relating to the
Original Notes. See "The Exchange Offer -- Purpose and Effect of the Exchange
Offer."
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission") to third parties, including Exxon Capital
Holdings, Corp. (April 13, 1989), Morgan Stanley & Co., Inc. (June 5, 1991) and
Shearman & Sterling (July 2, 1993), the Company believes the New Notes issued
pursuant to the Exchange Offer may be offered for resale, resold and otherwise
transferred by any holder thereof (other than any such holder that is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act) without compliance with the registration and
4
<PAGE>
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holder's business and such
holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes. See "The Exchange Offer--Purpose and Effects of
the Exchange Offer." Each broker-dealer (a "Participating Broker-Dealer") that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a participating Broker-Dealer will not be deemed to
admit that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer as a result of market-making activities or
other trading activities. The Company has agreed to keep this Prospectus current
for such time period as shall be necessary to enable broker-dealers who acquired
the New Notes in market-making or trading activities to make resales thereof.
See "Plan of Distribution."
The Notes constitute securities for which there is no established trading
market. Any Original Notes not tendered and accepted in the Exchange Offer will
remain outstanding. The Company does not currently intend to list the New Notes
on any securities exchange. To the extent that any Original Notes are tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered
Original Notes could be adversely affected. No assurances can be given as to the
liquidity of the trading market for either the Original Notes or the New Notes.
The Exchange Offer is not conditioned on any minimum aggregate principal amount
of Original Notes being tendered for exchange. The Exchange Offer will expire at
5:00 P.M. New York City time, on _____________, 199_, unless extended (the
"Expiration Date"). The date of acceptance for exchange of the Original Notes
will be the first business day following the Expiration Date. Original Notes
tendered pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date, otherwise, such tenders are irrevocable. The Company will
pay all expenses incident to the Exchange Offer.
Interest on the New Notes shall accrue from the last December 15 or June 15 (an
"Interest Payment Date") on which interest was paid on the Original Notes so
surrendered, or, if no interest has been paid on such Original Notes, from June
9, 1997.
See "Risk Factors" for a discussion of certain factors which holders of Original
Notes should consider in connection with the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS, ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is __________, 1997.
5
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-4 with respect to the New Notes
being offered hereby (including all exhibits and amendments thereto, the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all the information set forth in the
Registration Statement and the exhibits and schedules thereto, certain portions
of which have been omitted pursuant to the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered hereby, reference is made to the Registration Statement and
to the exhibits filed therewith. Statements made in this Prospectus as to the
contents of any contract or other document referred to are not necessarily
complete, and where applicable reference is made to the copy of such contract or
other document filed as an exhibit to the Registration Statement, each such
statement is qualified by such reference. The Registration Statement and other
information may be inspected and copied, at prescribed rates, at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street N.W., Washington, D.C. 20549, at the regional offices of the
Commission located at Seven World Trade Center, New York, New York 10048, and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
material may also be obtained from the Public Reference Section of the
Commission at 450 Fifth Street N.W., Washington, D.C. 20549 at prescribed rates.
The Commission also maintains a web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of such site is
http://www.sec.gov.
As a result of the filing of the Registration Statement with the Commission, the
Company and the Guarantors will become subject to the informational requirements
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith will be required to file periodic reports and other
information with the Commission. The obligation of the Company and the
Subsidiary Guarantors to file periodic reports and other information with the
Commission will be suspended if the Notes are hold of record by fewer than 300
holders as of the beginning of any fiscal year of the Company or Subsidiary
Guarantors other than the fiscal year in which the Exchange Offer Registration
Statement is declared effective. The Company will nevertheless be required to
continue to file reports with the Commission if the New Notes are listed on a
national securities exchange. In the event the Company or the Subsidiary
Guarantors cease to be subject to the informational requirements of the Exchange
Act, the Company and the Subsidiary Guarantors will be required under the
Indenture to continue to file with the Commission the annual and quarterly
reports, information, documents or other reports, including, without limitation,
reports on Forms 10-K, 10-Q and 8-K, which would be required pursuant to the
informational requirements of the Exchange Act. The Company and the Subsidiary
Guarantors will also furnish such other reports as may be required by law.
Furthermore, so long as the Notes are outstanding, during any period in which
the Company is not subject to Section 13 or 15(d) of the Exchange Act, the
Company has agreed to (i) file with the Commission to the extent permitted, and
distribute to holders ("Holders") of the Notes, reports, information and
documents specified in Section 13 and 15(d) of the Exchange Act, and (ii) make
available, upon request, to any holder of the Notes, the information required
pursuant to Rule 144A(d)(4) under the Exchange Act. Any such request should be
directed to the Secretary of the Company at 15 Bradley Street, Warren,
Pennsylvania 16365, telephone number 814-723-1500.
6
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial data, including
the financial statements and notes thereto, appearing elsewhere in this
Prospectus. Careful consideration to the information set forth under "Risk
Factors" should be given prior to making a decision to exchange Original Notes
for New Notes. Unless otherwise stated herein, references to the "Company" shall
mean United Refining Company and its subsidiaries. All references to a fiscal
year refer to the year ended August 31 of the stated year. Certain terms used
herein have been defined in the Glossary appearing on page 95 of this
Prospectus.
The Company
The Company is a leading integrated refiner and marketer of petroleum
products in its primary market area, which encompasses western New York and
northwestern Pennsylvania. The Company owns and operates a medium complexity
65,000 barrel per day ("bpd") petroleum refinery in Warren, Pennsylvania where
it produces a variety of products, including various grades of gasoline, diesel
fuel, kerosene, jet fuel, No. 2 heating oil, and asphalt. The Company sells
gasoline and diesel fuel under the Kwik Fill(R) brand name at a network of 319
Company-operated retail units, 230 of which it owns. In fiscal 1997
approximately 59% and 21% of the Company's gasoline and diesel fuel production,
respectively, was sold through this network. The Company operates convenience
stores at most of its retail units, primarily under the Red Apple Food Mart(R)
brand name. The Company also sells its petroleum products to long-standing
regional wholesale customers.
For the fiscal year ended August 31, 1997 the Company had total
revenues of approximately $871.3 million, of which approximately 55% were
derived from gasoline sales, approximately 37% were from sales of other
petroleum products and approximately 8% were from sales of non-petroleum
products. The Company's capacity utilization rates have ranged from
approximately 88% to approximately 97% over the last five years. In fiscal 1997,
approximately 77% of the Company's refinery output consisted of higher value
products such as gasoline and distillates.
Refining Operations
The Company believes that the location of its 65,000 bpd refinery in
Warren, Pennsylvania provides it with a transportation cost advantage over its
competitors, which is significant within an approximately 100-mile radius of the
Company's refinery. For example, in Buffalo, New York over its last five fiscal
years, the Company has experienced an approximately 2.1 cents per gallon
transportation cost advantage over those competitors who are required to ship
gasoline by pipeline and truck from New York Harbor sources to Buffalo. The
Company owns and operates the Kiantone Pipeline, a 78 mile long crude oil
pipeline which connects the refinery to Canadian, U.S. and world crude oil
sources through the Interprovincial Pipe Line/Lakehead Pipeline system ("IPL").
Utilizing the storage facilities of the pipeline, the Company is able to blend
various grades of crude oil from different suppliers, allowing it to efficiently
schedule production while managing feedstock mix and product yields in order to
optimize profitability.
In addition to its transportation cost advantage, the Company has
benefited from a reduction in regional production capacity of approximately
103,000 bpd brought about by the closure during the 1980s of two competing
refineries in Buffalo, New York, owned by Ashland Inc. and Mobil Oil
Corporation. The nearest fuels refinery is over 160 miles from Warren,
Pennsylvania and the Company believes that no significant production from such
refinery is currently shipped into the Company's primary market area. It is the
Company's view that the high construction costs and the stringent regulatory
requirements inherent in petroleum refinery operations make it uneconomical for
new competing refineries to be constructed in the Company's primary market area.
7
<PAGE>
During the period from January 1, 1979 to August 31, 1997, the Company
spent approximately $205 million on capital improvements to increase the
capacity and efficiency of its refinery and to meet environmental requirements.
These capital expenditures have: (i) substantially rebuilt and upgraded the
refinery, (ii) enhanced the refinery's capability to comply with applicable
environmental regulations, (iii) increased the refinery's efficiency, and (iv)
helped maximize profit margins by permitting the processing of lower cost, high
sulfur crudes.
Marketing and Distribution Operations
The Company's primary market area is western New York and northwestern
Pennsylvania and its core market encompasses its Warren County base and the
eight contiguous counties in New York and Pennsylvania. The Company's retail
gasoline and merchandise sales are split approximately 60%/40% between rural and
urban markets. Margins on gasoline sales are traditionally higher in rural
markets, while gasoline sales volume is greater in urban markets. The Company's
urban markets include Buffalo, Rochester and Syracuse, New York and Erie,
Pennsylvania. The Company believes it has higher profitability per store than
its average convenience store competitor. In 1995, convenience store operating
profit per store averaged approximately $70,100 for the Company, as compared to
approximately $66,500 for the industry as a whole according to industry data
compiled by the National Association of Convenience Stores ("NACS").
The Company is one of the largest marketers of refined petroleum
products within its core market area according to a study commissioned by the
Company from Gerke & Associates, Inc. ("Gerke"), an independent industry
consultant. The Company currently operates 319 retail units, of which 180 are
located in New York, 127 in Pennsylvania and 12 in Ohio. The Company owns 230 of
these units. In fiscal 1997, approximately 59% of the refinery's gasoline
production was sold through the Company's retail network. In addition to
gasoline, all units sell convenience merchandise, 39 have delicatessens and
eight of the units are full-service truck stops. Customers may pay for purchases
with credit cards including the Company's own "Kwik Fill" credit card. In
addition to this credit card, the Company maintains a fleet credit card catering
to regional truck and automobile fleets. Sales of convenience products, which
tend to have constant margins throughout the year, have served to reduce the
effects of the seasonality inherent in gasoline retail margins. The Company has
consolidated its entire retail system under the Red Apple Food Mart(R) and Kwik
Fill(R) brand names, providing the chain with a greater regional brand
awareness.
Capital Improvement Plan
Refining Operations
The Company intends to use approximately $14.8 million of the proceeds
of the Private Offering (as hereinafter defined) over the next two years to
expand and upgrade its refinery. The investment is expected to increase rated
crude oil throughput capacity from 65,000 bpd to 70,000 bpd, to improve yield of
finished products from crude inputs and to lower refinery costs.
Marketing and Distribution Operations
The Company intends to use approximately $20.0 million of the proceeds
of the Private Offering over the next two years to rebuild or refurbish 70
existing retail units and to acquire three new retail units. Approximately half
of this upgrade project is expected to be completed within the first twelve
months after the consummation of the Private Offering. Management believes that
these capital improvements will enable the Company's retail network to absorb
through retail sales at Company-operated units a majority of the additional
gasoline and diesel production resulting from the concurrent refinery upgrade,
with the remaining production being sold to wholesale customers.
8
<PAGE>
Business Strategy
The Company's goal is to strengthen its position as a leading producer
and marketer of high quality refined products within its primary market area.
The Company's business strategy is to: (i) maximize the benefits from its
transportation cost advantage within its primary market area; (ii) expand its
sales of high margin specialty products; (iii) optimize its feedstock mix and
product yield to maximize profitability; (iv) invest in increased refinery
capacity and improved refining productivity; and (v) increase its market share
and improve retail profitability through selective rebuildings or refurbishments
of retail units and, to a lesser extent, through acquisitions of selected retail
sites.
The Company's principal executive offices are located at 15 Bradley
Street, Warren, Pennsylvania 16365 and its telephone number is (814) 723-1500.
The Transactions
On June 9, 1997, the Company completed the sale (the "Private
Offering") of $200,000,000 principal amount of the Company's Original Notes. In
connection with the Private Offering, the Company also entered into a new credit
facility with PNC Bank and retired certain indebtedness then outstanding (the
"Transactions"). The Transactions were undertaken to: (i) enhance the Company's
financial flexibility; (ii) reduce the Company's annual debt service
requirements; (iii) funds its Capital Improvement Plan; and (iv) provide the
Company with a capital structure that will facilitate the continued growth of
its refinery and related operations.
The Exchange Offer
Purpose of the
Exchange Offer: The Original Notes were sold in the Private Offering by the
Company on June 9, 1997, to Dillon, Read & Co. Inc. and
Bear, Stearns & Co. Inc., as initial purchasers (the
"Initial Purchasers"). In connection therewith, the Company
executed and delivered, for the benefit of the holders of
the Original Notes, a Registration Rights Agreement dated
June 9, 1997 (the "Registration Rights Agreement") which is
filed as an exhibit to the Registration Statement of which
this Prospectus is a part, providing for, among other
things, the Exchange Offer so that the New Notes will be
freely transferable by the holders thereof without
registration or any prospectus delivery requirements under
the Securities Act, except that a "dealer" or any of their
"affiliates" as such terms are defined under the Securities
Act, who exchanges Original Notes held for its own account
(a "Restricted Holder") will be required to deliver copies
of this Prospectus in connection with any resale of the New
Notes (the "Resale Notes") issued in exchange for such
Original Notes (the "Prospectus Delivery Requirement"). See
"The Exchange Offer-- Purpose and Effect of the Exchange
Offer" and "Plan of Distribution."
The Exchange
Offer: The Company is offering to exchange pursuant to the Exchange
Offer up to $200,000,000 aggregate principal amount of the
Company's 10 3/4% Series B Senior Notes due 2007 (the "New
Notes") for $200,000,000 aggregate principal amount of the
Company's outstanding 10 3/4% Series A Senior Notes due 2007
(the "Original Notes"). The Original Notes and the New Notes
are collectively referred to herein as the "Notes". The
terms of the New Notes are substantially identical in all
respects (including principal amount, interest rate and
maturity) to the terms of the Original Notes for which they
may be exchanged pursuant to the Exchange Offer, except that
the New Notes are freely transferable by holders thereof
(other than as
9
<PAGE>
provided herein), and are not subject to any covenant
regarding registration under the Securities Act. See "The
Exchange Offer -- Terms of the Exchange" and "Procedures for
Tendering".
The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Original Notes being tendered
for exchange.
Expiration Date: The Exchange Offer will expire at 5:00 P.M. New York City
time on , 199_, unless extended (the "Expiration Date").
Conditions of
the Exchange Offer: The Company's obligation to consummate the Exchange
Offer will be subject to certain conditions. See "The
Exchange Offer -- Conditions to the Exchange Offer." The
Company reserves the right to terminate or amend the
Exchange Offer at any time prior to the Expiration Date upon
the occurrence of any such conditions.
Withdrawal Rights: Tenders may be withdrawn at any time prior to the Expiration
Date; otherwise, all tenders will be irrevocable.
Procedures for
Tendering Notes: See "The Exchange Offer -- Procedures for Tendering."
Federal Income Tax
Consequences: The exchange of Original Notes for New Notes will not be a
taxable exchange for federal income tax purposes. See
"Certain United States Federal Income Tax Considerations."
Effect on Holders
of the Original
Notes: As a result of the making of, and upon acceptance for
exchange of all validly tendered Original Notes pursuant to
the terms of this Exchange Offer, the Company will have
fulfilled one of the covenants contained in the Registration
Rights Agreement and, accordingly, there will be no increase
in the interest rate on the Original Notes pursuant to the
applicable terms of the Registration Rights Agreement due to
the Exchange Offer. Holders of the Original Notes who do not
tender their Original Notes will be entitled to all the
rights and limitations applicable thereto under the
Indenture dated as of June 9, 1997, among the Company and
IBJ Schroder Bank and Trust Company, as trustee (the
"Trustee") relating to the Original Notes and the New Notes
(the "Indenture"), except for any rights under the Indenture
or the Registration Rights Agreement, which by their terms,
terminate or cease to have further effectiveness as a result
of the making of, and the acceptance for exchange of all
validly tendered Original Notes pursuant to, the Exchange
Offer. All untendered Original Notes will continue to be
subject to the restrictions on transfer provided for in the
Original Notes and in the Indenture. To the extent that
Original Notes are tendered and accepted in the Exchange
Offer, the trading market for untendered Original Notes
could be adversely affected.
Use of Proceeds: There will be no cash proceeds to the Company from the
exchange pursuant to the Exchange Offer.
10
<PAGE>
Risk Factors
The information set forth under "Risk Factors" as well as other
information set forth in this Prospectus should be carefully considered in
evaluating the Notes and the Company.
The New Notes
The Exchange Offer applies to the $200,000,000 principal amount of the
Original Notes outstanding as of the date hereof. The form and the terms of the
New Notes will be identical in all material respects to the form and the terms
of the Original Notes except that the New Notes will have been registered under
the Securities Act and, therefore, will not contain legends restricting the
transfer thereof. The New Notes evidence the same debt as the Original Notes
exchanged for the New Notes and will be entitled to the benefits of the same
Indenture under which the Original Notes were issued. See "Description of the
Notes." Certain capitalized terms used below are defined under the caption
"Description of the Notes -- Certain Definitions."
Securities Offered: $200,000,000 aggregate principal amount of 10 3/4% Series B
Senior Notes due 2007 (the "New Notes").
Maturity Date: June 15, 2007.
Interest Payment
Dates: Interest on the New Notes shall accrue from the last
December 15 or June 15 on which interest was paid on the
Original Notes, or, if no interest has been paid on such
Original Notes, from June 9, 1997.
Ranking: The Notes will be senior unsecured obligations of the
Company and will rank pari passu in right of payment with
existing and future unsecured and unsubordinated
Indebtedness (as defined herein) of the Company and senior
to all Subordinated Indebtedness (as defined herein) of the
Company.
Subsidiary
Guarantees: The Notes will be unconditionally guaranteed by each of the
Company's subsidiaries (the "Subsidiary Guarantors"). The
Subsidiary Guarantees will be unconditional joint and
several obligations of each Subsidiary Guarantor
(collectively, the "Guarantees"), ranking pari passu in
right of payment with all other unsecured and unsubordinated
Indebtedness of such Subsidiary Guarantor.
Optional
Redemption: The Notes will be redeemable in whole or in part at the
option of the Company at any time on or after June 15, 2002
at the redemption prices set forth in "Description of the
Notes - Optional Redemption of the Notes." In addition, at
any time on or prior to June 15, 2000, the Company may
redeem up to 35% of the originally issued aggregate
principal amount of the Notes with the proceeds of one or
more Equity Offerings (as defined herein) at a redemption
price equal to 110.00% of the principal amount thereof, plus
accrued and unpaid interest, if any, to the date of
redemption, provided that after giving effect to such
redemption at least $100 million aggregate principal amount
remains outstanding. The Notes are not otherwise redeemable
at the option of the Company.
Offers to Purchase: In the event of a Change of Control (as defined herein),
each holder of Notes will have the right to require the
Company to purchase all of the Notes then held by it at a
purchase price equal to 101% of the aggregate principal
amount
11
<PAGE>
of the Notes, plus accrued and unpaid interest to the date
of purchase. In addition, under certain circumstances, the
Company will be required to offer to purchase Notes with the
proceeds of certain Asset Sales (as defined herein) and with
the Special Offer Amount of the Escrow Funds (each, as
defined herein) if the Company's Capital Improvement Plan is
abandoned or not completed by August 31, 1999. See
"Description of the Notes."
Certain Covenants: The Indenture will contain certain covenants that, among
other things, limit the incurrence of additional
indebtedness by the Company and its Subsidiaries (as defined
herein); limit the issuance of preferred stock of the
Company's Subsidiaries; limit the payment of dividends and
certain other payments by the Company and its Subsidiaries;
limit the creation of certain liens by the Company and its
Subsidiaries; limit the ability of the Company and its
Subsidiaries to enter into sale/leaseback transactions;
limit the Company's creation of restrictions on the ability
of Subsidiaries to make payments to the Company; restrict
the ability of the Company to engage in Asset Sales; and
limit the ability of the Company or its Subsidiaries to
enter into certain transactions with affiliates or merge,
consolidate or transfer substantially all of their assets.
12
<PAGE>
SUMMARY HISTORICAL AND
CONSOLIDATED FINANCIAL DATA
The following table sets forth certain historical financial and
operating data (the "Summary Information") as of August 31, 1993, 1994, 1995,
1996 and 1997 and for each of the years in the five-year period ended August 31,
1997. The summary income statement, balance sheet, financial and ratio data as
of and for each of the four years ended August 31, 1997 have been derived from
the audited consolidated financial statements of the Company. Such information
as of and for the year ended August 31, 1993 has been derived from the unaudited
consolidated financial statements of the Company. The audited consolidated
financial statements of the Company and related notes thereto as of August 31,
1995, 1996 and 1997, and for each of the three years ended August 31, 1997 and
related notes thereto appear elsewhere in this Prospectus. The operating
information for all periods presented has been derived from the accounting and
financial records of the Company. The Summary Information set forth below should
be read in conjunction with, and is qualified by reference to, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements of the Company and notes thereto and other
financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended August 31,
---------------------
1993 1994 1995 1996 1997
----------------------------------------------------
(Dollars in thousands, except operating information)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $830,054 $729,128 $783,686 $833,818 $871,348
Gross margin(1)(2) 162,251 156,898 151,852 168,440 164,153
Refining operating expenses 49,835 56,121 56,665 63,218 60,746
Selling, general and
administrative expenses 72,495 69,158 68,876 70,124 71,324
Operating income 33,099 22,580 18,112 26,882 23,853
Interest expense 15,377 17,100 18,523 17,606 17,509
Interest income 706 1,134 1,204 1,236 1,296
Other income (expense) (2,701) (3,257) 155 (884) (1,204)
Income before income tax expense and
extraordinary item 15,727 3,357 948 9,628 6,436
Income tax expense 6,687 1,337 487 3,787 2,588
Income before extraordinary item 9,040 2,020 461 5,841 3,848
Net income (loss) 9,040 490 461 5,841 (2,805)
Balance Sheet Data (at end of period):
Total assets $284,206 $315,194 $310,494 $306,104 $346,392
Total debt 137,721 158,491 154,095 136,777 201,272
Total stockholder's equity 77,235 77,725 78,186 84,027 52,937
Selected Financial Data:
EBITDA (3) 38,177 28,317 28,039 35,739 32,509
Adjusted EBITDA(2)(4) $ 38,030 $ 29,035 $ 27,159 $ 34,859 $31,849
Depreciation and amortization 7,073 7,860 8,568 8,505 8,564
Capital expenditures 30,680 20,889 12,134 4,562 5,824
Cash flow (used in) provided by operating activities 22,329 475 17,642 24,975 (2,311)
Cash flow (used in) investing activities (30,639) (17,358) (11,495) (3,909) (53,570)
Cash flow (used in) provided by financing activities (7,101) 20,121 (4,733) (17,969) 51,394
Selected Ratios:
Adjusted EBITDA/interest expense(2)(4) 2.47x 1.70x 1.47x 1.98x 1.82x
Total debt/Adjusted EBITDA(2)(4) 3.62x 5.46x 5.67x 3.92x 6.32x
Ratio of earnings to fixed charges(5) 1.86x 1.15x 1.04x 1.50x 1.34x
Pro forma interest expense (6) 22,503
13
<PAGE>
Year Ended August 31,
---------------------
1993 1994 1995 1996 1997
----------------------------------------------------
(Dollars in thousands, except operating information)
Operating Information (unaudited):
Refining Operations:
Crude oil input (mbbls/day) 61.5 57.0 62.4 63.0 61.8
Utilization(7) 94.7% 87.8% 96.0% 96.9% 95.1%
Total saleable refinery production
(mbbls/day) 62.0 57.2 62.1 63.5 62.6
Gasoline 31.4 27.7 30.1 29.9 29.0
Middle distillates 18.5 15.6 17.5 18.5 18.8
Asphalt 9.0 10.0 11.6 12.2 12.0
Total saleable products
(mbbls/day)(8) 65.3 62.3 64.1 65.4 66.3
Gross margin (per bbl) $ 3.87 $ 4.03 $ 3.48 $ 4.26 $ 4.06
Refining operating expenses
(per bbl) $ 2.09 $ 2.47 $ 2.42 $ 2.64 $ 2.51
Retail Network:
Number of stores (at period end) 345 341 335 327 319
Gasoline volume (m gal) 297,083 292,062 279,454 274,480 262,585
Gasoline gross margin (cents/gal) 11.9 13.6 15.7 14.4 14.7
Average gasoline volume per store
(m gal/month) 73 72 70 70 69
Distillate volume (m gal) 40,045 37,378 40,480 41,256 40,344
Distillate gross margin (cents/gal) 11.7 12.5 12.5 11.9 12.1
Merchandise sales (000s) $ 68,607 $ 68,178 $ 70,613 $ 71,686 $ 74,466
Merchandise gross margin 32.6% 30.5% 30.5% 30.6% 29.9%
Average merchandise sales per
store per month (000s) $ 16.6 $ 16.7 $ 17.6 $ 18.3 $ 19.3
Retail operating expenses (000s) $ 51,081 $ 51,892 $ 51,703 $ 53,218 $ 53,630
Total Sales (000s/store)
Convenience stores $ 1,303 $ 1,270 $ 1,299 $ 1,318 $ 1,351
Limited gasoline stations 1,061 1,058 1,102 1,140 1,174
Truckstops 6,327 6,046 6,516 6,813 6,919
Other 642 659 696 705 704
<FN>
(1) Gross margin is defined as gross profit plus refining operating expenses.
Refining operating expenses are expenses incurred in refining and included
in cost of goods sold in the Company's financial statements. Refining
operating expenses equals refining operating expenses per barrel,
multiplied by the volume of total saleable products per day, multiplied by
the number of days in the period. For fiscal 1993, gross margin for the
Company included $7.6 million of gross margin ($0.6 million on an EBITDA
and Adjusted EBITDA basis) from an entity conducting business unrelated to
the refining and marketing of petroleum products, which the Company sold to
its parent in fiscal 1993.
(2) Management believes that the use of gross margin and Adjusted EBITDA as
presented more closely reflect the true cash flow position of the Company
and hence its ability to service Notes. While they may have slight
variations to the EBITDA definition, the Adjusted EBITDA and gross margin
definitions included herein are commonly used within the industry. Adjusted
EBITDA is intended to make the Company's cash flow position more meaningful
for analysts and investors when comparing the Company's performance with
other companies in the industry.
(3) EBITDA is defined as earnings before interest expense, income taxes and
depreciation and amortization.
(4) Adjusted EBITDA is defined as earnings before income taxes, depreciation
and amortization, interest expense, prepayment or make-whole payments and
non-cash items. For a definition of non-cash items, see "Description of the
Notes." Adjusted EBITDA is presented not as an alternative measure of
operating results or cash flow from operations (as determined in
14
<PAGE>
accordance with generally accepted accounting principles), but rather to
provide additional information related to the debt servicing ability of the
Company. Interest expense as reflected on the Company's financial
statements does not include amortization of deferred financing fees.
Amortization of deferred financing fees is included in the Company's
financial statements in other expense and amounts to $0.5 million, $0.7
million, $0.6 million, $0.5 million and $0.5 million for fiscal years 1993,
1994, 1995, 1996 and 1997, respectively.
(5) The ratio of earnings to fixed charges is computed by dividing (i) income
before provision for income taxes plus fixed charges by (ii) fixed charges.
Fixed charges consist of interest on indebtedness including amortization of
discount and debt issuance costs and the estimated interest component of
rental expense which is 33% of actual rental expense.
(6) Pro forma interest expense represents what interest expense would have been
had the Private Offering occurred on September 1, 1996 and a portion of
proceeds thereof used by the Company to retire certain of its outstanding
indebtedness.
(7) Refinery utilization is the ratio of crude oil input to the rated capacity
of the refinery to process crude oil which is 65,000 bpd. Total input and
total yield may be greater than the rated capacity of the refinery because
feedstocks other than crude oil, which add to the refinery's yield are
utilized in the refining process. The rated capacity of the refinery
reflects estimated downtime for scheduled and unscheduled maintenance and
other contingencies during which refinery production is reduced.
Utilization may therefore exceed 100% if actual downtime is less than
estimated downtime. Utilization was lower in fiscal 1994 due to an 18 day
turnaround at the crude unit for scheduled maintenance.
(8) Includes refined products purchased from others and resold by the Company.
</FN>
</TABLE>
15
<PAGE>
RISK FACTORS
Holders of Original Notes should consider carefully all of the information set
forth in this Prospectus, and, in particular, should evaluate the following
risks before tendering their Original Notes in the Exchange Offer, although the
risk factors (other than the first risk factor) are generally applicable to the
Original Notes as well as the New Notes.
Consequence of Failure to Exchange
Holders of Original Notes who do not exchange their Original Notes for
New Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Original Notes as set forth in the legend
thereon as a consequence of the offer or sale of the Original Notes pursuant to
an exemption from in a transaction not subject to, the registration requirements
of the Securities Act and applicable state securities laws. In general, the
Original Notes may not be offered or sold, unless registered under the
Securities Act, except pursuant to an exemption from, or in a transaction not
subject to, the Securities Act or applicable state securities laws. The Company
does not currently anticipate that it will register the Original Notes under the
Securities Act. Based on interpretations by the staff of the Commission, New
Notes issued pursuant to the Exchange Offer in exchange for Original Notes may
be offered for resale, resold or otherwise transferred by holders thereof (other
than any such holder which is an "affiliate" of the Company within the meaning
of Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement with any person to participate in the distribution
of such New Notes. Any holder of Original Notes who tenders in the Exchange
Offer for the purpose of participating in a distribution of the New Notes could
not rely on such interpretation by the staff of the Commission and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Thus, any Original Notes acquired by
such holders will not be freely transferable except in compliance with the
Securities Act. Each Restricted Holder (as hereinafter defined) that receives
New Notes for its own account in exchange for the Original Notes, where such
Original Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities must acknowledge that it will deliver a
prospectus in connection with any resale of such New Notes. See "Plan of
Distribution."
Substantial Leverage and Ability to Service and Refinance Debt
As of August 31, 1997, the aggregate total debt of the Company was
$201.3 million and its stockholder's equity was $52.9 million. The ratio of the
Company's earnings to fixed charges for fiscal 1997 was 1.34:1. In addition,
subject to the restrictions in the Indenture and the New Bank Credit Facility
described in "Description of Certain Indebtedness", the Company may incur
additional indebtedness from time to time to provide working capital, to finance
acquisitions or capital expenditures or for other corporate purposes.
The level of the Company's indebtedness could have important
consequences to holders of the Notes, including: (i) a substantial portion of
the Company's cash flow from operations must be dedicated to debt service and
will not be available for other purposes; (ii) the Company's ability to obtain
additional debt financing in the future for working capital, capital
expenditures or acquisitions may be limited; and (iii) the Company's level of
indebtedness could limit its flexibility in planning for and reacting to changes
in the industry and economic conditions generally.
The Company's ability to pay interest and principal on the Notes and to
satisfy its other debt obligations will depend upon its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, most of which are beyond the Company's
control. The Company anticipates that its operating cash flow, together with
borrowings under the New Bank Credit Facility, will be sufficient to meet its
operating expenses and capital expenditures, to sustain
16
<PAGE>
operations and to service its interest requirements as they become due. If the
Company is unable to generate sufficient cash flow to service its indebtedness
and fund its capital expenditures, it will be forced to adopt an alternative
strategy that may include reducing or delaying capital expenditures, selling
assets, restructuring or refinancing its indebtedness (including the Notes) or
seeking additional equity capital. There can be no assurance that any of these
strategies could be effected on satisfactory terms, if at all. The Company's
ability to meet its debt service obligations will be dependent upon its future
performance which, in turn, is subject to future economic conditions and to
financial, business and other factors, many of which are beyond the Company's
control. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
Volatility of Crude Oil Prices and Refining Margins
The Company is engaged primarily in the business of refining crude oil
and selling refined petroleum products. The Company's earnings and cash flows
from operations are dependent upon its realizing refining and marketing margins
at least sufficient to cover its fixed and variable expenses. The cost of crude
oil and the prices of refined products depend upon numerous factors beyond the
Company's control, such as the supply of and demand for crude oil, gasoline and
other refined products, which are affected by, among other things, changes in
domestic and foreign economies, political events, production levels, weather,
the availability of imports, the marketing of gasoline and other refined
petroleum products by its competitors, the marketing of competitive fuels, the
impact of energy conservation efforts, and the extent of government regulation
and taxation. A large, rapid increase in crude oil prices would adversely affect
the Company's operating margins if the increased cost of raw materials could not
be passed to the Company's customers on a timely basis, and would adversely
affect the Company's sales volumes if consumption of refined products,
particularly gasoline, were to decline as a result of such price increases. A
sudden drop in crude oil prices would adversely affect the Company's operating
margins since wholesale prices typically decline promptly in response thereto,
while the Company will be paying the higher crude oil prices until its crude
supply at such higher prices is processed. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Recent Developments."
The prices which the Company may obtain for its refined products are also
affected by regional factors, such as local market conditions and the operations
of competing refiners of petroleum products as well as seasonal factors
influencing demand for such products. In addition, the Company's refinery
throughput and operating costs may vary due to scheduled and unscheduled
maintenance shutdowns.
Risks Related to Capital Expansion and Improvements
The Company plans to apply approximately $34.8 million of the proceeds
of the Private Offering over a two year period to fund the expansion of its
refining capacity and the improvement of refinery productivity and to make
capital improvements to its retail network. The Company believes that after
completion of the projects funded with the proceeds of the Private Offering, the
Company will experience positive effects on its revenues, refining margins and
operating income. However, there can be no assurance that such capital
expenditure plans will be implemented in the time frame disclosed herein, that
actual costs of planned projects will not exceed budgeted amounts or that the
projects will have such intended effects. For example, there can be no assurance
that the Company will be able to economically sell any increased production of
refined products as a result of expanding the capacity of its refinery.
Changes in the economic or regulatory environments or delays in
implementing the capital expenditure plans may require modification of such
plans, increase the cost to complete such plans or otherwise make the completion
of such plans impracticable or uneconomical. In certain circumstances, the
Company may be required to obtain additional financing to complete its planned
projects and there can be no assurance that such financing will be available on
acceptable terms, or at all.
17
<PAGE>
Competition
Many of the Company's competitors are fully integrated companies
engaged on a national and/or international basis in many segments of the
petroleum business, including exploration, production, transportation, refining
and marketing, on scales much larger than the Company. Large oil companies,
because of the diversity and integration of their operations, larger
capitalization and greater resources, may be better able to withstand volatile
market conditions, compete on the basis of price, and more readily obtain crude
oil in times of shortages.
The Company faces strong competition in its market for the sale of
refined petroleum products, including gasoline. Such competitors have in the
past and may in the future engage in marketing practices that result in profit
margin deterioration for the Company for periods of time, causing an adverse
impact on the Company.
Another refining company has announced its intention to reopen a fuels
refinery in the New York Harbor supply area. The Company cannot predict what
effect, if any, the reopening of such refinery would have on the supply of
petroleum products in the Company's marketing area or on the Company's sales or
profitability.
Impact of Environmental Regulation; Governmental Regulation
The Company's operations and properties are subject to stringent
environmental laws and regulations, such as those governing the use, storage,
handling, generation, treatment, transportation, emission, release, discharge
and disposal of certain materials, substances and wastes, remediation of areas
of contamination and the health and safety of employees. The nature of the
Company's operations and previous operations by others at certain of its
facilities exposes the Company to the risk of claims under those laws and
regulations. There can be no assurance that material costs or liabilities will
not be incurred in connection with such claims. Environmental compliance has
required, and will continue to require, capital expenditures. The Company spent
approximately $28.6 million in fiscal 1993, $14.0 million in fiscal 1994, $7.4
million in fiscal 1995, $1.6 million in fiscal 1996 and $5.8 million in fiscal
1997 for such capital expenditures. The Company currently estimates that capital
expenditures for environmental compliance will approximate $3.7 million in
fiscal 1998. Approximately $5.9 million of total fiscal 1997 and fiscal 1998
expenditures are for the upgrading of underground storage tanks at the Company's
retail units to meet certain minimum performance standards under regulations
promulgated by the United States Environmental Protection Agency (the "EPA")
which take effect in December 1998. As of August 31, 1997, approximately 65% of
the total sites have been completed and the Company expects to be in total
compliance with the regulations by the December 22, 1998 mandated deadline. See
"Business--Environmental Considerations."
Concentration of Refining Operations
All of the Company's refinery activities are conducted at its facility
in Warren, Pennsylvania. In addition, the Company obtains substantially all of
its crude oil supply through its owned and operated Kiantone Pipeline. Any
prolonged disruption to the operations of its refinery or the Kiantone Pipeline,
whether due to labor difficulties, destruction of or damage to such facilities,
severe weather conditions, interruption of utilities service or other reasons,
would have a material adverse effect on the Company's business, results of
operations or financial condition. In order to minimize the effects of any such
incident, the Company maintains a full schedule of insurance coverage which
includes, but is not limited to, property and business interruption insurance.
The property insurance policy has a combined loss limit for property loss at the
Company's refinery and business interruption of $249 million in excess of (i) a
$1 million self-insured retention and (ii) a deductible, which in the case of
property insurance is $250,000, and in the case of business interruption
insurance, is an amount equal to lost profits for a period of ten days. The
Company believes that its business interruption coverage is reasonable.
18
<PAGE>
However, there can be no assurance that the proceeds of any such insurance would
be paid in a timely manner or be in an amount sufficient to meet the Company's
needs if such an event were to occur.
Nature of Demand for Asphalt
In fiscal 1997, asphalt sales represented 11.2% of the total revenues
of the Company. Approximately 77% of the Company's asphalt is produced for use
in paving or repaving roads and highways. The level of paving activity is, in
turn, dependent upon funding available from federal, state and local
governments. Funding for paving has been affected in the past, and may be
affected in the future, by budget difficulties at the federal, state or local
levels. A decrease in demand for asphalt could cause the Company to sell asphalt
at significantly lower prices or to curtail production of asphalt by processing
more costly lower sulfur content crude oil which would adversely affect refining
margins. In addition, paving activity in the Company's marketing area generally
ceases in the winter months. Therefore, much of the Company's asphalt production
during the winter must be stored until warmer weather arrives, resulting in
deferred revenue and inventory buildups each year.
Ranking of the Notes; Security
Although the Original Notes are and the New Notes will be senior
unsecured obligations of the Company ranking pari passu with all other existing
and future senior debt of the Company, the indebtedness of the Company under the
$35 million New Bank Credit Facility is secured by all the accounts receivable
and certain inventory of the Company and its Subsidiaries. Accordingly, the New
Notes and the Subsidiary Guarantees will be effectively subordinated to the
extent of such security interests. See "Description of the Notes."
Restrictions Imposed by Terms of Indebtedness
The terms of the New Bank Credit Facility, the Indenture and the other
agreements governing the Company's indebtedness impose operating and financing
restrictions on the Company and the Company's subsidiaries. Such restrictions
affect, and in many respects limit or prohibit, among other things, the ability
of the Company and its subsidiaries to incur additional indebtedness, create
liens, sell assets, or engage in mergers or acquisitions. These restrictions
could limit the ability of the Company to plan for or react to market conditions
or meet extraordinary capital needs or otherwise could restrict corporate
activities. There can be no assurance that such restrictions will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities which will be in the interest of the
Company. See "Description of the Notes--Certain Covenants" and "Description of
Certain Indebtedness."
Controlling Stockholder
John A. Catsimatidis indirectly owns all of the outstanding voting
stock of the Company. By virtue of such stock ownership, Mr. Catsimatidis has
the power to control all matters submitted to stockholders of the Company and to
elect all directors of the Company. The interests of Mr. Catsimatidis as equity
holder may differ from the interests of holders of the Notes.
Possible Inability to Repurchase Notes
upon a Change of Control
Upon a Change of Control (as defined herein), the holders of all of the
Notes have the right to require the Company to offer to purchase all of the
outstanding Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. There can be no assurance that the
Company will have sufficient funds available or will be permitted by its other
debt agreements to purchase the Notes upon the occurrence of a Change of
Control. In addition, a Change of Control may require the Company to offer to
purchase other outstanding indebtedness and may cause a default under
19
<PAGE>
the New Bank Credit Facility. The inability to purchase all of the tendered
Notes would constitute an Event of Default (as defined herein) under the
Indenture. The definition of "Change of Control" does not include certain
transactions, such as acquisitions, refinancings and other recapitalizations.
Therefore, the provisions of the Indenture do not afford holders of the Notes
protection under these scenarios. See "Description of the Notes--Change of
Control."
Absence of Public Market for the Notes
The New Notes are being offered to the holders of the Original Notes.
The Original Notes were purchased and immediately resold by the Initial
Purchasers in June 1997 to a small number of institutional investors and are
eligible for trading in the Private Offerings, Resale and Trading through
Automatic Linkages (PORTAL) Market.
The Company does not intend to apply for a listing of the New Notes on
a securities exchange. There is currently no established market for the New
Notes and there can be no assurance as to the liquidity of markets that may
develop for the New Notes, the ability of the holders of the New Notes to sell
their New Notes or the price at which such holders would be able to sell their
New Notes. If such markets were to exist, the New Notes could trade at prices
that may be lower than the initial market values thereof depending on many
factors, including prevailing interest rates and the markets for similar
securities.
The liquidity of, and trading market for the New Notes also may be
adversely affected by general declines in the market for similar securities.
Such a decline may adversely affect such liquidity and trading markets
independent of the financial performance of, and prospects for, the Company.
