ITEM 1. BUSINESS.
INTRODUCTION
The Company is a leading integrated refiner and marketer of petroleum products in its primary market area, which encompasses western New York and northwestern Pennsylvania. The Company owns and operates a medium complexity 65,000 barrel per day ("bpd") petroleum refinery in Warren, Pennsylvania where it produces a variety of products, including various grades of gasoline, diesel fuel, kerosene, jet fuel, No.2 heating oil, and asphalt. The Company sells gasoline and diesel fuel under the Kwik Fill(R) brand name at a network of Company-operated retail units. As of August 31, 1998, the Company operated 309 units, 230 of which it owned. For the year ended August 31, 1998 (sometimes referred to as "fiscal 1998"), approximately 63% and 24% of the Company's gasoline and diesel fuel production, respectively, was sold through this network. The Company operates convenience stores at most of its retail units, primarily under the Red Apple Food Mart(R) brand name. The Company also sells its petroleum products to long-standing regional wholesale customers.
For fiscal year ended August 31, 1998, the Company had total revenues of approximately $758.6 million, of which approximately 54% were derived from gasoline sales, approximately 35% were from sales of other petroleum products and approximately 11% were from sales of non-petroleum products. The Company's capacity utilization rates have ranged from approximately 88% to approximately 97% over the last five years. In fiscal 1998, approximately 74% of the Company's refinery output consisted of higher value products such as gasoline and distillates.
The Company believes that the location of its 65,000 bpd refinery in Warren, Pennsylvania provides it with a transportation cost advantage over its competitors, which is significant within an approximately 100-mile radius of the Company's refinery. For example, in Buffalo, New York over its last five fiscal years, the Company has experienced an approximately 2.1 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo. The Company owns and operates the Kiantone Pipeline, a 78-mile long crude oil pipeline which connects the refinery to Canadian, U.S. and world crude oil sources through the Interprovincial Pipe Line/Lakehead Pipeline system ("IPL"). Utilizing the storage facilities of the pipeline, the Company is able to blend various grades of crude oil from different suppliers, allowing it to efficiently schedule production while managing feedstock mix and product yields in order to optimize profitability.
In addition to its transportation cost advantage, the Company has benefited from a reduction in regional production capacity of approximately 103,000 bpd brought about by the closure during the 1980's of two competing refineries in Buffalo, New York, owned by Ashland Inc. and Mobil Oil Corporation. The nearest fuels refinery is over 160 miles from Warren, Pennsylvania and the Company believes that no significant production from such refinery is currently shipped into the Company's primary market area. It is the Company's view that the high construction costs and the stringent regulatory requirements inherent in petroleum refinery operations make it uneconomical for new competing refineries to be constructed in the Company's primary market area.
During the period from September 1, 1993 to August 31, 1998, the Company spent approximately $50 million on capital improvements to increase the capacity and efficiency of its refinery and to meet environmental requirements. These capital expenditures have: (i) substantially rebuilt and upgraded the refinery, (ii) enhanced the refinery's capability to comply with applicable environmental regulations, (iii) increased the refinery's efficiency and (iv) helped maximize profit margins by permitting the processing of lower cost, high sulfur crudes.
The Company's primary market area is western New York and northwestern Pennsylvania and its core market encompasses its Warren County base and the eight contiguous counties in New York and Pennsylvania. The Company's retail gasoline and merchandise sales are split approximately 59% / 41% between rural and urban markets. Margins on gasoline sales are traditionally higher in rural markets, while gasoline sales volume is greater in urban markets. The Company's urban markets include Buffalo, Rochester and Syracuse, New York and Erie, Pennsylvania.
As of August 31, 1998, the Company operated 309 retail units, of which 175 are located in New York, 124 in Pennsylvania and 10 in Ohio. The Company owned 230 of these units. In fiscal 1998, approximately 63% of the refinery's gasoline production were sold through the Company's retail network. In addition to gasoline, all units sell convenience merchandise, 45 have delicatessens and eight of the units are full-service truck stops. Customers may pay for purchases with credit cards including the Company's own "Kwik Fill(R)" credit card. In addition to this credit card, the Company maintains a fleet credit card catering to regional truck and automobile fleets. Sales of convenience products, which tend to have constant margins throughout the year, have served to reduce the effects of the seasonality inherent in gasoline retail margins. The Company has consolidated its entire retail system under the Red Apple Food Mart(R) and Kwik Fill(R) brand names, providing the chain with a greater regional brand awareness.
On June 9, 1997, the Company completed the sale (the "Private Offering") of $200 million principal amount 10 3/4% Series A Senior Notes due 2007 to Dillon, Read & Co. Inc. and Bear, Sterns & Co. Inc. in a transaction exempt from registration under the Securities Act of 1933, as amended. Subsequent to this issue, the Company exchanged the Series A Senior Notes for its 10 3/4% Series B Senior Notes due 2007 which were previously registered under the Securities Act of 1933, as amended. An aggregate of $200 million in principal amount of Series A Senior Notes were exchanged for Series B Senior Notes effective January 16, 1998. The form and term of the Series B Senior Notes are identical in all material respects to the form and terms of the Series A Senior Notes except the Series B Senior Notes are registered under the Securities Act and, therefore, do not bear legends restricting the transfer thereof. The Series B Senior Notes do not represent additional indebtedness of the Company and are entitled to the benefits of the Indenture, which is the same Indenture as the one under which the Series A Senior Notes were issued.
Simultaneously with the consummation of the Private Offering, PNC Bank provided the Company and one of its subsidiaries a new bank credit facility (the "New Bank Credit Facility"). Subject to borrowing base limitations and the satisfaction of customary borrowing conditions, the Company and such subsidiary may borrow up to $35 million under the New Bank Credit Facility.
INDUSTRY OVERVIEW
Worldwide demand for petroleum products rose from an average 67.6 million bpd in 1993 to 73.8 million bpd in 1997, according to the International Energy Agency. While much of the increase has been in developing countries, increases in demand have also occurred in the developed industrial countries. The Company believes that worldwide economic growth will continue to raise demand for energy and petroleum products, but financial problems in Asia may moderate economic growth.
