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As filed with the Securities and Exchange Commission on March 13, 1997
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10/A
Amendment No. 3
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or 12(g) of
the Securities Exchange Act of 1934
---------------------
GETTY PETROLEUM MARKETING INC.
(Exact name of registrant as specified in its charter)
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Maryland 11-3339235
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 Jericho Turnpike
Jericho, New York 11753
(Address of principal executive office) (Zip Code)
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Registrant's telephone number, including area code:
(516) 338-6000
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Securities to be registered pursuant to Section 12(b) of the Act:
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TITLE OF CLASS NAME OF EACH EXCHANGE ON
TO BE SO REGISTERED WHICH CLASS IS TO BE REGISTERED
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Common Stock, $.01 par value New York Stock Exchange
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Securities to be registered pursuant to Section 12(g) of the Act:
None
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GETTY PETROLEUM MARKETING INC.
INFORMATION INCLUDED IN INFORMATION STATEMENT AND
INCORPORATED IN FORM 10 BY REFERENCE.
CROSS-REFERENCE SHEET BETWEEN INFORMATION SHEET AND
ITEMS ON FORM 10.
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ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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1. Business..................................... "SUMMARY OF CERTAIN INFORMATION,"
"INTRODUCTION," "THE DISTRIBUTION,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS,"
and "BUSINESS."
2. Financial Information........................ "SUMMARY OF CERTAIN INFORMATION," "SELECTED
CONSOLIDATED FINANCIAL INFORMATION," and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS."
3. Properties................................... "RELATIONSHIP BETWEEN GETTY AND MARKETING AFTER
THE DISTRIBUTION -- Master Lease Agreement" and
"BUSINESS."
4. Security Ownership of Certain Beneficial
Owners and Management...................... "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS" and "MANAGEMENT -- Security Ownership of
Directors, Executive Officers and 5% Owners."
5. Directors and Executive Officers............. "MANAGEMENT," and "LIABILITY AND IN-
DEMNIFICATION OF OFFICERS AND DIRECTORS."
6. Executive Compensation....................... "MANAGEMENT -- Director Compensation" and
"EXECUTIVE COMPENSATION."
7. Certain Relationships and Related Trans-
actions.................................... "SUMMARY OF CERTAIN INFORMATION,"
"INTRODUCTION," "THE DISTRIBUTION," "RISK
FACTORS," "RELATIONSHIP BETWEEN GETTY AND
MARKETING AFTER THE DISTRIBUTION" and "CERTAIN
TRANSACTIONS."
8. Legal Proceedings............................ "BUSINESS -- Legal Proceedings" and "INDEX TO
CONSOLIDATED FINANCIAL STATEMENTS."
9. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters........................ "SUMMARY OF CERTAIN INFORMATION,"
"INTRODUCTION," "THE DISTRIBUTION -- Listing and
Trading of Marketing Common Stock," "RISK
FACTORS -- No Prior Market for Marketing Common
Stock," "RISK FACTORS -- Dividend Policy,"
"SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS," "DIVIDEND POLICY," and "MANAGEMENT --
Security Ownership of Directors, Executive
Officers and 5% Owners."
10. Recent Sales of Unregistered Securities...... Not applicable.
11. Description of Registrant's Securities to be
Registered................................. "DESCRIPTION OF CAPITAL STOCK."
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ITEM NO. ITEM CAPTION LOCATION IN INFORMATION STATEMENT
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12. Indemnification of Directors
and Officers............................... "LIABILITY AND INDEMNIFICATION OF DIRECTORS AND
OFFICERS."
13. Financial Statements and Supplementary
Data....................................... "SUMMARY OF CERTAIN INFORMATION," "RISK
FACTORS," "SELECTED CONSOLIDATED FINANCIAL
INFORMATION," "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" and "INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS."
14. Changes in and Disagreements with Ac-
countants on Accounting and Financial
Disclosure................................. Not Applicable.
15. Financial Statements and Exhibits
(a) Financial Statements................. "INDEX TO CONSOLIDATED FINANCIAL STATEMENTS."
(b) Exhibits
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EXHIBIT NO. ITEM
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*2.1 Form of Reorganization and Distribution Agreement between
the Registrant and Getty Petroleum Corp.
*3.1 Articles of Incorporation of the Registrant as currently in
effect.
*3.2 Form of Articles of Incorporation of the Registrant, as
amended, to be in effect as of the Record Date.
*3.4 By-Laws of the Registrant.
*10.1 Form of Reorganization and Distribution Agreement between
the Registrant and Getty Petroleum Corp. (filed as Exhibit
2.1).
*10.2 Form of Master Lease Agreement between the Registrant and
Getty Petroleum Corp.
*10.3 Form of Tax Sharing Agreement between the Registrant and
Getty Petroleum Corp.
*10.4 Form of Services Agreement between the Registrant and Getty
Petroleum Corp.
*10.5 Form of Trademark License Agreement between Registrant and
Getty Petroleum Corp.
*10.6 Form of Registrant's 1997 Stock Option and Award Plan.
*10.7 Form of Registrant's Employee Stock Ownership Plan.
*10.8 Form of Stock Option Reformation Agreement between the
Registrant and Getty Petroleum Corp.
*10.9 Form of Registrant's Retirement and Profit Sharing Plan.
*10.10 Form of Supplemental Retirement Plan for Executives of the
Registrant and Participating Subsidiaries.
*22 List of Subsidiaries of the Registrant.
*99.1 Consent of Prospective Director of the Registrant.
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* Previously filed.
<PAGE> 4
GETTY PETROLEUM CORP.
125 JERICHO TURNPIKE
JERICHO, NEW YORK 11753
March 13, 1997
To the Stockholders of Getty Petroleum Corp:
Getty Petroleum Corp. ("Getty") currently owns all of the outstanding
shares of common stock of Getty Petroleum Marketing Inc. ("Marketing"), which
Getty has formed to hold and operate its petroleum marketing and related
businesses. The enclosed Information Statement contains information regarding
the distribution of the common stock of Marketing to the stockholders of Getty
(the "Distribution"). If you are a holder of Getty common stock on March 21,
1997, the record date for the Distribution, you will receive one (1) share of
Marketing common stock for each share of Getty common stock you own on that
date. Holders of Getty shares on the record date will not be required to make
any payment or take any other action in order to receive Marketing shares in the
Distribution. We expect that Marketing stock certificates will be mailed
beginning on March 31, 1997.
The principal effect of the Distribution will be to separate Getty's real
estate business from its petroleum marketing business. After the Distribution,
each business will be conducted by a separate, publicly held corporation, and
Getty will change its name to "Getty Realty Corp."
The Board of Directors of Getty, which approved the Distribution on
December 12, 1996, believes that the Distribution will enhance stockholder
values over the long term by allowing Getty and Marketing to concentrate on
their respective businesses, allowing Marketing to establish more meaningful and
effective equity-based employee compensation packages, and providing each
company with greater flexibility in pursuing its independent business
objectives. The petroleum marketing business of Marketing and the real estate
business of Getty have distinct investment, operating and financial
characteristics. The Getty Board of Directors believes that the Distribution
will enable the investment community to analyze more effectively the investment
characteristics, performance and future prospects of each business, enhancing
the likelihood that each will achieve appropriate market recognition of its
value. The Board of Directors of Getty has unanimously approved the
Distribution.
Details of the Distribution and other important information, including a
description of the business and management of Marketing after the Distribution,
are set forth in the accompanying Information Statement, which should be
reviewed carefully by stockholders. Stockholder approval of the Distribution is
not required, and we are not soliciting your proxy.
Stockholders of Getty with inquiries related to the Distribution should
contact John J. Fitteron, Senior Vice President, Treasurer and Chief Financial
Officer of Getty, at (516) 338-6000.
Sincerely yours,
Leo Liebowitz
Leo Liebowitz
Chairman and Chief Executive Officer
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INFORMATION STATEMENT
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GETTY PETROLEUM MARKETING INC.
COMMON STOCK
($.01 PAR VALUE)
This Information Statement is being furnished in connection with a special
distribution (the "Distribution") by Getty Petroleum Corp. ("Getty") of one (1)
share of common stock, $.01 par value ("Marketing Common Stock"), of Getty
Petroleum Marketing Inc. ("Marketing") for each share of Getty common stock,
$.10 par value (the "Getty Common Stock"), held of record as of the close of
business on March 21, 1997 (the "Record Date"). The Distribution will result in
100% of the outstanding shares of Marketing Common Stock being distributed to
the holders of Getty Common Stock. On March 21, 1997 (the "Distribution Date"),
Getty will deliver all of the issued and outstanding shares of Marketing Common
Stock to American Stock Transfer and Trust Company, as distribution agent (the
"Distribution Agent"), which in turn will distribute such shares to the holders
of Getty Common Stock as of the Record Date. It is expected that certificates
representing shares of Marketing Common Stock will be mailed by the Distribution
Agent on March 31, 1997. See "INTRODUCTION" and "THE DISTRIBUTION -- Manner of
Effecting the Distribution." Holders of Getty Common Stock on the Record Date
will not be required to make any payment or take any other action to receive
Marketing Common Stock in the Distribution. On the Distribution Date, Getty will
change its name to Getty Realty Corp.
Marketing is a newly formed company that, as of the close of business on
January 31, 1997, owns and operates the businesses and assets of, and is
responsible for the obligations and liabilities associated with, the petroleum
marketing business and the New York Mid-Hudson Valley home heating oil business,
both of which were previously conducted by Getty and its subsidiaries. There is
no established public trading market for Marketing Common Stock, although it is
expected that a "when-issued" trading market will develop on or about the Record
Date. Shares of Marketing Common Stock have been approved for listing on The New
York Stock Exchange, subject to official notice of issuance, under the symbol
"GPM." See "THE DISTRIBUTION -- Listing and Trading of Marketing Common Stock."
------------------------------
NO VOTE OF STOCKHOLDERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION.
NO PROXIES ARE BEING SOLICITED, AND YOU ARE REQUESTED
NOT TO SEND US A PROXY.
------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY OTHER FEDERAL OR STATE AUTHORITY, NOR HAS SUCH
COMMISSION OR OTHER AUTHORITY PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS INFORMATION STATEMENT SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES.
------------------------------
The date of this Information Statement is March 13, 1997
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TABLE OF CONTENTS
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PAGE
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SUMMARY OF CERTAIN INFORMATION.............................. 1
SUMMARY CONSOLIDATED FINANCIAL INFORMATION.................. 4
INTRODUCTION................................................ 5
RISK FACTORS................................................ 6
THE DISTRIBUTION............................................ 9
General................................................... 9
Background and Reasons for the Distribution............... 9
Future Management of Marketing............................ 11
Manner of Effecting the Distribution...................... 11
Listing and Trading of Marketing Common Stock............. 11
Federal Income Tax Aspects of the Distribution............ 12
Regulatory Approvals...................................... 12
Reasons For Furnishing the Information Statement.......... 12
RELATIONSHIP BETWEEN GETTY AND MARKETING AFTER THE
DISTRIBUTION.............................................. 13
Reorganization and Distribution Agreement................. 13
Master Lease Agreement.................................... 14
Tax Sharing Agreement..................................... 16
Services Agreement........................................ 16
Trademark License Agreement............................... 17
Board of Directors and Management......................... 17
Financing -- Credit Lines................................. 17
SELECTED CONSOLIDATED FINANCIAL INFORMATION................. 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 19
DIVIDEND POLICY............................................. 24
BUSINESS.................................................... 25
General................................................... 25
Operating Strategy........................................ 26
Distribution.............................................. 26
Product Supply............................................ 27
Marketing................................................. 28
Competition............................................... 28
Regulation................................................ 28
Personnel................................................. 29
Legal Proceedings......................................... 29
MANAGEMENT.................................................. 30
EXECUTIVE COMPENSATION...................................... 33
Stock Option Plans........................................ 34
Employee Stock Ownership Plan............................. 35
Miscellaneous Benefit Plans............................... 36
CERTAIN TRANSACTIONS........................................ 36
DESCRIPTION OF CAPITAL STOCK................................ 37
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS..... 39
ADDITIONAL INFORMATION...................................... 40
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-1
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SUMMARY OF CERTAIN INFORMATION
This summary is qualified by the more detailed information set forth
elsewhere in this Information Statement, which should be read in its entirety.
Unless the context otherwise requires, (i) references in the Information
Statement to Getty and Marketing shall include Getty's and Marketing's
respective subsidiaries, (ii) references in this Information Statement to
Marketing prior to the Distribution Date shall refer to the petroleum marketing
business as operated by Getty, (iii) references in this Information Statement to
Getty refer to Getty Petroleum Corp. prior to the Distribution Date and to Getty
Realty Corp. on and after such date, and (iv) references to a fiscal year are to
the twelve-month period ended January 31 of such year. Certain capitalized terms
used in this summary are defined elsewhere in this Information Statement.
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Distributing Company................... Getty Petroleum Corp., a Delaware corporation ("Getty").
On the Distribution Date, Getty will change its name to
Getty Realty Corp. ("Realty").
Distributed Company.................... Getty Petroleum Marketing Inc., a Maryland corporation
("Marketing"), which as of the close of business on
January 31, 1997, owns and operates the petroleum
marketing business and the New York Mid-Hudson Valley home
heating oil business, both previously conducted by Getty.
The Distribution....................... On the Distribution Date, all of the outstanding shares of
Marketing Common Stock will be delivered to the
Distribution Agent. It is expected that on March 31, 1997,
the Distribution Agent will begin to mail stock
certificates representing shares of Marketing Common Stock
to holders of record of Getty Common Stock as of the
Record Date. See "THE DISTRIBUTION -- Manner of Effecting
the Distribution."
Record Date............................ March 21, 1997 (the "Record Date").
Distribution Date...................... March 21, 1997 (the "Distribution Date").
Distribution Ratio..................... Each Getty stockholder will receive one share of common
stock, $.01 par value, of Marketing (the "Marketing Common
Stock") for each share of common stock, $.10 par value, of
Getty (the "Getty Common Stock") owned on the Record Date.
Shares to be Distributed............... Based on the number of shares of Getty Common Stock
outstanding on January 31, 1997, approximately 12,700,000
shares of Marketing Common Stock will be issued to Getty
stockholders in the Distribution. The shares to be
distributed to Getty stockholders, together with
approximately 667,000 shares to be issued to the Getty
Petroleum Marketing Employee Stock Ownership Plan (the
"Marketing ESOP"), will constitute all of the shares of
Marketing Common Stock outstanding immediately after the
Distribution.
Distribution Agent..................... American Stock Transfer and Trust Company (the
"Distribution Agent").
Fractional Share Interests............. Fractional shares will not be distributed. Any fractional
shares will be aggregated and sold in the public market by
the Distribution Agent and the aggregate cash proceeds
will be distributed ratably to those shareowners entitled
to fractional interests. See "THE DISTRIBUTION -- Manner
of Effecting the Distribution."
No Payment Required.................... Getty stockholders will not be required to make any
payment or to take any other action to receive their
portion of the Distribution. See "THE DISTRIBUTION --
Manner of Effecting the Distribution."
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Conditions to the Distribution......... The Distribution is conditioned upon, among other things,
declaration of the special dividend by the Board of
Directors of Getty (the "Getty Board") and a private
letter ruling from the Internal Revenue Service (the
"IRS") in form and substance satisfactory to the Board of
Directors of Getty (the "Getty Board"). See "-- Tax
Consequences." The private letter ruling was issued by the
IRS on September 11, 1996. The Getty Board has reserved
the right to waive any conditions to the Distribution or,
even if the conditions to the Distribution are satisfied,
to abandon, defer or modify the Distribution at any time
prior to the Distribution Date. See "INTRODUCTION" and
"THE DISTRIBUTION -- Manner of Effecting the
Distribution."
Reasons for the Distribution........... The Distribution will formally separate Getty's petroleum
marketing business from its real estate business. After
the Distribution, each business will be conducted by a
separate, publicly held corporation. The Getty Board
believes that the Distribution will (i) enable the
management of each company to concentrate its attention
and financial resources on the core businesses of such
company, (ii) facilitate the adoption of a broad-based
equity compensation plan for Marketing whereby Marketing
can more efficiently and meaningfully incentivize its
employees and (iii) enhance stockholder value over the
long term by allowing the investment community to analyze
more effectively the investment characteristics,
performance and future prospects of the two distinct
business groups. The Getty Board also believes that the
Distribution will provide each company with greater
flexibility in pursuing its independent business
objectives. See "THE DISTRIBUTION -- Background and
Reasons for the Distribution."
Tax Consequences....................... The Getty Board has conditioned the Distribution on
receipt of a private letter ruling from the IRS to the
effect, among other things, that receipt of shares of
Marketing Common Stock by holders of Getty Common Stock
will be tax free. On September 11, 1996, the IRS issued a
private letter ruling (the "Tax Ruling") confirming the
foregoing, as well as to confirm the treatment, for
Federal income tax purposes, of certain other matters
pertaining to the Distribution.
Trading Market......................... There is currently no public market for Marketing's Common
Stock. Shares of Marketing Common Stock have been approved
for listing on The New York Stock Exchange, subject to
official notice of issuance, under the symbol "GPM." See
"THE DISTRIBUTION -- Listing and Trading of Marketing
Common Stock" and "RISK FACTORS -- No Prior Market for
Marketing Common Stock."
Marketing.............................. Marketing was incorporated under the laws of Maryland on
October 1, 1996. As of the close of business on January
31, 1997, Marketing owns and operates the petroleum
marketing business and the New York Mid-Hudson Valley home
heating oil business, both previously owned and operated
by Getty. See "BUSINESS."
Principal Office of Marketing.......... The principal executive offices of Marketing are located
at 125 Jericho Turnpike, Jericho, New York 11753.
Board of Directors..................... Getty, as the sole stockholder of Marketing, has elected
the following persons to constitute the Board of Directors
of Marketing as of the Distribution Date: Messrs. Leo
Liebowitz, Milton Safenowitz, Ronald E. Hall, Richard E.
Montag and Matthew J. Chanin. See "MANAGEMENT."
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Risk Factors........................... See "RISK FACTORS" for a discussion of factors that should
be considered in connection with the Marketing Common
Stock received in the Distribution.
Preliminary Transactions............... As of the close of business on January 31, 1997, Getty
transferred to Marketing the stock of certain subsidiaries
engaged in the petroleum marketing and New York Mid-Hudson
Valley home heating oil businesses (collectively, the
"Transferred Subsidiaries"), as well as certain other
assets associated with petroleum marketing operations.
Financing.............................. Marketing has established facilities for letters of credit
and lines of credit. See "RELATIONSHIP BETWEEN GETTY AND
MARKETING AFTER THE DISTRIBUTION -- Financing -- Credit
Lines."
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SUMMARY CONSOLIDATED FINANCIAL INFORMATION
The following summary consolidated financial information of Marketing
should be read in conjunction with Marketing's historical and pro forma
consolidated financial statements and the notes thereto, included elsewhere in
this Information Statement. The following consolidated financial information
relates to the business of Marketing as it was operated as part of Getty and is
derived from the consolidated historical financial statements of Marketing. The
consolidated financial statements of Marketing are derived from the consolidated
historical financial statements of Getty and may not reflect the financial
position or results of operations that would have been obtained had Marketing
been a separate, publicly held company during such periods.
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NINE MONTHS ENDED
FISCAL YEARS ENDED JANUARY 31, OCTOBER 31,
------------------------------------------------------ --------------------
1992 1993 1994 1995 1996 1995 1996
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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OPERATING DATA:
Revenues............................. $1,121,176 $906,656 $776,285 $753,735 $791,194 $598,249 $642,225
Net earnings (loss)(a)............... (16,658) (7,303) 1,818 (2,434) 3,664(b) 1,701(b) (2,092)
Pro forma net earnings
(loss)(a)(c)....................... 3,302(d) (2,575)
Pro forma net earnings (loss) per
share(a)(c)(e)..................... .25(d) (.19)
BALANCE SHEET DATA AT END OF PERIOD:
Total assets......................... $ 131,208 $112,413 $111,515 $117,097 $124,498 $123,638 $128,879
Working capital (deficit)............ 13,208 (18,215) (16,425) (23,221) (8,723) (14,447) (17,162)
Pro forma working capital(f)......... 1,100
Stockholders' equity................. 70,813 39,811 41,991 37,061 50,311 46,809 44,027
Pro forma stockholders' equity(f).... 62,289
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(a) In the fourth quarter of fiscal 1997, Marketing will record a pre-tax charge
of $21.2 million for estimated environmental remediation expenses. See Note
6 to the consolidated financial statements. Such charge has not been
included in the pro forma consolidated financial statements.
(b) Includes charge of $282, or $.02 per share, from the cumulative effect of
adopting Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
(c) Pro forma net earnings (loss) reflect additional rent to be paid to Getty by
Marketing as provided for in the Master Lease and estimated costs Marketing
will incur in operating as a separate public company. Commencing February 1,
1997, Marketing will recognize a charge to operating results over a
five-year period relating to the Marketing ESOP and will also recognize a
charge to operations relating to certain change of control agreements. Such
charges, which are not reflected in the pro forma consolidated financial
statements, will be based on the value of the Marketing Common Stock in the
future and, as such, are not currently determinable.
(d) Excludes charge of $282, or $.02 per share, described in note (b).
(e) Pro forma net earnings (loss) per share is computed by dividing net earnings
(loss) by the weighted average number of shares of Marketing Common Stock
that would have been outstanding during the period had the Distribution
taken place as of the beginning of such period and had an additional 667,000
shares associated with the Marketing ESOP been issued.
(f) Pro forma working capital and stockholders' equity reflect a cash transfer
from Getty in an amount sufficient to provide Marketing with net working
capital of approximately $1.1 million in accordance with the Distribution
Agreement.
4
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INTRODUCTION
The Board of Directors of Getty Petroleum Corp., a Delaware corporation
("Getty"), has declared a special distribution (the "Distribution") of one share
of common stock, $.01 par value ("Marketing Common Stock"), of Getty Petroleum
Marketing Inc., a Maryland corporation ("Marketing"), for each share of Getty
common stock, $.10 par value ("Getty Common Stock"), held of record as of the
close of business on March 21, 1997 (the "Record Date"). Getty will effect the
Distribution on March 21, 1997 (the "Distribution Date") by delivering all of
the issued and outstanding shares of Marketing Common Stock to American Stock
Transfer and Trust Company, as the distribution agent (the "Distribution
Agent"), for transfer and distribution to the holders of record of Getty Common
Stock as of the Record Date. It is expected that certificates representing
shares of Marketing Common Stock will be mailed to Getty stockholders beginning
on March 31, 1997.
The principal effect of the Distribution will be to separate Getty's
petroleum marketing business from its real estate business. After the
Distribution, each business will be conducted by a separate, publicly held
corporation. Marketing will own and operate the petroleum marketing business and
own the New York Mid-Hudson Valley home heating oil business operated by its
subsidiary, Kingston Oil Supply Corp. ("KOSCO"), and Getty will retain and
continue to own and operate the real estate business and the Pennsylvania and
Maryland home heating oil business. See "BUSINESS." The Distribution is intended
to enhance stockholder value over the long term by allowing Getty and Marketing
to concentrate on their respective businesses, by facilitating the adoption of a
broad-based equity compensation plan for Marketing through which Marketing can
more efficiently and meaningfully incentivize its employees and by enabling the
investment community to analyze more effectively the investment characteristics,
performance and future prospects of the two distinct business groups. The
Distribution is also intended to provide each company with greater flexibility
in pursuing its independent business objectives.
For a description of risk factors in connection with the Distribution and
the related transactions described in this Information Statement, see "RISK
FACTORS."
Marketing was formed as a subsidiary of Getty on October 1, 1996. There has
been no trading market in Marketing Common Stock. However, subject to official
notice of issuance, shares of Marketing Common Stock have been approved for
listing on The New York Stock Exchange (the "NYSE") under the symbol "GPM," and
a "when-issued" trading market is expected to develop on or about the Record
Date. See "THE DISTRIBUTION -- Listing and Trading of Marketing Common Stock"
and "RISK FACTORS -- No Prior Market for Marketing Common Stock."
In consideration for Getty's transfer to Marketing of the petroleum
marketing business and the New York Mid-Hudson Valley home heating oil business,
on January 31, 1997 Marketing issued to Getty all of the outstanding shares of
Marketing Common Stock and assumed certain obligations and liabilities relating
to the transferred businesses. See "THE DISTRIBUTION."
The Distribution does not require stockholder approval and the Getty Board
may abandon, defer or modify the Distribution prior to the Distribution Date.
Marketing stockholders will not be entitled to appraisal rights in connection
with the Distribution.
The principal executive offices of Marketing are located at 125 Jericho
Turnpike, Jericho, New York 11753; telephone number (516) 338-6000.
5
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RISK FACTORS
Stockholders should note the following risk factors, as well as the other
information contained in this Information Statement.
VOLATILITY OF MARKETING MARGINS
Marketing's earnings and cash flow from operations depend upon rental
income from dealers and the sale of refined petroleum products at marketing
margins sufficient to cover fixed and variable expenses. Marketing has no crude
oil reserves or refining capacity. Marketing has entered into agreements with
Northeast and Mid-Atlantic suppliers for the purchase of refined petroleum
products. Substantially all of Marketing's supply contracts are for a term of
one year.
Historically, petroleum prices have been subject to extreme volatility and
there have been periodic shortages followed by periods of oversupply. A large,
rapid increase in petroleum prices would adversely affect Marketing's
profitability if Marketing's sales prices were not similarly increased or if
automobile consumption of gasoline were to significantly decline. No assurance
can be given that petroleum prices will not fluctuate greatly or that petroleum
products will continue to be available from multiple sources or available at all
in times of shortage. Management believes, however, that based on its experience
during times of shortage, Marketing will continue to have the ability to acquire
petroleum products on competitive terms due in part to the large volume of its
purchases and its storage capacity at its distribution terminals.
Petroleum products are commodities whose prices depend on numerous factors
beyond Marketing's control that affect the supply of and demand for petroleum
products, such as changes in domestic and foreign economies, political affairs
and production levels, the availability of imported oil, the marketing of
competitive fuels, the extent of government regulation and expected and actual
weather conditions. The prices paid by Marketing for its products are affected
by global, national and regional factors, such as petroleum pipeline capacity,
local market conditions and competition and the level of operations of
refineries. A large, rapid increase in refined petroleum prices would adversely
affect Marketing's operating margins if the increased cost of petroleum products
could not be passed on to Marketing's customers. Although Marketing believes,
based on its experience during periods of shortage, that it will continue to
have the ability to acquire petroleum products on competitive terms due in part
to the large volume of its purchases and its substantial storage capacity at its
distribution terminals, no assurance can be given that Marketing will be able to
negotiate favorable prices for petroleum products or that adequate supplies will
be available to it during times of shortage. In recent years, prices of refined
products have fluctuated substantially. Accordingly, Marketing's earnings are
subject to substantial fluctuations, as reflected in Marketing's financial
statements. Moreover, after the Distribution, Marketing's rental expense will be
substantially higher than that of Getty prior to the Distribution, and
Marketing's post-Distribution earnings may be more volatile and lower than
Getty's pre-Distribution earnings. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS."
