SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996)
FOR FISCAL YEAR ENDED AUGUST 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to .
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Commission File No. 333-35083
UNITED REFINING COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 25-1411751
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
See Table of Additional Subsidiary Guarantor Registrants
15 Bradley Street, Warren, PA 16365
(Address of principal executive offices) (Zip code)
(814) 723-1500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13, or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of November 28, 1997, 100 shares of the Registrant's common stock, $0.10 par
value per share, were outstanding. All shares of common stock of the Registrant
are held by an affiliate. Therefore, the aggregate market value of the voting
and non-voting common equity held by non-affiliates of the Registrant is zero.
Documents Incorporated by Reference: None
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TABLE OF ADDITIONAL REGISTRANTS
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State of Other Primary Standard IRS Employer
Jurisdiction of Industrial Classification Identification Commission File
Name Incorporation Number Number Number
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<S> <C> <C> <C> <C>
Kiantone Pipeline New York 4612 25-1211902 333-35083-01
Corporation
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Kiantone Pipeline Company Pennsylvania 4600 25-1416278 333-35083-03
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United Refining Company of Pennsylvania 5541 25-0850960 333-35083-02
Pennsylvania
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United Jet Center, Inc. Delaware 4500 52-1623169 333-35083-06
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Kwik-Fill, Inc. Pennsylvania 5541 25-1525543 333-35083-05
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Independent Gas and Oil New York 5170 06-1217388 333-35083-11
Company of Rochester, Inc.
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Bell Oil Corp. Michigan 5541 38-1884781 333-35083-07
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PPC, Inc. Ohio 5541 31-0821706 333-35083-08
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Super Test Petroleum, Inc. Michigan 5541 38-1901439 333-35083-09
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Kwik-Fil, Inc. New York 5541 25-1525615 333-35083-04
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Vulcan Asphalt Refining Delaware 2911 23-2486891 333-35083-10
Corporation
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</TABLE>
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ITEM 1. 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
Company-operated retail units. As of August 31, 1997, the Company operated 319
units, 230 of which it owned. For the year ended August 31, 1997 (sometimes
referred to as "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.
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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, 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.
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. As of August 31, 1997, the Company
operated 319 retail units, of which 180 were located in New York, 127 in
Pennsylvania and 12 in Ohio. The Company owned 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.
On June 9, 1997, the Company completed the sale (the "Private
Offering") of $200,000,000 principal amount 10 3/4% Series A Senior Notes due
2007 to Dillon, Read & Co. Inc. and Bear, Stearns & Co. Inc. in a transaction
exempt from registration under the Securities Act of 1933, as amended.
Simultaneously with the consummation of the Private Offering, PNC Bank provided
the Company and one of its subsidiaries a new bank credit facility (the "New
Bank Credit Facility"). Subject to borrowing base limitations and the
satisfaction of customary borrowing conditions, the Company and such subsidiary
may borrow up to $35 million under the New Bank Credit Facility.
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,
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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. 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:
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<TABLE>
<CAPTION>
1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
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<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
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<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
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<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.
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,
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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.
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.
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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:
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<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) 22,468 102.6% 24,218 102.3% 24,836 102.4% 24,341 102.4%
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<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
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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 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.
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
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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. 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.
11
<PAGE>
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 operated a retail marketing network that included 319 retail
units, of which 180 were located in western New York, 127 in northwestern
Pennsylvania and 12 in east Ohio. The Company owned 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 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:
12
<PAGE>
<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.
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.
13
<PAGE>
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
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.
14
<PAGE>
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.
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:
15
<PAGE>
<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.
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
16
<PAGE>
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.
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.
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
17
<PAGE>
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 Mart(R) service mark to identify
its retail units under a royalty-free, nonexclusive, nontransferable license
from RAS Operating Corp., a corporation affiliated with 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.
18
<PAGE>
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.
Governmental Approvals
The Company has obtained all necessary governmental approvals, licenses
and permits to operate the refinery and convenience stores.
ITEM 2. 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.
ITEM 3. LEGAL PROCEEDINGS.
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. However, based upon
available information, 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.
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.
19
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
NONE
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
NONE
ITEM 6. SELECTED FINANCIAL DATA.
<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) 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 72,877 70,028 69,292 70,968 73,200
Operating income 32,717 21,710 17,696 26,038 21,977
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) (2,319) (2,387) 571 (40) 672
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
- ---------------------------------
<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
from an entity conducting business unrelated to the refining and
marketing of petroleum products, which the Company sold to its parent in
fiscal 1993.