U.S. refined petroleum product demand increased in 1997 for the sixth consecutive year. Following the economic recession and Persian Gulf War in 1990 and 1991, U.S. refined petroleum product demand increased from an average of 16.7 million bpd in 1991 to 17.7 million bpd in 1995 based on information published by the U.S. Energy Information Administration (the "EIA") and to 18.6 million bpd in 1997, according to preliminary EIA industry statistics reported by the Oil & Gas Journal.
The increase in U.S. refined petroleum demand is largely the result of demand for gasoline, jet fuel and highway diesel fuel which increased from 10.0 million bpd in 1991 to 11.5 million bpd in 1997 based on preliminary industry statistics reported by the Oil & Gas Journal (based on information from EIA) and the Department of Transportation Federal Highway Administration ("FHA"). The Company believes that this is a reflection of the steady increase in economic activity in the U.S. The U.S. vehicle fleet has grown, and miles driven per vehicle have increased. In addition, passenger seat-miles flown by domestic airlines have increased. Gasoline demand has increased from an average of 7.2 million bpd in 1991 to 8.0 million bpd in 1997. The Company believes that demand for transportation fuels will continue to track domestic economic growth.
Asphalt is a residual product of the crude oil refining process, which is used primarily for construction and maintenance of roads and highways and as a component of roofing shingles. Distribution of asphalt is localized, usually within a distance of 150 miles from a refinery or terminal, and demand is influenced by levels of federal, state, and local government funding for highway construction and maintenance and by levels of roofing construction activities. The Company believes that an ongoing need for highway maintenance and domestic economic growth will sustain asphalt demand.
The Company believes that domestic refining capacity utilization is close to maximum sustainable limits
because of the existing high throughput coupled with a reduction in refining capacity. The following table sets forth selected U.S. refinery information published by the Oil & Gas Journal and EIA:
* Includes operating and operable but currently shutdown refineries.
The Company believes that high utilization rates coupled with little anticipated crude capacity expansion is likely to result over the long term in improved operating margins in the refining industry.
Since 1990 the refining sector of the domestic petroleum industry has been required to make significant capital expenditures, primarily to comply with federal environmental statutes and regulations, including the Clean Air Act, as amended ("CAA"). Capital expenditures were required to equip refineries to manufacture cleaner burning reformulated gasoline ("RFG") and low sulfur diesel fuel. From 1990 to 1995 refining sector capital expenditures have totaled over $32 billion, of which approximately $15 billion, or 46%, was for environmental compliance, according to the American Petroleum Institute ("API") and the Oil & Gas Journal. In 1996 and 1997 refining sector total capital expenditures are estimated to be approximately $3.9 billion and $3.1 billion respectively, based on information published by the Oil & Gas Journal.
The Company is a regional refiner and marketer located primarily in Petroleum Administration for Defense District ("PADD I"). As of January 1, 1998, there were 18 refineries operating in PADD I with a combined crude processing capacity of 1.7 million bpd, representing approximately 10% of U.S. refining capacity. Petroleum product consumption in 1997 in PADD I averaged 5.5 million bpd, representing approximately 30% of U.S. demand based on industry statistics reported by EIA. According to the Lundberg Letter, an industry newsletter, total gasoline consumption in the region grew by approximately 2.4% during 1997 in response to improving economic conditions. Refined petroleum production in PADD I is insufficient to satisfy demand for such products in the region, making PADD I a net importer of such products.
BUSINESS STRATEGY
The Company's goal is to strengthen its position as a leading producer and marketer of high quality refined petroleum products within its primary market area. The Company plans to accomplish this goal through continued attention to optimizing the Company's operations at the lowest possible cost, improving and enhancing the profitability of the Company's retail assets and capitalizing on opportunities present in its refinery assets. More specifically, the Company intends to:
o Maximize the transportation cost advantage afforded the Company by its geographic location by increasing retail and wholesale market shares within its primary market area.
o Expand sales of higher margin specialty products such as jet fuel, premium diesel, roofing asphalt and Strategic Highway Research Program ("SHRP") specification paving asphalt.
o Expand and upgrade its refinery to increase rated crude oil throughput capacity from 65,000 bpd to 70,000 bpd, improve the yield of finished products from crude oil inputs and lower refinery costs through improved energy efficiency and refinery debottlenecking.
o Optimize profitability by managing feedstock costs, product yields, and inventories through its recently improved refinery feedstock linear programming model and its system wide distribution model.
o Make capital investments in retail marketing to rebuild or refurbish existing retail units and to acquire new retail units. In addition, the Company plans to improve its comprehensive retail management information system which allows management to be informed and respond promptly to market changes, inventory levels, and overhead variances and to monitor daily sales, cash receipts, and overall individual location performance.
REFINING OPERATIONS
The Company's refinery is located on a 92-acre site in Warren, Pennsylvania. The refinery has a rated capacity of 65,000 bpd of crude oil processing. The refinery averaged saleable production of approximately 62,600 bpd during fiscal 1997 and approximately 59,400 bpd during fiscal 1998. The reduction is attributable to a decline in refinery production for regularly scheduled maintenance turnarounds and concurrent installation of components of the Company's refinery upgrade program in October 1997 and May 1998. The Company produces three primary petroleum products: gasoline, middle distillates and asphalt. The Company believes its geographic location in the product short PADD I is a marketing advantage. The Company's refinery is located in northwestern Pennsylvania and is geographically distant from the majority of PADD I refining capacity. The nearest fuels refinery is over 160 miles from Warren, Pennsylvania and the Company believes that no significant production from such refinery is currently shipped into the Company's primary market area.