PETROLEUM MARKETING IS A MATURE INDUSTRY
The petroleum marketing industry is a mature one, with only limited growth
in total demand for the product foreseen. Marketing expects the overall demand
for petroleum products to grow about 2% annually over the next several years,
with year to year industry volumes being impacted primarily by travel patterns.
Therefore, Marketing's ability to grow within the industry depends on its
ability to acquire new distributors, open new retail outlets, refurbish and
expand existing outlets and acquire new customers through effective marketing.
There can be no assurance that in the future Marketing will be able to (i) find
attractive acquisition candidates and acquire such candidates on economically
acceptable terms, or (ii) increase same service station sales through
refurbished or expanded service stations or through improved marketing.
ENERGY EFFICIENCY AND TECHNOLOGY TRENDS MAY AFFECT DEMAND FOR PETROLEUM PRODUCTS
Retail customers use petroleum primarily as a motor fuel, and Marketing's
sales therefore depend in part on the level of motor fuel consumption. Marketing
is not able to predict the effect that future conservation
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measures, technological advances in transportation or the use of alternative
fuels might have on Marketing's operations.
COMPETITION
Marketing believes that, based on the number of locations served, it is
currently one of the largest independent marketers of petroleum products in the
United States. Petroleum marketing is highly competitive, and Marketing competes
with a substantial number of integrated oil companies and other companies who
may have greater assets, financial resources and sales. Accordingly, Marketing's
earnings may be adversely affected by the marketing policies of such companies,
which may have greater flexibility to withstand price changes than Marketing.
COMPETITION AND VOLATILITY IN THE HOME HEATING OIL BUSINESS
The business of marketing and selling home heating oil has historically
been an intensely competitive one, due not only to the presence of other home
heating oil retailers and suppliers in the New York Mid-Hudson Valley area, but
also to the availability of other types of home heating fuels, such as natural
gas. The profitability of the home heating oil business is also subject to
fluctuations in the regional climate, as the demand for home heating oil is
generally linked to the severity of any particular winter. Furthermore, a large,
rapid increase in the cost of home heating oil prices would adversely affect
Marketing's profitability if Marketing's sales prices were not similarly
increased or if consumption of home heating oil were to significantly decline as
a result of such price increases. The price of home heating oil fluctuates
widely, and no assurances can be given with respect to consumers' continued use
of home heating oil in the New York Mid-Hudson Valley, the level of consumption
of home heating oil in this region during any given winter season, or the
ability of Marketing to negotiate favorable prices for home heating oil from its
suppliers.
REGULATION
The petroleum products industry is subject to numerous federal, state and
local laws and regulations. Although Marketing believes that the costs related
to compliance with those laws and regulations have not had and are not expected
to have a material adverse effect on the competitive or financial position of
Marketing, such costs may have a significant impact on results of operations or
liquidity for any single period.
Marketing is not a refiner and, therefore, is not subject to the Petroleum
Marketing Practices Act ("PMPA"), a federal law, with respect to its Getty(R)
branded stations. However, pursuant to Marketing's agreements with approximately
one-half of its Getty dealers and distributors, Marketing has voluntarily
extended to them coverage under PMPA. Under PMPA, Marketing complies with
certain notice requirements (generally 90 days) and extends nondiscriminatory
contracts to certain of its Getty licensed dealers and distributors, whose
franchises cannot be terminated or not renewed unless certain PMPA imposed
prerequisites are met as provided in Marketing's agreements. Although a licensed
dealer or distributor who is covered by PMPA is not required to renew his or her
franchise, because Marketing has agreed to comply with PMPA with respect to such
dealers and distributors, Marketing is required to renew the franchises of such
dealers and distributors who elect to renew. However, franchisees may be
terminated or not renewed for violating certain provisions of Marketing's
agreements as permitted under PMPA. The PMPA permitted grounds for termination
or non-renewal include, among other things, non-payment of rent, misuse of
trademark, bankruptcy, criminal misconduct, condemnation and expiration of an
underlying lease. Also, Marketing may elect to non-renew with a franchisee upon
a determination made in good faith that the franchise relationship is
uneconomical to Marketing. In such latter instance, Marketing must, in
accordance with PMPA, offer to the franchisee the right to purchase Marketing's
leasehold interest in the property at a bona fide price. Under the terms of the
Master Lease with Realty, Marketing would be required to offer to assign its
leasehold interest in the property (including all renewal options) to the
franchisee who is covered by PMPA.
In addition, Marketing's operations are governed by numerous federal, state
and local environmental laws and regulations affecting all aspects of its
operations. Among these laws are (i) requirements to dispense reformulated
gasoline in accordance with the Clean Air Act, (ii) restrictions imposed on the
amount of hydrocarbon vapors which may enter the air at Marketing's terminals
and service stations, (iii) OSHA and other laws regulating terminal employee
exposure to benzene and other hazardous materials,
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<PAGE> 14
(iv) requirements to report to governmental authorities discharges of petroleum
products into the environment and, under certain circumstances, to remediate the
soil and/or groundwater contamination pursuant to governmental order and
directive, (v) requirements to remove and replace underground storage tanks
which have exceeded governmental-mandated age limitations and (vi) the
requirement to provide a certificate of financial responsibility with respect to
claims relating to underground storage tank failures.
NO OPERATING HISTORY AS AN INDEPENDENT COMPANY
Marketing does not have an operating history as an independent public
company, and there is no assurance that it will be profitable as a stand-alone
company. For the nine months ended October 31, 1996, Marketing had a net loss of
approximately $2.1 million. The business of Marketing has historically relied on
Getty for various financial and administrative services. After the Distribution,
Marketing will maintain its own lines of credit, banking relationships and
administrative functions.
DIVIDEND POLICY
Marketing's dividend policy will be established by the Board of Directors
of Marketing (the "Marketing Board") from time to time based on the results of
operations and financial condition of Marketing and such other business
considerations as the Marketing Board considers relevant. Subject to the
foregoing, Marketing may declare and pay dividends after the Distribution,
although there can be no assurance that any dividends will be paid in the
future.
POTENTIAL CONFLICTS
The post-closing relationships between Getty and Marketing may cause the
interests of such companies to conflict. Potential sources of such conflict
include (i) Marketing's leasing of substantially all of its service station and
terminal properties from Getty pursuant to an agreement that allows Getty to
terminate Marketing's rights with respect to such properties upon the occurrence
of certain events of default, (ii) Marketing's licensing of the Getty trademark
from Getty under an agreement that terminates upon the occurrence of certain
events of default and that allows Getty to license the Getty trademark for use
by third parties on a non-exclusive basis in states in which Marketing is not
then doing business and (iii) Getty's retention of and agreement to pay for and
indemnify Marketing with respect to all scheduled pre-closing environmental
liabilities and obligations, all scheduled future upgrades (the "Upgrades")
necessary to cause underground storage tanks (such tanks, including related
piping, underground pumps, wiring and monitoring devices, the "USTs") to conform
to the 1998 federal standards for USTs (the "1998 Standards"), and all
environmental liabilities and obligations arising out of discharges with respect
to Properties (as defined below) containing USTs that have not been upgraded to
meet the 1998 Standards ("Nonupgraded USTs") that are discovered prior to the
date such USTs are upgraded to meet the 1998 Standards, with Marketing being
responsible for and indemnifying Getty with respect to all other environmental
obligations and liabilities. See "RELATIONSHIP BETWEEN GETTY AND MARKETING AFTER
THE DISTRIBUTION -- Master Lease Agreement" and "-- Trademark License
Agreement." In addition, Mr. Leo Liebowitz will serve as a director, chief
executive officer and Chairman of Marketing and as director, chief executive
officer and president of Getty, and Mr. Milton Safenowitz will also serve as a
director of Marketing and of Getty. Messrs. Liebowitz and Safenowitz will own
shares in both companies following the Distribution. In addition, all other
present directors and officers of Getty will own shares and have options to
purchase shares of both companies following the Distribution.
NO PRIOR MARKET FOR MARKETING COMMON STOCK
There has been no prior trading market for Marketing Common Stock and there
can be no assurance as to the prices at which Marketing Common Stock will trade
before or after the Distribution Date. Until Marketing Common stock is fully
distributed and an orderly market develops, the prices at which Marketing Common
Stock trades may fluctuate significantly. Prices for Marketing Common Stock will
be determined in the trading markets and may be influenced by many factors,
including the depth and liquidity of the market for Marketing Common Stock,
investor perceptions of Marketing and its business, Marketing's dividend policy,
and general economic and market conditions. See "THE DISTRIBUTION -- Listing and
Trading of Marketing Common Stock."
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<PAGE> 15
EFFECTS ON GETTY COMMON STOCK
After the Distribution, Getty Common Stock will continue to be listed on
the NYSE, and traded on certain other exchanges. As a result of the
Distribution, the trading prices of Getty Common Stock are likely to be lower
than the trading prices of Getty Common Stock immediately prior to the
Distribution. The aggregate trading prices of Getty Common Stock and Marketing
Common Stock after the Distribution may be less than, equal to or greater than
the trading prices of Getty Common Stock prior to the Distribution. In addition,
until the market has fully analyzed the operations of Getty without the
petroleum marketing business, the prices at which the Getty Common Stock trades
may fluctuate significantly.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
Getty has received a Tax Ruling from the IRS to the effect that, among
other things, for United States federal income tax purposes the Distribution
will be tax-free under Section 355 of the Code. See "THE DISTRIBUTION -- Federal
Income Tax Aspects of the Distribution." The continuing validity of the Tax
Ruling is subject to certain factual representations and assumptions. Marketing
is not aware of any facts or circumstances which should cause such
representations and assumptions to be untrue. The Tax Sharing Agreement (as
defined below) provides that neither Getty nor Marketing is to take any action
inconsistent with, nor fail to take any action required by, the request for the
Tax Ruling or the Tax Ruling unless required to do so by law or permitted to do
so by the prior written consent of the other party or, in certain circumstances,
a supplemental ruling. Getty and Marketing have agreed to indemnify each other
with respect to any tax liability resulting from their respective failures to
comply with such provisions. See "RELATIONSHIP BETWEEN GETTY AND MARKETING AFTER
THE DISTRIBUTION -- Tax Sharing Agreement."
CERTAIN ANTI-TAKEOVER FEATURES
Certain provisions of Maryland statutory law could discourage potential
acquisition proposals and could delay or prevent a change in control of
Marketing. Such provisions could diminish the opportunities for a stockholder to
participate in tender offers, including tender offers at a price above the then
current market value of the Marketing Common Stock. See "DESCRIPTION OF CAPITAL
STOCK -- Common Stock."
THE DISTRIBUTION
GENERAL
On the Distribution Date, Getty intends to distribute all of the
outstanding shares of Marketing Common Stock to holders of record on the Record
Date of Getty Common Stock. Each holder of Getty Common Stock will receive one
share of Marketing Common Stock for each share of Getty Common Stock held on the
Record Date. Holders of Getty Common Stock on the Record Date will not be
required to make any payment or to take any other action to receive their
portion of the Distribution.
BACKGROUND AND REASONS FOR THE DISTRIBUTION
The Board of Directors of Getty has determined, for the reasons set forth
below, to separate Getty into two publicly held companies: Marketing, a newly
formed corporation which will own and operate the petroleum marketing business
and the New York Mid-Hudson Valley home heating oil business, and Getty, which
will continue to own and operate the real estate business and the home heating
oil business in Pennsylvania and Maryland.
The Board of Directors of Getty believes that over the long term the
Distribution will benefit Getty's stockholders and each of Getty's current
businesses.
The petroleum marketing business of Marketing and the real estate business
of Getty have distinctly different investment, operating and financial
characteristics. Marketing's earnings largely depend on its ability to sell
petroleum products on a wholesale and retail level in a volatile industry at
product margins and in quantities sufficient to cover its fixed and variable
expenses. Marketing's variable costs, operating margins and earnings have varied
significantly over time and will likely continue to do so. In contrast, Getty's
earnings will depend on its receipt of rent from Marketing, its receipt of rent
for properties leased to other third parties, and
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<PAGE> 16
its ability to acquire and lease real estate at rates sufficient to cover its
costs. Although numerous factors beyond Getty's control have and will likely
continue to affect its earnings, Getty's earnings have historically been and are
likely to continue to be less volatile than those of Marketing.
Separate management teams addressing distinct business issues will manage
the two businesses, and separation of the businesses should result in greater
focus of the management teams on the core strengths that make each business
successful. In particular, the Distribution will allow both Marketing and Getty
to offer their employees more meaningful and effective equity-based employee
compensation packages. The Distribution will allow Marketing to adopt a
broad-based compensation plan (including the Marketing ESOP) through which it
can more efficiently and meaningfully incentivize all its employees by creating
equity-based incentives more directly correlated to the performance of the
Marketing business. Similarly, the Distribution will allow Getty to provide its
employees with incentive plans that better relate to the performance of its real
estate business.
In addition, the Board of Directors of Getty believes that Marketing's
post-Distribution capital structure and business focus should help it better
compete. For example, over the past few years, Marketing has divested
nonstrategic and uneconomic retail outlets and has increased the average
gasoline volume per retail outlet in each of the past five years. As a result of
the Distribution, Marketing will have no long-term debt and no known material
environmental liabilities, which liabilities will remain the responsibility of
Getty. Getty will retain responsibility for properties that are not related to
the petroleum marketing business. The Getty Board believes that these changes
should permit Marketing's management to focus more fully on its core business.
The Getty Board believes that the Distribution will enable the investment
community to analyze more effectively the individual investment characteristics,
performance and future prospects of the petroleum marketing business of
Marketing and the real estate business of Getty, enhancing the likelihood that
each of Marketing and Getty will achieve more appropriate market recognition of
its value.
Although Marketing's post-Distribution net rental expense may cause its
earnings to be lower and more volatile than Getty's pre-Distribution earnings,
Getty's management believes that the Distribution provides each company with
rental income and expenses appropriate to the characteristics of its business.
Under the Master Lease, Marketing will pay approximately $24 million more in
annual rent to Getty than it currently receives in annual rent from third
parties. Such net rental payment reduces the amount of, and increases the
volatility of, Marketing's earnings. Marketing's payments to Getty under the
Master Lease exceed its expected receipt of rental income from third parties
primarily because (i) Marketing's payments to Getty include rent for 10
distribution terminals and bulk plants, and for retail outlets that are not
subleased but are operated by Marketing or by management contractors and (ii)
Getty leases to Marketing at lease rates intended to approximate fair market
rates that would be negotiated by unrelated parties engaged solely in a real
estate transaction, whereas, consistent with petroleum industry practice,
Marketing generally leases its retail outlets at lower, but competitive, rates
to dealers in anticipation of also realizing profits on the sale of petroleum
products. Thus, Getty's management believes that Marketing's net rental expense
approximates the sum of the fair market rental value of those facilities not
subleased by Marketing and the reduced rentals offered to dealers in
anticipation of realizing profits on the sale of petroleum products.
In connection with its formulation and adoption of the Distribution, the
Getty Board consulted with Credit Suisse First Boston, which conducted analyses
of the businesses of Getty and Marketing based on information provided by
management. The Getty Board did not request or receive from Credit Suisse First
Boston any opinion as to the fairness from a financial point of view of the
Distribution to stockholders of Getty or any other opinion relating to the
Distribution.
A stockholder will have the same ownership interest in both Getty and
Marketing (except for dilution caused by the issuance of Marketing Common Stock
to the Marketing ESOP) after the Distribution as he or she had in Getty before
the Distribution. However, as a result of the Distribution, current stockholders
and prospective investors will have the ability to make separate investment
decisions regarding each business.
The Distribution will be reflected in Getty's financial statements as a
charge against stockholders' equity. The pro forma consolidated effect on Getty
of the Distribution, if it had occurred on October 31, 1996, would
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<PAGE> 17
have been to reduce Getty's assets by approximately $147.1 million and
stockholders' equity by approximately $62.3 million.
FUTURE MANAGEMENT OF MARKETING
Following the Distribution, it is presently intended that Marketing's
petroleum marketing business will continue to be operated with substantially the
same operating management and personnel as at present. See "MANAGEMENT."
MANNER OF EFFECTING THE DISTRIBUTION
In connection with the Distribution, all of the outstanding shares of
Marketing Common Stock will be delivered to the Distribution Agent for transfer
and distribution to the holders of record of Getty Common Stock as of the Record
Date. It is expected that certificates representing shares of Marketing Common
Stock will be mailed by the Distribution Agent to Getty stockholders beginning
on March 31, 1997.
The Board of Directors of Getty has reserved the right to abandon, defer or
modify the Distribution and the related transactions described in this
Information Statement at any time prior to 11:59 p.m., New York time, on the day
immediately preceding the Distribution Date.
No holder of Getty Common Stock will be required to pay any cash or other
consideration for the shares of Marketing Common Stock received in the
Distribution or surrender or exchange shares of Getty Common Stock in order to
receive Marketing Common Stock. The Distribution will not affect the number of,
or the rights attaching to, outstanding shares of Getty Common Stock. All shares
of Marketing Common Stock will be fully paid and non-assessable and the holders
of those shares will not be entitled to preemptive rights. See "DESCRIPTION OF
CAPITAL STOCK -- Common Stock."
No certificates or scrip representing fractional shares of Marketing Common
Stock will be issued to Getty stockholders as part of the Distribution. If, as a
result of the Distribution, any Getty stockholder would own fractional shares of
Marketing Common Stock, the Distribution Agent will aggregate such fractional
shares into whole shares and sell them in the open market at then prevailing
prices on behalf of such stockholders, and such stockholders will receive
instead a cash payment in the amount of their pro rata share of the sale
proceeds. Such sales are expected to be made on, or as soon as practicable
after, the Distribution Date.
LISTING AND TRADING OF MARKETING COMMON STOCK
There is not currently a public market for Marketing Common Stock. Prices
at which Marketing Common Stock may trade prior to the Distribution on a
"when-issued" basis or after the Distribution cannot be predicted. Until the
Marketing Common Stock is fully distributed and an orderly market develops, the
prices at which trading in such stock occurs may fluctuate significantly. The
prices at which Marketing Common Stock trades will be determined by the
marketplace and may be influenced by many factors, including, among others, the
depth and liquidity of the market for Marketing Common Stock, investor
perception of Marketing and the industries in which Marketing participates,
Marketing's dividend policy and general economic and market conditions. See
"RISK FACTORS -- No Prior Market for Marketing Common Stock."
Shares of Marketing Common Stock have been approved for listing on The New
York Stock Exchange, subject to official notice of issuance, under the symbol
"GPM." Marketing initially will have approximately 3,000 stockholders of record
based upon the number of stockholders of record of Getty as of January 31, 1997.
For certain information regarding options to purchase Marketing Common Stock
that will be outstanding after the Distribution, see "RELATIONSHIP BETWEEN GETTY
AND MARKETING AFTER THE DISTRIBUTION -- Reorganization and Distribution
Agreement."
Getty received a no-action letter from the Staff of the Securities and
Exchange Commission (the "Commission Staff") on December 9, 1996, confirming,
among other things, Getty's view that the Distribution of Marketing Common Stock
does not require registration under the Securities Act of 1933, as amended (the
"Securities Act"). Based on such no-action letter, it is Marketing's belief that
Marketing Common Stock distributed to Getty's stockholders in the Distribution
will be freely transferable, except for securities received by persons who may
be deemed to be "affiliates" of Getty within the meaning of Rule 144
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of the Securities Act, which persons may not publicly offer or sell Marketing
Common Stock received in connection with the Distribution except pursuant to a
registration statement under the Securities Act or pursuant to Rule 144 (without
regard to holding period requirements thereunder).
FEDERAL INCOME TAX ASPECTS OF THE DISTRIBUTION
On September 11, 1996, the IRS issued a ruling to Getty providing, among
other things, that the Distribution will qualify as a tax free spin-off under
Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"), and
that, for Federal income tax purposes:
(1) No gain or loss will be recognized by (and no amount will be
included in the income of) a holder of Getty Common Stock upon the receipt
of Marketing Common Stock in the Distribution.
(2) The aggregate basis of the Getty Common Stock and the Marketing
Common Stock in the hands of the stockholders of Getty immediately after
the Distribution will be the same as the aggregate basis of the Getty
Common Stock held immediately before the Distribution, allocated in
proportion to the fair market value of each.
(3) Any stockholder of Getty receiving cash in lieu of fractional
Marketing Common Stock will recognize gain or loss equal to the difference
between the amount of cash received and the basis such stockholder would
have had in the fractional Marketing Common Stock.
(4) The holding period of the Marketing Common Stock received by the
stockholders of Getty will include the holding period of Getty Common Stock
with respect to which the Distribution will be made, provided that such
stockholder held the Getty Common Stock as a capital asset on the
Distribution Date.
(5) No gain or loss will be recognized by Getty upon the
Distribution.
The summary of federal income tax consequences set forth above does not
purport to cover all federal income tax consequences that may apply to all
categories of stockholders. All stockholders should consult their own tax
advisors regarding the particular federal, foreign, state and local tax
consequences of the Distribution to such stockholders.
For a description of the Tax Sharing Agreement pursuant to which Getty and
Marketing have provided for various tax matters, see "RELATIONSHIP BETWEEN GETTY
AND MARKETING AFTER THE DISTRIBUTION -- Tax Sharing Agreement."
REGULATORY APPROVALS
Marketing does not believe that any material federal or state regulatory
approvals will be necessary in connection with the Distribution other than motor
fuel and terminal licenses and permits that have been obtained or will have been
obtained prior to the Distribution or that Marketing expects to receive in due
course thereafter (and for which temporary arrangements have been made).
REASONS FOR FURNISHING THE INFORMATION STATEMENT
This Information Statement is being furnished by Getty solely to provide
information to Getty stockholders who will receive Marketing Common Stock in the
Distribution. It is not, and is not to be construed as, an inducement or
encouragement to buy or sell any securities of Getty or Marketing. The
information contained in this Information Statement is believed by Getty and
Marketing to be accurate as of the date set forth on its cover. Changes may
occur after that date, and neither Getty nor Marketing will update the
information except in the normal course of their respective public disclosure
practices.
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RELATIONSHIP BETWEEN GETTY AND MARKETING
AFTER THE DISTRIBUTION
For purposes of governing certain relationships between Getty and Marketing
after the Distribution and providing for an orderly transition, Getty and
Marketing have entered into or will enter into various agreements, including
those described below. Copies of certain of the agreements are included as
exhibits to Marketing's Registration Statement on Form 10 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), relating to the Marketing
Common Stock, and the following discussions with respect to such agreements are
qualified in their entirety by reference to the agreements as filed.
REORGANIZATION AND DISTRIBUTION AGREEMENT
Getty and Marketing have entered into a Reorganization and Distribution
Agreement (the "Distribution Agreement"), which provides for, among other
things, the principal corporate transactions required to effect the
Distribution, the transfer to Marketing of the assets of the petroleum marketing
business and the stock of the Transferred Subsidiaries, the division between
Getty and Marketing of certain liabilities and obligations, the distribution by
Getty of all outstanding shares of Marketing Common Stock to Getty stockholders
and certain other agreements governing the relationship between Getty and
Marketing after the Distribution.
Subject to certain exceptions, the Distribution Agreement provides for,
among other things, assumptions of obligations and liabilities and
cross-indemnities designed to allocate financial responsibility for the
obligations and liabilities arising out of or in connection with the Marketing
business to Marketing and its subsidiaries, and financial responsibility for the
obligations and liabilities arising out of or in connection with the real estate
business to Getty and its subsidiaries; provided, however, that Getty shall
retain all liabilities relating to (i) scheduled pre-closing environmental
liabilities and obligations, (ii) scheduled future Upgrades for Nonupgraded
USTs, and (iii) environmental liabilities and obligations arising out of
discharges with respect to Properties containing Nonupgraded USTs that are
discovered prior to the date such USTs are upgraded to meet the 1998 Standards.
Marketing will be responsible for all other environmental liabilities and
obligations relating to USTs or otherwise. The agreements executed in connection
with the Distribution Agreement set forth certain specific allocations of other
liabilities between Getty and Marketing. See "-- Tax Sharing Agreement" below.
Under the Distribution Agreement, Getty will retain all cash and equivalent
balances of Getty and its subsidiaries except for an amount sufficient to
provide Marketing with net working capital of approximately $1.1 million. The
cash necessary to provide Marketing with net working capital of $1.1 million
will be transferred to Marketing upon the determination of Marketing's net
working capital as of January 31, 1997, which determination is expected to be
made no later than March 31, 1997.
To avoid adversely affecting the intended tax consequences of the
Distribution and related transactions, the Distribution Agreement provides that,
until the second anniversary of the Distribution Date, Marketing must obtain an
opinion of counsel reasonably satisfactory to Getty or a supplemental tax ruling
before Marketing may make certain material dispositions of its assets, engage in
certain repurchases of Marketing capital stock or cease the active, independent
conduct of its business with its own employees. Marketing does not expect these
limitations to inhibit significantly its operations, growth opportunities or
ability to respond to unanticipated developments. Getty must also obtain an
opinion of counsel reasonably satisfactory to Marketing or a supplemental tax
ruling before Getty may engage in similar transactions during such period. See
"RISK FACTORS -- Certain Federal Income Tax Considerations." Getty does not
expect these limitations to inhibit significantly its operations, growth
opportunities or ability to respond to unanticipated developments.
The Distribution Agreement also provides that each of Marketing and Getty
will be granted access to certain records and information in the possession of
the other, and requires the retention by each of Marketing and Getty for a
period of ten years following the Distribution of all such information in its
possession, and thereafter requires that each party give the other prior notice
of its intention to dispose of such information. In addition, the Distribution
Agreement provides for the allocation of shared privileges with respect to
certain information (including, for example, the attorney-client privilege) and
requires each of Marketing and Getty to obtain the consent of the other prior to
waiving any shared privilege.
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The Distribution Agreement also provides for the allocation of certain
responsibilities with respect to employee compensation and benefits and labor
matters. The Distribution Agreement provides that Marketing will, or will cause
one or more of its subsidiaries to, assume or retain, as the case may be, all
obligations and liabilities of Getty, to the extent unpaid as of January 31,
1997, under employee benefit plans, policies, arrangements, contracts and
agreements, including collective bargaining agreements, with respect to
employees who will be employees of Marketing or its subsidiaries. The
Distribution Agreement also provides that Getty will, or will cause one or more
of its subsidiaries to, assume or retain, as the case may be, all obligations
and liabilities of Getty, to the extent unpaid as of January 31, 1997, under
employee benefit plans, policies, arrangements, contracts and agreements,
including collective bargaining agreements, with respect to employees who on or
after January 31, 1997 are employees of Getty.
