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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
FOR FISCAL YEAR ENDED AUGUST 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
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 X No
------ ------
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 30, 1998, 100 shares of the Registrant's common stock, $0.10 par
value per share, were outstanding. All shares of common stock of the
Registrant's 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>
<CAPTION>
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TABLE OF ADDITIONAL REGISTRANTS
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State of Other Primary Standard IRS Employer
Name Jurisdiction of Industrial Identification Commission File
Incorporation Classification Number Number Number
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<S> <C> <C> <C> <C>
Kiantone Pipeline Corporation New York 4612 25-1211902 333-35083-01
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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, 1998, the Company operated 309
units, 230 of which it owned. For the year ended August 31, 1998 (sometimes
referred to as "fiscal 1998"), approximately 63% and 24% 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, 1998, the Company had total revenues
of approximately $758.6 million, of which approximately 54% were derived from
gasoline sales, approximately 35% were from sales of other petroleum products
and approximately 11% 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 1998, approximately 74% 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 1980's of two competing
refineries in Buffalo, New York, owned by Ashland Inc. and Mobil Oil
Corporation. The nearest fuels refinery is over 160 miles from Warren,
Pennsylvania and the Company believes that no significant production from such
refinery is currently shipped into the Company's primary market area. It is the
Company's view that the high construction costs and the stringent regulatory
requirements inherent in petroleum refinery operations make it uneconomical for
new competing refineries to be constructed in the Company's primary market area.
During the period from September 1, 1993 to August 31, 1998, the
Company spent approximately $50 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 59% / 41% 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.
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As of August 31, 1998, the Company operated 309 retail units, of which
175 are located in New York, 124 in Pennsylvania and 10 in Ohio. The Company
owned 230 of these units. In fiscal 1998, approximately 63% of the refinery's
gasoline production were sold through the Company's retail network. In addition
to gasoline, all units sell convenience merchandise, 45 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(R)" 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 million principal amount 10 3/4% Series A Senior Notes due
2007 to Dillon, Read & Co. Inc. and Bear, Sterns & Co. Inc. in a transaction
exempt from registration under the Securities Act of 1933, as amended.
Subsequent to this issue, the Company exchanged the Series A Senior Notes for
its 10 3/4% Series B Senior Notes due 2007 which were previously registered
under the Securities Act of 1933, as amended. An aggregate of $200 million in
principal amount of Series A Senior Notes were exchanged for Series B Senior
Notes effective January 16, 1998. The form and term of the Series B Senior Notes
are identical in all material respects to the form and terms of the Series A
Senior Notes except the Series B Senior Notes are registered under the
Securities Act and, therefore, do not bear legends restricting the transfer
thereof. The Series B Senior Notes do not represent additional indebtedness of
the Company and are entitled to the benefits of the Indenture, which is the same
Indenture as the one under which the Series A Senior Notes were issued.
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 73.8 million bpd in 1997, 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, but financial problems in Asia may
moderate economic growth.
U.S. refined petroleum product demand increased in 1997 for the sixth
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 18.6
million bpd in 1997, 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 11.5 million bpd in 1997 based on preliminary industry
statistics reported by the Oil & Gas Journal (based on information from EIA) and
the Department of Transportation Federal Highway Administration ("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, and miles driven per
vehicle have increased. 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 8.0 million bpd in 1997. 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.
The Company believes that domestic refining capacity utilization is
close to maximum sustainable limits
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because of the existing high throughput coupled with a reduction in refining
capacity. The following table sets forth selected U.S. refinery information
published by the Oil & Gas Journal and EIA:
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Operable annual average refining capacity
(million bpd)* 15.1 15.1 15.4 15.3 15.6
Crude input to refineries (million 13.6 13.9 14.0 14.2 14.6
bpd)
Utilization (in percent) 89.9 91.5 90.9 92.3 93.6
</TABLE>
* Includes operating and operable but currently shutdown refineries.
The Company believes that high utilization rates coupled with little
anticipated crude capacity expansion is likely to result over the long term in
improved operating margins in the refining industry.
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, according to the American Petroleum Institute ("API") and the Oil &
Gas Journal. In 1996 and 1997 refining sector total capital expenditures are
estimated to be approximately $3.9 billion and $3.1 billion respectively, based
on information published by the Oil & Gas Journal.
The Company is a regional refiner and marketer located primarily in
Petroleum Administration for Defense District ("PADD I"). As of January 1, 1998,
there were 18 refineries operating in PADD I with a combined crude processing
capacity of 1.7 million bpd, representing approximately 10% of U.S. refining
capacity. Petroleum product consumption in 1997 in PADD I averaged 5.5 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 1997 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,
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 Strategic Highway Research
Program ("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 system wide distribution model.
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o Make capital investments in retail marketing to rebuild or refurbish
existing retail units and to acquire 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 62,600
bpd during fiscal 1997 and approximately 59,400 bpd during fiscal 1998. The
reduction is attributable to a decline in refinery production for regularly
scheduled maintenance turnarounds and concurrent installation of components of
the Company's refinery upgrade program in October 1997 and May 1998. 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 September 1, 1993 to August 31, 1998, the Company spent
approximately $50 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 A distillate hydrotreater was completed 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. In connection with this
installation, a sulfur recovery unit was also completed which has the
capacity of recovering up to 60 tons per day of raw sulfur removed
from refined products. Total cost of these two projects was
approximately $42.0 million with capital expenditures over the last
five fiscal years approximating $17.0 million.
o The Company spent approximately $7.4 million to enable the refinery
to produce reformulated gasoline ("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.
o In fiscal 1998, the Company spent approximately $11.5 million to
expand and upgrade the refinery. These projects included an FCC feed
nozzle upgrade, improvements to monitoring instrumentations and
related engineering, electrical, and construction costs.
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 1998, approximately
63% of the Company's gasoline production were sold through its retail network
and the remaining 37% of such production were sold to wholesale customers.
Middle distillates include kerosene, diesel fuel, heating oil (No. 2
oil) and jet fuel. In fiscal 1998 the Company sold approximately 84% of its
middle distillate production to wholesale customers and the remaining 16% 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 four 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.
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The following table sets forth the refinery's product yield during the
five years ended August 31, 1998:
REFINERY PRODUCT YIELD (1)
(THOUSANDS OF BARRELS)
FISCAL YEAR ENDED AUGUST 31,
<TABLE>
<CAPTION>
1994 1995 1996 1997 1998
Volume Percent Volume Percent Volume Percent Volume Percent Volume Percent
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gasoline
Regular (87 octane) 7,413 33.8% 8,770 37.0% 8,952 36.9% 9,106 38.3% 8,703 38.4%
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% 1,332 5.9%
Middle distillates
Kerosene 336 1.5% 322 1.4% 377 1.6% 431 1.8% 237 1.0%
Diesel fuel 2,049 9.4% 4,195 17.7% 4,177 17.2% 4,485 18.9% 4,014 17.7%
No. 2 heating oil 3,287 15.0% 1,609 6.8% 1,770 7.3% 1,510 6.4% 1,334 5.9%
Jet fuel 24 0.1% 253 1.1% 445 1.8% 428 1.8% 357 1.6%
Asphalt 3,636 16.6% 4,228 17.9% 4,479 18.5% 4,409 18.5% 4,441 19.6%
Other 1,437 6.6% 1,076 4.5% 1,043 4.3% 1,031 4.3% 1,249 5.5%
----- --- ----- --- ----- --- ----- --- ----- ---
(2)
Saleable yield 20,863 95.2% 22,659 95.7% 23,233 95.8% 22,885 96.3% 21,668 95.6%
Refining fuel 1,605 7.3% 1,559 6.6% 1,603 6.6% 1,496 6.3% 1,479 6.5%
----- --- ----- --- ----- --- ----- --- ----- ---
Total product yield (3) 22,468 102.5% 24,218 102.3% 24,836 102.4% 24,381 102.6% 23,147 102.1%
</TABLE>
(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.
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
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unit converts the light naphtha catalytically into a gasoline component with 83
octane. The reformer unit converts the heavy naphtha into another gasoline
component with up to 94 octane depending upon the desired octane requirement for
the grade of gasoline 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
hydrotreater 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'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 65% 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 refinery margins
currently available. Sixty five percent of the Company's contracts with its
crude suppliers are on a month-to-month evergreen basis, with 30-to-60 day
cancellation provisions; thirty percent of the Company's crude contracts are on
an annual basis (with month to month pricing provisions). As of August 31, 1998,
the Company had supply contracts with 18 different suppliers for an aggregate of
59,500 bpd of crude oil. The Company has contracts with three vendors amounting
to 48% of daily crude oil supply. As of such date the Company had no other
contract covering more than 10% of its crude oil supply.
The Company accesses crude through the Kiantone Pipeline, which
connects with the IPL in West Seneca, New York, which is near Buffalo. The IPL
provides access to most North American and foreign crude oils through three
primary routes: (i) Canadian crude is transported eastward from Alberta and
other points in Canada along the IPL; (ii) various mid-continent crudes from
Texas, Oklahoma and Kansas are transported northeast along the Cushing-Chicago
Pipeline, which connects to the IPL at Griffith, Indiana; and (iii) foreign
crudes unloaded at the Louisiana Offshore Oil Port are transported north via the
Capline and Chicago pipelines which connect to the IPL at Mokena, Illinois.
The Kiantone Pipeline, a 78-mile Company-owned and operated pipeline,
connects the Company's West Seneca, New York terminal at the pipeline's northern
terminus to the refinery's tank farm at its southern terminus. The Company
completed construction of the Kiantone Pipeline in 1971 and has operated it
continuously since then. The Company is the sole shipper on the Kiantone
Pipeline, and can currently transport up to 68,000 bpd along the pipeline. The
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.
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Turnarounds: Refinery Expansion and Improvement
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 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. In accordance with
the Capital Improvement Plan of the Company's $200 Million Senior Notes due 2007
during fiscal 1998, the Company used $18.8 million for refinery improvements and
maintenance turnaround expenses. Of the $22.2 million originally escrowed for
the refinery, the remaining $3.4 million is included in the Company's capital
budget for fiscal 1999.
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 59% / 41% 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 1998, approximately 63% and 24% of the
Company's gasoline and diesel fuel production, respectively, was sold through
this retail network.
Retail Operations
As of August 31, 1998 the Company operated a retail marketing network
that includes 309 retail units, of which 175 are located in western New York,
124 in northwestern Pennsylvania and 10 in eastern Ohio. The Company owns 230 of
these units. Gasoline at these retail units is sold under the brand name "Kwik
Fill(R)". 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, snacks, cigarettes and
beverages and self-service gasoline. Forty-five 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, cigarettes and beverages and
self-service gasoline. Limited gasoline stations sell gasoline, cigarettes, oil
and related car care products and provide full service for gasoline customers.
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. 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, 1998, the average sales areas of the
Company's convenience stores, limited gasoline stations, truckstops and other
stores were 750, 200, 1,200 and 2,520 square feet, respectively.
9
<PAGE> 10
The table below sets forth certain information concerning the stores as of, and
for the fiscal years ended August 31, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
Average Monthly Average Monthly Average Monthly
Gasoline Gallonage Diesel Fuel Gallonage Merchandise Sales
(Thousands) (Thousands) (Thousands)
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
Store Format and Number of August 31, August 31, August 31,
--------------------------- ------------------------- ----------------------------
Stores at August 31, 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998
=================================== ============================ ========================= ============================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Convenience (179) 12,554 12,034 12,605 345 335 445 $4,671 $4,888 $5,540
Limited Gasoline Stations (119) 9,734 9,275 8,964 177 190 104 749 792 727
Truck Stops (8) 586 573 585 2,916 2,837 2,801 377 349 355
Other Stores (3) -- -- -- -- -- -- 176 176 171
Total (309) 22,874 21,882 22,154 3,438 3,362 3,350 $5,973 $6,205 $6,793
</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 59% / 41% 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.