Fraudulent Conveyance; Unenforceability of Subsidiary Guarantees
The Company believes that the indebtedness represented by the
Subsidiary Guarantees is being incurred for proper purposes and in good faith
and each Subsidiary Guarantor is, and after the consummation of the Offering
will be, solvent, will have sufficient capital for carrying on its business and
will be able to pay its debts as they mature. Revenues of the Subsidiary
Guarantors accounted for approximately 53.8% of the Company's consolidated
revenues for fiscal 1997 and as of August 31, 1997 the assets of such Subsidiary
Guarantors were approximately 28.6% of the assets of the Company on a
consolidated basis. If a court of competent jurisdiction in a suit by a creditor
or representative of creditors of any Subsidiary Guarantor (such as a trustee in
bankruptcy or a debtor-in-possession) were to find that, at the time of the
incurrence of the indebtedness represented by the Subsidiary Guarantee, such
Subsidiary Guarantor was insolvent, was rendered insolvent by reason of such
incurrence of such guarantee, was engaged in a business or transaction for which
its remaining assets constituted unreasonably small capital, intended to incur,
or believes that it would incur, debts beyond its ability to pay such debts as
they matured, or intended to hinder, delay or defraud its creditors, and that
the indebtedness was incurred for less than fair consideration or reasonably
equivalent value, then such court could, among other things, (a) void all or a
portion of such Subsidiary Guarantor's obligations to the holders of the Notes,
the effect of which could be that the holders of the Notes may not be repaid in
full and/or (b) subordinate such Subsidiary Guarantor's obligations to the
holders of the Notes to other existing and future indebtedness of such
Subsidiary Guarantor, the effect of which would be to entitle such other
creditors to be paid in full before any payment could be made on the Notes.
THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
The Original Notes were sold by the Company on June 9, 1997 to the
Initial Purchasers and immediately resold to certain accredited institutions in
the Private Offering. In connection therewith, the
20
<PAGE>
Company entered into the Registration Rights Agreement which required that
within ninety (90) days following the issuance of the Original Notes, the
Company file with the Commission a registration statement under the Securities
Act with respect to an issue of New Notes of the Company identical in all
material respects to the Original Notes, use its best efforts to cause such
registration statement to become effective under the Securities Act and, upon
the effectiveness of that registration statement, offer to the holders of the
Original Notes the opportunity to exchange their Original Notes for a like
principal amount of such New Notes, which will be issued without a restrictive
legend. The purpose of the Exchange Offer is to fulfill the Company's
obligations under the Registration Rights Agreement. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. Original Notes were initially represented by
two global Notes in registered form, registered in the name of Cede & Co., a
nominee of The Depository Trust Company, New York, New York ("DTC"), as
depositary.
Based on no-action letters issued by the staff of the Commission to
third parties, including, Exxon Capital Holdings Corp. (April 13, 1989), Morgan
Stanley (June 5, 1991) and Shearman & Sterling (July 2, 1993), the Company
believes that the New Notes issued pursuant to the Exchange Offer in exchange
for the Original Notes may be offered for resale, resold and otherwise
transferred by any holder of such New Notes without compliance with the
registration and prospectus delivery provisions of the Securities Act (other
than "affiliates" of the Company within the meaning of Rule 405 under the
Securities Act), provided that such New Notes are acquired in the ordinary
course of such holder's business and such holder has no arrangement or
understanding with any person to participate in the distribution of such New
Notes. Any holder of Original Notes who tenders in the Exchange Offer for the
purpose of participating in a distribution of the New Notes could not rely on
such interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Thus, any New Notes acquired by such
holders will not be freely transferable except in compliance with the Securities
Act. Each broker-dealer that receives New Notes for its own account in exchange
for the Original Notes, where such Original Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution."
The Registration Rights Agreement provides that (i) the Company and the
Subsidiary Guarantors will file a registration statement registering the New
Notes under the Securities Act (the "Exchange Offer Registration Statement")
with the Commission on or prior to 90 days after the closing of the Private
Offering, (ii) the Company and the Subsidiary Guarantors will use their best
efforts to have the Exchange Offer Registration Statement of which this
Prospectus constitutes a part was declared effective by the Commission on or
prior to 150 days after the closing of the Private Offering, (iii) unless the
Exchange Offer would not be permitted by a policy of the Commission, the Company
and the Subsidiary Guarantors will commence the Exchange Offer and will use
their best efforts to issue on or prior to 60 days after the date on which the
Exchange Offer Registration Statement is declared effective by the Commission
(the "Exchange Offer Effective Date") New Notes in exchange for all Notes
tendered prior thereto in the Exchange Offer and (iv) if obligated to file a
shelf registration statement (the "Shelf Registration Statement"), the Company
and the Subsidiary Guarantors will each use its best efforts to file the Shelf
Registration Statement with the Commission on or prior to 90 days after such
obligation arises and to cause the Shelf Registration Statement to be declared
effective by the Commission on or prior to 150 days after such obligation
arises. If (a) the Company and the Subsidiary Guarantors fail to file within 90
days, or cause to become effective within 150 days, the Exchange Offer
Registration Statement or (b) the Company and the Subsidiary Guarantors are
obligated to file the Shelf Registration Statement and such Shelf Registration
Statement is not filed within 90 days, or declared effective within 150 days, of
the date on which the Company and the Subsidiary Guarantors became so obligated
or (c) the Company and the Subsidiary Guarantors fail to consummate the Exchange
Offer within 60 days of the Exchange Offer Effective Date or (d) the Shelf
Registration Statement or the Exchange Offer Registration Statement is declared
effective but thereafter ceases to be effective or usable in connection with
resales of Transfer Restricted Securities (as hereinafter defined) during the
periods specified in the Registration Rights Agreement (each such event referred
to in clauses (a) through (d) above a "Registration Default"), in the
21
<PAGE>
case of clause (b) only, other than by reason of the failure of the Holders to
make certain representations to or provide information reasonably requested by
the Company or by reason of delays caused by the failure of any Holder to
provide information to the National Association of Securities Dealers, Inc. or
to any other regulatory agency having jurisdiction over any of the Holders, then
the Company will pay liquidated damages ("Liquidated Damages") to each Holder of
Transfer Restricted Securities (as hereinafter defined), during the first 90-day
period immediately following the occurrence of such Registration Default in an
amount equal to $.05 per week per $1,000 principal amount of Original Notes
constituting Transfer Restricted Securities held by such Holder. The amount of
the Liquidated Damages will increase an additional $.05 per week per $1,000
principal amount constituting Transfer Restricted Securities for each subsequent
90-day period until the applicable Registration Default has been cured, up to a
maximum amount of Liquidated Damages of $.30 per week per $1,000 principal
amount of Original Notes constituting Transfer Restricted Securities. Following
the cure of all Registration Defaults, the accrual of Liquidated Damages will
cease. See "Description of the Notes -- Registration Rights, Liquidated
Damages." The Company timely filed the Exchange Offer Registration Statement
within 90 days of the closing of the Private Offering. The Exchange Offer
Registration Statement, of which this Prospectus constitutes a part, was
declared effective on November , 1997.
As described above, the Original Notes were sold to the Initial
Purchasers and immediately resold to certain accredited institutional investors
on June 9, 1997 and there is a limited private trading market for them at
present. To the extent Original Notes are tendered and accepted in the Exchange
Offer, the principal amount of outstanding Original Notes will decrease.
Following the consummation of the Exchange Offer, holders of the Original Notes
will continue to be subject to certain restrictions on transfer. Accordingly,
the liquidity of the market for the Original Notes could be adversely affected.
See "Risk Factors--Consequence of Failure to Exchange."
Terms of the Exchange
Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal (which together constitute the
"Exchange Offer"), the Company will accept any and all Original Notes validly
tendered, and not theretofore withdrawn, prior to 5:00 p.m., New York City time,
on the Expiration Date. The Company will issue $1,000 principal amount of New
Notes in exchange for each $1,000 principal amount of outstanding Original Notes
accepted in the Exchange Offer as promptly as practicable after the Expiration
Date. Holders may tender some or all of their Original Notes pursuant to the
Exchange Offer provided, however, that Original Notes may be tendered only in
integral multiples of $1,000. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Original Notes being tendered for
exchange.
The form and terms of the New Notes are identical in all material
respects to the form and terms of the Original Notes except that the New Notes
will have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof. The New Notes will not represent
additional indebtedness of the Company and will be entitled to the benefits of
the Indenture, which is the same Indenture as the one under which the Original
Notes were issued.
Interest on New Notes will accrue from the most recent date to which
interest has been paid on the Original Notes or, if no interest has been paid,
from June 9, 1997.
Holders of Original Notes do not have any appraisal or dissenters'
rights under the Pennsylvania Business Corporation Law or the Indenture in
connection with the Exchange Offer. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act and the
rules and regulations of the Commission thereunder.
For purposes of the Exchange Offer, the Company shall be deemed to have
accepted for exchange and exchange Original Notes validly tendered for exchange
when, as and if the Company gives oral or written notice to the Exchange Agent
of acceptance of the tenders of such Original Notes for exchange.
22
<PAGE>
Exchange of Original Notes accepted for exchange pursuant to the Exchange Offer
will be made by deposit of tendered Original Notes with the Exchange Agent,
which will act as agent for the tendering holders for the purpose of receiving
New Notes from the Company and transmitting such New Notes to tendering Holders.
In all cases, any exchange of New Notes for Original Notes accepted for exchange
pursuant to the Exchange Offer will be made only after timely receipt by the
Exchange Agent of certificates for such Original Notes (or of a confirmation of
a book-entry transfer of such Original Notes in the Exchange Agent's account at
the Book Entry Transfer Facility (as defined in "Procedures for Tendering"
below)), a properly completed and duly executed Letter of Transmittal (or
facsimile thereof) and any other required documents. For a description of the
procedures for tendering Original Notes pursuant to the Exchange Offer see
"Procedures for Tendering."
If any tendered Original Notes are not accepted for exchange because of
an invalid tender, or due to the occurrence of certain other events set forth
herein or otherwise, certificates for any such unaccepted Original Notes will be
returned without expense to the tendering holders thereof (or in the case of
Original Notes tendered by book entry transfer, such Original Notes will be
credited to the account of such holder maintained at the Book Entry Transfer
Facility), as promptly as practicable after the expiration or termination of the
Exchange Offer.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of a Letter of Transmittal (or facsimile
thereof), waive any right to receive notice of acceptance of their Original
Notes for exchange.
Holders who tender Original Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Original Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes, in connection with the
Exchange Offer. See "Fees and Expenses."
This Prospectus, together with the Letter of Transmittal, is being sent
to registered holders of Original Notes as of , 1997.
Expiration Date; Amendments; Termination
The term "Expiration Date" shall mean 5:00 p.m. New York City time on ,
199_, unless the Company, in its sole discretion, extends the Exchange Offer in
which case the term "Expiration Date" shall mean the later date and time to
which the Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will make a public
announcement thereof, each prior to 9:00 a.m. New York City time, on the next
business day, after the previously scheduled expiration date of the Exchange
Offer.
The Company reserves the right, at any time and from time to time, in
its sole discretion (subject to its obligations under the Registration Rights
Agreement) (i) to delay accepting any Original Notes or to delay the issuance
and exchange of New Notes for Original Notes, to extent the Exchange Offer or,
if any of the conditions set forth below under "Conditions to the Exchange
Offer" shall not have been satisfied, to terminate the Exchange Offer by giving
oral or written notice of such delay, extension or termination to the Exchange
Agent, or (ii) to amend the terms of the Exchange Offer in any manner.
If the Company extends the period of time during which the Exchange
Offer is open, or if it is delayed in accepting for exchange of, or in issuing
and exchanging the New Notes for, any Original Notes or is unable to accept for
exchange of, or issue New Notes for, any Original Notes pursuant to the Exchange
Offer for any reason, then, without prejudice to the Company's rights under the
Exchange Offer the Exchange Agent may, on behalf of the Company, retain all
Original Notes tendered and such
23
<PAGE>
Original Notes may not be withdrawn except as otherwise provided in "Withdrawal
of Tenders." The reservation by the Company of the right to delay acceptance for
exchange of, or the issuance and the exchange of the New Notes, for any Original
Notes is subject to applicable law, including Rule 14e-1(c) under the Exchange
Act, which requires that the Company pay the consideration offered or return the
Original Notes deposited by or on behalf of the holders thereof promptly after
the termination or withdrawal of the Exchange Offer.
Any such delay in acceptance, extension, termination or amendment will
be followed as promptly as practicable by a public announcement thereof. If the
Exchange Offer is amended in a manner determined by the Company to constitute a
material change, the Company will promptly disclose such amendment by means of a
prospectus supplement that will be distributed to the registered Holders, and
the Company will extend the Exchange Offer for a period of five to ten business
days, depending upon the significance of the amendment and the manner of
disclosure to the registered Holders, if the Exchange Offer would otherwise
expire during such five to ten business day period. The term "business day"
shall mean any day other than Saturday, Sunday or a federal holiday and shall
consist of the time period from 12:01 a.m. through 12:00 midnight, New York City
time.
Without limiting the manner in which the Company may choose to make
public announcement of any delay, extension, termination or amendment of the
Exchange Offer, the Company shall have no obligation to make public, advertise
or otherwise communicate any such public announcement, other than by making a
timely release to the Dow Jones News Service. Any such announcement of an
extension of the exchange offer shall be issued no later than 9:00 A.M. New York
City time, on the next business day after the previously scheduled expiration of
the Exchange Offer.
24
<PAGE>
Procedures for Tendering
Only a holder of Original Notes may tender such Original Notes in the
Exchange Offer. To tender in the Exchange Offer the holder must complete, sign
and date the Letter of Transmittal or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
any other required documents, to the Exchange Agent so that delivery is received
prior to 5:00 p.m. New York City time, on the Expiration Date. To be tendered
effectively, the Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent" prior to 5:00 p.m. New York City time on the Expiration Date. In
addition, either (i) the certificates for the tendered Original Notes must be
received by the Exchange Agent along with the Letter of Transmittal or such
Original Notes must be received by the Exchange Agent along with the Letter of
Transmittal or such Original Notes must be tendered pursuant to the procedures
for book entry transfer described below and a confirmation of receipt of such
tendered Original Notes must be received by the Exchange Agent in each case,
prior to 5:00 p.m. New York City time, on the Expiration Date, or (ii) the
tendering holder must comply with the guaranteed delivery procedures described
below.
NO LETTERS OF TRANSMITTAL, CERTIFICATES REPRESENTING ORIGINAL NOTES OR
ANY OTHER REQUIRED DOCUMENTATION SHOULD BE SENT TO THE COMPANY. SUCH DOCUMENTS
SHOULD BE SENT ONLY TO THE EXCHANGE AGENT.
The tender by a holder of Original Notes made pursuant to any method of
delivery set forth herein will constitute a binding agreement between such
tendering holder and the Company in accordance with the terms and subject to the
conditions of the Exchange Offer.
The method of delivery of Original Notes and the Letter of Transmittal
and all other required documents to the Exchange Agent is at the election and
risk of the Holder. Instead of delivery by mail, it is recommended that holders
use an overnight or hand delivery service. In all cases, sufficient time should
be allowed to assure delivery to the Exchange Agent before the Expiration Date.
Holders may request their respective brokers, dealers, commercial banks, trust
companies or nominees to effect the above transaction for such holders or for
assistance concerning the Exchange Offer.
Any beneficial owner whose Original Notes are registered in the name of
a broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Original Notes either make appropriate arrangements to register
ownership of the Original Notes in such owner's name or obtain a properly
completed bond power from the registered Holder. The transfer of registered
ownership may take considerable time.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Original Notes (which term includes any participants in
DTC whose name appears on a security position listing as the owner of the
Original Notes) or if the delivery of the Original Notes is to be made to a
person other than the registered Holder, such Original Notes must be endorsed or
accompanied by a properly completed bond power, in either case signed by such
registered holder as such registered Holder's name appears on such Original
Notes with the signature on the Original Note or the bond power guaranteed by an
Eligible Institution (as defined below).
If the Letter of Transmittal or any Original Notes or bond powers are
signed by trustees, executors, administrators, guardians, attorney-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing and unless waived by the
Company must submit with the Letter of Transmittal evidence satisfactory to the
Company of their authority to so act.
25
<PAGE>
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Original Notes tendered pursuant thereto are tendered (i) by a
registered holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal ,
(ii) for the account of an Eligible Institution, or (iii) for the account of
DTC. See Instruction 4 in the Letter of Transmittal. In the event that
signatures on a Letter of Transmittal or a notice of withdrawal as the case may
be are required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (any of which is referred to
herein as an "Eligible Institution").
The Exchange Agent will establish an account with respect to the
Original Notes at DTC (the "Book Entry Transfer Facility") for the purpose of
the Exchange Offer promptly after the date of this Prospectus, and any financial
institution that is a participant in the Book Entry Transfer Facility's system
may make delivery of the Original Notes by causing the Book Entry Transfer
Facility to transfer such Original Notes into the Exchange Agent's Notes account
in accordance with the Book Entry Transfer Facility's procedure for such
transfer. ALTHOUGH DELIVERY OF ORIGINAL NOTES MAY BE EFFECTED THROUGH BOOK ENTRY
TRANSFER IN THE EXCHANGE AGENT'S ACCOUNT AT THE BOOK ENTRY TRANSFER FACILITY,
THE LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) WITH ALL REQUIRED SIGNATURE
GUARANTEES AND ANY OTHER REQUIRED DOCUMENTS MUST, IN ANY CASE, BE TRANSMITTED TO
AND RECEIVED AND CONFIRMED BY THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH BELOW
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE, EXCEPT AS
OTHERWISE PROVIDED BELOW UNDER THE CAPTION "GUARANTEED DELIVERY PROCEDURES."
DELIVERY OF DOCUMENTS TO THE BOOK ENTRY TRANSFER FACILITY IN ACCORDANCE WITH ITS
PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
All questions as to the validity, form (including time of receipt),
acceptance and withdrawal of tendered Original Notes will be determined by the
Company in its sole discretion which determination will be final and binding.
The Company reserves the absolute right to reject any and all Original Notes
determined by the Company not to be validly tendered or any Original Notes the
Company's acceptance of which would, in the opinion of counsel for the Company,
be unlawful. The Company also reserves the absolute right to waive any defects,
irregularities or conditions of tender as to particular Original Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of the Original Notes will render such tenders invalid
unless such defects or irregularities are cured within such time as the Company
shall determine. Although the Company intends to notify holders of defects or
irregularities with respect to tenders of Original Notes, neither the Company,
the Exchange Agent nor any other person shall incur any liability for failure to
give such notification. Any Original Notes received by the Exchange Agent that
are not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned by the Exchange Agent to the tendering
holders, unless otherwise provided in the Letter of Transmittal as soon as
practicable following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Original Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth herein, to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase original
Notes in the open market privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
26
<PAGE>
Guaranteed Delivery Procedures
Holders who wish to tender their Original Notes and (i) whose Original
Notes are not immediately available, or (ii) who cannot deliver their Original
Notes (or complete the procedures for book entry transfer), the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, may nevertheless effect a tender of Original Notes if all of
the following conditions are met:
(a) the tender is made by or through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed
Notice of Guaranteed Delivery (by facsimile transmission, mail, hand
delivery or overnight courier) setting forth the name and address of
the Holder, any certificate number(s) of such Original Notes and the
principal amount of original Notes tendered, stating that the tender
is being made thereby and guaranteeing that, within five New York
Stock Exchange trading days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Original Notes (or a confirmation of a book entry
transfer of such Original Notes in the Exchange Agent's account at the
Book Entry Transfer Facility) and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal
(or facsimile thereof) as well as the certificate(s) representing all
tendered Original Notes in proper form for transfer (or a confirmation
of book entry transfer of such Original Notes into the Exchange
Agent's account at the Book Entry Transfer Facility) and all other
documents required by the Letter of Transmittal are received by the
Exchange Agent within five New York Stock Exchange trading days after
the Expiration Date.
A notice of Guaranteed Delivery is being sent to holders along with
this Prospectus and the Letter of Transmittal.
Withdrawal of Tenders
Except as otherwise provided herein, tenders of Original Notes may be
withdrawn at any time prior to 5:00 p.m. New York City time, on the Expiration
Date, as such term is defined above under the caption "Expiration Date;
Amendments; Termination," unless previously accepted for exchange. If the
Company extends the period of time during which the Exchange Offer is open, or
if it is delayed in accepting for exchange of, or in issuing and exchanging the
New Notes for, any Original Notes or are unable to accept for exchange of, or
issue and exchange the New Notes for, any Original Notes pursuant to the
Exchange Offer for any reason, then without prejudice to the Company's rights
under the Exchange Offer the Exchange Agent may, on behalf of the Company,
retain all Original Notes tendered, and such Original Notes may not be withdrawn
except as otherwise provided herein, subject to Rule 14e-1(c) under the Exchange
Agent which provides that the person making an issuer tender offer shall either
pay the consideration offered or return tendered securities, promptly after the
termination or withdrawal of the offer.
To withdraw a tender of Original Notes in the Exchange Offer a written
or facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m. New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Original Notes to be withdrawn (the
"Depositor"), (ii) specify the serial numbers on the particular certificates
evidencing the Original Notes to be withdrawn and the name of the registered
holder thereof (if certificates have been delivered or otherwise identified to
the Exchange Agent) or the name and number of the account at DTC to be credited
with withdrawn Original Notes (if the Original Notes have been tendered pursuant
to the procedures for book entry transfer),
27
<PAGE>
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which Original Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Note Registrar with respect to the Original Notes
register the transfer of such Original Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Original
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company in its sold discretion, which
determination shall be final and binding on all parties. Any Original Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Original Notes so withdrawn are validly tendered. Properly withdrawn Original
Notes may be retendered by following one of the procedures described above under
"Procedures for Tendering" at any time prior to the Expiration Date.
Conditions to the Exchange Offer
Notwithstanding any other term of the Exchange Offer and without
prejudice to the Company's other rights under the Exchange Offer the Company
shall not be required to accept for exchange, or exchange New Notes for any
Original Notes and may amend or terminate the Exchange Offer as provided herein
before the acceptance of such Original Notes if, among other things:
(a) any action or proceeding is instituted or threatened in any
court or by or before any governmental agency with respect to the
Exchange Offer which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer or materially impair the contemplated benefits of the
Exchange Offer to the Company, or any material adverse development has
occurred in any existing action or proceeding with respect to the
Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective
change, in the business or financial affairs of the Company or any of
its subsidiaries has occurred which, in the sole judgment of the
Company, might materially impair the ability of the Company to proceed
with respect to the Exchange Offer or materially impair the
contemplated benefits of the Exchange Offer to the Company; or
(c) any law, statute, rule or regulation is proposed, adopted or
enacted, which, in the sold judgment of the Company, might materially
impair the ability of the Company to proceed with the Exchange Offer
or materially impair the contemplated benefits of the Exchange Offer
to the Company; or
(d) the New Notes to be received by holders of Original Notes in
the Exchange Offer upon receipt, will not be transferable by such
holders (other than as "affiliates" of the Company) without
restriction under the Securities Act and the Exchange Act and without
material restriction under the blue sky laws of substantially all of
the states of the United States (subject, in the case of Restricted
Holders, to any requirements that such persons comply with the
Prospectus Delivery Requirements).
If the Company determines in its sole discretion that any of the
conditions are not satisfied, the Company may, subject to its obligations under
the Registration Rights Agreement to use its best efforts to consummate the
Exchange Offer (i) terminate the Exchange Offer and return all tendered Original
Notes to tendering holders, (ii) extend the Exchange Offer and, subject to
withdrawal rights as set forth in "Withdrawal of Tenders" above, retain all such
Original Notes until the expiration of the Exchange Offer as so extended, (iii)
waive such condition and, subject to any requirement to extend the period of
time during which the Exchange Offer is open, exchange all Original Notes
validly tendered for exchange by the Expiration Date and not withdrawn, or (iv)
delay acceptance for exchange of, or delay the issuance and exchange of New
Notes for, any Original Notes until satisfaction or waiver of such conditions to
the
28
<PAGE>
Exchange Offer even though the Exchange Offer has expired. The Company's right
to delay acceptance for exchange of, or delay the issuance and exchange of New
Notes for, Original Notes tendered for exchange pursuant to the Exchange Offer
is subject to provisions of applicable law, including, to the extent applicable,
Rule 14e-1(c) promulgated under the Exchange Agent which requires that the
Company pay the consideration offered or return the Original Notes deposited by
or on behalf of holders of Original Notes promptly after termination or
withdrawal of the Exchange Offer. For a description of the Company's right to
extend the period of time during which the Exchange Offer is open and to amend,
delay or terminate the Exchange Offer see "Expiration Date; Amendments;
Termination" above. If such waiver constitutes a material change to the Exchange
Offer the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered Holders, and the Company
will extend the Exchange Offer for a period of five to ten business days,
depending upon the significance of the waiver and the manner of disclosure to
the registered Holders, if the Exchange Offer would otherwise expire during such
five to ten business day period.
Exchange Agent
IBJ Schroder Bank & Trust Company has been appointed as Exchange Agent
for the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
By Registered or Certified Mail
IBJ Schroder Bank & Trust Company
P.O. Box 84
Bowling Green Station
New York, New York 10274-0084
Attn: Reorganization Operations Department
By Overnight Courier or By Hand
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
Attn: Securities Processing Window, Subcellar One (SC-1)
By Facsimile
(212) 858-2611
Confirm by Telephone
(212) 858-2103
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
Fees and Expenses
The expense of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail, however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
29
<PAGE>
The Company has not retained any dealer-manager or other soliciting
agent in connection with the Exchange Offer and will not make any payments to
brokers, dealers or others soliciting acceptance of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith and will pay the reasonable fees and expenses of one firm
acting as counsel for the holders of Original Notes should such holders deem it
advisable to appoint such counsel.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company and are estimated in the aggregate to be
approximately $ . Such expenses include fees and expenses of the Exchange Agent,
Trustee, Paying Agent and Note Registrar, accounting and legal fees and printing
costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Original Notes pursuant to the Exchange Offer. If, however,
certificates representing New Notes or Original Notes for principal amounts not
tendered or acceptable for exchange, are to be delivered to, or are to be issued
in the name of any person other than the registered holder of the Original Notes
tendered, or if tendered Original Notes are registered in the name of any person
other than the person signing the Letter of Transmittal or if a transfer tax is
imposed for any reason other than the exchange of Original Notes pursuant to the
Exchange Offer then the amount of any such transfer taxes (whether imposed on
the registered holder or any other persons) will be payable by the tendering
Holder. If satisfactory evidence of payment of such taxes or exemption therefrom
is not submitted with the Letter of Transmittal the amount of such transfer
taxes will be billed directly to such tendering holder.
Accounting Treatment
The New Notes will be recorded at the same carrying value as the
Original Notes as reflected in the Company's accounting records on the date of
the exchange. Accordingly no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer will be amortized over the term
of the New Notes.
Transfer Taxes
Holders who tender their Original Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that holders
who instruct the Company to register New Notes in the name of, or request that
Original Notes not tendered or not accepted in the Exchange Offer be returned
to, a person other than the registered tendering holder will be responsible for
the payment of any applicable transfer tax thereon.
Consequences of Failure to Exchange
Holders of Original Notes who do not exchange their Original Notes for
New Notes pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfers of such Original Notes as set forth in the legend
thereon as a consequence of the issuance of the Original Notes pursuant to the
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Original Notes may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company does not currently anticipate that it will register the Original Notes
under the Securities Act. Based on interpretations by the staff of the
Commission, New Notes issued pursuant to the Exchange Offer may be offered for
resale, resold or otherwise transferred by holders thereof (other than any such
holder which is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act) without compliance with the registration and
prospectus delivery provisions of the Securities Act provided that such New
Notes are acquired in the ordinary course of such holders' business and such
holders have no arrangement or understanding with respect to the distribution of
the New Notes to be acquired pursuant to the Exchange
30
<PAGE>
Offer, such holder (i) could not rely on the applicable interpretations of the
staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with a
secondary resale transaction. In addition, to comply with the securities laws of
certain jurisdictions, if applicable, the New Notes may not be offered or sold
unless they have been registered or qualified for sale in such jurisdiction or
an exemption from registration or qualification is available and is complied
with. The Company has agreed, pursuant to the Registration Agreement and subject
to certain specified limitations therein, to register or qualify the New Notes
for offer or sale under the securities or blue sky laws of such jurisdictions as
any holder of the New Notes reasonably requests in writing.
31
<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the Exchange Offer. The
net proceeds from the sale of the Original Notes, net of discounts to the
Initial Purchasers, were approximately $193.5 million. The Company has used and
expects to use such proceeds as follows:
Application of Proceeds Amount (in thousands)
Repayment of Indebtedness(1).......................$145.4
Capital Expenditures(2).............................$48.1
(1) All of such repayments were made on or about June 9, 1997 to retire the
Company's (i) 11.5% senior Unsecured Notes and certain make whole premiums
associated therewith, and (ii) revolving credit facility and miscellaneous
bank fees.
(2) As of October 16, 1997, the Company has expended and applied for
reimbursement of approximately $3.8 million of the $48.1 million to be used
for expanding and upgrading the refinery, rebuilding and refurbishing
retail locations and other capital projects.
CAPITALIZATION
The following table sets forth the consolidated capitalization of the
Company as of August 31, 1997, and reflects the sale of the Original Notes
offered by the Company in the Private Offering and the application of the net
proceeds therefrom.
As of August 31, 1997
(Dollars in thousands)
Cash and cash equivalents ............................ $ 11,024
========
Long-term debt including current maturities(1):
New Bank Credit Facility(2) ........................ 0
10 3/4% Senior Notes due 2007 ...................... 200,000
Other long-term debt ............................... 1,272
-------
Total long-term debt including current
maturities ................................ 201,272
Stockholder's equity ........................ 52,937
Total capitalization ...................... $254,209
(1) For a further description of the terms of the Company's long-term debt, see
Notes 6 and 7 of Notes to Consolidated Financial Statements.
(2) For a further description of the New Bank Credit Facility, see "Description
of Certain Indebtedness."
32
<PAGE>
SELECTED FINANCIAL AND OTHER OPERATING DATA
The following table sets forth certain historical financial and
operating data (the "Selected Information") as of August 31, 1993, 1994, 1995,
1996 and 1997 and for each of the years in the five-year period ended August 31,
1997. The selected income statement, balance sheet, financial and ratio data as
of and for each of the four years ended August 31, 1997 have been derived from
the audited consolidated financial statements of the Company. Such information
as of and for the year ended August 31, 1993 has been derived from the unaudited
consolidated financial statements of the Company. The audited consolidated
financial statements of the Company and related notes thereto as of August 31,
1995, 1996 and 1997, and for each of the three years ended August 31, 1997 and
related notes thereto appear elsewhere in this Prospectus. The operating
information for all periods presented has been derived from the accounting and
financial records of the Company. The Selected Information set forth below
should be read in conjunction with, and is qualified by reference to,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company and notes
thereto and other financial information included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Year Ended August 31,
1993 1994 1995 1996 1997
-----------------------------------------------------------
(Dollars in thousands, except operating information)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $830,054 $729,128 $783,686 $833,818 $871,348
Gross margin(1)(2) 162,251 156,898 151,852 168,440 164,153
Refining operating expenses 49,835 56,121 56,665 63,218 60,746
Selling, general and administrative
expenses 72,495 69,158 68,876 70,124 71,324
Operating income 33,099 22,580 18,112 26,882 23,853
Interest expense 15,377 17,100 18,523 17,606 17,509
Interest income 706 1,134 1,204 1,236 1,296
Other income (expense) (2,701) (3,257) 155 (884) (1,204)
Income before income tax
expense and extraordinary
item 15,727 3,357 948 9,628 6,436
Income tax expense 6,687 1,337 487 3,787 2,588
Income before
extraordinary item 9,040 2,020 461 5,841 3,848
Net income (loss) 9,040 490 461 5,841 (2,805)
Balance Sheet Data (at end of period):
Total assets $284,206 $315,194 $310,494 $306,104 $346,392
Total debt 137,721 158,491 154,095 136,777 201,272
Total stockholder's equity 77,235 77,725 78,186 84,027 52,937
Selected Financial Data:
EBITDA(3) $ 38,177 $ 28,317 $ 28,039 $ 35,739 $ 32,509
Adjusted EBITDA(2)(4) $ 38,030 $ 29,035 $ 27,159 $ 34,859 $ 31,849
Depreciation and amortization 7,073 7,860 8,568 8,505 8,564
Capital expenditures 30,680 20,889 12,134 4,562 5,824
Cash flow (used in) provided by
operating activities 22,329 475 17,642 24,975 (2,311)
Cash flow (used in)
investing activities (30,639) (17,358) (11,495) (3,909) (53,570)
Cash flow (used in) provided by
financing activities (7,101) 20,121 (4,733) (17,969) 51,394
Selected Ratios:
Adjusted EBITDA/interest expense(2)(4) 2.47x 1.70x 1.47x 1.98x 1.82x
Total debt/Adjusted EBITDA(2)(4) 3.62x 5.46x 5.67x 3.92x 6.32x
Pro Forma interest expense(5) 22,503
33
<PAGE>
Year Ended August 31,
1993 1994 1995 1996 1997
-----------------------------------------------------------
(Dollars in thousands, except operating information)
Operating Information (unaudited):
Refining Operations:
Crude oil input (mbbls/day) 61.5 57.0 62.4 63.0 61.8
Utilization(6) 94.7% 87.8% 96.0% 96.9% 95.1%
Total saleable refinery production
(mbbls/day) 62.0 57.2 62.1 63.5 62.6
Gasoline 31.4 27.7 30.1 29.9 29.0
Middle distillates 18.5 15.6 17.5 18.5 18.8
Asphalt 9.0 10.0 11.6 12.2 12.0
Total saleable products
(mbbls/day)(7) 65.3 62.3 64.1 65.4 66.3
Gross margin (per bbl) $3.87 $4.03 $3.48 $4.26 $4.06
Refining operating expenses
(per bbl) $2.09 $2.47 $2.42 $2.64 $2.51
Retail Network:
Number of stores (at period end) 345 341 335 327 319
Gasoline volume (m gal) 297,083 292,062 279,454 274,480 262,585
Gasoline gross margin (cents/gal) 11.9 13.6 15.7 14.4 14.7
Average gasoline volume per store
(m gal/month) 73 72 70 70 69
Distillate volume(m gal) 40,045 37,378 40,480 41,256 40,344
Distillate gross margin (cents/gal) 11.7 12.5 12.5 11.9 12.1
Merchandise sales (000s) $68,607 $68,178 $70,613 $71,686 $74,466
Merchandise gross margin 32.6% 30.5% 30.5% 30.6% 29.9%
Average merchandise sales per
store per month (000s) $ 16.6 $ 16.7 $ 17.6 $18.3 $19.3
Retail operating expenses (000s) $ 51,081 $ 51,892 $ 51,703 $53,218 $53,630
Total Sales (000s/store)
Convenience stores $ 1,303 $ 1,270 $ 1,299 $1,318 $1,351
Limited gasoline stations 1,061 1,058 1,102 1,140 1,174
Truckstops 6,327 6,046 6,516 6,813 6,919
Other 642 659 696 705 704
<FN>
(1) Gross margin is defined as gross profit plus refining operating expenses.
Refining operating expenses are expenses incurred in refining and included
in cost of goods sold in the Company's financial statements. Refining
operating expenses equals refining operating expenses per barrel,
multiplied by the volume of total saleable products per day, multiplied by
the number of days in the period. For fiscal 1993, gross margin for the
Company included $7.6 million of gross margin ($0.6 million on an EBITDA
and Adjusted EBITDA basis) from an entity conducting business unrelated to
the refining and marketing of petroleum products, which the Company sold to
its parent in fiscal 1993.
(2) Management believes that the use of gross margin and Adjusted EBITDA as
presented more closely reflects the true cash flow position of the Company
and hence its ability to service Notes. While they may have slight
variations to the EBITDA definition, the Adjusted EBITDA and gross margin
definitions included herein are commonly used within the industry. Adjusted
EBITDA is intended to make the Company's cash flow position more meaningful
for analysts and investors when comparing the Company's performance with
other companies in the industry.
(3) EBITDA is defined as earnings before interest expense, income taxes and
depreciation and amortization.
(4) Adjusted EBITDA is defined as earnings before income taxes, depreciation
and amortization, interest expense, prepayment or make-whole payments and
non-cash items. For a definition of non-cash items, see "Description of the
Notes." Adjusted EBITDA is presented not as an alternative measure of
operating
34
<PAGE>
results or cash flow from operations (as determined in accordance with
generally accepted accounting principles), but rather to provide additional
information related to the debt servicing ability of the Company. Interest
expense as reflected on the Company's financial statements does not include
amortization of deferred financing fees. Amortization of deferred financing
fees is included in the Company's financial statements in other expense and
amounts to $0.5 million, $0.7 million, $0.6 million, $0.5 million and $0.5
million for fiscal years 1993, 1994, 1995, 1996 and 1997, respectively.
(5) Pro forma interest expense represents what interest expense would have been
had the Private Offering occurred on September 1, 1996 and a portion of the
proceeds thereof used by the Company to retire certain of its outstanding
indebtedness.
(6) Refinery utilization is the ratio of crude oil input to the rated capacity
of the refinery to process crude oil which is 65,000 bpd. Total input and
total yield may be greater than the rated capacity of the refinery because
feedstocks other than crude oil, which add to the refinery's yield are
utilized in the refining process. The rated capacity of the refinery
reflects estimated downtime for scheduled and unscheduled maintenance and
other contingencies during which refinery production is reduced.
Utilization may therefore exceed 100% if actual downtime is less than
estimated downtime. Utilization was lower in fiscal 1994 due to an 18 day
turnaround at the crude unit for scheduled maintenance.
(7) Includes refined products purchased from others and resold by the Company.
</FN>
</TABLE>
35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company is engaged in the refining and marketing of petroleum
products. In fiscal 1997, approximately 59% and 21% of the Company's gasoline
and diesel fuel production was sold through the Company's network of service
stations and truckstops. The balance of the Company's refined products were sold
to wholesale customers. In addition to transportation and heating fuels,
primarily gasoline and distillate, the Company is a major regional wholesale
marketer of asphalt. The Company also sells convenience merchandise at
convenience stores located at most of its service stations. The Company's
profitability is influenced by fluctuations in the market prices of crude oil
and refined products. Although the Company's product sales mix helps to reduce
the impact of large short term variations in crude oil price, net sales and
costs of goods sold can fluctuate widely based upon fluctuations in crude oil
prices. Specifically, the margins on wholesale gasoline and distillate tend to
decline in periods of rapidly declining crude oil prices, while margins on
asphalt and retail gasoline and distillate tend to improve. During periods of
rapidly rising crude oil prices, margins on wholesale gasoline and distillate
tend to improve, while margins on asphalt and retail gasoline and distillate
tend to decline. Gross margins on the sale of convenience merchandise have been
consistently near 30% for the last five years and are essentially unaffected by
variations in crude oil and petroleum product prices. The Company includes in
cost of goods sold operating expenses incurred in the refining process.
Therefore, operating expenses reflect only selling, general and administrative
expenses, including all expenses of the retail network, and depreciation and
amortization.
Recent Developments
Although September 1997 spot market gasoline prices declined from the strong
levels of August, the Company maintained September wholesale gasoline margins
significantly above those of September 1996. The Company's average retail
gasoline price and retail margin for September improved compared to August 1997
and to September of the previous year. September 1997 gasoline margins benefited
from gasoline demand which remained above previous year levels beyond the
traditional end of the peak driving season on Labor Day weekend. October
operating margins will benefit from the Company's October crude cost, which had
already been largely established at lower prices, before an increase in world
crude oil prices during October. The Company's September and October 1997
refinery input volumes were reduced somewhat from the high rates achieved in
previous months to allow previously scheduled maintenance to certain refinery
processing units without accumulating undesirably high inventories of unfinished
feedstocks. Refinery input volume for September and October was 4.4% lower than
in the same months of the previous year. The first phase of refinery expansion
and improvement included in the Company's Capital Improvement Plan will be
completed during the maintenance activities in October and early November 1997.
Results of Operations
Comparison of Fiscal 1997 and Fiscal 1996.
Net Sales. Net sales increased $37.5 million or 4.5% from $833.8 million
for fiscal 1996 to $871.3 million for fiscal 1997. The increase was primarily
due to an 8.1% increase in wholesale gasoline and distillate weighted average
net selling prices, 5.8% higher retail refined product selling prices, and a
16.3% increase in average asphalt selling prices. Also contributing to the
revenue increase was a 3.9% increase in retail merchandise sales. These
increases were partially offset by an 1.1% decrease in wholesale gasoline and
distillate volume and by a 4.1% decrease in retail refined products volume. The
lower sales volumes were primarily the result of lower refinery input and
production in the first half of fiscal 1997.
36
<PAGE>
Cost of Good Sold. Cost of goods sold increased $39.3 million or 5.4%
from $728.6 million for fiscal 1996 to $767.9 million for fiscal 1997. The
increase was primarily the result of a 12.7% increase in annual average per
barrel crude oil costs, partially offset by lower refinery crude oil input
volume. The Company's higher crude cost resulted from a rapid increase in world
crude oil prices, which peaked in February 1997 at the highest level since the
Gulf War. For the first half of fiscal 1997 (ending February 28), the average
cost of crude processed by the Company was 36.6% above the same months of fiscal
1996. Subsequent to February, world crude oil prices decreased substantially.
This decrease was reflected in the Company's crude costs for the second half of
fiscal 1997, which were 7.0% below the second half of fiscal 1996. The Company's
crude costs for the fourth quarter of fiscal 1997 were 11.6% below the same
quarter of fiscal 1996.