In addition, the Distribution Agreement provides that, immediately prior to
the Distribution, each current holder of an option to acquire shares of Getty
pursuant to Getty's 1985, 1988 or 1991 Stock Option Plans will receive, in
exchange therefor, two separately exercisable options: one to purchase shares of
Getty Common Stock (a "Getty Option") and one to purchase Marketing Common Stock
(a "Marketing Option"), each exercisable for the same number of shares and
containing terms substantially equivalent in the aggregate to those of such
holder's pre-Distribution option. The exercise price for each Getty Option and
Marketing Option will be set so as to preserve the Aggregate Spread (as defined
below) in value attributed to the options currently held by holders, such
determination to be based on the average of the closing trading prices over a
designated 10 trading-day period with respect to Getty Common Stock and
Marketing Common Stock. The "Aggregate Spread" of an option is an amount
representing the difference between the exercise price of an option and the
price of a share of Getty Common Stock immediately prior to the Distribution
multiplied by the number of shares underlying such option.
The Distribution Agreement provides that, except as otherwise set forth
therein or in any related agreement, all costs and expenses in connection with
the Distribution will be charged to the party for whose benefit the expenses are
incurred.
MASTER LEASE AGREEMENT
Getty and Marketing have entered into a Master Lease Agreement (the "Master
Lease") under which service station and convenience store properties and
terminal facilities (the "Properties") are leased or subleased by Getty as the
Lessor to Marketing as the Lessee. The Properties will be used for gasoline
sales, convenience stores, and other complementary lawful uses in conjunction
with the sale of petroleum products or convenience store items, except when the
provisions of any underlying lease are more restrictive. Marketing may sublet
any property, provided that Marketing remains fully responsible for a
sublessee's performance and, except in cases of economic abandonment (as
described below), a sublease for uses other than those described above will
require Getty's consent. Except for certain environmental and UST obligations
described below, the Master Lease is a "triple-net" lease, with Marketing
assuming responsibility for the cost of all taxes, maintenance, repairs,
insurance and other operating expenses.
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The Properties leased or subleased by Getty to Marketing pursuant to the
Master Lease are as follows:
<TABLE>
<CAPTION>
NUMBER OF
DISTRIBUTION TERMINATION DATE UNDER
NUMBER OF TERMINALS AND THE MASTER LEASE (NOT
SERVICE STATIONS BULK PLANTS INCLUDING RENEWALS)
---------------- --------------- ------------------------
<S> <C> <C> <C>
Owned by Getty and Leased to Marketing........ 358 2 January 31, 2012
Leased by Getty from Power Test Realty Company
Limited Partnership* and
Subleased to Marketing...................... 265 5 January 31, 2012
Leased by Getty from Third Parties and
Subleased to Marketing...................... 414 3 Various dates coincident
with the termination
dates of the applicable
underlying leases, but
not later than January
31, 2012
----- --
1,037 10
</TABLE>
- ---------------
*See "CERTAIN TRANSACTIONS."
Rent for each of the Properties has been set using the fair market value of
each such Property, assuming the USTs have been upgraded to meet the 1998
Standards and such Properties are free of known environmental contamination,
since Getty is to be responsible for all such costs. Rent for each Property will
increase at the end of each five-year period by the net increase in the Consumer
Price Index for all items in the Northeast Region for such five-year period,
such increase not to exceed fifteen percent (15%). Rents for all Properties are
payable in advance on the first day of the month. The initial term of the Master
Lease is (i) fifteen years with respect to Properties owned in fee by Getty and
leased to Marketing and Properties leased by Getty from Power Test Realty
Company Limited Partnership and subleased to Marketing and (ii) the length of
time remaining under underlying lease terms (which ranges from one to fifteen
years under the Master Lease) with respect to other Properties leased by Getty
from other third parties and subleased to Marketing. See "CERTAIN TRANSACTIONS."
The Master Lease terms for each category of Properties described above also
include four ten-year renewal options (or, with respect to category (ii), such
shorter period as the underlying lease may provide), which may be exercised by
Marketing with two years advance notice on an individual property basis for all
Properties then subject to the Master Lease. For the subleased Properties, Getty
has agreed to use reasonable efforts to extend the underlying lease terms upon
conditions acceptable to Marketing. In the event that Marketing desires not to
renew the sublease upon terms (including any underlying lease term extensions
negotiated by Getty) available to it, Getty may extend or renew the lease and
sublease the property to a third party after the end of Marketing's term. The
Bylaws of Marketing contain a provision requiring that the renewal of leases
under the Master Lease, including the exercise of any renewal options, must be
approved by a majority of Directors, including, for so long as Outside Directors
(as defined below) are required to constitute a majority of the Board of
Directors, a majority of such Outside Directors. See "-- Board of Directors and
Management."
The Master Lease provides that if during the lease term, Marketing
determines that any of the leased premises have become uneconomic or unsuitable
for their use as a service station or convenience store and has discontinued use
of the Property or intends to discontinue use of the Property as a service
station or convenience store within one year of the date of said determination,
Marketing shall have the right to sublet the Property for any lawful use without
Getty's consent and, prior to the commencement of any such sublease term,
Marketing shall remove any USTs on the Property and thereafter perform all
requisite environmental investigations and/or remediations. Marketing shall have
the right of economic abandonment with respect to no more than ten Properties
during any fiscal year of the lease term. Marketing shall have no right of
economic abandonment for the terminal premises and the premises subject to third
party leases.
15
<PAGE> 22
Getty may terminate Marketing's right to possession of the Properties upon
the occurrence of an event of default, including a failure of Marketing to pay
rent due under the Master Lease timely or to comply with its covenants under the
Distribution Agreement.
Getty has agreed to deliver all Properties with active gasoline sales
licenses and permits, and to assist Marketing in the re-registration of all
licenses and permits in the name of Marketing as operator of the locations and
as owner of the underground tanks related thereto. The Master Lease provides
that Marketing may make any alterations consistent with the use of the
Properties as gasoline stations/convenience stores. Any other alterations
require Getty's consent, which will not be unreasonably withheld.
Pursuant to the Master Lease, Getty will be responsible and pay for, and
indemnify Marketing against, all pre-closing liabilities, including
environmental remediation and other matters specifically identified on the
relevant Master Lease schedule. Getty has also agreed to undertake to have all
USTs in compliance with federal underground storage tank regulations not later
than December 22, 1998. Since rental rates under the Master Lease assume that
the Properties comply with the 1998 Standards, in the event that Getty fails to
make the expenditures required for underground storage tank and environmental
compliance, Marketing will have the right to offset the costs of compliance
against its rental obligations under the Master Lease.
Marketing has agreed, pursuant to the Master Lease, to indemnify Getty
against, and be responsible for, all post-closing liabilities, except all
scheduled pre-closing environmental liabilities and obligations, all scheduled
future Upgrades to Nonupgraded USTs, and all environmental liabilities and
obligations arising out of discharges with respect to Properties containing
Nonupgraded USTs that are discovered prior to the date such USTs are upgraded to
meet the 1998 Standards.
TAX SHARING AGREEMENT
Getty and Marketing have entered into a tax sharing agreement (the "Tax
Sharing Agreement") that defines the parties' rights and obligations with
respect to filing of returns, payments, deficiencies and refunds of federal,
state and other income, franchise or motor fuel taxes relating to Getty's
business for tax years prior to and including the Distribution and with respect
to certain tax attributes of Getty after the Distribution. In general, with
respect to periods ending on or before the last day of the taxable year in which
the Distribution occurs, Getty is responsible for (i) filing both consolidated
federal tax returns for the Getty affiliated group and combined or consolidated
state tax returns for any group that includes a member of the Getty affiliated
group, including in each case Marketing and its subsidiaries for the relevant
periods of time that such companies were members of the applicable group, and
(ii) paying the taxes relating to such returns (including any subsequent
adjustments resulting from the redetermination of such tax liabilities by the
applicable taxing authorities). Marketing is responsible for filing returns and
paying taxes relating to any member of the Marketing affiliated group for
periods that begin before and end after the Distribution and for periods that
begin after the Distribution. Getty and Marketing have agreed to cooperate with
each other and to share information in preparing such tax returns and in dealing
with other tax matters.
SERVICES AGREEMENT
Pursuant to the terms of the Distribution Agreement, and as a condition
precedent to the consummation of the transactions contemplated thereby, Getty
and Marketing have entered into a Services Agreement (the "Services Agreement"),
under the terms of which Marketing will provide certain administrative and
technical services to Getty and Getty will provide certain limited services to
Marketing. The term of the Services Agreement is two years, except that it may
be earlier terminated in whole or in part by either party upon 120 days' notice.
The types of services to be provided pursuant to the Services Agreement by
Marketing, through its employees, include financial reporting, accounting, data
processing, tax, legal, treasury, credit, office services, insurance, human
resources, engineering and environmental. The monthly fees to be paid by Getty
for each type of service are set forth in the Services Agreement and may change
dependent upon the level of activity with respect to any service compared to the
level prior to the execution of the Services Agreement.
Getty will provide certain services on a transition basis to Marketing
pursuant to the Services Agreement, including acting as agent for Marketing with
respect to certain motor fuel licenses or permits pending their
16
<PAGE> 23
transfer to Marketing and for collection of certain amounts via electronic funds
transfer due from Getty dealers whose distribution contracts will be transferred
to Marketing.
Marketing estimates that the net fees to be paid by Getty to Marketing for
services performed (after deducting the fees paid by Marketing to Getty for
services provided by Getty) will initially be approximately $80,000 per month,
which amount takes into account Marketing's additional costs related to
providing such services, and will decline as the services performed decrease.
Getty presently expects that most of such services will be provided by Marketing
for approximately one year.
TRADEMARK LICENSE AGREEMENT
Getty and Marketing have entered into a Trademark License Agreement (the
"Trademark License Agreement") providing for the license to Marketing of certain
Getty trademarks, service marks and trade names, including the name "Getty" (the
"Licensed Marks") used in connection with Marketing's business. Under the
Trademark License Agreement, Getty granted to Marketing an exclusive,
royalty-free license to use the Licensed Marks within the territory specified in
the Trademark License Agreement. Subject to the consent of Getty, which consent
is not to be unreasonably withheld, Marketing may sublicense the Licensed Marks
to retailers or wholesalers of petroleum and other related products within the
territory, including but not limited to service station retailers, jobbers and
distributors, subject to the terms of the Trademark License Agreement. The term
of the Trademark License Agreement will be 55 years. In the event that the
Master Lease terminates prior thereto, then commencing on the termination date,
the license shall become non-exclusive in all areas, including the territory
specified in the Trademark License Agreement, and Marketing shall pay to Getty a
rental fee for the use and maintenance of Getty signage and related items based
on gross revenues generated and/or gallonage sold under the Licensed Marks at a
rate customary and reasonable in the trade. Under the Trademark License
Agreement, Marketing has an option to expand the license on a non-exclusive
basis to additional states within the United States in which Marketing may
expand its marketing business. In the event that Marketing were to exercise any
option to expand the licensed territory, Marketing would be obligated to pay a
signage rental fee determined as described above.
BOARD OF DIRECTORS AND MANAGEMENT
Initially, the Marketing Board will consist of five directors. Following
the Distribution, Mr. Leo Liebowitz and Mr. Milton Safenowitz will serve as
directors of Marketing and will continue to serve as directors of Getty. The
Bylaws of Marketing (the "Marketing Bylaws") provide that a majority of the
entire Board of Directors may increase or decrease the number of directors,
provided that the number thereof shall never be less than the minimum number
required by Maryland General Corporation Law (the "MGCL"), nor more than
fifteen. The tenure of office of any director shall not be affected by any
increase or decrease in the number of directors. The Marketing Bylaws also
require that until the earlier of (i) such time as Mr. Leo Liebowitz, Mr. Milton
Safenowitz and Mr. Milton Cooper and their related parties collectively own less
than 15% of the voting stock of Getty or Marketing or (ii) the Master Lease
terminates or expires, a majority of the Marketing Board shall be comprised of
persons (the "Outside Directors") who are neither (x) owners of voting stock in
excess of 5% of the outstanding voting stock of Getty nor (y) directors or
officers of Getty. See "MANAGEMENT -- Security Ownership of Directors, Executive
Officers and 5% Owners." As a result, following the Distribution, three members
of the five person Marketing Board will be Outside Directors.
Although Mr. Liebowitz will serve as President and Chief Executive Officer
of both Marketing and Getty, it is not currently anticipated that at the time of
and subsequent to the Distribution any other persons will serve as officers of
both companies. It is anticipated that the majority of Getty's officers and
employees will become officers and employees of Marketing, whose services will
thereafter become available to Getty pursuant to the Services Agreement. See
"MANAGEMENT."
FINANCING -- CREDIT LINES
Marketing has obtained uncommitted lines of credit in an aggregate amount
of $50 million to meet its working capital needs. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Liquidity and
Capital Resources."
17
<PAGE> 24
SELECTED CONSOLIDATED FINANCIAL INFORMATION
GETTY PETROLEUM MARKETING INC.
The following selected consolidated financial information of Marketing
should be read in conjunction with the consolidated historical and pro forma
financial statements and notes thereto included elsewhere in this Information
Statement. Selected consolidated financial information relates to the business
of Marketing as it was operated by Getty. The following selected consolidated
financial data are derived from the consolidated historical financial statements
of Marketing for the five fiscal years ended January 31, 1996 and the unaudited
consolidated historical financial statements of Marketing for the nine months
ended October 31, 1996 and 1995. In the opinion of management, the unaudited
consolidated financial statements at October 31, 1996 and 1995 reflect all
adjustments (consisting of normal recurring accruals) necessary to present
fairly the financial position and results of operations of Marketing for such
interim periods. The consolidated financial statements of Marketing are derived
from the consolidated historical financial statements of Getty and may not
reflect the financial position or results of operations that would have been
obtained had Marketing been a separate, publicly held company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JANUARY 31, OCTOBER 31,
------------------------------------------------------ -------------------
1992 1993 1994 1995 1996 1995 1996
---------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Net sales............................... $1,094,316 $878,937 $747,667 $723,875 $758,887 $574,021 $617,168
Rental income........................... 24,819 27,324 28,443 29,860 32,025 23,949 24,904
Other income............................ 2,041 395 175 -- 282 279 153
---------- -------- -------- -------- -------- -------- --------
1,121,176 906,656 776,285 753,735 791,194 598,249 642,225
---------- -------- -------- -------- -------- -------- --------
Cost of sales (excluding depreciation
and amortization)..................... 1,100,740 880,606 738,261 721,354 750,680 569,354 619,930
Selling, general and administrative
expenses.............................. 33,256 25,580 23,262 22,588 20,702 15,846 15,403
Restructuring charges................... -- -- -- 1,846 -- -- --
Interest expense........................ 212 302 226 285 388 291 352
Depreciation and amortization........... 12,616 11,491 11,718 11,640 13,099 9,580 10,159
---------- -------- -------- -------- -------- -------- --------
1,146,824 917,979 773,467 757,713 784,869 595,071 645,844
---------- -------- -------- -------- -------- -------- --------
Earnings (loss) before provision
(credit) for income and cumulative
effect of accounting change........... (25,648) (11,323) 2,818 (3,978) 6,325 3,178 (3,619)
Provision (credit) for income taxes..... (8,990) (4,020) 1,000 (1,544) 2,379 1,195 (1,527)
---------- -------- -------- -------- -------- -------- --------
Earnings (loss) before cumulative effect
of accounting change.................. (16,658) (7,303) 1,818 (2,434) 3,946 1,983 (2,092)
Cumulative effect of accounting
change(a)............................. -- -- -- -- (282) (282) --
---------- -------- -------- -------- -------- -------- --------
Net earnings (loss)(b).................. $ (16,658) $ (7,303) $ 1,818 $ (2,434) $ 3,664 $ 1,701 $ (2,092)
========== ======== ======== ======== ======== ======== ========
Pro forma net earnings (loss)(b)(c)..... $ 3,302(d) $ (2,575)
======== ========
Pro forma per share data(b)(c)(e):
Net earnings (loss) per share......... $.25(d) $(.19)
======== ========
Weighted average shares outstanding... 13,315 13,340
======== ========
BALANCE SHEET DATA AT END OF PERIOD:
Total assets............................ $ 131,208 $112,413 $111,515 $117,097 $124,498 $123,638 $128,879
Working capital (deficit)............... 13,208 (18,215) (16,425) (23,221) (8,723) (14,447) (17,162)
Pro forma working capital(f)............ 1,100
Stockholders' equity.................... 70,813 39,811 41,991 37,061 50,311 46,809 44,027
Pro forma stockholders' equity(f)....... 62,289
</TABLE>
- ---------------
(a) Represents charge of $282, or $.02 per share, from the cumulative effect of
adopting Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of."
(b) In the fourth quarter of fiscal 1997, Marketing will record a pre-tax
charge of $21.2 million for estimated environmental remediation expenses.
See Note 6 to the consolidated financial statements. Such charge has not
been included in the pro forma consolidated financial statements.
(c) Pro forma net earnings (loss) reflect additional rent to be paid to Getty
by Marketing as provided for in the Master Lease and additional costs
Marketing will incur in operating as a separate public company. Commencing
February 1, 1997, Marketing will recognize a charge to operating results
over a five-year period relating to the Marketing ESOP and will also
recognize a charge to operations relating to certain change in control
agreements. Such charges, which are not reflected in the pro forma
consolidated financial statements, will be based on the value of the
Marketing Common Stock in the future and, as such, are not currently
determinable.
(d) Excludes charge of $282, or $.02 per share, described in note (a).
(e) Pro forma per share data is computed by dividing earnings (loss) by the
weighted average number of shares of Marketing Common Stock that would have
been outstanding during the period had the Distribution taken place as of
the beginning of such period and had an additional 667,000 shares
associated with the Marketing ESOP been issued.
(f) Pro forma working capital and stockholders' equity reflect a cash transfer
from Getty in an amount sufficient to provide Marketing with net working
capital of approximately $1.1 million in accordance with the Distribution
Agreement.
18
<PAGE> 25
GETTY PETROLEUM MARKETING INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
consolidated financial statements of Marketing appearing elsewhere in this
Information Statement. The results set forth in the consolidated financial
statements of Marketing should not be taken as indicative of future operations.
Marketing's results of operations in future periods will reflect certain
expenses not incurred in prior periods associated with operating and reporting
as a separate, publicly held company.
The consolidated financial statements contained in this Information
Statement have been prepared on the basis that the assets and liabilities of the
petroleum marketing business were transferred using historical carrying values
as recorded by Getty, and Marketing's results of operations and cash flows were
derived from Getty's historical financial statements. The consolidated financial
statements of Marketing reflect all costs of doing business. Historical rental
expense to Realty was established on the basis of the fair market value of the
leased properties, which assumed that the properties have been upgraded to meet
the 1998 Standards and are free of known environmental contamination, since
Realty is responsible for all such costs as described under "-- Environmental
Matters" below.
Assets, liabilities, revenues and expenses were specifically identified as
being related to either the business of Marketing or Realty, except that
Marketing's results of operations include allocations of certain selling,
general and administrative expenses, namely employee benefits, payroll taxes and
travel and entertainment expenses. These expenses were allocated based on number
of personnel and salaries specifically identified to Marketing. Management
believes these allocations to be reasonable. Assets, liabilities, revenues and
expenses specifically identified were as follows (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED NINE MONTHS ENDED
JANUARY 31, 1996 OCTOBER 31, 1996
------------------------------------ ------------------------------------
MARKETING REALTY MARKETING REALTY
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Total assets.................. $ 124,498 $ 136,968 $ 128,879 $ 145,239
Total liabilities............. 74,187 76,705 84,852 75,038
Revenues...................... 791,194 90,837(a) 642,225 62,929(a)
Expenses...................... 784,869(a)(b) 75,640(b) 645,844(a)(b) 51,428(b)
</TABLE>
- ---------------
(a) Includes $55,130 and $42,132 of rental payments paid by Marketing to Realty
for the fiscal year ended January 31, 1996 and the nine months ended October
31, 1996, respectively.
(b) Includes $1,546 and $1,348 of selling, general and administration expenses
allocated from Realty to Marketing for the fiscal year ended January 31,
1996 and the nine months ended October 31, 1996, respectively.
OVERVIEW AND OUTLOOK
Marketing's revenues are derived primarily from its operations in the motor
fuel marketing business. Marketing is one of the nation's largest independent
marketers of petroleum products; it distributes, markets and sells gasoline and
diesel fuel to the general public through a network of 1,574 Getty and other
branded retail outlets (also referred to as service stations) located in 12
Northeastern and Mid-Atlantic states. Approximately 30% of the service stations
also have convenience food stores. Marketing purchases its gasoline, fuel oil
and related petroleum products from a number of Northeast and Mid-Atlantic
suppliers. These products are delivered by cargo ship, barge, pipeline and truck
to Marketing's 10 storage and distribution terminals and bulk plants, all of
which are located in Marketing's distribution region. Marketing distributes and
markets its product to retail outlets through its distribution network and truck
transportation fleet of 141 vehicles. Marketing engages in activities such as
negotiating the prices and terms of the purchase of the gasoline and diesel
fuel, developing the prices, terms and methods of selling the products to
consumers and operators of motor fuel service stations, monitoring compliance by
the service station operators with Getty standards and providing marketing
services to the operators.
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<PAGE> 26
Marketing derives revenues from its wholesale petroleum marketing and
distribution business, which involves the sale of gasoline, fuel oil, diesel
fuel and kerosene from distribution terminals and bulk plants in truckload,
barge and pipeline quantities, as well as from its home heating oil business,
which involves the purchase, storage, transportation and sale of fuel oil,
kerosene, propane and oil burner and related services to residential and
commercial customers in the New York Mid-Hudson Valley.
The distribution of motor fuels accounted for approximately 96% of net
sales in each of the three fiscal years ended January 31, 1996. Petroleum
products are commodities whose prices depend on numerous factors beyond
Marketing's control. The prices paid by Marketing for its products are affected
by global, national and regional factors and may vary substantially over time.
From time to time, competitive market conditions may limit Marketing's ability
to pass on to its customers large, rapid changes in the price Marketing pays for
its product and accordingly, its operating margins may vary substantially.
Because Marketing's operating margins may vary significantly from time to time
while its rental expense and certain of its other expenses do not, Marketing's
earnings may fluctuate substantially.
RESULTS OF OPERATIONS
Nine months ended October 31, 1996 compared to nine months ended October 31,
1995
Marketing's net sales for the nine months ended October 31, 1996
were $617.2 million as compared with $574.0 million for the same period last
year or an increase of 7.5%. Of the 7.5% increase in net sales, two-thirds was
attributable to an increase in sales prices and the balance was due to an
increase in sales volume. Average selling prices increased by 5% and retail
gallonage sold increased by 30.3 million gallons or 5.6% to 570.4 million
gallons, partially offset by a 13.3 million gallon or 7.1% decrease in wholesale
gallonage sold to 174.7 million gallons. The average gasoline volume per retail
outlet increased by 6.3% in the nine month period ended October 31, 1996. Gross
profit before depreciation and amortization (excluding rental and other income)
was a loss of $2.8 million for the nine months ended October 31, 1996 compared
to a profit of $4.7 million in the comparable period last year. This $7.5
million decrease in gross profit was principally due to lower retail product
margins of approximately 1.1 cents per gallon or $6.9 million, a LIFO inventory
charge of $4.0 million and a decrease of $0.3 million from a wholesale sales
volume decrease of 13.3 million gallons during the nine months ended October 31,
1996. This decrease was partially offset by increased retail sales volumes of
30.3 million gallons or $2.9 million and an increase in wholesale product
margins of approximately 0.5 cents per gallon or $1.0 million. The LIFO
inventory charge was the result of product cost increases of approximately 16
cents per gallon from January 31, 1996 to October 31, 1996.
Marketing's earnings depend largely on retail marketing margins and rental
income from its dealers. The petroleum marketing industry has been and continues
to be volatile and highly competitive. The cost of petroleum products purchased
by Marketing as well as the price of petroleum products sold have fluctuated
widely in the past. As a result of the historic volatility of product margins
and the fact that they are affected by numerous diverse factors, it is
impossible to predict future margin levels. Marketing believes that it has only
been modestly affected by inflation since increased costs are passed along to
its customers to the extent permitted by competition.
Rental income for the nine months ended October 31, 1996 amounted to $24.9
million as compared with $23.9 million for the nine months ended October 31,
1995. The 4.0% increase was about equally due to rent escalations provided under
existing lease agreements, lease renewals and higher rentals as a result of
improvements to the facilities.
Other income was $0.2 million for the nine months ended October 31, 1996,
which was comparable to the nine months ended October 31, 1995.
Selling, general and administrative expenses for the nine months ended
October 31, 1996 amounted to $15.4 million, which was comparable to the $15.8
million for the nine months ended October 31, 1995.
Depreciation and amortization was $10.2 million for the nine months ended
October 31, 1996 compared to $9.6 million for the nine months ended October 31,
1995. The increase was due to higher depreciation as a result of additions to
equipment and improvements to facilities.
20
<PAGE> 27
The results for the nine months ended October 31, 1995 reflect a charge to
earnings of $0.3 million relating to assets held for disposal for the cumulative
effect of adopting at the end of that fiscal year Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of."
In October 1995, SFAS No. 123, "Accounting for Stock-Based Compensation"
was issued. The Statement, which becomes effective in fiscal 1997, defines a
fair value based method of accounting for employee stock options and allows
companies to continue to measure compensation cost for such options by using the
intrinsic value based method of accounting prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25").
Marketing plans to account for its stock-based employee compensation plans under
APB No. 25 and effective with the fiscal 1997 consolidated financial statements
will present, in the footnotes, as required under SFAS No. 123, pro forma
disclosures of net income and earnings per share as if the fair value method had
been applied.
Fiscal year ended January 31, 1996 compared to fiscal year ended January 31,
1995
Marketing's net sales for the year ended January 31, 1996 ("fiscal 1996")
were $758.9 million as compared with $723.9 million for the year ended January
31, 1995 ("fiscal 1995"). The increase in net sales of 4.8% was primarily a
result of an increase in average selling prices of 9.6%, partially offset by
lower sales volume. Wholesale gallonage sold decreased by 18.8% or 58.9 million
gallons (primarily bulk sales) to 254.1 million gallons, partially offset by a
1.9% or 13.9 million gallon increase in retail gallonage sold to 741.7 million
gallons through 6.1% fewer outlets. The average gasoline volume per retail
outlet increased by 9%. Gross profit before depreciation and amortization
(excluding rental and other income) was $8.2 million in fiscal 1996 compared to
$2.5 million in the prior fiscal year. This $5.7 million increase in gross
profit was principally due to higher wholesale product margins of approximately
$3.0 million and gross profit of approximately $1.6 million from increased
retail sales volumes.