Total merchandise sales for fiscal year 1998 were $81.5 million, with a
gross profit of approximately $23.8 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 1998, the Company purchased
approximately 71% 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 three times a week to collect operating data including sales and
inventory levels. Data transmissions are made using 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. Upon completion of a capital project, management
tracks "before and after" performance, to evaluate the return on investment
which has resulted from the improvements.
Capital Improvement Program
During the fiscal year ended August 31, 1998, the Company spent
approximately $14.0 million from the capital expenditure escrow account on the
retail portion of its Capital Improvement Program. Of the $25.9 million
originally escrowed for retail improvements, the remaining $11.9 million is
included in the Company's fiscal 1999 capital budget. The scope of the project
work completed as of August 31, 1998 included:
o Eleven petroleum upgrades. These upgrades include new drive
pads, canopy, lighting, multi-product dispensers (most with
pay-at-the-pump), new petroleum lines and signage. Petroleum
upgrades will be performed simultaneously with the underground
storage tank upgrades, which must be completed prior to December
22, 1998.
o Thirteen rebuilds that include ground-up construction of a new
building and a complete petroleum upgrade (not included above). Two
of these locations also provide fast food and one includes a smoke
shop. Also, six rebuilds are currently in progress.
10
<PAGE> 11
o Three convenience stores rehabs (two locations also have complete
petroleum upgrades not included above).
o One "touchless" car wash was installed and one new retail location
was purchased.
Wholesale Marketing and Distribution
The Company sold in fiscal year 1998, on a wholesale basis,
approximately 43,200 bpd of gasoline, distillate and asphalt products to
distributor, commercial and government accounts. In addition, the Company sells
approximately 1,000 bpd of propane to liquefied petroleum gas marketers. In
fiscal 1998, the Company's production of gasoline, distillate and asphalt sold
at wholesale was 37%, 84% and 100%, respectively. The Company sells 98% of its
wholesale gasoline and distillate products from its Company-owned and operated
product terminals. The remaining 2% are sold through third-party exchange
terminals.
The Company's wholesale gasoline customer base includes 57 branded
dealer/distributor units operating under the Company's proprietary "Keystone(R)"
brand name. Long-term Keystone(R) dealer/distributor contracts accounted for
approximately 13% of the Company's wholesale gasoline sales in fiscal 1998.
Supply contracts generally range from three to five years in length, with
Keystone(R) 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 1998, the Company sold 5.5 million barrels of asphalt while
producing 4.5 million barrels. The refinery was unable to produce enough asphalt
to satisfy the demand and, therefore, purchased 1.0 million barrels for resale.
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
asphalt terminal network allows the Company to enter into product exchanges.
11
<PAGE> 12
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 thousands of barrels) as of August 31, 1998 were
as follows:
<TABLE>
<CAPTION>
Gasoline Distillate Asphalt Total
Terminal Location Capacity Capacity Capacity Capacity
----------------- -------- --------- -------- --------
<S> <C> <C> <C> <C>
Cordova, Alabama - bbls - bbls 200 bbls 200 bbls
Tonawanda, New York 60 190 75 325
Rochester, New York - 190 - 190
Pittsford, New York * - - 170 170
Springdale, Pennsylvania - - 130 130
Dravosburg, Pennsylvania* - - 100 100
Warren, Pennsylvania 697 451 1,004 2,152
Butler, Pennsylvania - - 10 10
---------- --------- --------- ----------
Total
757 bbls 831 bbls 1,689 bbls 3,277 bbls
========== ========= ========= ==========
* Leased
</TABLE>
During fiscal 1998, approximately 89% of the Company's refined products
were transported from the refinery via truck transports, with the remaining 11%
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 ten gasoline tank trucks that supply
approximately 25% of its Kwik Fill retail stations.
Product distribution costs to both retail and wholesale accounts are
minimized through product exchanges. Through these exchanges, the Company has
access to product supplies at 40 sources located throughout the Company's retail
marketing 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 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.
12
<PAGE> 13
The Company's on-road diesel represented 67% of its total distillate
sales in fiscal 1998. 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 required 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, 1998, approximately 77% 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, 1998 the total remaining cost of the upgrade was estimated to be
$3.1 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 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
13
<PAGE> 14
requirements inherent in petroleum refinery operations make it uneconomical for
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 is product price and quality, reliability
and availability of supply and location of distribution points.
EMPLOYEES
As of August 31, 1998 the Company had approximately 1,660 full-time and
1,400 part-time employees. Approximately 2,410 persons were employed at the
Company's retail units, 580 persons at the Company's refinery, and the balance
at the Kiantone pipeline and at terminals operated by the Company and 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 216, 7, 21 and 18 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 Red Apple Supermarkets, Inc., a corporation which is indirectly wholly
owned by John A. Catsimatidis, the sole stockholder, Chairman of the Board and
Chief Executive Officer of the Company. The license is for an indefinite term.
The licensor has the right to terminate this license in the event that the
Company fails to maintain quality acceptable to the licensor. The Company
licenses the right to use the Keystone(R) trademark to approximately 57
independent distributors on a non-exclusive royalty-free basis for contracted
wholesale sales of gasoline and distillates.
The Company does not own any patents. Management believes that the
Company does not infringe upon the patent rights of others, nor does the
Company's lack of patents have a material adverse effect on the business of the
Company.
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 the Company's 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 that
would enable the Company to build a second pipeline on property contiguous to
the Kiantone Pipeline.
14
<PAGE> 15
The Company also leases an aggregate of 79 sites in Pennsylvania, New
York and Ohio upon which it operates retail units. As of August 31, 1998, the
leases had an average remaining term of 43 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 Section 505 of the federal Water Pollution Control Act, 33
U.S.C. Section 1251, et. seq. The complaint alleges a series of discharges to
the Allegheny River at the Company's refining facility in Warren, Pennsylvania
exceeding the limits contained in the Company's waste water discharge permits.
PEDF seeks to enjoin future discharges in excess of permitted limits, an
assessment of civil penalties up to $25,000 per day as provided in the Act, and
an award of attorneys' fees. The case has been tried to the Court and post-trial
proceedings are continuing. No judgement has been rendered. The Company believes
that this action will not have any material adverse effect upon its operations
or consolidated financial condition.
The United States Environmental Protection Agency ("USEPA") has issued
certain Notices of Violation, an Administrative Order, and has asserted certain
additional claims arising under federal and state statutory and regulatory law
through and including August 5, 1998 (collectively the "Claims"). The Claims
arise from allegations that (1) the Company failed to properly and consistently
monitor, report and control emissions of Volatile Organic Compounds ("VOCs")
from its refining facility in Warren, Pennsylvania; (2) fuel gas used in the
refining process has in the past contained levels of hydrogen sulfide in excess
of permitted parameters, and ; (3) the Company in the past has failed to
properly calculate and report emissions of benzene from its refining facility.
The Claims allege violations of the federal Clean Air Act, as amended, and
associated federal and state regulatory requirements. USEPA's review of the
Company's operations is continuing. The Claims seek civil money penalties in
accordance with USEPA's penalty policies in an amount yet to be determined. The
Company believes that the Claims and the results of USEPA's continuing review
will not have any material adverse effect upon its operations or consolidated
financial condition.
In addition to the foregoing proceedings, the Company and its
subsidiaries are from time to time parties to various legal proceedings that
arise in the ordinary course of their respective business operations. These
proceedings include various administrative actions relating to federal, state
and local environmental laws and regulations. The Company believes that if the
legal proceedings in which it is currently involved are determined against the
Company, they would not result in a material adverse effect on the Company's
operations or its consolidated financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
NONE
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS.
NONE
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
Year Ended August 31,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales $ 729,128 $ 783,686 $ 833,818 $ 871,348 $ 758,623
Gross margin (1) 156,898 151,852 168,440 164,153 151,564
Refining operating expenses 56,121 56,665 63,218 60,746 60,840
Selling, general and administrative
expenses 70,028 69,292 70,968 73,200 75,064
Operating income 21,710 17,696 26,038 21,977 7,340
Interest expense 17,100 18,523 17,606 17,509 22,188
Interest income 1,134 1,204 1,236 1,296 2,701
Other income (expense) (2,387) 571 (40) 672 (685)
Income (loss) before income tax
expense and extraordinary item 3,357 948 9,628 6,436 (12,832)
Income tax expense (benefit) 1,337 487 3,787 2,588 (5,132)
Income (loss) before extraordinary
item 2,020 461 5,841 3,848 (7,700)
Extraordinary item, net of tax
benefit of $4,200 - - - (6,653) -
Net income (loss) 490 461 5,841 (2,805) (7,700)
Balance Sheet Data (at end of period):
Total assets 315,194 310,494 306,104 346,392 342,579
Total debt 158,491 154,095 136,777 201,272 201,309
Total stockholder's equity 77,725 78,186 84,027 52,937 45,237
</TABLE>
- ----------------------------------------------------
(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 expense 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.
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 1998, approximately 63% and 24% 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, the
Company is a major regional wholesale marketer of asphalt. The Company also
sells convenience merchandise at convenience stores located at most of its
service stations. The Company's profitability is influenced by fluctuations in
the market prices of crude oil and refined products. Although the Company's
product sales mix helps to reduce the impact of large short-term variations in
crude oil
16
<PAGE> 17
price, net sales and costs of goods sold can fluctuate widely based upon
fluctuations in crude oil prices. For example, 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 products prices.
In addition to their effect on petroleum product margins, fluctuations
in crude oil prices can affect the Company's reported financial results by
producing significant changes in the value of the Company's working inventories.
The change in the value of working inventory is that portion of the total change
in the Company's inventory value which is due to changes in the pricing of
working inventory volumes. Working inventory volumes are those volumes of
inventory of the Company's various products and feedstocks necessary to support
normal operations. While changes in the value of working inventory affect the
Company's reported gross profit, operating income and net income, they have no
material effect on the Company's operating cash flow.
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 1998 and Fiscal 1997.
Net Sales. Net sales decreased $112.7 million or 12.9% from $871.3
million for fiscal 1997 to $758.6 million for fiscal 1998. The decrease was
primarily due to an 22.6% decrease in wholesale gasoline and distillate weighted
average net selling prices, 17.4% lower retail petroleum selling prices, and a
14.5% decrease in average asphalt selling prices. Also contributing to the
revenue decrease was a 4.8% decrease in wholesale gasoline and distillate
volume. However the wholesale gasoline and distillate volume declines were
slightly more than offset by a 1.0% increase in retail petroleum volume and a
15.5% increase in asphalt sales volume, as overall petroleum product sales
volume increased slightly from 23.69 million barrels in fiscal 1997 to 23.74
million barrels in fiscal 1998. Also offsetting lower petroleum selling prices
was a 9.5% increase in retail merchandise sales from $74.5 million in fiscal
1997 to $81.5 million in fiscal 1998. The decreases in the Company's product
prices were primarily due to lower worldwide prices for petroleum products which
accompanied a 23.1% decrease in world crude oil prices, as indicated by prices
of NYMEX crude oil contracts. The decreased wholesale gasoline and distillate
volume was due primarily to a 5.9% decrease in crude oil processing resulting
from the planned shutdown of certain refinery processing units for maintenance
and upgrading in October 1997 and May 1998.