The refinery was established in 1902 but has been substantially rebuilt and expanded. From September 1, 1993 to August 31, 1998, the Company spent approximately $50 million on capital improvements to increase the capacity and efficiency of its refinery and to meet environmental requirements. Major investments have included the following:
o A distillate hydrotreater was completed to produce low sulfur diesel fuel (less than 0.05% sulfur content) in compliance with requirements of the CAA for the sale of on-road diesel. In connection with this installation, a sulfur recovery unit was also completed which has the capacity of recovering up to 60 tons per day of raw sulfur removed from refined products. Total cost of these two projects was approximately $42.0 million with capital expenditures over the last five fiscal years approximating $17.0 million.
o The Company spent approximately $7.4 million to enable the refinery to produce reformulated gasoline ("RFG") for its marketing area. Although not currently mandated by federal law, Pennsylvania and New York had opted into the EPA program for RFG for counties within the Company's marketing area with an effective date of January 1, 1995. However, both states elected to "opt out" of the program late in December 1994. The Company believes that it will be able to produce RFG without incurring substantial additional fixed costs if the use of RFG is mandated in the future in the Company's marketing area.
o In fiscal 1998, the Company spent approximately $11.5 million to expand and upgrade the refinery. These projects included an FCC feed nozzle upgrade, improvements to monitoring instrumentations and related engineering, electrical, and construction costs.
Products
The Company presently produces two grades of unleaded gasoline, 87-octane regular and 93-octane premium. The Company also blends its 87 and 93 octane gasoline to produce a mid-grade 89 octane. In fiscal 1998, approximately 63% of the Company's gasoline production were sold through its retail network and the remaining 37% of such production were sold to wholesale customers.
Middle distillates include kerosene, diesel fuel, heating oil (No. 2 oil) and jet fuel. In fiscal 1998 the Company sold approximately 84% of its middle distillate production to wholesale customers and the remaining 16% at the Company's retail units, primarily at the Company's eight truck stops. The Company also produces aviation fuels for commercial airlines (Jet-A) and military aircraft (JP-8).
The Company optimizes its bottom of the barrel processing by producing asphalt, a higher value alternative to residual fuel oil. Asphalt production as a percentage of all refinery production has increased over the last four fiscal years due to the Company's ability and decision to process a larger amount of less costly higher sulfur content crudes in order to realize higher overall refining margins.
The following table sets forth the refinery's product yield during the five years ended August 31, 1998:
REFINERY PRODUCT YIELD (1) (THOUSANDS OF BARRELS) FISCAL YEAR ENDED AUGUST 31,
(1) Percent yields are percentage of refinery input.
(2) Includes primarily butane, propane and sulfur.
(3) Total product yield is greater than 100% due to the processing of crude oil into products which, in total are less dense and therefore, have a higher volume than the raw materials processed.
Refining Process
The Company's production of petroleum products from crude oil involves many complex steps, which are briefly summarized below.
The Company seeks to maximize refinery profitability by selecting crude oil and other feedstocks taking into account factors including product demand and pricing in the Company's market areas as well as price, quality and availability of various grades of crude oil. The Company also considers product inventory levels and any planned turnarounds of refinery units for maintenance. The combination of these factors is optimized by a sophisticated proprietary linear programming computer model, which selects the most profitable feedstock and product mix. The linear programming model is continuously updated and improved to reflect changes in the product market place and in the refinery's processing capability.
Blended crude is stored in a tank farm near the refinery, which has a capacity of approximately 200,000 barrels. The blended crude is then brought into the refinery where it is first distilled at low pressure into its component streams in the crude and preflash unit. This yields the following intermediate products: light products consisting of fuel gas components (methane and ethane) and LPG (propane and butane), naphtha or gasoline, kerosene, diesel or heating oil, heavy atmospheric distillate; and crude tower bottoms which are further distilled under vacuum conditions to yield light and heavy vacuum distillates and asphalt. The present capacity of the crude unit is 65,000 bpd.
The intermediate products are then processed in downstream units that produce finished products. A naphtha hydrotreater treats naphtha with hydrogen across a fixed bed catalyst to remove sulfur before further treatment. The treated naphtha is then distilled into light and heavy naphtha at a prefractionator. Light naphtha is then sent to an isomerization unit and heavy naphtha is sent to a reformer in each case for octane enhancement. The isomerization
unit converts the light naphtha catalytically into a gasoline component with 83 octane. The reformer unit converts the heavy naphtha into another gasoline component with up to 94 octane depending upon the desired octane requirement for the grade of gasoline to be produced. The reformer also produces as a co-product all the hydrogen needed to operate hydrotreating units in the refinery.
Raw kerosene or heating oil is treated with hydrogen at a distillate hydrotreater to remove sulfur and make finished kerosene, jet fuels and No.2 fuel oil. A new distillate hydrotreater built in 1993 also treats raw distillates to produce low sulfur diesel fuel.
The long molecular chains of the heavy atmospheric and vacuum distillates are broken or "cracked" in the fluidized catalytic cracking unit and separated and recovered in the gas concentration unit to produce fuel gas, propylene, butylene, LPG, gasoline, light cycle oil and clarified oil. Fuel gas is burned within the refinery, propylene is fed to a polymerization unit which polymerizes its molecules into a larger chain to produce an 87 octane gasoline component, butylene is fed into an alkylation unit to produce a gasoline component and LPG is treated to remove trace quantities of water and then sold. Clarified oil is burned in the refinery or sold. Various refinery gasoline components are blended together in refinery tankage to produce 87 octane and 93 octane finished gasoline. Likewise, light cycle oil is blended with other distillates to produce low sulfur diesel and No.2 fuel oil.
Although the major components of the downstream units are capable of producing finished products based on an 80,000 bpd crude rate, the 65,000 bpd rated capacity of the crude unit currently limits sustainable crude oil input to that level or less. The Company's refining configuration allows the processing of a wide variety of crude oil inputs. Historically, its inputs have been of Canadian origin and range from light low sulfur (38 degrees API, 0.5% sulfur) to high sulfur heavy asphaltic (25 degrees API, 2.8% sulfur). The Company's ability to market asphalt enables it to purchase selected heavier crudes at a lower cost.
Supply of Crude Oil
Even though the Company's crude supply is currently nearly all Canadian, the Company is not dependent on this source alone. Within 60 days, the Company could shift up to 65% of its crude oil requirements to some combination of domestic and offshore crude. With additional time, 100% of its crude requirements could be obtained from non-Canadian sources. The Company utilizes Canadian crude because it affords the Company the highest refinery margins currently available. Sixty five percent of the Company's contracts with its crude suppliers are on a month-to-month evergreen basis, with 30-to-60 day cancellation provisions; thirty percent of the Company's crude contracts are on an annual basis (with month to month pricing provisions). As of August 31, 1998, the Company had supply contracts with 18 different suppliers for an aggregate of 59,500 bpd of crude oil. The Company has contracts with three vendors amounting to 48% of daily crude oil supply. As of such date the Company had no other contract covering more than 10% of its crude oil supply.