Rental income of $32.0 million in fiscal 1996 increased 7.3% over fiscal
1995 rental income of $29.9 million. The increase was about equally due to rent
escalations provided under existing lease agreements, lease renewals and higher
rentals as a result of improvements to the facilities.
Selling, general and administrative expenses in fiscal 1996 amounted to
$20.7 million, a decrease of $1.9 million from the prior year. The decrease was
principally due to lower expenses as a result of the October 1994 restructuring.
Depreciation and amortization in fiscal 1996 amounted to $13.1 million, an
increase of $1.5 million over the prior year. The increase was due to higher
depreciation as a result of additions to equipment and improvements to
facilities. The current fiscal year also included $0.3 million of additional
depreciation relating to operating assets as a result of the adoption of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of."
In addition to the above-mentioned $0.3 million charge to depreciation
expense for operating assets, Marketing also separately reported, for assets
held for disposal, the cumulative effect of the change in accounting principle
related to SFAS No. 121 as a charge to earnings of $0.3 million in the
consolidated statement of operations.
Fiscal year ended January 31, 1995 compared to fiscal year ended January 31,
1994
Marketing's net sales for fiscal 1995 were $723.9 million as compared with
$747.7 million in the year ended January 31, 1994 ("fiscal 1994") or a decrease
of 3.2%. Of the 3.2% decrease in net sales, two-thirds was attributable to a
decrease in sales volume and the balance was due to a decrease in sales prices.
Wholesale gallonage sold decreased by 11.9% or 42.2 million gallons to 313.1
million gallons and average selling prices decreased by 1%. This was partially
offset by a 2.7% or 19.2 million gallon increase in retail gallonage sold to
727.8 million gallons through 7.8% fewer outlets. Gross profit before
depreciation and amortization (excluding rental and other income) was $2.5
million in fiscal 1995 compared to $9.4 million in the prior fiscal year. This
$6.9 million decrease in gross profit was principally due to lower retail gross
margins of approximately 1.7 cents per gallon or $12.0 million, partially offset
by gross profit of $2.2 million realized from increased retail sales volumes and
lower net credit card expenses of $1.2 million.
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<PAGE> 28
Rental income of $29.9 million in fiscal 1995 increased 5.0% over fiscal
1994 rental income of $28.4 million. The increase was about equally due to rent
escalations provided under existing lease agreements, lease renewals and higher
rentals as a result of improvements to the facilities.
Selling, general and administrative expenses in fiscal 1995 amounted to
$22.6 million, a decrease of $0.7 million from the prior year. The decrease
principally occurred in the fourth quarter of fiscal 1995 as a result of a
restructuring of Marketing's organization and operations in October 1994.
During fiscal 1995, pre-tax charges of $1,846,000 were recorded to provide
for severance and other costs associated with the October 1994 restructuring of
Marketing's organization and its operations. The restructuring charges included
$1,171,000 for severance and related benefits resulting from a 6% reduction in
the work force and $675,000 for other costs. Other costs include $203,000
related to cancellation of computer equipment leases, $168,000 related to
computer system modifications, $141,000 related to the reduction of office
space, $100,000 related to legal fees and $63,000 for other miscellaneous costs.
Marketing's consolidated balance sheets as of January 31, 1996 and 1995 included
an accrual of $326,000 and $1,048,000, respectively, relating to the
restructuring. The remaining accrual of $326,000 at January 31, 1996 relates to
severance and related benefits payable through October 1999.
Depreciation and amortization was $11.6 million in fiscal 1995 which was
comparable to the amount in fiscal 1994.
LIQUIDITY AND CAPITAL RESOURCES
As of October 31, 1996, Marketing's working capital deficit amounted to
$17.2 million as compared to a deficit of $8.7 million at January 31, 1996.
Marketing's working capital deficits result from its historical practice of
transferring substantially all of its cash balances to Getty for centralized
cash management purposes. However, under the Distribution Agreement, Marketing
will receive cash from Getty in an amount sufficient to provide Marketing with
net working capital of approximately $1.1 million. Such cash amount will be paid
upon the determination of Marketing's net working capital as of January 31,
1997, which determination is expected to be made no later than March 31, 1997.
See Unaudited Pro Forma Consolidated Financial Statements.
Marketing has been able to operate its business with negative working
capital, principally because most sales are for cash and payment terms have been
received from vendors and for gasoline taxes. Marketing's principal sources of
liquidity are cash flows from operations, which amounted to $18 million during
the nine months ended October 31, 1996. Management believes that cash
requirements for operations, including payments under the Master Lease Agreement
and capital expenditures, can be met by cash flows from operations, cash and
cash equivalents and credit lines. Marketing has obtained uncommitted lines of
credit with two banks in the aggregate amount of $50 million through January
1998, which may be utilized for working capital borrowings and letters of
credit. Borrowings under such lines of credit are unsecured and will bear
interest at the applicable bank's prime rate or, at Marketing's option, 1.1%
above LIBOR. Such lines of credit are subject to renewal at the discretion of
the banks. These banks have historically provided similar lines of credit to
Getty in an aggregate amount of $60 million.
During fiscal 1996, Marketing concluded agreements with a number of
Northeast suppliers, replacing the previous supply agreement with Phibro Energy
USA, Inc. which was phased out through August 31, 1995. As a result, during
fiscal 1996 cash was utilized principally for higher inventory levels and lower
product payable balances, partially offset by higher gasoline taxes payable. The
benefits of the new supply agreements included improved logistics and greater
flexibility which has become increasingly important with the introduction of
reformulated gasolines. Also contributing to higher inventory and lower accounts
receivable balances in fiscal 1996 was an increase in the number of commission
lessee accounts (for which Marketing owns the inventory at the retail outlets),
and a decrease in the number of wholesale customers (which have longer credit
terms).
Marketing and Realty have entered into a Master Lease Agreement under which
1,037 retail outlets and 10 terminal facilities will be leased or subleased by
Realty as the lessor to Marketing as the lessee. During the first year following
the Distribution, the annual rental under the Master Lease will be approximately
$56.9 million, compared to approximately $56.1 million for the fiscal year ended
January 31, 1997.
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<PAGE> 29
Marketing's capital expenditures for the years ended January 31, 1996, 1995
and 1994 amounted to $15.9 million, $16.8 million and $14.3 million,
respectively, which included $8.6 million, $6.5 million and $7.7 million,
respectively, for the replacement of USTs. Marketing's capital expenditures for
the nine months ended October 31, 1996 amounted to $13.8 million, which included
$7.4 million for UST replacements. Marketing's capital expenditures also include
discretionary expenditures to improve the image of the service stations, to
improve the terminal facilities and for routine replacement of service station
equipment at existing and newly acquired locations. Pursuant to the Distribution
Agreement, commencing February 1, 1997, expenditures with respect to tank
replacements required to meet the 1998 Standards will be the responsibility of
and will be paid by Getty.
ENVIRONMENTAL MATTERS
The petroleum products industry is subject to numerous existing federal,
state and local laws and regulations, including matters relating to the
protection of the environment. Environmental expenses have been attributable to
remediation, monitoring, soil disposal and governmental agency reporting
(collectively, "Remediation Costs") incurred in connection with contaminated
sites and the replacement or upgrading of underground storage tanks, related
piping, underground pumps, wiring and monitoring devices (collectively, the
"USTs") to meet federal, state and local environmental standards, as well as
routine monitoring and tank testing. Environmental exposures are difficult to
assess and estimate for numerous reasons, including the extent of contamination,
alternative treatment methods that may be applied, location of the property
which subjects it to differing local laws and regulations and their
interpretations, as well as the time it takes to remediate contamination. In
developing the estimates of environmental remediation costs, consideration is
given to, among other things, enacted laws and regulations, assessments of
contamination, currently available technologies for treatment, alternative
methods of remediation and prior experience. Estimates of such costs are subject
to change as contingencies become more clearly defined and remediation treatment
progresses. For the years ended January 31, 1996, 1995 and 1994, net
environmental expenses included in Marketing's cost of sales amounted to
$14,346,000, $11,769,000 and $9,673,000, respectively, which amounts were net of
probable recoveries from state UST remediation funds.
During the fourth quarter of fiscal 1997, the Getty Board formally approved
the Distribution. Under the Master Lease, Getty committed to a program to bring
the leased properties to regulatory closure and, thereafter, transfer all future
environmental risks from Getty to Marketing. Upon achieving closure of each
individual site, Getty's environmental liability under the Master Lease for that
site will be satisfied, and future remediation obligations will be the
responsibility of Marketing. In order to establish the Remediation Costs
obligation and estimate the incremental cost of accelerated remediation,
Marketing and Getty commissioned a detailed property-by-property environmental
study of all retail outlets, with the objective of achieving closure in
approximately five years. This acceleration program, utilizing new, more
effective remediation techniques, will result in a substantial increase in
environmental costs over those that had been previously identified and accrued,
as the acceleration program contemplates the use of additional active
remediation systems at many sites in lieu of relying on periodic monitoring and
natural attenuation permitted by applicable environmental regulations. As a
result, Marketing revised its estimate of future Remediation Costs in the fourth
quarter of fiscal 1997 and will record a pre-tax charge in such quarter for
Remediation Costs of $21.2 million. The pre-tax charge resulted from the
acceleration of remediation activities to be paid by Getty through more
aggressive means of treating contaminated sites to bring them to closure in
approximately five years, which resulted in significant incremental Remediation
Costs, changes in estimated Remediation Costs at previously identified
properties, including costs to be incurred in connection with UST upgrades, and
additional charges to comply with AICPA Statement of Position 96-1,
"Environmental Remediation Liabilities."
Getty has agreed to pay all costs relating to, and to indemnify Marketing
for, all scheduled known pre-Distribution environmental liabilities and
obligations, all scheduled future upgrades necessary to cause USTs to conform to
the 1998 Standards, and all environmental liabilities and obligations arising
out of discharges with respect to properties containing USTs that have not been
upgraded to meet the 1998 Standards that are discovered prior to the date such
USTs are upgraded to meet the 1998 Standards (collectively, the "Getty
Environmental Liabilities"). Getty will also collect recoveries from state UST
remediation funds related to Getty Environmental Liabilities.
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<PAGE> 30
Marketing has not reflected a liability for the Getty Environmental
Liabilities in its consolidated balance sheet since Getty remains the primary
obligor for such liabilities. The liabilities, which were initially recorded in
Marketing's balance sheet, were subsequently capitalized into stockholders'
equity as a contribution to capital by Getty to Marketing. In the unlikely event
that Getty fails to remediate a contaminated property and Marketing is held
jointly and severally responsible for the Remediation Costs, Getty is obligated
to indemnify Marketing, and any Remediation Costs paid by Marketing will be
offset against Marketing's rental obligations under the Master Lease. Because of
such rental offset, it is remote that Marketing would incur any incremental
costs in connection with any such remediation.
Marketing will be responsible for and will indemnify Getty with respect to
all environmental obligations and liabilities other than the Getty Environmental
Liabilities. No amounts have been included for Marketing environmental
obligations and liabilities as such amounts are not currently probable and
estimable. However, future environmental expenditures may have a significant
impact on results of operations for any single fiscal year or interim period,
though Marketing believes that such costs will not have a material adverse
effect on Marketing's financial position.
Marketing cannot predict what environmental legislation or regulation may
be enacted in the future or how existing laws or regulations will be
administered or interpreted with respect to products or activities to which they
have not previously been applied. Compliance with more stringent laws or
regulations as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws which may develop in the
future, could have an adverse effect on the financial position or operations of
Marketing and could require substantial additional expenditures for future
remediation or the installation and operation of required environmental or
pollution control systems and equipment.
TERMINATION OF UNI-MARTS AGREEMENTS
On December 27, 1996, Uni-Marts, Inc. ("Uni-Marts") notified Getty that,
effective December 31, 1997, it would not renew its various leases and subleases
of approximately 100 service station properties from Getty or the existing
petroleum supply agreement between Getty and Uni-Marts with respect to such
service stations and certain additional service stations owned or operated by
Uni-Marts. Uni-Marts subsequently advised Getty by letter that it may be
interested in negotiating and entering into revised arrangements. While Getty
has preliminarily discussed such matters with Uni-Marts, there can be no
assurance that any revised terms will be agreed upon. In connection with the
Distribution, Marketing will become a party to the existing supply agreement and
the sublessor or sub-sublessor under the leases and subleases with Uni-Marts. In
the event the parties do not agree upon any revised arrangements prior to
December 31, 1997, Marketing believes that it will be able to re-lease the
approximately 100 affected service station properties. The loss of motor fuel
product sales to Uni-Marts pursuant to the existing supply agreement, if not
replaced, could have a material adverse effect on Marketing's revenues.
Marketing believes such loss of product sales would not impact its operating
income because the affected leased service station properties should be
re-leased to retail dealers at higher retail product margins to be realized by
Marketing than the current lower wholesale product margins under the supply
agreement with Uni-Marts. Net sales and rental income attributable to the
Uni-Marts agreement amounted to $76.8 million (or 10.1% of net sales) and $4.6
million (or 14.3% of rental income), respectively, for the year ended January
31, 1996 and $66.5 million (or 10.8% of net sales) and $3.4 million (or 13.8% of
rental income), respectively, for the nine months ended October 31, 1996.
DIVIDEND POLICY
The payment and amount of cash dividends on Marketing Common Stock after
the Distribution will be subject to the discretion of the Marketing Board.
Marketing's dividend policy will be reviewed by Marketing's Board of Directors
from time to time as may be appropriate and payment of dividends on Marketing
Common Stock will depend upon Marketing's financial position, capital
requirements and other factors as the Marketing Board deems relevant. Subject to
the foregoing, Marketing may declare and pay dividends after the Distribution,
although there can be no assurance that any dividends will be paid in the future
or at what level.
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<PAGE> 31
BUSINESS
Getty Petroleum Marketing Inc. was incorporated in Maryland on October 1,
1996, to be the successor to the petroleum marketing and New York Mid-Hudson
Valley home heating oil businesses of Getty. Its principal executive offices are
located at 125 Jericho Turnpike, Jericho, New York 11753. Unless otherwise
indicated, references in this section to Marketing refer to the petroleum
marketing business of Getty to be owned and operated by Marketing after the
Distribution, and references in this section to Getty refer to Getty Petroleum
Corp. prior to the Distribution Date and Getty Realty Corp. on and subsequent to
the Distribution Date.
GENERAL
Marketing, together with its subsidiaries, is one of the nation's largest
independent marketers of petroleum products. Marketing serves retail and
wholesale customers through a distribution and marketing network of 1,574
Getty(R) and other branded retail outlets (also referred to as "service
stations") located in 12 Northeastern and Mid-Atlantic states, of which
approximately 30% have convenience food stores. Marketing stores and distributes
petroleum products from 10 distribution terminals and bulk plants. Marketing
purchases gasoline, fuel oil and related petroleum products from a number of
Northeast and Mid-Atlantic suppliers. These products are delivered by cargo
ship, barge, pipeline and truck to Marketing's distribution terminals and bulk
plants located in Marketing's marketing region. Through its truck transportation
fleet of 141 vehicles and its distribution network, Marketing markets and
distributes such products throughout its 12 state marketing region. Of the 1,574
retail outlets supplied by Marketing at October 31, 1996, approximately 65% are
held by Marketing under long-term leases or subleases with Getty and certain of
its subsidiaries. The remaining retail outlets purchase petroleum products from
Marketing under contract as licensed Getty dealers or from licensed Getty
distributors who purchase Getty products from Marketing. The distribution of
motor fuels accounted for approximately 96% of net sales in each of the three
fiscal years ended January 31, 1996. Marketing also sells on a wholesale basis
gasoline, fuel oil, diesel fuel and kerosene from distribution terminals and
bulk plants in truckload, barge and pipeline quantities and sells fuel oil,
kerosene, propane and oil burner and related services to residential, commercial
and governmental customers in New York's Mid-Hudson Valley.
Marketing and its predecessors have been in the petroleum marketing
business for over 40 years. Mr. Leo Liebowitz, Chairman and Chief Executive
Officer and a director of Marketing, and Mr. Milton Safenowitz, a director and
former executive vice president of Marketing's predecessors, entered the
petroleum marketing business in 1955 with one service station and have pursued a
strategy of expanding the business principally through acquisitions. Prior to
1985, Marketing's predecessors had expanded into five states under various brand
names, principally Power Test. On February 1, 1985, Marketing's predecessors
acquired the marketing and distribution assets of Getty Oil Company in the
Northeastern and Mid-Atlantic states from a subsidiary of Texaco Inc. The Getty
acquisition included the Getty(R) trademark and trade name and added service
stations, distribution terminals and a wholesale heating oil and middle
distillate marketing network in six states.
During the period from 1985 to 1991, Marketing's predecessors continued to
expand by acquiring numerous small regional distributors, service stations and
convenience food stores. In addition to adding locations through fee ownership
and leasing, Marketing's predecessors continued to implement its program of
adding non-petroleum products and revenue enhancing services at retail outlets
in its marketing network, particularly convenience food stores, automotive
repairs and car washes. Commencing in 1992, Marketing's predecessors implemented
a comprehensive program of evaluating retail outlets to determine the long-term
viability of certain locations as gasoline stations. Over the last five years,
this process has resulted in the divestment of non-strategic and uneconomic
retail outlets. Pursuant to the terms of the Master Lease between Getty and
Marketing, executed as part of the Distribution, Marketing will, except for
certain locations presently leased to third parties for non-Getty brand uses,
lease from Getty those retail outlets which are owned by Getty and certain of
its subsidiaries at the time of the Distribution and sublease from Getty those
retail outlets which are leased by Getty and certain of its subsidiaries at the
time of the Distribution.
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<PAGE> 32
OPERATING STRATEGY
Marketing's operating strategy is to market motor fuels through service
stations operated by independent Getty-licensed dealers, many of whom sublease
Marketing's service stations and convenience stores. Marketing's dealers either
buy their petroleum products from Marketing or from licensed Getty distributors
who purchase Getty products from Marketing, or sell Marketing's petroleum
products and receive a commission. Marketing views each of its retail outlets as
a "profit center" and believes that independent operators, with greater
financial incentive than salaried employees, generally operate retail outlets
more economically. Moreover, the leasing and subleasing of retail outlets to
independent operators has provided Marketing with a steady and increasing source
of rental income and has enabled Marketing to reduce its direct operating costs.
Marketing directly operated two retail outlets at October 31, 1996
utilizing salaried employees. While Marketing seeks to sublease retail outlets
to independent operators, it historically retains a small number of such company
operated outlets. These outlets permit management to keep abreast of changes in
retail marketing, to assist in providing practical guidance to independent
dealers and to test new products and concepts.
Certain of the outlets have convenience food stores, automotive repair
centers and car washes. Marketing receives higher rentals from such Properties
as a result of such additional uses.
Marketing intends to expand its retail operations by purchasing or leasing
new sites, either from Getty or from third parties, and by entering into supply
agreements with third parties. Under the Master Lease and other agreements,
Getty has no obligation to procure and lease new properties to Marketing.
DISTRIBUTION
The retail outlets sell gasoline, diesel fuel and other related petroleum
products (such as motor oil and lubricants) under Marketing's brand name
"Getty(R)" or, to a limited extent, under other brand names, in the states of
Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New
Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virginia.
As of October 31, 1996, Marketing had 1,574 Getty and other branded retail
outlets as follows:
(i) 2 company operated retail outlets which are operated by salaried
employees;
(ii) 263 sublessee dealer operated retail outlets (dealers who sublease
retail outlets and purchase their petroleum products from Marketing);
(iii) 677 commission sublessee dealer operated retail outlets (dealers who
sublease retail outlets and receive a commission for sale of
Marketing's petroleum products);
(iv) 95 retail outlets operated by management contractors (dealers who
operate Marketing's retail outlets pursuant to a management
contract);
(v) 111 contract dealer retail outlets (dealers who purchase their
petroleum products from Marketing or sell Marketing's petroleum
products on a commission basis but do not sublease retail outlets
from Marketing); and
(vi) 36 distributors who purchase their petroleum products from Marketing,
which distributors in turn supply the petroleum product
requirements of 426 retail outlets.
The table below summarizes the aggregate additions and deletions to the
number of retail outlets during each of the three fiscal years ended January 31,
1996 and the nine months ended October 31, 1996:
<TABLE>
<CAPTION>
RETAIL OUTLETS RETAIL OUTLETS
AT BEGINNING AT END
FISCAL YEAR OF PERIOD ADDITIONS DELETIONS OF PERIOD
- -------------------------------------------------- -------------- --------- --------- --------------
<S> <C> <C> <C> <C>
1997 (through October 31, 1996)................... 1,625 8 59 1,574(a)
1996.............................................. 1,751 7 133 1,625
1995.............................................. 1,865 8 122 1,751
1994.............................................. 2,110 5 250 1,865
</TABLE>
- ---------------
(a) Includes 278 retail outlets operated by Uni-Marts.
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<PAGE> 33
Marketing generally extends three-year lease terms to its dealers, except
for new dealers, who generally receive a one-year trial lease. Such leases
generally provide for fixed rentals at competitive rates. In addition, most
leases provide for an additional rental if the dealer fails to sell certain
minimum quantities of gasoline during a month. The lessee of a retail outlet is
generally responsible for payment of utilities and for all maintenance and
repairs, except for structural and marketing equipment repairs and capital
improvements, which are performed by Marketing.
Marketing distributes its petroleum products from 10 distribution terminals
and bulk plants, two of which are controlled by Getty through fee ownership and
leased to Marketing pursuant to the terms of the Master Lease, and eight of
which are controlled by Getty on long-term net lease basis and are subleased to
Marketing pursuant to the terms of the Master Lease. These distribution
terminals and bulk plants are located in New York, New Jersey, Rhode Island,
Pennsylvania, and Connecticut, and have an aggregate storage capacity of
approximately 57 million gallons. The terminals located in East Providence,
Rhode Island and Rensselaer, New York are deep-water terminals, capable of
handling large vessels. In addition, Marketing utilizes additional terminals
pursuant to thruput and storage agreements with unrelated parties. A substantial
portion of the petroleum products are transported to retail outlets by
Marketing's truck transportation fleet subsidiary, whose drivers are compensated
in part on an incentive-based system.
On December 27, 1996, Uni-Marts notified Getty that, effective December 31,
1997, it would not renew its various leases and subleases of approximately 100
service station properties from Getty or the existing petroleum supply agreement
between Getty and Uni-Marts with respect to such service stations and certain
additional service stations owned or operated by Uni-Marts. Uni-Marts
subsequently advised Getty by letter that it may be interested in negotiating
and entering into revised arrangements. While Getty has preliminarily discussed
such matters with Uni-Marts, there can be no assurance that any revised terms
will be agreed upon. In connection with the Distribution, Marketing will become
a party to the existing supply agreement and the sublessor or sub-sublessor
under the leases and subleases with Uni-Marts. In the event the parties do not
agree upon any revised arrangements prior to December 31, 1997, Marketing
believes that it will be able to re-lease the approximately 100 affected service
station properties. The loss of motor fuel product sales to Uni-Marts pursuant
to the existing supply agreement, if not replaced, could have a material adverse
effect on Marketing's revenues. Marketing believes such loss of product sales
would not impact its operating income because the affected leased service
station properties should be re-leased to retail dealers at higher retail
product margins to be realized by Marketing than the current lower wholesale
product margins under the supply agreement with Uni-Marts. Net sales and rental
income attributable to the Uni-Marts agreement amounted to $76.8 million (or
10.1% of net sales) and $4.6 million (or 14.3% of rental income), respectively,
for the year ended January 31, 1996 and $66.5 million (or 10.8% of net sales)
and $3.4 million (or 13.8% of rental income), respectively, for the nine months
ended October 31, 1996.
Marketing also sells, through its KOSCO subsidiary, home heating oil,
propane (LPG) and related services directly to approximately 26,600 retail and
commercial customers in the New York Mid-Hudson Valley. In addition, Marketing
is a wholesale supplier of #2 heating oil (also known as "home heating oil") in
the Northeast, supplying heating oil to dealers who deliver to residences and
commercial accounts. Diesel fuel and kerosene are marketed both to distributors
of such products and directly by Marketing to retail outlets and consumers.
PRODUCT SUPPLY
Marketing, through its predecessors, has entered into agreements with a
number of Northeast and Mid-Atlantic suppliers for the purchase of refined
petroleum products. These agreements typically have one-year terms, and prices
under the agreements are generally based on formulas which are tied to the New
York Harbor price for the petroleum product being purchased. Marketing has no
crude oil reserves or refining capacity.
Historically, petroleum prices have been subject to extreme volatility and
there have been periodic shortages followed by periods of oversupply. No
assurance can be given that petroleum prices will not fluctuate greatly or that
petroleum products will continue to be available from multiple sources or
available at all in times of shortage. Furthermore, a large, rapid increase in
petroleum prices could adversely affect
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<PAGE> 34
Marketing's margins and/or profitability if Marketing's sales prices could not
be increased or automobile consumption of gasoline were to significantly decline
as a result of such price increases. Management believes, however, that, based
upon its experience during times of shortage, Marketing will continue to have
the ability to acquire petroleum products on competitive terms due in part to
the large volume of its purchases and the storage capacity at its distribution
terminals.
MARKETING
In order to provide efficient service to retail dealers and other
customers, Marketing is divided into four marketing regions. Marketing's
regional marketing personnel provide significant guidance, counseling and
assistance to Marketing's dealers, including advice on retail operations. The
marketing personnel also supervise the company operated retail outlets.
Marketing provides advertising and promotional support to its retail
outlets. Both radio and newspaper media are utilized, and promotional programs
are implemented on an ongoing basis.
Marketing has a co-branded Getty MasterCard, and accepts Visa, MasterCard,
Discover, Diners Club and American Express credit cards and "NYCE" and "MAC"
debit cards. In addition, Marketing has a Getty fleet fueling card and accepts
certain other fleet fueling cards, all of which have tracking programs which
provide cost control data to fleet customers.
COMPETITION
Marketing believes that, based on the number of locations served, it is
currently one of the largest independent marketers of petroleum products in the
United States. Petroleum marketing is highly competitive, and Marketing competes
with a substantial number of integrated oil companies and other companies who
may have greater assets, financial resources and sales. Accordingly, Marketing's
earnings may be adversely affected by the marketing policies of such companies,
which may have greater flexibility to withstand price changes than Marketing.
Marketing competes for new dealers and distributors primarily on the basis of
Getty brand acceptance, location, supply, price and marketing support. The
retail outlets in Marketing's marketing network compete primarily on the basis
of Getty brand acceptance, location, customer service, appearance of the retail
outlet and price.