Cost of Goods Sold. Cost of goods sold decreased $100.0 million or
13.0% from $767.9 million for fiscal 1997 to $667.9 million for fiscal 1998. The
decrease was primarily the result of a 23.1% decrease in world crude oil prices,
as well as lower refinery crude oil input volume. Partially offsetting lower
crude oil prices were increases in costs of goods sold from changes in inventory
prices. The per barrel value of the Company's inventories declined during fiscal
1998 as a result of declining world petroleum prices. The declining prices
reduced the value of the Company's working inventories by approximately $12.8
million. These reductions in inventory value contributed to corresponding
increases to cost of goods sold. For fiscal 1997, the corresponding changes in
inventory prices had the effect of decreasing the Company's cost of goods sold
by approximately $0.3 million. The Company maintains certain volumes of working
inventory necessary to support normal operations, and changes in valuation of
this inventory occur with fluctuations in world petroleum prices. The lower
pricing of the Company's working inventories at the end of fiscal 1998, for
example, was the result of world petroleum prices which ended fiscal 1998
approximately 32% below their level at the end of fiscal 1997.
Operating Expenses. Operating expenses increased $2.0 million or 2.4%
from $81.4 million for 1997 to $83.4 million for fiscal 1998. This increase was
primarily due to increased retail expenses for sales promotions, retail station
wages and maintenance and environmental expense. Increased retail station wages
were primarily due to an increase in the federal minimum wage, while increased
retail environmental expenses were primarily connected with the upgrading of
underground storage tanks to new federal standards. Increased retail promotions
expenses were primarily in connection with a "frequent fueler" program which has
been effective in increasing retail gasoline volume.
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<PAGE> 18
Operating Income. Operating income decreased $14.6 million from $22.0
million for fiscal 1997 to $7.3 million for fiscal 1998. This was primarily due
to a decline in gross profit as the result of a $12.8 million negative impact on
cost of goods sold for changes in working inventory value. Also contributing to
the decline in gross profit and operating income was the reduction in refinery
production resulting from the scheduled maintenance shutdowns in October 1997
and May 1998.
Interest Expense. Net interest expense (interest expense less interest
income) increased $3.3 million from $16.2 million for fiscal 1997 to $19.5
million for fiscal 1998. The increase was primarily due to an increase in the
amount of long-term debt outstanding following the Company's sale of $200
million of Senior Unsecured Notes in June 1997. This was partially offset by a
reduction in the average interest rate for long-term debt outstanding and by
interest income received on restricted cash and investment.
Income Taxes. The Company's effective tax rate for fiscal 1998 was
approximately 40.0% compared to a rate of 40.2% for fiscal 1997.
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 a 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.
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.
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.
18
<PAGE> 19
LIQUIDITY AND CAPITAL RESOURCES
Working capital (current assets minus current liabilities) at August
31, 1998, was $57.9 million and at August 31, 1997 was $59.3 million. The
Company's current ratio (current assets divided by current liabilities) was
1.9:1 at August 31, 1998, and was 2.1:1 at August 31, 1997.
Net cash provided by operating activities totaled $15.4 million for
fiscal 1998 compared to net cash used in operating activities of $2.3 million in
fiscal 1997. This increase is primarily the result of a decrease in accounts
receivable and inventories, and an increase in sales, use and fuel taxes
payable, offset by a decrease in accounts payable and accrued liabilities and an
increase in deferred income tax assets. Changes in the carrying value of the
Company's inventory are the result of fluctuations in world petroleum prices and
do not have a material effect on the Company's operating cash flow.
Net cash provided by investing activities totaled $.3 million for the
year ended August 31, 1998 as compared to net cash used in investing activities
of $53.6 million for fiscal 1997. For the fiscal year ended August 31, 1998 and
1997 respectively, investments included $15.3 million and $48.2 million in
government securities and commercial paper maturing through December 1998 and
1997 respectively. Net cash used in investing activities for purchases of
property, plant and equipment and other assets totaled $33.5 million and $5.8
million for fiscal 1998 and 1997 respectively. Fiscal 1998 included improvements
and upgrades to the refinery of approximately $16.6 million and to the Company's
retail outlets of approximately $16.9 million.
The Company reviews its capital expenditures on an ongoing basis.
During fiscal 1998, the Company invested approximately $33.5 million for capital
improvements; of which approximately $32.9 million (including reimbursement of
approximately $7.4 million for eligible turnaround expenditures) was funded from
the capital expenditure escrow account established in conjunction with the
Company's offering in 1997 and the remaining expenditures were funded from cash
flow. The Company currently has budgeted approximately $20.0 million for capital
expenditures in fiscal 1999, of which approximately $3.1 million is for the
completion of projects relating to underground storage tanks. The remaining
$16.9 million for fiscal 1999 is budgeted for the refinery and retail capital
improvement program and routine maintenance. The refinery 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 as Agent 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.
19
<PAGE> 20
SEASONAL FACTORS
Seasonal factors affecting the Company's business may cause variation
in the prices and margins of some of the Company's products. For example, demand
for gasoline tends to be highest in spring and summer months, while demand for
home heating oil and kerosene tends to be highest in winter months. As a result,
the margin on gasoline prices versus crude oil costs generally tends to increase
in the spring and summer, while margins on home heating oil and kerosene tend to
increase in winter.
INFLATION
The effect of inflation on the Company has not been significant during
the last five fiscal years.
YEAR 2000 COMPUTER ISSUES
The year 2000 presents many challenges to our industry with respect to,
among other things, date-related functions in some computer systems.
Historically, certain computer programs have been written using two digits
rather than four to define the applicable year, which could result in the
computer recognizing a date using "00" as the year 1900 rather than the year
2000. This in turn could result in major system failures or miscalculations and
is generally referred to as the "Year 2000" problem.
The Company is examining all areas of our business to ensure Year 2000
readiness, including computer hardware and software applications. The Company is
addressing Year 2000 issues primarily with internal resources to ensure that the
transition to the Year 2000 will not disrupt the Company's operations. The
Company anticipates that essentially all of its systems will be compliant by
calendar year end 1998, including its non-information technology systems. In
addition, the Company has communicated with and evaluated the systems of its
customers, suppliers, financial institutions and others with which it does
business to identify any Year 2000 issues. Costs incurred by the Company to date
to implement its plan have not been material and are not expected to have a
material effect on the Company's financial condition or results of operations.
There can be no assurance, however, that the Year 2000 issue will not adversely
affect the Company and its business.
RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("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. Results of operations, financial position and
financial statement disclosures 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.
20
<PAGE> 21
Statement 131 is effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Results of operations, financial position and
financial statement disclosures will be unaffected by implementation of this
standard.
In February 1998, the FASB issued Statement of Financial Accounting
Standard No. 132 ("Statement 132"), "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits". Statement 132 standardizes the disclosure
requirements for pensions and other post-retirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful.
Statement 132 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 disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and
Hedging Activities". Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure these instruments at fair value. The
accounting for changes in the fair value of a derivative, that is, gains and
losses, depends on the intended use of the derivative and its resulting
designation.
Statement 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. 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 disclosures.
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants 23
Consolidated Financial Statements:
Balance Sheets 24
Statements of Operations 25
Statements of Stockholder's Equity 26
Statements of Cash Flows 27
Notes to Consolidated Financial Statements 28 - 45
22
<PAGE> 23
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, 1998 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, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 1998 in conformity with generally accepted accounting
principles.
/s/ BDO SEIDMAN, LLP
New York, New York
October 29, 1998
23
<PAGE> 24
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
=========================================================================================
August 31,
---------------------
1998 1997
<S> <C> <C>
- -----------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 26,400 $ 11,024
Accounts receivable, net 27,017 29,762
Inventories 55,124 67,096
Prepaid expenses and other assets 7,727 6,786
Deferred income taxes 5,024 712
- -----------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 121,292 115,380
- -----------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Cost 256,895 234,956
Less: accumulated depreciation 58,918 60,757
- -----------------------------------------------------------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 197,977 174,199
- -----------------------------------------------------------------------------------------
RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS 15,289 48,168
DEFERRED FINANCING COSTS, NET 7,244 7,807
OTHER ASSETS 777 838
- -----------------------------------------------------------------------------------------
$342,579 $346,392
=========================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT:
Current installments of long-term debt $ 283 $ 218
Accounts payable 25,298 29,010
Accrued liabilities 11,823 13,753
Sales, use and fuel taxes payable 26,026 13,056
- -----------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 63,430 56,037
LONG TERM DEBT: LESS CURRENT INSTALLMENTS 201,026 201,054
DEFERRED INCOME TAXES 16,889 17,390
DEFERRED GAIN ON SETTLEMENT OF PENSION PLAN OBLIGATIONS 2,205 2,420
DEFERRED RETIREMENT BENEFITS 12,350 10,797
OTHER NONCURRENT LIABILITIES 1,442 5,757
- -----------------------------------------------------------------------------------------
TOTAL LIABILITIES 297,342 293,455
- -----------------------------------------------------------------------------------------
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 38,087 45,787
- -----------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 45,237 52,937
- -----------------------------------------------------------------------------------------
$342,579 $346,392
=========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 25
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
===============================================================================================
YEAR ENDED
AUGUST 31,
---------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES (includes consumer excise taxes of
$145,316, $139,371 and $142,791) $ 758,623 $ 871,348 $ 833,818
COST OF GOODS SOLD 667,899 767,941 728,596
- -----------------------------------------------------------------------------------------------
GROSS PROFIT 90,724 103,407 105,222
- -----------------------------------------------------------------------------------------------
EXPENSES:
Selling, general and administrative expenses 75,064 73,200 70,968
Depreciation and amortization expenses 8,320 8,230 8,216
- -----------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 83,384 81,430 79,184
- -----------------------------------------------------------------------------------------------
OPERATING INCOME 7,340 21,977 26,038
- -----------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 2,701 1,296 1,236
Interest expense (22,188) (17,509) (17,606)
Other, net (685) 672 (40)
- -----------------------------------------------------------------------------------------------
(20,172) (15,541) (16,410)
- -----------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
AND EXTRAORDINARY ITEM (12,832) 6,436 9,628
- -----------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT):
Current (319) 3,463 200
Deferred (4,813) (875) 3,587
- -----------------------------------------------------------------------------------------------
(5,132) 2,588 3,787
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (7,700) 3,848 5,841
- -----------------------------------------------------------------------------------------------
EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $4,200 -- (6,653) --
- -----------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (7,700) $ (2,805) $ 5,841
===============================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 26
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
================================================================================================
Additional Total
Common Stock Paid-In Retained Stockholder's
Shares Amount Capital Earnings Equity
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 1, 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)
Dividends -- -- (28,285) (28,285)
- ------------------------------------------------------------------------------------------------
Balance at August 31, 1997 100 -- 7,150 45,787 52,937
Net loss -- -- (7,700) (7,700)
- ------------------------------------------------------------------------------------------------
Balance at August 31, 1998 100 $ -- $ 7,150 $38,087 $ 45,237
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
26
<PAGE> 27
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
============================================================================================================================
YEAR ENDED AUGUST 31,
-------------------------------------------
1998 1997 1996
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (7,700) $ (2,805) $ 5,841
Adjustments to reconcile net income/(loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 8,973 8,564 8,505
Write-off of deferred financing costs - 1,118 -
Post-retirement benefits 1,553 2,413 2,000
Change in deferred income taxes (4,813) (875) 3,587
Write-off of insurance claim - 1,251 -
(Gain) loss on asset dispositions 503 4 (132)
Cash provided by (used in) working capital items 16,892 (11,676) 5,614
Other, net (42) (305) (440)
-----------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 23,066 494 19,134
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,366 (2,311) 24,975
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Increase) decrease in restricted cash and cash equivalents 32,879 (48,168) -
and investments
Additions to property, plant and equipment (33,516) (5,824) (4,562)
Proceeds from asset dispositions 913 422 653
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 276 (53,570) (3,909)
-----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends - (5,000) -
Principal reductions of long-term debt (250) (135,512) (17,939)
Proceeds from issuance of long-term debt 287 200,000 -
Deferred financing costs (303) (8,094) (30)
-----------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (266) 51,394 (17,969)
-----------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,376 (4,487) 3,097
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,024 15,511 12,414
-----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 26,400 $ 11,024 $ 15,511
=======================================================================================================================
CASH PROVIDED BY (USED IN) WORKING CAPITAL ITEMS:
Accounts receivable, net $ 2,745 $ (2,686) $ (3,585)
Inventories 11,972 (14,852) 4,859
Prepaid expenses and other assets (941) (344) 2,277
Accounts payable (3,712) 6,623 5,864
Accrued liabilities (6,142) 1,354 (3,974)
Sales, use and fuel taxes payable 12,970 (1,771) 173
-----------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE $ 16,892 $ (11,676) $ 5,614
=======================================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest $ 22,454 $ 16,280 $ 18,480
Income taxes $ 266 $ 195 $ 929
=======================================================================================================================
NON-CASH FINANCING ACTIVITIES:
Dividends $ - $ 23,285 $ -
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
27
<PAGE> 28
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 consolidated financial statements include the accounts of United
Refining Company and its subsidiaries (collectively, the "Company"), United
Refining Company of Pennsylvania and its subsidiaries, and Kiantone Pipeline
Corporation.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investment securities with maturities of three
months or less at date of acquisition to be cash equivalents.