</FN>
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Company Background
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
20
<PAGE>
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.
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.
Cost of Goods 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. Additionally, cost of goods sold includes a write-off of
$1,251,000 relating to a change in estimate of an insurance claim receivable.
The claim initially arose from an asphalt spill in fiscal 1990. The total amount
of a valid and enforceable claim was approximately $10,000,000 and was recorded
as a reduction of cost of goods sold. Through June 1997, $8,200,000 has been
received from the insurance company. In July 1997, the Company received notice
from the insurance company of a question in the calculation of the balance of
the claim. The Company believes that this difference will be resolved by
arbitration. Accordingly, the Company has recorded the $1,251,000 charge.
Operating Expenses. Operating expenses increased $2.2 million or 2.8%
from $79.2 million for 1996 to $81.4 million for fiscal 1997. This increase was
primarily due to a special one time bonus of approximately $1 million.
Operating Income: Operating income decreased $4.1 million or 15.6% from
$26.0 million for fiscal 1996 to $22.0 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.
21
<PAGE>
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 Item. 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 $1.7 million or 2.2%
from $77.5 million in fiscal 1995 to $79.2 million in fiscal 1996. This was due
to increases in retail operating expenses due 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 $8.3 million or 47.1% from
$17.7 million in fiscal 1995 to $26.0 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.
22
<PAGE>
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, cash on hand and borrowings under
the Company's bank credit facility with PNC Bank. 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 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.
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.
23
<PAGE>
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.
Inflation
The effect of inflation on the Company has not been significant during
the last five fiscal years.
24
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
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
======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
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 ..................... 69,292 70,968 73,200
Depreciation and amortization expenses ........................... 8,199 8,216 8,230
--------- --------- ---------
Total operating expenses ................................... 77,491 79,184 81,430
--------- --------- ---------
Operating income ........................................... 17,696 26,038 21,977
--------- --------- ---------
Other income (expense):
Interest income .................................................. 1,204 1,236 1,296
Interest expense ................................................. (18,523) (17,606) (17,509)
Other, net ....................................................... 571 (40) 672
--------- --------- ---------
(16,748) (16,410) (15,541)
--------- --------- ---------
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)
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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
======== ====== ======== ======== ========
See accompanying notes to consolidated financial statements.
</TABLE>
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
========= ========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
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 of the Senior Unsecured Notes
(Note 7), 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.
F-7
<PAGE>
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.
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.
In August 1997, the Company recorded a charge to earnings of $1,251,000
relating to a change in estimate. This accounting change results from the
write-off of a portion of an insurance claim receivable and is included in cost
of goods sold.
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).
F-10
<PAGE>
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 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.
F-11
<PAGE>
3. Property, Plant and Equipment
Property, plant and equipment is summarized as follows:
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:
F-12
<PAGE>
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
======
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."
F-13
<PAGE>
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:
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, 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
F-18
<PAGE>
unfavorable disposition would not have a material adverse effect on the
consolidated financial position of the Company.
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.
F-19
<PAGE>
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 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 Item
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 $ 9,708 $ 4,056 $ 3,267
Wholesale 7,988 21,982 18,710
---------- -------- --------
$ 17,696 $ 26,038 $ 21,977
========= ======== ========
Identifiable assets:
Retail $ 98,469 $ 97,548 $ 80,124
Wholesale 212,026 208,556 266,268
-------- -------- --------
$310,495 $306,104 $346,392
======== ======== ========
F-20
<PAGE>
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
======== ======== ========
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 10,474 5,413 5,185
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>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information as of November 28, 1997 with respect to
all directors and executive officers of the Company.
<TABLE>
<CAPTION>
Director
Name Age Since Position Principal Occupation for the Past 5 Years
- ---- --- ----- -------- -----------------------------------------
<S> <C> <C> <C> <C>
John A. Catsimatidis 49 1986 Chairman of the Board, He also serves as Chairman of the Board, Chief
Chief Executive Board, Executive President, and was the founder of
Officer, Director 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 45 1988 President, Chief President and Chief Operating Officer of the Company
Operating Officer, since September 1996. From June 1987 to September
Director 1996 he was Chief Financial Officer and Executive
Vice President of the Company.
Thomas C. Covert 63 1988 Vice Chairman Vice Chairman of the Company since September 1996.
and Director From December 1987 to September 1996 he was
Executive Vice President and Chief Operating Officer
of the Company.
25
<PAGE>
Ashton L. Ditka 56 --- Senior Vice Senior Vice President--Marketing of the Company
President - since July 1990. From December 1989 to July 1990 he
Marketing 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 54 --- Vice President-- Vice President--Refining of the Company since
Refining 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.