Operating Expenses. Operating expenses increased $1.2 million or 1.5%
from $78.3 million for 1996 to $79.6 million for fiscal 1997.
Operating Income: Operating income decreased $3.0 million or 11.3%
from $26.9 million for fiscal 1996 to $23.9 million for fiscal 1997. The
Company's product margins and operating income were negatively affected by the
high world crude oil prices in the first half of fiscal 1997. In the second half
of fiscal 1997, lower world crude oil prices and accompanying strong product
margins, particularly for gasoline and asphalt, led to substantial recovery in
terms of operating income.
Interest Expense. Net interest expense (interest expense less interest
income) declined $0.2 million from $16.4 million for fiscal 1996 to $16.2
million for fiscal 1997. The decrease was due to a reduction in the amount of
long-term debt outstanding for most of fiscal 1997, prior to the sale in June
1997 of $200 million of Senior Notes.
Income Taxes. The Company's effective tax rate for fiscal 1997 was
approximately 40.2% compared to a rate of 39.3% for fiscal 1996.
Extraordinary Items. In June 1997, the Company incurred an extraordinary
loss of $6.7 million (net of an income tax benefit of $4.2 million) as a result
of "make-whole premiums" paid and financing costs written-off in connection with
the early retirement of its 11.50% and 13.50% Senior Unsecured Notes.
Comparison of Fiscal 1996 and Fiscal 1995
Net Sales. Net sales increased $50.1 million or 6.4% from $783.7 million
in fiscal 1995 to $833.8 million in fiscal 1996. This was the result of a 3.5%
volume increase in refined product sales corresponding to higher refinery
throughput, as well as a 5.3% increase in weighted average net selling prices of
refined products. The 3.5% volume increase in refined product sales consisted of
a 5.9% increase in wholesale refined product volume combined with a 1.3% volume
decrease in retail sales. The decreased retail volume resulted from factors
including the Company's closure of eight retail units and retail expansion by
competitors. Sales of convenience merchandise at retail units increased by $1.1
million or 1.5% due to new marketing techniques, introduction of new merchandise
items and redesigns of store layouts.
Cost of Goods Sold. Cost of goods sold increased $40.1 million or 5.8%
from $688.5 million in fiscal 1995 to $728.6 million in fiscal 1996. This was
due to a 7.0% increase in the per barrel cost of crude oil purchases as well as
a 2.5% increase in the volume of crude oil and other feedstocks purchased. The
increase in the Company's per barrel crude cost was in line with the general
increase in market crude oil prices.
Operating Expenses. Operating expenses increased $1.3 million or 1.6%
from $77.1 million in fiscal 1995 to $78.3 million in fiscal 1996. This was due
to increases in retail operating expenses due
37
<PAGE>
to an intensified retail station maintenance program and to expenses for snow
removal and similar items related to unusually severe weather in the second
fiscal quarter of fiscal 1996.
Operating Income. Operating income increased $8.8 million or 48.4% from
$18.1 million in fiscal 1995 to $26.9 million in fiscal 1996. Rising crude costs
in the third quarter of fiscal 1996 reduced retail and asphalt margins, but this
was more than offset by the improvement in wholesale gasoline and distillate
margins, as the Company was able to increase wholesale product prices in step
with crude oil price increases, while deriving significant benefit from
processing crude oil purchased approximately 30 days earlier at lower prices.
The magnitude of the wholesale improvement is reflected in a refinery gross
margin improvement from $3.48/bbl in fiscal 1995 to $4.26/bbl in fiscal 1996.
Also contributing to increased earnings was a $1.1 million increase in
convenience merchandise sales.
Interest Expense. Net interest expense declined $0.9 million from $17.3
million in fiscal 1995 to $16.4 million in fiscal 1996 due to a reduction in the
Company's long-term debt outstanding.
Income Taxes. The Company's effective tax rate for fiscal 1996 was
approximately 39.3% compared to a rate of 51.4% for fiscal 1995. The high 1995
effective rate reflects the effects of certain permanently non-deductible
expenses for tax purposes, against minimal pre-tax book income.
Liquidity and Capital Resources
Working capital (current assets minus current liabilities) at August 31,
1997, was $59.3 million and at August 31, 1996 was $39.9 million. The Company's
current ratio (current assets divided by current liabilities) was 2.06:1 at
August 31, 1997, and was 1.59:1 at August 31, 1996.
Net cash used in operating activities totaled $2.3 million for the year
ended August 31, 1997 compared to net cash provided by operating activities of
$25.0 million in 1996.
Net cash used in investing activities for purchases of property, plant
and equipment and other assets totaled $53.6 million for the year ended August
31, 1997. For the fiscal year ended August 31, 1997, investments included $48.2
million in government securities and commercial paper maturing through December
1997. Net cash used in investing activities for purchases of property, plant and
equipment and other assets totaled $5.8 million, $4.6 million and $12.1 million
for fiscal 1997, 1996 and 1995, respectively. Fiscal 1995 saw the completion of
major projects including installation of equipment for the production of
reformulated gasoline, a distillate hydrotreater and a sulfur recovery unit,
while in fiscal 1996 expenditures were primarily for enhancements to existing
units.
The Company reviews its capital expenditures on an ongoing basis. The
Company currently has budgeted approximately $28.2 million for capital
expenditures in fiscal 1998 with $3.3 million for completion of projects
relating to underground storage tanks. The remaining $24.9 million for fiscal
1998 is budgeted for the refinery expansion and retail capital improvement
program, refinery environmental compliance and routine maintenance. The refinery
expansion and retail capital improvement program is expected to be completed in
fiscal 1999. Maintenance and non-discretionary capital expenditures have
averaged approximately $4 million annually over the last three years for the
refining and marketing operations.
Future liquidity, both short and long-term, will continue to be
primarily dependent on realizing a refinery margin sufficient to cover fixed and
variable expenses, including planned capital expenditures. The Company expects
to be able to meet its working capital, capital expenditure and debt service
requirements out of cash flow from operations, the proceeds of the Private
Offering and borrowings under the New Bank Credit Facility. Although the Company
is not aware of any pending circumstances which would change its expectation,
changes in the tax laws, the imposition of and changes in federal and state
38
<PAGE>
clean air and clean fuel requirements and other changes in environmental laws
and regulations may also increase future capital expenditure levels. Future
capital expenditures are also subject to business conditions affecting the
industry. The Company continues to investigate strategic acquisitions and
capital improvements to its existing facilities.
Simultaneously with the consummation of the Private Offering, PNC Bank
("PNC") provided the Company and one of its subsidiaries a New Bank Credit
Facility. Subject to borrowing base limitations and the satisfaction of
customary borrowing conditions, the Company and such subsidiary are permitted to
borrow up to $35 million under the New Bank Credit Facility. Obligations under
the New Bank Credit Facility are secured by certain qualifying cash accounts,
accounts receivable and inventory of the Company. Additionally, the Company pays
PNC an annual commitment fee equal to three eighths of one percent (3/8%) of the
unused balance of the New Bank Credit Facility. As of August 31, 1997, there
were no letters of credit or borrowings outstanding under the New Bank Credit
Facility.
The revolving credit loans bear interest at PNC's Base Rate (defined as
the higher of PNC's prime rate or the Federal Funds rate plus 0.50%) plus up to
an additional 0.75% per annum or at LIBOR plus an additional 2.25% per annum
based upon the ratio of the Company's total indebtedness to EBITDA (as such
terms are defined in the New Bank Credit Facility) as of the end of each fiscal
quarter.
The New Bank Credit Facility terminates on June 9, 2002, unless sooner
terminated at the Company's option or upon an event of default and outstanding
revolving credit loans will be payable on such date or such earlier date as they
may be accelerated following the occurrence of an event of default.
Federal, state and local laws and regulations relating to the
environment affect nearly all the operations of the Company. As is the case with
all the companies engaged in similar industries, the Company faces significant
exposure from actual or potential claims and lawsuits involving environmental
matters. Future expenditures related to environmental matters cannot be
reasonably quantified in many circumstances due to the uncertainties as to
required remediation methods and related clean-up cost estimates. The Company
cannot predict what additional environmental legislation or regulations will be
enacted or become effective in the future or how existing or future laws or
regulations will be administered or interpreted with respect to products or
activities to which they have not been previously applied.
Seasonal Factors
Seasonal factors affecting the Company's business may cause variation in
the prices and margins of some of the Company's products. For example, demand
for gasoline tends to be highest in spring and summer months, while demand for
home heating oil and kerosene tends to be highest in winter months. As a result,
the margin on gasoline prices versus crude oil costs generally tends to increase
in the spring and summer, while margins on home heating oil and kerosene tend to
increase in winter.
Also, because winter weather in the Company's market is not favorable
for paving activity, the Company's asphalt sales in winter months are composed
of a much lower percentage of paving asphalt and a correspondingly higher
percentage of roofing asphalt whose demand is much less seasonal. In addition,
the Company stores a significant portion of winter asphalt production for sale
the following spring and summer.
This storage of asphalt for later sales results in seasonal patterns in
the Company's cash flow. In winter months, when asphalt production typically
exceeds sales, the storage of asphalt creates a cash demand as cash must be
expended for crude oil purchased for processing into products including asphalt.
Unlike most other products, however, a significant portion of winter asphalt
production is stored, delaying the receipt of cash revenues. In the spring and
summer, asphalt inventories are a significant source of cash, as inventories
built the preceding winter are drawn down, typically beginning in June,
generating cash receipts. Because of the nature of its asphalt business, the
Company has historically used
39
<PAGE>
its bank credit facility primarily to provide the necessary cash to allow the
building of winter asphalt inventory for subsequent spring and summer sale.
Inflation
The effect of inflation on the Company has not been significant during
the last five fiscal years.
40
<PAGE>
BUSINESS
Introduction
The Company is a leading integrated refiner and marketer of petroleum
products in its primary market area, which encompasses western New York and
northwestern Pennsylvania. The Company owns and operates a medium complexity
65,000 barrel per day ("bpd") petroleum refinery in Warren, Pennsylvania where
it produces a variety of products, including various grades of gasoline, diesel
fuel, kerosene, jet fuel, No. 2 heating oil, and asphalt. The Company sells
gasoline and diesel fuel under the Kwik Fill(R) brand name at a network of 319
Company-operated retail units, 230 of which are owned by the Company. In fiscal
1997 approximately 59% and 21% of the Company's gasoline and diesel fuel
production, respectively, was sold through this network. The Company operates
convenience stores at most of its retail units, primarily under the Red Apple
Food Mart(R) brand name. The Company also sells its petroleum products to
long-standing regional wholesale customers.
For fiscal year ended August 31, 1997 the Company had total revenues of
approximately $871.3 million, of which approximately 55% were derived from
gasoline sales, approximately 37% were from sales of other petroleum products
and approximately 8% were from sales of non-petroleum products. The Company's
capacity utilization rates have ranged from approximately 88% to approximately
97% over the last five years. In fiscal 1997, approximately 77% of the Company's
refinery output consisted of higher value products such as gasoline and
distillates.
The Company believes that the location of its 65,000 bpd refinery in
Warren, Pennsylvania provides it with a transportation cost advantage over its
competitors, which is significant within an approximately 100-mile radius of the
Company's refinery. For example, in Buffalo, New York over its last five fiscal
years, the Company has experienced an approximately 2.1 cents per gallon
transportation cost advantage over those competitors who are required to ship
gasoline by pipeline and truck from New York Harbor sources to Buffalo. The
Company owns and operates the Kiantone Pipeline, a 78 mile long crude oil
pipeline which connects the refinery to Canadian, U.S. and world crude oil
sources through the Interprovincial Pipe Line/Lakehead Pipeline system ("IPL").
Utilizing the storage facilities of the pipeline, the Company is able to blend
various grades of crude oil from different suppliers, allowing it to efficiently
schedule production while managing feedstock mix and product yields in order to
optimize profitability.
In addition to its transportation cost advantage, the Company has
benefited from a reduction in regional production capacity of approximately
103,000 bpd brought about by the closure during the 1980s of two competing
refineries in Buffalo, New York, owned by Ashland Inc. and Mobil Oil
Corporation. The nearest fuels refinery is over 160 miles from Warren,
Pennsylvania and the Company believes that no significant production from such
refinery is currently shipped into the Company's primary market area. It is the
Company's view that the high construction costs and the stringent regulatory
requirements inherent in petroleum refinery operations make it uneconomical for
new competing refineries to be constructed in the Company's primary market area.
During the period from January 1, 1979 to August 31, 1997, the Company
spent approximately $205 million on capital improvements to increase the
capacity and efficiency of its refinery and to meet environmental requirements.
These capital expenditures have: (i) substantially rebuilt and upgraded the
refinery, (ii) enhanced the refinery's capability to comply with applicable
environmental regulations, (iii) increased the refinery's efficiency and (iv)
helped maximize profit margins by permitting the processing of lower cost, high
sulfur crudes.
The Company's primary market area is western New York and northwestern
Pennsylvania and its core market encompasses its Warren County base and the
eight contiguous counties in New York and Pennsylvania. The Company's retail
gasoline and merchandise sales are split approximately 60%/40% between rural and
urban markets. Margins on gasoline sales are traditionally higher in rural
markets,
41
<PAGE>
while gasoline sales volume is greater in urban markets. The Company's urban
markets include Buffalo, Rochester and Syracuse, New York and Erie,
Pennsylvania. The Company believes it has higher profitability per store than
its average convenience store competitor. In 1995, convenience store operating
profit per store averaged approximately $70,100 for the Company, as compared to
approximately $66,500 for the industry as a whole according to industry data
compiled by the NACS.
The Company is one of the largest marketers of refined petroleum
products within its core market area according to a study commissioned by the
Company from Gerke. The Company currently operates 319 retail units, of which
180 are located in New York, 127 in Pennsylvania and 12 in Ohio. The Company
owns 230 of these units. In fiscal 1997, approximately 59% of the refinery's
gasoline production was sold through the Company's retail network. In addition
to gasoline, all units sell convenience merchandise, 39 have delicatessens and
eight of the units are full-service truck stops. Customers may pay for purchases
with credit cards including the Company's own "Kwik Fill" credit card. In
addition to this credit card, the Company maintains a fleet credit card catering
to regional truck and automobile fleets. Sales of convenience products, which
tend to have constant margins throughout the year, have served to reduce the
effects of the seasonality inherent in gasoline retail margins. The Company has
consolidated its entire retail system under the Red Apple Food Mart(R) and Kwik
Fill(R) brand names, providing the chain with a greater regional brand
awareness.
Industry Overview
Worldwide demand for petroleum products rose from an average 67.6
million bpd in 1993 to 68.9 million bpd in 1994, 70.1 million bpd in 1995 and
71.7 million bpd in 1996, according to the International Energy Agency. While
much of the increase has been in developing countries, increases in demand have
also occurred in the developed industrial countries. The Company believes that
worldwide economic growth will continue to raise demand for energy and petroleum
products.
U.S. refined petroleum product demand increased in 1996 for the fifth
consecutive year. Following the economic recession and Persian Gulf War in 1990
and 1991, U.S. refined petroleum product demand increased from an average of
16.7 million bpd in 1991 to 17.7 million bpd in 1995 based on information
published by the U.S. Energy Information Administration (the "EIA") and to 18.2
million bpd in 1996 according to preliminary EIA industry statistics reported by
the Oil & Gas Journal.
The increase in U.S. refined petroleum demand is largely the result of
demand for gasoline, jet fuel and highway diesel fuel which increased from 10.0
million bpd in 1991 to 11.0 million bpd in 1995 based on industry information
reported by EIA and the Department of Transportation Federal Highway
Administration ("FHA") and to 11.2 million bpd in 1996 based on preliminary
industry statistics reported by the Oil & Gas Journal (based on information from
EIA) and the FHA. The Company believes that this is a reflection of the steady
increase in economic activity in the U.S. The U.S. vehicle fleet has grown,
miles driven per vehicle have increased and fuel efficiency has dropped as
consumers have shown an increased preference for light trucks and sport utility
vehicles. In addition, passenger seat-miles flown by domestic airlines have
increased. Gasoline demand has increased from an average of 7.2 million bpd in
1991 to 7.8 million bpd in 1995 and to 7.9 million bpd in 1996. The Company
believes that demand for transportation fuels will continue to track domestic
economic growth.
Asphalt is a residual product of the crude oil refining process which is
used primarily for construction and maintenance of roads and highways and as a
component of roofing shingles. Distribution of asphalt is localized, usually
within a distance of 150 miles from a refinery or terminal, and demand is
influenced by levels of federal, state, and local government funding for highway
construction and maintenance and by levels of roofing construction activities.
The Company believes that an ongoing need for highway maintenance and domestic
economic growth will sustain asphalt demand.
In addition, Congress recently approved legislation that shifts 4.3
cents of the federal tax on motor fuels out of the U.S. Treasury's general fund
into the Highway Trust Fund effective October 1, 1997.
42
<PAGE>
The Congressional Budget estimates that by adding revenues from 4.3 cents per
gallon tax, total tax deposits to the Highway Trust Fund will rise from $24.5
billion in 1997 to $31.4 billion in 1998. The additional tax revenues will be
split between the Trust Funds highway account and the mass transit account with
3.45 cents to highways and 0.85 cents to mass transit.
The Company believes that domestic refining capacity utilization is
close to maximum sustainable limits because of the existing high throughput
coupled with a reduction in refining capacity. The following table sets forth
selected U.S. refinery information published by the Oil & Gas Journal and EIA:
<TABLE>
<CAPTION>
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operable annual average
refining capacity
(million bpd)* 18.3 18.6 17.4 16.7 16.0 15.7 15.5 15.6 15.9 15.7 15.6 15.7 15.5 15.1 15.1 15.4 15.3
Crude input to
refineries (million bpd) 13.5 12.5 11.8 11.7 12.0 12.0 12.7 12.9 13.2 13.4 13.4 13.3 13.4 13.6 13.9 14.0 14.2
Utilization (in percent) 73.8 67.0 67.5 70.1 75.1 76.6 82.3 82.2 83.1 85.3 85.8 84.7 86.7 89.9 91.5 90.9 92.3
<FN>
* Includes operating and operable but currently shutdown refineries
</FN>
</TABLE>
Since 1990 the refining sector of the domestic petroleum industry has
been required to make significant capital expenditures, primarily to comply with
federal environmental statutes and regulations, including the Clean Air Act, as
amended ("CAA"). Capital expenditures were required to equip refineries to
manufacture cleaner burning reformulated gasoline ("RFG") and low sulfur diesel
fuel. From 1990 to 1995 refining sector capital expenditures have totaled over
$32 billion, of which approximately $15 billion, or 46%, was for environmental
compliance. The American Petroleum Institute ("API") and the Oil & Gas Journal
have estimated that the refining sector made the following capital expenditures
during such time:
<TABLE>
<CAPTION>
1990 1991 1992 1993 1994 1995 Total
---------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total capital expenditure (billions) $4.4 $6.7 $6.1 $5.4 $5.1 $4.9 $32.6
Environmental capital expenditure (billions) $1.3 $1.8 $3.3 $3.2 $3.1 $2.2 $14.9
Environmental/total 29% 27% 53% 60% 61% 45% 46%
</TABLE>
In 1996 total refining sector capital expenditures are estimated to be
approximately $3.9 billion based on information published by the Oil & Gas
Journal.
The Company believes that high utilization rates and the reduction in
refinery crude processing capacity coupled with little anticipated crude
capacity expansion is likely to result over the long term in improved operating
margins in the refining industry.
The Company is a regional refiner and marketer located primarily in
Petroleum Administration for Defense District ("PADD") I. As of January 1, 1997,
there were 17 refineries operating in PADD I with a combined crude processing
capacity of 1.5 million bpd, representing approximately 10% of U.S. refining
capacity. Petroleum product consumption in 1995 in PADD I averaged 5.3 million
bpd, representing approximately 30% of U.S. demand based on industry statistics
reported by EIA. According to the Lundberg Letter, an industry newsletter, total
gasoline consumption in the region grew by approximately 2.4% during 1995 in
response to improving economic conditions. Refined petroleum production in PADD
I is insufficient to satisfy demand for such products in the region, making PADD
I a net importer of such products.
43
<PAGE>
Business Strategy
The Company's goal is to strengthen its position as a leading producer
and marketer of high quality refined petroleum products within its primary
market area. The Company plans to accomplish this goal through continued
attention to optimizing the Company's operations at the lowest possible cost,
improving and enhancing the profitability of the Company's retail assets and
capitalizing on opportunities present in its refinery assets. More specifically,
the Company intends to:
o Maximize the transportation cost advantage afforded the Company
by its geographic location by increasing retail and wholesale
market shares within its primary market area.
o Expand sales of higher margin specialty products such as jet
fuel, premium diesel, roofing asphalt and SHRP specification
paving asphalt.
o Expand and upgrade its refinery to increase rated crude oil
throughput capacity from 65,000 bpd to 70,000 bpd, improve the
yield of finished products from crude oil inputs and lower
refinery costs through improved energy efficiency and refinery
debottlenecking.
o Optimize profitability by managing feedstock costs, product
yields, and inventories through its recently improved refinery
feedstock linear programming model and its systemwide
distribution model.
o Make capital investments in retail marketing to rebuild or
refurbish 70 existing retail units and to acquire three new
retail units. In addition, the Company plans to improve its
comprehensive retail management information system which allows
management to be informed and respond promptly to market changes,
inventory levels, and overhead variances and to monitor daily
sales, cash receipts, and overall individual location
performance.
Refining Operations
The Company's refinery is located on a 92 acre site in Warren,
Pennsylvania. The refinery has a rated capacity of 65,000 bpd of crude oil
processing. The refinery averaged saleable production of approximately 63,500
bpd during fiscal 1996 and approximately 62,600 bpd during fiscal 1997. The
Company produces three primary petroleum products: gasoline, middle distillates
and asphalt. The Company believes its geographic location in the product short
PADD I is a marketing advantage. The Company's refinery is located in
northwestern Pennsylvania and is geographically distant from the majority of
PADD I refining capacity. The nearest fuels refinery is over 160 miles from
Warren, Pennsylvania and the Company believes that no significant production
from such refinery is currently shipped into the Company's primary market area.
The refinery was established in 1902 but has been substantially rebuilt
and expanded. From January 1, 1979 to August 31, 1997, the Company spent
approximately $205 million on capital improvements to increase the capacity and
efficiency of its refinery and to meet environmental requirements. Major
investments have included the following:
o Between 1979 and 1983, the Company spent over $76 million
expanding the capacity of the refinery from 45,000 bpd to 65,000
bpd. The expansion included a new crude unit and a fluid
catalytic cracking unit. This increase in the capacity of the
refinery had the effect of reducing per barrel operating costs
and allowing the refinery to benefit from increased economies of
scale.
44
<PAGE>
o In fiscal 1987, the Company installed an isomerization unit, at a
cost of $10.1 million, which enabled the refinery to produce
higher octane unleaded gasoline.
o In fiscal 1988, the Company spent $6.1 million for the expansion
of its wastewater plant, a new electrostatic precipitator and new
fuel gas scrubbers, which allowed the refinery to meet
environmental standards for wastewater quality, particulate
emissions and sulfur dioxide emissions from refinery fuel gas.
o In fiscal 1990, the Company spent $3.3 million installing a wet
gas compressor at the fluid catalytic cracker, increasing the
refinery's gasoline production capacity.
o In fiscal 1993, a distillate hydrotreater was built to produce
low sulfur diesel fuel (less than 0.05% sulfur content) in
compliance with requirements of the CAA for the sale of on-road
diesel. This unit has a present capacity of 16,000 bpd; however,
its reactor was designed to process 20,000 bpd. In connection
with this installation, a sulfur recovery unit was built which
has the capacity of recovering up to 60 tons per day of raw
sulfur removed from refined products. In fiscal 1996 the unit was
running at approximately 60% of capacity giving the Company the
opportunity to run higher sulfur content crudes as opportunities
arise. The capital expenditures for these two projects were
approximately $42.0 million.
o In fiscal 1994, the Company spent approximately $7.4 million to
enable the refinery to produce RFG for its marketing area.
Although not currently mandated by federal law, Pennsylvania and
New York had opted into the EPA program for RFG for counties
within the Company's marketing area with an effective date of
January 1, 1995. However, both states elected to "opt out" of the
program late in December 1994. The Company believes that it will
be able to produce RFG without incurring substantial additional
fixed costs if the use of RFG is mandated in the future in the
Company's marketing area.
Products
The Company presently produces two grades of unleaded gasoline, 87
octane regular and 93 octane premium. The Company also blends its 87 and 93
octane gasoline to produce a mid-grade 89 octane. In fiscal 1997, approximately
59% of the Company's gasoline production was sold through its retail network and
the remaining 41% of such production was sold to wholesale customers.
Middle distillates include kerosene, diesel fuel, heating oil (No. 2
oil) and jet fuel. In fiscal 1997 the Company sold approximately 86% of its
middle distillate production to wholesale customers and the remaining 14% at the
Company's retail units, primarily at the Company's eight truck stops. The
Company also produces aviation fuels for commercial airlines (Jet-A) and
military aircraft (JP-8).
The Company optimizes its bottom of the barrel processing by producing
asphalt, a higher value alternative to residual fuel oil. Asphalt production as
a percentage of all refinery production has increased over the last three fiscal
years due to the Company's ability and decision to process a larger amount of
less costly higher sulfur content crudes in order to realize higher overall
refining margins.
The following table sets forth the refinery's product yield during the
four years ended August 31, 1997:
45
<PAGE>
<TABLE>
<CAPTION>
Refinery Product Yield(1)
(thousands of barrels)
Fiscal Year Ended August 31,
1994 1995 1996 1997
Volume Percent Volume Percent Volume Percent Volume Percent
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline
Regular (87 octane) 7,413 33.8% 8,770 37.0% 8,952 36.9% 9,103 38.3%
Midgrade (89 octane) -- -- 288 1.2% 249 1.0% -- --
Premium (93 octane) 2,681 12.2% 1,918 8.1% 1,741 7.2% 1,485 6.2%
Middle distillates
Kerosene 336 1.5% 322 1.4% 377 1.6% 431 1.8%
Diesel fuel 2,049 9.4% 4,195 17.7% 4,177 17.2% 4,485 18.9%
No. 2 heating oil 3,287 15.0% 1,609 6.8% 1,770 7.3% 1,509 6.3%
Jet fuel 24 0.1% 253 1.1% 445 1.8% 428 1.8%
Asphalt 3,636 16.6% 4,228 17.9% 4,479 18.5% 4,369 18.4%
Other(2) 1,437 6.6% 1,076 4.5% 1,043 4.3% 1,035 4.4%
------ ----- ------ ----- ------ ----- -------- -------
Saleable yield 20,863 95.3% 22,659 95.7% 23,233 95.8% 22,845 96.1%
Refining fuel 1,605 7.3% 1,559 6.6% 1,603 6.6% 1,496 6.3%
------ ----- ------ ----- ------- ---- ------ -----
Total product yield(3) 22,468 8 102.6% 24,218 102.3% 24,836 102.40% 1,496 6.3%
<FN>
(1) Percent yields are percentage of refinery input.
(2) Includes primarily butane, propane and sulfur.
(3) Total product yield is greater than 100% due to the processing of crude
oil into products which, in total, are less dense and therefore, have a
higher volume than the raw materials processed.
</FN>
</TABLE>
Refining Process
The Company's production of petroleum products from crude oil involves many
complex steps which are briefly summarized below.
The Company seeks to maximize refinery profitability by selecting crude oil
and other feedstocks taking into account factors including product demand and
pricing in the Company's market areas as well as price, quality and availability
of various grades of crude oil. The Company also considers product inventory
levels and any planned turnarounds of refinery units for maintenance. The
combination of these factors is optimized by a sophisticated proprietary linear
programming computer model which selects the most profitable feedstock and
product mix. The linear programming model is continuously updated and improved
to reflect changes in the product market place and in the refinery's processing
capability.
Blended crude is stored in a tank farm near the refinery which has a
capacity of approximately 200,000 barrels. The blended crude is then brought
into the refinery where it is first distilled at low pressure into its component
streams in the crude and preflash unit. This yields the following intermediate
products: light products consisting of fuel gas components (methane and ethane)
and LPG (propane and butane), naphtha or gasoline, kerosene, diesel or heating
oil, heavy atmospheric distillate and crude tower bottoms which are further
distilled under vacuum conditions to yield light and heavy vacuum distillates
and asphalt. The present capacity of the crude unit is 65,000 bpd.
The intermediate products are then processed in downstream units that
produce finished products. A naphtha hydrotreater treats naphtha with hydrogen
across a fixed bed catalyst to remove sulfur before further treatment. The
treated naphtha is then distilled into light and heavy naphtha at a
prefractionator. Light naphtha is then sent to an isomerization unit and heavy
naphtha is sent to a reformer in each case for octane enhancement. The
isomerization unit converts the light naphtha catalytically into a gasoline
component with 83 octane. The reformer unit converts the heavy naphtha into
another gasoline component with up to 94 octane depending upon the desired
octane requirement for the grade of gasoline
46
<PAGE>
to be produced. The reformer also produces as a co-product all the hydrogen
needed to operate hydrotreating units in the refinery.
Raw kerosene or heating oil is treated with hydrogen at a distillate
hydotreater to remove sulfur and make finished kerosene, jet fuels and No. 2
fuel oil. A new distillate hydrotreater built in 1993 also treats raw
distillates to produce low sulfur diesel fuel.
The long molecular chains of the heavy atmospheric and vacuum distillates
are broken or "cracked" in the fluidized catalytic cracking unit and separated
and recovered in the gas concentration unit to produce fuel gas, propylene,
butylene, LPG, gasoline, light cycle oil and clarified oil. Fuel gas is burned
within the refinery, propylene is fed to a polymerization unit which polymerizes
its molecules into a larger chain to produce an 87 octane gasoline component,
butylene is fed into an alkylation unit to produce a gasoline component and LPG
is treated to remove trace quantities of water and then sold. Clarified oil is
burned in the refinery or sold. Various refinery gasoline components are blended
together in refinery tankage to produce 87 octane and 93 octane finished
gasoline. Likewise, light cycle oil is blended with other distillates to produce
low sulfur diesel and No. 2 fuel oil.
Although the major components of the downstream units are capable of
producing finished products based on an 80,000 bpd crude rate the 65,000 bpd
rated capacity of the crude unit currently limits sustainable crude oil input to
that level or less. The Company intends to use a portion of the proceeds of the
Private Offering to expand the capacity of the crude unit to 70,000 bpd. The
Company's refining configuration allows the processing of a wide variety of
crude oil inputs. Historically, its inputs have been of Canadian origin and
range from light low sulfur (38 degrees API, 0.5% sulfur) to high sulfur heavy
asphaltic (25 degrees API, 2.8% sulfur). The Company's ability to market asphalt
enables it to purchase selected heavier crudes at a lower cost.
47
<PAGE>
Set forth below is a diagram which outlines the major steps and components
of the Company's refining process.
Diagram outlines the major steps and components of the Company's refining
process.
48
<PAGE>
Supply of Crude Oil
Even though the Company's crude supply is currently nearly all Canadian, the
Company is not dependent on this source alone. Within 60 days, the Company could
shift up to 85% of its crude oil requirements to some combination of domestic
and offshore crude. With additional time, 100% of its crude requirements could
be obtained from non-Canadian sources. The Company utilizes Canadian crude
because it affords the Company the highest refining margins currently available.
The Company's contracts with its crude suppliers are on a month-to-month
evergreen basis, with 30-to-60 day cancellation provisions. As of August 31,
1997 the Company had supply contracts with 18 different suppliers for an
aggregate of 59,200 bpd of crude oil. The Company's contracts with Husky Trading
Company and Pancanadian Petroleum Limited covered an aggregate of 13,500 and
12,000 bpd, respectively. As of such date the Company had no other contract
covering more than 10% of its crude oil supply.
The Company accesses crude through the Kiantone Pipeline, which connects
with the IPL in West Seneca, New York which is near Buffalo. The IPL provides
access to most North American and foreign crude oils through three primary
routes: (i) Canadian crude is transported eastward from Alberta and other points
in Canada along the IPL; (ii) various mid-continent crudes from Texas, Oklahoma
and Kansas are transported northeast along the Cushing-Chicago Pipeline, which
connects to the IPL at Griffith, Indiana; and (iii) foreign crudes unloaded at
the Louisiana Offshore Oil Port are transported north via the Capline and
Chicago pipelines which connect to the IPL at Mokena, Illinois.
The Kiantone Pipeline, a 78-mile Company-owned and operated pipeline,
connects the Company's West Seneca, New York terminal at the pipeline's northern
terminus to the refinery's tank farm at its southern terminus. The Company
completed construction of the Kiantone Pipeline in 1971 and has operated it
continuously since then. The Company is the sole shipper on the Kiantone
Pipeline, and can currently transport up to 68,000 bpd along the pipeline. The
pipeline's flow rate can be increased to approximately 72,000 bpd through the
injection of surfactants into the crude being transported. The Company believes
that the cost of the surfactants required to increase pipeline flow to 70,000
bpd would be approximately $0.2 million per annum. Additional increases in flow
rate to a maximum rate of 80,000 bpd are possible with the installation of pumps
along the pipeline at an estimated cost of $2.6 million. The Company's right to
maintain the pipeline is derived from approximately 265 separate easements,
right-of-way agreements, licenses, permits, leases and similar agreements.
The pipeline operation is monitored by a computer located at the refinery.
Shipments of crude arriving at the West Seneca terminal are separated and stored
in one of the terminal's three storage tanks, which have an aggregate storage
capacity of 485,000 barrels. The refinery tank farm has two additional crude
storage tanks with a total capacity of 200,000 barrels. An additional 35,000
barrels can be stored at the refinery.
Turnarounds
Turnaround cycles vary for different refinery units. A planned turnaround of
each of the two major refinery units--the crude unit and the fluid catalytic
cracking unit--is conducted approximately every three or four years, during
which time such units are shut down for internal inspection and repair. A
turnaround, which generally takes two to four weeks to complete in the case of
the two major refinery units, consists of a series of moderate to extensive
maintenance exercises. Turnarounds are planned and accomplished in a manner that
allows for reduced production during maintenance instead of a complete plant
shutdown. The Company completed its latest turnarounds of the crude unit and the
fluid catalytic cracking unit in March 1994 and April 1994, respectively, and is
scheduled to complete turnarounds for the fluid catalytic cracking unit in the
fall of 1997 and the crude unit in the spring of 1998 during which times it
intends to complete certain of the projects to be financed with the proceeds of
the Private Offering. The Company accrues on a monthly basis a charge for the
maintenance work to be conducted as part of turnarounds of major units. The
costs of turnarounds of other units are expensed as incurred.
49
<PAGE>
It is anticipated that the turnarounds to be conducted in the fall of 1997 and
spring of 1998 will cost approximately $7.0 million, exclusive of projects to be
financed with the proceeds of the Private Offering. The Company began accruing
charges for the 1997 and 1998 turnarounds in May 1994.
Refinery Expansion and Improvement
The Company intends to use approximately $14.8 million of the proceeds of
the Private Offering over the next two years to expand and upgrade its refinery
to increase rated crude oil throughput capacity from 65,000 to 70,000 bpd,
improve the yield of finished products from crude inputs and lower refinery
costs. Each of the key projects was selected because the Company believes that
it has a relatively rapid pay back rate and improves profitability at low as
well as high crude throughput rates.
The Company anticipates that the total completion time for the projects will
be two years. Most of the projects are scheduled to coincide with the
turnarounds planned for the fall of 1997 and spring of 1998. The key projects
are: (i) the addition of convection sections to two existing furnaces for energy
savings, (ii) the installation of a new vacuum tower bottoms exchanger to
recover waste heat, (iii) the replacement of the fluid catalytic cracker feed
nozzle to improve product yield, (iv) the modification of the reformer for low
pressure operation to improve product yield, (v) the modification of the
alkylation unit to improve efficiency, (vi) the installation of advanced
computer controls for the crude unit and fluid catalytic cracking unit to
improve product yield and reduce operating expense and (vii) modifications to
two boilers, water wash tower and compressor to improve product yield and reduce
operating expense.
Marketing and Distribution
General
The Company has a long history of service within its market area. The
Company's first retail service station was established in 1927 near the Warren
refinery and over the next seventy years its distribution network has steadily
expanded. Major acquisitions of competing retail networks occurred in 1983, with
the acquisition of 78 sites from Ashland Oil Company and in 1989 to 1991, with
the acquisition of 53 sites from Sun Oil Company and Busy Bee Stores, Inc.
The Company maintains an approximate 60/40% split between sales at its rural
and urban units. The Company believes this to be advantageous, balancing the
higher gross margins often achievable due to decreased competition in rural
areas with higher volumes in urban areas. The Company believes that its rural
convenience store units provide an important alternative to traditional grocery
store formats. In fiscal 1997, approximately 59% and 21% of the Company's
gasoline and diesel fuel production, respectively, was sold through this retail
network.
Retail Operations
The Company operates a retail marketing network that includes 319 retail
units, of which 180 are located in western New York, 127 in northwestern
Pennsylvania and 12 in east Ohio. The Company owns 230 of these units. Gasoline
at these retail units is sold under the brand name "Kwik Fill". Most retail
units operate under the brand name Red Apple Food Mart(R). The Company believes
that Red Apple Food Mart(R) and Kwik Fill(R) are well-recognized names in the
Company's marketing areas. The Company believes that the operation of its retail
units provides it with a significant advantage over competitors that operate
wholly or partly through dealer arrangements because the Company has greater
control over pricing and operating expenses, thus establishing a potential for
improved margins.
The Company classifies its stores into four categories: convenience stores,
limited gasoline stations, truck stop facilities and other stores. Full
convenience stores have a wide variety of foods and beverages and self-service
gasoline. Thirty-nine of such units also have delicatessens where food
(primarily submarine sandwiches, pizza, chicken and lunch platters) is prepared
on the premises for retail sales and
50
<PAGE>
also distribution to other nearby Company units which do not have in-store
delicatessens. Mini convenience stores sell snacks and beverages and
self-service gasoline. Limited gasoline stations sell gasoline as well as oil
and related car care products and provide full service for gasoline customers.
They also sell cigarettes, candy and beverages. Truckstop facilities sell
gasoline and diesel fuel on a self-service and full-service basis. All
truckstops include either a full or mini convenience store. Four of the
truckstops include either an expanded delicatessen area with seating or an
on-site restaurant and shower facilities. In addition, two of the truck stops
have stand alone restaurants and one has a truck repair garage. These three
facilities are classified separately in the table below as "other stores." As of
August 31, 1997, the average sales areas of the Company's convenience stores,
limited gasoline stations, truckstops and other stores were 700, 200, 1,140 and
2,520 square feet, respectively.
The table below sets forth certain information concerning the stores as of
and for the fiscal year ended August 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
Average Monthly Average Monthly Average Monthly
Gasoline Gallonage Diesel Fuel Gallonage Merchandise Sales
(Thousands) (Thousands) (Thousands)
Store Format and Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
Number of Stores August 31, August 31, August 31,
at August 31, 1997 1995 1996 1997 1995 1996 1997 1995 1996 1997
- ------------------ ----------------------- -------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Convenience (185) 12,764 12,554 12,034 302 345 335 $4,636 $4,671 $4,888
Limited Gasoline
Stations (123) 9,902 9,734 9,275 165 177 190 699 749 792
Truck Stops (8) 622 586 573 2,907 2,916 2,837 375 377 349
Other Stores(3) 0 0 0 0 0 0 174 176 176
------ ------ ------ ------ ------ ------ ------ ------ ------
Total (319) 23,288 22,874 21,882 3,374 3,438 3,362 $5,884 $5,973 $6,205
</TABLE>
The Company's strategy has been to maintain diversification between
rural and urban markets within its region. Retail gasoline and merchandise sales
are split approximately 60%/40% between rural and urban markets. Margins on
gasoline sales are traditionally higher in rural markets, while gasoline sales
volume is greater in urban markets. In addition, more opportunities for
convenience store sales have arisen with the closing of local independent
grocery stores in the rural areas of New York and Pennsylvania. The Company
believes it has higher profitability per store than its average convenience
store competitor. In 1995, convenience store operating profit per store averaged
approximately $70,100 for the Company, as compared to approximately $66,500 for
the industry as a whole, according to industry data compiled by the NACS.
Total merchandise sales for fiscal year 1997 were $74.5 million, with a
gross profit of approximately $22.3 million. Over the last five fiscal years,
merchandise gross margins have averaged approximately 30% and the Company
believes that merchandise sales will continue to remain a stable source of gross
profit.
Merchandise Supply
The Company's primary merchandise vendor is Tripifoods, which is
located in Buffalo, New York. During fiscal 1997, the Company purchased
approximately 47% of its convenience merchandise from this vendor. Tripifoods
supplies the Company with tobacco products, candy, deli foods, grocery, health
and beauty products, and sundry items on a cost plus basis for resale. The
Company also purchases dairy products, beer, soda, snacks, and novelty goods
from direct store vendors for resale. The Company annually reviews its
suppliers' costs and services versus those of alternate suppliers. The Company
believes that alternative sources of merchandise supply at competitive prices
are readily available.