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. Supply inventories are stated at either lower of cost or market or
replacement cost and include various parts for the refinery operations. If the
cost of inventories exceeds their market value, provisions are made currently
for the difference between the cost and the market value. Due to fluctuating
market conditions for certain petroleum product inventories, LIFO cost exceeded
market by approximately $11,200,000 and $1,800,000 as of August 31, 1998 and
1997, respectively, resulting in the valuation of certain inventories at market.
Inventories consist of the following:
<TABLE>
<CAPTION>
AUGUST 31,
-------------------------
1998 1997
---------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Crude Oil $12,042 $18,169
Petroleum Products 22,513 31,306
---------------------------------------------------------------
Total @ LIFO 34,555 49,475
---------------------------------------------------------------
Merchandise 7,479 6,372
Supplies 13,090 11,249
---------------------------------------------------------------
Total @ FIFO 20,569 17,621
---------------------------------------------------------------
Total Inventory $55,124 $67,096
===============================================================
</TABLE>
28
<PAGE> 29
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Included in petroleum product inventories are exchange balances either
held for or due from other petroleum marketers. These balances are not
significant.
The Company does not own sources of crude oil and depends on outside
vendors for its needs.
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.
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
and cash equivalents and investments in government securities and commercial
paper held in trust and committed only 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
Revenues from wholesale sales are recognized upon shipment or when
title passes. Retail revenues are recognized immediately upon sale to the
customer.
29
<PAGE> 30
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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. Pursuant to the tax sharing
agreement, included in prepaid expenses and other assets are amounts due from
the Parent of approximately $1,600,000 and $650,000 as of August 31, 1998 and
1997, respectively.
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.
30
<PAGE> 31
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
Environmental Matters
The Company expenses environmental expenditures related to existing
condition 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 15).
Long-Lived Assets
Long-lived assets, such as intangible assets and property and
equipment, are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated undiscounted future cash flows from the use of these assets. When
any such impairment exists, the related assets will be written down to fair
value.
Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board ("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. Results of operations, financial position and
financial statement disclosures 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
31
<PAGE> 32
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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. Results of operations, financial position and
financial statement disclosures will be unaffected by implementation of this
standard.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 ("Statement 132"), "Employers' Disclosures about Pensions and
Other Post-Retirement Benefits". Statement 132 standardizes the disclosure
requirements for pensions and other post-retirement benefits, requires
additional information on changes in the benefit obligations and fair values of
plan assets that will facilitate financial analysis, and eliminates certain
disclosures that are no longer useful.
Statement 132 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 disclosures. Results of operations and financial position,
however, will be unaffected by implementation of this standard.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and
Hedging Activities". Statement 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure these instruments at fair value. The
accounting for changes in the fair value of a derivative, that is, gains and
losses, depends on the intended use of the derivative and its resulting
designation.
Statement 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. 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 disclosures.
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, 1998 and 1997, accounts receivable were net of
allowance for doubtful accounts of $405,000 and $511,000 respectively.
32
<PAGE> 33
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1998 1997
-------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Refinery equipment,
Including construction-in-progress $162,703 $155,618
Marketing (i.e. retail outlets) 87,230 72,463
Transportation 6,962 6,875
-------------------------------------------------------------------------------
256,895 234,956
Less: Accumulated depreciation 58,918 60,757
-------------------------------------------------------------------------------
$197,977 $174,199
===============================================================================
</TABLE>
4. ACCRUED LIABILITIES
Accrued liabilities include the following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1998 1997
-------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Interest $ 4,631 $ 4,906
Payrolls and benefits 6,359 7,657
Other 833 1,190
-------------------------------------------------------------------------------
$11,823 $13,753
===============================================================================
</TABLE>
33
<PAGE> 34
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
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.
Future minimum lease payments as of August 31, 1998 are summarized as
follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDED AUGUST 31, LEASES LEASES
------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
1999 $ 177 $3,096
2000 156 2,118
2001 102 1,247
2002 79 815
2003 81 529
Thereafter 510 790
------------------------------------------------------------------------------------
Total minimum lease payments 1,105 8,595
Less: Minimum sublease rents - 25
------------------------------------------------------------------------------------
Net minimum sublease payments 1,105 $8,570
========
Less: Amount representing interest 470
-------------------------------------------------------------------------
Present value of net minimum
lease payments $ 635
=========================================================================
</TABLE>
Net rent expense for operating leases amounted to $3,338,000,
$3,238,000 and $3,265,000 for the years ended August 31, 1998, 1997 and 1996
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 $52,397,000 as of August
31, 1998. 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 7.9% as of August 31, 1998.
As of August 31, 1998, 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.
34
<PAGE> 35
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
7. LONG-TERM DEBT
During June 1997, the Company sold $200,000,000 of 10-3/4% Senior
Unsecured Notes due 2007, Series A. Subsequent to this issue, the Company
exchanged these notes for its 10-3/4% Senior Unsecured Notes due 2007, Series B.
Such notes are fully and unconditionally guaranteed on a senior unsecured basis
by all of the Company's subsidiaries (Note 18). 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 $48,100,000 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, 1998 and 1997, the unused funds were
classified as "Restricted Cash and Cash Equivalents and Investments".
Both the senior unsecured notes and secured credit facility require
that the Company maintain certain minimum levels of tangible net worth, working
capital ratios and cash flow and restrict the amount available to distribute
dividends. The Company is currently in compliance with its loan covenants.
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------------
1998 1997
----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt:
10.75% senior unsecured notes due June 9, 2007,
Series B $200,000 $200,000
Other long-term debt 674 503
Capitalized lease obligations 635 769
----------------------------------------------------------------------------------------------------
201,309 201,272
Less: Current installments of long-term debt 283 218
----------------------------------------------------------------------------------------------------
Total long-term debt, less current installments $201,026 $201,054
====================================================================================================
</TABLE>
35
<PAGE> 36
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The principal amount of long-term debt outstanding as of August 31,
1998, matures as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------------
(IN THOUSANDS)
<S> <C>
1999 $ 283
2000 232
2001 123
2002 98
2003 78
Thereafter 200,495
-----------------------------------------------------
$201,309
=====================================================
</TABLE>
The following financing costs have been deferred and are being
amortized to expense over the term of the related debt:
<TABLE>
<CAPTION>
AUGUST 31,
----------------------------
1998 1997
--------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Beginning balance $7,807 $1,380
Current year additions 303 8,094
--------------------------------------------------------------------
Total financing costs 8,110 9,474
Write-off of deferred financing costs - (1,118)
Amortization (866) (549)
--------------------------------------------------------------------
$7,244 $7,807
====================================================================
</TABLE>
36
<PAGE> 37
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
8. 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 included the following components:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost $ 1,381 $ 1,283 $ 1,166
Interest cost on projected benefit obligation 1,897 1,632 1,442
Return on assets (1,921) (1,509) (1,227)
Net amortization and deferral (35) 35 45
-------------------------------------------------------------------------------------------------
Net periodic pension cost $ 1,322 $ 1,441 $ 1,426
=================================================================================================
</TABLE>
Assumptions used in the calculation of the projected benefit obligation
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------
1998 1997 1996
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rates 8.0% 8.0% 8.0%
Salary increases 3.0% - 4.5% 3.0% - 4.5% 3.0% - 4.5%
Expected long-term rate of return on assets 8.0% 8.0% 8.0%
=================================================================================================
</TABLE>
37
<PAGE> 38
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table sets forth the plans' funded status and amounts
recognized in the Company's consolidated balance sheets.
<TABLE>
<CAPTION>
AUGUST 31,
------------------------------------
1998 1997
==================================================================================================================
(In Thousands)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ 19,359 $ 16,840
==================================================================================================================
Accumulated benefit obligation $ 20,239 $ 17,414
==================================================================================================================
Projected benefit obligation $ 26,696 $ 23,074
Plan assets at fair value (25,665) (20,195)
- ------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 1,031 2,879
Unrecognized net obligation as of September 1, 1985 (1,330) (1,470)
Unrecognized prior service cost (920) (995)
Unrecognized net gain 6,203 4,058
- ------------------------------------------------------------------------------------------------------------------
Pension liability recognized on the consolidated balance sheets $ 4,984 $ 4,472
==================================================================================================================
</TABLE>
The Company's deferred gain on settlement of past pension plan
obligations amounted to $2,205,000 and $2,420,000 as of August 31, 1998 and
1997, respectively, and is being amortized over 23 years.
9. 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
$412,000, $331,000 and $497,000 for the years ended August 31, 1998, 1997 and
1996, respectively. Benefit payments are reflected as a reduction of the accrued
post-retirement healthcare benefit costs.
38
<PAGE> 39
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
The following table sets forth the post-retirement healthcare benefits
status reconciled with the amounts on the Company's consolidated balance sheets.
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Retirees $ 3,080 $ 3,174
Fully eligible active plan participants 9,369 9,494
Unrecognized net gain 4,678 3,593
Unrecognized transition obligation, being recognized over 20 years (8,952) (9,549)
- ---------------------------------------------------------------------------------------------------------
Accrued post-retirement healthcare benefit cost $ 8,175 $ 6,712
=========================================================================================================
</TABLE>
Net periodic post-retirement healthcare benefit cost for the year
includes the following components:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
--------------------------------------------
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost $ 620 $ 670 $ 545
Interest cost on accumulated post-retirement healthcare
Benefit obligation 892 905 919
Amortization of transition obligation 597 597 597
Amortization of net gain (211) (140) (107)
- ------------------------------------------------------------------------------------------------------------------------
Net periodic post-retirement healthcare benefit cost $1,898 $2,032 $1,954
========================================================================================================================
</TABLE>
For measurement purposes, the assumed annual rate of increase in the
per capita cost of covered medical and dental benefits was 7.4% and 5%,
respectively for 1998; the rates were assumed to decrease gradually to 5% for
both medical and dental benefits until 2007 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, 1998, by
$2,126,000 and the aggregate of the service and interest cost components of net
periodic post-retirement healthcare benefit cost for the year then ended by
$286,000.