Frederick J. Martin, Jr. 43 --- Vice President Vice President--Supply and Transportation of the
Supply and Company since February 1993. From 1980 to January
Transportation 1993 he held other positions in the Company
involving transportation, product supply, crude
supply and pipeline and terminal administration.
James E. Murphy 52 --- Vice President Chief Financial Officer of the Company since January
and Chief Financial 1997. He was Vice President--Finance from April 1995
Officer 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.
John R. Wagner 38 --- Vice President-- Vice President--General Counsel and Secretary of the
General Counsel, Company since August 1997. Prior to joining the
Secretary Company, Mr. Wagner served as Counsel to Dollar
Bank, F.S.B. from 1988 until assuming his current
position.
26
<PAGE>
Dennis E. Bee, Jr. 55 --- Treasurer Treasurer of the Company since May 1988.
Martin R. Bring 54 1988 Director 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 71 1997 Director 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 50 1997 Director 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.
Douglas Lemmonds 50 1997 Director 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.
27
<PAGE>
Andrew Maloney 65 1997 Director 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 54 1997 Director 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.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance
Not Applicable
28
<PAGE>
ITEM 11. 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>
Stock Options
No stock options are outstanding.
Compensation of Directors
Non-officer directors receive a stipend of $15,000 per year and $1,000 for each
meeting attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The following table sets forth certain information regarding ownership of Common
Stock on November 28, 1997 by: (i) each stockholder known to the Company to own
beneficially more than 5% of the outstanding shares of Common Stock; (ii) each
of the Company's directors; and (iii) all officers and directors of the Company
as a group. The Company believes that ownership of the shares by the
29
<PAGE>
persons named below is both of record and beneficial and such persons have sole
voting and investment power with respect to the shares indicated.
Name and Address of
Beneficial Owner Number of Shares Percent of Class
John Catsimatidis 100 100%
823 Eleventh Avenue
New York, NY 10019
All officers and directors
as a group (15 persons) 100 100%
30
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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. In June 1997, the Company
distributed the note to its sole stockholder.
The Company paid a service fee relating to certain costs incurred
by its parent, Red Apple Group, Inc. ("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 in June 1997, commencing in fiscal 1998, 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 hereof, United Refining, Inc., 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
hereof, the Company was current on all rent obligations under such leases.
RAG files a consolidated tax return with affiliated entities,
including the Company. Commencing in June 1997, 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.
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.
31
<PAGE>
PART IV
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
A list of all financial statements filed as part of this
report is contained in the index to Item 8, which index is
incorporated herein by reference.
(2) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
Number Description
3.1 Certificate of Incorporation of United Refining Company ("URC").
Incorporated by reference to Exhibit 3.1 to the Registrant's Registration
Statement on Form S-4 (File No. 333-35083) (the "Registration Statement").
3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration
Statement.
3.3 Certificate of Incorporation of United Refining Company of Pennsylvania
("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration
Statement.
3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the
Registration Statement.
3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC").
Incorporated by reference to Exhibit 3.5 to the Registration Statement.
3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration
Statement.
3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY").
Incorporated by reference to Exhibit 3.7 to the Registration Statement.
3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the
Registration Statement.
3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by
reference to Exhibit 3.9 to the Registration Statement.
3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the
Registration Statement.
3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of
Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to
the Registration Statement.
3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the
Registration Statement.
3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by
reference to Exhibit 3.13 to the Registration Statement.
3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the
Registration Statement.
3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by
reference to Exhibit 3.15 to the Registration Statement.
3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the
Registration Statement.
3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI").
Incorporated by reference to Exhibit 3.17 to the Registration Statement.
3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the
Registration Statement.
3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by
reference to Exhibit 3.19 to the Registration Statement.
3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the
Registration Statement.
3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation
("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration
Statement.
3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the
Registration Statement.
32
<PAGE>
3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI").
Incorporated by reference to Exhibit 3.23 to the Registration Statement.
3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the
Registration Statement.
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. Incorporated by reference to Exhibit 4.1 to the Registration
Statement.
4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the Registration
Statement.
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"). Incorporated by reference to Exhibit
10.1 to the Registration Statement.
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.
Incorporated by reference to Exhibit 10.2 to the Registration Statement.
10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow Agent,
Schroder, as Trustee, and URC. Incorporated by reference to Exhibit 10.3 to
the Registration Statement.
10.4 Servicing Agreement dated June 9, 1997 between URC and Red Apple Group,
Inc. Incorporated by reference to Exhibit 10.4 to the Registration
Statement.