51
<PAGE>
Location Performance Tracking
The Company maintains a store tracking mechanism whereby transmissions
are made five times a week to collect operating data including sales and
inventory levels. Data transmissions are made using either hand held
programmable data collection units or personal computers which are available at
each location. Once verified, the data interfaces with a variety of retail
accounting systems which support daily, weekly and monthly performance reports.
These different reports are then provided to both the field management and
office staff. Following significant capital improvements, management closely
tracks "before and after" performance, to observe the return on investment which
has resulted from the improvements.
Capital Improvement Program
The Company intends to use approximately $20.0 million of the proceeds
of the Private Offering over the next two years to rebuild or refurbish 70
existing retail units and to acquire three new retail units. The program targets
approximately 60% of the funds to units within 100 miles of the refinery,
thereby taking advantage of the Company's transportation cost advantage.
Management believes that these capital improvements will enable the Company's
retail network to absorb through retail sales at Company-operated units a
majority of the additional gasoline and diesel production resulting from the
concurrent refinery upgrade with the remaining production being sold to
wholesale customers.
In developing its retail capital improvement program, the Company
considered and evaluated over 90 units. For each location the Company generally
made sales and expense projections in comparison to the Company's five year
historical average performance for similar facilities based on geographic
proximity or type of location or both. In some cases only projected gasoline
increases were considered. In all cases the incremental profitability was
calculated using the 1996 average margins on petroleum and merchandise specific
to a given site. All projects were then ranked based on the projected return on
investment. While the retail projects include the Company's entire marketing
area, the greatest emphasis has been placed on units closest to the refinery.
The substantial majority of the capital to be expended in the program
involves the rebuilding or refurbishment of existing facilities, including the
enhancement of existing stores and the upgrading of petroleum dispensing units.
Rebuilds include the development of previously undeveloped properties,
as well as the total removal of existing facilities for replacement with
efficient, modern and "sales smart" facilities. Generally, rebuilt structures
will be in one of two styles which have previously been used by the Company and
have resulted in improved sales performance. The plan incorporates 31 rebuild
projects. The construction cycle is expected to accommodate 15 to 16 rebuilds
during each building season and hence is expected to be completed within two
years after the consummation of the Private Offering. Nine projects involve
improvements to existing facilities, such as enhancements to sales counters,
flooring, ceilings, lighting and windows and the addition of more coolers and
freezers, rather than complete rebuilds. Some projects are limited to the
confines of the existing marketing area while others convert unused space to
additional marketing area. In some cases an addition to the existing building
will be made. All refurbishment projects are expected to be completed in the 12
months after consummation of the Private Offering.
Petroleum upgrades include the removal of existing petroleum dispensing
equipment, the repositioning of the dispensing area for optimal visibility,
accessibility and throughput, the installation of new petroleum dispensing
equipment and the installation of a custom canopy which is designed and sized
according to the number of dispensers and fueling positions that it will cover
and which is equipped with improved lighting to enhance the visibility and
appeal of the unit. The petroleum dispensing units to be installed have multiple
product dispensers with six hoses per unit (three per side) offering three
52
<PAGE>
grades of product. The dispensers are capable of offering several marketing
enhancements, such as built-in credit card readers, cash acceptors, video
advertising and fuel blending.
The petroleum upgrades will be performed simultaneously with the
underground storage tank upgrades which must be completed prior to December 22,
1998. The Company estimates that about 50% of the petroleum upgrades will be
performed within 12 months after the consummation of the Private Offering and
the remaining upgrades will be completed within the following 12 months.
Wholesale Marketing and Distribution
The Company sold in fiscal year 1997, on a wholesale basis,
approximately 42,600 bpd of gasoline, distillate and asphalt products to
distributor, commercial and government accounts. In addition, the Company sells
1,000 bpd of propane to liquified petroleum gas marketers. In fiscal 1997, the
Company's output of gasoline, distillate and asphalt sold at wholesale was 41%,
86% and 100%, respectively. The Company sells 97% of its wholesale gasoline and
distillate products from its Company-owned and operated product terminals. The
remaining 3% is sold through six third-party exchange terminals located in East
Freedom, Pennsylvania; Rochester, Syracuse, Vestal and Brewerton, New York; and
Niles, Ohio.
The Company's wholesale gasoline customer base includes 62 branded
dealer/distributor units operating under the Company's proprietary "Keystone"
brand name. Long-term Keystone dealer/distributor contracts accounted for
approximately 12% of the Company's wholesale gasoline sales in fiscal 1997.
Supply contracts generally range from three to five years in length, with
Keystone branded prices based on the prevailing Company wholesale rack price in
Warren.
The Company believes that the location of its refinery provides it with
a transportation cost advantage over its competitors which is significant within
an approximately 100-mile radius of the Company's refinery. For example, in
Buffalo, New York over its last five fiscal years, the Company has experienced
an approximately 2.1 cents per gallon transportation cost advantage over those
competitors who are required to ship gasoline by pipeline and truck from New
York Harbor sources to Buffalo. In addition to this transportation cost
advantage, the Company's proximity to local accounts allows it a greater range
of shipment options, including the ability to deliver truckload quantities of
approximately 200 barrels versus much larger 25,000 barrel pipeline batch
deliveries, and faster response time, which the Company believes help it provide
enhanced service to its customers.
The Company's ability to market asphalt is critical to the performance
of its refinery, since such marketing ability enables the Company to process
lower cost higher sulfur content crude oils which in turn affords the Company
higher refining margins. Sales of paving asphalt generally occur during the
summer months due primarily to weather conditions. In order to maximize its
asphalt sales, the Company has made substantial investments to increase its
asphalt storage capacity through the installation of additional tanks, as well
as through the purchase or lease of outside terminals. Partially mitigating the
seasonality of the asphalt paving business is the Company's ability to sell
asphalt year-round to roofing shingle manufacturers, which accounted for
approximately 23% of its total asphalt sales over the Company's last five fiscal
years. In fiscal 1997, the Company sold 4.7 million barrels of asphalt while
producing 4.4 million barrels. The refinery was unable to produce enough asphalt
to satisfy the demand and, therefore, purchased 300,000 barrels for resale at a
profit.
The Company has a significant share of the asphalt market in the cities
of Pittsburgh, Pennsylvania and Rochester and Buffalo, New York. The Company
distributes asphalt from the refinery by railcar and truck transport to its
owned and leased asphalt terminals in such cities or their suburbs. The Company
also operates a terminal at Cordova, Alabama giving it a presence in the
Southeast. Asphalt can be purchased in the Gulf Coast area and delivered by
barge to third party or Company-owned terminals near Pittsburgh. The Company's
wide asphalt terminal network allows the Company to enter into product exchanges
between units, as a means to balance supply and demand.
53
<PAGE>
The Company uses a network of eight terminals to store and distribute
refined products. The Company's gasoline, distillate and asphalt terminals and
their respective capacities in barrels as of August 31, 1997 were as follows:
<TABLE>
<CAPTION>
Gasoline Distillate Asphalt Total
Terminal Location Capacity Capacity Capacity Capacity
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Warren, Pennsylvania 697,000 451,000 1,004,000 2,152,000
Tonawanda, New York 60,000 190,000 75,000 325,000
Rochester, New York -- 190,000 -- 190,000
Pittsford, New York* -- -- 170,000 170,000
Springdale, Pennsylvania -- -- 130,000 130,000
Dravosburg, Pennsylvania* -- -- 100,000 100,000
Cordova, Alabama -- -- 200,000 200,000
Butler, Pennsylvania -- -- 10,000 10,000
--------- --------- --------- ---------
Total 757,000 831,000 1,689,000 3,277,000
======= ======= ========= =========
<FN>
* Leased
</FN>
</TABLE>
During fiscal 1997, approximately 90% of the Company's refined products
were transported from the refinery to retail units, wholesale customers and
product storage terminals via truck transports, with the remaining 10%
transported by rail. The majority of the Company's wholesale and retail gasoline
distribution is handled by common carrier trucking companies at competitive
costs. The Company also operates a fleet of eight gasoline tank trucks that
supply approximately 20% of its Kwik Fill retail stations.
Product distribution costs to both retail units and wholesale accounts
are minimized through product exchanges. Through these exchanges, the Company
has access to product supplies at 34 terminals located throughout the Company's
retail market area. The Company seeks to minimize retail distribution costs
through the use of a system wide distribution model.
Environmental Considerations
General
The Company is subject to federal, state and local laws and regulations
relating to pollution and protection of the environment such as those governing
releases of certain materials into the environment and the storage, treatment,
transportation, disposal and clean-up of wastes, including, but not limited to,
the Federal Clean Water Act, as amended, the CAA, the Resource Conservation and
Recovery Act of 1976, as amended, Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended ("CERCLA"), and analogous
state and local laws and regulations.
Pennsylvania DER Action Under Clean Streams Law
and Storage Tank and Spill Prevention Act
The Company believes that its refinery and other operations are in
substantial compliance with all applicable environmental requirements including
those relating to wastewater discharge, particulate emissions, sulfur in fuel
gas, vapor recovery at the loading rack, volatile organic compounds and solid
waste. However, the Company has entered into a Consent Order and Agreement with
the Pennsylvania Department of Environmental Resources (the "DER") under the
Clean Streams Law and the Storage Tank and Spill Prevention Act to, among other
things, perform ongoing investigations to define the extent, if any, of on-site
ground water contamination at its refinery and to remove and contain any such
contamination. The Company is currently conducting groundwater remediation
on-site. DER has
54
<PAGE>
extended the investigation to adjacent properties. The Company initially
contested such investigation to adjacent properties, but the Company withdrew
its objection. In addition, in 1996, the DER issued a notice of violation
requiring the Company to install vapor controls on the refinery's API separator,
which the Company intends to install in calendar 1997 at a cost of approximately
$150,000.
EPA Action Under CERCLA
The Company has been identified by the EPA as a potentially responsible
party ("PRP") under CERCLA with respect to the Pollution Abatement Services Site
in Oswego, New York, the Batavia Landfill Site in Batavia, New York and the
Frontier Chemical Superfund Site in Niagara Falls, New York based on the alleged
shipment of materials to them by the Company. Based upon available information,
including the substantial number of other PRPs and the relatively small share of
costs expected to be allocated to it, the Company does not believe that any
ultimate liability relating to those sites will be material.
Pennsylvania Environmental Defense Foundation
Action Under Federal Water Pollution Control Act
In 1995, the Pennsylvania Environmental Defense Foundation ("PEDF")
commenced a lawsuit in the United States District Court for the Western District
of Pennsylvania under the Federal Water Pollution Control Act, as amended,
against the Company alleging ongoing violations of discharge limits in the
Company's waste-water discharge permit on substances discharged to the Allegheny
River at its refinery in Warren, Pennsylvania. PEDF seeks to enjoin the alleged
ongoing violations, an assessment of civil penalties up to $25,000 per day per
violation, and an award of attorneys' fees. The Company's motion for summary
judgment seeking dismissal of the action was denied. Based upon available
information, however, and its belief that the discharges are in substantial
compliance with applicable requirements, the Company believes this action will
not result in any material adverse effect upon its operations or consolidated
financial condition.
Potential Effect on the Company of
Environmental Claims
Based on its experience to date, the Company believes that none of the
above matters or any future costs of compliance with existing environmental
protection law and health and safety laws and regulations or liability for other
known environmental claims, will have a material adverse effect on the Company's
business and consolidated financial condition. However, the actual costs
associated with known requirements could be substantial and future events, such
as the discovery of presently unknown environmental conditions and changes in
existing laws and regulations or their interpretation or more vigorous
enforcement policies of regulatory agencies, may give rise to additional
expenditures or liabilities that could be material to the Company's business and
consolidated financial condition.
The Clean Air Act Amendments of 1990
In 1990 the CAA was amended to greatly expand the role of the
government in controlling product quality. The legislation included provisions
that have significantly impacted the manufacture of both gasoline and diesel
fuel including the requirement for significantly lower sulfur content and a
limit on aromatics content in diesel fuel. The Company is able to satisfy these
requirements.
Diesel Fuel Sulfur and Aromatics Content
The EPA issued rules under the CAA which became effective in October
1993 which limit the sulfur and aromatics content of diesel fuels nationwide.
The rules required refiners to reduce the sulfur in on-highway diesel fuel from
0.5 Wt.% to 0.05 Wt.%. The Company meets these specifications of the CAA for all
of its on-highway diesel production.
55
<PAGE>
The Company's on-road diesel represented 73% of its total distillate
sales in fiscal 1997. Since the reduction of sulfur in diesel required some new
investment at most refineries, a two-tier market has developed in distillate
sales. Due to capital constraints and timing issues, as well as strategic
decisions not to invest in diesel fuel desulfurization, some other refineries
are unable to produce specification highway diesel.
Reformulated Gasoline
The CAA requires that by January 1, 1995 RFG be sold in the nine worst
ozone non-attainment areas of the U.S. None of these areas is within the
Company's marketing area. However, the CAA enabled the EPA to specify 87 other,
less serious ozone non-attainment areas that could opt into this program. In
1994, the Company spent approximately $7.4 million to enable its refinery to
produce RFG for its marketing area because the Governors of Pennsylvania and New
York had opted into the RFG program. In December 1994 such states elected to
"opt out" of the program.
The CAA also contains provisions requiring oxygenated fuels in carbon
monoxide non-attainment areas to reduce pollution. There are currently no carbon
monoxide non-attainment areas in the Company's primary marketing area.
Conventional Gasoline Quality
In addition to reformulated and oxygenated gasoline requirements, the
Environmental Protection Agency has promulgated regulations under the CAA which
relate to the quality of "conventional" gasoline and which require expanded
reporting of the quality of such gasoline by refiners. Substantially all of the
Company's gasoline sales are of conventional gasoline. The Company closely
monitors the quality of the gasoline it produces to assure compliance at the
lowest possible cost with CAA regulations.
Underground Storage Tank Upgrade
The Company is currently undergoing a tank replacement/retrofitting
program at its retail units to comply with regulations promulgated by the EPA.
These regulations require new tanks to meet all performance standards at the
time of installation. Existing tanks can be upgraded to meet such standards. The
upgrade requires retrofitting for corrosion protection (cathodic protection,
interior lining or a combination of the two), spill protection (catch basins to
contain spills from delivery hoses) and overfill protection (automatic shut off
devices or overfill alarms). As of August 31, 1997, approximately 65% of the
total sites had been completed, and the Company expects to be in total
compliance with the regulations by the December 22, 1998 mandated deadline. As
of August 31, 1997 the total remaining cost of the upgrade was estimated to be
$3.3 million.
Legal Proceedings
For information regarding the lawsuit commenced against the Company by
the PEDF, see "- Environmental Considerations - Pennsylvania Environmental
Defense Fund Action Under Federal Water Pollution Control Act" which is
incorporated herein by reference.
From time to time, the Company and its subsidiaries are parties to
various legal proceedings that arise in the ordinary course of the Company's
business, including various administrative proceedings relating to federal,
state and local environmental matters. The Company's management believes that if
the legal proceedings in which the Company is currently involved were determined
against the Company, they would not have a material adverse effect on the
Company's consolidated results of operations or financial condition.
56
<PAGE>
Competition
Petroleum refining and marketing is highly competitive. The Company's
major retail competitors include British Petroleum, Citgo, Amerada Hess, Mobil
and Sun Oil Company. With respect to wholesale gasoline and distillate sales,
the Company competes with Sun Oil Company, Mobil and other major refiners. The
Company primarily competes with Marathon Oil Company and Ashland Oil Company in
the asphalt market. Many of the Company's principal competitors are integrated
multinational oil companies that are substantially larger and better known than
the Company. Because of their diversity, integration of operations, larger
capitalization and greater resources, these major oil companies may be better
able to withstand volatile market conditions, compete on the basis of price and
more readily obtain crude oil in times of shortages.
The principal competitive factors affecting the Company's refining
operations are crude oil and other feedstock costs, refinery efficiency,
refinery product mix and product distribution and transportation costs. Certain
of the Company's larger competitors have refineries which are larger and more
complex and, as a result, could have lower per barrel costs or higher margins
per barrel of throughput. The Company has no crude oil reserves and is not
engaged in exploration. The Company believes that it will be able to obtain
adequate crude oil and other feedstocks at generally competitive prices for the
foreseeable future.
The withdrawal of retail marketing operations in New York in the early
1980's by Ashland, Texaco, Gulf and Exxon significantly reduced competition from
major oil companies in New York and substantially enhanced the Company's market
position. The Company believes that the high construction costs and stringent
regulatory requirements inherent in petroleum refinery operations makes it
uneconomical for new competing refineries to be constructed in the Company's
primary market area. The Company believes that the location of its refinery
provides it with a transportation cost advantage over its competitors, which is
significant within an approximately 100-mile radius of the Company's refinery.
For example, in Buffalo, New York over the last five fiscal years, the Company
has experienced an approximately 2.1 cents per gallon transportation cost
advantage over those competitors who are required to ship gasoline by pipeline
and truck from New York Harbor sources to Buffalo.
The principal competitive factors affecting the Company's retail
marketing network are location of stores, product price and quality, appearance
and cleanliness of stores and brand identification. Competition from large,
integrated oil companies, as well as from convenience stores which sell motor
fuel, is expected to continue. The principal competitive factors affecting the
Company's wholesale marketing business are product price and quality,
reliability and availability of supply and location of distribution points.
Employees
As of August 31, 1997 the Company had approximately 1,706 full-time and
1,359 part-time employees. Approximately 2,473 persons were employed at the
Company's retail units, 551 persons at the Company's refinery, 53 at the
Kiantone pipeline and at terminals operated by the Company and the balance at
the Company's corporate offices in Warren, Pennsylvania. The Company has entered
into collective bargaining agreements with International Union of Operating
Engineers Local No. 95, United Steel Workers of America Local No. 2122-A, the
International Union of Plant Guard Workers of America Local No. 502 and General
Teamsters Local Union No. 397 covering 196, 6, 23 and 17 employees,
respectively. The agreements expire on February 1, 2001, January 31, 2000, June
25, 1999 and July 31, 2000, respectively. The Company believes that its
relationship with its employees is good.
Intellectual Property
The Company owns various federal and state service marks used by the
Company, including Kwik-Fill(R), United(R) and Keystone(R). The Company has
obtained the right to use the Red Apple Food
57
<PAGE>
Mart(R) service mark to identify its retail units under a royalty-free,
nonexclusive, nontransferable license from Red Apple Supermarkets, Inc., a
corporation which is indirectly wholly owned by John A. Catsimatidis, the sole
stockholder, Chairman of the Board and Chief Executive Officer of the Company.
The license is for an indefinite term. The licensor has the right to terminate
this license in the event that the Company fails to maintain quality acceptable
to the licensor. The Company licenses the right to use the trademark Keystone(R)
to approximately 62 independent distributors on a non-exclusive royalty-free
basis for contracted wholesale sales of gasoline and distillates.
The Company does not own any patents. Management believes that the
Company does not infringe upon the patent rights of others nor does the
Company's lack of patents have a material adverse effect on the business of the
Company.
Insurance
The Company maintains a full schedule of insurance coverage, including
property insurance, business interruption insurance and general liability
insurance. The property insurance policy has a combined loss limit for property
loss at the Company's refinery and business interruption of $249 million in
excess of (i) a $1 million self-insured retention and (ii) a deductible, which
in the case of property insurance is $250,000, and in the case of business
interruption insurance is an amount equal to lost profits for a period of five
days. The Company's primary liability coverage has a limit of $1 million per
occurrence with a $150,000 self-insured retention on the refinery operations and
a $50,000 self-insured retention on the retail operations. In addition to the
primary coverage the Company carries another $50 million of umbrella liability
insurance coverage. The Company also carries other insurance customary in the
industry.
Properties
The Company owns a 92-acre site in Warren, Pennsylvania upon which it
operates its refinery. The site also contains a building housing the Company's
principal executive offices.
The Company owns various real property in the states of Pennsylvania,
New York and Ohio upon which it operates 230 retail units and two crude oil and
six refined product storage terminals. The Company also owns the 78 mile long
Kiantone Pipeline, a pipeline which connects a crude oil storage terminal to the
refinery's tank farm. The Company's right to maintain the pipeline is derived
from approximately 265 separate easements, right-of-way agreements, leases,
permits, and similar agreements. The Company also has easements, right-of-way
agreements, leases, permits and similar agreements which would enable the
Company to build a second pipeline on property contiguous to the Kiantone
Pipeline.
The Company also leases an aggregate of 89 sites in Pennsylvania, New
York and Ohio upon which it operates retail units. As of August 31, 1997, the
leases had an average remaining term of 38 months, exclusive of option terms.
Annual rents on such retail units range from $2,400 to $74,500.
58
<PAGE>
MANAGEMENT
Directors and Officers
The directors and executive officers of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Director Position
Since
<S> <C> <C> <C>
John A. Catsimatidis 49 1986 Chairman of the Board, Chief Executive Officer and Director
Myron L. Turfitt 45 1988 President, Chief Operating Officer and Director
Thomas C. Covert 63 1988 Vice Chairman and Director
Ashton L. Ditka 56 --- Senior Vice President--Marketing
Thomas E. Skarada 54 --- Vice President--Refining
Frederick J. Martin, Jr. 43 --- Vice President--Supply and Transportation
James E. Murphy 52 --- Vice President and Chief Financial Officer
John R. Wagner 38 --- Vice President--General Counsel and Secretary
Dennis E. Bee, Jr. 55 --- Treasurer
Martin R. Bring 54 1988 Director
Evan Evans 71 1997 Director
Kishore Lall 50 1997 Director
Douglas Lemmonds 50 1997 Director
Andrew Maloney 65 1997 Director
Dennis Mehiel 54 1997 Director
</TABLE>
John A. Catsimatidis has been Chairman of the Board and Chief Executive
Officer of the Company since February 1986, when his wholly-owned company,
United Acquisition Corp., purchased the parent of the Company. He also served as
President of the Company from February 1986 until September 1996. He also serves
as Chairman of the Board, Chief Executive Officer, President, and was the
founder of Red Apple Group, Inc. (a holding company for certain businesses,
including corporations which operate supermarkets in New York); Chief Executive
Officer and Director of Sloan's Supermarkets, Inc., a public company whose
common stock is listed on the American Stock Exchange and operates supermarkets
in New York; a director of News Communications, Inc., a public company whose
stock is traded over-the-counter; and Fonda Paper Company, Inc., a privately
held company.
Myron L. Turfitt has been President and Chief Operating Officer of the
Company since September 1996. From June 1987 to September 1996 he was Chief
Financial Officer and Executive Vice President of the Company. From August 1983
until June 1987 he was Senior Vice President--Finance and from July 1981 to
August 1983, Mr. Turfitt held the position of Vice President, Accounting and
Administration. Mr. Turfitt is a CPA with over 22 years of financial and
operations experience in all phases of the petroleum business including
exploration and production, refining and retail marketing. His experience covers
both fully-integrated major oil companies and large independents.
Thomas C. Covert has been Vice Chairman of the Company since September
1996. From December 1987 to September 1996 he was Executive Vice President and
Chief Operating Officer of the Company and from June 1986 to December 1987 he
was Executive Vice President--Manufacturing of the Company. Mr. Covert was
Executive Vice President of Prudential Energy Company from 1983 until June 1986.
Prior thereto Mr. Covert was Vice President--Refining of Coastal Corporation.
Mr. Covert is a petroleum expert with over 35 years of experience in the
international and domestic petroleum industry. He is experienced in all phases
of integrated oil company operations including crude oil and gas production,
refining, marketing, marine and pipeline.
59
<PAGE>
Ashton L. Ditka has been Senior Vice President--Marketing of the
Company since July 1990. From December 1989 to July 1990 he was Vice
President--Wholesale & Retail Marketing and from August 1976 until December 1989
he was Vice President--Wholesale Marketing. Mr. Ditka has over 30 years of
experience in the petroleum industry, including 11 years in retail marketing
with Atlantic Richfield Company.
Thomas E. Skarada has been Vice President--Refining of the Company
since February 1996. From September 1994 to February 1996 he was Assistant Vice
President--Refining and from March 1993, when he joined the Company, to
September 1994 he was Director of Regulatory Compliance. From March 1992 to
March 1993, he was a consultant with Muse, Stancil and Co., in Dallas, Texas.
Over his 30 year refining and marketing career, Mr. Skarada has worked in
virtually every segment of the downstream business including supply,
distribution, refinery operations, economics, planning, research and
development, including 18 years of managerial experience with Sun Refining and
Marketing Co.
Frederick J. Martin, Jr. has been Vice President--Supply and
Transportation of the Company since February 1993. From 1980 to January 1993 he
held other positions in the Company involving transportation, product supply,
crude supply and pipeline and terminal administration.
James E. Murphy has been Chief Financial Officer of the Company since
January 1997. He was Vice President--Finance from April 1995 to December 1996
and since May 1982 has held other accounting and internal auditing positions
with the Company, including Director of Internal Auditing since April 1986.
Prior to joining the Company, Mr. Murphy had over 10 years experience in
accounting and auditing with banking, public accounting and manufacturing
companies.
John R. Wagner has been Vice President--General Counsel and Secretary
of the Company since August 1997. Prior to joining the Company, Mr. Wagner
served as Counsel to Dollar Bank, F.S.B. from 1988 until assuming his current
position.
Dennis E. Bee, Jr. has been Treasurer of the Company since May 1988.
Prior thereto and since he joined the Company in 1977, Mr. Bee held various
positions in the accounting department including Assistant Treasurer from July
1982 to May 1988.
Martin R. Bring has been a member of the law firm of Lowenthal, Landau,
Fischer & Bring, P.C., New York, New York since 1978. He also serves as a
Director for both The He-Ro Group, Ltd., an apparel manufacturer and Sloan's
Supermarkets, Inc., a supermarket chain.
Evan Evans has been the Chairman of Holvan Properties, Inc., a
privately owned petroleum industry consulting firm since 1983. He is also a
director of U.S. Energy Systems, Inc., a public company whose common stock is
quoted on the Nasdaq SmallCap Market, and of Alexander-Allen, Inc., a privately
owned company which owns a refinery in Alabama which is currently shut down. He
has been a director of both of these companies since 1994.
Kishore Lall is an independent consultant. Prior to becoming a
consultant in 1994, Mr. Lall was Senior Vice President and head of commercial
banking of ABN AMRO Bank, New York branch from 1990 to 1994. In his capacity as
head of commercial banking with ABN AMRO, Mr. Lall also served on the Management
and Credit Committees.
Douglas Lemmonds has been a Managing Director and the Chief Operating
Officer, Private Banking-Americas of the Deutsche Bank Group since May 1996.
Private Banking-Americas operates across four separate legal entities, including
a registered investment advisor, a broker-dealer, a trust company and a
commercial bank. From June 1991 to May 1996 Mr. Lemmonds was the Regional
Director of Private Banking of the Northeast Regional Office of the Bank of
America and from August 1973 to June 1991 he held various other positions with
Bank of America.
60
<PAGE>
Andrew Maloney has been a partner of Brown & Wood LLP, a New York law
firm, since December 1992. From June 1986 to December 1992 he was the United
States Attorney for the Eastern District of New York.
Dennis Mehiel has been Chairman and Chief Executive Officer of The
Fonda Group, Inc. since 1988. Since 1966 he has been the Chairman of Four M, a
converter and seller of interior packaging, corrugated sheets and corrugated
containers which he co-founded, and since 1977 (except during a leave of absence
from April 1994 through July 1995) he has been the Chief Executive Officer of
Four M. Mr. Mehiel is also the Chairman of MannKraft Corporation, a manufacturer
of corrugated containers, and Chief Executive Officer and Chairman of Creative
Expressions, Group, Inc.
Executive Compensation
The following table sets forth for fiscal years 1995, 1996 and 1997 the
compensation paid by the Company to its Chairman of the Board and Chief
Executive Officer and each of the three other executive officers of the Company
whose salary and bonus exceeded $100,000 during fiscal year 1997.
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Other Other
Annual Annual
Compensa- Compensa-
Name and Principal Position Year Salary($) Bonus($) tion(1) ($) tion(2) ($)
- --------------------------- ---- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
John A. Catsimatidis, 1997 $360,000 $265,000 -- $4,750
Chairman of the Board and 1996 360,000 205,000 -- 4,750
Chief Executive Officer 1995 360,000 205,000 -- 4,620
Myron L. Turfitt, 1997 235,000 280,000 $2,780 4,750
President and 1996 235,000 120,000 2,600 4,750
Chief Operating Officer 1995 235,000 120,000 2,167 4,620
Ashton L. Ditka, 1997 135,042 31,405 3,241 3,782
Senior Vice President-- 1996 125,558 6,100 3,262 3,660
Marketing 1995 122,000 6,100 3,089 3,660
Thomas E. Skarada, 1997 120,116 29,900 7,580 2,860
Vice President--Refining 1996 94,250 4,500 7,536 2,670
1995 89,000 4,450 4,576 2,662
<FN>
(1) All amounts are automobile allowances.
(2) All amounts are Company matching contributions under the Company's 401(k)
Incentive Savings Plan.
</FN>
</TABLE>
Employment and Consulting Agreements
Myron L. Turfitt is employed by the Company pursuant to an Employment
and Termination Benefits Agreement dated June 30, 1993. The agreement is for a
five year term expiring on May 31, 1998 and provides for an annual salary of
$235,000 and a cash bonus to be paid in the discretion of the Board of
Directors. Additional benefits include participation in the Company's Flexible
Benefit Plan or the provision by the Company to Mr. Turfitt of benefits
comparable thereto for male individuals of the same age. In the event that the
Company terminates Mr. Turfitt's employment without cause, Mr. Turfitt is
entitled to his full compensation over the remaining term of the agreement. If
Mr. Turfitt's employment is terminated due to death, legal incapacity or a
mental or physical disability, Mr. Turfitt or his estate will be entitled to
compensation for a period equal to the lesser of one year after the date of
termination or the remaining term of the agreement. If Mr. Turfitt's employment
is terminated by the
61
<PAGE>
Company for specified acts constituting "cause", he will not be entitled to
further compensation under the agreement after the date of his termination. If
the agreement is terminated within three years after a change of control (as
defined in the agreement) other than as a result of Mr. Turfitt's death, total
and permanent disability or his voluntarily termination for good reason (as
defined in the agreement), then Mr. Turfitt is entitled to termination benefits
equal to the greater of (a) the full compensation payable to him over the
remaining term of the agreement or (b) 300% of his average compensation for the
three years out of the five most recent calendar years ended immediately before
the year in which the change of control occurs during which Mr. Turfitt earned
the highest compensation under the agreement.
Mr. Turfitt is also the Vice President-Finance of Red Apple Group, Inc.
("RAG"), a corporation which is wholly owned by John A. Catsimatidis, the sole
stockholder, Chairman of the Board and Chief Executive Officer of the Company.
However, substantially all of Mr. Turfitt's working time is devoted to the
affairs of the Company. Mr. Turfitt's Employment Agreement provides that if any
of RAG, United Refining Inc. ("URI"), United Acquisition Corp. ("UAC") or the
Company becomes insolvent or bankrupt, then the employment of Mr. Turfitt shall
be deemed terminated under the Employment Agreement and Mr. Turfitt will be
entitled to his full compensation over the remaining term of the agreement. In
such event, RAG, URI, UAC and the Company are jointly and severally obligated to
pay such compensation to Mr. Turfitt. Mr. Catsimatidis owns all of the
outstanding capital stock of RAG. RAG owns all of the outstanding capital stock
of UAC, which in turn owns all of the outstanding capital stock of URI. URI owns
all of the outstanding capital stock of the Company.
Thomas C. Covert has entered into a two-year consulting agreement with
the Company, the term of which commenced on September 1, 1996. The term of the
agreement will be extended for two additional one year periods unless the
Company or Mr. Covert gives written notice of cancellation to the other party
within specified time periods. Under the agreement Mr. Covert is obligated to
render services to the Company on a limited time basis of between 30-40 hours
per month in such capacities as the Board of Directors of the Company may
designate. Under the agreement the Company has agreed to pay Mr. Covert $170 per
hour for services rendered, but in no event less than $6,800 per month for each
month during the term of the agreement.
Mr. Covert has also entered into a Deferred Compensation Agreement with
the Company pursuant to which since the date of his retirement on September 1,
1996, the Company has been paying Mr. Covert a retirement benefit at the rate of
approximately $12,300 per year. The benefit is payable to Mr. Covert until his
death, whereupon Mr. Covert's wife is entitled to a benefit of approximately
$6,150 per year until her death if she does not predecease him.
Compensation of Directors
Non-officer directors receive a stipend of $15,000 per year and $1,000
for each meeting attended.
62
<PAGE>
CERTAIN TRANSACTIONS
During 1993, the Company sold certain retail grocery operations to Red
Apple (Caribbean), Inc., a corporation indirectly wholly-owned by John A.
Catsimatidis, the Chairman of the Board, Chief Executive Officer and beneficial
owner of all of the outstanding capital stock of the Company, in exchange for a
promissory note totalling $17,600,000. The note bears interest at the rate of 5%
per annum and was originally due on December 31, 1994. Subsequent to this date,
the note was successively amended and restated. Simultaneously with the
consummation of the Private Offering, the Company distributed the note to its
sole stockholder.
The Company paid a service fee relating to certain costs incurred by
its parent, RAG, for the Company's New York office for fiscal 1996 and fiscal
1997 amounting to approximately $2,424,000 and $2,712,000, respectively.
Pursuant to a Servicing Agreement entered into between the Company and RAG
simultaneously with the consummation of the Private Offering the Company will
pay a $1,000,000 per year management fee relating to these costs. The term of
the Servicing Agreement expires on June 9, 2000, but the term shall be
automatically extended for periods of one year if neither party gives notice of
termination of the Servicing Agreement prior to the expiration of the then
current term.
As of the date of this Prospectus, URI owned by John A. Catsimatidis,
was leasing to the Company nine retail units. The term of each lease expires on
April 1, 2001. The annual rentals payable under the leases aggregate $264,000,
which the Company believes are market rates. As of the date of this Prospectus,
the Company was current on all rent obligations under such leases.
RAG files a consolidated tax return with affiliated entities, including
the Company. Simultaneously with the consummation of the Private Offering, RAG,
the Company and certain of their affiliates entered into a tax sharing agreement
(the "Tax Sharing Agreement"). Under the Tax Sharing Agreement the parties
established a method for allocating the consolidated federal income tax
liability and combined state tax liability of the RAG affiliated group among its
members; for reimbursing RAG for payment of such tax liability; for compensating
any member for use of its net operating loss or tax credits in arriving at such
tax liability; and to provide for the allocation and payment of any refund
arising from a carryback of net operating loss or tax credits from subsequent
taxable years.
Included in amounts due from affiliated companies are advances and
amounts relating to the allocation of overhead expenses, certain charter air
services and income taxes from the Company's parent. These amounts do not bear
interest and have no set repayment terms. At August 31, 1995 and 1996, the
amounts approximated $2,000,000 and $2,500,000 respectively. At August 31, 1997,
there were no amounts outstanding.
In June 1997, the Company declared a dividend of $28,285,000 of which
$5,000,000 was paid in cash and $23,285,000 was forgiveness of debt from related
parties. Additionally, the Company has offset $2,017,000 of amounts due from
related parties with deferred tax benefits previously received. Therefore, upon
consummation of the Private Offering there were no outstanding liabilities
between the Company and affiliated entities.
During fiscal 1997, the Company made payments for services rendered to
it by Lowenthal, Landau, Fischer & Bring, P.C. ("LLF&B"), a law firm of which
Martin R. Bring, a director of the Company, is a member. The Company believes
that the fees paid to LLF&B for legal services are comparable to fees it would
pay to a law firm for similar services, none of whose members are officers,
directors or principal stockholders, of the Company.
63
<PAGE>
PRINCIPAL STOCKHOLDER
As of the date of this Prospectus, URI owned 1,000 shares of the Common
Stock of the Company, constituting all of the outstanding shares of capital
stock of the Company. UAC owns all of the outstanding capital stock of URI. All
of the outstanding capital stock of UAC is owned by RAG. As a result of his
ownership of all of the outstanding capital stock, and control, of RAG and his
control of each of UAC and URI, John A. Catsimatidis beneficially owns all of
the outstanding shares of capital stock of the Company. There are no outstanding
securities which are exercisable for, or convertible into, shares of any class
of capital stock of the Company.
64
<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The Company is a party to a $35,000,000 secured revolving credit
facility with PNC Bank (the "New Bank Credit Facility"). As of August 31, 1997,
there were no letters of credit or borrowings outstanding under the New Bank
Credit Facility.
The New Bank Credit Facility enables the Company to obtain revolving
credit loans from time to time for general corporate purposes and working
capital in an aggregate amount not exceeding the lesser of (x) $35 million and
(y)(i) 100% of cash in PNC's account which is subject to a security interest,
(ii) 80% of eligible accounts receivable plus (iii) the lesser of (a) 70% of
eligible inventory or (b) 150% of advances against eligible receivables.
The revolving credit loans bear interest at PNC's Base Rate (defined as
the higher of PNC's prime rate or the Federal Funds rate plus 0.50%) plus up to
an additional 0.75% per annum or at LIBOR plus an additional 2.25% per annum
based upon the ratio of the Company's Total Indebtedness as of the end of each
fiscal quarter to EBITDA (as such capitalized terms are defined in the
commitment letter) for the previous four fiscal quarters.
The New Bank Credit Facility terminates on June 9, 2002, unless sooner
terminated at the Company's option or upon an event of default and outstanding
revolving credit loans will be payable on such date or such earlier date as they
may be accelerated following the occurrence of an event of default.
The New Bank Credit Facility is secured by a lien on the Company's
accounts receivable and the following inventory of the Company: all crude oil,
wherever located; all asphalt, wherever located; and motor gasoline located at
the Company's refinery. The New Bank Credit Facility has various restrictive
covenants and events of default customary for a transaction of this type
including limitations on liens, limitations on asset sales, additional
indebtedness, investments and advances, acquisitions, payments of parent company
overhead expenses, prohibition on business changes and financial covenants
relating to the maintenance of a net worth equal to at least 70% of the
Company's net worth (as defined) upon entering into the New Bank Credit Facility
plus 50% of positive net income of the Company thereafter and maintenance of a
fixed charge coverage ratio (as defined) of at least 1.10 to 1.00 for the period
until February 28, 1998 and 1.25 to 1.00 thereafter.
65
<PAGE>
DESCRIPTION OF THE NOTES
The Original Notes were, and the New Notes will be, issued under an
indenture dated as of June 9, 1997 (the "Indenture") between the Company and IBJ
Schroeder Bank & Trust Company, as trustee (the "Trustee"). The New Notes are
subject to all the terms of the Indenture, and holders of New Notes are referred
to the Indenture, which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part. The form of the New Notes and the
Original Notes will be identical in all material respects except that the New
Notes will have been registered under the Securities Act and, therefore, will
not bear legends restricting their transfer pursuant thereto. The New Notes will
not represent new indebtedness of the Company, will be entitled to the benefits
of the same Indenture which governs the Original Notes and will rank pari passu
with the Original Notes. Any provision of the Indenture which requires actions
by or approval of a specified percentage of Original Notes shall require the
approval of the holders of such percentage of Original Notes and New Notes, in
the aggregate. (The Original Notes and New Notes are collectively referred to
herein as the "Notes").
The following is a summary of the material terms and provisions of the
Notes. This summary does not purport to be a complete description of the Notes
and is subject to the detailed provisions of, and qualified in its entirety by
reference to, the Notes and the Indenture (including the definitions contained
therein). Definitions relating to certain capitalized terms are set forth under
"--Certain Definitions" and throughout this description. Capitalized terms that
are used by not otherwise defined herein have the meanings assigned to them in
the Indenture and such definitions are incorporated herein by reference.
General
The Notes are senior unsecured obligations of the Company limited to an
aggregate principal amount of $200 million.
The Notes bear interest at 10 3/4%, payable on June 15 and December 15
of each year, commencing on December 15, 1997, to holders of record at the close
of business on June 1 or December 1, as the case may be, immediately preceding
the relevant interest payment date. The Notes will mature on June 15, 2007 and
issued in registered form, without coupons, and in denominations of $1,000 and
integral multiples thereof. The Notes are payable as to principal, premium, if
any, and interest at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
by wire transfer of immediately available funds or, in the case of certificated
securities only, by mailing a check to the registered address of the holder. See
"--Delivery and Form of Securities--Book Entry, Delivery and Form." Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose.
Ranking
The Notes and each Subsidiary Guarantee are senior unsecured
obligations of the Company, and the applicable Subsidiary Guarantor,
respectively, and rank pari passu in right of payment with all other existing
and future unsecured and unsubordinated Indebtedness of the Company and the
applicable Subsidiary Guarantor, respectively, and senior to all existing and
future subordinated indebtedness of the Company and the Subsidiary Guarantors.
At August 31, 1997, the Company and the Subsidiary Guarantors had approximately
$1.3 million of Indebtedness outstanding other than the Notes, of which
approximately $0.5 million was secured. Subject to certain limitations, the
Company and its Subsidiaries (including the Subsidiary Guarantors) may incur
additional Indebtedness in the future. See "--Certain Covenants--Limitations on
Additional Indebtedness."