The Company accesses crude through the Kiantone Pipeline, which connects with the IPL in West Seneca, New York, which is near Buffalo. The IPL provides access to most North American and foreign crude oils through three primary routes: (i) Canadian crude is transported eastward from Alberta and other points in Canada along the IPL; (ii) various mid-continent crudes from Texas, Oklahoma and Kansas are transported northeast along the Cushing-Chicago Pipeline, which connects to the IPL at Griffith, Indiana; and (iii) foreign crudes unloaded at the Louisiana Offshore Oil Port are transported north via the Capline and Chicago pipelines which connect to the IPL at Mokena, Illinois.
The Kiantone Pipeline, a 78-mile Company-owned and operated pipeline, connects the Company's West Seneca, New York terminal at the pipeline's northern terminus to the refinery's tank farm at its southern terminus. The Company completed construction of the Kiantone Pipeline in 1971 and has operated it continuously since then. The Company is the sole shipper on the Kiantone Pipeline, and can currently transport up to 68,000 bpd along the pipeline. The Company's right to maintain the pipeline is derived from approximately 265 separate easements, right-of-way agreements, licenses, permits, leases and similar agreements.
The pipeline operation is monitored by a computer located at the refinery. Shipments of crude arriving at the West Seneca terminal are separated and stored in one of the terminal's three storage tanks, which have an aggregate storage capacity of 485,000 barrels. The refinery tank farm has two additional crude storage tanks with a total capacity of 200,000 barrels. An additional 35,000 barrels can be stored at the refinery.
Turnarounds: Refinery Expansion and Improvement
Turnaround cycles vary for different refinery units. A planned turnaround of each of the two major refinery units - the crude unit and the fluid catalytic cracking unit - is conducted approximately every three or four years, during which time such units are shut down for internal inspection and repair. A turnaround, which generally takes two to four weeks to complete in the case of the two major refinery units, consists of a series of moderate to extensive maintenance exercises. Turnarounds are planned and accomplished in a manner that allows for reduced production during maintenance instead of a complete plant shutdown. The Company accrues on a monthly basis a charge for the maintenance work to be conducted as part of turnarounds of major units. The costs of turnarounds of other units are expensed as incurred. In accordance with the Capital Improvement Plan of the Company's $200 Million Senior Notes due 2007 during fiscal 1998, the Company used $18.8 million for refinery improvements and maintenance turnaround expenses. Of the $22.2 million originally escrowed for the refinery, the remaining $3.4 million is included in the Company's capital budget for fiscal 1999.
MARKETING AND DISTRIBUTION
General
The Company has a long history of service within its market area. The Company's first retail service station was established in 1927 near the Warren refinery and over the next seventy years its distribution network has steadily expanded. Major acquisitions of competing retail networks occurred in 1983, with the acquisition of 78 sites from Ashland Oil Company and in 1989 to 1991, with the acquisition of 53 sites from Sun Oil Company and Busy Bee Stores, Inc.
The Company maintains an approximate 59% / 41% split between sales at its rural and urban units. The Company believes this to be advantageous, balancing the higher gross margins often achievable due to decreased competition in rural areas with higher volumes in urban areas. The Company believes that its rural convenience store units provide an important alternative to traditional grocery store formats. In fiscal 1998, approximately 63% and 24% of the Company's gasoline and diesel fuel production, respectively, was sold through this retail network.
Retail Operations
As of August 31, 1998 the Company operated a retail marketing network that includes 309 retail units, of which 175 are located in western New York, 124 in northwestern Pennsylvania and 10 in eastern Ohio. The Company owns 230 of these units. Gasoline at these retail units is sold under the brand name "Kwik Fill(R)". Most retail units operate under the brand name Red Apple Food Mart(R). The Company believes that Red Apple Food Mart(R) and Kwik Fill(R) are well-recognized names in the Company's marketing areas. The Company believes that the operation of its retail units provides it with a significant advantage over competitors that operate wholly or partly through dealer arrangements because the Company has greater control over pricing and operating expenses, thus establishing a potential for improved margins.
The Company classifies its stores into four categories: convenience stores, limited gasoline stations, truck stop facilities and other stores. Full convenience stores have a wide variety of foods, snacks, cigarettes and beverages and self-service gasoline. Forty-five of such units also have delicatessens where food (primarily submarine sandwiches, pizza, chicken and lunch platters) is prepared on the premises for retail sales and also distribution to other nearby Company units which do not have in-store delicatessens. Mini convenience stores sell snacks, cigarettes and beverages and self-service gasoline. Limited gasoline stations sell gasoline, cigarettes, oil and related car care products and provide full service for gasoline customers. Truckstop facilities sell gasoline and diesel fuel on a self-service and full-service basis. All truckstops include either a full or mini convenience store. Two of the truck stops have stand alone restaurants and one has a truck repair garage. These three facilities are classified separately in the table below as "other stores." As of August 31, 1998, the average sales areas of the Company's convenience stores, limited gasoline stations, truckstops and other stores were 750, 200, 1,200 and 2,520 square feet, respectively.
The table below sets forth certain information concerning the stores as of, and for the fiscal years ended August 31, 1996, 1997 and 1998:
The Company's strategy has been to maintain diversification between rural and urban markets within its region. Retail gasoline and merchandise sales are split approximately 59% / 41% between rural and urban markets. Margins on gasoline sales are traditionally higher in rural markets, while gasoline sales volume is greater in urban markets. In addition, more opportunities for convenience store sales have arisen with the closing of local independent grocery stores in the rural areas of New York and Pennsylvania.
Total merchandise sales for fiscal year 1998 were $81.5 million, with a gross profit of approximately $23.8 million. Over the last five fiscal years, merchandise gross margins have averaged approximately 30% and the Company believes that merchandise sales will continue to remain a stable source of gross profit.