10.5 Collective Bargaining Agreement dated February 1, 1996 between URC and
International Union of Operating Engineers, Local No. 95. Incorporated by
reference to Exhibit 10.5 to the Registration Statement.
10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and
International Union, United Plant Guard Workers of America and Local No.
502. Incorporated by reference to Exhibit 10.6 to the Registration
Statement.
10.7 Collective Bargaining Agreement dated February 1, 1997 between URC and
United Steel Workers of America Local Union No. 2122-A. Incorporated by
reference to Exhibit 10.7 to the Registration Statement.
10.8 Collective Bargaining Agreement dated August 1, 1995 between URC and
General Teamsters Local Union No. 397. Incorporated by reference to Exhibit
10.8 to the Registration Statement.
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.
Incorporated by reference to Exhibit 10.9 to the Registration Statement.
10.10Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997
by URC. Incorporated by reference to Exhibit 10.10 to the Registration
Statement.
10.11Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997
by URCP. Incorporated by reference to Exhibit 10.11 to the Registration
Statement.
10.12Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997
by KPC. Incorporated by reference to Exhibit 10.12 to the Registration
Statement.
10.13Security 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.
Incorporated by reference to Exhibit 10.13 to the Registration Statement.
21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit
21.1 to the Registration Statement.
(b) Reports on Form 8-K
None
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNITED REFINING COMPANY
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
President and Chief Operating Officer
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- --------------------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 28, 1997
- ---------------------------------
Myron L. Turfitt
/s/ Thomas C. Covert Vice Chairman and Director November 28, 1997
- --------------------------------
Thomas C. Covert
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- -------------------------------- Officer) November 28, 1997
James E. Murphy
/s/ Martin R. Bring Director November 28, 1997
- --------------------------------
Martin R. Bring
/s/ Evan Evans Director November 28, 1997
- --------------------------------
Evan Evans
/s/ Kishore Lall Director November 28, 1997
- --------------------------------
Kishore Lall
/s/ Douglas Lemmonds Director November 28, 1997
- --------------------------------
Douglas Lemmonds
/s/ Andrew Maloney Director November 28, 1997
- --------------------------------
Andrew Maloney
/s/ Dennis Mehiel Director November 28, 1997
- --------------------------------
Dennis Mehiel
</TABLE>
34
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNITED REFINING COMPANY OF
PENNSYLVANIA
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
President and Chief Operating
Officer
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 28, 1997
- ----------------------------
Myron L. Turfitt
/s/ Thomas C. Covert Vice Chairman and Director November 28, 1997
- ---------------------------------
Thomas C. Covert
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting Officer) November 28, 1997
- ---------------------------------
James E. Murphy
/s/ Martin R. Bring Director November 28, 1997
- ---------------------------------
Martin R. Bring
</TABLE>
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KIANTONE PIPELINE CORPORATION
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
President and Chief Operating Officer
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 28, 1997
- --------------------------------
Myron L. Turfitt
/s/ Thomas C. Covert Vice Chairman and Director November 28, 1997
- ---------------------------------
Thomas C. Covert
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting Officer) November 28, 1997
- ---------------------------------
James E. Murphy
/s/ Martin R. Bring Director November 28, 1997
- ---------------------------------
Martin R. Bring
</TABLE>
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KIANTONE PIPELINE COMPANY
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal
- --------------------------------- Accounting Officer) November 28, 1997
James E. Murphy
</TABLE>
37
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
UNITED JET CENTER, INC.
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
VULCAN ASPHALT REFINING
CORPORATION
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
39
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KWIK-FIL, INC.
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
KWIK FILL, INC.
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
INDEPENDENT GASOLINE & OIL
COMPANY OF ROCHESTER, INC.
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
42
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
BELL OIL CORP.
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PPC, INC.
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- --------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
SUPER TEST PETROLEUM, INC.
Dated: November 28, 1997 By:/s/ Myron L. Turfitt
--------------------------
Myron L. Turfitt
Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Chairman of the Board, Chief
/s/ John A. Catsimatidis Executive Officer and Director November 28, 1997
- ---------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 28, 1997
- --------------------------------
Myron L. Turfitt
Vice President and Chief
/s/ James E. Murphy Financial Officer (Principal November 28, 1997
- --------------------------------- Accounting Officer)
James E. Murphy
</TABLE>
45
<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 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
46
<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>
47
<PAGE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT
TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED
SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material was sent to security holders by the
Partnership during the fiscal yar ended August 31, 1997.
48