66
<PAGE>
Subsidiary Guarantees
The Company's payment obligations under the Notes are jointly and
severally guaranteed (the "Subsidiary Guarantees") by the Subsidiary Guarantors.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee is
joint and several and full and unconditional, limited only so as not to
constitute a fraudulent conveyance under applicable law. The Subsidiary
Guarantors are Kiantone Pipeline Corporation, Kiantone Pipeline Company, United
Jet Center, Inc., United Refining Company of Pennsylvania, Kwik Fill, Inc.,
Independent Gasoline and Oil Company of Rochester, Inc., Bell Oil Corp., PPC,
Inc., Super Test Petroleum, Inc., Kwik-Fil, Inc. and Vulcan Asphalt Refining
Corporation.
The Indenture provides that no Subsidiary Guarantor may consolidate
with or merge with or into (whether or not such Subsidiary Guarantor is the
surviving Person) another Person whether or not affiliated with such Subsidiary
Guarantor unless (i) the Person formed by or surviving any such consolidation or
merger (if other than such Subsidiary Guarantor) assumes all of the obligations
of such Subsidiary Guarantor pursuant to a supplemental indenture, in form and
substance satisfactory to the Trustee, under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists; and (iii) immediately after giving effect to such transaction
the Company could incur at least $1.00 of additional Indebtedness pursuant to
the Consolidated Fixed Charge Coverage Ratio test set forth in the covenant
described under "Limitations on Additional Indebtedness."
Optional Redemption of the Notes
The Notes may not be redeemed prior to June 15, 2002, but will be
redeemable at the option of the Company, in whole or in part, at any time on or
after June 15, 2002, at the following redemption prices (expressed as
percentages of principal amount), together with accrued and unpaid interest, if
any, thereon to the redemption date, if redeemed during the 12-month period
beginning June 15:
Optional
Year Redemption Price
2002 105.375%
2003 103.583%
2004 101.792%
2005 and thereafter 100.000%
Notwithstanding the foregoing, at any time prior to June 15, 2000, the
Company may redeem up to 35% of the aggregate principal amount of the Notes with
the net cash proceeds of one or more Equity Offerings at a redemption price
equal to 110.00% of the principal amount thereof, plus accrued and unpaid
interest to the redemption date; provided that (a) at least $100 million
aggregate principal amount of the Notes remains outstanding immediately after
the occurrence of such redemption and (b) such redemption occurs within 60 days
of the date of the closing of any such Equity Offering.
If less than all of the Notes are to be redeemed at any time, selection
of the Notes to be redeemed will be made by the Trustee from among the
outstanding Notes on a pro rata basis, by lot or by any other method permitted
in the Indenture. Notice of redemption will be mailed at least 30 days but not
more than 60 days before the redemption date to each Holder whose Notes are to
be redeemed at the registered address of such Holder. On and after the
redemption date, interest will cease to accrue on the Notes or portions thereof
called for redemption.
Change of Control
Upon the occurrence of a Change of Control, the Company shall be
obligated to make an offer to all holders of Notes to purchase (a "Change of
Control Offer") all outstanding Notes and will purchase, on a business day not
more than 60 days nor less than 30 days after the occurrence of the Change of
67
<PAGE>
Control (such purchase date being the "Change of Control Purchase Date"), all
Notes properly tendered pursuant to such offer to purchase for a cash price (the
"Change of Control Purchase Price") equal to 101% of the principal amount of the
Notes, plus accrued and unpaid interest, if any, to the Change of Control
Purchase Date. The Change of Control Offer is required to remain open for at
least 20 business days or for such longer period as is required by law.
In order to effect a Change of Control Offer, the Company shall within
30 days after the occurrence of the Change of Control mail to the Trustee, who
shall mail to each holder of Notes, a copy of the Change of Control Offer, which
shall state, among other things, the procedures that holders must follow to
accept the Change of Control Offer.
The occurrence of the events constituting a Change of Control under the
Indenture may result in an event of default in respect of other Indebtedness of
the Company and its Subsidiaries and, consequently, the lenders thereof may have
the right to require repayment of such Indebtedness in full. If a Change of
Control Offer is made, there can be no assurance that the Company will have
available funds sufficient to pay for all or any of the Notes that might be
delivered by holders of Notes seeking to accept the Change of Control Offer. The
Company's obligation to make a Change of Control Offer will be satisfied if a
third party makes the Change of Control Offer in the manner and at the times and
otherwise in compliance with the requirements applicable to a Change of Control
Offer made by the Company and purchases all Notes properly tendered and not
withdrawn under such Change of Control Offer. The definition of Change of
Control includes the sale of "all or substantially all" of the assets of the
Company or the Company and its Subsidiaries taken as a whole. The phrase "all or
substantially all" is subject to interpretation under applicable legal precedent
and has no clear meaning. As a result, there may be uncertainty as to whether a
Change of Control has occurred.
The Change of Control feature of the Notes, by requiring a Change of
Control Offer, may in certain circumstances make more difficult or discourage a
sale or takeover of the Company, and, thus, the removal of incumbent management.
The Change of Control feature, however, is not part of a plan by management to
adopt a series of antitakeover provisions. Instead, the Change of Control
feature is a result of negotiations between the Company and the Initial
Purchasers. Subject to the limitations discussed below, the Company could, in
the future, enter into certain transactions, including acquisitions,
refinancings or other recapitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of Indebtedness
outstanding at such time or otherwise affect the Company's capital structure or
credit ratings.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act to the extent applicable in connection with the purchase of Notes
pursuant to a Change of Control Offer.
Capital Improvements Escrow and Special Offer to Purchase
On the Issue Date the Company deposited with the Escrow Agent $48.1
million of the net proceeds from the sale of the Notes. All amounts so deposited
with the Escrow Agent (collectively, the "Escrow Funds") have been pledged to
and are being held by the Escrow Agent on behalf of the holders of the Notes as
security for the Notes. Out of the Escrow Funds, approximately $34.8 million
will be used for the Capital Improvement Plan and no more than $13.3 million
will be used for Other Capital Expenditures. The Escrow Agreement provides that
from time to time, upon delivery by the Company to the Escrow Agent of a request
for disbursement, an Officer's Certificate certifying that the monies to be
disbursed are to be applied to pay costs and expenses of the Capital Improvement
Plan or to fund Other Capital Expenditures, as applicable, and a certificate
signed by the Secretary or Assistant Secretary of the Company (a "Secretary's
Certificate") which sets forth and authenticates a resolution that has been
adopted by a majority vote of the Independent Directors of the Company which
states that the monies to be disbursed are to be applied to pay costs and
expenses of the Capital Improvement Plan or to fund Other Capital Expenditures,
as applicable, and authorizes the disbursement of such monies, then the Escrow
Agent will release Escrow Funds to the Company in an amount equal to the
requested
68
<PAGE>
disbursement for application to the Capital Improvements Plan or for Other
Capital Expenditures, as applicable. Upon release of all of the Escrow Funds,
the Notes will be unsecured obligations of the Company.
Pending release of the Escrow Funds as provided in the Indenture, the
Escrow Funds will be invested in cash and Cash Equivalents and any investment
income therefrom will be available to the Company at any time upon written
request. If an offer to purchase Notes is made on the Special Offer Notice Date,
all Notes tendered or, if the aggregate principal amount of Notes tendered
exceeds the amount of Escrow Funds, a pro rata portion thereof in an aggregate
principal amount equal to the Escrow Funds, will be purchased with the Escrow
Funds and any portion of the Escrow Funds remaining after the consummation of
the offer to purchase will be returned to the Company.
If the Capital Improvement Plan is abandoned by the Company because its
completion is no longer possible, practical or economical, as determined by the
Board of Directors and evidenced by a Board Resolution, or not completed on or
before August 31, 1999, then, 30 days after the earlier of (i) written notice,
and a certified copy of the Board Resolution, is received by the Trustee
regarding the abandonment of the Capital Improvement Plan or, (ii) August 31,
1999, (as the case may be, the "Special Offer Notice Date") the Company will be
obligated to make an offer to purchase (the "Special Offer") an aggregate
principal amount of Notes equal to $34.8 million less any amount previously
released from the Escrow Funds to be applied to the Capital Improvement Plan
(the "Special Offer Amount") for a purchase price of 100% of the principal
amount of the Notes, plus accrued and unpaid interest to the date of purchase
(the "Special Offer Purchase Date").
On the Special Offer Notice Date, the Company shall mail to each holder
of Notes at such holder's registered address a notice stating: (i) that the
Capital Improvement Plan has been abandoned or not completed and that the
Company is offering to purchase the specified aggregate principal amount of
Notes at a purchase price in cash equal to 100% of the aggregate principal
amount thereof, plus accrued and unpaid interest to the Special Offer Purchase
Date, which shall be a business day, specified in such notice, that is not
earlier than 30 days or later than 60 days from the date such notice is mailed,
(ii) the amount of accrued and unpaid interest as of the Special Offer Purchase
Date, (iii) that any Note not tendered will continue to accrue interest, (iv)
that, unless the Company defaults in the payment of the purchase price for the
Notes payable pursuant to the Special Offer, any Notes accepted for payment
pursuant to the Special Offer shall cease to accrue interest on and after the
Special Offer Purchase Date, (v) the procedures, consistent with the Indenture,
to be followed by a holder of Notes in order to accept a Special Offer or to
withdraw such acceptance, and (vi) such other information as may be required by
the Indenture and applicable laws and regulations.
On the Special Offer Purchase Date, the Company will (i) accept for
payment the aggregate principal amount of Notes covered by the Special Offer or
such lesser amount as is tendered pursuant to the Special Offer and (ii) deliver
or cause to be delivered to the Trustee all Notes tendered pursuant to the
Special Offer and accepted for payment and the Special Offer Amount of the
Escrow Funds will be applied to consummate the Special Offer. If less than all
Notes tendered pursuant to the Special Offer are accepted for payment by the
Company for any reason consistent with the Indenture, selection of the Notes to
be purchased by the Company shall be in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not so listed, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate; provided that Notes
accepted for payment in part shall only be purchased in integral multiples of
$1,000. The paying agent shall promptly mail to each holder of Notes or portions
thereof accepted for payment an amount equal to the purchase price for such
Notes including any accrued and unpaid interest thereon, and the Trustee shall
promptly authenticate and mail to such holder of Notes accepted for payment in
part a new Note equal in principal amount to any unpurchased portion of the
Notes, and any Note not accepted for payment in whole or in part for any reason
consistent with the Indenture shall be promptly returned to the holder of such
Note. On and after the Special Offer Purchase Date, interest will cease to
accrue on the Notes or portions thereof accepted for payment, unless the Company
defaults in the payment of the
69
<PAGE>
purchase price therefor. The Company will announce the results of the Special
Offer to holders of the Notes on or as soon as practicable after the Special
Offer Purchase Date.
The Company will comply with the applicable tender offer rules,
including the requirements of Rule 14e-1 under the Exchange Act, and all other
applicable securities laws and regulations in connection with any Special Offer.
Certain Covenants
Limitations on Additional Indebtedness. (a) The Indenture provides that
(i) the Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, create, incur, assume, guarantee or otherwise become
liable with respect to (collectively, "incur") any Indebtedness (including
without limitation Acquired Indebtedness), and (ii) the Company will not permit
any of its Subsidiaries to issue (except if issued to or owned beneficially and
of record by the Company or any of its Subsidiaries) any Capital Stock having a
preference in liquidation or with respect to the payment of dividends; provided
that (i) the Company and its Subsidiaries may incur Permitted Indebtedness and
(ii) the Company may incur Indebtedness if, after giving effect thereto, the
Company's Consolidated Fixed Charge Coverage Ratio on the date thereof would be
at least 2.0 to 1, determined on a pro forma basis as if the incurrence of such
additional Indebtedness, and the application of the net proceeds therefrom, had
occurred at the beginning of the four-quarter period used to calculate the
Company's Consolidated Fixed Charge Coverage Ratio.
(b) The Company will not, and will not permit any of its Subsidiaries
to, incur any Indebtedness that is expressly subordinated to any other
Indebtedness of the Company or such Subsidiary unless such Indebtedness by its
terms is also expressly made subordinated to the Notes, in the case of the
Company, or the Subsidiary Guarantees, in the case of a Subsidiary.
Limitations on Restricted Payments. The Indenture provides that the
Company will not, and will not permit any of its Subsidiaries to, directly or
indirectly, make any Restricted Payment (except as permitted below) if at the
time of such Restricted Payment:
(i) a Default or Event of Default shall have occurred and be
continuing or shall occur as a consequence thereof;
(ii) the Company would be unable to incur an additional $1.00 of
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio
test set forth in the covenant described under "Limitations on
Additional Indebtedness"; or
(iii) the amount of such Restricted Payment, when added to the
aggregate amount of all Restricted Payments made after the Issue Date,
exceeds the sum of (A) 50% of the Company's Consolidated Net Income
(taken as one accounting period) from but not including February 28,
1997 to the end of the Company's most recently ended fiscal quarter
for which financial statements are available at the time of such
Restricted Payment (or, if such aggregate Consolidated Net Income
shall be a deficit, minus 100% of such aggregate deficit) plus (B) the
net cash proceeds from the issuance and sale (other than to a
Subsidiary of the Company) after the Issue Date of the Company's
Capital Stock that is not Disqualified Capital Stock, plus (C) to the
extent that any Restricted Investment that was made after the Issue
Date is sold for cash or otherwise liquidated or repaid for cash, the
lesser of (x) the cash return of capital with respect to such
Restricted Investment (less the cost of disposition, if any) and (y)
the initial amount of such Restricted Investment plus (D) the amount
of Restricted Investment outstanding in an Unrestricted Subsidiary at
the time such Unrestricted Subsidiary is designated a Subsidiary of
the Company in accordance with the definition of "Unrestricted
Subsidiary".
70
<PAGE>
The foregoing provisions will not prohibit, so long as no default shall
have occurred and be continuing, (1) the payment of any dividend within 60 days
after the date of declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the Indenture; (2) the
redemption, repurchase, retirement or other acquisition of any Capital Stock of
the Company in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Capital
Stock of the Company (other than any Disqualified Capital Stock); (3) the
defeasance, redemption, repurchase or other retirement of Subordinated
Indebtedness in exchange for, or out of the proceeds of, the substantially
concurrent issue and sale of Capital Stock of the Company (other than (x)
Disqualified Capital Stock, (y) Capital Stock sold to a Subsidiary of the
Company and (z) Capital Stock purchased with the proceeds of loans from the
Company or any of its Subsidiaries); (4) the making of a Petroleum Investment so
long as the amount of such investment outstanding or committed does not exceed
at any time $35.0 million less the amount of cash received upon the disposition
of any such investment or the return of capital thereon; (5) the making of a
Related Business Investment in joint ventures or Unrestricted Subsidiaries out
of the proceeds of the substantially concurrent issue and sale of Capital Stock
of the Company (other than (x) Disqualified Capital Stock, (y) Capital Stock
sold to a Subsidiary of the Company and (z) Capital Stock purchased with the
proceeds of loans from the Company or any of its Subsidiaries); or (6)
Restricted Payments (other than Restricted Investments and Restricted Debt
Payments) which, when added to the aggregate amount of Restricted Payments made
pursuant to this clause (6) after the Issue Date, does not exceed $5.0 million.
The amounts referred to in clauses (1), (2) and (5) shall be included
as Restricted Payments in any computation made pursuant to clause (iii) above.
Not later than the date of making any Restricted Payment, the Company
shall deliver to the Trustee an Officers' Certificate stating that such
Restricted Payment is permitted and setting forth the basis upon which the
calculations required by the covenant "Limitations on Restricted Payments" were
computed, which calculations shall be based upon the Company's latest available
financial statements.
Limitations on Restrictions on Distributions from Subsidiaries. The
Indenture provides that the Company will not, and will not permit any of its
Subsidiaries to, create or otherwise cause or suffer to exist or become
effective any consensual Payment Restriction with respect to any of its
Subsidiaries, except for (a) any such Payment Restriction in effect on the Issue
Date under the New Bank Credit Facility or any similar Payment Restriction under
any similar bank credit facility or any replacement thereof, provided that such
similar Payment Restriction is no more restrictive than the Payment Restriction
in effect on the date of the Indenture under the New Bank Credit Facility, (b)
any such Payment Restriction under any agreement evidencing any Acquired
Indebtedness that was permitted to be incurred pursuant to the Indenture,
provided that such Payment Restriction only applies to assets that were subject
to such restriction and encumbrances prior to the acquisition of such assets by
the Company or its Subsidiaries and (c) any such Payment Restriction arising in
connection with Refinancing Indebtedness; provided that any such Payment
Restrictions that arise under such Refinancing Indebtedness are not, taken as a
whole, more restrictive than those under the agreement creating or evidencing
the Indebtedness being refunded or refinanced.
Limitations on Transactions with Affiliates. The Indenture provides
that the Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, in one transaction or a series of related transactions,
sell, lease, transfer or otherwise dispose of any of its properties or assets
to, or purchase any property or assets from or enter into any contract,
agreement, understanding, loan, advance or guarantee with, or for the benefit
of, any Affiliate (each of the foregoing, an "Affiliate Transaction"), unless
(i) such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction (or series of related transactions) involving aggregate
payments in excess of $1.0 million but less than $3.0 million, an Officers'
Certificate certifying that such Affiliate Transaction complies with clause (i)
above and a Secretary's Certificate which sets forth and authenticates a
resolution
71
<PAGE>
that has been adopted by a vote of a majority of the Independent Directors
approving such Affiliate Transaction or, if at the time fewer than four
Independent Directors are then in office, a Secretary's Certificate which sets
forth and authenticates a resolution that has been adopted unanimously by the
Company's Board of Directors set forth in a Secretary's Certificate and (b) with
respect to any Affiliate Transaction (or series of related transactions)
involving aggregate payments of $3.0 million or more, the certificates described
in the preceding clause (a) and an opinion as to the fairness to the Company or
such Subsidiary from a financial point of view issued by an Independent
Financial Advisor; provided, however, that (w) any employment agreement entered
into by the Company or any of its Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Subsidiary, (x) transactions exclusively between or among the Company and/or its
Subsidiaries, (y) the payment of up to $1 million per fiscal year pursuant to
the Servicing Agreement and (z) payments under the Tax Sharing Agreement shall
not be deemed to be Affiliate Transactions. Notwithstanding the foregoing
proviso, the Company shall not, and shall not permit any of its Subsidiaries to,
pay any of its employees total annual compensation in excess of $250,000 unless
(a) such amount of compensation has been approved by a vote of a majority of the
Independent Directors, or (b) such employee's total annual compensation in
effect on the Issue Date exceeded $250,000. Any increase in total compensation
over and above the amount previously approved in the case of clause (a) or the
employee's total annual compensation on the Issue Date in the case of clause (b)
shall be approved by a vote of a majority of the Independent Directors, other
than an increase at the end of any year in the amount of total compensation by
an amount equal to the Index Amount for such year.
Independent Directors. (a) The Indenture provides that the Company's
Board of Directors shall at all times have at least four Independent Directors;
provided, however, that, notwithstanding the foregoing, if an Independent
Director resigns, dies or is terminated for any reason and the remaining number
of Independent Directors is less than four, a replacement for that Independent
Director shall be elected as promptly as practicable, but in no event later than
the date that is six months from the date of the resignation, death or
termination of the Independent Director being replaced.
(b) After the Issue Date, the election of any new Independent Directors
must be approved by a unanimous vote of the Independent Directors then in
office, provided that only a majority vote of the Independent Directors is
required if at the time there are four or more Independent Directors in office.
The Independent Directors shall approve such new Independent Director unless the
Independent Directors determine that such person does not satisfy the
requirements to serve as an Independent Director under the Indenture or such
person is not able or willing to perform the obligations of the Independent
Directors under the Indenture.
(c) If at any time the number of Independent Directors then in office
is less than two, then until such time as the number of Independent Directors
exceeds two the Company shall not, and shall not permit any of its Subsidiaries
to, engage in any transaction that the Indenture requires be approved by a vote
of the Independent Directors.
(d) Any transaction that the Indenture requires be approved by a vote
of the Independent Directors shall be evidenced by a Secretary's Certificate
setting forth a resolution adopted by at least the requisite number of
Independent Directors, a copy of which shall be delivered to the Trustee, which
resolution shall state that the transaction being approved is not unfair to the
holders of the Notes. The failure to comply with this clause(d) shall have the
effect of the Company failing to comply with the requirement in the Indenture to
obtain a vote of the Independent Directors.
Limitations on Liens. The Indenture provides that neither the Company
nor any of its Subsidiaries may directly or indirectly create, incur, assume or
suffer to exist any Lien on any property or asset now owned or hereafter
acquired, or on any income or profits therefrom, or assign or convey any right
to receive income therefrom, except Permitted Liens, unless prior thereto or
simultaneously therewith the Notes are equally and ratably secured; provided
that if such Indebtedness is Subordinated Indebtedness the Lien securing such
Indebtedness shall be junior to the Lien securing the Notes.
72
<PAGE>
Limitations on Asset Sales. (a) The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries to, consummate any Asset
Sale unless (i) the Company receives consideration at the time of such Asset
Sale at least equal to the Fair Market Value of the assets included in such
Asset Sale; provided that the aggregate Fair Market Value of the consideration
received from any Asset Sale that is not in the form of cash or Cash Equivalents
shall not, when aggregated with the Fair Market Value of all other non-cash
consideration received by the Company and its Subsidiaries from all previous
Asset Sales since the Issue Date that have not, prior to such date, been
converted to cash or Cash Equivalents, exceed five percent of the Consolidated
Tangible Assets of the Company at the time of the Asset Sale under
consideration; and provided, further, that with respect to any Asset Sales to
Affiliates the Company receives consideration consisting of no less than 85%
cash or Cash Equivalents and (ii) the Company delivers to the Trustee an
Officers' Certificate certifying that such Asset Sale complies with clause (i).
The amount (without duplication) of any Indebtedness (other than Subordinated
Indebtedness) of the Company or such Subsidiary that is expressly assumed by the
transferee in such Asset Sale and with respect to which the Company or such
Subsidiary, as the case may be, is unconditionally released by the holder of
such Indebtedness, shall be deemed to be cash or Cash Equivalents for purposes
of clause (ii) and shall also be deemed to constitute a repayment of, and a
permanent reduction in, the amount of such Indebtedness for purposes of the
following paragraph (b). If at any time any non-cash consideration received by
the Company or any Subsidiary of the Company, as the case may be, in connection
with any Asset Sale is converted into or sold or otherwise disposed of for cash
(other than interest received with respect to any such non-cash consideration),
then the date of such conversion or disposition shall be deemed to constitute
the date of an Asset Sale hereunder and the Net Available Proceeds thereof shall
be applied in accordance with this covenant. A transfer of assets by the Company
to a Subsidiary or by a Subsidiary to the Company or to a Subsidiary will not be
deemed to be an Asset Sale and a transfer of assets that constitutes a
Restricted Investment and that is permitted under "--Limitations on Restricted
Payments" will not be deemed to be an Asset Sale.
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Subsidiaries as an entirety to a
Person in a transaction permitted under "--Merger, Consolidation and Sale of
Assets," the successor corporation shall be deemed to have sold the properties
and assets of the Company and its Subsidiaries not so transferred for purposes
of this covenant, and shall comply with the provisions of this covenant with
respect to such deemed sale as if it were an Asset Sale. In addition, the Fair
Market Value of such properties and assets of the Company or its Subsidiaries
deemed to be sold shall be deemed to be Net Available Proceeds for purposes of
this covenant.
(b) If the Company or any Subsidiary engages in an Asset Sale, the
Company or any Subsidiary may either, no later than 270 days after such Asset
Sale, (i) apply all or any of the Net Available Proceeds therefrom to repay
amounts outstanding under the New Bank Credit Facility or any other Indebtedness
(other than Subordinated Indebtedness) of the Company or any Subsidiary;
provided, in each case, that the related loan commitment (if any) is thereby
permanently reduced by the amount of such Indebtedness so repaid or (ii) invest
all or any part of the Net Available Proceeds thereof in properties and assets
that replace the properties or assets that were the subject of such Asset Sale
or in other properties or assets that will be used in the business of the
Company and its Subsidiaries as it existed on the Issue Date. The amount of such
Net Available Proceeds not applied or invested as provided in this paragraph
will constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds $5.0
million, the Company will be required to make an offer to purchase, from all
Holders of the Notes, an aggregate principal amount of Notes equal to such
Excess Proceeds as follows:
(i) The Company will make an offer to purchase (a "Net Proceeds
Offer") from all Holders of the Notes in accordance with the
procedures set forth in the Indenture the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out
of the amount (the "Payment Amount") of such Excess Proceeds.
73
<PAGE>
(ii) The offer price for the Notes will be payable in cash in an
amount equal to 100% of the principal amount of the Notes tendered
pursuant to a Net Proceeds Offer, plus accrued and unpaid interest and
Liquidated Damages, if any, to the date such Net Proceeds Offer is
consummated (the "Offered Price"), in accordance with the procedures
set forth in the Indenture. To the extent that the aggregate Offered
Price of Notes tendered pursuant to a Net Proceeds Offer is less than
the Payment Amount relating thereto (such shortfall constituting a
"Net Proceeds Deficiency"), the Company may use such Net Proceeds
Deficiency, or a portion thereof, for general corporate purposes,
subject to the limitations of the "Limitations on Restricted Payments"
covenant.
(iii) If the aggregate Offered Price of Notes validly tendered
and not withdrawn by Holders thereof exceeds the Payment Amount, Notes
to be purchased will be selected on a pro rata basis.
(iv) Upon completion of such Net Proceeds Offer, the amount of
Excess Proceeds remaining shall be zero.
The Company will not permit any Subsidiary to enter into or suffer to exist any
agreement that would place any restriction of any kind (other than pursuant to
law or regulation) on the ability of the Company to make a Net Proceeds Offer
following any Asset Sale. The Company will comply with Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder, if
applicable, in the event that an Asset Sale occurs and the Company is required
to purchase Notes as described above.
Restrictions on Sale and Leaseback Transactions. The Indenture provides
that the Company will not, and will not permit any of its Subsidiaries to,
directly or indirectly, enter into, renew or extend any Sale and Leaseback
Transaction unless: (i) the Company or such Subsidiary would be entitled, under
the covenant described under "Limitations on Additional Indebtedness" to incur
Indebtedness in an amount equal to the Attributable Indebtedness with respect to
such Sale and Leaseback Transaction, (ii) such Sale and Leaseback Transaction
would not result in a violation of the covenant described under "Limitations on
Liens"; and (iii) the Net Available Proceeds from any such Sale and Leaseback
Transaction are applied in a manner consistent with the provisions described
under "Limitations on Asset Sales."
Restrictions on Sale of Capital Stock of Subsidiaries. The Indenture
provides that the Company will not, and will not permit any Subsidiary to,
directly or indirectly sell or otherwise dispose of any of the Capital Stock of
any Subsidiary unless: (i) (a) the Company shall retain ownership, directly or
indirectly, of more than 50% of the Common Equity of such Subsidiary or (b) all
of the Capital Stock of such Subsidiary shall be sold or otherwise disposed of;
and (ii) the Net Available Proceeds from any such sale or disposition are
applied in a manner consistent with the provisions described under "Limitations
on Asset Sales."
Limitations on Mergers and Certain Other Transactions. The Indenture
provides that the Company will not, in a single transaction or a series of
related transactions, (i) consolidate or merge with or into (other than a merger
with a Wholly-Owned Subsidiary solely for the purpose of changing the applicable
Company's jurisdiction of incorporation to another State of the United States),
or sell, lease, transfer, convey or otherwise dispose of or assign all or
substantially all of the assets of the Company or the Company and the
Subsidiaries (taken as a whole), or assign any of its obligations under the
Notes and the Indenture, to any Person or (ii) adopt a Plan of Liquidation
unless, in either case: (a) the Person formed by or surviving such consolidation
or merger (if other than the Company) or to which such sale, lease, conveyance
or other disposition or assignment shall be made (or, in the case of a Plan of
Liquidation, any Person to which assets are transferred) (collectively, the
"Successor"), is a corporation organized and existing under the laws of the
United States or any State thereof or the District of Columbia, and the
Successor assumes by supplemental indenture in a form satisfactory to the
Trustee all of the obligations of the Company under the Notes and the Indenture;
(b) immediately prior to and immediately after giving effect to such transaction
and the assumption of the obligations as set forth in
74
<PAGE>
clause (a) above and the incurrence of any Indebtedness to be incurred in
connection therewith, no Default or Event of Default shall have occurred and be
continuing; and (c) immediately after and giving effect to such transaction and
the assumption of the obligations set forth in clause (a) above and the
incurrence of any Indebtedness to be incurred in connection therewith, and the
use of any net proceeds therefrom on a pro forma basis, (1) the Consolidated Net
Worth of the Company or the Successor, as the case may be, would be at least
equal to the Consolidated Net Worth of the Company immediately prior to such
transaction and (2) the Company or the Successor, as the case may be, could
incur at least $1.00 of additional Indebtedness pursuant to the Consolidated
Fixed Charge Coverage Ratio test set forth in the covenant described under
"Limitations on Additional Indebtedness;" and (d) each Subsidiary Guarantor,
unless it is the other party to the transactions described above, shall have by
amendment to its guarantee confirmed that its guarantee of the Notes shall apply
to the obligations of the Company or the Successor under the Notes and the
Indenture. For purposes of this covenant, any Indebtedness of the Successor
which was not Indebtedness of the Company immediately prior to the transaction
shall be deemed to have been incurred in connection with such transaction.
Additional Subsidiary Guarantees. The Indenture provides that if the
Company or any of its Subsidiaries shall acquire or create another Subsidiary,
then such newly acquired or created Subsidiary will be required to execute a
Subsidiary Guarantee, in accordance with the terms of the Indenture, unless it
has been designated as an Unrestricted Subsidiary.
Reports. Whether or not required by the rules and regulations of the
Securities and Exchange Commission (the "Commission"), so long as any Notes are
outstanding, the Company and the Subsidiary Guarantors will file with the
Commission, to the extent such filings are accepted by the Commission, and will
furnish to the Holders of Notes all quarterly and annual reports and other
information, documents and reports that would be required to be filed with the
Commission pursuant to Section 13 of the Exchange Act if the Company and the
Subsidiary Guarantors were required to file under such section. In addition, the
Company and the Subsidiary Guarantors will make such information available to
prospective purchasers of the Notes, securities analysts and broker-dealers who
request it in writing. The Company and the Subsidiary Guarantors have agreed
that, for so long as any Notes remain outstanding, they will furnish to the
Holders and beneficial holders of Notes and to prospective purchasers of Notes
designated by the Holders of Transfer Restricted Securities and to broker
dealers, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
Events of Default
An "Event of Default" is defined in the Indenture as (i) failure by the
Company to pay interest on any of the Notes when it becomes due and payable and
the continuance of any such failure for 30 days; (ii) failure by the Company to
pay the principal or premium, if any, on any of the Notes when it becomes due
and payable, whether at stated maturity, upon redemption, upon acceleration or
otherwise; (iii) the Company shall fail to comply with any of its agreements or
covenants described above under "Change of Control" or under "Certain
Covenants--Limitations on Asset Sales" and "--Independent Directors"; (iv)
failure by the Company to comply with any other covenant in the Indenture and
continuance of such failure for 30 days after notice of such failure has been
given to the Company by the Trustee or by the Holders of at least 25% of the
aggregate principal amount of the Notes then outstanding; (v) failure by either
of the Company or any of their Subsidiaries to make any payment when due after
the expiration of any applicable grace period, in respect of any Indebtedness of
the Company or any of such Subsidiaries that has an aggregate outstanding
principal amount of $5.0 million or more; (vi) a default under any Indebtedness
of the Company or any Subsidiary, whether such Indebtedness now exists or
hereafter shall be created, if (A) such default results in the holder or holders
of such Indebtedness causing the Indebtedness to become due prior to its stated
maturity and (B) the outstanding principal amount of such Indebtedness, together
with the outstanding principal amount of any other such Indebtedness the
maturity of which has been so accelerated, aggregate $5.0 million or more at any
one time; (vii) one or more final judgments or orders that exceed $5.0 million
in the aggregate for the payment of money have been entered by a court or courts
of competent jurisdiction against the Company
75
<PAGE>
or any Subsidiary of the Company and such judgment or judgments have not been
satisfied, stayed, annulled or rescinded within 60 days of being entered; (viii)
certain events of bankruptcy, insolvency or reorganization involving the Company
or any Significant Subsidiary of the Company; and (ix) except as permitted by
the Indenture, any Subsidiary Guarantee ceases to be in full force and effect or
any Subsidiary Guarantor repudiates its obligations under any Subsidiary
Guarantee.
If an Event of Default (other than an Event of Default specified in
clause (viii) above involving the Company), shall have occurred and be
continuing under the Indenture, the Trustee, by written notice to the Company,
or the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding by written notice to the Company and the Trustee may declare all
amounts owing under the Notes to be due and payable immediately. Upon such
declaration of acceleration, the aggregate principal of, premium, if any, and
interest on the outstanding Notes shall immediately become due and payable. If
an Event of Default results from bankruptcy, insolvency or reorganization
involving the Company, all outstanding Notes shall become due and payable
without any further action or notice. In certain cases, the Holders of a
majority in aggregate principal amount of the Notes then outstanding may waive
an existing Default or Event of Default and its consequences, except a default
in the payment of principal of, premium, if any, and interest on the Notes.
The Holders may not enforce the provisions of the Indenture or the
Notes except as provided in the Indenture. Subject to certain limitations,
Holders of a majority in principal amount of the Notes then outstanding may
direct the Trustee in its exercise of any trust or power; provided however, that
such direction does not conflict with the terms of the Indenture. The Trustee
may withhold from the Holders notice of any continuing Default or Event of
Default (except any Default or Event of Default in payment of principal of,
premium, if any, or interest on the Notes) if the Trustee determines that
withholding such notice is in the Holders' interest.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture and, upon any Officer of the Company
becoming aware of any Default or Event of Default, a statement specifying such
Default or Event of Default and what action the Company is taking or proposes to
take with respect thereto.
Satisfaction and Discharge of Indenture; Defeasance
The Company may terminate its obligations under the Indenture at any
time by delivering all outstanding Notes to the Trustee for cancellation and
paying all sums payable by it thereunder. The Company, at its option, (i) will
be discharged from any and all obligations with respect to the Notes (except for
certain obligations of the Company to register the transfer or exchange of such
Notes, replace stolen, lost or mutilated Notes, maintain paying agencies and
hold moneys for payment in trust) or (ii) need not comply with certain of the
restrictive covenants with respect to the Indenture, if the Company deposits
with the Trustee, in trust, U.S. Legal Tender or U.S. Government Obligations or
a combination thereof that, through the payment of interest and premium thereon
and principal amount at maturity in respect thereof in accordance with their
terms, will be sufficient to pay all the principal amount at maturity of and
interest and premium on the Notes on the dates such payments are due in
accordance with the terms of such Notes as well as the Trustee's fees and
expenses. To exercise either such option, the Company is required to deliver to
the Trustee (A) an Opinion of Counsel and, in connection with a discharge
pursuant to clause (i) above, a private letter ruling issued to the Company by
the Internal Revenue Service (the "Service"), to the effect that the holders of
the Notes will not recognize income, gain or loss for federal income tax
purposes as a result of the deposit and related defeasance and will be subject
to federal income tax on the same amount and in the same manner and at the same
times as would have been the case if such option had not been exercised, (B)
subject to certain qualifications, an Opinion of Counsel to the effect that
funds so deposited will not be subject to avoidance under applicable bankruptcy
law and (C) an Officers' Certificate and an Opinion of Counsel to the effect
that the Company has complied with all conditions precedent to the defeasance.
Notwithstanding the foregoing, the Opinion of Counsel required by clause (A)
above need not be delivered if all Notes not
76
<PAGE>
theretofore delivered to the Trustee for cancellation (i) have become due and
payable, (ii) will become due and payable on the maturity date within one year
or (iii) are to be called for redemption within one year under arrangements
satisfactory to the Trustee for the giving of notice of redemption by the
Trustee in the name, and at the expense, of the Company.
Transfer and Exchange
A Holder will be able to register the transfer of or exchange Notes
only in accordance with the provisions of the Indenture. The Registrar may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and to pay any taxes and fees required by law or permitted by
the Indenture. Without the prior consent of the Company, the Registrar is not
required (i) to register the transfer of or exchange any Note selected for
redemption, (ii) to register the transfer of or exchange any Note for a period
of 15 days before a selection of Notes to be redeemed or (iii) to register the
transfer or exchange of a Note between a record date and the next succeeding
interest payment date. The registered holder of a Note will be treated as the
owner of such Note for all purposes.
Amendment, Supplement and Waiver
Subject to certain exceptions, the Indenture or the Notes may be
amended or supplemented with the consent (which may include consents obtained in
connection with a tender offer or exchange offer for Notes) of the Holders of at
least a majority in principal amount of the Notes then outstanding, and any
existing Default under, or compliance with any provision of, the Indenture may
be waived (other than any continuing Default or Event of Default in the payment
of the principal of, premium, if any, or interest on the Notes) with the consent
(which may include consents obtained in connection with a tender offer or
exchange offer for Notes) of the Holders of a majority in principal amount of
the Notes then outstanding. Without the consent of any Holder, the Company and
the Trustee may amend or supplement the Indenture or the Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Notes in
addition to or in place of certificated Notes, to provide for the assumption of
the Company's obligations to Holders in the case of a merger or acquisition, or
to make any change that does not adversely affect the rights of any Holder.
Without the consent of each Holder affected, the Company and the
Trustee may not: (i) extend the maturity of any Note; (ii) affect the terms of
any scheduled payment of interest on or principal of the Notes (including
without limitation any redemption provisions); (iii) make any change in the
provisions described above under the caption "Change of Control" or in the
obligations of the Company to make a Net Proceeds Offer or Special Offer or the
definitions related thereto that could adversely affect the rights of any Holder
of the Notes; (iv) take any action that would subordinate the Notes or the
Subsidiary Guarantees to any other Indebtedness of the Company or any of its
Subsidiaries, respectively, or otherwise affect the ranking of the Notes or the
Subsidiary Guarantees; (v) reduce the percentage of Holders necessary to consent
to an amendment, supplement or waiver to the Indenture.
Concerning the Trustee
The Indenture contains certain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of claims
in certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; however, if it acquires any conflicting interest (as defined
in the Indenture), it must eliminate such conflict or resign.
The Holders of a majority in principal amount of the then outstanding
Notes will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that, in case an Event of Default
occurs and is not cured, the Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent person in similar circumstances in
the conduct of his own affairs. Subject to such
77
<PAGE>
provisions, the Trustee will be under no obligation to exercise any of its
rights or powers under the Indenture at the request of any Holder, unless such
Holder shall have offered to the Trustee security and indemnity satisfactory to
the Trustee.
Governing Law
Each of the Indenture, the Notes and the Subsidiary Guarantees provides
that it will be governed by, and construed in accordance with, the laws of the
State of New York.
Delivery and Form of Securities
Book-Entry, Delivery and Form
The Original Notes were initially issued in the form of two Global
Notes (the "Global Notes"). The Global Notes were deposited on the date of the
closing of the sale of the Original Notes (the "Closing Date") with, or on
behalf of, the Depositary and registered in the name of Cede & Co., as nominee
of the Depositary (such nominee being referred to herein as the "Global Note
Holder"). The Depositary maintains the Original Notes in denominations of $1,000
and integral multiples thereof through its book-entry facilities.
The New Notes will be issued in the form of one or more global notes
(the "New Global Notes"). The New Global Notes will be deposited with the
Depository and registered in the name of the Global Note Holder.
The Depositary is a limited-purpose trust company that was created to
hold securities for its participating organizations (collectively, the
"Participants" or the "Depositary's Participants") and to facilitate the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants. The
Depositary's Participants include securities brokers and dealers (including the
Initial Purchasers), banks and trust companies, clearing corporations and
certain other organizations. Access to the Depositary's system is also available
to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants with portions of the principal amount of the Global
Notes and (ii) ownership of the New Notes will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
The laws of some states require that certain persons take physical
delivery in definitive form of securities that they own. Consequently, the
ability to transfer the Notes will be limited to such extent. For certain other
restrictions on the transferability of the Notes, see "Transfer Restrictions."
So long as the Global Note Holder is the registered owner of any Notes,
the Global Note Holder will be considered the sole Holder of outstanding Notes
under the Indenture. Except as provided below, owners of Notes will not be
entitled to have Notes registered in their names and will not be considered the
owners or Holders thereof under the Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. None of the Company, the Subsidiary Guarantors or the
Trustee will have any responsibility or liability for any aspect of the records
78
<PAGE>
relating to or payments made on account of Notes by the Depositary, or for
maintaining, supervising or reviewing any records of the Depositary relating to
such Notes.
Payments in respect of the principal of, premium, if any, and interest
on any Notes registered in the name of a Global Note Holder on the applicable
record date will be payable by the Trustee to or at the direction of such Global
Note Holder in its capacity as the registered Holder under the Indenture. Under
the terms of the Indenture, the Company and the Trustee may treat the persons in
whose names any Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments and for any and all other
purposes whatsoever. Consequently, none of the Company or the Trustee has or
will have any responsibility or liability for the payment of such amounts to
beneficial owners of Notes (including principal, premium, if any, and interest).