The weighted average discount rate used in determining the accumulated
post retirement healthcare benefit obligation for August 31, 1998 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 $548,000, $498,000 and $491,000 for the years ended August 31, 1998,
1997 and 1996, respectively.
39
<PAGE> 40
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
10. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------
1998 1997 1996
------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal:
Current $ (600) $2,928 $ (44)
Deferred (2,971) (491) 2,868
------------------------------------------------------------
(3,571) 2,437 2,824
------------------------------------------------------------
State:
Current 281 535 244
Deferred (1,842) (384) 719
------------------------------------------------------------
(1,561) 151 963
------------------------------------------------------------
$(5,132) $2,588 $3,787
------------------------------------------------------------
</TABLE>
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 item is as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
U. S. federal income taxes at the statutory rate of 34% $(4,363) $2,188 $3,274
State income taxes, net of Federal benefit (664) 363 716
Reduction of taxes provided in prior year (51) (62) (201)
Nondeductible expenses 174 317 62
Other (228) (218) (64)
- -----------------------------------------------------------------------------------------------------------------
Income tax attributable to income
before income tax expense and extraordinary item $(5,132) $2,588 $3,787
=================================================================================================================
</TABLE>
40
<PAGE> 41
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Deferred income tax liabilities (assets) are comprised of the
following:
<TABLE>
<CAPTION>
AUGUST 31,
-----------------------------
1998 1997
--------------------------------------------------------------------------------------
(IN THOUSANDS)
Deferred income tax assets:
<S> <C> <C>
Inventory valuation $(2,501) $ 3,343
Accounts receivable allowance (165) (196)
Accrued liabilities (2,513) (3,996)
Other 155 137
--------------------------------------------------------------------------------------
(5,024) (712)
--------------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment 28,971 28,264
Accrued liabilities (6,216) (5,785)
Tax credits and carryforwards (4,300) (4,370)
State net operating loss carryforwards (2,513) (2,197)
Valuation allowance 870 1,084
Other 77 394
--------------------------------------------------------------------------------------
16,889 17,390
--------------------------------------------------------------------------------------
Net deferred income tax liability $11,865 $16,678
======================================================================================
</TABLE>
The Company's results of operations are included in the consolidated
Federal tax return of the Parent.
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.
The Company generated AMT credits in prior years of approximately $4,000,000
that is available to offset the regular tax liability in the future years.
11. 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 determined using the fair
market value of the individual debt instruments. As of August 31, 1998, the
carrying amount and estimated fair value of these debt instruments approximated
$201,309,000 and $179,153,000, respectively.
41
<PAGE> 42
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
12. 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 an
unfavorable disposition would not have a material adverse effect on the
consolidated financial position of the Company.
13. 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 forgiveness of debt from related
parties. Additionally, the Company offset $2,017,000 of amounts due from related
parties with deferred tax benefits previously received.
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,
1998, 1997 and 1996, such fees amounted to approximately $980,000, $2,712,000
and $2,424,000 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, 1998, 1997 and 1996.
14. 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.
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. Management of the Company believes
that remediation or related environmental costs incurred during the normal
course of business are not expected to be material.
42
<PAGE> 43
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
15. 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, 1998 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
---------------------------------------------------------------
(IN THOUSANDS)
<S> <C>
1999 $160
2000 160
2001 160
2002 160
2003 160
---------------------------------------------------------------
$800
===============================================================
</TABLE>
16. 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.
17. 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.
43
<PAGE> 44
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------------
(IN THOUSANDS)
Net Sales
<S> <C> <C> <C>
Retail $435,151 $463,895 $460,869
Wholesale 323,472 407,453 372,949
-------------------------------------------
$758,623 $871,348 $833,818
===========================================
Intersegment Sales
Wholesale $156,959 $198,129 $189,631
===========================================
Income (Loss) from Operations
Retail $ (2,333) $ 3,267 $ 4,056
Wholesale 9,673 18,710 21,982
-------------------------------------------
$ 7,340 $ 21,977 $ 26,038
===========================================
Identifiable Assets
Retail $ 95,654 $ 80,124 $ 97,548
Wholesale 246,925 266,268 208,556
-------------------------------------------
$342,579 $346,392 $306,104
===========================================
Depreciation and Amortization
Retail $ 1,985 $ 1,906 $ 1,893
Wholesale 6,335 6,324 6,323
-------------------------------------------
$ 8,320 $ 8,230 $ 8,216
===========================================
Capital Expenditures
Retail $ 16,880 $ 3,095 $ 2,122
Wholesale 16,636 2,729 2,440
-------------------------------------------
$ 33,516 $ 5,824 $ 4,562
===========================================
</TABLE>
18. SUBSIDIARY GUARANTORS
Summarized financial information for the Company's wholly-owned
subsidiary guarantors (Note 7) is as follows:
<TABLE>
<CAPTION>
AUGUST 31,
--------------------------------
1998 1997
------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
Current Assets $ 39,901 $35,653
Noncurrent Assets 73,666 60,131
Current Liabilities 103,977 82,131
Noncurrent Liabilities 10,651 10,474
========================================================================
</TABLE>
44
<PAGE> 45
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31,
-----------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net Sales $439,563 $468,570 $465,656
Gross Profit 66,157 68,524 68,484
Operating Income (Loss) (1,582) 5,185 5,413
Net Income (Loss) (4,129) 1,624 1,351
----------------------------------------------------------------------------------------
</TABLE>
Separate financial statements of the wholly-owned subsidiary guarantors
are not presented because management believes they would not be meaningful to
investors.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
NET
INCOME (LOSS)
BEFORE
GROSS EXTRAORDINARY
NET SALES PROFIT ITEM
- ---------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
<S> <C> <C> <C>
1998
First Quarter $213,302 $27,181 $ 725
Second Quarter 163,263 8,949 (9,557)
Third Quarter 175,246 22,705 (2,314)
Fourth Quarter 206,812 31,889 3,446
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)
=====================================================================================================================
</TABLE>
45
<PAGE> 46
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 30, 1998 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 50 1986 Chairman of the Chairman of the Board, Chief Executive
Board, Chief Officer and President of Red Apple Group,
Executive Inc. (a holding company for certain
Officer, businesses, including corporations which
Director operate supermarkets in New York); Chief
Executive Officer and Director of Gristede's
Sloan's, 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 46 1988 President, Chief President and Chief Operating Officer of the
Operating Company since September 1996. From June 1987
Officer, to September 1996 he was Chief Financial
Director Officer and Executive Vice President of the
Company.
Thomas C. Covert 64 1988 Vice Chairman Vice Chairman of the Company since September
And Director 1996. From December 1987 to September 1996
he was Executive Vice President and Chief
Operating Officer of the Company.
Ashton L. Ditka 57 --- Senior Vice Senior Vice President - Marketing of the
President - Company since July 1990. From December
Marketing 1989 to July 1990 he was Vice President -
Wholesale & Retail Marketing and from
August 1976 until December 1989 he was Vice
President - Wholesale Marketing. Mr. Ditka
has over 30 years of experience in the
petroleum industry, including 11 years in
retail marketing with Atlantic Richfield
Company.
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS
---- --- ----- -------- -----------------------------------------
<S> <C> <C> <C> <C>
Thomas E. Skarada 55 --- Vice President - Vice President - Refining of the Company
Refining since February 1996. From September 1994
to February 1996 he was Assistant Vice
President - Refining and from March 1993,
when he joined the Company, to September
1994 he was Director of Regulatory Compliance.
From March 1992 to March 1993, he was a
consultant with Muse, Stancil and Co., in
Dallas, Texas.
Frederick J. Martin, Jr. 44 --- Vice President - Vice President - Supply and Transportation
Supply and of the Company since February 1993. From
Transportation 1980 to January 1993 he held other positions
in the Company involving transportation,
product supply, crude supply and pipeline and
terminal administration.
James E. Murphy 53 --- Vice President Chief Financial Officer of the Company
and Chief since January 1997. He was Vice President
Financial - Finance from April 1995 to December 1996
Officer 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 39 --- Vice President - Vice President - General Counsel and General
Counsel, Secretary of the Company since August
Secretary 1997. Prior to joining the Company, Mr.
Wagner served as Counsel to Dollar Bank,
F.S.B. from 1988 until assuming his current
position.
Dennis E. Bee, Jr. 56 --- Treasurer Treasurer of the Company since May 1988.
Martin R. Bring 55 1988 Director A member of the law firm of Wolf, Block,
Schorr and Solis-Cohen, LLP, New York since
1978. He also serves as a Director of
Gristede's Sloan's, Inc., a supermarket
chain.
</TABLE>
47
<PAGE> 48
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS
---- --- ----- -------- -----------------------------------------
<S> <C> <C> <C> <C>
Evan Evans 72 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 shutdown. He has been a
director of both of these companies since
1994.
Kishore Lall 51 1997 Director Director of Gristede's Sloan's, Inc. since
October 1997. Consultant to Red Apple Group
Inc. from January 1997 to October 1997.
Private investor from June 1994 to December
1996. Senior Vice President and head of
commercial banking of ABN AMRO Bank, New
York branch from January 1991 to May 1994.
Douglas Lemmonds 51 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.
Andrew Maloney 66 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 55 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>
48
<PAGE> 49
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not Applicable
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the three fiscal years ended August
31, 1996, 1997 and 1998 the compensation paid by the Company to its Chairman of
the Board and Chief Executive Officer and each of the four other executive
officers of the Company whose salary and bonus exceeded $100,000 for the fiscal
year ended August 31, 1998.
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OTHER ANNUAL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
NAME & PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($) (2)
- ------------------------- ---- -------------------------- ------- -------
<S> <C> <C> <C> <C> <C>
John A. Catsimatidis 1998 $360,000 $265,000 $ - $8,052
Chairman of the Board & 1997 360,000 265,000 - 7,802
Chief Executive Officer 1996 360,000 205,000 - 7,802
Myron L. Turfitt 1998 $235,000 $200,000 $5,325 $6,932
President & 1997 235,000 280,000 2,780 6,562
Chief Operating Officer 1996 235,000 120,000 2,600 6,218
Ashton L. Ditka 1998 $140,000 $ 11,200 $2,985 $7,214
Senior Vice President 1997 135,042 31,405 3,241 6,731
Marketing 1996 125,558 6,100 3,262 5,879
Thomas E. Skarada 1998 $110,000 $ 8,800 $6,781 $5,490
Vice President 1997 105,000 29,900 7,580 4,470
Refining 1996 94,250 4,500 7,536 4,060
Frederick J. Martin, Jr. 1998 $100,000 $ 8,000 $4,915 $4,036
Vice President 1997 94,300 4,620 4,210 3,835
Supply & Transportation 1996 90,567 4,500 3,390 3,713
</TABLE>
(1) Amounts include automobile allowances.
(2) Amounts include Company matching contributions under the Company's
401(K) Incentive Savings Plan and health and term life insurance
benefits.
49
<PAGE> 50
PENSION PLAN
The Company maintains a defined benefit pension plan for eligible
employees. The following table shows estimated annual benefits payable upon
retirement in specified compensation categories and years of service
classifications.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
----------------
AVERAGE EARNINGS 15 20 30
- ----------------
<S> <C> <C> <C>
$100,000 $17,583 $23,444 $35,165
$150,000 26,958 35,944 53,915
$200,000 28,833 38,444 57,665
$250,000 28,833 38,444 57,665
$300,000 28,833 38,444 57,665
</TABLE>
The benefit formula is based on the average earnings of the participant
for the three years in which such participant's earnings were the highest.