Merchandise Supply
The Company's primary merchandise vendor is Tripifoods, which is located in Buffalo, New York. During fiscal 1998, the Company purchased approximately 71% of its convenience merchandise from this vendor. Tripifoods supplies the Company with tobacco products, candy, deli foods, grocery, health and beauty products, and sundry items on a cost plus basis for resale. The Company also purchases dairy products, beer, soda, snacks, and novelty goods from direct store vendors for resale. The Company annually reviews its suppliers' costs and services versus those of alternate suppliers. The Company believes that alternative sources of merchandise supply at competitive prices are readily available.
Location Performance Tracking
The Company maintains a store tracking mechanism whereby transmissions are made three times a week to collect operating data including sales and inventory levels. Data transmissions are made using personal computers, which are available at each location. Once verified, the data interfaces with a variety of retail accounting systems, which support daily, weekly and monthly performance reports. These different reports are then provided to both the field management and office staff. Upon completion of a capital project, management tracks "before and after" performance, to evaluate the return on investment which has resulted from the improvements.
Capital Improvement Program
During the fiscal year ended August 31, 1998, the Company spent approximately $14.0 million from the capital expenditure escrow account on the retail portion of its Capital Improvement Program. Of the $25.9 million originally escrowed for retail improvements, the remaining $11.9 million is included in the Company's fiscal 1999 capital budget. The scope of the project work completed as of August 31, 1998 included:
o Eleven petroleum upgrades. These upgrades include new drive pads, canopy, lighting, multi-product dispensers (most with pay-at-the-pump), new petroleum lines and signage. Petroleum upgrades will be performed simultaneously with the underground storage tank upgrades, which must be completed prior to December 22, 1998.
o Thirteen rebuilds that include ground-up construction of a new building and a complete petroleum upgrade (not included above). Two of these locations also provide fast food and one includes a smoke shop. Also, six rebuilds are currently in progress.
o Three convenience stores rehabs (two locations also have complete petroleum upgrades not included above).
o One "touchless" car wash was installed and one new retail location was purchased.
Wholesale Marketing and Distribution
The Company sold in fiscal year 1998, on a wholesale basis, approximately 43,200 bpd of gasoline, distillate and asphalt products to distributor, commercial and government accounts. In addition, the Company sells approximately 1,000 bpd of propane to liquefied petroleum gas marketers. In fiscal 1998, the Company's production of gasoline, distillate and asphalt sold at wholesale was 37%, 84% and 100%, respectively. The Company sells 98% of its wholesale gasoline and distillate products from its Company-owned and operated product terminals. The remaining 2% are sold through third-party exchange terminals.
The Company's wholesale gasoline customer base includes 57 branded dealer/distributor units operating under the Company's proprietary "Keystone(R)" brand name. Long-term Keystone(R) dealer/distributor contracts accounted for approximately 13% of the Company's wholesale gasoline sales in fiscal 1998. Supply contracts generally range from three to five years in length, with Keystone(R) branded prices based on the prevailing Company wholesale rack price in Warren.
The Company believes that the location of its refinery provides it with a transportation cost advantage over its competitors, which is significant within an approximately 100-mile radius of the Company's refinery. For example, in Buffalo, New York over its last five fiscal years, the Company has experienced an approximately 2.1 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo. In addition to this transportation cost advantage, the Company's proximity to local accounts allows it a greater range of shipment options, including the ability to deliver truckload quantities of approximately 200 barrels versus much larger 25,000 barrel pipeline batch deliveries, and faster response time, which the Company believes help it provide enhanced service to its customers.
The Company's ability to market asphalt is critical to the performance of its refinery, since such marketing ability enables the Company to process lower cost higher sulfur content crude oils which in turn affords the Company higher refining margins. Sales of paving asphalt generally occur during the summer months due primarily to weather conditions. In order to maximize its asphalt sales, the Company has made substantial investments to increase its asphalt storage capacity through the installation of additional tanks, as well as through the purchase or lease of outside terminals. Partially mitigating the seasonality of the asphalt paving business is the Company's ability to sell asphalt year-round to roofing shingle manufacturers, which accounted for approximately 23% of its total asphalt sales over the Company's last five fiscal years. In fiscal 1998, the Company sold 5.5 million barrels of asphalt while producing 4.5 million barrels. The refinery was unable to produce enough asphalt to satisfy the demand and, therefore, purchased 1.0 million barrels for resale.
The Company has a significant share of the asphalt market in the cities of Pittsburgh, Pennsylvania and Rochester and Buffalo, New York. The Company distributes asphalt from the refinery by railcar and truck transport to its owned and leased asphalt terminals in such cities or their suburbs. The Company also operates a terminal at Cordova, Alabama giving it a presence in the Southeast. Asphalt can be purchased in the Gulf Coast area and delivered by barge to third party or Company-owned terminals near Pittsburgh. The Company's asphalt terminal network allows the Company to enter into product exchanges.
The Company uses a network of eight terminals to store and distribute refined products. The Company's gasoline, distillate and asphalt terminals and their respective capacities (in thousands of barrels) as of August 31, 1998 were as follows:
During fiscal 1998, approximately 89% of the Company's refined products were transported from the refinery via truck transports, with the remaining 11% transported by rail. The majority of the Company's wholesale and retail gasoline distribution is handled by common carrier trucking companies at competitive costs. The Company also operates a fleet of ten gasoline tank trucks that supply approximately 25% of its Kwik Fill retail stations.
Product distribution costs to both retail and wholesale accounts are minimized through product exchanges. Through these exchanges, the Company has access to product supplies at 40 sources located throughout the Company's retail marketing area. The Company seeks to minimize retail distribution costs through the use of a system wide distribution model.
ENVIRONMENTAL CONSIDERATIONS
General
The Company is subject to federal, state and local laws and regulations relating to pollution and protection of the environment such as those governing releases of certain materials into the environment and the storage, treatment, transportation, disposal and clean-up of wastes, including, but not limited to, the Federal Clean Water Act as amended, the CAA, the Resource Conservation and Recovery Act of 1976 as amended, Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), and analogous state and local laws and regulations.