The Company believes, however, that it is currently the policy of the Depositary
to immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective beneficial interests in
the relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
Subject to certain conditions, any person having a beneficial interest
in the Global Notes may, upon request to the Trustee, exchange such beneficial
interest for Notes in definitive form. Upon any such issuance, the Trustee is
required to register such Notes in the name of, and cause the same to be
delivered to, such person or persons (or the nominee of any thereof). Such Notes
would be issued in fully registered form and would be subject to the legal
requirements described herein under the caption "Notice to Investors." In
addition, if (i) the Company notifies the Trustee in writing that the Depositary
is no longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes in
definitive form under the Indenture, then, upon surrender by the relevant Global
Note Holder of its Global Note(s), Notes in such form will be issued to each
person that such Global Note Holder and the Depositary identifies as being the
beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of
Notes and the Company and the Trustee may conclusively rely on, and will be
protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
The Indenture requires that payments in respect of the Notes
represented by the Global Notes (including principal, premium, if any, interest
and Liquidated Damages, if any) be made by wire transfer of immediately
available funds to the accounts specified by the Global Note Holder. With
respect to Certified Securities, the Company will make all payments of
principal, premium, if any, interest and Liquidated Damages, if any, by wire
transfer of immediately available funds to the accounts specified by the Holders
thereof or, if no such available funds to the accounts specified by the Holders
thereof or, if no such account is specified, by mailing a check to each such
Holder's registered address. The Company expects that secondary trading in the
Certified Securities will also be settled in immediately available funds.
Registration Rights; Liquidated Damages
The Company and the Initial Purchasers entered into a Registration
Rights Agreement in connection with the Private Offering. Pursuant to the
Registration Rights Agreement, the Company agreed to file with the Commission
the Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to the New Notes. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer, pursuant to the
Exchange Offer, to the Holders of Transfer Restricted Securities who are able to
make certain representations the opportunity to exchange their Transfer
Restricted Securities for New Notes. If (i) the Company is not required to file
the
79
<PAGE>
Exchange Offer Registration Statement because the Exchange Offer is not
permitted by applicable law or Commission policy or (ii) any Holder of Transfer
Restricted Securities notifies the Company that (a) it is prohibited by law or
Commission policy from participating in the Exchange Offer or (b) it may not
resell the New Notes acquired by it in the Exchange Offer to the public without
delivering a prospectus and the prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales or (c)
it is a broker-dealer and holds Original Notes acquired directly from the
Company or an affiliate of the Company, the Company will file with the
Commission a Shelf Registration Statement to cover resales of the Original Notes
by the Holders thereof who satisfy certain conditions relating to the provision
of information in connection with the Shelf Registration Statement. The Company
will use its best efforts to cause the applicable registration statement to be
declared effective as promptly as possible by the Commission. For purposes of
the foregoing, "Transfer Restricted Securities" means each Original Note or New
Note (each, a "Note") until (i) the date on which such Original Note has been
exchanged by a person other than a broker-dealer for a New Note in the Exchange
Offer, (ii) following the exchange by a broker-dealer in the Exchange Offer of
an Original Note for a New Note, the date on which such New Note is sold to a
purchaser who receives from such broker-dealer on or prior to the date of such
sale a copy of the prospectus contained in the Exchange Offer Registration
Statement, (iii) the date on which such Original Note has been effectively
registered under the Securities Act and disposed of in accordance with the Shelf
Registration Statement or (iv) the date on which such Note is distributed to the
public pursuant to Rule 144 under the Act.
The Registration Rights Agreement provides that (i) the Company and the
Subsidiary Guarantors will file an Exchange Offer Registration Statement with
the Commission on or prior to 90 days after the Issue Date, (ii) the Company and
the Subsidiary Guarantors will use their best efforts to have the Exchange Offer
Registration Statement declared effective by the Commission on or prior to 150
days after the Issue Date, (iii) unless the Exchange Offer would not be
permitted by a policy of the Commission, the Company and the Subsidiary
Guarantors will commence the Exchange Offer and will use their best efforts to
issue on or prior to 60 days after the date on which the Exchange Offer
Registration Statement is declared effective by the Commission (the "Exchange
Offer Effective Date") New Notes in exchange for all Notes tendered prior
thereto in the Exchange Offer and (iv) if obligated to file the Shelf
Registration Statement, the Company and the Subsidiary Guarantors will each use
its best efforts to file the Shelf Registration Statement with the Commission on
or prior to 90 days after such obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
150 days after such obligation arises. If (a) the Company and the Subsidiary
Guarantors fail to file within 90 days, or cause to become effective within 150
days, the Exchange Offer Registration Statement or (b) the Company and the
Subsidiary Guarantors are obligated to file the Shelf Registration Statement and
such Shelf Registration Statement is not filed within 90 days, or declared
effective within 150 days, of the date on which the Company and the Subsidiary
Guarantors became so obligated or (c) the Company and the Subsidiary Guarantors
fail to consummate the Exchange Offer within 60 days of the Exchange Offer
Effective Date or (d) the Shelf Registration Statement or the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable in connection with resales of Transfer Restricted Securities
during the periods specified in the Registration Rights Agreement (each such
event referred to in clauses (a) through (d) above a "Registration Default"), in
the case of clause (b) only, other than by reason of the failure of the Holders
to make certain representations to or provide information reasonably requested
by the Company or by reason of delays caused by the failure of any Holder to
provide information to the National Association of Securities Dealers, Inc. or
to any other regulatory agency having jurisdiction over any of the Holders, then
the Company will pay liquidated damages ("Liquidated Damages") to each Holder of
Transfer Restricted Securities, during the first 90-day period immediately
following the occurrence of such Registration Default in an amount equal to $.05
per week per $1,000 principal amount of Original Notes constituting Transfer
Restricted Securities held by such Holder. The amount of the Liquidated Damages
will increase an additional $.05 per week per $1,000 principal amount
constituting Transfer Restricted Securities for each subsequent 90-day period
until the applicable Registration Default has been cured, up to a maximum amount
of Liquidated Damages of $.30 per week per $1,000 principal amount of Original
Notes constituting Transfer Restricted Securities. All accrued Liquidated
Damages will be paid by the Company on each Damages Payment Date to the Global
80
<PAGE>
Note Holder by wire transfer of immediately available funds or by federal funds
check and to the Holders of certificated securities by mailing a check to such
Holders' registered addresses. Following the cure of all Registration Defaults,
the accrual of Liquidated Damages will cease.
Holders of the Original Notes will be required to make certain
representations to the Company (as described in the Registration Rights
Agreement) in order to participate in the Exchange Offer and will be required to
deliver information to be used in connection with the Shelf Registration
Statement within the time periods set forth in the Registration Rights Agreement
in order to have their Original Notes included in the Shelf Registration
Statement and benefit from the provisions regarding Liquidated Damages set forth
above.
Following the consummation of the Exchange Offer, holders of the Old
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Old Notes will not have any further registration rights and such
Old Notes will continue to be subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for such Old Notes could be adversely
affected.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in
the Indenture. Reference is made to the Indenture for the full definition of all
such terms.
"Acquired Indebtedness" means (a) with respect to any Person that
becomes a direct or indirect Subsidiary of the Company after the date of the
Indenture, Indebtedness of such Person and its Subsidiaries existing at the time
such Person becomes a Subsidiary of the Company that was not incurred in
connection with, or in contemplation of, such Person becoming a Subsidiary of
the Company and (b) with respect to the Company or any of its Subsidiaries, any
Indebtedness assumed by the Company or any of its Subsidiaries in connection
with the acquisition of an asset from another Person that was not incurred by
such other Person in connection with, or in contemplation of, such acquisition.
"Affiliate" of any Person means any Person (i) which directly or
indirectly controls or is controlled by, or is under direct or indirect common
control with, the referent Person, (ii) which beneficially owns or holds 10% or
more of any class of the Voting Stock of the referent Person, (iii) of which 10%
or more of the Voting Stock (or, in the case of a Person which is not a
corporation, 10% or more of the equity interest) is beneficially owned or held
by the referent Person or (iv) with respect to an individual, any immediate
family member of such person. For purposes of this definition, control of a
Person shall mean the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease,
assignment or other disposition to any Person other than the Company or any of
its Subsidiaries (including, without limitation, by means of a Sale and
Leaseback Transaction or a merger or consolidation) (collectively, for purposes
of this definition, a "transfer"), directly or indirectly, in one transaction or
a series of related transactions, of (a) any Capital Stock of any Subsidiary or
(b) any other properties or assets of the Company or any of its Subsidiaries
other than transfers of cash, Cash Equivalents, accounts receivable, inventory
or other properties or assets in the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include any of the
following: (i) any transfer of properties or assets (including Capital Stock)
that is governed by, and made in accordance with, the provisions described under
"Covenants--Limitations on Mergers and Certain Other Transactions"; (ii) any
transfer of properties or assets to an Unrestricted Subsidiary, if permitted
under the "Limitations on Restricted Payments" covenant; (iii) sales of damaged,
worn-out or obsolete equipment or assets that, in the Company's reasonable
judgment, are either no longer used or useful in the business of the Company or
its Subsidiaries; and (iv) any transfers that, but for this clause (iv), would
be Asset Sales, if after giving effect to such transfers, the aggregate Fair
Market Value of the properties or assets transferred in such transaction or any
such series of related transactions does not exceed $100,000.
81
<PAGE>
"Attributable Indebtedness," when used with respect to any Sale and
Leaseback Transaction, means, as at the time of determination, property subject
to such Sale and Leaseback Transaction and the present value (discounted at a
rate equivalent to the Company's then-current weighted average cost of funds for
borrowed money as at the time of determination, compounded on a semi-annual
basis) of the total obligations of the lessee for rental payments during the
remaining term of the lease included in any such Sale and Leaseback Transaction.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal,
state or foreign law for the relief of debtors.
"Board Resolution" means a duly adopted resolution of the Board of
Directors of the Company.
"Capital Improvement Plan" means the Company's plans to expand its
refinery capacity and improve and upgrade its retail network as described in
this Prospectus.
"Capital Stock" of any Person means any and all shares, rights to
purchase, warrants or options (whether or not currently exercisable),
participations or other equivalents of or interests in (however designated) the
equity (including without limitation common stock, preferred stock and
partnership interests) of such Person.
"Capitalized Lease Obligations" of any Person means the obligations of
such Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such obligation shall be the capitalized amount thereof determined in
accordance with GAAP.
"Cash Equivalents" means (i) marketable obligations with a maturity of
180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500 million; (iii) commercial
paper maturing no more than 180 days from the date of creation thereof issued by
a corporation that is not an Affiliate of the Company and is organized under the
laws of any state of the United States or the District of Columbia and rated at
least A-1 by S&P or at least P-1 by Moody's; (iv) repurchase obligations with a
term of not more than seven days for underlying securities of the types
described in clause (i) above entered into with any commercial bank meeting the
specifications of clause (ii) above; and (v) investments in money market or
other mutual funds substantially all of whose assets comprise securities of the
types described in clauses (i) through (iv) above.
"Change of Control" means the occurrence of any of the following: (i)
the consummation of any transaction the result of which is (x) if such
transaction occurs prior to the first sale of Common Equity of the Company
pursuant to a registration statement under the Securities Act that results in at
least 20% of the then outstanding Common Equity of the Company having been sold
to the public, that Permitted Holders beneficially own less than, directly or
indirectly, 51% of the Common Equity of the Company, and (y) if such transaction
occurs thereafter, that any Person or group (as such term is used in Section
13(d)(3) of the Exchange Act) (other than Permitted Holders) owns, directly or
indirectly, a majority of the Common Equity of the Company, (ii) the Company
consolidates with, or merges with or into, another person or sells, assigns,
conveys, transfers, leases or otherwise disposes of all or substantially all of
the Company's assets or the assets of Company and its Subsidiaries taken as a
whole to any Person, or any Person consolidates with, or merges with or into,
the Company, in any such event pursuant to a transaction in which the
outstanding Voting Stock of the Company, as the case may be, is converted into
or exchanged for cash, securities or other property, other than any such
transaction where the outstanding Voting Stock of the Company, as the case may
be, is converted into or exchanged for Voting Stock (other than Disqualified
Stock) of the surviving or transferee corporation and the beneficial owners of
the Voting
82
<PAGE>
Stock of the Company immediately prior to such transaction own, directly or
indirectly, not less than a majority of the Voting Stock of the surviving or
transferee corporation immediately after such transaction, (iii) the Company,
either individually or in conjunction with one or more Subsidiaries sells,
assigns, conveys, transfers, leases or otherwise disposes of, or the
Subsidiaries sell, assign, convey, transfer, lease or otherwise dispose of, all
or substantially all of the properties and assets of the Company and its
Subsidiaries, taken as a whole (either in one transaction or a series of related
transactions), including Capital Stock of the Subsidiaries, to any Person (other
than the Company or a Wholly Owned Subsidiary), or (iv) during any consecutive
two-year period, individuals who at the beginning of such period constituted the
Board of Directors of the Company (together with any new directors whose
election by such Board of Directors or whose nomination for election by the
stockholders of the Company was approved by either (i) a vote of two-thirds of
the directors then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved or (ii) a Permitted Holder) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office.
"Common Equity" of any Person means all Capital Stock of such Person
that is generally entitled to (i) vote in the election of directors of such
Person or (ii) if such Person is not a corporation, vote or otherwise
participate in the selection of the governing body, partners, managers or others
that controls the management and policies of such Person.
"Consolidated Amortization Expense" of any Person for any period means
the amortization expense of such Person and its Subsidiaries for such period (to
the extent included in the computation of Consolidated Net Income of such
Person), determined on a consolidated basis in accordance with GAAP.
"Consolidated Depreciation Expense" of any Person for any period means
the depreciation expense of such Person and its Subsidiaries for such period (to
the extent included in the computation of Consolidated Net Income of such
Person), determined on a consolidated basis in accordance with GAAP.
"Consolidated Fixed Charge Coverage Ratio" of any Person means, with
respect to any determination date, the ratio of (i) EBITDA for such Person's
four full fiscal quarters immediately preceding the determination date, to (ii)
the aggregate Fixed Charges of such Person for such four fiscal quarters. In
making such computations, (i) EBITDA and Fixed Charges shall be calculated on a
pro forma basis assuming that (A) the Indebtedness to be incurred or the
Disqualified Capital Stock to be issued (and all other Indebtedness incurred or
Disqualified Capital Stock issued after the first day of such period of four
full fiscal quarters referred to in the covenant described in paragraph (a)
under "-- Certain Covenants--Limitations on Additional Indebtedness" through and
including the date of determination), and (if applicable) the application of the
net proceeds therefrom (and from any other such Indebtedness or Disqualified
Capital Stock), including the refinancing of other Indebtedness, had been
incurred on the first day of such four quarter period and, in the case of
Acquired Indebtedness, on the assumption that the related transaction (whether
by means of purchase, merger or otherwise) also had occurred on such date with
the appropriate adjustments with respect to such acquisition being included in
such pro forma calculation and (B) any acquisition or disposition by the Company
or any Subsidiary of any properties or assets outside the ordinary course of
business or any repayment of any principal amount of any Indebtedness of the
Company or any Subsidiary prior to the stated maturity thereof, in either case
since the first day of such period of four full fiscal quarters through and
including the date of determination, had been consummated on such first day of
such four quarter period; (ii) the Fixed Charges attributable to interest on any
Indebtedness required to be computed on a pro forma basis in accordance with the
covenant described in paragraph (a) under "--Certain Covenants--Limitations on
Additional Indebtedness" and (A) bearing a floating interest rate shall be
computed as if the rate in effect on the date of computation had been the
applicable rate for the entire period and (B) which was not outstanding during
the period for which the computation is being made but which bears, at the
option of the Company, a fixed or floating rate of interest, shall be computed
by applying, at the option of the Company, either the fixed or floating rate;
(iii) the Fixed Charges attributable to interest on any Indebtedness under a
revolving credit facility required to be computed on a pro forma basis in
accordance with the covenant
83
<PAGE>
described in paragraph (a) under "--Certain Covenants--Limitations on Additional
Indebtedness" shall be computed based upon the average daily balance of such
Indebtedness during the applicable period, provided that such average daily
balance shall be reduced by the amount of any repayment of Indebtedness under a
revolving credit facility during the applicable period, which repayment
permanently reduced the commitments or amounts available to be reborrowed under
such facility, (iv) notwithstanding the foregoing clauses (ii) and (iii),
interest on Indebtedness determined on a fluctuating basis, to the extent such
interest is covered by agreements relating to Hedging Obligations, shall be
deemed to have accrued at the rate per annum resulting after giving effect to
the operation of such agreements; and (v) if after the first day of the
applicable four quarter period the Company has permanently retired any
Indebtedness out of the net proceeds of the issuance and sale of shares of
Capital Stock (other than Disqualified Capital Stock) of the Company within 30
days of such issuance and sale, Fixed Charges shall be calculated on a pro forma
basis as if such Indebtedness had been retired on the first day of such period.
"Consolidated Income Tax Expense" means, for any Person for any period,
the provision for taxes based on income and profits of such Person and its
Subsidiaries to the extent such income or profits were included in computing
Consolidated Net Income of such Person for such period.
"Consolidated Interest Expense" means, without duplication, with
respect to any Person for any period, the sum of the interest expense on all
Indebtedness of such Person and its Subsidiaries for such period, determined on
a consolidated basis in accordance with GAAP and including, without limitation
(i) imputed interest on Capitalized Lease Obligations and Attributable
Indebtedness, (ii) commissions, discounts and other fees and charges owed with
respect to letters of credit securing financial obligations and bankers'
acceptance financing, (iii) the net costs associated with Hedging Obligations,
(iv) amortization of other financing fees and expenses, (v) the interest portion
of any deferred payment obligations, (vi) amortization of debt discount or
premium, if any, (vii) all other non-cash interest expense, (viii) capitalized
interest, (ix) all interest payable with respect to discontinued operations, and
(x) all interest on any Indebtedness of any other Person guaranteed by the
referent Person or any of its Subsidiaries.
"Consolidated Net Income" of any Person for any period means the net
income (or loss) of such Person and its Subsidiaries for such period determined
on a consolidated basis in accordance with GAAP; provided that there shall be
excluded from such net income (to the extent otherwise included therein),
without duplication: (i) the net income (or loss) of any Person (other than a
Subsidiary of the referent Person) in which any Person other than the referent
Person has an ownership interest, except to the extent that any such income has
actually been received by the referent Person or any of its Wholly-Owned
Subsidiaries in the form of cash dividends during such period; (ii) except to
the extent includible in the consolidated net income of the referent Person
pursuant to the foregoing clause (i), the net income (or loss) of any Person
that accrued prior to the date that (a) such Person becomes a Subsidiary of the
referent Person or is merged into or consolidated with the referent Person or
any of its Subsidiaries or (b) the assets of such Person are acquired by the
referent Person or any of its Subsidiaries; (iii) the net income of any
Subsidiary of the referent Person during such period to the extent that the
declaration or payment of dividends or similar distributions by such Subsidiary
of that income (a) is not permitted by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Subsidiary during such period or (b)
would be subject to any taxes payable on such dividend or distribution; (iv) any
gain (but not loss), together with any related provisions for taxes on any such
gain, realized during such period by the referent Person or any of its
Subsidiaries upon (a) the acquisition of any securities, or the extinguishment
of any Indebtedness, of the referent Person or any of its Subsidiaries or (b)
any Asset Sale by the referent Person or any of its Subsidiaries, (v) any
extraordinary gain (but not extraordinary loss), together with any related
provision for taxes on any such extraordinary gain, realized by the referent
Person or any of its Subsidiaries during such period; and (vi) in the case of a
successor to such Person by consolidation, merger or transfer of its assets, any
earnings of the successor prior to such merger, consolidation or transfer of
assets; and provided, further, that (y) any gain referred to in clauses (iv) and
(v) above that relates to a Restricted
84
<PAGE>
Investment and which is received in cash by the referent Person or one of its
Subsidiaries during such period shall be included in the consolidated net income
of the referent Person.
"Consolidated Net Worth" means, with respect to any Person as of any
date, the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such date plus (ii) the
respective amounts reported on such Person's balance sheet as of such date with
respect to any series of preferred stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by such
Person upon issuance of such preferred stock, less all write-ups (other than
write-ups resulting from foreign currency translations and write-ups of tangible
assets of a going concern business made within 12 months after the acquisition
of such business) subsequent to the date of the Indenture in the book value of
any asset owned by such Person or a Subsidiary of such Person.
"Consolidated Tangible Assets" of any Person as of any date means the
total assets of such Person and its Subsidiaries (excluding any assets that
would be classified as "intangible assets" under GAAP) on a consolidated basis
at such date, determined in accordance with GAAP, less all write-ups subsequent
to the Issue Date in the book value of any asset owned by such Person or any of
its Subsidiaries.
"Custodian" means any receiver, trustee, assignee, liquidator,
sequestrator or similar official under any Bankruptcy Law.
"Default" means any event, act or condition that is, or after notice or
the passage of time or both would be, an Event of Default.
"Disqualified Capital Stock" means any Capital Stock of such Person or
any of its Subsidiaries that, by its terms, by the terms of any agreement
related thereto or by the terms of any security into which it is convertible,
puttable or exchangeable, is, or upon the happening of any event or the passage
of time would be, required to be redeemed or repurchased by such Person or any
to its Subsidiaries, whether or not at the option of the holder thereof, or
matures or is mandatorily redeemable, pursuant to a sinking fund obligation or
otherwise, in whole or in part, on or prior to the final maturity date of the
Notes; provided, however, that any class of Capital Stock of such Person that,
by its terms, authorizes such Person to satisfy in full its obligations with
respect to the payment of dividends or upon maturity, redemption (pursuant to a
sinking fund or otherwise) or repurchase thereof or otherwise by the delivery of
Capital Stock that is not Disqualified Capital Stock, and that is not
convertible, puttable or exchangeable for Disqualified Capital Stock or
Indebtedness, shall not be deemed to be Disqualified Capital Stock so long as
such Person satisfies its obligations with respect thereto solely by the
delivery of Capital Stock that is not Disqualified Capital Stock.
"EBITDA" means, with respect to any Person for any period, without
duplication, the sum of the amounts for such period of (i) Consolidated Net
Income, (ii) Consolidated Income Tax Expense, (iii) Consolidated Amortization
Expense (but only to the extent not included in Fixed Charges), (iv)
Consolidated Depreciation Expense, (v) Fixed Charges, (vi) prepayment or
make-whole payments incurred in connection with the repayment of Indebtedness on
the date of the Indenture, and (vii) all other non-cash items reducing the
Consolidated Net Income (excluding any such non-cash charge that results in an
accrual of a reserve for cash charges in any future period) of such Person and
its Subsidiaries, in each case determined on a consolidated basis in accordance
with GAAP (provided, however, that the amounts set forth in clauses (ii) through
(vii) shall be included without duplication and only to the extent such amounts
actually reduced Consolidated Net Income), less the aggregate amount of all
non-cash items, determined on a consolidated basis, to the extent such items
increase Consolidated Net Income.
"Equity Offering" means an offering or sale of Capital Stock (other
than Disqualified Capital Stock) of the Company pursuant to a registration
statement filed with the Commission in accordance with the Securities Act or
pursuant to an exemption from the registration requirements thereof.
85
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Indebtedness" means all of the Indebtedness of the Company
and its Subsidiaries that is outstanding on the Issue Date.
"Fair Market Value" means the fair market value as determined in good
faith by the Board of Directors and evidenced by a Board Resolution.
"Fixed Charges" means, with respect to any Person for any period, the
sum of (a) the Consolidated Interest Expense of such Person and its Subsidiaries
for such period, and (b) the product of (i) all cash dividend payments (and
non-cash dividend payments in the case of a Person that is a Subsidiary) on any
series of preferred stock of such Person or a Subsidiary of such Person, times
(ii) a fraction, the numerator of which is one and the denominator of which is
one minus the then current combined federal, state and local statutory tax rate
of such Person, expressed as a decimal, in each case, on a consolidated basis
and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect on the Issue date.
"Hedging Obligations" of any person means the obligations of such
person pursuant to any interest rate swap agreement, interest rate collar
agreement or other similar agreement or arrangement relating to interest rates.
"Indebtedness" of any Person at any date means, without duplication:
(i) all liabilities, contingent or otherwise, of such Person for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
person or only to a portion thereof); (ii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments; (iii) all
obligations of such Person in respect of letters of credit or other similar
instruments (or reimbursement obligations with respect thereto); (iv) all
obligations of such Person to pay the deferred and unpaid purchase price of
property or services, except trade payables and accrued expenses incurred by
such Person in the ordinary course of business in connection with obtaining
goods, materials or services, which payable is not overdue by more than 60 days
according to the original terms of sale unless such payable is being contested
in good faith; (v) the maximum fixed repurchase price of all Disqualified
Capital Stock of such Person; (vi) all Capitalized Lease Obligations of such
Person; (vii) all Indebtedness of others secured by a Lien on any asset of such
Person, whether or not such Indebtedness is assumed by such Person; (viii) all
Indebtedness of others guaranteed by such Person to the extent of such
guarantee; provided that Indebtedness of the Company or its Subsidiaries that is
guaranteed by the Company or the Company's Subsidiaries shall only be counted
once in the calculation of the amount of Indebtedness of the Company and its
Subsidiaries on a consolidated basis; and (ix) all Attributable Indebtedness.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above, the
maximum liability of such Person for any such contingent obligations at such
date and, in the case of clause (vii), the lesser of (A) the Fair Market Value
of any asset subject to a Lien securing the Indebtedness of others on the date
that the Lien attaches and (B) the amount of the Indebtedness secured. For
purposes of the preceding sentence, the "maximum fixed repurchase price" of any
Disqualified Capital Stock that does not have a fixed repurchase price shall be
calculated in accordance with the terms of such Disqualified Capital Stock as if
such Disqualified Capital Stock were purchased on any date on which Indebtedness
shall be required to be determined pursuant to the Indenture, and if such price
is based upon, or measured by, the fair market value of such Disqualified
Capital Stock (or any equity security for which it may be exchanged or
converted), such fair market value shall be determined in good faith by the
Board of Directors of such Person, which determination shall be evidenced by a
Board Resolution.
86
<PAGE>
"Independent Director" means a director of the Company who has not and
whose Affiliates have not, at any time during the twelve months prior to the
taking of any action hereunder, directly or indirectly, received, or entered
into any understanding or agreement to receive, any compensation, payment or
other benefit, of any type or form, from the Company or any of its Affiliates,
other than customary directors fees for serving on the Board of Directors of the
Company or any Affiliate and reimbursement of out-of-pocket expenses for
attendance at the Company's or Affiliate's board and board committee meetings.
"Independent Financial Advisor" means an accounting, appraisal or
investment banking firm of nationally recognized standing that is, in the
reasonable judgment of the Company's Board of Directors, qualified to perform
the task for which it has been engaged and disinterested and independent with
respect to the Company and its Affiliates.
"Index Amount" means, for any year, an amount equal to the percentage
increase, if any, in the Index as of the end of such year when compared to the
Index in effect at the end of the previous year multiplied by the applicable
amount of total compensation for such year. The "Index" means the Consumer Price
Index for all Urban Consumers (CPI-U), Northeast, all items, 1982-84 = 100,
published by the Bureau of Labor Statistics of the U. S. Department of Labor or
if at any time such Index is not published, any substitute index designated by
the Company and appropriately adjusted.
"Investments" of any Person means (i) all investments by such Person in
any other Person in the form of loans, advances or capital contributions
(excluding commission, travel and similar advances to officers and employees
made in the ordinary course of business) or similar credit extensions
constituting Indebtedness of such Person, and any guarantee of Indebtedness of
any other Person, (ii) all purchases (or other acquisitions for consideration)
by such Person of Indebtedness, Capital Stock or other securities of any other
Person and (iii) all other items that would be classified as investments
(including without limitation purchases of assets outside the ordinary course of
business) on a balance sheet of such Person prepared in accordance with GAAP.
"Issue Date" means the date the Original Notes are initially issued.
"Lien" means, with respect to any asset or property, any mortgage, deed
of trust, lien (statutory or other), pledge, lease, easement, restriction,
covenant, charge, security interest or other encumbrance of any kind or nature
in respect of such asset or property, whether or not filed, recorded or
otherwise perfected under applicable law (including without limitation any
conditional sale or other title retention agreement, and any lease in the nature
thereof, any option or other agreement to sell, and any filing of, or agreement
to give, any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"Net Available Proceeds" means, with respect to any Asset Sale, the
proceeds thereof in the form of cash or Cash Equivalents including payments in
respect of deferred payment obligations when received in the form of cash or
Cash Equivalents (except to the extent that such obligations are financed or
sold with recourse to the Company or any Subsidiary), net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of legal
counsel, accountants and investment banks) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale (after taking
into account any available tax credits or deductions and any tax sharing
arrangements), (iii) amounts required to be paid to any Person (other than the
Company or any Subsidiary) owning a beneficial interest in the properties or
assets subject to the Asset Sale or having a Lien therein and (iv) appropriate
amounts to be provided by the Company or any Subsidiary, as the case may be, as
a reserve required in accordance with GAAP against any liabilities associated
with such Asset Sale and retained by the Company or any Subsidiary, as the case
may be, after such Asset Sale, including, without limitation, pensions and other
postemployment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such Asset
Sale, all as reflected in an Officers' Certificate
87
<PAGE>
delivered to the Trustee; provided, however, that any amounts remaining after
adjustments, revaluations or liquidations of such reserves shall constitute Net
Available Proceeds.
"New Bank Credit Facility" means that certain Credit Agreement dated as
of June 9, 1997 by and among PNC Bank, National Association, as agent, the banks
party thereto, the Company, United Refining Company of Pennsylvania and Kiantone
Pipeline Corporation, as subsequently amended, restated or replaced from time to
time. See "Description of Certain Indebtedness."
"Non-Recourse Purchase Money Indebtedness" means Indebtedness of the
Company or any of its Subsidiaries incurred (a) to finance the purchase of any
assets of the Company or any of its Subsidiaries within 90 days of such
purchase, (b) to the extent the amount of Indebtedness thereunder does not
exceed 100% of the purchase cost of such assets, (c) to the extent the purchase
cost of such assets is or should be included in "additions to property, plant
and equipment" in accordance with GAAP, (d) to the extent that such Indebtedness
is non-recourse to the Company or any of its Subsidiaries or any of their
respective assets other than the assets so purchased, and (e) to the extent the
purchase of such assets is not part of an acquisition of any Person.
"Other Capital Expenditures" means capital expenditures and expenses
incurred to fund capital improvement projects of the Company including without
limitation, to fund the replacement of its underground storage tanks to comply
with applicable environmental laws and regulations.
"Payment Restriction", with respect to a Subsidiary of any Person,
means any encumbrance, restriction of limitation, whether by operation of the
terms of its charter or by reason of any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation, on the ability of (i)
such Subsidiary to (a) pay dividends or make other distributions on its Capital
Stock or make payments on any obligation, liability or Indebtedness owed to such
Person or any other Subsidiary of such Person, (b) make loans or advances to
such Person or any other Subsidiary or such Person or (c) transfer any of its
properties or assets to such Person or any other Subsidiary of such Person or
(ii) such Person or any other Subsidiary of such Person to receive or retain any
such dividends, distributions or payments, loans or advances or transfer or
properties or assets.
"Permitted Holders" means John A. Catsimatidis and his Related Parties.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness in an aggregate principal amount at any time
outstanding not to exceed 85% of the book value of the eligible
accounts receivable and 60% of inventory of the Company and its
Subsidiaries, calculated on a consolidated basis and in accordance
with GAAP;
(ii) Indebtedness under the Notes, the Subsidiary Guarantees and
the Indenture;
(iii) Existing Indebtedness;
(iv) Indebtedness under Hedging Obligations, provided that (1)
such Hedging Obligations are related to payment obligations on
Permitted Indebtedness or Indebtedness otherwise permitted by
paragraph (a) of the "Limitations on Additional Indebtedness"
covenant, and (2) the notional principal amount of such Hedging
Obligations does not exceed the principal amount of such Indebtedness
to which such Hedging Obligations relate;
(v) Indebtedness of the Company to a Subsidiary and Indebtedness
of any Subsidiary to the Company or a Subsidiary; provided, however,
that upon either (1) the subsequent issuance (other than directors'
qualifying shares), sale, transfer or other disposition of any Capital
Stock or any other event which results in any such Subsidiary ceasing
to be a Subsidiary or (2) the transfer or other disposition of any
such Indebtedness (except to the Company or a Subsidiary),
88
<PAGE>
the provisions of any such Indebtedness (except to the Company or a
Subsidiary), the provisions of this clause (v) shall no longer be
applicable to such Indebtedness and such Indebtedness shall be deemed,
in each case, to be incurred and shall be treated as an incurrence for
purposes of paragraph (a) of the "Limitations on Additional
Indebtedness" covenant at the time the Subsidiary in question ceased
to be a Subsidiary or the time such transfer or other disposition
occurred;
(vi) Indebtedness in respect of bid, performance or surety bonds
issued for the account of the Company in the ordinary course of
business, including guarantees or obligations of the Company with
respect to letters of credit supporting such bid, performance or
surety obligations (in each case other than for an obligation for
money borrowed);
(vii) Indebtedness in respect of Non-Recourse Purchase Money
Indebtedness incurred by the Company or any Subsidiary; and
(viii) Refinancing Indebtedness.
"Permitted Liens" means: (i) Liens for taxes, assessments or
governmental charges or claims that either (a) are not yet delinquent or (b) are
being contested in good faith by appropriate proceedings and as to which
appropriate reserves or other provisions have been made in accordance with GAAP;
(ii) statutory Liens of landlords and carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other Liens imposed by law arising in
the ordinary course of business and with respect to amounts that either (a) are
not yet delinquent or (b) are being contested in good faith by appropriate
proceedings and as to which appropriate reserves or other provisions have been
made in accordance with GAAP; (iii) Liens incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (iv) Liens incurred
or deposits made to secure the performance of tenders, bids, leases, statutory
obligations, surety and appeal bonds, progress payments, government contracts
and other obligations of like nature (exclusive of obligations for the payment
of borrowed money), in each case, incurred in the ordinary course of business;
(v) easements, rights-of-way, restrictions and other similar charges or
encumbrances in respect of real property not interfering with the ordinary
conduct of the business of the Company or any of its Subsidiaries and not
materially affecting the value of the property subject thereto; (vi) leases or
subleases granted to others not interfering with the ordinary conduct of the
business of the Company or any of its Subsidiaries and not materially affecting
the value of the property subject thereto; (vii) Liens securing Acquired
Indebtedness, provided that such Liens (x) are not incurred in connection with,
or in contemplation of, the acquisition of the property or assets acquired and
(y) do not extend to or cover any property or assets of the Company or any of
its Subsidiaries other than the property or assets so acquired; (viii) Liens
securing Refinancing Indebtedness to the extent incurred to repay, refinance or
refund Indebtedness that is secured by Liens and outstanding as of the Issue
Date (after giving effect to the application of the proceeds of the Offering),
provided that such Refinancing Indebtedness shall be secured solely by the
assets securing the outstanding Indebtedness being repaid, refinanced or
refunded; (ix) Liens that secure Sale and Leaseback Transactions that are
permitted under the covenants described under "Limitations on Additional
Indebtedness" and "Limitations on Sale and Leaseback Transactions"; (x) Liens
securing Indebtedness between the Company and its Wholly Owned Subsidiaries or
among such Wholly Owned Subsidiaries; and (xi) Liens existing on the Issue Date
to the extent and in the manner such Liens are in effect on the Issue Date
(after giving effect to the application of the proceeds of the Offering); (xii)
Liens securing the New Bank Credit Facility; provided that any such Liens shall
not extend to or cover Restricted Inventory of the Company or any of its
Subsidiaries unless on the date such Liens are incurred either (A)(1) the
Company has in effect a rating no lower than B from Standard & Poor's ("S&P"),
(2) the Notes have in effect a rating no lower than B from S&P and (3) the Notes
have in effect a rating no lower than B3 from Moody's, or (B)(1) the Notes have
in effect a rating no lower than B3 from Moody's and (2) the Company's
Consolidated Fixed Charge Coverage Ratio for the four full fiscal quarters
immediately preceding the determination date is no less than 2.25 to 1; (xiii)
Liens securing Non-Recourse Purchase Money Indebtedness, provided, that such
Liens extend only to the
89
<PAGE>
property being acquired and such Lien is created within 90 days of the purchase
of such property and (xiv) Liens securing Indebtedness in an amount not to
exceed $500,000 at any time outstanding.
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
"Petroleum Investment" means an Investment by the Company in an entity
engaged in the business of petroleum refining and/or retail marketing of refined
petroleum products and which is not an Affiliate of the Company.
"Plan of Liquidation", with respect to any Person, means a plan that
provides for, contemplates or the effectuation of which is preceded or
accompanied by (whether or not substantially contemporaneously, in phases or
otherwise): (i) the sale, lease, conveyance or other disposition of all or
substantially all of the assets of such Person otherwise than as an entirety or
substantially as an entirety; and (ii) the distribution of all or substantially
all of the proceeds of such sale, lease, conveyance or other disposition and all
or substantially all of the remaining assets of such Person to Holders of
Capital Stock of such Person.
"Refinancing Indebtedness" means Indebtedness of the Company or a
Subsidiary of the Company issued in exchange for, or the proceeds from the
issuance and sale or disbursement of which are used substantially concurrently
to repay, redeem, refund, refinance, discharge or otherwise retire for value, in
whole or in part (collectively, "repay"), or constituting an amendment,
modification or supplement to or a deferral or renewal of (collectively, an
"amendment"), any Indebtedness of the Company or any of its Subsidiaries or
incurred pursuant to the Fixed Charge Coverage Ratio test of the covenant
described under "Limitations on Additional Indebtedness" in a principal amount
not in excess of the principal amount of the Indebtedness so repaid or amended
(or, if such Refinancing Indebtedness refinances Indebtedness under a revolving
credit facility or other agreement providing a commitment for subsequent
borrowings, with a maximum commitment not to exceed the maximum commitment under
such revolving credit facility or other agreement); provided that: (i) the
Refinancing Indebtedness is the obligation of the same Person, and is
subordinated to the Notes, if at all, to the same extent, as the Indebtedness
being repaid or amended; (ii) the Refinancing Indebtedness is scheduled to
mature either (a) no earlier than the Indebtedness being repaid or amended or
(b) after the maturity date of the Notes; (iii) the portion, if any, of the
Refinancing Indebtedness that is scheduled to mature on or prior to the maturity
date of the Notes has a Weighted Average Life to Maturity at the time such
Refinancing Indebtedness is incurred that is equal to or greater than the
Weighted Average Life to Maturity of the portion of the Indebtedness being
repaid that is scheduled to mature on or prior to the maturity date of the
Notes; and (iv) the Refinancing Indebtedness is secured only to the extent, if
at all, and by the assets, that the Indebtedness being repaid or amended is
secured.
"Related Business Investment" means any Investment directly by the
Company or its Subsidiaries in any business that is closely related to or
complements the business of the Company or its Subsidiaries as such business
exists on the Issue Date.
"Related Party" with respect to any Person means (i) any 80% (or more)
owned Subsidiary, or spouse or immediate family member (in the case of an
individual) of such Person, or (ii) any trust, corporation, partnership or other
entity, the beneficiaries, stockholders, partners, owners or Persons
beneficially holding an 80% or more controlling interest of which consist of
such Person and/or such other Persons referred to in the immediately preceding
clause (i).
"Restricted Debt Payment" means any purchase, redemption, defeasance
(including without limitation in substance or legal defeasance) or other
acquisition or retirement for value, directly or indirectly, by the Company or a
Subsidiary, prior to the scheduled maturity or prior to any scheduled
90
<PAGE>
repayment of principal or sinking fund payment, as the case may be, in respect
of Subordinated Indebtedness.
"Restricted Inventory" means all the Company's and its Subsidiaries'
inventory other than inventory of crude oil and asphalt wherever located and
motor gasoline located in Warren, Pennsylvania.
"Restricted Investment", with respect to any Person, means any
Investment by such Person (other than investments in Cash Equivalents) in any
Person that is not a Subsidiary, including its Unrestricted Subsidiaries, if
any.
"Restricted Payment" means with respect to any Person: (i) the
declaration of any dividend (other than a dividend declared by a Wholly Owned
Subsidiary to holders of its Common Equity) or the making of any other payment
or distribution of cash, securities or other property or assets in respect of
such Person's Capital Stock (except that a dividend payable solely in Capital
Stock (other than Disqualified Capital Stock) of such Person shall not
constitute a Restricted Payment); (ii) any payment on account of the purchase,
redemption, retirement or other acquisition for value of such Person's Capital
Stock or any other payment or distribution made in respect thereof, either
directly or indirectly (other than a payment solely in Capital Stock that is not
Disqualified Capital Stock); (iii) any Restricted Investment; (iv) any
Restricted Debt Payment; or (v) any payments under the Servicing Agreement in
excess of $1 million per fiscal year.
"Sale and Leaseback Transaction" means with respect to any Person an
arrangement with any bank, insurance company or other lender or investor or to
which such lender or investor is a party, providing for the leasing by such
Person or any of its Subsidiaries of any property or asset of such Person or any
of its Subsidiaries which has been or is being sold or transferred by such
Person or such Subsidiary to such lender or investor or to any Person to whom
funds have been or are to be advanced by such lender or investor on the security
of such property or asset.