Earnings include salary and bonus up to a maximum of $160,000 per year. Benefits
are calculated by multiplying the sum of (a) 1% of average earnings up to the
Social Security compensation base, plus (b) 1.25% of average earnings in excess
of the Social Security compensation base, by (c) the number of years of service.
Payments of retirement benefits are not reduced by any Social Security benefits
received by the participant. The Social Security compensation base for 1998 is
$31,128.
Assuming that the following officers continue to be employed by the
Company until they reach age 65, their credited years of service will be as
follows:
<TABLE>
<CAPTION>
CURRENT YEARS YEARS OF SERVICE
OF SERVICE AT AGE 65
NAME OF INDIVIDUAL
<S> <C> <C>
JOHN A. CATSIMATIDIS 12 27
MYRON L. TURFITT 20 39
ASHTON L. DITKA 22 30
THOMAS E. SKARADA 5 14
FREDERICK J. MARTIN, JR. 18 39
</TABLE>
COMPENSATION OF DIRECTORS
Non-officer directors receive a stipend of $15,000 per year and $1,000
for each meeting attended.
50
<PAGE> 51
EMPLOYMENT AND CONSULTING AGREEMENTS
Thomas C. Covert entered into a consulting agreement with the Company,
the initial term of which commenced on September 1, 1996 and expired on August
31, 1998. The Agreement provides that its term shall be extended for two
additional one year periods unless the Company or Mr. Covert gives written
notice of cancellation to the other party within specified time periods. Under
such provision the term of the Agreement has been extended to August 31, 1999.
Under the agreement Mr. Covert is obligated to render services to the Company on
a limited time basis of between 30-40 hours per month in such capacities as the
Board of Directors of the Company may designate. Under the agreement the Company
has agreed to pay Mr. Covert $170 per hour for services rendered, but in no
event less than $6,800 per month for each month during the term of the
agreement.
Mr. Covert has also entered into a Deferred Compensation Agreement with
the Company pursuant to which since the date of his retirement on September 1,
1996, the Company has been paying Mr. Covert a retirement benefit at the rate of
approximately $12,300 per year. The benefit is payable to Mr. Covert until his
death, whereupon Mr. Covert's wife is entitled to a benefit of approximately
$6,150 per year until her death if she does not predecease him.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth certain information regarding ownership
of Common Stock on November 30, 1998 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 persons named below is both of record and beneficial and such
persons have sole voting and investing power with respect to the shares
indicated.
<TABLE>
<CAPTION>
Name and Address of
Beneficial Owner Number of Shares Percent of Class
<S> <C> <C>
John Catsimatidis
823 Eleventh Avenue 100 100%
New York, NY 10019
All officers and directors 100 100%
as a group (15 persons)
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
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 1998 amounting to approximately $980,000. Pursuant to a Servicing
Agreement entered into between the Company and RAG in June 1997, the Company
will pay up to a $1,000,000 per year 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
51
<PAGE> 52
carryback of net operating loss or tax credits from subsequent taxable years.
Pursuant to the tax sharing agreement included in prepaid expenses and other
assets are amounts due from the Parent of approximately $1,600,000 and $650,000
as of August 31, 1998 and 1997, respectively.
During fiscal 1998, the Company made payments for services rendered to
it by Wolf, Block, Schorr and Solis-Cohen, LLP, ("WBS&S-C"), a law firm of which
Martin R. Bring, a director of the Company, is a member. The Company believes
that the fees paid to WBS&S-C 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.
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
Report of Independent Certified Public Accountants
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.
52
<PAGE> 53
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.
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, Dillion,
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.
10.10 Continuing Agreement of Guaranty and Suretyship dated as of June
9, 1997 by URC. Incorporated by reference to Exhibit 10.10 to the
Registration Statement.
10.11 Continuing Agreement of Guaranty and Suretyship dated as of June
9, 1997 by URCP. Incorporated by reference to Exhibit 10.11 to the
Registration Statement.
10.12 Continuing Agreement of Guaranty and Suretyship dated as of June
9, 1997 by KPC. Incorporated by reference to Exhibit 10.12 to the
Registration Statement.
10.13 Security Agreement dated as of June 9, 1997 by and among, URC,
URCP, KPC and the Banks party thereto and PNC Bank, National
Association, as Agent. Incorporated by reference to Exhibit 10.13
to the Registration Statement.
10.14 Waiver and Amendment to Credit Agreement dated as of July 15, 1998
by and among, URC, URCP, KPC and the banks party thereto and PNC
Bank, National Association, as Agent.*
10.15 Consulting Agreement dated September 1, 1996 with Thomas C.
Covert.*
10.16 Deferred Compensation Agreement dated September 1, 1996 with
Thomas C. Covert. *
21.1 Subsidiaries of the Registrants. Incorporated by reference to
Exhibit 21.1 to the Registration Statement.
27.1 Financial data schedule for the twelve months ended August 31,
1998.*
(b) Reports on Form 8-K
NONE
* Filed herewith
53
<PAGE> 54
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 29, 1998 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, 1998. 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 - Valuation and
Qualifying Accounts, presents fairly, in all material respects, the information
set forth therein.
/s/ BDO SEIDMAN, LLP
New York, New York
October 29, 1998
54
<PAGE> 55
UNITED REFINING COMPANY AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
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, 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
================ =============== ================ ====================
Year ended August 31, 1998:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
Accounts $ 511 $ 258 $ (364) $ 405
================ =============== ================ ====================
</TABLE>
55
<PAGE> 56
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 30, 1998 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 30, 1998
- -------------------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 30, 1998
- -------------------------------
Myron L. Turfitt
/s/ Thomas C. Covert Vice Chairman and Director November 30, 1998
- -------------------------------
Thomas C. Covert
/s/ James E. Murphy Vice President and Chief Financial
- ------------------------------- Officer (Principal Accounting
James E. Murphy Officer) November 30, 1998
/s/ Martin R. Bring Director November 30, 1998
- -------------------------------
Martin R. Bring
/s/ Evan Evans Director November 30, 1998
- -------------------------------
Evan Evans
/s/ Kishore Lall Director November 30, 1998
- -------------------------------
Kishore Lall
/s/ Douglas Lemmonds Director November 30, 1998
- -------------------------------
Douglas Lemmonds
/s/ Andrew Maloney Director November 30, 1998
- -------------------------------
Andrew Maloney
/s/ Dennis Mehiel Director November 30, 1998
- -------------------------------
Dennis Mehiel
</TABLE>
56
<PAGE> 57
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 30, 1998 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>
/s/ John A. Catsimatidis Chairman of the Board, Chief November 30, 1998
- ------------------------------- Executive Officer and Director
John A. Catsimatidis
/s/ Myron L. Turfitt President, Chief Operating Officer November 30, 1998
- -------------------------------
Myron L. Turfitt
/s/ James E. Murphy Vice President and Chief Financial
- ------------------------------- Officer (Principal Accounting
James E. Murphy Officer) November 30, 1998
</TABLE>
57
<PAGE> 58
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 30, 1998 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 30, 1998
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt President, Chief Operating Officer November 30, 1998
- ------------------------------- and Director
Myron L. Turfitt
/s/ James E. Murphy Vice President and Chief Financial
- ------------------------------- Officer (Principal Accounting
James E. Murphy Officer) November 30, 1998
</TABLE>
58
<PAGE> 59
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 30, 1998 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>
/s/ John A. Catsimatidis Chairman of the Board, Chief November 30, 1998
- ------------------------------- Executive Officer and Director
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
/s/ James E. Murphy Vice President and Chief Financial
- ------------------------------- Officer (Principal Accounting
James E. Murphy Officer) November 30, 1998
</TABLE>
59
<PAGE> 60
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 30, 1998 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>
/s/ John A. Catsimatidis Chairman of the Board, Chief November 30, 1998
- ------------------------------- Executive Officer and Director
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
/s/ James E. Murphy Vice President and Chief Financial
- ------------------------------- Officer (Principal Accounting
James E. Murphy Officer) November 30, 1998
</TABLE>
60
<PAGE> 61
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 30, 1998 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>
/s/ John A. Catsimatidis Chairman of the Board, Chief
- ------------------------------- Executive Officer and Director November 30, 1998
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
/s/ James E. Murphy Vice President and Chief Financial
- ------------------------------- Officer (Principal Accounting
James E. Murphy Officer) November 30, 1998
</TABLE>
61
<PAGE> 62
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 30, 1998 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>
/s/ John A. Catsimatidis Chairman of the Board, Chief
- ------------------------------- Executive Officer and Director November 30, 1998
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 30, 1998
James E. Murphy
</TABLE>
62
<PAGE> 63
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 30, 1998 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 30, 1998
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 30, 1998
James E. Murphy
</TABLE>
63
<PAGE> 64
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 30, 1998 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 30, 1998
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 30, 1998
James E. Murphy
</TABLE>
64
<PAGE> 65
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 30, 1998 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 30, 1998
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 30, 1998
James E. Murphy
</TABLE>
65
<PAGE> 66
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 30, 1998 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 30, 1998
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 30, 1998
James E. Murphy
</TABLE>
66
<PAGE> 67
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 30, 1998 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 30, 1998
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 30, 1998
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 30, 1998
James E. Murphy
</TABLE>
67
<PAGE> 68
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
Corporation during the fiscal year ended August 31, 1998.
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.
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, Dillion,
Read & Co. Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI").
Incorporated by reference to Exhibit 10.1 to the Registration
Statement.
68
<PAGE> 69
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.
10.10 Continuing Agreement of Guaranty and Suretyship dated as of June
9, 1997 by URC. Incorporated by reference to Exhibit 10.10 to the
Registration Statement.
10.11 Continuing Agreement of Guaranty and Suretyship dated as of June
9, 1997 by URCP. Incorporated by reference to Exhibit 10.11 to the
Registration Statement.
10.12 Continuing Agreement of Guaranty and Suretyship dated as of June
9, 1997 by KPC. Incorporated by reference to Exhibit 10.12 to the
Registration Statement.
10.13 Security Agreement dated as of June 9, 1997 by and among, URC,
URCP, KPC and the Banks party thereto and PNC Bank, National
Association, as Agent. Incorporated by reference to Exhibit 10.13
to the Registration Statement.
10.14 Waiver and Amendment to Credit Agreement dated as of July 15, 1998
by and among, URC, URCP, KPC and the banks party thereto and PNC
Bank, National Association, as Agent.*
10.15 Consulting Agreement dated September 1, 1996 with Thomas C.
Covert.*
10.16 Deferred Compensation Agreement dated September 1, 1996 with
Thomas C. Covert. *
21.1 Subsidiaries of the Registrants. Incorporated by reference to
Exhibit 21.1 to the Registration Statement.
27.1 Financial data schedule for the twelve months ended August 31,
1998.*
(c) Reports on Form 8-K
NONE
* Filed herewith
69
<PAGE> 1
Exhibit 10.14
WAIVER AND AMENDMENT AGREEMENT
This Waiver and Amendment Agreement (the "Waiver") is dated as of July
15,1998 and is made by and among UNITED REFINING COMPANY, a Pennsylvania
corporation ("United Refining"), UNITED REFINING COMPANY OF PENNSYLVANIA, a
Pennsylvania Corporation ("United Refining PA"), KIANTONE PIPELINE CORPORATION,
a New York Corporation ("Kiantone, and hereinafter together with United Refining
and United Refining PA sometimes collectively referred to as the "Borrowers" and
individually as a "Borrower") the BANKS under the Credit Agreement (as
hereinafter defined) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as
agent for the Banks under the Credit Agreement (hereinafter referred to in such
capacity as the "Agent").