The Clean Air Act Amendments of 1990
In 1990 the CAA was amended to greatly expand the role of the government in controlling product quality. The legislation included provisions that have significantly impacted the manufacture of both gasoline and diesel fuel including the requirement for significantly lower sulfur content and a limit on aromatics content in diesel fuel. The Company is able to satisfy these requirements.
Diesel Fuel Sulfur and Aromatics Content
The EPA issued rules under the CAA which became effective in October 1993 which limit the sulfur and aromatics content of diesel fuels nationwide. The rules required refiners to reduce the sulfur in on-highway diesel fuel from 0.5 Wt.% to 0.05 Wt.%. The Company meets these specifications of the CAA for all of its on-highway diesel production.
The Company's on-road diesel represented 67% of its total distillate sales in fiscal 1998. Since the reduction of sulfur in diesel required some new investment at most refineries, a two-tier market has developed in distillate sales. Due to capital constraints and timing issues, as well as strategic decisions not to invest in diesel fuel desulfurization, some other refineries are unable to produce specification highway diesel.
Reformulated Gasoline
The CAA required that by January 1, 1995 RFG be sold in the nine worst ozone non-attainment areas of the U.S. None of these areas is within the Company's marketing area. However, the CAA enabled the EPA to specify 87 other, less serious ozone non-attainment areas that could opt into this program. In 1994, the Company spent approximately $7.4 million to enable its refinery to produce RFG for its marketing area because the Governors of Pennsylvania and New York had opted into the RFG program. In December 1994 such states elected to "opt out" of the program.
The CAA also contains provisions requiring oxygenated fuels in carbon monoxide non-attainment areas to reduce pollution. There are currently no carbon monoxide non-attainment areas in the Company's primary marketing area.
Conventional Gasoline Quality
In addition to reformulated and oxygenated gasoline requirements, the Environmental Protection Agency has promulgated regulations under the CAA which relate to the quality of "conventional" gasoline and which require expanded reporting of the quality of such gasoline by refiners. Substantially all of the Company's gasoline sales are of conventional gasoline. The Company closely monitors the quality of the gasoline it produces to assure compliance at the lowest possible cost with CAA regulations.
Underground Storage Tank Upgrade
The Company is currently undergoing a tank replacement/retrofitting program at its retail units to comply with regulations promulgated by the EPA. These regulations require new tanks to meet all performance standards at the time of installation. Existing tanks can be upgraded to meet such standards. The upgrade requires retrofitting for corrosion protection (cathodic protection, interior lining or a combination of the two), spill protection (catch basins to contain spills from delivery hoses) and overfill protection (automatic shut off devices or overfill alarms). As of August 31, 1998, approximately 77% of the total sites had been completed, and the Company expects to be in total compliance with the regulations by the December 22, 1998 mandated deadline. As of August 31, 1998 the total remaining cost of the upgrade was estimated to be $3.1 million.
COMPETITION
Petroleum refining and marketing is highly competitive. The Company's major retail competitors include British Petroleum, Citgo, Amerada Hess, Mobil and Sun Oil Company. With respect to wholesale gasoline and distillate sales, the Company competes with Sun Oil Company, Mobil and other major refiners. The Company primarily competes with Marathon Oil Company and Ashland Oil Company in the asphalt market. Many of the Company's principal competitors are integrated multinational oil companies that are substantially larger and better known than the Company. Because of their diversity, integration of operations, larger capitalization and greater resources, these major oil companies may be better able to withstand volatile market conditions, compete on the basis of price and more readily obtain crude oil in times of shortages.
The principal competitive factors affecting the Company's refining operations are crude oil and other feedstock costs, refinery efficiency, refinery product mix and product distribution and transportation costs. Certain of the Company's larger competitors have refineries which are larger and more complex and, as a result, could have lower per barrel costs or higher margins per barrel of throughput. The Company has no crude oil reserves and is not engaged in exploration. The Company believes that it will be able to obtain adequate crude oil and other feedstocks at generally competitive prices for the foreseeable future.
The withdrawal of retail marketing operations in New York in the early 1980's by Ashland, Texaco, Gulf and Exxon significantly reduced competition from major oil companies in New York and substantially enhanced the Company's market position. The Company believes that the high construction costs and stringent regulatory
requirements inherent in petroleum refinery operations make it uneconomical for competing refineries to be constructed in the Company's primary market area. The Company believes that the location of its refinery provides it with a transportation cost advantage over its competitors, which is significant within an approximately 100-mile radius of the Company's refinery. For example, in Buffalo, New York over the last five fiscal years, the Company has experienced an approximately 2.1 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo.
The principal competitive factors affecting the Company's retail marketing network are location of stores, product price and quality, appearance and cleanliness of stores and brand identification. Competition from large, integrated oil companies, as well as from convenience stores which sell motor fuel, is expected to continue. The principal competitive factors affecting the Company's wholesale marketing business is product price and quality, reliability and availability of supply and location of distribution points.
EMPLOYEES
As of August 31, 1998 the Company had approximately 1,660 full-time and 1,400 part-time employees. Approximately 2,410 persons were employed at the Company's retail units, 580 persons at the Company's refinery, and the balance at the Kiantone pipeline and at terminals operated by the Company and at the Company's corporate offices in Warren, Pennsylvania. The Company has entered into collective bargaining agreements with International Union of Operating Engineers Local No. 95, United Steel Workers of America Local No. 2122-A, the International Union of Plant Guard Workers of America Local No. 502 and General Teamsters Local Union No. 397 covering 216, 7, 21 and 18 employees, respectively. The agreements expire on February 1, 2001, January 31, 2000, June 25, 1999 and July 31, 2000, respectively. The Company believes that its relationship with its employees is good.