REGULATION
The petroleum products industry is subject to numerous federal, state and
local laws and regulations. Although compliance with those laws and regulations
may have a significant impact on results of operations or liquidity for any
single period, Marketing believes that the costs related to such compliance have
not had and are not expected to have a material adverse effect on the
competitive or financial position of Marketing.
Marketing is not a refiner and, therefore, is not subject to the PMPA with
respect to its Getty branded stations. However, pursuant to Marketing's
agreements with approximately one-half of its Getty dealers and distributors,
Marketing has voluntarily extended to them coverage under PMPA. Under PMPA,
Marketing complies with certain notice requirements (generally 90 days) and
extends nondiscriminatory contracts to certain of its Getty licensed dealers and
distributors, whose franchises cannot be terminated or not renewed unless
certain PMPA imposed prerequisites are met as provided in Marketing's
agreements. Although a licensed dealer or distributor who is covered by PMPA is
not required to renew his or her franchise, because Marketing has agreed to
comply with PMPA with respect to such dealers or distributors, Marketing is
required to renew the franchises of such dealers and distributors who elect to
renew. However, franchisees may be terminated or not renewed for violating
certain provisions of Marketing's agreements as permitted under PMPA. The PMPA
permitted grounds for termination or non-renewal include, among other things,
non-payment of rent, misuse of trademark, bankruptcy, criminal misconduct,
condemnation and expiration of an underlying lease. Also, Marketing may elect to
non-renew with a franchisee upon a determination made in good faith that the
franchise relationship is uneconomical to Marketing. In such latter instance,
Marketing must, in accordance with PMPA, offer to the franchisee the right to
purchase Marketing's leasehold interest in the property at a bona fide price.
Under the terms of the Master Lease with Realty, Marketing would be
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<PAGE> 35
required to offer to assign its leasehold interest in the property (including
all renewal options) to the franchisee who is covered by PMPA.
In addition, Marketing's operations are governed by numerous federal, state
and local environmental laws and regulations. Among these laws are (i)
requirements to dispense reformulated gasoline in accordance with the Clean Air
Act, (ii) restrictions imposed on the amount of hydrocarbon vapors which may
enter the air at Marketing's terminals and service stations, (iii) OSHA and
other laws regulating terminal employee exposure to benzene and other hazardous
materials, (iv) requirements to report to governmental authorities discharges of
petroleum products into the environment and, under certain circumstances, to
remediate the soil and/or groundwater contamination pursuant to governmental
order and directive, (v) requirements to remove and replace underground storage
tanks which have exceeded governmental-mandated age limitations and (vi) the
requirement to provide a certificate of financial responsibility with respect to
claims relating to underground storage tank failures.
Environmental expenses have been attributable to remediation, monitoring,
soil disposal and governmental agency reporting incurred in connection with
contaminated sites and the replacement or upgrading of USTs to meet federal,
state and local environmental standards, as well as routine monitoring and tank
testing.
Getty has agreed to pay all costs relating to, and to indemnify Marketing
for, the Getty Environmental Liabilities. Marketing has not reflected a
liability for the Getty Environmental Liabilities in its consolidated balance
sheet since Getty remains the primary obligor for such liabilities. In the
unlikely event that Getty fails to remediate a contaminated property and
Marketing is held jointly and severally responsible for the remediation costs,
Getty is obligated to indemnify Marketing, and any remediation costs paid by
Marketing will be offset against Marketing's rental obligations to Getty under
the Master Lease. Because of such rental offset, it is remote that Marketing
would incur any incremental costs in connection with any such remediation.
Marketing will be responsible for and will indemnify Getty with respect to
all environmental obligations and liabilities other than the Getty Environmental
Liabilities. No amounts have been included for Marketing environmental
obligations and liabilities as such amounts are not currently probable and
estimable. However, future environmental expenditures may have a significant
impact on results of operations for any single fiscal year or interim period,
though Marketing believes that such costs will not have a material adverse
effect on Marketing's financial position.
Marketing believes that it is in substantial compliance with federal, state
and local provisions enacted or adopted pertaining to environmental matters.
Although Marketing is unable to predict what legislation or regulations may be
adopted in the future with respect to environmental protection and waste
disposal, existing legislation and regulations have had no material adverse
effect on its competitive position.
PERSONNEL
As of October 31, 1996, Marketing had 544 employees, of which 222
employees, consisting of truck drivers and service technicians, are represented
by Amalgamated Local Union 355. Marketing considers its relationships with its
employees and the union to be satisfactory.
LEGAL PROCEEDINGS
In 1991, the State of New York brought an action in Albany County against
KOSCO, Marketing's subsidiary, seeking reimbursement in the amount of $189,000
for clean-up costs incurred at a service station. The State is also seeking
penalties of $200,000 and interest. There has been no activity in this
proceeding in the past several years. The only other legal proceedings pending
against Marketing are certain personal injury and property damage proceedings
pending against Marketing's trucking subsidiary and against KOSCO. These
proceedings are not expected, individually or in the aggregate, to have a
material adverse effect on Marketing's financial position or results of
operations. Moreover, pursuant to the Distribution Agreement, Getty has agreed
to defend all existing proceedings and indemnify Marketing and its subsidiaries
with respect thereto. Pursuant to the Distribution Agreement, Getty will retain
liability for current proceedings relating to the pre-Distribution operation of
the business of Marketing including the aforementioned trucking subsidiary and
KOSCO. In the event any plaintiff in such a proceeding should seek to add
Marketing as a defendant, Getty will, pursuant to the Distribution Agreement,
indemnify and defend Marketing in such proceeding.
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<PAGE> 36
MANAGEMENT
DIRECTORS
Pursuant to the Marketing Bylaws, the Board of Directors has fixed the
number of directors at five persons. Getty, as the sole stockholder of
Marketing, has elected or intends to elect the five persons named in the table
below to constitute the entire Marketing Board. Messrs. Leo Liebowitz and Milton
Safenowitz are also currently directors of Getty. The current term of each
director named below began with his election in 1996 and will expire at the next
annual meeting of the stockholders of Marketing.
Set forth below is a list of the names and ages of, and certain
biographical information concerning, the persons expected to be directors of
Marketing immediately after the Distribution, including information concerning
their principal occupations for the past five years.
<TABLE>
<CAPTION>
NAME AND AGE YEAR ELECTED PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
------------ ------------ ------------------------------------------------------
<S> <C> <C>
Leo Liebowitz - 69 1996 President, Chief Executive Officer and Director of
Getty since 1971. Director, President and Treasurer of
CLS General Partnership Corp., the general partner of
Power Test Investors Limited Partnership.
Milton Safenowitz - 69 1996 Director of Getty since 1971 and Executive Vice
President of Getty until February 1990. Director,
Executive Vice President and Assistant Secretary of
CLS General Partnership Corp.
Ronald E. Hall - 65 1996 Chairman of the Board of Howell Corporation, a company
engaged primarily in the exploration, production,
acquisition and development of oil and gas properties,
since 1995. Formerly President and Chief Executive
Officer of CITGO Petroleum Corporation ("CITGO"), from
1985 to 1995. Director of CITGO from 1990 to 1995.
Richard E. Montag - 64 1996 Vice President - Development of the Richard E. Jacobs
Group, a regional shopping mall developer, since 1982.
Matthew J. Chanin - 42 1996 Senior Managing Director of Prudential Capital Group,
an investment unit of the Prudential Insurance Company
of America ("Prudential") since 1995. Has served in
other executive and management positions with
Prudential for more than the past five years.
</TABLE>
COMMITTEES OF THE BOARD OF DIRECTORS
There will be three standing committees of the Board of Directors of
Marketing: the Audit Committee, the Nominating Committee and the Compensation
and Benefits Committee, each comprised of one or more directors. The members of
these committees will be appointed on or about the Distribution Date.
The primary purpose of the Audit Committee will be to (i) select the firm
of independent accountants that will audit the consolidated financial statements
of Marketing and its subsidiaries, (ii) discuss the scope and the results of the
audit with the accountants and (iii) discuss Marketing's financial accounting
and reporting principles. The Audit Committee will also examine the summary
reports of the internal auditors of Marketing and discuss the adequacy of
Marketing's financial controls with the independent accountants and with
management.
The Nominating Committee will recommend candidates to the Board for
election as officers, recommend nominees for election to the Board and review
the role, composition and structure of the Board and its committees. The
Nominating Committee will consider nominees recommended by stockholders upon
submission in writing to the Secretary of Marketing with the names of such
nominees, together with their qualifications for service as a director of
Marketing.
The Compensation and Benefits Committee (the "Compensation Committee") will
administer the Incentive Compensation Plan, the Supplemental Retirement Plan,
the Marketing ESOP and the Stock Option Plan, and will review the compensation
of the directors and officers of Marketing.
30
<PAGE> 37
DIRECTOR COMPENSATION
Directors will be compensated for their services according to a standard
arrangement authorized by resolution of the Marketing Board. An annual retainer
fee of $12,000 will be paid to each director, and a committee and board meeting
fee of $1,000 will also be paid to each director for each meeting attended.
Directors who are employees of Marketing will not receive retainers or board
meeting fees.
EXECUTIVE OFFICERS
Set forth below is a list of the names and ages of all persons who will be
executive officers of Marketing immediately after the Distribution, indicating
their positions with Marketing and their principal occupations during the past
five years. Except for Mr. Liebowitz, all such persons will resign as officers
of Getty on the Distribution Date.
<TABLE>
<CAPTION>
NAME AND AGE PRINCIPAL OCCUPATIONS FOR PAST FIVE YEARS
------------ ------------------------------------------------------------
<S> <C>
Leo Liebowitz - 69..... Chairman, Chief Executive Officer, President and Director of
Marketing. President, Chief Executive Officer and Director
of Getty since 1971.
Alvin A. Smith - 59.... Senior Vice President and Chief Operating Officer of
Marketing. Senior Vice President and Chief Operating Officer
of Getty since 1994. Mr. Smith has been a Senior Vice
President of Getty since 1985 and became Chief Operating
Officer in 1994. Prior thereto, he was employed at Getty Oil
Company as Wholesale Manager and Petroleum Manager.
James R. Craig - 45.... Vice President-Marketing of Marketing. Vice
President-Marketing of Getty since 1987. He joined Getty in
1982 as a District Manager and became Manager - Retail Sales
in 1984. Prior to joining Getty, he was a Regional Manager
of Amerada Hess Corp.
Michael K. Hantman - Vice President and Corporate Controller of Marketing. Vice
45................... President and Corporate Controller of Getty since 1991. He
joined Getty in 1985 as Corporate Controller. Prior to
joining Getty, he was a Principal at Arthur Young & Company,
an international accounting firm.
Samuel M. Jones - 60... Vice President, Corporate Secretary and General Counsel of
Marketing. Vice President, Corporate Secretary and General
Counsel of Getty since 1994. Mr. Jones joined Getty in 1986
as Vice President and General Counsel and assumed the
additional position of Corporate Secretary in 1994. Prior to
joining Getty, he was a Senior Attorney with Texaco Inc.
</TABLE>
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND 5% OWNERS
Included in the following table is the number of shares of Marketing Common
Stock to be beneficially owned (or deemed to be beneficially owned) immediately
after the Distribution by each of the persons expected to be a director of
Marketing, by each of the executive officers listed above under "MANAGEMENT --
Executive Officers," and by all of the persons expected to be directors or
executive officers of Marketing as a group, based on the number of shares of
Getty Common Stock expected to be held on the Distribution Date, and each other
person expected to own of record or beneficially more than 5% of the outstanding
Marketing Common Stock. Such number of shares includes exercisable options or
options to become exercisable within 60 days with respect to Marketing Common
Stock. On December 13, 1996, each of Messrs. Hall and Montag, in their capacity
as directors of Marketing, received options with respect to 15,000 shares of
Getty Common Stock, which options will be exercisable beginning December 13,
1997. Such options will be exchanged for options with respect to Getty Common
Stock and Marketing Common Stock immediately prior to the Distribution. See
"EXECUTIVE COMPENSATION -- Stock Option Plans."
31
<PAGE> 38
<TABLE>
<CAPTION>
Name of Beneficial Owners, Amount and Nature of Percent
Directors and Officers Beneficial ownership(1) of Class(2)
-------------------------- ----------------------- -----------
<S> <C> <C>
Leo Liebowitz............................................... 2,478,290(3) 18.58%
Milton Safenowitz........................................... 2,210,719(4) 16.57%
James R. Craig.............................................. 87,958(5) *
Michael K. Hantman.......................................... 77,955(5) *
Samuel M. Jones............................................. 91,654(5) *
Alvin A. Smith.............................................. 191,295(5) 1.39%
Ronald E. Hall.............................................. 0 *
Richard E. Montag........................................... 26,762(6) *
Matthew J. Chanin........................................... 339 *
Directors and executive officers as a group (9 persons)..... 5,214,448 37.83%
Getty Petroleum Marketing Inc. Employee Stock Ownership
Plan...................................................... 667,000 5.00%
Milton Cooper............................................... 1,059,538(7) 7.94%
</TABLE>
- ------------------
* Total shares beneficially owned constitute less than one percent of the
outstanding shares.
(1) Unless otherwise indicated, each person has sole voting and dispositive
power with respect to the shares shown.
(2) The percentage is determined by dividing the number of shares shown by the
aggregate number of shares of Marketing Common Stock expected to be
outstanding immediately after the Distribution and the shares of Marketing
Common Stock which may be acquired within 60 days.
(3) Includes 166,410 shares held in trust for children, 230,977 shares held by
his wife for which beneficial ownership is disclaimed and 30,724 shares
held by a charitable foundation.
(4) Includes 2,034,601 shares held by Irrevocable Trust for Milton Safenowitz
and 176,118 shares held by Irrevocable Trust for the benefit of his wife.
(5) Gives effect to the vesting of outstanding Getty stock options held by such
individual pursuant to certain "change of control" agreements. See
"EXECUTIVE COMPENSATION."
(6) Includes 10,190 shares held by his wife for which beneficial ownership is
disclaimed.
(7) Includes 10,311 shares held in a partnership of which he is a partner,
2,013 shares held by his wife for which beneficial ownership is disclaimed
and 160,000 shares held by a charitable foundation.
With the exception of Leo Liebowitz, whose address is care of Getty
Petroleum Corp., 125 Jericho Tpke., Jericho, New York 11753, Milton Safenowitz,
whose address is 7124 Queenferry Cr., Boca Raton, Florida 33496, Milton Cooper,
whose address is care of Kimco Realty Corporation, 3333 New Hyde Park Road,
Suite 100, New Hyde Park, New York 11042-0020, and the Getty Petroleum Marketing
Inc. Employee Stock Ownership Plan, whose address is 125 Jericho Tpke., Jericho,
New York 11753, management knows of no other person owning of record or
beneficially more than 5% of the outstanding Marketing Common Stock.
32
<PAGE> 39
EXECUTIVE COMPENSATION
The following table sets forth, as to the Chief Executive Officer and the
other four most highly compensated executive officers of Getty that will become
executive officers of Marketing immediately after the Distribution, information
concerning the compensation paid by Getty for services in all capacities to
Getty and its subsidiaries to or for the benefit of such persons during the
periods indicated.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
FISCAL YEAR ENDED JANUARY 31 COMPENSATION AWARDS
-------------------------------------------------------------------------------------------------
OTHER ANNUAL RESTRICTED ALL OTHER
SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR $ $ ($)(1) ($) (#) ($)(2)
- --------------------------- ---- ------------- ------------- ------------- ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
LEO LIEBOWITZ.............. 1996 404,103 263,000 59,886
Director, President and 1995 387,228 164,500 60,713
Chief Executive Officer 1994 384,860 193,950 53,564
ALVIN A. SMITH............. 1996 301,192 190,700 15,000 45,373
Senior Vice President and 1995 268,606 99,000 15,000 40,353
Chief Operating Officer 1994 261,615 107,247 5,000 35,496
SAMUEL M. JONES............ 1996 163,307 115,000 15,000 26,629
Vice President, General 1995 154,646 79,000 10,000 26,616
Counsel and Corporate 1994 146,808 87,432 5,000 21,532
Secretary
JAMES R. CRAIG............. 1996 145,537 125,000 15,000 24,419
Vice President 1995 137,843 79,000 10,000 24,260
1994 122,354 87,432 5,000 18,665
MICHAEL K. HANTMAN......... 1996 115,667 110,000 15,000 21,787
Vice President and 1995 110,274 79,000 10,000 22,458
Corporate Controller 1994 106,972 87,432 5,000 17,394
</TABLE>
- ---------------
(1) None of the Executive Officers listed received perquisites or other
personal benefits that exceeded the lesser of $50,000 or 10% of the salary
and bonus for such officer.
(2) All other compensation includes Getty's contributions to the defined
contribution retirement profit sharing plan, matching contributions under
the company's 401(k) savings plan, Getty's contributions to the
Supplemental Retirement Plan for executives and term life insurance
premiums as follows:
<TABLE>
<CAPTION>
FISCAL YEAR DEFINED COMPANY SUPPLEMENTAL
ENDED CONTRIBUTION MATCH RETIREMENT TERM LIFE
JANUARY 31 RETIREMENT PLAN 401(K) PLAN PLAN INSURANCE
----------- --------------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Leo Liebowitz......................... 1996 $ 2,388 $ -- $ 55,319 $ 2,179
1995 2,394 -- 56,140 2,179
1994 4,140 -- 47,245 2,179
Alvin A. Smith........................ 1996 2,388 4,620 34,410 3,955
1995 2,394 4,620 29,859 3,480
1994 4,140 4,481 23,395 3,480
Samuel M. Jones....................... 1996 2,388 4,629 17,499 2,113
1995 2,394 4,611 17,507 2,104
1994 3,310 4,367 11,751 2,104
James R. Craig........................ 1996 2,388 3,486 16,668 1,877
1995 2,394 3,478 16,546 1,842
1994 2,898 3,405 10,520 1,842
Michael K. Hantman.................... 1996 2,388 3,458 14,179 1,762
1995 2,394 3,422 14,915 1,727
1994 2,557 3,195 9,915 1,727
</TABLE>
33
<PAGE> 40
In December 1994, Getty entered into agreements (collectively, the "Change
of Control Agreements") with its non-director officers and certain key
employees, wherein Getty agreed to make certain payments under certain
circumstances upon a "change of control" of Getty. Under such circumstances,
Getty also agreed that all Getty stock options granted to such officer or key
employee would immediately vest, and made provision to allow such individual to
exercise his or her options within three years of the "change of control" for
the officers, and a shorter period for key employees, and to preserve the
economic value of his or her options. In December 1995, Getty amended the Change
of Control Agreements to treat a spin-off or similar transaction involving a
substantial portion of Getty's marketing or real estate business or assets as a
"change of control." Accordingly, a "change of control" will, for purposes of
the Change of Control Agreements, be deemed to occur on the Distribution Date.
Marketing intends to pay those officers and key employees who become employees
of Marketing compensation at least comparable to the compensation which Getty
paid them prior to the Distribution. In the event that Marketing does not pay
comparable compensation to any such individual or any such individual does not
become an employee of either Getty or Marketing (or ceases to be an employee of
Getty or Marketing for any reason other than for cause) after the Distribution
Date, then for the 36-month period after the Distribution Date for officers, and
a shorter period of time for those certain key employees, Getty will pay to each
such individual over the applicable period an amount not less than the average
annual sum of such individual's (i) base salary, (ii) benefits under any
incentive or bonus plan and (iii) the total amount of employer contributions
(other than elective salary deferrals) made to the individual's account under
401(k) and other deferred compensation plans, based upon the requisite period
prior to the "change of control." The compensation to be paid to an officer or
key employee pursuant to a Change of Control Agreement will be reduced by the
amount of compensation, if any, such officer or key employee receives from
Marketing or from any other employer during the covered period. Marketing
intends to fully perform Getty's obligations under the Change of Control
Agreements with respect to those individuals who will become either an officer
or employee of Marketing.
STOCK OPTION PLANS
The following table sets forth as to the persons named in the Executive
Compensation Table additional information with respect to Getty stock options
granted during the fiscal year ended January 31, 1996:
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
% OF TOTAL OPTIONS APPRECIATION FOR
GRANTED TO EMPLOYEES EXERCISE OR OPTION TERM
OPTIONS IN FISCAL YEAR ENDED BASE PRICE EXPIRATION ---------------------
NAME GRANTED 1/31/96 ($/SHARE) DATE 5% ($) 10% ($)
---- ------- -------------------- ----------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Leo Liebowitz.............. -- -- -- -- -- --
Alvin A. Smith............. 15,000 12.71% $13.875 12/8/05 130,889 331,698
Samuel M. Jones............ 15,000 12.71 13.875 12/8/05 130,889 331,698
James R. Craig............. 15,000 12.71 13.875 12/8/05 130,889 331,698
Michael K. Hantman......... 15,000 12.71 13.875 12/8/05 130,889 331,698
</TABLE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
The following table provides information as to Getty stock options
exercised by each of the named executive officers of Getty during the fiscal
year ended January 31, 1996 and the value of Getty stock options held by such
officers at year-end measured in terms of the closing price of Getty Common
Stock on
34
<PAGE> 41
January 31, 1996. No Getty stock options were exercised by the named executive
officers in the fiscal year ended January 31, 1996.
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED OPTIONS AT FISCAL VALUE OF UNEXERCISED IN-THE-MONEY
YEAR END(#) OPTIONS/SARS AT FISCAL YEAR END($)
EXERCISABLE/ EXERCISABLE/
NAME UNEXERCISABLE(1) UNEXERCISABLE(1)
---- --------------------------------------- ----------------------------------
<S> <C> <C>
Leo Liebowitz................... -- --
-- --
Alvin A. Smith.................. 143,798 $207,193
34,375 40,390
Samuel M. Jones................. 50,651 58,353
27,500 24,061
James R. Craig.................. 50,134 61,224
27,500 24,061
Michael K. Hantman.............. 40,935 49,755
26,875 22,577
</TABLE>
- -------------------------
(1) Pursuant to the Change in Control Agreements, all unexercisable options held
by the named executive officers will become exercisable on the Distribution
Date.
As described under "RELATIONSHIP BETWEEN GETTY AND MARKETING AFTER THE
DISTRIBUTION--Reorganization and Distribution Agreement," immediately prior to
the Distribution, each director, officer and key employee who is a holder of an
option to acquire shares of Getty pursuant to Getty's 1985, 1988 and 1991 Stock
Option Plans will receive, in exchange therefor, two separately exercisable
options: one to purchase shares of Getty Common Stock (a "Getty Option") and one
to purchase Marketing Common Stock (a "Marketing Option"), each exercisable for
the same number of shares and containing terms substantially equivalent in the
aggregate to those of such holder's pre-Distribution option. The exercise price
for each Getty Option and Marketing Option will be set so as to preserve the
Aggregate Spread in value attributed to the options currently held by such
directors, officers and key employees. See "RELATIONSHIP BETWEEN GETTY AND
MARKETING AFTER THE DISTRIBUTION -- Reorganization and Distribution Agreement."
EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the Distribution, Marketing will establish a leveraged
Employee Stock Ownership Plan (the "Marketing ESOP") that will purchase newly
issued shares of Marketing Common Stock from Marketing equal to five percent of
the outstanding shares of Marketing. The Marketing ESOP will purchase such
newly-issued shares from Marketing using the proceeds of a loan to be made by
Marketing to the Marketing ESOP. The Marketing ESOP loan will be repaid over a
five-year period, and Marketing will contribute annually to the Marketing ESOP
the funds required to repay such loan. The principal amount of the Marketing
ESOP loan is expected to be equal to the number of shares purchased by the
Marketing ESOP (approximately 667,000) multiplied by the purchase price per
share (determined on the basis of the value of the Marketing Common Stock). It
is expected that the repayment of the Marketing ESOP loan will result in
projected allocations to participants' accounts of an aggregate of approximately
133,400 shares of Marketing Common Stock per year, allocated in proportion to
compensation. Marketing expects that the five percent of the outstanding stock
of Marketing purchased by the Marketing ESOP will be allocated to covered
employees over a five-year period. Commencing February 1, 1997, Marketing will
recognize a charge to operating results over a five-year period relating to the
Marketing ESOP. Such charge will be based on the value of the Marketing Common
Stock in the future and, as such, is not currently determinable. See Note 9 to
the consolidated financial statements.
35
<PAGE> 42
MISCELLANEOUS BENEFIT PLANS
Marketing will establish the same benefit plans which Getty presently has
in effect: The Getty Petroleum Marketing Inc. Retirement (401(k)) and Profit
Sharing Plan (the "401(k) Plan"), a medical and dental plan, a flexible spending
plan, group life and disability insurance, and, for the officers of Marketing, a
non-qualified Supplemental Retirement Plan for Executives (the "Supplemental
Plan").
Under the 401(k) Plan, Marketing will contribute to each participating
employee an amount equal to 50% of such employee's contribution but in no event
more than 3% of such employee's compensation. Any annual discretionary
contribution to the 401(k) Plan will be determined by Marketing's Board of
Directors. Under the Supplemental Plan (which is not qualified for purposes of
Section 401(a) of the Internal Revenue Code of 1986, as amended), a
participating executive may receive in his trust account an amount equal to 10%
of his compensation, reduced by the amount of any contributions allocated to
such executive under the 401(k) Plan. The amounts paid to the trustee under the
Supplemental Plan may be used to satisfy claims of general creditors in the
event of Marketing's or any of its subsidiaries' bankruptcy. The trustee shall
not cause the Supplemental Plan to be other than "unfunded" for purposes of the
Employee Retirement Income Security Act of 1974, as amended. An executive's
account shall vest in the same manner as under the 401(k) Plan and shall be paid
upon termination of employment. Under the Supplemental Plan, the Board of
Directors may, during any fiscal year, elect not to make any payment to the
account of any or all executives.
Pursuant to a long-standing arrangement, in the event of the death of Mr.
Liebowitz, benefits in an amount equal to twelve months' salary will be paid to
his estate. In the event of termination of Mr. Liebowitz's employment due to
illness or incapacity for a period of one year or longer, benefits equal to
twenty-four months' salary will be payable to Mr. Liebowitz.
CERTAIN TRANSACTIONS
THE PARTNERSHIP
In 1985, Power Test Investors Limited Partnership (the "Partnership") was
formed as a public master limited partnership and capitalized by a rights
offering to all Getty stockholders. The Partnership is the limited partner in
Power Test Realty Company Limited Partnership (the "Operating Partnership"),
which was also formed in 1985 and which purchased the Northeast and Mid-Atlantic
petroleum marketing assets of Getty Oil Company from Texaco Inc. The Operating
Partnership leased these assets to Getty on a long-term net basis.