"Servicing Agreement" means that certain agreement dated June 9, 1997,
between RAG and the Company, pursuant to which the Company shall pay to RAG for
the use of RAG's New York headquarters, as such agreement may be amended from
time to time, and any agreement concerning the same subject matter between the
Company and John A. Catsimatidis and/or any of his Affiliates, whether such
agreement is a replacement thereof or in addition thereto.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the Issue Date, except all references to "10 percent" in such definition shall
be changed to "2 percent".
"Subordinated Indebtedness" means Indebtedness of the Company or any
Subsidiary that is subordinated in right of payment to the Notes or the
Subsidiary Guarantees, respectively.
"Subsidiary" of any Person means (i) any corporation of which at least
a majority of the aggregate voting power of all classes of the Common Equity is
owned by such Person directly or through one or more other Subsidiaries of such
Person and (ii) any entity other than a corporation in which such Person,
directly or indirectly, owns at least a majority of the Common Equity of such
entity, other than any such person designated as an Unrestricted Subsidiary in
accordance with the definition of "Unrestricted Subsidiary".
"Subsidiary Guarantors" means each of Kiantone Pipeline Corporation,
Kiantone Pipeline Company, United Jet Center, Inc., United Refining Company of
Pennsylvania, Kwik Fill, Inc., Independent Gasoline and Oil Company of
Rochester, Inc., Bell Oil Corp., PPC, Inc., Super Test Petroleum, Inc.,
Kwik-Fil, Inc. and Vulcan Asphalt Refining Corporation and each other person who
is required to become a Subsidiary Guarantor by the terms of the Indenture.
91
<PAGE>
"Tax Sharing Agreement" means the Tax Sharing Agreement dated June 9,
1997, by and among RAG, the Company and certain of their affiliates, as in
effect on the Issue Date and as amended from time to time thereafter; provided
that any such amendment does not increase the liability or decrease the rights
of the Company or any of its Subsidiaries under the Tax Sharing Agreement.
"Unrestricted Subsidiary" means each of the Subsidiaries of the Company
so designated by a resolution adopted by the Board of Directors of the Company
and whose creditors have no direct or indirect recourse (including without
limitation recourse with respect to the payment of principal of or interest on
Indebtedness of such Subsidiary) to the Company or a Subsidiary; provided,
however, that the Board of Directors of the Company will be prohibited from
designating as an Unrestricted Subsidiary any Subsidiary existing on the date of
the Indenture. The Board of Directors of the Company may designate an
Unrestricted Subsidiary to be a Subsidiary, provided that (i) any such
redesignation shall be deemed to be an incurrence by the Company and its
Subsidiaries of the Indebtedness (if any) of such redesignated Subsidiary for
purposes of the "Limitations on Additional Indebtedness" covenant in the
Indenture as of the date of such redesignation and (ii) immediately after giving
effect to such redesignation and the incurrence of any such additional
Indebtedness, the Company and its Subsidiaries could incur $1 of additional
Indebtedness pursuant to the Consolidated Fixed Charge Coverage Ratio test set
forth in the "Limitations on Additional Indebtedness" covenant described above.
Any such designation or redesignation by the Board of Directors shall be
evidenced to the Trustee by the filing with the Trustee of a certified copy of
the Board Resolution giving effect to such designation or redesignation and an
Officer's Certificate certifying that such designation or redesignation complied
with the foregoing conditions and setting forth the underlying calculations of
such certificate.
"Voting Stock", with respect to any Person, means securities of any
class of Capital Stock of such Person entitling the holders thereof (whether at
all times or only so long as no senior class of stock has voting power by reason
of any contingency) to vote in the election of members of the board of directors
of such Person.
"Weighted Average Life to Maturity", when applied to any Indebtedness
at any date, means the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payment of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly-Owned Subsidiary" of the Company means a Subsidiary of the
Company, of which 100% of the Common Equity (except for directors' qualifying
shares or certain minority interests owned by other Persons solely due to local
law requirements that there be more than one stockholder, but which interest is
not in excess of what is required for such purpose) is owned directly by the
Company or through one or more Wholly-Owned Subsidiaries of the Company.
92
<PAGE>
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following summary describes only the United States federal income
tax consequences of the ownership of Notes as of the date hereof relating to the
exchange of the Original Notes for New Notes. It deals only with Notes held as
capital assets by United States Holders and does not deal with special
situations, such as those of dealers in securities or currencies, financial
institutions, life insurance companies, persons holding Notes as a part of the
hedging or conversion transaction or a straddle or United States Holder whose
"functional currency" is not the U.S. dollar. Furthermore, the discussion below
is based on the provisions of the Internal Revenue Code of 1986, as amended, and
regulations, rulings and judicial decisions thereunder as of the date hereof,
and such authorities may be repealed, revoked or modified so as to result in
federal income tax consequences different from those discussed below. Persons
considering the purchase, ownership or disposition of Notes should consult their
own tax advisors concerning the federal income tax consequences in light of
their particular situations as well as any consequences arising under the laws
of any other taxing jurisdiction. As used herein a "United States Holder" of a
Note means a holder that is a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in or under the
laws of the United States or any political subdivision thereof, or an estate or
trust the income of which is subject to United States federal income taxation
regardless of its source.
Exchange Offer
The exchange of New Notes for the Original Notes pursuant to the
Exchange Offer will not be treated as an "exchange" for federal income tax
purposes because the New Notes will not be considered to differ materially in
kind or extent from the Original Notes. Rather, the New Notes received by a
holder will be treated as a continuation of the Original Notes in the hands of
such holder. As a result, there will be no federal income tax consequences to
holders exchanging the Original Notes for the New Notes pursuant to the Exchange
Offer. If, however, the exchange of the Original Notes for the New Notes were
treated as an "exchange" for federal income tax purposes, such exchange would
constitute a recapitalization for federal income tax purposes. Holders
exchanging Original Notes pursuant to such recapitalization would not recognize
any gain or loss upon the exchange.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Original Notes
where such Original Notes were acquired as a result of market-making activities
or other trading activities. The Company has agreed that, for such time period
as shall be necessary, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until , all dealers effecting transactions in the New Notes may be
required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writings of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account pursuant to
the Exchange Offer and any broker or dealer that participates in a distribution
of such New Notes may be deemed to be an "underwriter" within the meaning of the
93
<PAGE>
Securities Act and any profit on any such resale of New Notes and any
commissions or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. Each letter of transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
The Company has agreed to pay all expenses incident to the Exchange
Offer (including the expenses of one counsel for the holders of the Notes) other
than commissions or concessions of any brokers or dealers and will indemnify
holders of the Notes (including any broker-dealers) against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
Certain legal matters with respect to the Notes offered hereby will be
passed upon for the Company by Lowenthal, Landau, Fischer & Bring, P.C., New
York, New York. Martin R. Bring, a member of the firm of Lowenthal, Landau,
Fischer & Bring, P.C., is a director of the Company.
EXPERTS
The consolidated financial statements and schedule included in this
Prospectus and in the Registration Statement have been audited by BDO Seidman,
LLP, independent certified public accountants, to the extent and for the periods
set forth in their reports contained herein and in the Registration Statement.
All such financial statements and schedule have been included in reliance upon
such reports given upon the authority of such firm as experts in auditing and
accounting.
94
<PAGE>
GLOSSARY
The following table includes definitions of certain terms used in this
Prospectus:
alkylation: a refining process for chemically combining isobutane with
olefins, such as butylene, through the control of temperature and pressure in
the presence of sulfuric acid catalyst to produce alkylate, a high octane
gasoline component.
API gravity: an arbitrary scale recommended by the American Petroleum
Institute for measuring the density of crude oil or other liquid hydrocarbons
and expressed as "Degrees API".
aromatics: hydrocarbons whose molecular structure consists of rings
containing six carbon atoms. Aromatics are high octane chemicals but their usage
in gasoline is limited by environmental regulation. Benzene, toluene and xylenes
are examples of aromatics.
barrels: unit of measurement commonly used in the refining industry,
equivalent to 42 U.S. gallons.
bbl: abbreviation for barrel.
bottom of the barrel ("bottoms"): refers to the fraction of crude oil with
the highest boiling point, typically 1000(degree) F or higher, which collects in
the bottom of a fractionation tower.
bpd: barrels per day; when used in connection with a discussion of an
operating capacity, bpd means that the refinery is believed capable of averaging
the given bpd rate seven days per week over a long period of time, net of a
reasonably anticipated number of days down for maintenance or other reasons.
crude unit: equipment used in the refining process which separates crude
oil components at slightly higher than atmospheric pressure by heating the crude
oil to a temperature of approximately 700(degree) F in a series of heat
exchangers and a furnace and subsequently condensing the fractions by cooling.
The Company's crude unit consists of one distillation tower, one furnace and
multiple heat exchangers and pumps.
distillate hydrotreater: refinery equipment used in the refining process
for treating the middle distillate fraction from the crude unit in the presence
of a catalyst and substantial quantities of hydrogen. Hydrotreating includes
desulfurization and other chemical reactions to upgrade the quality of the
product. The Company also hydrotreats light cycle oil, a diesel component
produced from the fluid catalytic cracking unit.
electrostatic precipitator: large hoppers which electrically attract and
capture particulates in the flue gas from the fluid catalytic cracking unit.
Elements in the hoppers through which the flue gas travels bear an electric
charge which attracts the particulates, which are subsequently discharged into
the hoppers and removed as a non-hazardous solid waste.
fluid catalytic cracking unit: refinery equipment used in the refining
process to break down the larger, heavier and more complex hydrocarbon molecules
into simpler and lighter molecules. Gas oil feed contacts a hot circulating
catalyst and reacts to form a product mixture consisting of methane, ethane,
propane, propylene, butane, butylenes, catalytic gasoline, light cycle oil,
clarified oil and coke. The coke is consumed in the unit as refinery fuel.
gal: U.S. gallon
95
<PAGE>
gas oil: a liquid petroleum fraction produced in conventional distillation
operations and having an approximate boiling range from 650(degree) F to
1000(degree) F.
heavy crude: crude oil of 25(degree) API or less.
isomerization unit: refinery equipment used in the refining process which
alters the arrangement of atoms in the molecule without adding or removing
anything from the original material. The Company's unit converts low octane
normal pentane and hexane into isopentane and iso-hexane, high-octane gasoline
components.
light crude: crude oil of 30(degree) API or greater.
m: thousands
medium complexity: a relative term indicating that a refinery incorporates
upgrading units such as a reformer, fluid catalytic cracker, alkylation and
isomerization but does not utilize coking, petrochemical or lubricating oil
production units.
m gals: thousands of gallons
middle distillates: a general classification for one of the petroleum
fractions produced in conventional distillation operations and having an
approximate boiling range from 400(degree) F to 650(degree) F. Included are
kerosene, jet fuel, heating oils and diesel fuels.
mm: millions
naphtha: a petroleum fraction produced in conventional distillation
operations and having an approximate boiling range from 150(degree) F to
400(degree) F.
naphtha hydrotreating unit: refinery equipment used in the refining process
for treating the naphtha fraction from the atmospheric distillation unit in the
presence of a catalyst and substantial quantities of hydrogen. Hydrotreating
includes desulfurization and removal of substances that deactivate reformer unit
catalyst.
PADD: Petroleum Administration for Defense District. There are five such
districts in the United States. The Company's refinery and primary market area
are located in PADD I which encompasses most of the eastern seaboard.
polymerization unit: refinery equipment used in the refining process to
combine two or more molecules of propylene in the presence of a catalyst to form
a gasoline blending component having an octane value similar to that of regular
grade 87 road octane gasoline.
preflash unit: refinery equipment used in the refining process for
performing the initial separation of light components in crude oil by heating
the crude oil to a temperature of about 300(degree) F in a series of heat
exchangers and subsequent cooling of the fractions. The Company's preflash unit
consists of one distillation tower and multiple heat exchangers and pumps.
rated crude oil throughput capacity: the input crude oil capacity of the
crude unit after accounting for scheduled downtime, and estimated to be 65,000
bpd for the Company's crude unit.
reformer: refinery equipment used in the refining process whereby
controlled heat and pressure are used with a catalyst to rearrange certain
hydrocarbon molecules, converting low octane hydrocarbons into higher octane
hydrocarbons suitable for blending into finished gasoline. The Company operates
its reformer unit at varying severity thereby producing a lower octane or a
higher octane reformate product
96
<PAGE>
as required for blending regular and premium grades of gasoline. The reformer
also produces hydrogen which is utilized in the hydrotreater units.
reformulated gasoline (RFG): gasoline formulated for use in motor vehicles,
the composition and properties of which meet the requirements of the
reformulated gasoline regulations promulgated by the U.S. Environmental
Protection Agency.
road octane: the performance rating of gasoline which is posted on
dispensing pumps at gasoline service stations. Road octane is the arithmetic
average of a gasoline or gasoline component research octane and motor octane.
saturate gas plant: refinery equipment used in the refining process which
applies compression and distillation to separate gases and produce refinery fuel
gas, propane, butane and a pentane gasoline component.
SHRP specification paving asphalt: asphalt made to the specifications of
the Strategic Highway Research Program established by Congress to improve the
performance and durability of U.S. roads.
sulfur recovery unit: refinery equipment used in the refining process for
reacting hydrogen sulfide gas with oxygen at high temperature and in the
presence of a catalyst to form elemental sulfur for later sale.
throughput: volume of feedstock input to a process unit.
turnaround: the planned, periodic inspection and preventive maintenance of
the units of a refinery requiring the shutting down of the units. Turnaround
cycles vary for different units so that some units continue to operate when
others are inactive.
utilization: the ratio of the actual input to a unit to the rated capacity
of the unit. The Company's refinery utilization is the ratio of actual crude oil
input to the crude unit to the Company's 65,000 barrel per day rated capacity of
the crude unit.
yield: the output volume of the mixture of products produced from the
refining of crude oil input.
97
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants ......... F-2
Consolidated Financial Statements:
Balance Sheets ............................................. F-3
Statements of Operations ................................... F-4
Statements of Stockholder's Equity ......................... F-5
Statements of Cash Flows ................................... F-6
Notes to Consolidated Financial Statements ................. F-7 - F-21
F-1
<PAGE>
Report of Independent Certified Public Accountants
The Board of Directors and Stockholder
United Refining Company
We have audited the accompanying consolidated balance sheets of United
Refining Company and subsidiaries as of August 31, 1996 and 1997, and the
related consolidated statements of operations, stockholder's equity and cash
flows for each of the three years in the period ended August 31, 1997. These
consolidated financial statements are the responsibility of the management of
United Refining Company and its subsidiaries. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of United
Refining Company and subsidiaries as of August 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended August 31, 1997 in conformity with generally accepted
accounting principles.
As discussed in Note 1, the consolidated financial statements for the
years ended August 31, 1995 and 1996 have been revised to apply pushdown
accounting.
New York, New York
October 24, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
August 31,
1996 1997
-------- --------
<S> <C> <C>
Assets
Current:
Cash and cash equivalents $ 15,511 $11,024
Accounts receivable, net 33,340 29,762
Inventories 52,168 67,096
Prepaid expenses and other assets 6,728 6,786
Deferred income taxes -- 712
-------- --------
Total current assets 107,747 115,380
-------- --------
Property, plant and equipment:
Cost 230,606 234,956
Less: accumulated depreciation 53,564 60,757
-------- --------
Net property, plant and equipment 177,042 174,199
-------- --------
Amounts due from affiliated companies 19,038 --
Restricted cash and cash equivalents
and investments -- 48,168
Deferred financing costs 1,380 7,807
Other assets 897 838
-------- --------
$306,104 $346,392
======== ========
Liabilities and Stockholder's Equity
Current:
Current installments of long-term debt $ 16,759 $ 218
Accounts payable 22,387 29,010
Accrued liabilities 13,401 13,753
Sales, use and fuel taxes payable 14,827 13,056
Deferred income taxes 508 --
------- -------
Total current liabilities 67,882 56,037
Long term debt: less current installments 120,018 201,054
Deferred income taxes 18,699 17,390
Deferred gain on settlement of pension
plan obligations 2,635 2,420
Deferred retirement benefits 8,384 10,797
Other noncurrent liabilities 4,459 5,757
-------- ---------
Total liabilities 222,077 293,455
-------- ---------
Commitments and contingencies
Stockholder's equity:
Common stock, $.10 par value per share--
shares authorized 100; issued and
outstanding 100 -- --
Additional paid-in capital 7,150 7,150
Retained earnings 76,877 45,787
-------- --------
Total stockholder's equity 84,027 52,937
-------- --------
$306,104 $346,392
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
Year Ended August 31,
1995 1996 1997
------- -------- -------
<S> <C> <C> <C>
Net sales (includes consumer excise taxes of
$145,078, $142,791, and $139,371) $783,686 $833,818 $871,348
Cost of goods sold 688,499 728,596 767,941
-------- -------- --------
Gross profit 95,187 105,222 103,407
-------- -------- --------
Expenses:
Selling, general and administrative expenses 68,876 70,124 71,324
Depreciation and amortization expenses 8,199 8,216 8,230
-------- -------- --------
Total operating expenses 77,075 78,340 79,554
-------- -------- --------
Operating income 18,112 26,882 23,853
-------- -------- --------
Other income (expense):
Interest income 1,204 1,236 1,296
Interest expense (18,523) (17,606) (17,509)
Other, net 155 (884) (1,204)
------- -------- -------
(17,164) (17,254) (17,417)
------- -------- -------
Income before income tax expense
and extraordinary item 948 9,628 6,436
Income tax expense (benefit):
Current 1,500 200 3,100
Deferred (1,013) 3,587 (512)
-------- -------- -------
487 3,787 2,588
-------- -------- -------
Net income before extraordinary item 461 5,841 3,848
Extraordinary item, net of tax benefit of $4,200 -- -- (6,653)
-------- -------- -------
Net income (loss) $ 461 $ 5,841 $(2,805)
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands, except share data)
Additional Total
Common Stock Paid-In Retained Stockholder's
Shares Amount Capital Earnings Equity
------ ----- ------ ------- -------
<S> <C> <C> <C> <C> <C>
Balance at August 31, 1994 100 $ -- $7,150 $70,575 $77,725
Net income -- -- -- 461 461
--- ----- ------ ------- -------
Balance at August 31, 1995 100 -- 7,150 71,036 78,186
Net income -- -- -- 5,841 5,841
--- ----- ------ ------- -------
Balance at August 31, 1996 100 -- 7,150 76,877 84,027
Net loss -- -- -- (2,805) (2,805)
Dividend -- -- -- (28,285) (28,285)
--- ----- ------ ------- -------
Balance at August 31, 1997 100 $ -- $7,150 $45,787 $52,937
=== ===== ====== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended August 31,
1995 1996 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $ 461 $ 5,841 $ (2,805)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization ......................................... 8,568 8,505 8,564
Extraordinary item - write-off of deferred
financing costs .................................................. -- -- 1,118
Post-retirement benefits .............................................. 2,885 2,000 2,413
Change in deferred income taxes ....................................... (1,013) 3,587 (875)
Write-off of insurance claims receivable .............................. -- -- 1,251
(Gain)/loss on asset dispositions ..................................... (338) (132) 4
Cash provided by (used in) working capital items ...................... 6,698 5,614 (11,676)
Other, net ............................................................ 381 (440) (305)
--------- --------- ---------
Total adjustments ................................................ 17,181 19,134 494
--------- --------- ---------
Net cash provided by (used in) operating activities .............. 17,642 24,975 (2,311)
--------- --------- ---------
Cash flows from investing activities:
Restricted cash and cash equivalents and investments .................... -- -- (48,168)
Additions to property, plant and equipment .............................. (12,134) (4,562) (5,824)
Proceeds from asset dispositions ........................................ 639 653 422
--------- --------- ---------
Net cash used in investing activities ............................ (11,495) (3,909) (53,570)
--------- --------- ---------
Cash flows from financing activities:
Dividends ............................................................... -- -- (5,000)
Net (reductions) borrowings on revolving credit facility ................ (4,000) -- --
Principal reductions of long-term debt .................................. (629) (17,939) (135,512)
Proceeds from issuance of long-term debt ................................ -- -- 200,000
Deferred financing costs ................................................ (104) (30) (8,094)
--------- --------- ---------
Net cash provided by (used in) financing
activities ..................................................... (4,733) (17,969) 51,394
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents: .................... 1,414 3,097 (4,487)
Cash and cash equivalents, beginning of year .............................. 11,000 12,414 15,511
--------- --------- ---------
Cash and cash equivalents, end of year .................................... $ 12,414 $ 15,511 $ 11,024
========= ========= =========
Cash provided by (used in) working capital items:
Accounts receivable, net ................................................ $ 1,350 $ (3,585) $ (2,686)
Inventories ............................................................. 6,371 4,859 (14,852)
Prepaid expenses and other assets ....................................... 1,201 2,277 (344)
Accounts payable ........................................................ (4,012) 5,864 6,623
Accrued liabilities ..................................................... 1,973 (3,974) 1,354
Sales, use and fuel taxes payable ....................................... (185) 173 (1,771)
--------- --------- ---------
Total change ..................................................... $ 6,698 $ 5,614 $ (11,676)
========= ========= =========
Cash paid during the period for:
Interest (net of amount capitalized) .................................... $ 18,336 $ 18,480 $ 16,280
========= ========= =========
Income taxes ............................................................ $ 339 $ 929 $ 195
========= ========= =========
Non-cash financing activities:
Dividend ................................................................ $ -- $ -- $ 23,285
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Accounting Policies
Basis of Presentation
United Refining Company is a wholly-owned subsidiary of United
Refining, Inc. ("United"), a wholly-owned subsidiary of United Acquisition
Corporation ("UAC") which, in turn is a wholly-owned subsidiary of Red Apple
Group, Inc. (the "Parent "). The cost of the Parent's investment in the Company
is reflected as the basis in the consolidated financial statements of the
Company ("pushdown accounting"). The common stock of the Company was acquired by
the Parent in February, 1986 in a transaction accounted for as a purchase for
$8.0 million, an amount below the historical cost of the acquired assets net of
liabilities.
Stock acquisitions are not required to be reported on the basis of
pushdown accounting and prior to the offering the Company's separate financial
statements were presented on the basis of the historical cost of the assets and
liabilities. The financial statements for 1996 and prior years have been revised
to apply pushdown accounting. The effects of the revision were as follows:
August 31,
1996
(in thousands)
Reduction in property, plant and equipment $26,897
Increase in deferred income tax assets 4,043
Decrease in stockholder's equity 22,854
Year Ended August 31,
1995 1996
---- ----
(in thousands)
Increase in net income $2,830 $2,830
Principles of Consolidation
The consolidated financial statements include the accounts of United
Refining Company and its subsidiaries (collectively, the "Company"), United
Refining Company of Pennsylvania and its subsidiaries, and Kiantone Pipeline
Corporation.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investment securities with maturities of three
months or less at date of acquisition to be cash equivalents.
F-7
<PAGE>
Inventories and Exchanges
Inventories are stated at the lower of cost or market, with cost being
determined under the Last-in, First-out (LIFO) method for crude oil and
petroleum product inventories and the First-in, First-out (FIFO) method for
merchandise and supply inventories. If the cost of inventories exceeds their
market value, provisions are made currently for the difference between the cost
and market value. Due to fluctuating market conditions for certain petroleum
product inventories, LIFO cost exceeded market by approximately $4,000,000 and
$1,800,000 as of August 31, 1996 and 1997, respectively, resulting in the
valuation of certain inventories at market.
Inventories consist of the following:
August 31,
1996 1997
------- -------
(in thousands)
Crude Oil $ 8,775 $18,169
Petroleum Products 25,763 31,306
------- -------
Total @ LIFO 34,538 49,475
------ -------
Merchandise 6,343 6,372
Supplies 11,287 11,249
------- -------
Total @ FIFO 17,630 17,621
------- -------
Total Inventory $52,168 $67,096
======= =======
Product exchange balances consist of petroleum products either held for
or due from other petroleum marketers and are reflected in petroleum
inventories. The balances are not material.
The Company does not own sources of crude oil and depends on outside
vendors for supplies of crude oil.
F-8
<PAGE>
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated by the
straight-line method over the respective estimated useful lives. The costs of
funds used to finance projects during construction are capitalized.
Routine current maintenance, repairs and replacement costs are charged
against income. Turnaround costs, which consist of complete shutdown and
inspection of significant units of the refinery at intervals of two or more
years for necessary repairs and replacements, are estimated during the units'
operating cycles and charged against income currently. Expenditures which
materially increase values, expand capacities or extend useful lives are
capitalized. A summary of the principal useful lives used in computing
depreciation expense is as follows:
Estimated Useful
Lives (Years)
Refinery Equipment 20-30
Marketing 15-30
Transportation 20-30
Restricted Cash and Cash Equivalents and Investments
Restricted cash and cash equivalents and investments consist of cash,
cash equivalents and investments in government securities and commercial paper
held in trust and committed for expanding and upgrading the refinery, rebuilding
and refurbishing existing retail units and for acquiring new retail units and
other capital projects. These funds represent the unused proceeds from the
$200,000,000 10 3/4% Senior Unsecured Notes offering completed in June, 1997 and
are carried at cost, which approximates market.
Revenue Recognition
Revenue from wholesale sales are recognized upon shipment or when title
passes. Retail revenues are recognized immediately upon sale to the customer.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company joins with the Parent and the Parent's other subsidiaries
in filing a Federal income tax return on a consolidated basis. Income taxes are
calculated on a separate return basis with consideration of the tax sharing
agreement among the Parent and its subsidiaries.
F-9
<PAGE>
Post-retirement Healthcare Benefits
The Company provides at no cost to retirees, post-retirement healthcare
benefits to salaried and certain hourly employees. The benefits provided are
hospitalization, medical coverage and dental coverage for the employee and
spouse until age 65. After age 65, benefits continue until the death of the
retiree which results in the termination of benefits for all dependent coverage.
If an employee leaves the Company as a terminated vested member of a pension
plan prior to normal retirement age, the person is not entitled to any
post-retirement healthcare benefits.
The Company accrues post-retirement benefits other than pensions during
the years that the employee renders the necessary service, of the expected cost
of providing those benefits to an employee and the employee's beneficiaries and
covered dependents. The Company has elected to amortize the transition
obligation of approximately $12,000,000 on a straight-line basis over a 20-year
period.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Concentrations of Credit Risk
The Company extends credit based on evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
Insurance Claims
Revenue is recognized or expense is reduced, as appropriate, relating
to amounts recoverable from insurance carriers for, among other things, property
damage and business interruption arising from insured occurrences at the time
the Company determines the related claims to be valid and enforceable.
Environmental Matters
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures which extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Company determines its liability on a site by site basis and
records a liability at the time when it is probable and can be reasonably
estimated. The Company's estimated liability is reduced to reflect the
anticipated participation of other potentially responsible parties in those
instances where it is probable that such parties are legally responsible and
financially capable of paying their respective shares of the relevant costs. The
estimated liability of the Company is discounted, but is not reduced for
possible recoveries from insurance carriers (Note 16).
Recent Accounting Standards
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 ("Statement 121"),
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of." Statement 121 requires, among other things, an impairment loss on
assets to be held and gains or losses from assets that are expected to be
disposed of to be included as a component of income from continuing operations
before taxes on income. The
F-10
<PAGE>
Company has adopted Statement 121 in fiscal 1997, and its implementation has not
had a material effect on the consolidated financial statements.
In June, 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 ("Statement 130"), "Reporting Comprehensive Income," which
establishes standards for reporting and display of comprehensive income, its
components and accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, Statement 130 requires that
all items that are required to be recognized under current accounting standards
as components of comprehensive income be reported in a financial statement that
is displayed with the same prominence as other financial statements.
Statement 130 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, the standard
may have on future financial disclosures. Results of operations and financial
position, however, will be unaffected by the implementation of this standard.
Also in June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 ("Statement 131"), "Disclosures about Segments of an
Enterprise and Related Information," which supersedes Statement 14, "Financial
Reporting for Segments of a Business Enterprise." Statement 131 establishes
standards for the way that public companies report information about operating
segments in annual financial statements and requires reporting of selected
information about operating segments in interim financial statements issued to
the public. It also establishes standards for disclosures regarding products and
services, geographic areas and major customers. Statement 131 defines operating
segments as components of a company about which separate financial information
is available that is evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing performance.
Statement 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of this standard,
management has been unable to fully evaluate the impact, if any, it may have on
future financial statement disclosures. Results of operations and financial
position, however, will be unaffected by implementation of this standard.
Reclassification
Certain amounts in the prior year's consolidated financial statements
have been reclassified to conform with the presentation in the current year.
2. Accounts Receivable, Net
As of August 31, 1996 and 1997, accounts receivable was net of
allowance for doubtful accounts of $541,000, and $511,000, respectively.
3. Property, Plant and Equipment
Property, plant and equipment is summarized as follows:
F-11
<PAGE>
August 31,
1996 1997
------- -------
(in thousands)
Refinery equipment, including
construction-in-progress $153,507 $ 155,618
Marketing (i.e. retail outlets) 70,225 72,463
Transportation 6,874 6,875
------- -------
230,606 234,956
Less: Accumulated depreciation 53,564 60,757
------ ------
$177,042 $174,199
4. Accrued Liabilities
Accrued liabilities include the following:
August 31,
1996 1997
------- -------
(in thousands)
Interest $ 3,702 $4,906
Payrolls and benefits 6,292 7,657
Income taxes 565 --
Other 2,842 1,190
------- -------
$13,401 $13,753
5. Leases
The Company occupies premises, primarily retail gas stations and
convenience stores and office facilities under long-term leases which require
minimum annual rents plus, in certain instances, the payment of additional rents
based upon sales. The leases generally are renewable for one to three five-year
periods.
As of August 31, 1996 and August 31, 1997, capitalized lease
obligations, included in long-term debt, amounted to $769,000 and $648,000,
respectively, net of current portion of $174,000 and $121,000, respectively. The
related assets (retail gas stations and convenience stores) as of August 31,
1996 and 1997, amounted to $656,000, and $540,000, respectively, net of
accumulated amortization of $956,000 and $523,000, respectively.
Lease amortization amounting to $110,000, $106,000, and $117,000, for
the years ended August 31, 1995, 1996 and 1997, respectively, is included in
depreciation and amortization expense.
Future minimum lease payments as of August 31, 1997 are summarized as
follows:
Capital Operating
leases leases
------ ------
(in thousands)
Year ended August 31,
1998 $225 $2,853
1999 193 2,179
2000 156 1,246
2001 101 540
2002 79 260
Thereafter 591 324
--- ---
Total minimum lease payments 1,345 7,402
Less: Minimum sublease income -- 44
------ ------
Net minimum sublease payments 1,345 $7,358
====== ======
Less:
Amount representing interest 576
Present value of net
minimum lease payments $ 769
======
F-12
<PAGE>
Net rent expense for operating leases amounted to $3,157,000, and
$3,265,000 and $3,238,000 for the years ended August 31, 1995, 1996 and 1997,
respectively.
6. Credit Facility
In June 1997, the Company negotiated a $35,000,000 secured revolving
credit facility (the "Facility") with a syndicate of banks that provides for
revolving credit loans and for the issuance of letters of credit. The Facility
expires on June 9, 2002 and is secured by certain qualifying cash accounts,
accounts receivable, and inventory, which amounted to $50,784,000 as of August
31, 1997. Until maturity, the Company may borrow, repay and reborrow on an
amount not exceeding certain percentages of secured assets. The interest rate on
borrowings varies with the Company's earnings and is based on the higher of the
bank's prime rate or Federal funds rate plus 1/2% for base rate borrowings and
the LIBOR rate for Euro-Rate borrowings, which was 7.91% as of August 31, 1997.
As of August 31, 1997, no letters of credit and no borrowings were outstanding
under the agreement. No other borrowings or letters of credit were outstanding
for any other period presented. The Company pays a commitment fee of 3/8% per
annum on the unused balance of the Facility.
7. Long-term Debt
During June 1997, the Company sold $200,000,000 of 10 3/4% Senior
Unsecured Notes due 2007, Series A. Such Notes are fully and unconditionally
guaranteed on a senior unsecured basis by all of the Company's subsidiaries
(Note 19). The proceeds of the offering were used to retire all of its
outstanding senior notes, pay prepayment penalties related thereto and to retire
the amount outstanding under the Company's existing secured revolving credit
facility. The excess proceeds from the offering of approximately $48,129,000
were deposited in an escrow account to be used for expanding and upgrading the
refinery, rebuilding and refurbishing existing retail units, and for acquiring
new retail units and other capital expenditure projects. As of August 31, 1997,
the excess proceeds were classified as "Restricted Cash and Cash Equivalents and
Investments."
Both the senior unsecured notes and secured credit facility require
that the Company maintain certain minimum levels of tangible net worth, working
capital ratios and cash flow and restrict the amount available to distribute
dividends.
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
August 31,
1996 1997
---- ----
(in thousands)
<S> <C> <C>
Long-term debt:
10.75% senior unsecured notes due June 9, 2007, Series A ...... $ -- $200,000
11.50% senior unsecured notes due in annual
installments of $16,500 beginning December 1, 1995
through December 1, 1998, when the remaining principal
balance is due and payable .................................. 93,500 --
13.50% senior unsecured notes due in annual installments
of $9,600 on December 31, 2001 and 2002, with the
remaining principal balance of $22,550 due on
December 31, 2003 ........................................... 41,750 --
Other long-term debt ............................................ 589 503
Other obligations:
F-13
<PAGE>
Capitalized lease obligations ................................. 943 769
------- -------
136,782 201,272
Less: Unamortized long-term discount of debt .................. 5 --
------- ------
136,777 201,272
Less: Current installments of long-term debt .................. 16,759 218
------- -------
Total long-term debt, less current
installments ....................................... $120,018 $201,054
======== ========
</TABLE>
The principal amount of long-term debt outstanding (including amounts
due under capital leases) as of August 31, 1997, matures as follows:
Year ended August 31, (in thousands)
1998 $ 218
1999 207
2000 166
2001 113
2002 87
Thereafter 200,481
--------
$201,272
F-14
<PAGE>
The following financing costs have been deferred and are classified as
other assets and are being amortized to expense over the term of the related
debt:
August 31,
1996 1997
---- ----
(in thousands)
Beginning balance $1,854 $1,380
Current year additions 30 8,094
------ ------
Total financing costs 1,884 9,474
Write-off of deferred financing costs -- (1,118)
Amortization (504) (549)
----- -----
$1,380 $7,807
====== ======
8. Interest Expense
Interest expense consists of the following:
Year Ended August 31,
1995 1996 1997
------- ------- -------
(in thousands)
Interest on long-term notes and other debt $18,249 $17,182 $16,982
Interest on secured debt, capital leases
and other obligations 374 424 527
Interest cost capitalized as a component of
construction costs (100) -- --
------- ------- -------
$18,523 $17,606 $17,509
======= ======= =======
9. Retirement Plans
Substantially all employees of the Company are covered by
noncontributory defined benefit retirement plans. The benefits are based on each
employee's years of service and compensation. The Company's policy is to
contribute the minimum amounts required by the Employee Retirement Income
Security Act of 1974, as amended. The assets of the plans are invested in an
investment trust fund and consist of interest-bearing cash and bank
common/collective trust funds.
Net periodic pension cost for the years ended August 31, 1995, 1996 and
1997 included the following components:
1995 1996 1997
------- ------- ------
(in thousands)
Service cost $ 1,067 $ 1,166 $1,283
Interest cost on projected benefit
obligation 1,171 1,442 1,632
Return on assets (1,319) (1,227) (1,509)
Net amortization and deferral (15) 45 35
------- ------- ------
Net periodic pension cost $ 904 $ 1,426 $1,441
======= ======= ======
Assumptions for the years ended August 31, 1995, 1996 and 1997 used in
the calculation of the projected benefit obligation were:
1995 1996 1997
---- ---- ----
Discount rates 8.0% 8.0% 8.0%
Salary increases 4.0% 3.0%-4.5% 3.0%-4.5%
Expected long-term rate of return
on assets 8.0% 8.0% 8.0%
F-15
<PAGE>
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets as of August 31, 1996
and 1997:
<TABLE>
<CAPTION>
1996 1997
-------- -------
(in thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 14,489 $16,840
======== =======
Accumulated benefit obligation $ 15,055 $17,414
======== =======
Projected benefit obligation $ 20,394 $23,074
Plan assets at fair value (16,360) (20,195)
-------- -------
Projected benefit obligation in excess of plan assets 4,034 2,879
Unrecognized net obligation as of September 1, 1985 (1,610) (1,470)
Unrecognized prior service cost (562) (995)
Unrecognized net gain 2,881 4,058
-------- -----
Pension liability recognized on the consolidated
balance sheets $ 4,743 $4,472
======== ======
</TABLE>
The Company's deferred gain on settlement of past pension plan
obligations amounted to $2,635,000 and $2,420,000 as of August 31, 1996 and
1997, respectively, and is being amortized over 23 years.
10. Other Benefit Plans
As discussed in Note 1, the Company accrues for certain post-retirement
healthcare benefits to salaried and certain hourly employees. The Company funds
such benefits as they become payable. The Company made benefit payments of
$504,000, $497,000 and $331,000, for the years ended August 31, 1995, 1996, and
1997, respectively. Benefit payments are reflected as a reduction of the accrued
post-retirement healthcare benefit costs.
The following table sets forth the post-retirement healthcare benefits
status reconciled with the amounts on the Company's consolidated balance sheets
as of August 31, 1996 and 1997:
1996 1997
-------- --------
(in thousands)
Retirees $ 4,689 $ 3,174
Fully eligible active plan participants 8,012 9,494
Unrecognized net gain 2,576 3,593
Unrecognized transition obligation, being
recognized over 20 years (10,145) ( 9,549)
-------- --------
Accrued post-retirement healthcare benefit cost $ 5,132 $ 6,712
======== ========
<TABLE>
<CAPTION>
Year Ended August 31,
1995 1996 1997
------ ------- ------
(in thousands)
<S> <C> <C> <C>
Net periodic post-retirement healthcare benefit
cost for the year includes the following
components:
Service cost $ 970 $ 545 $ 670
Interest cost on accumulated post-retirement
healthcare benefit obligation 854 919 905
Amortization of transition obligation 597 597 597
Amortization of net gain -- (107) (140)
------ ------- ------
Net periodic post-retirement healthcare benefit cost $2,421 $1,954 $2,032
====== ====== ======
</TABLE>
F-16
<PAGE>
For measurement purposes, the assumed annual rate of increase in the
per capita cost of covered medical and dental benefits was 7.7% and 5%,
respectively for 1997; the rates were assumed to decrease gradually to 5% for
both medical and dental benefits until 2006 and remain at that level thereafter.
The healthcare cost trend rate assumption has a significant effect on the
amounts reported. To illustrate, increasing the assumed healthcare cost trend
rates by 1 percentage point in each year would increase the accumulated
post-retirement healthcare benefit obligation as of August 31, 1997, by
$2,147,000 and the aggregate of the service and interest cost components of net
periodic post-retirement healthcare benefit cost for the year then ended by
$299,000.
The weighted average discount rate used in determining the accumulated
post-retirement healthcare benefit obligation for August 31, 1996 and 1997 was
8.0%.
The Company also contributes to voluntary employee savings plans
through regular monthly contributions equal to various percentages of the
amounts invested by the participants. The Company's contributions to these plans
amounted to $453,000, $491,000 and $498,000, for the years ended August 31,
1995, 1996 and 1997, respectively.
11. Income Taxes
Income tax expense (benefit) consisted of:
Year Ended August 31,
1995 1996 1997
---- ---- ----
(in thousands)
Federal:
Current $1,031 $ (44) $2,565
Deferred (517) 2,868 (128)
----- ----- -------
514 2,824 2,437
---- ----- ------
State:
Current 469 244 535
Deferred (496) 719 (384)
------ ------ -------
(27) 963 151
------ ------ ------
$ 487 $3,787 $2,588
====== ====== ======
Reconciliation of the differences between income taxes computed at the
Federal statutory rate and the provision for income taxes attributable to income
before income tax expense (benefit) and extraordinary items is as follows:
Year Ended August 31,
1995 1996 1997
---- ---- ----
(in thousands)
U. S. Federal income taxes
at the statutory rate of 34% $322 $3,274 $2,188
State income taxes, net of
Federal benefit 78 716 363
Reduction of taxes provided
in prior year -- (201) (62)
Nondeductible expenses 67 62 317
Other 20 (64) (218)
---- ------ ------
Income tax attributable
to income before
income tax expense
(benefit) and
extraordinary item $487 $3,787 $2,588
==== ====== ======
F-17
<PAGE>
Deferred tax liabilities (assets) are comprised of the following:
August 31,
1996 1997
---- ----
(in thousands)
Inventory valuation $ 4,583 $ 4,045
Accounts receivable allowance (261) (237)
Property, plant and equipment 26,975 28,446
Accrued liabilities (9,388) (10,656)
Tax credits and carryforwards (3,636) (4,370)
State net operating loss carryforwards (1,952) (2,197)
Valuation allowance 1,041 1,084
Other 1,845 563
------- -------
Net deferred income taxes $19,207 $16,678
======= =======
The Company's results of operations are included in the consolidated
Federal tax return of the Parent. The Company's net operating loss carryforward
for regular tax is approximately $1,000,000, available for use in years
beginning after August 31, 1997.
The Tax Reform Act of 1986 created a separate parallel tax system
called the Alternative Minimum Tax ("AMT") system. AMT is calculated separately
from the regular U.S. Federal income tax and is based on a flat rate of 20%
applied to a broader tax base. The higher of the two taxes is paid. The excess
AMT over regular tax is a tax credit, which can be carried forward indefinitely
to reduce regular tax liabilities in excess of AMT liabilities of future years.