INTELLECTUAL PROPERTY
The Company owns various federal and state service marks used by the Company, including Kwik-Fill(R), United(R) and Keystone(R). The Company has obtained the right to use the Red Apple Food Mart(R) service mark to identify its retail units under a royalty-free, nonexclusive, nontransferable license from Red Apple Supermarkets, Inc., a corporation which is indirectly wholly owned by John A. Catsimatidis, the sole stockholder, Chairman of the Board and Chief Executive Officer of the Company. The license is for an indefinite term. The licensor has the right to terminate this license in the event that the Company fails to maintain quality acceptable to the licensor. The Company licenses the right to use the Keystone(R) trademark to approximately 57 independent distributors on a non-exclusive royalty-free basis for contracted wholesale sales of gasoline and distillates.
The Company does not own any patents. Management believes that the Company does not infringe upon the patent rights of others, nor does the Company's lack of patents have a material adverse effect on the business of the Company.
GOVERNMENTAL APPROVALS
The Company has obtained all necessary governmental approvals, licenses and permits to operate the refinery and convenience stores.
ITEM 2.
ITEM 2. PROPERTIES.
The Company owns a 92-acre site in Warren, Pennsylvania upon which it operates its refinery. The site also contains a building housing the Company's principal executive offices.
The Company owns various real property in the states of Pennsylvania, New York and Ohio upon which it operates 230 retail units and two crude oil and six refined product storage terminals. The Company also owns the 78 mile long Kiantone Pipeline, a pipeline which connects the Company's crude oil storage terminal to the refinery's tank farm. The Company's right to maintain the pipeline is derived from approximately 265 separate easements, right-of-way agreements, leases, permits, and similar agreements. The Company also has easements, right-of-way agreements, leases, permits and similar agreements that would enable the Company to build a second pipeline on property contiguous to the Kiantone Pipeline.
The Company also leases an aggregate of 79 sites in Pennsylvania, New York and Ohio upon which it operates retail units. As of August 31, 1998, the leases had an average remaining term of 43 months, exclusive of option terms. Annual rents on such retail units range from $2,400 to $74,500.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
In 1995, the Pennsylvania Environmental Defense Foundation ("PEDF") commenced a lawsuit in the United States District Court for the Western District of Pennsylvania under Section 505 of the federal Water Pollution Control Act, 33 U.S.C. Section 1251, et. seq. The complaint alleges a series of discharges to the Allegheny River at the Company's refining facility in Warren, Pennsylvania exceeding the limits contained in the Company's waste water discharge permits. PEDF seeks to enjoin future discharges in excess of permitted limits, an assessment of civil penalties up to $25,000 per day as provided in the Act, and an award of attorneys' fees. The case has been tried to the Court and post-trial proceedings are continuing. No judgement has been rendered. The Company believes that this action will not have any material adverse effect upon its operations or consolidated financial condition.
The United States Environmental Protection Agency ("USEPA") has issued certain Notices of Violation, an Administrative Order, and has asserted certain additional claims arising under federal and state statutory and regulatory law through and including August 5, 1998 (collectively the "Claims"). The Claims arise from allegations that (1) the Company failed to properly and consistently monitor, report and control emissions of Volatile Organic Compounds ("VOCs") from its refining facility in Warren, Pennsylvania; (2) fuel gas used in the refining process has in the past contained levels of hydrogen sulfide in excess of permitted parameters, and ; (3) the Company in the past has failed to properly calculate and report emissions of benzene from its refining facility. The Claims allege violations of the federal Clean Air Act, as amended, and associated federal and state regulatory requirements. USEPA's review of the Company's operations is continuing. The Claims seek civil money penalties in accordance with USEPA's penalty policies in an amount yet to be determined. The Company believes that the Claims and the results of USEPA's continuing review will not have any material adverse effect upon its operations or consolidated financial condition.
In addition to the foregoing proceedings, the Company and its subsidiaries are from time to time parties to various legal proceedings that arise in the ordinary course of their respective business operations. These proceedings include various administrative actions relating to federal, state and local environmental laws and regulations. The Company believes that if the legal proceedings in which it is currently involved are determined against the Company, they would not result in a material adverse effect on the Company's operations or its consolidated financial condition.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.
NONE
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS.
NONE
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
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(1) Gross margin is defined as gross profit plus refining operating expenses. Refining operating expenses are expenses incurred in refining and included in cost of goods sold in the Company's financial statements. Refining operating expense equals refining operating expenses per barrel, multiplied by the volume of total saleable products per day, multiplied by the number of days in the period.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
COMPANY BACKGROUND
General
The Company is engaged in the refining and marketing of petroleum products. In fiscal 1998, approximately 63% and 24% of the Company's gasoline and diesel fuel production was sold through the Company's network of service stations and truckstops. The balance of the Company's refined products were sold to wholesale customers. In addition to transportation and heating fuels, the Company is a major regional wholesale marketer of asphalt. The Company also sells convenience merchandise at convenience stores located at most of its service stations. The Company's profitability is influenced by fluctuations in the market prices of crude oil and refined products. Although the Company's product sales mix helps to reduce the impact of large short-term variations in crude oil
price, net sales and costs of goods sold can fluctuate widely based upon fluctuations in crude oil prices. For example, the margins on wholesale gasoline and distillate tend to decline in periods of rapidly declining crude oil prices, while margins on asphalt and retail gasoline and distillate tend to improve. During periods of rapidly rising crude oil prices, margins on wholesale gasoline and distillate tend to improve, while margins on asphalt and retail gasoline and distillate tend to decline. Gross margins on the sale of convenience merchandise have been consistently near 30% for the last five years and are essentially unaffected by variations in crude oil and petroleum products prices.
In addition to their effect on petroleum product margins, fluctuations in crude oil prices can affect the Company's reported financial results by producing significant changes in the value of the Company's working inventories. The change in the value of working inventory is that portion of the total change in the Company's inventory value which is due to changes in the pricing of working inventory volumes. Working inventory volumes are those volumes of inventory of the Company's various products and feedstocks necessary to support normal operations. While changes in the value of working inventory affect the Company's reported gross profit, operating income and net income, they have no material effect on the Company's operating cash flow.
The Company includes in cost of goods sold operating expenses incurred in the refining process. Therefore, operating expenses reflect only selling, general and administrative expenses, including all expenses of the retail network, and depreciation and amortization.
RESULTS OF OPERATIONS
Comparison of Fiscal 1998 and Fiscal 1997.