CLS General Partnership Corp., a Delaware corporation ("CLS"), is the sole
general partner of both the Partnership and the Operating Partnership. The three
stockholders of CLS are Messrs. Liebowitz, Safenowitz and Cooper (the "Principal
Holders"), who are also directors and stockholders of Getty and stockholders of
Marketing. Messrs. Liebowitz and Safenowitz are also directors of Marketing and
Mr. Liebowitz serves as Chief Executive Officer of Getty and Marketing. See
"MANAGEMENT." As of October 31, 1996, the Principal Holders beneficially owned
an aggregate of 3,103,131 (48%) of the general and limited partnership interests
in the Partnership.
Marketing does not have (nor did Getty have) any ownership interest in the
Partnership, the Operating Partnership or any of its assets. Neither the
Partnership nor the Operating Partnership conducts any substantial activities
other than those related to the ownership and leasing to Getty of the former
Getty Oil Company assets, substantially all of which Marketing subleases from
Getty.
THE MASTER LEASE AND RELATED AGREEMENTS
Pursuant to the Master Lease, Marketing anticipates that it will make, on
an annual basis, net lease payments to Getty aggregating approximately $57
million commencing in fiscal 1998. See "RELATIONSHIP BETWEEN GETTY AND MARKETING
AFTER THE DISTRIBUTION -- Master Lease Agreement," and Note 4 to the
consolidated financial statements.
36
<PAGE> 43
In addition to the Master Lease, Getty and Marketing have entered into,
among other things, certain licensing, service and tax sharing agreements. See
"RELATIONSHIP BETWEEN GETTY AND MARKETING AFTER THE DISTRIBUTION."
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of Marketing does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Marketing Charter (as defined herein) and the Marketing Bylaws,
copies of which have been filed as exhibits to this Registration Statement on
Form 10.
GENERAL
Under Marketing's Charter, as amended substantially in the form set forth
in Exhibit 3.2 to this Form 10 (the "Marketing Charter"), the total number of
shares of all classes of stock that Marketing has authority to issue is
40,000,000, 30,000,000 of which are shares of Marketing Common Stock and
10,000,000 of which are shares of preferred stock, $.01 par value per share (the
"Marketing Preferred Stock"). Based on the number of shares of Getty Common
Stock outstanding at January 31, 1997, approximately 12,700,000 shares of
Marketing Common Stock, constituting approximately 42% of the then authorized
Marketing Common Stock, will be issued to Getty and distributed by Getty to its
stockholders in the Distribution. In addition, approximately 667,000 shares of
Marketing Common Stock will be issued to the Marketing ESOP at the time of the
Distribution. See "EXECUTIVE COMPENSATION -- Employee Stock Ownership Plan." All
of the shares of Marketing Common Stock issued in the Distribution and to the
Marketing ESOP will be validly issued, fully paid and non-assessable and have no
preemptive rights.
COMMON STOCK
All shares of Marketing Common Stock will be duly authorized, fully paid
and nonassessable. Subject to the preferential rights of any other shares or
series of stock, holders of shares of Marketing Common Stock are entitled to
receive dividends on such stock if, as and when authorized and declared by the
Marketing Board out of assets legally available therefor and to share ratably in
the assets of Marketing legally available for distribution to its stockholders
in the event of its liquidation, dissolution or winding up after payment of or
adequate provision for all known debts and liabilities of Marketing.
Each outstanding share of Marketing Common Stock entitles the holder to one
vote on all matters submitted to a vote of stockholders, including the election
of directors and, except as provided with respect to any other class or series
of stock, the holders of such shares will possess the exclusive voting power.
There is no cumulative voting in the election of directors, which means that the
holders of a majority of the outstanding shares of Marketing Common Stock can
elect all of the directors then standing for election and the holders of the
remaining shares will not be able to elect any directors.
Holders of shares of Marketing Common Stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have no preemptive
rights to subscribe for any securities of Marketing. Shares of Marketing Common
Stock will have equal dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's charter. The Marketing Charter
provides for approval by a majority of all the votes entitled to be cast in such
situations. With respect to the phrase "all or substantially all," the words
"substantially all" are not defined in the MGCL, there are only a limited number
of cases interpreting the meaning of such words and the few cases doing so rely
heavily on the particular facts and circumstances thereof. It is therefore
difficult to state with certainty when a Maryland corporation may be required to
obtain stockholder approval for a sale of assets. There can be no assurance
that, if presented with a particular situation, a Maryland court (or a court
appropriately applying Maryland law) would find that a sale
37
<PAGE> 44
of more than 50% of the assets of a corporation was the sale of "substantially
all" of the assets of the corporation requiring stockholder approval.
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer or
issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns ten percent or more of the
voting power of the corporation's shares or an affiliate of the corporation who,
at any time within the two-year period prior to the date in question, was the
beneficial owner of ten percent or more of the voting power of the then
outstanding voting stock of the corporation (an "Interested Stockholder") or an
affiliate of such an Interested Stockholder are prohibited for five years after
the most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative vote
of at least (a) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation and (b) two-thirds of the votes
entitled to be cast by holders of voting stock of the corporation other than
shares held by the Interested Stockholder with whom (or with whose affiliate)
the business combination is to be effected, unless, among other conditions, the
corporation's common stockholders receive a minimum price (as defined in the
MGCL) for their shares and the consideration is received in cash or in the same
form as previously paid by the Interested Stockholder for its shares. These
provisions of the MGCL do not apply, however, to business combinations that are
approved or exempted by the board of directors of the corporation prior to the
time that the Interested Stockholder becomes an Interested Stockholder. These
provisions of the MGCL could delay, defer or prevent a transaction or a change
in control of Marketing that might involve a premium price for holders of
Marketing Common Stock or otherwise be in their best interest.
The Marketing Charter authorizes the Marketing Board to reclassify any
unissued shares of Marketing Common Stock into other classes or series of
classes of stock and to establish the number of shares in each class or series
and to set the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
or terms or conditions of redemption for each such class or series.
The transfer agent and registrar for the Marketing Common Stock will be
American Stock Transfer and Trust Company.
PREFERRED STOCK
The Marketing Charter will provide that the Marketing Board is authorized
to provide for the issuance of shares of Marketing Preferred Stock, from time to
time, and to fix the designations, preferences, conversion or other rights,
voting powers, restrictions, dividends and other distributions, qualifications
or terms or conditions of redemption of such series.
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
Marketing believes that the power of the Marketing Board to issue
additional authorized but unissued shares of Marketing Common Stock and
Marketing Preferred Stock and to classify or reclassify unissued shares of
Marketing capital stock and thereafter to cause Marketing to issue such
classified or reclassified shares of stock will provide Marketing with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other needs which may arise. The additional classes or series, as well
as the Marketing Common Stock and Marketing Preferred Stock, will be available
for issuance without further action by Marketing's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which Marketing's securities may be listed or
traded. Although the Marketing Board has no intention at the present time of
doing so, it could authorize Marketing to issue a class or series that could,
depending upon the terms of such class or series, delay, defer or prevent a
transaction or a change in control of Marketing that might involve a premium
price for holders of Marketing Common Stock or otherwise be in their best
interests.
38
<PAGE> 45
LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Marketing Charter
contains such a provision which limits such liability to the maximum extent
permitted by Maryland law.
The Marketing Charter authorizes Marketing, to the maximum extent permitted
by Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (a) any
present or former director or officer or (b) any individual who, while a
director of Marketing and at the request of Marketing, serves or has served
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her status as
a present or former director or officer of Marketing. The Marketing Bylaws
obligate Marketing, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (a) any present or former director or officer who
is made a party to the proceeding by reason of his or her service in that
capacity or (b) any individual who, while a director of Marketing and at the
request of Marketing, serves or has served another corporation, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his or her service in that capacity. The
Marketing Charter and Marketing Bylaws also permit Marketing to indemnify and
advance expenses to any person who served a predecessor of Marketing in any of
the capacities described above and to any employee or agent of Marketing or a
predecessor of Marketing.
The MGCL requires a corporation (unless its charter provides otherwise,
which Marketing's Charter does not) to indemnify a director or officer who has
been successful, on the merits or otherwise, in the defense of any proceeding to
which he or she is made a party by reason of his or her service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection with
any proceeding to which they may be made a party by reason of their service in
those or other capacities unless it is established that (a) the act or omission
of the director or officer was material to the matter giving rise to the
proceeding and (i) was committed in bad faith or (ii) was the result of active
and deliberate dishonesty, (b) the director or officer actually received an
improper personal benefit in money, property or services or (c) in the case of
any criminal proceeding, the director or officer had reasonable cause to believe
that the act or omission was unlawful. However, a Maryland corporation may not
indemnify a present or former director or officer for an adverse judgment in a
suit by or in the right of the corporation. In addition, the MGCL requires
Marketing, as a condition to advancing expenses, to obtain (a) a written
affirmation by the director or officer of his or her good faith belief that he
or she has met the standard of conduct necessary for indemnification by
Marketing as authorized by the Bylaws and (b) a written statement by or on his
or her behalf to repay the amount paid or reimbursed by Marketing if it shall
ultimately be determined that the standard of conduct was not met.
In addition, Marketing has entered or will enter into an indemnification
agreement ("Indemnification Agreement") with each of its directors. The
Indemnification Agreement provides for the prompt indemnification and
advancement of expenses, including attorneys' fees and other costs, to the
fullest extent permitted by law of a director against expenses and obligations
paid or incurred in connection with investigating, defending, being a witness or
participating in (including on appeal) any threatened, pending or completed
action, suit or proceeding related to the fact that such director is or was a
director, officer, partner, employee, agent, or fiduciary of Marketing or is or
was serving at the request of Marketing as a director, officer, partner,
employee, trustee, agent or fiduciary of another corporation, partnership, joint
venture, employee benefit plan trust or other enterprise, or by reason of
anything done or not done by a director in any such capacity.
39
<PAGE> 46
The Indemnification Agreement also provides (i) that a director is
automatically entitled to indemnification for expenses to the extent the
director is successful in defending any indemnifiable claim whether on the
merits or otherwise, (ii) that Marketing has the burden of proving that a
director is not entitled to indemnification in any particular case and that
certain presumptions that may otherwise be drawn against a director seeking
indemnification in connection with the termination of actions or proceedings are
negated, except that the termination of an action or proceeding by conviction or
a plea of nolo contendere (or its equivalent) creates a presumption that the
director is not entitled to indemnification, (iii) a mechanism through which a
director may seek court relief in the event that the Marketing Board (or other
person or body appointed by the Marketing Board) determines that the director
would not be permitted to be indemnified under applicable law (and therefore is
not entitled to indemnification under the Indemnification Agreement), (iv) that
a director is entitled to indemnification against all expenses (including
attorneys' fees) incurred in seeking to collect an indemnification claim or
advancement of expenses from Marketing or incurred in seeking to recover under a
directors' and officers' liability insurance policy, (v) that after there has
been a change in control in Marketing, all Marketing determinations regarding a
right to indemnification, and the right to advancement of expenses, shall be
made by independent legal counsel, and (vi) that prior to a change in control of
Marketing, a director shall not be entitled to indemnification pursuant to the
Indemnification Agreement in connection with an action, suit or proceeding
initiated by the director against Marketing, or its directors or officers unless
Marketing joins in or consents to the action, suit or proceeding, except as
provided in Section 3 of the Indemnification Agreement.
Directors' rights under the Indemnification Agreement are not exclusive of
any other rights they may have under Maryland law, directors' or officers'
liability insurance, the Marketing Bylaws or otherwise. However, the
Indemnification Agreement does prevent double payment.
The Indemnification Agreement, although not requiring the maintenance of
directors' and officers' liability insurance, does require that the directors be
provided with maximum coverage reasonably economically available if there is
such a policy. Finally, the Indemnification Agreement provides that, if
Marketing pays a director pursuant to the Indemnification Agreement, Marketing
will be subrogated to the director's rights to recover from third parties.
ADDITIONAL INFORMATION
Marketing has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form 10 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") with respect to the Marketing
Common Stock described herein. This Information Statement does not contain all
of the information set forth in the Registration Statement and the exhibits and
schedules thereto. Further information may be obtained from the Registration
Statement and such exhibits and schedules. Copies of these documents may be
inspected at and obtained at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the Regional
Offices of the Commission at 7 World Trade Center, Suite 1300, New York, New
York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
Such reports and other documents may be obtained from the web site that the
Commission maintains at http://www.sec.gov. Copies of such information can also
be obtained by mail from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. Shares of
Marketing Common Stock have been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "GPM." Reports and other
information concerning Marketing Common Stock can also be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005.
Following the Distribution, Marketing will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. Additionally, Marketing will be subject to
the proxy solicitation requirements of the Exchange Act and will furnish annual
reports containing audited financial statements to its stockholders in
connection with its annual meetings of stockholders.
40
<PAGE> 47
No person is authorized to give any information or to make any
representations other than those contained in this Information Statement. Any
other information or representations given or made must not be relied upon as
having been authorized. This Information Statement does not constitute an offer
to sell or a solicitation of an offer to buy any securities. The delivery of
this Information Statement must not under any circumstances be construed as an
implication that there has been no change in the affairs of Marketing subsequent
to the date of this Information Statement.
41
<PAGE> 48
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS:
REPORT OF INDEPENDENT ACCOUNTANTS......................... F-2
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the fiscal
years ended January 31, 1996,
1995 and 1994........................................ F-3
Consolidated Balance Sheets as of January 31, 1996 and
1995.................................................. F-4
Consolidated Statements of Cash Flows for the fiscal
years ended January 31, 1996,
1995 and 1994........................................ F-5
Notes to Consolidated Financial Statements............. F-6
UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
Consolidated Statements of Operations for the nine
months ended October 31, 1996 and 1995................ F-16
Consolidated Balance Sheet as of October 31, 1996...... F-17
Consolidated Statements of Cash Flows for the nine
months ended October 31, 1996 and 1995................ F-18
Notes to Unaudited Consolidated Interim Financial
Statements............................................ F-19
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION.... F-22
Pro Forma Consolidated Statements of Operations for the
fiscal year ended January 31, 1996 and for the nine
months ended October 31, 1996......................... F-23
Notes to Unaudited Pro Forma Consolidated Statements of
Operations............................................ F-24
Pro Forma Consolidated Balance Sheet as of October 31,
1996.................................................. F-26
Notes to Unaudited Pro Forma Consolidated Balance
Sheet................................................. F-27
</TABLE>
F-1
<PAGE> 49
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Getty Petroleum Marketing Inc.:
We have audited the accompanying consolidated balance sheets of GETTY
PETROLEUM MARKETING INC. and SUBSIDIARIES as of January 31, 1996 and 1995, and
the related consolidated statements of operations and cash flows for each of the
three years in the period ended January 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Getty Petroleum
Marketing Inc. and Subsidiaries as of January 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended January 31, 1996, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the
Company changed its method of accounting for the impairment of long-lived assets
in fiscal 1996.
Coopers & Lybrand L.L.P.
New York, New York
November 6, 1996, except for
Notes 6, 9 and 12, as to which
the date is February 28, 1997.
F-2
<PAGE> 50
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Net sales..................................................... $758,887 $723,875 $747,667
Rental income................................................. 32,025 29,860 28,443
Other income.................................................. 282 -- 175
-------- -------- --------
791,194 753,735 776,285
-------- -------- --------
Cost of sales (excluding depreciation and amortization)....... 750,680 721,354 738,261
Selling, general and administrative expenses.................. 20,702 22,588 23,262
Depreciation and amortization................................. 13,099 11,640 11,718
Restructuring charges......................................... -- 1,846 --
Interest expense.............................................. 388 285 226
-------- -------- --------
784,869 757,713 773,467
-------- -------- --------
Earnings (loss) before provision (credit) for income taxes and
cumulative effect of accounting change...................... 6,325 (3,978) 2,818
Provision (credit) for income taxes........................... 2,379 (1,544) 1,000
-------- -------- --------
Earnings (loss) before cumulative effect of accounting
change...................................................... 3,946 (2,434) 1,818
Cumulative effect of accounting change........................ (282) -- --
-------- -------- --------
Net earnings (loss)........................................... $ 3,664 $ (2,434) $ 1,818
======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 51
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JANUARY 31,
---------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................................... $ 676 $ 2,449
Accounts receivable, less allowance
for doubtful accounts of $1,225
in 1996 and $1,336 in 1995...................................... 12,194 14,688
Inventories........................................................ 19,917 9,985
Deferred income taxes.............................................. 2,220 2,188
Prepaid expenses and other
current assets.................................................. 2,827 2,943
-------- --------
Total current assets....................................... 37,834 32,253
Property and equipment, at cost, less
accumulated depreciation and amortization.......................... 84,116 82,227
Other assets......................................................... 2,548 2,617
-------- --------
TOTAL ASSETS............................................... $124,498 $117,097
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 23,378 $ 36,194
Accrued expenses................................................... 9,265 11,023
Gasoline taxes payable............................................. 13,914 8,257
-------- --------
Total current liabilities.................................. 46,557 55,474
Deferred income taxes................................................ 13,789 11,500
Other, principally deposits.......................................... 13,841 13,062
Commitments and contingencies (Notes 4 and 6)
Stockholders' equity................................................. 50,311 37,061
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY................. $124,498 $117,097
======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 52
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED JANUARY 31,
----------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss)...................................... $ 3,664 $ (2,434) $ 1,818
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change................. 282 -- --
Depreciation and amortization.......................... 13,099 11,640 11,718
Deferred income taxes.................................. 2,257 659 1,804
(Gain) loss on dispositions of property and
equipment........................................... (12) 235 79
Changes in assets and liabilities:
Accounts receivable.................................... 2,494 1,437 2,789
Inventories............................................ (9,932) (1,156) (485)
Prepaid expenses and other current assets.............. 25 (40) 725
Other assets........................................... (46) 278 198
Accounts payable, accrued expenses and
gasoline taxes payable.............................. (8,917) 8,089 (5,722)
Other, principally deposits............................ 779 1,027 866
-------- -------- --------
Net cash provided by operating activities........... 3,693 19,735 13,790
-------- -------- --------
Cash flows from investing activities:
Capital expenditures................................... (15,858) (16,787) (14,306)
Proceeds from dispositions of equipment................ 806 500 365
-------- -------- --------
Net cash used in investing activities............... (15,052) (16,287) (13,941)
-------- -------- --------
Cash flows from financing activities:
Net cash transferred from (to) Getty................... 9,586 (2,496) 362
-------- -------- --------
Net cash provided by (used in) financing
activities........................................ 9,586 (2,496) 362
-------- -------- --------
Net increase (decrease) in cash and equivalents.......... (1,773) 952 211
Cash and equivalents at beginning of year................ 2,449 1,497 1,286
-------- -------- --------
Cash and equivalents at end of year...................... $ 676 $ 2,449 $ 1,497
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for interest................. $ 388 $ 285 $ 226
</TABLE>
See accompanying notes.
F-5
<PAGE> 53
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
Getty Petroleum Marketing Inc., a Maryland corporation ("Marketing"), was
formed on October 1, 1996 as a wholly-owned subsidiary of Getty Petroleum Corp.
("Getty"). Getty plans to separate its petroleum marketing business from its
real estate business at the close of business on January 31, 1997 with each
business to be conducted by a separate, publicly held corporation. In order to
effect the separation of these businesses, Getty will transfer to Marketing the
assets and liabilities of the petroleum marketing business and the New York
Mid-Hudson Valley home heating oil business previously conducted by a subsidiary
of Getty, and distribute all of the common shares of Marketing to the
stockholders of Getty (the "Distribution"). The Distribution is expected to be
at the rate of one share of common stock of Marketing (the "Marketing Common
Stock") for each share of Getty common stock. Getty will retain and continue to
own and operate the real estate business and the Pennsylvania and Maryland home
heating oil business previously conducted by another subsidiary. After the
Distribution, Getty will change its name to Getty Realty Corp. ("Realty" or
"Getty").
The consolidated financial statements of Marketing contained herein have
been prepared on the basis that the assets and liabilities of the petroleum
marketing business were transferred using historical carrying values as recorded
by Getty, and Marketing's results of operations and cash flows were derived from
Getty's historical financial statements. The consolidated financial statements
of Marketing reflect all costs of doing business. Historical rental expense to
Getty (see Notes 4 and 6) was established on the basis of the fair market value
of the leased properties, which assumed that the properties have been upgraded
to meet the 1998 Standards (as defined below) and are free of known
environmental contamination, since Getty is responsible for all such costs as
described below.
Assets, liabilities, revenues and expenses were specifically identified as
being related to either the business of Marketing or Realty, except that
Marketing's results of operations include allocations of certain selling,
general and administrative expenses, namely employee benefits, payroll taxes and
travel and entertainment expenses. Employee benefits, payroll taxes and travel
and entertainment expenses were allocated to Marketing based on number of
personnel and salaries specifically identified to Marketing. Selling, general
and administrative expenses allocated to Marketing from Getty were $1,546,000,
$1,348,000 and $1,776,000 for the fiscal years ended 1996, 1995 and 1994,
respectively. Management believes these allocations to be reasonable.
The financial information presented herein is not necessarily indicative of
the financial results that would have occurred had Marketing been operated as a
separate, stand-alone entity during the reporting periods nor is it necessarily
indicative of future results. However, Management believes that these allocated
amounts approximate what the expense would have been on a stand-alone basis and
that any additional costs, excluding additional rent associated with the Master
Lease (see Note 4), would have been immaterial.
Getty uses a centralized approach to cash management. As a result, cash and
equivalents (other than actual cash on hand) were not allocated to Marketing in
the consolidated financial statements. However, under the Distribution Agreement
(as defined below), Marketing will receive cash from Getty in an amount
sufficient to provide Marketing with net working capital of $1.1 million. Such
cash amount will be paid upon the determination of Marketing's net working
capital as of January 31, 1997.
As part of the separation of the petroleum marketing business from the real
estate business, Marketing and Realty have entered into various agreements which
address the allocation of assets and liabilities between them and govern future
relationships, including a Reorganization and Distribution Agreement (the
"Distribution Agreement"), a Master Lease Agreement, a Tax Sharing Agreement, a
Services Agreement and a Trademark License Agreement.
Getty and Marketing have entered into a Services Agreement (the "Services
Agreement"), under the terms of which Marketing will provide certain
administrative and technical services to Getty and Getty will provide certain
limited services to Marketing. Marketing estimates that the net fees to be paid
by Getty to
F-6
<PAGE> 54
Marketing for services performed (after deducting the fees paid by Marketing to
Getty for services provided by Getty) will initially be approximately $80,000
per month, which amount takes into account Marketing's additional costs related
to providing such services, and will decline as the services performed decrease.
Getty presently expects that most of such services will be provided by Marketing
for approximately one year.
The following schedule summarizes intercompany transactions between
Marketing and Realty for the three years ended January 31, 1996, 1995 and 1994
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Rent expense (including environmental
expenses) paid to Realty.................... $55,130 $55,352 $55,900
Selling, general and administrative expenses
allocated to Marketing...................... 1,546 1,348 1,776
Income taxes paid to (received from) Realty... 122 (2,203) (804)
Net cash transferred from (to) Realty......... 9,586 (2,496) 362
</TABLE>
Intercompany transactions are settled immediately and, accordingly, average
intercompany balances were insignificant during the periods presented.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Consolidation: The consolidated financial statements include the accounts
of Marketing and its wholly-owned subsidiaries. Marketing is principally engaged
in the marketing and distribution of petroleum products in 12 Northeastern and
Mid-Atlantic states. All significant intercompany accounts and transactions have
been eliminated.
Use of Estimates: The financial statements have been prepared in conformity
with generally accepted accounting principles and include amounts that are based
on management's best estimates and judgments. While all available information
has been considered, actual results could differ from those estimates.
Cash and Equivalents: Marketing considers highly liquid investments
purchased with an original maturity of three months or less to be cash
equivalents.
Inventories: Inventories, primarily finished petroleum products, are
principally accounted for under the lower of last-in, first-out ("LIFO") cost or
market. Marketing enters into product exchange agreements with various parties
to improve its supply logistics and reduce its delivery costs. Net product
exchange positions with other companies are reflected in inventory and are
generally immaterial. Marketing may take positions in the futures market as part
of its overall purchasing strategy in order to reduce the risk associated with
price fluctuations. Gains and losses on futures contracts are included as a part
of product costs and have been immaterial for each of the three years in the
period ended January 31, 1996. As of January 31, 1996, outstanding futures
contracts were immaterial.
Property and Equipment: Expenditures for renewals and betterments are
capitalized; maintenance and repairs are charged to income when incurred. When
fixed assets are sold or retired, the cost and related accumulated depreciation
and amortization are eliminated from the respective accounts and any gain or
loss is credited or charged to income.
Depreciation and Amortization: Depreciation of fixed assets is computed on
the straight-line method based upon the estimated useful lives of the assets.
Leasehold improvements are amortized on the straight-line method over the
shorter of the term of the lease or the useful life of the related asset.
Environmental Costs: The estimated future costs for known environmental
remediation requirements are accrued when it is probable that a liability has
been incurred and the amount of remediation costs can be reasonably estimated.
Recoveries of environmental costs, principally from state underground storage
tank remediation funds, are accrued as income when such recoveries are
considered probable. Such accruals are adjusted as further information develops
or circumstances change.
Income Taxes: Deferred income taxes are provided for the effect of items
which are reported for income tax purposes in years different from that in which
they are recorded for financial statement purposes.
F-7
<PAGE> 55
Revenue Recognition: Revenue is recognized from sales when product
ownership is transferred to the customer and from rentals as earned.
Accounting Change: In fiscal 1996, Marketing adopted Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of." The Statement
requires that assets used in operations be written down to fair value when
events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amount of those assets. SFAS No. 121 also requires that assets held
for disposal be written down to fair value less costs to sell. Marketing
continually evaluates retail outlets to determine the profitability and
long-term viability of certain locations as gasoline stations or convenience
stores, which results in the divestment of non-strategic and uneconomic retail
outlets through sale, lease assignment or lease termination. Marketing estimates
fair value and costs to sell based on the best information available, including
discounted cash flows and comparable market values, in making whatever
estimates, judgments and projections are considered necessary.
Due to continuing operating losses resulting from changes in local market
or operating conditions at certain retail outlets, Marketing recorded a pre-tax
charge of $267,000 in fiscal 1996 relating to operating assets, which is
included in depreciation and amortization expense. In addition, Marketing
reported the cumulative effect of the change in accounting principle relating to
assets held for disposal as an after-tax charge to earnings of $282,000 in the
consolidated statement of operations. As of January 31, 1996, the net book value
of marketing equipment and leasehold improvements at locations held for disposal
amounted to $617,000. The impact of these retail outlets on the results of
operations of Marketing was not material for each of the three years in the
period ended January 31, 1996. While these retail outlets are being actively
marketed, the disposal period may exceed one year for some locations.
3. INVENTORIES
As of January 31, 1996, 1995 and 1994, the carrying value of Marketing's
LIFO inventories approximated the first-in, first-out ("FIFO") method or
replacement cost.