For accounting purposes, the Company generated AMT credits in prior years of
approximately $3,600,000 that is available to offset the regular tax liability
in future years. The Company's AMT net operating loss is approximately
$1,000,000 which expires after August 31, 1997.
A general business credit carryforward for tax reporting purposes
amounts to approximately $200,000 and expires beginning after August 31, 2001.
12. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value.
The carrying amount of cash and cash equivalents, trade accounts and
notes receivable and current liabilities approximate fair value because of the
short maturity of these instruments.
The fair value of long-term debt (Note 7) was calculated by discounting
scheduled cash flows through the maturity of the debt using estimated market
rates for the individual debt instruments. As of August 31, 1996 and 1997, the
carrying amount and estimated fair value of these debt instruments approximated
$201,272,000 and $201,398,000, respectively.
13. Contingencies
The Company is a defendant in various claims, legal actions and
complaints arising in the ordinary course of business. In the opinion of
management, all such matters are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve such amounts that
unfavorable disposition would not have a material adverse effect on the
consolidated financial position of the Company.
F-18
<PAGE>
14. Transactions with Affiliated Companies
In June 1997, the Company declared a dividend of $28,285,000 of which
$5,000,000 was paid in cash and $23,285,000 was a forgiveness of debt from
related parties, resulting in a non-cash financing activity. Additionally, the
Company has offset $2,017,000 of amounts due from related parties with deferred
tax benefits previously received.
During 1993, the Company sold certain retail grocery operations
acquired in December 1990 from an affiliated entity to Red Apple (Caribbean),
Inc., an affiliated company, in exchange for a promissory note amounting to
$17,600,000. The note bears interest at the rate of 5% per annum and was
originally due on December 31, 1994. Subsequent to this date, the note was
amended and restated, extending the due date to December 31, 1997. During the
years ended August 31, 1995, 1996 and 1997, interest income of $880,000,
$880,000 and $660,000, respectively, was recognized. As of August 31, 1996, the
entire amount of the note, plus the accrued interest income relating thereto,
was outstanding. As of August 31, 1997, no amounts were outstanding relating to
this note.
Included in amounts due from affiliated companies are advances, certain
charter air services and income taxes due from the Parent company. These amounts
do not bear interest and have no set repayment terms. As of August 31, 1996, the
amount approximated $2,500,000. As of August 31, 1997, no amounts were
outstanding.
The Company paid a service fee relating to certain costs incurred by
its Parent for the Company's New York office. During the years ended August 31,
1995, 1996 and 1997 such fees amounted to approximately $2,480,000, $2,424,000,
and $2,712,000, respectively.
An affiliate of the Company leases nine retail gas station and
convenience stores to the Company under various operating leases which all
expire in 2001. Rent expense relating to these leases was $264,000 for each of
the years ended August 31, 1995, 1996 and 1997, respectively.
15. Environmental Matters
The Company is subject to federal, state and local laws and regulations
relating to pollution and protection of the environment such as those governing
releases of certain materials into the environment and the storage, treatment,
transportation, disposal and clean-up of wastes, including, but not limited to,
the Federal Clean Water Act, as amended, the Clean Air Act, as amended, the
Resource Conservation and Recovery Act of 1976, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, and
analogous state and local laws and regulations.
Pursuant to a consent order issued by the Pennsylvania Department of
Environmental Protection, the Company is required to determine the extent of any
ground water contamination and its effect on site remediation. Management of the
Company believes that remediation costs or other expenditures required by the
consent order are not expected to be material.
Due to the nature of the Company's business, the Company is and will
continue to be subject to various environmental claims, legal actions and
complaints. In the opinion of management, all current matters are without merit
or are of such kind or involve such amounts that an unfavorable disposition
would not have a material adverse effect on the consolidated financial position
and results of operations of the Company.
16. Other Expense
During 1994, the Company incurred a loss of $1,598,000 in connection
with the settlement of a claim dating back to a period prior to the acquisition
by the Parent (Note 1). The related settlement amount of $2,300,000 ($1,598,000
after being discounted at 13% per annum) is payable in quarterly
F-19
<PAGE>
installments of $125,000 commencing on January 13, 1995, and continuing to
October 13, 1998, at which time annual payments of $160,000 will be required
until the remaining outstanding balance is liquidated on October 13, 2002.
The undiscounted amounts due as of August 31, 1997 are as follows:
Year ended August 31 (in thousands)
1998 $ 125
1999 160
2000 160
2001 160
2002 160
Thereafter 160
$925
17. Extraordinary Items
In June 1997, the Company incurred an extraordinary loss of $6,653,000
(net of an income tax benefit of $4,200,000) as a result of "make-whole
premiums" paid and financing costs written-off in connection with the early
retirement of its 11.50% and 13.50% senior unsecured notes.
18. Segments of Business
The Company operates in two industry segments. The retail segment sells
petroleum products and convenience store merchandise to the general public. The
wholesale segment sells petroleum products to other oil companies and
distributors. Intersegment sales are primarily from the wholesale segment to the
retail segment and are accounted for in a manner similar to third party sales
and are eliminated in consolidation.
Year Ended August 31,
1995 1996 1997
-------- -------- --------
(in thousands)
Net sales:
Retail $456,690 $460,869 $463,895
Wholesale 326,996 372,949 407,453
-------- -------- --------
$783,686 $833,818 $871,348
======== ======== ========
Intersegment sales:
Wholesale $178,057 $189,631 $198,129
======== ======== ========
Income from operations:
Retail $ 9,849 $ 4,425 $ 3,674
Wholesale 8,263 22,457 20,179
---------- -------- --------
$ 18,112 $ 26,882 $ 23,853
========= ======== ========
Identifiable assets:
Retail $ 98,469 $ 97,548 $ 80,124
Wholesale 212,026 208,556 266,268
--------- -------- --------
$310,494 $306,104 $346,392
======== ======== ========
Depreciation and
amortization:
Retail $ 1,985 $ 1,893 $ 1,906
Wholesale 6,214 6,323 6,324
-------- -------- --------
$ 8,199 $ 8,216 $ 8,230
======== ======== ========
Capital expenditures:
Retail $ 2,835 $ 2,122 $ 3,095
Wholesale 9,299 2,440 2,729
-------- -------- --------
$ 12,134 $ 4,562 $ 5,824
======== ======== ========
F-20
<PAGE>
19. Subsidiary Guarantors
Summarized financial information for the Company's wholly-owned
subsidiary guarantors (Note 7) are as follows:
August 31,
1996 1997
---- ----
Current Assets $37,032 $35,653
Noncurrent Assets 76,287 60,131
Current Liabilities 80,350 82,131
Noncurrent Liabilities 9,747 10,474
Year Ended August 31,
1995 1996 1997
---- ---- ----
Net Sales $461,474 $465,656 $468,570
Gross Profit 72,002 68,484 68,524
Operating Income 10,615 5,782 5,592
Net Income 4,894 1,351 1,624
Separate financial statements of the wholly-owned subsidiary guarantors
are not presented because management believes that they would not be meaningful
to investors.
20. Quarterly Financial Data (unaudited):
Net Income (Loss)
Net Gross before extra-
Sales Profit ordinary Item
-------- -------- --------
(in thousands)
1997
First Quarter $227,264 $25,539 $ 902
Second Quarter 207,812 17,528 (3,382)
Third Quarter 203,644 24,415 371
Fourth Quarter 232,628 35,925 5,957
1996
First Quarter $204,089 $29,712 $ 2,982
Second Quarter 185,904 25,433 1,143
Third Quarter 208,070 28,114 2,309
Fourth Quarter 235,755 21,963 (593)
1995
First Quarter $197,607 $24,855 $ 776
Second Quarter 166,275 16,588 (4,714)
Third Quarter 194,212 25,189 1,661
Fourth Quarter 225,592 28,555 2,738
F-21
<PAGE>
================================================================================
No dealer, salesperson or any other person
has been authorized to give any information or
to make any representation not contained in
this Prospectus and, if given or made, such
information or representation must not be $200,000,000
relied upon as having been authorized by the
Company. This Prospectus does not constitute an
offer to sell or a solicitation of an offer to
buy, any securities other than the securities
to which it relates or an offer to buy such UNITED REFINING COMPANY
securities by any person in any circumstances
in which each offer or solicitation is unlawful
offered hereby in any jurisdiction to any
person to whom it is unlawful to make any such 10 3/4% Series B Senior
offer or solicitation in such jurisdiction. Notes due 2007
Neither the delivery of this Prospectus, nor
any sale made hereunder shall, under any
circumstances, create any implication that the
information herein is correct as of any time
subsequent to the date hereof or that there has
been no change in the affairs of the Company.
TABLE OF CONTENTS
Page
Available Information......................
Summary....................................
Risk Factors...............................
Use of Proceeds............................ PROSPECTUS
The Exchange Offer.........................
Capitalization.............................
Selected Financial and Other
Operating Data............................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.............................
Business...................................
Management.................................
Certain Transactions.......................
Principal Stockholder......................
Description of Certain Indebtedness........
Description of the Notes...................
Certain United States Federal Income Tax...
Consequences...............................
Plan of Distribution.......................
Legal Matters..............................
Experts....................................
Glossary...................................
Index to Financial Statements..............
Additional Information.....................
Index to Financial Statements..............
Until _____________, 199_ (90 days after the
date of this Prospectus) all dealers effecting
transactions in the New Notes, whether or not ___________, 1997
participating in this distribution, may be
required to deliver a Prospectus. This is in
addition to the obligation of dealers to
deliver a Prospectus when selling New Notes
received in exchange for Original Notes held
for their own account. See "Plan of
Distribution."
================================================================================
F-23
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers
United Jet Center, Inc. and Vulcan Asphalt Refining Corporation ("Vulcan
Asphalt"), each a Delaware corporation, (the "Delaware Subsidiaries").
The Certificates of Incorporation of the Delaware Subsidiaries, together
with Vulcan Asphalt's By-laws, provide for indemnification of the Delaware
Subsidiaries' directors, officers, employers and other agents to the fullest
extent permitted by the provisions of Section 145 of the General Corporation Law
of the State of Delaware (the "GCL"), as the same shall be amended and
supplemented.
Section 145 of the GCL permits a Delaware corporation to indemnify each
person who was or is made a party to (or is threatened to be made a party to) or
is otherwise involved in any civil or criminal action, suit or proceeding by
reason of the fact that such person is or was a director, officer, employee or
agent of the Company or was serving as such with respect to another corporation
or entity at the request of the Company, including expenses incurred in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf thereof (i) against any and all of the expenses,
liabilities or other matters referred to in or covered by said section, and (ii)
advance expenses to any and all said persons, and that such indemnification and
advances shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in their official
capacities and as to action in another capacity while holding such offices, and
shall continue as to persons who have ceased to be directors, officers,
employees or agents and shall inure to the benefit of their heirs, executors and
administrators of such person.
In addition, Article Eight of Vulcan Asphalt's Certificate of Incorporation
also provides for the elimination of personal liability of directors of the
Corporation to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, to the fullest extent permitted by the
GCL, as amended and supplemented. In the case of an amendment to the GCL, Vulcan
Asphalt's Certificate of Incorporation limits such amendment to the extent that
the amendment permits the Corporation to provide broader indemnification rights
than said law permitted the Corporation to provide prior to such amendment.
Bell Oil Corp. ("Bell") and Super Test Petroleum, Inc. ("STPI"), each a Michigan
Corporation.
The Certificates of Incorporation and By-laws of Bell and STPI do not
contain any provisions regarding the indemnification of its officers and
director.
The Michigan Corporate Business Act provides that a Michigan corporation
shall have power to indemnify any person who was or is a party or is threatened
to be made a party to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal,
II-1
<PAGE>
administrative or investigative and whether formal or informal, including an
action by or in the right of the corporation to procure judgment in its favor,
by reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, partner, trustee, employee or agent of another foreign
or domestic corporation, partnership, joint venture, trust or other enterprise,
whether for profit or not, against expenses, including attorneys' fees,
judgments, penalties, fines and amounts paid in settlement actually and
reasonably incurred by him or her in connection with such action, suit or
proceeding if the person acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the
corporation or its shareholders, and with respect to any criminal action or
proceeding, if the person had no reasonable cause to believe his conduct was
unlawful. To the extent that a director, officer, employee, or agent of a
corporation has been successful on the merits or other in defense of an action,
suit, or proceeding referred to herein, or in defense of a claim, issue, or
matter in the action, suit, or proceeding, he or she shall be indemnified
against actual and reasonable expenses, including attorneys' fee, incurred by
him or her in connection with the action, suit or proceeding and an action,
suit, or proceeding brought to enforce the mandatory indemnification provided in
this subsection. The indemnification or advancement of expenses is not exclusive
of other rights to which a person seeking indemnification or advancement of
expenses may be entitled under the articles of incorporation, By-laws, or a
contractual agreement and continues as to a person who ceases to be a director,
officer, employee, or agent and shall inure to the benefit of the heirs,
personal representatives, and administrators of the person. A Michigan
corporation shall have the power to purchase and maintain insurance on behalf of
any person described above.
Independent Gasoline and Oil Company of Rochester, Inc. ("IGOC"), Kiantone
Pipeline Corporation ("Kiantone") and Kwik-Fil, Inc. ("KFI"), each a New York
corporation.
Articles V of the IGOC and Kiantone By-laws contain indemnification
provisions for its directors and officers to the fullest extent permitted by the
New York Business Corporation Law in effect at any time. The Certificate of
Incorporation and By-laws of KFI do not contain any provisions regarding the
indemnification of its officers and directors.
The New York Corporation Business Corporation Law permits a New York
corporation, to indemnify, including interim indemnification, any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, against all liabilities, expenses (including attorney's fees),
judgments, fines and amounts paid in settlement incurred by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, partner or trustee of another corporation, partnership, joint
venture trust, association or other entity or enterprise. Expenses (including
attorney's fees) incurred in defending an action, suit or proceeding shall be
paid by the Corporation in advance of the final disposition of such action, suit
or proceeding to the fullest extent and under the circumstances permitted by
law. By provision of By-laws, by resolution of the shareholders or of the
directors or by agreement, the Corporation may, in accordance with Section 721
of the Business Corporation Law of the State of New York (as now or hereafter
amended or under any similar provisions hereafter enacted), grant any director
or officer rights of indemnification or advancement of expenses in addition
II-2
<PAGE>
to or other than those granted pursuant to, or provided by, said Sections 722
and 725 of said Business Corporation law (as now or hereafter amended or under
any similar provisions hereafter enacted).
P P C, INC. ("PPC"), an Ohio Corporation.
The Certificate of Incorporation and By-laws of PPC do not contain any
provisions regarding the indemnification of its officers and directors.
The Ohio General Corporation Law provides that a corporation may indemnify
or agree to indemnify any person who was or is a party, or is threatened to be
made a party, to any threatened, pending, or completed action, suit, or
proceeding, whether civil, criminal, administrative, or investigative, including
an action or suit by or in the right of the corporation to procure a judgment in
its favor, by reason of the fact that he is or was a director, officer,
employee, or agent of the corporation, or is or was serving at the request of
the corporation as a director, trustee, officer, employee, member, manager, or
agent of another corporation, domestic or foreign, nonprofit or for profit, a
limited liability company, or a partnership, joint venture, trust, or other
enterprise, against expenses, including attorney's fees, judgments, fines, and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding, if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reasonable cause to believe his conduct was unlawful. To the extent that a
director, trustee, officer, employee, member, manager, or agent has been
successful on the merits or otherwise in defense of any action, suit, or
proceeding referred to in Section 1701.13(E)(1) or (2), or in defense of any
claim, issue, or matter therein, he shall be indemnified against expenses,
including attorney's fees, actually and reasonably incurred by him in connection
with the action, suit, or proceeding. Expenses, including attorney's fees,
incurred by a director in defending the action, suit, or proceeding shall be
paid by the corporation as they are incurred, in advance of the final
disposition of the action, suit, or proceeding, upon receipt of an undertaking.
The indemnification authorized by this section shall not be exclusive of, and
shall be in addition to, any other rights granted to those seeking
indemnification under the articles, the regulations, any agreement a vote of
shareholders or disinterested directors, or otherwise, both as to action in
their official capacities and as to action in another capacity while holding
their offices or positions, and shall continue as to a person who has ceased to
be a director, trustee, officer, employee, member, manager, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
Kiantone Pipeline Company ("KPC"), Kwik-Fill Corporation ("Kwik-Fill"), United
Refining Company ("URC") and United Refining Company of Pennsylvania ("URCP"),
each a Pennsylvania corporation.
Articles VIII of the By-laws of KPC, Kwik-Fill, URC and URCP contain
provisions making indemnification of their directors and officers mandatory to
the fullest extent now or hereafter permitted by the Pennsylvania Business
Corporation Law.
The Pennsylvania Business Corporation Law permits any Pennsylvania
Corporation, unless otherwise restricted by a corporation's By-laws, to have
power to indemnify
II-3
<PAGE>
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
corporation), by reason of the fact that he is or was a representative of the
corporation, or is or was serving at the request of the corporation as a
representative of another domestic or foreign corporation for profit or
not-for-profit, partnership, joint venture, trust or other enterprise, against
expenses (including attorney's fees), judgements, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with the action
or proceeding if he acted in good faith and in a manner he reasonably believed
to be in, or not opposed to, the best interests of the corporation. To the
extent that a representative of a business corporation has been successful on
the merits or otherwise in defense of any action or proceeding relating to
third-party actions or relating to derivative and corporate actions or in
defense of any claim, issue or matter therein, he shall be indemnified against
expenses (including attorney fees) actually and reasonably incurred by him in
connection therewith. Expenses (including attorneys' fees) incurred in defending
any action or proceeding referred to in this subchapter may be paid by a
business corporation in advance of the final disposition of the action or
proceeding upon receipt of an undertaking by or on behalf of the representative
to repay the amount if it is ultimately determined that he is not entitled to be
indemnified by the corporation as authorized herein or otherwise. The
indemnification and advancement of expenses shall not be deemed exclusive of any
other rights to which a person seeking indemnification or advancement of
expenses may be entitled under any By-law, agreement, vote of shareholders or
disinterested directors or otherwise, both as to action in his official capacity
and as to action in another capacity while holding that office. Unless otherwise
restricted in its By-laws, a business corporation shall have power to purchase
and maintain insurance.
Item 21. Exhibits and Financial Statement Schedule
(a) Exhibits
+3.1 Certificate of Incorporation of United Refining Company ("URC").
+3.2 Bylaws of URC.
+3.3 Certificate of Incorporation of United Refining Company of
Pennsylvania ("URCP").
+3.4 Bylaws of URCP.
+3.5 Certificate of Incorporation of Kiantone Pipeline Corporation
("KPC").
+3.6 Bylaws of KPC.
+3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY").
+3.8 Bylaws of KPCY.
+3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI").
+3.10 Bylaws of KFI.
+3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of
Rochester, Inc. ("IGOCRI").
+3.12 Bylaws of IGOCRI.
+3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC").
+3.14 Bylaws of BOC.
+3.15 Certificate of Incorporation of PPC, Inc. ("PPCI").
+3.16 Bylaws of PPCI.
II-4
<PAGE>
+3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI").
+3.18 Bylaws of STPI.
+3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI").
+3.20 Bylaws of K-FI.
+3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation
("VARC").
+3.22 Bylaws of VARC.
+3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI").
+3.24 Bylaws of UJCI.
+4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC,
KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ
Schroder Bank & Trust Company ("Schroder"), relating to the 10
3/4% Series A Senior Notes due 2007.
+4.2 Form of Note (included in Exhibit 4.1 hereto).
+5.1 Opinion of Lowenthal, Landau, Fischer & Bring, P.C.
+10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY,
KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillon, Read & Co.
Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI").
+10.2 Registration Rights Agreement dated June 9, 1997 between URC,
URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC,
UJCI, DRCI and BSCI.
+10.3 Escrow Agreement dated June 9, 1997 between Schroder, as
Escrow Agent, Schroder, as Trustee, and URC.
+10.4 Servicing Agreement dated June 9, 1997 between URC and Red
Apple Group, Inc.
+10.5 Collective Bargaining Agreement dated February 1, 1996 between URC
and International Union of Operating Engineers, Local No. 95.
+10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and
International Union, United Plant Guard Workers of America and Local
No. 502.
+10.7 Collective Bargaining Agreement dated February 1, 1997 between URC
and United Steel Workers of America Local Union No. 2122-A.
+10.8 Collective Bargaining Agreement dated August 1, 1995 between URC and
General Teamsters Local Union No. 397.
+10.9 Credit Agreement dated as of June 9, 1997 by and among, URC,
URCP, KPC and the Banks party thereto and PNC Bank, National
Association, as Agent.
+10.10 Continuing Agreement of Guaranty and Suretyship dated as of June 9,
1997 by URC.
+10.11 Continuing Agreement of Guaranty and Suretyship dated as of June 9,
1997 by URCP.
+10.12 Continuing Agreement of Guaranty and Suretyship dated as of June 9,
1997 by KPC.
+10.13 Form of Security Agreement dated as of June 9, 1997 by and
among, URC, URCP, KPC and the Banks party thereto and PNC
Bank, National Association, as Agent.
+21.1 Subsidiaries of the Registrants.
+23.1 Consent of Lowenthal, Landau, Fischer & Bring, P.C., included in
Exhibit 5.1.
*23.2 Consent of BDO Seidman, LLP.
+24.1 Powers of Attorney (contained on signature page of Registration
Statement).
*25.1 Statement of Eligibility of Trustee on Form T-1 related to the Notes.
*27.1 Financial Data Schedule
II-5
<PAGE>
+99.1 Letter of Transmittal relating to the 10 3/4% Series A Senior Notes
due 2007.
+99.2 Form of Notice of Guaranteed Delivery relating to the 10 3/4% Series
A Senior Notes due 2007.
+99.3 Form of Letter to Brokers, Dealers, Commercial Banks, Trust
Companies and Other Nominees relating to the 10 3/4% Series A
Senior Notes due 2007.
+99.4 Form of Letter to Clients relating to the 10 3/4% Series A Senior
Notes due 2007.
* Filed herewith.
+ Previously filed
(b) Financial Statement Schedule
Schedule II Valuation and qualifying accounts
Item 22. Undertakings
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrants pursuant to the foregoing provisions, or otherwise, the
Registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrants of expenses
incurred or paid by a director, officer or controlling person of the Registrants
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrants will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being made,
a posteffective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933.
(ii) To reflect in the prospectus any fact or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent
II-6
<PAGE>
change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof."
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
UNITED REFINING COMPANY
By:/s/ Myron L. Turfitt
--------------------
Myron L. Turfitt
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- ----------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 4, 1997
- ----------------------
Myron L. Turfitt
* Vice Chairman and Director November 4, 1997
- ----------------------
Thomas C. Covert
Vice President and Chief Financial
* Officer (Principal Accounting
- ---------------------- Officer)
James E. Murphy November 4, 1997
Director November 4, 1997
- ----------------------
Martin R. Bring
* Director November 4, 1997
- ----------------------
Evan Evans
* Director November 4, 1997
- ----------------------
Kishore Lall
* Director November 4, 1997
- ----------------------
Douglas Lemmonds
* Director November 4, 1997
- ----------------------
Andrew Maloney
* Director November 4, 1997
- ----------------------
Dennis Mehiel
* By Myron L. Turfitt, Attorney-in-Fact
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
UNITED REFINING COMPANY OF
PENNSYLVANIA
By:/s/ Myron L. Turfitt
--------------------
Myron L. Turfitt
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 4, 1997
- -----------------------
Myron L. Turfitt
* Vice Chairman and Director November 4, 1997
- -----------------------
Thomas C. Covert
Vice President and Chief Financial
Officer (Principal Accounting
* Officer) November 4, 1997
- -----------------------
James E. Murphy
* Director November 4, 1997
- -----------------------
Martin R. Bring
* By Myron L. Turfitt, Attorney-in-Fact
II-9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
KIANTONE PIPELINE CORPORATION
By:/s/ Myron L. Turfitt
------------------------------
Myron L. Turfitt
President and Chief Operating Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 4, 1997
- -----------------------
Myron L. Turfitt
* Vice Chairman and Director November 4, 1997
- -----------------------
Thomas C. Covert
Vice President and Chief Financial
* Officer (Principal Accounting
- ----------------------- Officer) November 4, 1997
James E. Murphy
* Director November 4, 1997
- -----------------------
Martin R. Bring
* By Myron L. Turfitt, Attorney-in-Fact
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
KIANTONE PIPELINE COMPANY
By:/s/ Myron L. Turfitt
-----------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
UNITED JET CENTER, INC.
By:/s/ Myron L. Turfitt
---------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
VULCAN ASPHALT REFINING
CORPORATION
By:/s/ Myron L. Turfitt
-----------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
KWIK-FIL, INC.
By:/s/ Myron L. Turfitt
---------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
KWIK FILL, INC.
By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
INDEPENDENT GASOLINE & OIL
COMPANY OF ROCHESTER, INC.
By:/s/ Myron L. Turfitt
----------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
BELL OIL CORP.
By:/s/ Myron L. Turfitt
----------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
PPC, INC.
By:/s/ Myron L. Turfitt
------------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- ----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- ----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ---------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereto duly authorized, in the City of New York,
State of New York, on November 4, 1997.
SUPER TEST PETROLEUM, INC.
By:/s/ Myron L. Turfitt
--------------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
Signature Title Date
Chairman of the Board, Chief
* Executive Officer and Director November 4, 1997
- -----------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 4, 1997
- -----------------------
Myron L. Turfitt
Vice President and Chief
* Financial Officer (Principal
- ----------------------- Accounting Officer) November 4, 1997
James E. Murphy
* By Myron L. Turfitt, Attorney-in-Fact
II-19
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholder of United Refining Company
The audits referred to in our report dated October 24, 1997 relating
to the consolidated financial statements of United Refining Company and
Subsidiaries, which is contained in the Prospectus constituting a part of this
Registration Statement, included the audits of the financial statement Schedule
II - Valuation and Qualifying Accounts for each of the three years in the period
ended August 31, 1997. This financial statement schedule is the responsibility
of management. Our responsibility is to express an opinion on this schedule
based on our audits.
In our opinion, such financial statement Schedule II -- Valuation
and Qualifying Accounts, presents fairly, in all material respects, the
information set forth therein.
BDO SEIDMAN, LLP
New York, New York
October 24, 1997
II-20
<PAGE>
<TABLE>
<CAPTION>
UNITED REFINING COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Balance at Charged to
Beginning of Costs and Balance at End
Description Period Expenses Deductions of Period
- ------------------------------------ --------------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Year ended August 31, 1995:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $ 631 $ 141 $ (231) $ 541
=============== ============== =============== =================
Year ended August 31, 1996:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $ 541 $ 369 $ (369) $ 541
=============== ============== =============== =================
Year ended August 31, 1997:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
accounts $ 541 $ 407 $ (437) $ 511
=============== ============== =============== =================
</TABLE>
S-1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
United Refining Company
Warren, Pennsylvania
We hereby consent to the use in the Prospectus constituting a
part of this Registration Statement of our report dated October 24, 1997,
relating to the consolidated financial statements of United Refining Company and
Subsidiaries, which is contained in that Prospectus, and of our report dated
October 24, 1997 relating to the schedule, which is contained in Part II of the
Registration Statement.
We also consent to the reference to us under the captions
"Experts" in the Prospectus.
BDO SEIDMAN, LLP
New York, New York
November 5, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939, AS AMENDED, OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305 (b) (2)
IBJ SCHRODER BANK & TRUST COMPANY
(Exact name of trustee as specified in its charter)
New York 13-5375195
(State of Incorporation (I.R.S. Employer
if not a U.S. national bank) Identification No.)
One State Street, New York, New York 10004
(Address of principal executive offices) (Zip code)
Luis Perez, Assistant Vice President
IBJ Schroder Bank & Trust Company
One State Street
New York, New York 10004
(212) 858-2000
(Name, Address and Telephone Number of Agent for Service)
UNITED REFINING COMPANY
(Exact name of obligor as specified in its charter)
Delaware 25-1411751
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
15 Bradley Street
Warren Pennsylvania 10365
(Address of principal executive office) (Zip code)
$200,000,000 10 3/4% Senior Notes due 2007
(Title of Indenture Securities)
<PAGE>
Item 1. General information
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
New York State Banking Department
Two Rector Street
New York, New York
Federal Deposit Insurance Corporation
Washington, D.C.
Federal Reserve Bank of New York Second District
33 Liberty Street
New York, New York
(b) Whether it is authorized to exercise corporate trust powers.
Yes
Item 2. Affiliations with the Obligor.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
The obligor is not an affiliate of the trustee.
Item 3. Voting securities of the trustee.
Furnish the following information as to each class of voting
securities of the trustee:
As of August 19, 1997
- --------------------------------------------------------------------------------
Col. A Col. B
Title of class Amount Outstanding
- --------------------------------------------------------------------------------
Not Applicable
2
<PAGE>
Item 4. Trusteeships under other indentures.
If the trustee is a trustee under another indenture under which any
other securities, or certificates of interest or participation in any
other securities, of the obligor are outstanding, furnish the
following information:
(a) Title of the securities outstanding under each such other
indenture
Not Applicable
(b) A brief statement of the facts relied upon as a basis for the
claim that no conflicting interest within the meaning of Section
310 (b) (1) of the Act arises as a result of the trusteeship
under any such other indenture, including a statement as to how
the indenture securities will rank as compared with the
securities issued under such other indenture.
Not Applicable
Item 5. Interlocking directorates and similar relationships with the obligor
or underwriters.
If the trustee or any of the directors or executive officers of the
trustee is a director, officer, partner, employee, appointee, or
representative of the obligor or of any underwriter for the obligor,
identify each such person having any such connection and state the
nature of each such connection.
Not Applicable
Item 6. Voting securities of the trustee owned by the obligor or its
officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by the obligor and each director, partner,
and executive officer of the obligor:
As of August 19, 1997
- --------------------------------------------------------------------------------
Col A Col. B Col. C Col. D
Name of Owner Title of class Amount owned Percent of voting
beneficially securities represented by
amount given in Col. C
- --------------------------------------------------------------------------------
Not Applicable
3
<PAGE>
Item 7. Voting securities of the trustee owned by underwriters or their
officials.
Furnish the following information as to the voting securities of the
trustee owned beneficially by each underwriter for the obligor and
each director, partner and executive officer of each such underwriter:
As of August 19, 1997
- --------------------------------------------------------------------------------
Col A Col. B Col. C Col. D
Name of Owner Title of class Amount owned Percent of voting
beneficially securities represented by
amount given in Col. C
- --------------------------------------------------------------------------------
Not Applicable
Item 8. Securities of the obligor owned or held by the trustee
Furnish the following information as to securities of the obligor
owned beneficially or held as collateral security for obligations in
default by the trustee:
As of August 19,1997
- --------------------------------------------------------------------------------
Col A Col. B Col. C Col. D
Name of Owner Title of class Amount owned Percent of voting
beneficially securities represented
or held as by amount given
collateral security in Col. C
for obligations
in default
- --------------------------------------------------------------------------------
Not Applicable
4
<PAGE>
Item 9. Securities of underwriters owned or held by the trustee.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of an underwriter for the
obligor, furnish the following information as to each class of
securities of such underwriter any of which are so owned or held by
the trustee:
As of August 19, 1997
- --------------------------------------------------------------------------------
Col A Col. B Col. C Col. D
Name of Owner Title of class Amount owned Percent of voting
beneficially securities represented
or held as by amount given
collateral security in Col. C
for obligations
in default
- --------------------------------------------------------------------------------
Not Applicable
Item 10. Ownership or holdings by the trustee of voting securities of certain
affiliates or securityholders of the obligor.
If the trustee owns beneficially or holds as collateral security for
obligations in default voting securities of a person who, to the
knowledge of the trustee (1) owns 10 percent or more of the voting
securities of the obligor or (2) is an affiliate, other than a
subsidiary, of the obligor, furnish the following information as to
the voting securities of such person:
As of August 19, 1997
- --------------------------------------------------------------------------------
Col A Col. B Col. C Col. D
Name of Owner Title of class Amount owned Percent of voting
beneficially securities represented
or held as by amount given
collateral security in Col. C
for obligations
in default
- --------------------------------------------------------------------------------
Not Applicable
5
<PAGE>
Item 11. Ownership or holdings by the trustee of any securities of a person
owning 50 percent or more of the voting securities of the obligor.
If the trustee owns beneficially or holds as collateral security for
obligations in default any securities of a person who, to the
knowledge of the trustee, owns 50 percent or more of the voting
securities of the obligor, furnish the following information as to
each class of securities of such any of which are so owned or held by
the trustee:
As of August 19, 1997
- --------------------------------------------------------------------------------
Col. A Col. B Col. C
Nature of Indebtedness Amount Outstanding Date Due
- --------------------------------------------------------------------------------
Not Applicable
Item 12. Indebtedness of the Obligor to the Trustee.
Except as noted in the instructions, if the obligor is indebted to the
trustee, furnish the following information:
As of August 19, 1997
- --------------------------------------------------------------------------------
Col A Col. B Col. C Col. D
Name of Owner Title of class Amount owned Percent of voting
beneficially securities represented
or held as by amount given
collateral security in Col. C
for obligations
in default
- --------------------------------------------------------------------------------
Not Applicable
Item 13. Defaults by the Obligor.
(a) State whether there is or has been a default with respect to the
securities under this indenture. Explain the nature of any such
default.
Not Applicable
6
<PAGE>
(b) If the trustee is a trustee under another indenture under which
any other securities, or certificates of interest or
participation in any other securities, of the obligor are
outstanding, or is trustee for more than one outstanding series
of securities under the indenture, state whether there has been a
default under any such indenture or series, identify the
indenture or series affected, and explain the nature of any such
default.
Not Applicable
Item 14. Affiliations with the Underwriters
If any underwriter is an affiliate of the trustee, describe each such
affiliation.
Not Applicable
Item 15. Foreign Trustees.
Identify the order or rule pursuant to which the foreign trustee is
authorized to act as sole trustee under indentures qualified or to be
qualified under the Act.
Not Applicable
Item 16. List of Exhibits.
List below all exhibits filed as part of this statement of
eligibility.
*1. A copy of the Charter of IBJ Schroder Bank & Trust Company as
amended to date. (See Exhibit 1A to Form T-1, Securities and
Exchange Commission File No. 22-18460).
*2. A copy of the Certificate of Authority of the Trustee to Commence
Business (Included in Exhibit I above).
*3. A copy of the Authorization of the Trustee, as amended to date
(See Exhibit 4 to Form T-1, Securities and Exchange Commission
File No. 22- 19146).
*4. A copy of the existing By-Laws of the Trustee, as amended to date
(See Exhibit 4 to Form T-1, Securities and Exchange Commission
File No. 22-19146).
7
<PAGE>
5. A copy of each Indenture referred to in Item 4, if the Obligor is
in default. Not Applicable.
6. The consent of the United States institutional trustee required
by Section 321(b) of the Act.
7. A copy of the latest report of condition of the trustee published
pursuant to law or the requirements of its supervising or
examining authority.
* The Exhibits thus designated are incorporated herein by reference as
exhibits hereto. Following the description of such Exhibits is a
reference to the copy of the Exhibit heretofore filed with the
Securities and Exchange Commission, to which there have been no
amendments or changes.
NOTE
In answering any item in this Statement of Eligibility which relates to
matters peculiarly within the knowledge of the obligor and its
directors or officers, the trustee has relied upon information
furnished to it by the obligor.
Inasmuch as this Form T-1 is filed prior to the ascertainment by the
trustee of all facts on which to base responsive answers to Item 2, the
answer to said Item are based on incomplete information.
Item 2, may, however, be considered as correct unless amended by an
amendment to this Form T-1.
Pursuant to General Instruction B, the trustee has responded to Items
1, 2 and 16 of this form since to the best knowledge of the trustee as
indicated in Item 13, the obligor is not in default under any indenture
under which the applicant is trustee.
8
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as amended, the
trustee, IBJ Schroder Bank & Trust Company, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility & qualification to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, and State of New York,
on the 19th day of August, 1997.
IBJ SCHRODER BANK & TRUST COMPANY
By:/S/ LUIS PEREZ
----------------------------
Luis Perez
Assistant Vice President
<PAGE>
Exhibit 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939, as amended, in connection with the issue by United Refining Company of its
10 3/4% Senior Notes due 2007, we hereby consent that reports of examinations by
Federal, State, Territorial, or District authorities may be furnished by such
authorities to the Securities and Exchange Commission upon request therefor.
IBJ SCHRODER BANK & TRUST COMPANY
By:/S/ LUIS PEREZ
---------------------------
Luis Perez
Assistant Vice President
Dated: August 19, 1997
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 7
CONSOLIDATED REPORT OF CONDITION OF
IBJ SCHRODER BANK & TRUST COMPANY
of New York, New York
And Foreign and Domestic Subsidiaries
Report as of June 30, 1997
Dollar Amounts
in Thousands
ASSETS
<S> <C> <C>
Cash and balance due from depository institutions:
Noninterest-bearing balances and currency and coin ..........................................................$ 41,319
Interest-bearing balances......................................................................................$ 314,579
Securities: Held-to-maturity securities.........................................................................$ 180,111
Available-for-sale securities.................................................................$ 47,600
Federal funds sold and securities purchased under agreements to resell in
domestic offices of the bank and of its Edge and Agreement subsidiaries and in
IBFs:
Federal Funds sold and Securities purchased under agreements to resell.........................................$ 694,859
Loans and lease financing receivables:
Loans and leases, net of unearned income.....................................................$ 1,955,686
LESS: Allowance for loan and lease losses....................................................$ 62,876
LESS: Allocated transfer risk reserve........................................................$ -0-
Loans and leases, net of unearned income, allowance, and reserve...............................................$ 1,892,810
Trading assets held in trading accounts............................................................................$ 603
Premises and fixed assets (including capitalized leases)...........................................................$ 3,709
Other real estate owned............................................................................................$ 202
Investments in unconsolidated subsidiaries and associated companies................................................$ -0-
Customers' liability to this bank on acceptances outstanding.......................................................$ 81
Intangible assets..................................................................................................$ -0-
Other assets.......................................................................................................$ 67,092
TOTAL ASSETS.......................................................................................................$ 3,242,965
<PAGE>
LIABILITIES
Deposits:
In domestic offices............................................................................................$ 1,694,675
Noninterest-bearing .....................................................................$ 263,641
Interest-bearing ........................................................................$ 1,431,034
In foreign offices, Edge and Agreement subsidiaries, and IBFs..................................................$ 1,121,075
Noninterest-bearing .......................................................................................$ 17,535
Interest-bearing ..........................................................................................$ 1,103,540
Federal funds purchased and securities sold under agreements to repurchase in
domestic offices of the bank and of its Edge and Agreement subsidiaries, and in
IBFs:
Federal Funds purchased and Securities sold under agreements to repurchase.....................................$ 25,000
Demand notes issued to the U.S. Treasury...........................................................................$ 60,000
Trading Liabilities................................................................................................$ 140
Other borrowed money:
a) With a remaining maturity of one year or less...............................................................$ 38,369
b) With a remaining maturity of more than one year.............................................................$ 1,763
c) With a remaining maturity of more than three years..........................................................$ 2,242
Bank's liability on acceptances executed and outstanding...........................................................$ 81
Subordinated notes and debentures..................................................................................$ -0-
Other liabilities..................................................................................................$ 69,908
TOTAL LIABILITIES..................................................................................................$ 3,013,253
Limited-life preferred stock and related surplus...................................................................$ -0-
EQUITY CAPITAL
Perpetual preferred stock and related surplus......................................................................$ -0-
Common stock.......................................................................................................$ 29,649
Surplus (exclude all surplus related to preferred stock)...........................................................$ 217,008
Undivided profits and capital reserves.............................................................................$ (17,000)
Net unrealized gains (losses) on available-for-sale securities.....................................................$ 55
Cumulative foreign currency translation adjustments................................................................$ -0-
TOTAL EQUITY CAPITAL...............................................................................................$ 229,712
TOTAL LIABILITIES AND EQUITY CAPITAL...............................................................................$ 3,242,965
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> $11,024
<SECURITIES> $0
<RECEIVABLES> $29,762
<ALLOWANCES> $511
<INVENTORY> $67,096
<CURRENT-ASSETS> $115,380
<PP&E> $234,956
<DEPRECIATION> $60,575
<TOTAL-ASSETS> $346,392
<CURRENT-LIABILITIES> $56,037
<BONDS> $201,054
$0
$0
<COMMON> $0
<OTHER-SE> $52,937
<TOTAL-LIABILITY-AND-EQUITY> $346,392
<SALES> $871,348
<TOTAL-REVENUES> $871,348
<CGS> $767,941
<TOTAL-COSTS> $71,324
<OTHER-EXPENSES> $0
<LOSS-PROVISION> $407
<INTEREST-EXPENSE> $18,058
<INCOME-PRETAX> $6,436
<INCOME-TAX> $2,588
<INCOME-CONTINUING> $3,848
<DISCONTINUED> $0
<EXTRAORDINARY> ($6,653)
<CHANGES> $0
<NET-INCOME> ($2,805)
<EPS-PRIMARY> $0
<EPS-DILUTED> $0
</TABLE>