RECITALS:
WHEREAS, Borrowers, the Banks, and the Agent are parties to that certain
Credit Agreement dated as of June 9, 1997 (as previously amended, restated,
supplemented or modified, the "Credit Agreement"); and
WHEREAS, unless otherwise defined herein, capitalized terms used herein
shall have the meanings given to them in the Credit Agreement; and
WHEREAS, Borrowers have not complied with the covenant contained in
Section 7.2.16 (Minimum Fixed Charge Coverage Ratio) of the Credit Agreement
(the "Section 7.2.16 Violation") during some or all of the period of the fiscal
quarter ended May 31,1998 as more fully disclosed in the Compliance Certificate
which Borrowers have delivered to the Banks for such fiscal quarter (the
"Delivered Compliance Certificate); and
WHEREAS, the Borrowers have requested that the Banks waive the Section
72.16 Violation for the fiscal quarter ended May 31,1998 and amend Section
7.2.16, as more fully provided herein.
NOW, THEREFORE, in consideration of the foregoing and intending to be
legally bound, the parties hereto agree as follows;
1. Warranty. The Borrowers represent and warrant to the Banks that the
Delivered Compliance Certificate correctly discloses Borrowers' Fixed Charge
Coverage Ratio as of the date and periods set forth in such Delivered Compliance
Certificate and that except for the Section 7.2.16 Violation, the Borrowers were
in full compliance with the Credit Agreement during the fiscal quarter ended May
31, 1998.
2. Waiver and Amendment With Respect To Section 7.2.16 Violation.
(i) Waiver Under Section 7.2.16. The Banks hereby waive the
violation of Section 7.2.16 for the fiscal quarter ended May 31, 1998 subject to
Borrowers' warranty in paragraph and the acknowledgments and agreements by the
Borrowers in paragraph 3 hereof.
1
<PAGE> 2
(ii) The parties hereto hereby amend and restate Section
7.2.16 (Minimum Fixed Charge Coverage Ratio) to read as follows:
"The Loan Parties shall not permit the Fixed Charge
Coverage Ratio calculated as of the end of each fiscal quarter set forth below
(each a "Measurement Date") for the period set forth below (each a "Measurement
Period") to be less than the ratio set forth below:
<TABLE>
<CAPTION>
Measurement Date Measurement Period Minimum Ratio
---------------- ------------------ -------------
<S> <C> <C>
August 31, 1997 Quarter then ended 1.1 to 1.0
November 30, 1997 2 Quarters then ended 1.1 to 1.0
February 28, 1998 3 Quarters then ended 1.1 to 1.0
May 31, 1998 4 Quarters then ended 1.25 to 1.0
August 31, 1998 Quarter then ended 1.0 to 1.0
November 30, 1998 2 Quarters then ended 1.0 to 1.0
February 28, 1999 3 Quarters then ended 1.0 to 1.0
May 31, 1999 and 4 Quarters then ended 1.25 to 1.0
each fiscal quarter
thereafter
</TABLE>
3. Full Force and Effect
All provisions of the Credit Agreement remain in full force and effect on
and after the date hereof. The Banks do not amend or waive any provisions of the
Credit Agreement except as expressly amended or waived hereby. Without limiting
the foregoing, the Banks retain all rights given to the Banks under the Credit
Agreement and under applicable law in connection with any failure by the
Borrower to comply with the Credit Agreement as amended hereby. The foregoing
rights expressly include, without limitation, any rights given to the Banks
under Section 8.2 if a Potential Default or an Event of Default arises as a
result of any such failure to comply.
4. Counterparts: Effective Date.
This Waiver may be signed in counterparts. This Waiver shall become
effective when it has been executed by the Borrowers and the Banks.
[SIGNATURES BEGIN ON NEXT PAGE]
2
<PAGE> 3
[SIGNATURE PAGE 1 OF I TO WAIVER AND AMENDMENT AGREEMENT]
The undersigned have executed this Waiver as of the date first above written.
UNITED REFINING COMPANY, a
Pennsylvania corporation
By: /s/ James E. Murphy
-----------------------------------------------
Title: V.P. - Finance and Chief Financial Officer
UNITED REFINING COMPANY OF PENNSYLVANIA, a
Pennsylvania corporation
By: /s/ James E. Murphy
-----------------------------------------------
Title: V.P. - Finance and Chief Financial Officer
KIANTONE PIPELINE CORPORATION,
a New York corporation
By: /s/ James E. Murphy
-----------------------------------------------
Title: V.P. - Finance and Chief Financial Officer
THE SUMITOMO BANK, LIMITED
By: /s/ Brian M. Smith
-----------------------------------------------
Title: Senior Vice President
By:
-----------------------------------------------
Title: General Manager
PNC BANK, NATIONAL ASSOCIATION,
individually and as Agent
By: /s/ Richard C. Munsick
-----------------------------------------
Title: Vice President
3
<PAGE> 1
EXHIBIT 10.15
CONSULTING AGREEMENT
AGREEMENT made as of the 1st day of September 1996, by and between
UNITED REFINING COMPANY, a Pennsylvania corporation (hereinafter referred to as
the "Company"), and THOMAS C. COVERT (hereinafter referred to as the
"Consultant").
W I T N E S S E T H :
WHEREAS, the Consultant has served as the Executive Vice President,
Chief Operating Officer and a director of the Company for a number of years and
has a unique knowledge of the business of the Company and of the oil petroleum
industry generally; and
WHEREAS, since the Consultant is retiring as the Executive Vice
President and Chief Operating Officer of the Company as of the date hereof and
the Company and the Consultant desire to enter into this Agreement whereby the
Company will be assured of the right to the Consultant's services for the period
and on the terms and conditions hereinafter set forth, and the Consultant will
be assured of his engagement on such terms and conditions.
NOW, THEREFORE, in consideration of the foregoing, and of the mutual
covenants contained in this Agreement, the Company and the Consultant hereby
agree as follows:
1. Engagement.
(a) Subject to the terms and conditions hereinafter set
forth, the Company hereby retains the Consultant and the Consultant hereby
agrees to render services to the Company in such capacities as the Board of
Directors of the Company may, from time to time, designate. The Consultant shall
have the honorary title of Vice Chairman of the Board of the Company. The
Consultant shall also hold such directorships in the Company and/or any
subsidiary of the Company to which, from time to time during the term of his
retention, the Consultant may be elected or appointed. Nothing contained in this
Agreement shall restrict the right of the Consultant to serve as an employee,
officer, agent or member of the boards of directors of corporations which are
engaged in businesses which are not competitive with any businesses then
conducted or knowingly contemplated by the Company or any of its subsidiaries,
if any, or the right of the Consultant to manage his private investments, if
such directorships or such investment activities do not interfere with the
performance by the Consultant of his duties under this Agreement. The Consultant
shall render his services with due regard for the prompt, efficient and
economical operation of the business of the Company and its subsidiaries to the
end of maximizing the profitability of the Company and its subsidiaries.
(b) The Consultant shall perform services hereunder on a
limited-time basis (not to be less than an average of 30 hours per month nor to
exceed an average of 40 hours per month), as an independent contractor to , and
not as an employee of, the Company. Subject to the authority delegated to him by
the Board of Directors on each matter to which he is assigned, the Consultant
shall be granted authority to make decisions with respect to any matter he is
assigned and to which he renders services. The Company will give consideration,
insofar as reasonably practicable, to the convenience of the consultant in
respect of the times and places at which it shall request the performance of
services by the Consultant.
1
<PAGE> 2
2. Term: Company's Option to Extend Term.
The term of the engagement of the Consultant by the Company
pursuant to this Agreement shall be for a period of two years commencing on the
date hereof, subject to earlier termination as provided in Paragraph 5 hereof.
This Agreement will be extended for two additional one year periods unless the
Company or the Consultant give written notice of cancellation to the other party
not less than thirty (30) nor more than one hundred eighty (180) days prior to
the next yearly anniversary of the date of this Agreement.
3. Compensation.
In consideration of the services to be rendered by the
Consultant pursuant to this Agreement, including, without limitation, any
services rendered by the Consultant as a director of the Company or any
subsidiary of the Company, the Company agrees to pay to the Consultant monthly,
in arrears, compensation at the rate of $170.00 per hour of services rendered,
but in no event less than $6,800.00 per month for each month during the term of
this Agreement.
4. Expenses.
During the term of this Agreement, the Company will reimburse
the Consultant, for expenses incurred during the execution of assignments
authorized by the Company for all travel, entertainment and other out-of-pocket
expenses which are reasonably and necessarily incurred by the Consultant in the
performance of his duties hereunder. Such expenses shall include, but not be
limited to, the reasonable cost of setting up an office in the Consultant's
home, including the purchase of a personal computer, fax machine, printer and
other equipment reasonably necessary for a home office, and travel expenses. All
office equipment and supplies paid for by the Company or for the purchase of
which the Consultant is reimbursed by the Company, shall be the property of the
Company and upon the termination of this Agreement, at the Company's request,
the Consultant shall promptly return to the Company all remaining equipment and
supplies.
5. Termination.
(a) This Agreement shall terminate immediately upon the
death of the Consultant. This Agreement may also be terminated upon thirty (30)
days written notice by the Company to the Consultant, if the Consultant becomes
disabled or fails to diligently perform the services the Company requests him to
perform under Paragraph 1 hereof; provided, that the Company has given the
Consultant written notice of such failure and the Consultant does not within
thirty (30) days thereafter adequately perform the required services in the
reasonable opinion of the Company.
(b) In the event that at any time during the stated term of
this Agreement, this Agreement is terminated for any reason, including the
Consultant's death or disability, the Company shall pay to Consultant, his
estate or his legal representative, as the case may be, the Consultant's
compensation through the end of the month in which his employment is terminated
(and any additional amount as shall be required so that the Consultant's average
monthly compensation hereunder through the date of termination of this Agreement
is at least $6,800.00). Thereafter, the Company shall have no obligation to the
Consultant to make any further payments to him, his estate or legal
representatives hereunder. This does not affect other pension, insurance or
medical benefits paid by the Company to which the Consultant is entitled.
6. Non-Disclosure of Confidential Information and
Non-Competition.
(a) The Consultant acknowledges that it is the policy of
the Company to maintain as secret and confidential certain valuable and unique
information heretofore and hereafter acquired, developed or used by the Company
relating to the business, operations, employees, suppliers, dealers and
customers of the Company, which gives the Company or its subsidiaries a
competitive advantage in is industry (all such information is hereinafter
referred to as "Confidential Information"). The parties recognize that the
services to be performed by the Consultant pursuant to this Agreement are
special and unique, and that by reason of his prior employment and present
engagement by the Company, the Consultant has acquired and will acquire
Confidential Information. The
2
<PAGE> 3
Consultant recognizes that all such Confidential Information is the property of
the Company. In consideration of the Consultant's retention by the Company
pursuant to this Agreement, the Consultant agrees that:
(i) except as required by his duties hereunder, the
Consultant shall never, directly or indirectly use,
publish, disseminate or otherwise disclose any
Confidential Information obtained during the term of
this Agreement without the prior written consent of
the Board of Directors of the Company, it being
understood that the provisions of this subparagraph
(a)(i) shall survive the termination of this
Agreement; and
(ii) during the term of this Agreement, the Consultant
shall exercise all due and diligent precautions to
protect the integrity of business plans, customer,
supplier and dealer lists, statistical data and
compilations, agreements, contracts, manuals or other
documents of the Company and embodying any
Confidential Information and, upon termination of
this Agreement the Consultant shall return to the
Company any and all such documents (and copies
thereof) which are in the possession or under the
control of the Consultant.