4. LEASES
Marketing and Realty have entered into a Master Lease Agreement (the
"Master Lease") under which 1,037 retail outlets and 10 terminal facilities (the
"Properties") are leased or subleased by Realty as the lessor to Marketing as
the lessee. The Properties will be used for gasoline sales, convenience store
uses and other complementary or related lawful uses in conjunction with the sale
of petroleum products and convenience store items, except when the provisions of
any underlying lease are more restrictive. Marketing may sublet any property,
provided that Marketing remains fully responsible for a sublessee's performance
and, except in cases of economic abandonment (as described below), a sublease
for non-petroleum purposes will require Getty's consent. Except for certain
environmental obligations, and obligations pertaining to USTs (as defined
below), the Master Lease will be a "triple-net" lease, with Marketing retaining
responsibility for all taxes, maintenance, repairs and insurance. For financial
statement purposes, such Master Lease has been recorded as an operating lease.
Rent for each of the Properties has been set using the fair market value of
each such Property, assuming the USTs have been upgraded to meet the 1998
Standards and such Properties are free of known environmental contamination,
since Getty is to be responsible for all such costs. Rent for each Property will
increase at the end of each five-year period by the net increase in the Consumer
Price Index for all items in the Northeast Region for such five-year period,
such increase not to exceed fifteen percent (15%). Rents for all Properties are
payable in advance on the first day of the month. The initial term of the Master
Lease is (i) fifteen years with respect to Properties owned in fee by Getty and
leased to Marketing, and Properties leased by Getty from Power Test Realty
Company Limited Partnership and subleased to Marketing and (ii) the length of
time remaining under underlying lease terms (which ranges from one to fifteen
years under the Master Lease) with respect to Properties leased by Getty from
other third parties and subleased to Marketing. The Master Lease terms for each
category of Properties described above also include four ten-year renewal
options (or, with respect to category (ii), such shorter period as the
underlying lease may provide), which may be exercised by Marketing with two
years advance notice on an individual property basis for all
F-8
<PAGE> 56
Properties then subject to the Master Lease. For the subleased Properties, Getty
has agreed to use reasonable efforts to extend the underlying lease terms upon
conditions acceptable to Marketing. In the event that Marketing desires not to
renew the sublease upon terms (including any underlying lease term extension
negotiated by Getty) available to it, Getty may extend or renew the lease and
sublease the property to a third party after the end of Marketing's term.
The Master Lease provides that if during the lease term, Marketing
determines that any of the leased premises have become uneconomic or unsuitable
for their use as a service station or convenience store and has discontinued use
of the property or intends to discontinue use of the property as a service
station or convenience store within one year of the date of said determination,
Marketing shall have the right to sublet the property for any lawful use without
Getty's consent and, prior to the commencement of any such sublease term,
Marketing shall remove any USTs on the Property and thereafter perform all
requisite environmental investigations and/or remediations. Marketing shall have
the right of economic abandonment with respect to no more than ten properties
during any fiscal year of the lease term. Marketing shall have no right of
economic abandonment for the terminal premises and the premises subject to third
party leases.
Rent expense paid to Realty, which is included in cost of sales, amounted
to $55,130,000, $55,352,000 and $55,900,000 for the years ended January 31,
1996, 1995 and 1994, respectively. Future minimum annual rentals under
noncancelable operating leases which have terms in excess of one year as of
January 31, 1996, payable to Realty, are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
-----------------------
<S> <C>
1997........................................................ $ 56,070
1998........................................................ 56,859
1999........................................................ 56,298
2000........................................................ 55,651
2001........................................................ 55,350
Thereafter.................................................. 561,356
--------
$841,584
========
</TABLE>
Rent income received under subleases amounted to $32,025,000, $29,860,000
and $28,443,000 for the years ended January 31, 1996, 1995 and 1994,
respectively. Substantially all of these subleases have remaining terms which
range from one to three years. Although there is no assurance that these
subleases will be renewed, no significant difficulty has been experienced in
subleasing retail outlets.
5. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DEPRECIABLE
1996 1995 LIFE (YEARS)
-------- -------- ------------
<S> <C> <C> <C>
Equipment................................................... $153,005 $138,655 10 to 15
Motor vehicles.............................................. 3,014 4,495 3 to 10
Furniture and fixtures...................................... 1,566 1,537 10
Leasehold improvements...................................... 1,197 1,158 See Note 2
-------- --------
158,782 145,845
Less, accumulated depreciation and amortization............. 74,666 63,618
-------- --------
$ 84,116 $ 82,227
======== ========
</TABLE>
6. COMMITMENTS AND CONTINGENCIES
The petroleum products industry is subject to numerous existing federal,
state and local laws and regulations, including matters relating to the
protection of the environment. Environmental expenses have been attributable to
remediation, monitoring, soil disposal and governmental agency reporting
(collectively, "Remediation Costs") incurred in connection with contaminated
sites and the replacement or upgrading of underground storage tanks, related
piping, underground pumps, wiring and monitoring devices (collectively,
F-9
<PAGE> 57
the "USTs") to meet federal, state and local environmental standards, as well as
routine monitoring and tank testing. For the years ended January 31, 1996, 1995
and 1994, net environmental expenses included in Marketing's cost of sales
amounted to $14,346,000, $11,769,000 and $9,673,000, respectively, which amounts
were net of probable recoveries from state UST remediation funds.
During the fourth quarter of fiscal 1997, the Board of Directors of Getty
formally approved the Distribution. Under the Master Lease, Getty committed to a
program to bring the leased properties to regulatory closure and, thereafter,
transfer all future environmental risks from Getty to Marketing. In order to
establish the Remediation Costs obligation and estimate the incremental cost of
accelerated remediation, Marketing and Getty commissioned a detailed
property-by-property environmental study of all retail outlets, with the
objective of achieving closure in approximately five years. As a result,
Marketing revised its estimate of future Remediation Costs in the fourth quarter
of fiscal 1997 and will record a pre-tax charge in such quarter for Remediation
Costs of $21.2 million. The pre-tax charge resulted from the acceleration of
remediation activities to be paid by Getty through more aggressive means of
treating contaminated sites to bring them to closure in approximately five
years, which resulted in significant incremental Remediation Costs, changes in
estimated Remediation Costs at previously identified properties, including costs
to be incurred in connection with UST upgrades, and additional charges to comply
with AICPA Statement of Position 96-1, "Environmental Remediation Liabilities."
Getty has agreed to pay all costs relating to, and to indemnify Marketing
for, all scheduled known pre-Distribution environmental liabilities and
obligations, all scheduled future upgrades necessary to cause USTs to conform to
the 1998 federal standards (the "1998 Standards"), and all environmental
liabilities and obligations arising out of discharges with respect to properties
containing USTs that have not been upgraded to meet the 1998 Standards that are
discovered prior to the date such USTs are upgraded to meet the 1998 Standards
(collectively, the "Getty Environmental Liabilities"). Getty will also collect
recoveries from state UST remediation funds related to Getty Environmental
Liabilities.
Marketing has not reflected a liability for the Getty Environmental
Liabilities in its consolidated balance sheet since Getty remains the primary
obligor for such liabilities. The liabilities, which were initially recorded in
Marketing's balance sheet, were subsequently capitalized into stockholders'
equity as a contribution to capital by Getty to Marketing. In the unlikely event
that Getty fails to remediate a contaminated property and Marketing is held
jointly and severally responsible for the Remediation Costs, Getty is obligated
to indemnify Marketing, and any Remediation Costs paid by Marketing will be
offset against Marketing's rental obligations under the Master Lease. Because of
such rental offset, it is remote that Marketing would incur any incremental
costs in connection with any such remediation.
Marketing will be responsible for and will indemnify Getty with respect to
all environmental obligations and liabilities other than the Getty Environmental
Liabilities. No amounts have been included for Marketing environmental
obligations and liabilities as such amounts are not currently probable and
estimable. However, future environmental expenditures may have a significant
impact on results of operations for any single fiscal year or interim period,
though Marketing believes that such costs will not have a material adverse
effect on Marketing's financial position.
On September 16, 1996, Getty entered into an Agreement with the New York
State Department of Taxation and Finance (the "Department"), settling the
license revocation proceedings brought by the Department whereby Getty's
wholly-owned subsidiary Getty Terminals Corp.'s ("Getty Terminals") licenses and
permits for its three New York State terminals and its New York motor fuels and
diesel distributor licenses would be terminated. The revocation proceedings were
the result of the 1990 conviction of Getty Terminals for federal gasoline excise
tax evasion and conspiracy in 1985. Under the terms of the Agreement, Getty's
wholly-owned subsidiary, Kingston Oil Supply Corp. ("KOSCO") will be permitted
to assume all of the storage and distribution activities and operations now
performed by Getty Terminals in New York. KOSCO will have six months in which to
obtain new or amended licenses and permits and, upon the issuance thereof, Getty
Terminals will surrender its licenses and permits. KOSCO's Board of Directors
will consist of three persons, one of whom shall be an independent director, and
KOSCO shall provide periodic reports to the Department relating to New York tax
laws. The Agreement shall terminate on September 15, 1999. Under the
F-10
<PAGE> 58
terms of the settlement, Getty and its subsidiaries are not required to pay any
penalties or fines. Prior to the Distribution, Marketing will become a party to
the Agreement. The implementation of the settlement will have no adverse impact
on the results of operations, financial condition or liquidity of Marketing,
including the ability to sell motor fuels in New York or operate its New York
State terminals.
Marketing is subject to various legal proceedings in the ordinary course of
business. Such proceedings are not expected to have a material adverse effect on
Marketing's financial condition or results of operations. Pursuant to the
Distribution Agreement, Getty has agreed to defend all existing proceedings and
indemnify Marketing with respect thereto.
In order to minimize Marketing's exposure to credit risk associated with
financial instruments, Marketing places its temporary cash investments with high
credit quality institutions and, by policy, limits the amount invested with any
one institution other than the U.S. Government. Except for one customer,
Uni-Marts, Inc. ("Uni-Marts"), which represents approximately 10% of Marketing's
net sales for each of the three years in the period ended January 31, 1996,
concentration of credit risk with respect to trade receivables generally is
limited due to the large number of customers comprising Marketing's customer
base.
On December 27, 1996, Uni-Marts notified Getty that, effective December 31,
1997, it would not renew its various leases and subleases of approximately 100
service station properties from Getty or the existing petroleum supply agreement
between Getty and Uni-Marts with respect to such service stations and certain
additional service stations owned or operated by Uni-Marts. Uni-Marts
subsequently advised Getty by letter that it may be interested in negotiating
and entering into revised arrangements. While Getty has preliminarily discussed
such matters with Uni-Marts, there can be no assurance that any revised terms
will be agreed upon. In the event the parties do not agree upon any revised
arrangements prior to December 31, 1997, Marketing believes that it will be able
to re-lease the approximately 100 affected service station properties. The loss
of motor fuel product sales to Uni-Marts pursuant to the existing supply
agreement, if not replaced, could have a material adverse effect on Marketing's
revenues. Marketing believes such loss of product sales would not impact its
operating income because the affected leased service station properties should
be re-leased to retail dealers at higher retail product margins to be realized
by Marketing than the current lower wholesale product margins under the supply
agreement with Uni-Marts. Net sales and rental income attributable to the
Uni-Marts agreement amounted to $76.8 million (or 10.1% of net sales) and $4.6
million (or 14.3% of rental income), respectively, for the year ended January
31, 1996.
Marketing's financial results depend largely on retail marketing margins
and rental income from its dealers. The petroleum marketing industry has been
and continues to be volatile and highly competitive. The cost of petroleum
products purchased by Marketing as well as the price of petroleum products sold
have fluctuated widely in the past. As a result of the historic volatility of
product margins and the fact that they are affected by numerous diverse factors,
it is impossible to predict future margin levels.
7. INCOME TAXES
Getty and Marketing have entered into a Tax Sharing Agreement that defines
the parties' rights and obligations with respect to filing of returns, payments,
deficiencies and refunds of federal, state and other income, franchise or motor
fuel taxes relating to Getty's business for tax years prior to and including the
Distribution and with respect to certain tax attributes of Getty after the
Distribution. In general, the Tax Sharing Agreement provides that Getty will be
responsible for all federal, state and local tax liabilities that relate to
periods (or portions thereof) ending on or prior to the Distribution. For
periods subsequent to the Distribution, Marketing will file its own tax returns.
The provision for income taxes is reflected in the consolidated financial
statements as if Marketing had been operating on a stand-alone basis.
Marketing's provision (credit) for income taxes is summarized as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------- -------
<S> <C> <C> <C>
Current..................................................... $ 122 $ (2,203) $ (804)
Deferred.................................................... 2,257 659 1,804
----------- ------------- -------
Provision (credit) for income taxes......................... $ 2,379 $(1,544) $ 1,000
=========== ============= =======
</TABLE>
F-11
<PAGE> 59
The tax effects of temporary differences which comprise the deferred tax
assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
--------------- ---------------
<S> <C> <C>
Property and equipment...................................... $(13,889) $(11,636)
Accruals.................................................... 1,626 1,736
Inventories................................................. 694 588
--------------- ---------------
Net deferred tax liabilities................................ $ (11,569) $ (9,312)
=============== ===============
</TABLE>
The following is a reconciliation of the expected statutory federal income
tax provision (credit) and the actual provision (credit) for income taxes (in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
----------- ------------- -----------
<S> <C> <C> <C>
Expected provision (credit) at statutory federal income tax
rate...................................................... $ 2,214 $ (1,392) $ 986
State and local income taxes, net of federal benefit........ 183 (182) 138
Other....................................................... (18) 30 (124)
----------- ------------- -----------
Provision (credit) for income taxes......................... $ 2,379 $(1,544) $ 1,000
=========== ============= ===========
</TABLE>
8. STOCKHOLDERS' EQUITY
Marketing's authorized capital stock presently consists of 1,000 shares of
Marketing Common Stock, of which 1,000 shares are issued and outstanding and are
owned by Getty. Prior to the Distribution, Marketing's articles of incorporation
will be amended by the Marketing Board and by Getty, as sole stockholder of
Marketing. Under such amended articles, the total number of shares of all
classes of stock that Marketing will have authority to issue will be 40,000,000,
30,000,000 of which will be shares of Marketing Common Stock, $.01 par value per
share, and 10,000,000 of which will be shares of preferred stock, $.01 par value
per share. Based on the estimated number of shares of Getty Common Stock
outstanding as of the Distribution, approximately 12,675,000 shares of Marketing
Common Stock will be issued to stockholders of Getty. In addition, approximately
667,000 shares of Marketing Common Stock will be issued to the Marketing ESOP at
the time of the Distribution (See Note 9).
A summary of the changes in stockholders' equity for the three years ended
January 31, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Balance, February 1, 1993................................... $ 39,811
Net income.................................................. 1,818
Net cash transferred from Getty............................. 362
-------------
Balance, January 31, 1994................................... 41,991
Net loss.................................................... (2,434)
Net cash transferred to Getty............................... (2,496)
-------------
Balance, January 31, 1995................................... 37,061
Net income.................................................. 3,664
Net cash transferred from Getty............................. 9,586
-------------
Balance, January 31, 1996................................... $ 50,311
=============
</TABLE>
9. EMPLOYEE BENEFIT PLANS
Effective after the Distribution, Marketing will have a retirement and
profit sharing plan with deferred 401(k) savings plan provisions (the
"Retirement Plan") for non-union employees meeting certain service requirements
and a Supplemental Plan for executives. Under the terms of these plans, the
annual discretionary contributions to the plans are determined by the Board of
Directors. Under the Retirement Plan, employees may make voluntary contributions
and Marketing has elected to match an amount equal to 50% of such contributions
but in no event more than 3% of the employee's eligible compensation. Under the
Supplemental Plan, a participating executive may receive an amount equal to 10%
of his compensation, reduced by the amount of any contributions allocated to
such executive under the Retirement Plan. Contributions, net of forfeitures,
made by Getty under the comparable Getty retirement plan and supplemental plan
in respect of persons who will be Marketing employees approximated $569,000,
$606,000 and $622,000 for the years ended
F-12
<PAGE> 60
January 31, 1996, 1995 and 1994, respectively. In addition, Marketing has
contributed $346,000, $334,000 and $283,000 to a union welfare plan for the
years ended January 31, 1996, 1995 and 1994, respectively. Such amounts are
included in the accompanying consolidated statements of operations.
In connection with the Distribution, Marketing will establish a leveraged
Employee Stock Ownership Plan (the "Marketing ESOP") that will purchase newly
issued shares of Marketing Common Stock from Marketing equal to five percent of
the outstanding shares of Marketing. The Marketing ESOP will purchase such
newly-issued shares from Marketing using the proceeds of a loan to be made by
Marketing to the Marketing ESOP. The Marketing ESOP loan will be repaid over a
five-year period, and Marketing will contribute annually to the Marketing ESOP
the funds required to repay such loan. The principal amount of the Marketing
ESOP loan is expected to be equal to the number of shares purchased by the
Marketing ESOP (approximately 667,000) multiplied by the purchase price per
share (determined on the basis of the value of the Marketing Common Stock). It
is expected that the repayment of the Marketing ESOP loan will result in
projected allocations to participants' accounts of an aggregate of approximately
133,400 shares of Marketing Common Stock per year, allocated in proportion to
compensation. Marketing expects that the five percent of the outstanding stock
of Marketing purchased by the Marketing ESOP will be allocated to covered
employees over a five-year period. Commencing February 1, 1997, Marketing will
recognize a charge to operating results over a five-year period relating to the
Marketing ESOP. Such charge will be based on the value of the Marketing Common
Stock in the future and, as such, is not currently determinable.
Immediately prior to the Distribution, each current holder of an option to
acquire shares of Getty Common Stock pursuant to Getty's 1985, 1988 and 1991
Stock Option Plans will receive, in exchange therefor, two separately
exercisable options: one to purchase shares of Getty Common Stock (a "Getty
Option") and one to purchase Marketing Common Stock (a "Marketing Option"), each
exercisable for the same number of shares and containing substantially
equivalent terms as the pre-Distribution option. The exercise price of each
Getty Option and Marketing Option (each, a "Replacement Option") will be set so
as to preserve the Aggregate Spread (as defined below) in value attributed to
the options currently held by such directors, officers and key employees. The
"Aggregate Spread" is an amount representing the difference between the exercise
price of an option and the price of a share of Getty Common Stock immediately
prior to the Distribution multiplied by the number of shares underlying such
option. Certain presently unexercisable options covering a total of 224,594
shares will become immediately exercisable at the date of the Distribution for
persons covered by certain "change of control" agreements. Accordingly,
Marketing will recognize a charge to operating results at the date of the
Distribution equal to the product of the number of such options and the
difference between their exercise price and the market price. Since the charge
will be based on the value of the Marketing Common Stock in the future, such
amount is not currently determinable.
The Marketing Stock Option Plan authorizes Marketing to grant options to
purchase shares of Marketing Common Stock. The aggregate number of shares of
Marketing Common Stock which may be made the subject of options under the
Marketing Stock Option Plan will not exceed 1,300,000 shares, subject to further
adjustment for stock dividends and stock splits, of which approximately
1,080,000 shares will be subject to issuance upon the exercise of Replacement
Options (as described above) and the balance will be available for future option
grants. Except with respect to certain of the Replacement Options, which will be
immediately exercisable, the Marketing Stock Option Plan provides that options
are exercisable starting one year from the date of grant, on a cumulative basis
at the annual rate of 25 percent of the total number of shares covered by the
option.
F-13
<PAGE> 61
The following is a schedule of stock option prices and activity relating to
the Getty Petroleum Corp. Stock Option Plans for the three years ended January
31, 1996. Subsequent to the Distribution, the exercise price of each Getty
option and Marketing option will be set so as to preserve the Aggregate Spread
(as defined above) in value attributed to the options currently held by the
holders:
<TABLE>
<CAPTION>
1985 PLAN 1988 PLAN 1991 PLAN
---------------------------- ---------------------------- ----------------------------
NUMBER GETTY STOCK NUMBER GETTY STOCK NUMBER GETTY STOCK
OF OPTION PRICE OF OPTION PRICE OF OPTION PRICE
SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
------------- ------------ ------------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at February 1,
1993.................... 207,159 $10.49-14.09 256,523 $11.12-18.62 214,275 $10.88-12.38
Granted................... 80,000 12.25-13.13
Exercised................. (9,833) 10.49 (2,500) 11.12 (1,250) 12.38
Cancelled................. (8,052) 10.49-14.09 (15,014) 11.12-18.62 (12,325) 10.88-12.38
------------- ------------ ------------- ------------ ------------- ------------
Outstanding at January 31,
1994.................... 189,274 10.49-14.09 239,009 11.12-18.62 280,700 10.88-13.13
Granted................... 107,250 10.88
Exercised................. (1,245) 10.49-14.09 (250) 11.12 (125) 10.88
Cancelled................. (1,217) 14.09 (926) 17.12-18.62 (1,250) 10.88
------------- ------------ ------------- ------------ ------------- ------------
Outstanding at January 31,
1995.................... 186,812 10.49-14.09 237,833 11.12-18.62 386,575 10.88-13.13
Granted................... 64,500 13.88 63,500 13.88
Exercised................. (2,500) 11.12 (5,500) 10.88
Cancelled................. (991) 10.49-14.09 (1,551) 11.12-18.62 (1,250) 10.88-12.38
------------- ------------ ------------- ------------ ------------- ------------
Outstanding at January 31,
1996.................... 185,821 $10.49-14.09 298,282 $11.12-18.62 443,325 $10.88-13.88
============= ============ ============= ============ ============= ============
Exercisable at January 31,
1996.................... 185,821 $10.49-14.09 298,282* $11.12-18.62 390,997* $10.88-13.13
============= ============ ============= ============ ============= ============
Available for grant at
January 31, 1996........ -- 207 49,800
============= ============= =============
</TABLE>
- ---------------
* Includes options which become exercisable as of the date of the Distribution.
On December 13, 1996 additional options were granted for 151,400 shares with an
option price of $14.75 per share.
F-14
<PAGE> 62
10. QUARTERLY FINANCIAL DATA
The following is a summary of the quarterly results of operations for the
years ended January 31, 1996 and 1995 (unaudited as to quarterly information):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------- YEAR ENDED
FISCAL 1996: APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 JANUARY 31
------------ --------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 194,967 $ 187,796 $ 215,486 $ 192,945 $ 791,194
Gross profit (loss)(a).............. (1,789) 2,425 4,031 3,540 8,207
Depreciation and amortization....... 3,095 3,146 3,339 3,519 13,099
Earnings (loss) before income taxes
and cumulative effect of
accounting
change............................ (2,113) 1,756 3,535 3,147 6,325
Net earnings (loss)................. (1,600)(b) 1,101 2,200 1,963 3,664(b)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------------------------------- YEAR ENDED
FISCAL 1995: APRIL 30 JULY 31 OCTOBER 31 JANUARY 31 JANUARY 31
------------ --------------- --------------- --------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues............................ $ 170,136 $ 182,869 $ 198,240 $ 202,490 $ 753,735
Gross profit (loss)(a).............. (1,222) (8,084) 4,626 7,201 2,521
Depreciation and amortization....... 2,770 2,868 3,037 2,965 11,640
Earnings (loss) before income
taxes............................. (2,127) (8,992) 1,179 5,962 (3,978)
Net earnings (loss)................. (1,301) (5,502) 721 3,648 (2,434)
</TABLE>
- ---------------
(a) Gross profit (loss) is calculated as net sales (excluding rental and other
income) less cost of sales (excluding depreciation and amortization).
(b) Includes charge to earnings of $282 from the cumulative effect of adopting
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of."
11. RESTRUCTURING
During fiscal 1995, pre-tax charges of $1,846,000 were recorded to provide
for severance and other costs associated with restructuring Marketing's
organization and its operations. The restructuring charges included $1,171,000
for severance and related benefits resulting from a 6% reduction in the work
force, and $675,000 for other costs. Other costs include $203,000 related to
cancellation of computer equipment leases, $168,000 related to computer system
modifications, $141,000 related to the reduction of office space, $100,000
related to legal fees and $63,000 for other miscellaneous costs. Marketing's
consolidated balance sheets as of January 31, 1996 and 1995 included an accrual
of $326,000 and $1,048,000, respectively, relating to the restructuring. The
remaining accrual of $326,000 at January 31, 1996 relates to severance and
related benefits payable through October 1999.
12. SUBSEQUENT EVENT
In January 1997, Marketing obtained uncommitted lines of credit with two
banks in the aggregate amount of $50,000,000 through January 1998, which may be
utilized for working capital borrowings and letters of credit. Borrowings under
such lines of credit are unsecured and will bear interest at the applicable
bank's prime rate or, at Marketing's option, 1.1% above LIBOR.
F-15
<PAGE> 63
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
OCTOBER 31,
----------------------------------
1996 1995
--------------- ---------------
<S> <C> <C>
Net sales................................................... $ 617,168 $ 574,021
Rental income............................................... 24,904 23,949
Other income................................................ 153 279
--------------- ---------------
642,225 598,249
--------------- ---------------
Cost of sales (excluding depreciation and amortization)..... 619,930 569,354
Selling, general and administrative expenses................ 15,403 15,846
Depreciation and amortization............................... 10,159 9,580
Interest expense............................................ 352 291
--------------- ---------------
645,844 595,071
--------------- ---------------
Earnings (loss) before provision (credit) for income taxes
and cumulative effect of accounting change................ (3,619) 3,178
Provision (credit) for income taxes......................... (1,527) 1,195
--------------- ---------------
Earnings (loss) before cumulative effect of accounting
change.................................................... (2,092) 1,983
Cumulative effect of accounting change...................... -- (282)
--------------- ---------------
Net earnings (loss)......................................... $ (2,092) $ 1,701
=============== ===============
</TABLE>
See accompanying notes.
F-16
<PAGE> 64
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
OCTOBER 31,
1996
---------------
<S> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 937
Accounts receivable, less allowance
for doubtful accounts of $1,302........................ 13,559
Inventories............................................... 20,275
Deferred income taxes..................................... 1,657
Prepaid expenses and other
current assets......................................... 2,674
---------------
Total current assets.............................. 39,102
Property and equipment, at cost, less
accumulated depreciation and amortization................. 87,614
Other assets................................................ 2,163
---------------
TOTAL ASSETS...................................... $ 128,879
===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 28,821
Accrued expenses.......................................... 11,247
Gasoline taxes payable.................................... 16,196
---------------
Total current liabilities......................... 56,264
Deferred income taxes....................................... 14,125
Other, principally deposits................................. 14,463
Commitments and contingencies (Note 1)
Stockholders' equity........................................ 44,027
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........ $ 128,879
===============
</TABLE>
See accompanying notes.