The Consultant agrees that the provisions of this Paragraph
(a) are reasonably necessary to protect the proprietary rights of the Company
and the subsidiaries of the Company in the Confidential Information and their
trade secrets, good will and reputation.
(b) During the term of this Agreement, the Consultant shall
not, in any manner, be engaged, directly or indirectly, within the United States
of America (its territories and possessions) and Canada (or for such lesser
geographical area as may be determined by a court of law or equity to be a
reasonable limitation on the competitive activities of the Consultant) as an
employee, partner, officer, director, representative, consultant, agent or
stockholder of any corporation, partnership, proprietorship or other form of
business entity which is competitive with the Company. The Consultant shall not,
either during the term of this Agreement, seek to persuade any director or
officer or employee of the Company or any subsidiary or affiliate of the
Company, to discontinue that individual's status or employment with the Company,
nor to become employed in any activity similar to or competitive with the
activities of the Company or any subsidiary or affiliate of the Company, nor
will the Consultant hire or retain any such person, nor will he solicit (or
cause or authorize), directly or indirectly, to be solicited, for or on behalf
of himself or any third party, any competitive business from others who are, at
any time within three (3) years prior to the cessation of his employment
hereunder, customers of the Company or any subsidiary or affiliate of the
Company. Not withstanding the foregoing, the Consultant may provide advisory
services to other companies in a business similar to that of the Company.
(c) The Consultant acknowledges that any breach or
threatened breach or alleged breach or threatened alleged breach by the
Consultant of any of the provisions of Paragraph 6 of this Agreement can cause
irreparable harm to the Company, for which the Company would have no adequate
remedy at law. In the event of a breach or threatened breach or an alleged
breach or alleged threatened breach by the Consultant of any of the provisions
of Paragraph 5, the Company, in addition to any and all other rights and
remedies it may have under this Agreement or otherwise, may immediately seek any
judicial action which the Company may deem necessary or advisable including,
without limitation, the obtaining of temporary and preliminary injunctive
relief.
7. Notices
Any notice, request, instruction or other document to be given
under this Agreement to any party hereunder by any other party
hereunder shall be in writing and delivered personally, or sent by
registered or certified mail, postage prepaid, to the following
addresses:
3
<PAGE> 4
If to the Company:
United Refining Company
15 Bradley Street
Warren, Pennsylvania 16365
Attention: Myron Turfitt
If to the Consultant:
Mr. Thomas C. Covert
29439 Summit Ridge Drive
Fair Oaks Ranch, Texas 78015
or to such other address as a party hereto may hereafter designate in writing to
the other party, provided that any notice of a change of address shall become
effective only upon receipt thereof.
8. Benefit: Assignment.
(a) This Agreement shall be binding upon and shall inure to
the benefit of the Company, its successors and assigns, and the Consultant and
his heirs, legal representatives, successors and permitted assigns.
(b) This Agreement is personal to the Consultant and the
Consultant may not assign any of this rights or delegate any of his duties under
this Agreement.
9. Entire Agreement: Amendment.
This Agreement contains the entire understanding between the
Company and the Consultant with respect to the retention of the Consultant and
supersedes all prior negotiations and understandings between the Company and the
Consultant with respect to the retention of the Consultant by the Company. This
Agreement may not be amended or modified except by a written instrument signed
by both the Company and the Consultant.
10. Severability.
In the event any one or more provisions of this Agreement is
held to be invalid or unenforceable, such illegality or unenforceability shall
not affect the validity or enforceability of the other provisions hereof, and
such other provisions shall remain in full force and effect, unaffected by such
invalidity or unenforceability.
11. Governing Law.
This Agreement shall be construed and governed in accordance
with the laws of the Commonwealth of Pennsylvania.
4
<PAGE> 5
12. Execution in Counterparts.
This Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original but all of which together shall
constitute one and the same instrument.
IN WITNESS WHEREOF the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
UNITED REFINING COMPANY
By: /s/ JOHN A. CATSIMATIDIS
----------------------------
John A. Catsimatidis
/s/ THOMAS C. COVERT
-------------------------------
Thomas C. Covert
5
<PAGE> 1
EXHIBIT 10.16
DEFERRED COMPENSATION AGREEMENT
THIS AGREEMENT is made effective as of September 1, 1996, by and
between United Refining Company, a Pennsylvania corporation with principal
offices at 15 Bradley Street, Warren, Pennsylvania 16365 (the "Company"), and
Thomas C. Covert (the "Executive").
WHEREAS, the Executive is a key employee of the Company, possessing
substantial knowledge and experience in the business of the Company, and such
knowledge and experience have been, and continue to be, of great value to the
Company in the conduct of its business;
WHEREAS, the Executive has been employed by the Company as the Vice
President and Chief Operating Officer for many years, during which time, based
upon his performance, his compensation has been less than which was otherwise
deserved;
WHEREAS, the Company desires to secure for itself the continued
services of Executive until Executive retires, and to provide certain deferred
compensation benefits for Executive, to become payable upon his retirement, in
consideration of the Executive's past and future services to the Company;
NOW THEREFORE, in consideration of the above premises and the
agreements and covenants hereinafter contained, the Company and the Executive,
intending to be legally bound, mutually agrees as follows:
1. DEFINITIONS. For the purposes of this Agreement, the
following terms shall be defined as set forth in this Section 1.
Retirement Age: "Retirement Age" shall mean the date upon
which the Executive elects to retire; provided that Executive remains
continuously in the employ of the Company from the date hereof until such date.
2. RETIREMENT OF EXECUTIVE.
Deferred Compensation. Upon attaining Retirement Age,
Executive shall retire, whereupon the Company shall pay the Executive a joint
and fifty percent survivor retirement benefit of Twelve Thousand Three Hundred
Three Dollars and Eighty-Four Cents ($12,303.84) per year payable in equal
monthly installments of One Thousand Twenty Five Dollars and Thirty-Two Cents
$(1,025.32) for a period ending at the end of the month in which Executive's
death occurs and a fifty percent survivor benefit payable to your spouse, if she
survives you, for her life ending at the end of the month in which her death
occurs. The fifty percent survivor benefit shall equal Six Thousand One Hundred
Fifty-One Dollars and Ninety-Two Cents ($6,151.92) per year and shall continue
to be paid in equal monthly installments of Five Hundred Twelve Dollars and
Sixty-Six Cents ($512.66).
The retirement benefits will be payable on the 15th day of
the month with the first payment due on the first day of the month following the
date on which the Executive reaches Retirement Age.
3. NONDISCLOSURE, NONCOMPETITION AND NONINTERFERENCE
3.1 Nondisclosure: Executive shall at all times hold in strictest
confidence any and all confidential information within his knowledge concerning
the products, services, businesses, suppliers, and customers of the Company.
Such confidential information includes, without limitation, financial
information, sales and distribution information, price lists, customer lists and
technical information, all to the extent that such information is not intended
by the Company for dissemination to the general public.
3.2 Noncompetition. While employed by the Company, and for ten
(10) years thereafter, Executive shall not, without the prior written consent of
the Company, either directly or indirectly operate or perform any advisory or
consulting services for, invest in (other than stock in a publicly-held
corporation which is
1
<PAGE> 2
traded on a recognized securities exchange or over the counter, provided that
the ownership of such equity interest does not give Executive the right to
control or substantially influence the policy or operational decisions of such
corporation, or otherwise become associated with in any capacity, any
corporation, partnership, organization, proprietorship, or other entity which
develops, manufactures, prepares, sells or distributes products or performs
services then in competition with the products developed, manufactured,
prepared, sold or distributed or services performed by the Company within those
geographical areas in which the Company then develops, manufactures, sells or
distributes such products or performs such services.
3.3 Noninterference. Executive shall not, at any time, without
the prior written consent of the Company, directly or indirectly induce or
attempt to induce any employee, agent or other representative or associate of
the Company to terminate his or its relationship with the Company, or in any way
directly or indirectly interfere with such a relationship or any relationship
between the Company and any of its suppliers or customers.
3.4 Remedy for Certain Breaches. Executive acknowledges that the
restrictions on his activities under this Section 3 are required for the
reasonable protection of the Company. Executive further acknowledges and agrees
that a breach of these continuing damage to the Company for which there will be
no adequate remedy at law and agrees that in the event of any said breach, the
Company, and its successors and assigns, shall be entitled to injunctive relief
and to such further relief as is proper in the circumstances.
4. MISCELLANEOUS
4.1 No Assignment Without Consent of Company. Except as set forth
herein, no rights of any kind under this Agreement shall, without the written
consent of the Company, be transferable or assignable by the Executive, the
Executive's Spouse or any other person, or be subject to alienation,
encumbrance, garnishment, attachment, execution or levy of any kind, voluntary
or involuntary. This Agreement shall be binding upon and shall inure to the
benefit of the Company, the Executive, the Executive's Spouse and their
permitted successors and assigns.
4.2 Interpretation. All questions of interpretation, construction
or application arising under this Agreement shall be decided by the Board of
Directors of the Company, whose decision shall be final and conclusive upon all
persons.
4.3 Savings Clause. In the event that any provision or term of
this Agreement is determined by any judicial, quasi-judicial or administrative
body to be void or not enforceable for any reason, it is the agreed upon intent
of the parties hereto that all other provisions or terms of the Agreement shall
remain in full force and effect and that the Agreement shall be enforceable as
if such void or nonenforceable provision or term had never been a part hereof.
In addition, if any provision continued in Section 3 hereof is determined by any
judicial, quasi-judicial or administrative body to be void or not enforceable
for any reason, such body is hereby authorized and directed by the parties
hereto to exercise its discretion in reforming such provision for the purpose of
imposing nondisclosure, noncompetition and noninterference covenants on the
Executive that are reasonable under the circumstances and enforceable by the
Company.
4.4 No Rights In Any Property of Company. The undertakings of the
Company herein constitute merely the unsecured promise of the Company to make
the payments as provided for herein. No property of the Company is or shall, by
reason of this Agreement, be held in trust for the Executive, or any other
person, and neither the Executive or any other person shall have by reason of
this Agreement, any rights, title or interest of any kind in or to any property
of the Company.
4.5 Governing Law. This Agreement is executed in and shall be
construed in accordance with and governed by the laws of the State of
Pennsylvania, without regard to conflict of laws principles.
4.6 Employment of Executive by Company. Nothing herein shall be
construed as an offer or commitment by the Company to continue the Executive's
employment with the Company for any period of time.
2
<PAGE> 3
IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as
of the day and year first above written.
United Refining Company
By: /s/ MYRON L. TURFITT
---------------------------------------
Myron L. Turfitt, President
/s/ THOMAS C. COVERT
---------------------------------------
Thomas C. Covert
3
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM
10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENT.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-START> SEP-01-1997
<PERIOD-END> AUG-31-1998
<CASH> 26,400
<SECURITIES> 0
<RECEIVABLES> 27,017
<ALLOWANCES> 405
<INVENTORY> 55,124
<CURRENT-ASSETS> 121,292
<PP&E> 256,895
<DEPRECIATION> 58,918
<TOTAL-ASSETS> 342,579
<CURRENT-LIABILITIES> 63,430
<BONDS> 201,026
0
0
<COMMON> 0
<OTHER-SE> 45,237
<TOTAL-LIABILITY-AND-EQUITY> 342,579
<SALES> 758,623
<TOTAL-REVENUES> 758,623
<CGS> 667,899
<TOTAL-COSTS> 75,064
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 259
<INTEREST-EXPENSE> 23,055
<INCOME-PRETAX> (12,832)
<INCOME-TAX> (5,132)
<INCOME-CONTINUING> (7,700)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,700)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