F-17
<PAGE> 65
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
OCTOBER 31,
--------------------------
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)......................................... $ (2,092) $ 1,701
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Cumulative effect of accounting change.................... -- 282
Depreciation and amortization............................. 10,159 9,580
Deferred income taxes..................................... 899 560
Gain on dispositions of property and equipment............ (95) (61)
Changes in assets and liabilities:
Accounts receivable....................................... (1,365) 4,073
Inventories............................................... (358) (8,556)
Prepaid expenses and other current assets................. 153 (294)
Other assets.............................................. 385 (55)
Accounts payable, accrued expenses and gasoline taxes
payable................................................ 9,707 (4,821)
Other, principally deposits............................... 622 598
-------- --------
Net cash provided by operating activities.............. 18,015 3,007
-------- --------
Cash flows from investing activities:
Capital expenditures...................................... (13,843) (12,753)
Proceeds from dispositions of equipment................... 281 419
-------- --------
Net cash used in investing activities.................. (13,562) (12,334)
-------- --------
Cash flows from financing activities:
Net cash transferred from (to) Getty...................... (4,192) 8,047
-------- --------
Net cash provided by (used in) financing activities.... (4,192) 8,047
-------- --------
Net increase (decrease) in cash and equivalents............. 261 (1,280)
Cash and equivalents at beginning of period................. 676 2,449
-------- --------
Cash and equivalents at end of period....................... $ 937 $ 1,169
======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for interest.................... $ 352 $ 291
</TABLE>
See accompanying notes.
F-18
<PAGE> 66
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The unaudited consolidated financial statements included herein have been
prepared by Getty Petroleum Marketing Inc. ("Marketing") on the same basis as
the audited financial statements, and include all adjustments (consisting of
normal recurring accruals) which are, in the opinion of management, necessary
for a fair presentation of the results of operations for the interim periods
ended October 31, 1996 and 1995, pursuant to the rules and regulations of the
Securities and Exchange Commission.
Marketing, a Maryland corporation, was formed on October 1, 1996 as a
wholly-owned subsidiary of Getty Petroleum Corp. ("Getty"). Getty plans to
separate its petroleum marketing business from its real estate business at the
close of business on January 31, 1997 with each business to be conducted by a
separate, publicly held corporation. In order to effect the separation of these
businesses, Getty will transfer to Marketing the assets and liabilities of the
petroleum marketing business and the New York Mid-Hudson Valley home heating oil
business previously conducted by a subsidiary of Getty, and distribute all of
the common shares of Marketing to the stockholders of Getty (the
"Distribution"). The Distribution is expected to be at the rate of one share of
common stock of Marketing (the "Marketing Common Stock") for each share of Getty
common stock (the "Getty Common Stock"). Getty will retain and continue to own
and operate the real estate business and the Pennsylvania and Maryland home
heating oil business previously conducted by another subsidiary. After the
Distribution, Getty will change its name to Getty Realty Corp. ("Realty" or
"Getty").
The consolidated financial statements of Marketing contained herein have
been prepared on the basis that the assets and liabilities of the petroleum
marketing business were transferred using historical carrying values as recorded
by Getty, and Marketing's results of operations and cash flows were derived from
Getty's historical financial statements. The consolidated financial statements
of Marketing reflect all costs of doing business. Historical rental expense to
Getty was established on the basis of the fair market value of the leased
properties, which assumed that the properties have been upgraded to meet the
1998 Standards (as defined below) and are free of known environmental
contamination, since Getty is responsible for all such costs as described below.
Assets, liabilities, revenues and expenses were specifically identified as
being related to either the business of Marketing or Realty, except that
Marketing's results of operations include allocations of certain selling,
general and administrative expenses, namely employee benefits, payroll taxes and
travel and entertainment expenses. Employee benefits, payroll taxes and travel
and entertainment expenses were allocated to Marketing based on number of
personnel and salaries specifically identified to Marketing. Selling, general
and administrative expenses allocated to Marketing from Getty were $1,348,000
and $1,171,000 for the nine month periods ended October 31, 1996 and October 31,
1995, respectively. Management believes these allocations to be reasonable.
The financial information presented herein is not necessarily indicative of
the financial results that would have occurred had Marketing been operated as a
separate, stand-alone entity during the reporting period nor is it necessarily
indicative of future results. However, Management believes that these allocated
amounts approximate what the expense would have been on a stand-alone basis and
that any additional costs, excluding additional rent associated with the Master
Lease, would have been immaterial.
The petroleum products industry is subject to numerous existing federal,
state and local laws and regulations, including matters relating to the
protection of the environment. Environmental expenses have been attributable to
remediation, monitoring, soil disposal and governmental agency reporting
(collectively, "Remediation Costs") incurred in connection with contaminated
sites and the replacement or upgrading of underground storage tanks, related
piping, underground pumps, wiring and monitoring devices (collectively, the
"USTs") to meet federal, state and local environmental standards, as well as
routine monitoring and tank testing. For the nine months ended October 31, 1996
and 1995, net environmental expenses included in Marketing's cost of sales
amounted to $6,795,000 and $11,206,000, respectively.
During the fourth quarter of fiscal 1997, the Board of Directors of Getty
formally approved the Distribution. Under the Master Lease, Getty committed to a
program to bring the leased properties to
F-19
<PAGE> 67
regulatory closure and, thereafter, transfer all future environmental risks from
Getty to Marketing. In order to establish the Remediation Costs obligation and
estimate the incremental cost of accelerated remediation, Marketing and Getty
commissioned a detailed property-by-property environmental study of all retail
outlets, with the objective of achieving closure in approximately five years. As
a result, Marketing revised its estimate of future Remediation Costs in the
fourth quarter of fiscal 1997 and will record a pre-tax charge in such quarter
for Remediation Costs of $21.2 million. The pre-tax charge resulted from the
acceleration of remediation activities to be paid by Getty through more
aggressive means of treating contaminated sites to bring them to closure in
approximately five years, which resulted in significant incremental Remediation
Costs, changes in estimated Remediation Costs at previously identified
properties, including costs to be incurred in connection with UST upgrades, and
additional charges to comply with AICPA Statement of Position 96-1,
"Environmental Remediation Liabilities."
Getty has agreed to pay all costs relating to, and to indemnify Marketing
for, all scheduled known pre-Distribution environmental liabilities and
obligations, all scheduled future upgrades necessary to cause USTs to conform to
the 1998 federal standards (the "1998 Standards"), and all environmental
liabilities and obligations arising out of discharges with respect to properties
containing USTs that have not been upgraded to meet the 1998 Standards that are
discovered prior to the date such USTs are upgraded to meet the 1998 Standards
(collectively, the "Getty Environmental Liabilities"). Getty will also collect
recoveries from state UST remediation funds related to Getty Environmental
Liabilities.
Marketing has not reflected a liability for the Getty Environmental
Liabilities in its consolidated balance sheet since Getty remains the primary
obligor for such liabilities. The liabilities, which were initially recorded in
Marketing's balance sheet, were subsequently capitalized into stockholders'
equity as a contribution to capital by Getty to Marketing. In the unlikely event
that Getty fails to remediate a contaminated property and Marketing is held
jointly and severally responsible for the Remediation Costs, Getty is obligated
to indemnify Marketing, and any Remediation Costs paid by Marketing will be
offset against Marketing's rental obligations under the Master Lease. Because of
such rental offset, it is remote that Marketing would incur any incremental
costs in connection with any such remediation.
Marketing will be responsible for and will indemnify Getty with respect to
all environmental obligations and liabilities other than the Getty Environmental
Liabilities. No amounts have been included for Marketing environmental
obligations and liabilities as such amounts are not currently probable and
estimable. However, future environmental expenditures may have a significant
impact on results of operations for any single fiscal year or interim period,
though Marketing believes that such costs will not have a material adverse
effect on Marketing's financial position.
Getty uses a centralized approach to cash management. As a result, cash and
equivalents (other than actual cash on hand) were not allocated to Marketing in
the consolidated financial statements. However, under the Reorganization and
Distribution Agreement, Marketing will receive cash from Getty in an amount
sufficient to provide Marketing with net working capital of $1.1 million. Such
cash amount will be paid upon the determination of Marketing's net working
capital as of January 31, 1997.
The results of operations for the interim periods ended October 31, 1996
and 1995 are not necessarily indicative of the results to be expected for the
full fiscal years.
2. ACCOUNTING CHANGE
The consolidated statement of operations for the nine months ended October
31, 1995 includes an after-tax charge to earnings of $282,000 for the cumulative
effect of adopting, at the end of that fiscal year, Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" relating to assets held for
disposal.
3. INVENTORIES
Inventories, primarily finished petroleum products, are principally
accounted for under the lower of last-in, first-out ("LIFO") cost or market. Due
to changes in product costs during the nine months ended October 31, 1996,
Marketing recorded a LIFO inventory reserve of $3,955,000, which increased cost
of sales
F-20
<PAGE> 68
and decreased pre-tax income by such amount. During the prior year's comparable
period, there was no LIFO inventory charge.
4. STOCKHOLDERS' EQUITY
A summary of the changes in stockholders' equity for the nine months ended
October 31, 1996 is as follows (in thousands):
<TABLE>
<S> <C>
Balance, February 1, 1996.................................. $50,311
Net loss................................................... (2,092)
Net cash transferred to Getty.............................. (4,192)
-------
Balance, October 31, 1996.................................. $44,027
=======
</TABLE>
5. EMPLOYEE BENEFIT PLANS
In connection with the Distribution, Marketing will establish a leveraged
Employee Stock Ownership Plan (the "Marketing ESOP") that will purchase newly
issued shares of Marketing Common Stock from Marketing equal to five percent of
the outstanding shares of Marketing. The Marketing ESOP will purchase such
newly-issued shares from Marketing using the proceeds of a loan to be made by
Marketing to the Marketing ESOP. The Marketing ESOP loan will be repaid over a
five-year period, and Marketing will contribute annually to the Marketing ESOP
the funds required to repay such loan. The principal amount of the Marketing
ESOP loan is expected to be equal to the number of shares purchased by the
Marketing ESOP (approximately 667,000) multiplied by the purchase price per
share (determined on the basis of the value of the Marketing common stock). It
is expected that the repayment of the Marketing ESOP loan will result in
projected allocations to participants' accounts of an aggregate of approximately
133,400 shares of Marketing Common Stock per year, allocated in proportion to
compensation. Marketing expects that the five percent of the outstanding stock
of Marketing purchased by the Marketing ESOP will be allocated to covered
employees over a five-year period. Commencing February 1, 1997, Marketing will
recognize a charge to operating results over a five-year period relating to the
Marketing ESOP. Such charge will be based on the value of the Marketing Common
Stock in the future and, as such, is not currently determinable.
Immediately prior to the Distribution, each current holder of an option to
acquire shares of Getty Common Stock pursuant to Getty's 1985, 1988 and 1991
Stock Option Plans will receive, in exchange therefor, two separately
exercisable options: one to purchase shares of Getty Common Stock (a "Getty
Option") and one to purchase Marketing Common Stock (a "Marketing Option"), each
exercisable for the same number of shares and containing substantially
equivalent terms as the pre-Distribution option. The exercise price of each
Getty Option and Marketing Option will be set so as to preserve the Aggregate
Spread (as defined below) in value attributed to the options currently held by
such directors, officers and key employees. The "Aggregate Spread" is an amount
representing the difference between the exercise price of an option and the
price of a share of Getty Common Stock immediately prior to the Distribution
multiplied by the number of shares underlying such option. Certain presently
unexercisable options covering a total of 224,594 shares will become immediately
exercisable at the date of the Distribution for persons covered by certain
"change of control" agreements. Accordingly, Marketing will recognize a charge
to operating results at the date of the Distribution equal to the product of the
number of such options and the difference between their exercise price and the
market price. Since the charge will be based on the value of the Marketing
Common Stock in the future, such amount is not currently determinable.
F-21
<PAGE> 69
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Getty Petroleum Marketing Inc., a Maryland corporation ("Marketing"), was
formed on October 1, 1996 as a wholly-owned subsidiary of Getty Petroleum Corp.
("Getty"). Getty plans to separate its petroleum marketing business from its
real estate business at the close of business on January 31, 1997 with each
business to be conducted by a separate, publicly held corporation. In order to
effect the separation of these businesses, Getty will transfer to Marketing the
assets and liabilities of the petroleum marketing business and the New York
Mid-Hudson Valley home heating oil business previously conducted by a subsidiary
of Getty, and distribute all of the common shares of Marketing to the
stockholders of Getty (the "Distribution"). The Distribution is expected to be
at the rate of one share of common stock of Marketing (the "Marketing Common
Stock") for each share of Getty common stock. Getty will retain and continue to
own and operate the real estate business and the Pennsylvania and Maryland home
heating oil business previously conducted by another subsidiary. After the
Distribution, Getty will change its name to Getty Realty Corp.
The historical consolidated financial statements of Marketing reflect
periods during which Marketing did not operate as a separate, publicly held
company. The historical consolidated financial statements of Marketing contained
herein have been prepared on the basis that the assets and liabilities of the
petroleum marketing and related business were transferred using historical
carrying values as recorded by Getty and present Marketing's financial position
and results of operations as derived from Getty's historical financial
statements. Therefore, such historical consolidated financial statements may not
reflect the consolidated results of operations or financial position that would
have existed had Marketing operated as a separate, publicly held company.
The following unaudited pro forma consolidated financial statements of
Marketing contain adjustments to the historical consolidated balance sheet as of
October 31, 1996 and the historical consolidated statements of operations for
the fiscal year ended January 31, 1996 and for the nine months ended October 31,
1996 as if the Distribution had occurred on October 31, 1996 for purposes of the
pro forma consolidated balance sheet and on February 1, 1995 for purposes of the
pro forma consolidated statements of operations.
THE UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS ARE PROVIDED FOR
COMPARATIVE PURPOSES ONLY AND DO NOT PURPORT TO BE INDICATIVE OF THE RESULTS
WHICH ACTUALLY WOULD HAVE BEEN OBTAINED IF THE ABOVE-MENTIONED TRANSACTIONS HAD
BEEN EFFECTED ON THE DATES INDICATED OR OF THE RESULTS WHICH MAY BE OBTAINED IN
THE FUTURE. THE INFORMATION PROVIDED IN THE UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS OF MARKETING
AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS INFORMATION STATEMENT. THE
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS DO NOT CONTAIN ALL
DISCLOSURES REQUIRED BY GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
F-22
<PAGE> 70
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JANUARY 31, 1996 NINE MONTHS ENDED OCTOBER 31, 1996
------------------------------------------ ---------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- --------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales................... $758,887 $ -- $758,887 $617,168 $ -- $617,168
Rental income............... 32,025 -- 32,025 24,904 -- 24,904
Other income................ 282 960 (a) 1,242 153 720 (a) 873
-------- ------- -------- -------- ----- --------
791,194 960 792,154 642,225 720 642,945
-------- ------- -------- -------- ----- --------
Cost of sales (excluding
depreciation and
amortization)............. 750,680 789 (b) 751,469 619,930 592 (b) 620,522
Selling, general and
administrative expenses... 20,702 1,260 (a)(c) 21,962 15,403 945 (a)(c) 16,348
Depreciation and
amortization.............. 13,099 -- 13,099 10,159 -- 10,159
Interest expense............ 388 -- 388 352 -- 352
-------- ------- -------- -------- ----- --------
784,869 2,049 786,918 645,844 1,537 647,381
-------- ------- -------- -------- ----- --------
Income (loss) before
provision (credit) for
income taxes.............. 6,325 (1,089) 5,236 (3,619) (817) (4,436)
Provision (credit) for
income taxes.............. 2,379 (445)(d) 1,934 (1,527) (334)(c) (1,861)
-------- ------- -------- -------- ----- --------
Net earnings (loss)......... $ 3,946(e) $ (644) $ 3,302(e) $ (2,092) $(483) $ (2,575)
======== ======= ======== ======== ===== ========
Per share data:
Net earnings (loss)
per share............... $ .25(e) $ (.19)
======== ========
Weighted average shares
outstanding............. 13,315(f) 13,340(f)
======== ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated statements of
operations.
F-23
<PAGE> 71
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The unaudited pro forma consolidated statements of operations have been
derived from the historical financial statements of Marketing and reflect
certain pro forma adjustments as if the Distribution had been effected as of
February 1, 1995.
(a) Getty and Marketing have entered into a Services Agreement (the
"Services Agreement"), under which Marketing will provide certain administrative
and technical services to Getty and Getty will provide certain limited services
to Marketing. Marketing estimates that the net fees to be paid by Getty to
Marketing for services performed (after deducting the fees paid by Marketing to
Getty for services provided by Getty) will initially be approximately $80,000
per month, which amount takes into account Marketing's additional costs related
to providing such services, and will decline as the services performed decrease.
It is estimated that the difference between the net fees and additional costs
will not have a material impact on Marketing's results of operations. Getty
presently expects that most of such services will be provided by Marketing for
approximately one year.
(b) Represents additional rent paid to Getty by Marketing as provided for
in the Master Lease Agreement between the parties.
(c) Selling, general and administrative expenses include additional
incremental administrative costs Marketing will incur, such as audit, stock
exchange listing and transfer agent fees, annual report costs and board of
directors' costs as a result of operating as a separate, publicly held company.
(d) Represents the adjustment to the tax provision (benefit) due to the net
effect of the pro forma adjustments described above at the statutory tax rate of
40.9%.
(e) Excludes charge of $282,000, or $.02 per share, from the cumulative
effect of adopting Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of."
(f) In connection with the Distribution, Marketing will establish a
leveraged Employee Stock Ownership Plan (the "Marketing ESOP") that will
purchase newly issued shares of Marketing Common Stock from Marketing equal to
five percent of the outstanding shares of Marketing. The pro forma weighted
average number of shares of common stock outstanding during the fiscal year
ended January 31, 1996 and nine months ended October 31, 1996 includes weighted
average shares outstanding (based on Getty's weighted average shares
outstanding) plus 667,000 shares to reflect the issuance of the Marketing ESOP
shares.
Commencing February 1, 1997, Marketing will recognize a charge to operating
results relating to the Marketing ESOP over a five-year period. Such charge will
be based on the value of the Marketing Common Stock in the future and, as such,
is not currently determinable and, therefore, is not reflected in the unaudited
pro forma consolidated statements of operations.
A "change in control" will be deemed to have occurred as a result of the
Distribution pursuant to certain agreements entered into by Getty in December
1994 with its non-director officers and certain key employees. Under the
agreements, all Getty stock options granted to such officers or key employees
would immediately vest and would be exercisable for three years for such
officers and a shorter period for such key employees. Accordingly, for certain
of such options covering a total of 224,594 shares, Marketing will recognize a
charge to operating results at the Distribution Date, representing the
difference between the exercise price and the market price multiplied by the
number of such options. Since the charge will be based on the value of the
Marketing Common Stock in the future, such amount is not currently determinable
and has not been included in the unaudited pro forma consolidated statements of
operations.
The unaudited pro forma consolidated statements of operations of Marketing
reflect all costs of doing business. Historical rental expense to Getty (see
Notes 4 and 6 to the consolidated financial statements) was established on the
basis of the fair market value of the leased properties, which assumed that the
properties have been upgraded to meet the 1998 Standards (as defined below) and
are free of known environmental contamination, since Getty is responsible for
all such costs as described below.
F-24
<PAGE> 72
The petroleum products industry is subject to numerous existing federal,
state and local laws and regulations, including matters relating to the
protection of the environment. Environmental expenses have been attributable to
remediation, monitoring, soil disposal and governmental agency reporting
(collectively, "Remediation Costs") incurred in connection with contaminated
sites and the replacement or upgrading of underground storage tanks, related
piping, underground pumps, wiring and monitoring devices (collectively, the
"USTs") to meet federal, state and local environmental standards, as well as
routine monitoring and tank testing. For the year ended January 31, 1996 and the
nine months ended October 31, 1996, net environmental expenses included in
Marketing's cost of sales amounted to $14,346,000 and $6,795,000, respectively.
During the fourth quarter of fiscal 1997, the Board of Directors of Getty
formally approved the Distribution. Under the Master Lease, Getty committed to a
program to bring the leased properties to regulatory closure and, thereafter,
transfer all future environmental risks from Getty to Marketing. In order to
establish the Remediation Costs obligation and estimate the incremental cost of
accelerated remediation, Marketing and Getty commissioned a detailed
property-by-property environmental study of all retail outlets, with the
objective of achieving closure in approximately five years. As a result,
Marketing revised its estimate of future Remediation Costs in the fourth quarter
of fiscal 1997 and will record a pre-tax charge in such quarter for Remediation
Costs of $21.2 million. The pre-tax charge resulted from the acceleration of
remediation activities to be paid by Getty through more aggressive means of
treating contaminated sites to bring them to closure in approximately five
years, which resulted in significant incremental Remediation Costs, changes in
estimated Remediation Costs at previously identified properties, including costs
to be incurred in connection with UST upgrades, and additional charges to comply
with AICPA Statement of Position 96-1, "Environmental Remediation Liabilities."
Getty has agreed to pay all costs relating to, and to indemnify Marketing
for, all scheduled known pre-Distribution environmental liabilities and
obligations, all scheduled future upgrades necessary to cause USTs to conform to
the 1998 federal standards (the "1998 Standards"), and all environmental
liabilities and obligations arising out of discharges with respect to properties
containing USTs that have not been upgraded to meet the 1998 Standards that are
discovered prior to the date such USTs are upgraded to meet the 1998 Standards
(collectively, the "Getty Environmental Liabilities"). Getty will also collect
recoveries from state UST remediation funds related to Getty Environmental
Liabilities.
Marketing has not reflected a liability for the Getty Environmental
Liabilities in its consolidated balance sheet since Getty remains the primary
obligor for such liabilities. The liabilities, which were initially recorded in
Marketing's balance sheet, were subsequently capitalized into stockholders'
equity as a contribution to capital by Getty to Marketing. In the unlikely event
that Getty fails to remediate a contaminated property and Marketing is held
jointly and severally responsible for the Remediation Costs, Getty is obligated
to indemnify Marketing, and any Remediation Costs paid by Marketing will be
offset against Marketing's rental obligations under the Master Lease. Because of
such rental offset, it is remote that Marketing would incur any incremental
costs in connection with any such remediation.
Marketing will be responsible for and will indemnify Getty with respect to
all environmental obligations and liabilities other than the Getty Environmental
Liabilities. No amounts have been included for Marketing environmental
obligations and liabilities as such amounts are not currently probable and
estimable. However, future environmental expenditures may have a significant
impact on results of operations for any single fiscal year or interim period,
though Marketing believes that such costs will not have a material adverse
effect on Marketing's financial position.
F-25
<PAGE> 73
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
AS OF OCTOBER 31, 1996
(in thousands)
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents................................... $ 937 $18,262(a) $ 19,199
Accounts receivable, net............................... 13,559 -- 13,559
Inventories............................................ 20,275 -- 20,275
Deferred income taxes.................................. 1,657 -- 1,657
Prepaid expenses and other current assets.............. 2,674 -- 2,674
-------- ------- --------
Total current assets................................ 39,102 18,262 57,364
Property and equipment, net.............................. 87,614 -- 87,614
Other assets............................................. 2,163 -- 2,163
-------- ------- --------
TOTAL ASSETS........................................ $128,879 $18,262 $147,141
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 28,821 $ -- $ 28,821
Accrued expenses....................................... 11,247 -- 11,247
Gasoline taxes payable................................. 16,196 -- 16,196
-------- ------- --------
Total current liabilities........................... 56,264 -- 56,264
Deferred income taxes.................................... 14,125 -- 14,125
Other, principally deposits.............................. 14,463 -- 14,463
Stockholders' equity..................................... 44,027 18,262(a)(b) 62,289
-------- ------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $128,879 $18,262 $147,141
======== ======= ========
</TABLE>
See accompanying notes to unaudited pro forma consolidated balance sheet.
F-26
<PAGE> 74
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The unaudited pro forma consolidated balance sheet has been derived from
the historical financial statements of Marketing and reflects certain pro forma
adjustments as if the Distribution had been effected as of October 31, 1996.
(a) The $18.3 million represents cash which would have been received from
Getty in an amount sufficient to provide Marketing with net working capital of
$1.1 million in accordance with the Distribution Agreement. The actual cash
amount to be received from Getty will be based upon the determination of
Marketing's net working capital as of January 31, 1997, which determination is
expected to be made no later than March 31, 1997.
(b) Marketing does not, and will not, have a liability in its consolidated
pro forma balance sheet for the Getty Environmental Liabilities, including the
fiscal 1997 fourth quarter charge for Remediation Costs of $21.2 million, since
Getty remains the primary obligor for such liabilities. Such liabilities, which
will be initially recorded in Marketing's balance sheet, will be subsequently
capitalized into stockholders' equity as a contribution to capital by Getty to
Marketing. Such capital contribution will offset the related charge for
Remediation Costs, resulting in no net change to stockholders' equity. See notes
to unaudited pro forma consolidated statements of operations.
In connection with the Distribution, Marketing will establish the Marketing
ESOP that will purchase newly issued shares of Marketing Common Stock from
Marketing equal to five percent of the outstanding shares of Marketing. In
connection therewith, Marketing common stock and paid-in capital will increase
by the fair value of such shares purchased. This increase in stockholders'
equity will be offset by an equal amount for the related note receivable from
the Marketing ESOP. As such amounts will be based on the value of the Marketing
Common Stock in the future, they are not currently determinable and, therefore,
are not reflected in the unaudited pro forma consolidated balance sheet.
F-27
<PAGE> 75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Stockholders of Getty Petroleum Marketing Inc.:
In connection with our audits of the consolidated financial statements of
Getty Petroleum Marketing Inc. and Subsidiaries as of January 31, 1996 and 1995,
and for each of the three years in the period ended January 31, 1996, which
financial statements are included in this Form 10/A, we have also audited the
financial statement schedule on page II-2.
In our opinion, the financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly, in
all material respects, the information required to be included therein.
Coopers & Lybrand L.L.P.
New York, New York
November 6, 1996, except for Notes 6, 9 and 12, as to which
the date is February 28, 1997.
II-1
<PAGE> 76
GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED JANUARY 31, 1996, 1995 AND 1994
(in thousands)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING END OF
OF PERIOD ADDITIONS DEDUCTIONS PERIOD
---------- --------- ---------- ----------
<S> <C> <C> <C> <C>
1996:
Allowance for doubtful accounts*............ $1,336 $493 $604 $1,225
====== ==== ==== ======
1995:
Allowance for doubtful accounts*............ $1,379 $313 $356 $1,336
====== ==== ==== ======
1994:
Allowance for doubtful accounts*............ $1,467 $495 $583 $1,379
====== ==== ==== ======
</TABLE>
- -------------------------
* Relates to accounts receivable.
II-2
<PAGE> 77
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this registration statement to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: March 13, 1997
GETTY PETROLEUM MARKETING INC.
By: /s/ Leo Liebowitz
-------------------------------------
Leo Liebowitz
Chairman and Chief Executive
Officer
II-3