Net Sales. Net sales decreased $112.7 million or 12.9% from $871.3 million for fiscal 1997 to $758.6 million for fiscal 1998. The decrease was primarily due to an 22.6% decrease in wholesale gasoline and distillate weighted average net selling prices, 17.4% lower retail petroleum selling prices, and a 14.5% decrease in average asphalt selling prices. Also contributing to the revenue decrease was a 4.8% decrease in wholesale gasoline and distillate volume. However the wholesale gasoline and distillate volume declines were slightly more than offset by a 1.0% increase in retail petroleum volume and a 15.5% increase in asphalt sales volume, as overall petroleum product sales volume increased slightly from 23.69 million barrels in fiscal 1997 to 23.74 million barrels in fiscal 1998. Also offsetting lower petroleum selling prices was a 9.5% increase in retail merchandise sales from $74.5 million in fiscal 1997 to $81.5 million in fiscal 1998. The decreases in the Company's product prices were primarily due to lower worldwide prices for petroleum products which accompanied a 23.1% decrease in world crude oil prices, as indicated by prices of NYMEX crude oil contracts. The decreased wholesale gasoline and distillate volume was due primarily to a 5.9% decrease in crude oil processing resulting from the planned shutdown of certain refinery processing units for maintenance and upgrading in October 1997 and May 1998.
Cost of Goods Sold. Cost of goods sold decreased $100.0 million or 13.0% from $767.9 million for fiscal 1997 to $667.9 million for fiscal 1998. The decrease was primarily the result of a 23.1% decrease in world crude oil prices, as well as lower refinery crude oil input volume. Partially offsetting lower crude oil prices were increases in costs of goods sold from changes in inventory prices. The per barrel value of the Company's inventories declined during fiscal 1998 as a result of declining world petroleum prices. The declining prices reduced the value of the Company's working inventories by approximately $12.8 million. These reductions in inventory value contributed to corresponding increases to cost of goods sold. For fiscal 1997, the corresponding changes in inventory prices had the effect of decreasing the Company's cost of goods sold by approximately $0.3 million. The Company maintains certain volumes of working inventory necessary to support normal operations, and changes in valuation of this inventory occur with fluctuations in world petroleum prices. The lower pricing of the Company's working inventories at the end of fiscal 1998, for example, was the result of world petroleum prices which ended fiscal 1998 approximately 32% below their level at the end of fiscal 1997.
Operating Expenses. Operating expenses increased $2.0 million or 2.4% from $81.4 million for 1997 to $83.4 million for fiscal 1998. This increase was primarily due to increased retail expenses for sales promotions, retail station wages and maintenance and environmental expense. Increased retail station wages were primarily due to an increase in the federal minimum wage, while increased retail environmental expenses were primarily connected with the upgrading of underground storage tanks to new federal standards. Increased retail promotions expenses were primarily in connection with a "frequent fueler" program which has been effective in increasing retail gasoline volume.
Operating Income. Operating income decreased $14.6 million from $22.0 million for fiscal 1997 to $7.3 million for fiscal 1998. This was primarily due to a decline in gross profit as the result of a $12.8 million negative impact on cost of goods sold for changes in working inventory value. Also contributing to the decline in gross profit and operating income was the reduction in refinery production resulting from the scheduled maintenance shutdowns in October 1997 and May 1998.
Interest Expense. Net interest expense (interest expense less interest income) increased $3.3 million from $16.2 million for fiscal 1997 to $19.5 million for fiscal 1998. The increase was primarily due to an increase in the amount of long-term debt outstanding following the Company's sale of $200 million of Senior Unsecured Notes in June 1997. This was partially offset by a reduction in the average interest rate for long-term debt outstanding and by interest income received on restricted cash and investment.
Income Taxes. The Company's effective tax rate for fiscal 1998 was approximately 40.0% compared to a rate of 40.2% for fiscal 1997.
Comparison of Fiscal 1997 and Fiscal 1996.
Net Sales. Net sales increased $37.5 million or 4.5% from $833.8 million for fiscal 1996 to $871.3 million for fiscal 1997. The increase was primarily due to an 8.1% increase in wholesale gasoline and distillate weighted average net selling prices, 5.8% higher retail refined product selling prices, and a 16.3% increase in average asphalt selling prices. Also contributing to the revenue increase was a 3.9% increase in retail merchandise sales. These increases were partially offset by a 1.1% decrease in wholesale gasoline and distillate volume and by a 4.1% decrease in retail refined products volume. The lower sales volumes were primarily the result of lower refinery input and production in the first half of fiscal 1997.
Cost of Goods Sold. Cost of goods sold increased $39.3 million or 5.4% from $728.6 million for fiscal 1996 to $767.9 million for fiscal 1997. The increase was primarily the result of a 12.7% increase in annual average per barrel crude oil costs, partially offset by lower refinery crude oil input volume. The Company's higher crude cost resulted from a rapid increase in world crude oil prices, which peaked in February 1997 at the highest level since the Gulf War. For the first half of fiscal 1997 (ending February 28), the average cost of crude processed by the Company was 36.6% above the same months of fiscal 1996. Subsequent to February, world crude oil prices decreased substantially. This decrease was reflected in the Company's crude costs for the second half of fiscal 1997, which were 7.0% below the second half of fiscal 1996. The Company's crude costs for the fourth quarter of fiscal 1997 were 11.6% below the same quarter of fiscal 1996. Additionally, cost of goods sold includes a write-off of $1,251,000 relating to a change in estimate of an insurance claim receivable.
Operating Expenses. Operating expenses increased $2.2 million or 2.8% from $79.2 million for 1996 to $81.4 million for fiscal 1997. This increase was primarily due to a special one-time bonus of approximately $1 million.
Operating Income. Operating income decreased $4.1 million or 15.6% from $26.0 million for fiscal 1996 to $22.0 million for fiscal 1997. The Company's product margins and operating income were negatively affected by the high world crude oil prices in the first half of fiscal 1997. In the second half of fiscal 1997, lower world crude oil prices and accompanying strong product margins, particularly for gasoline and asphalt, led to substantial recovery in terms of operating income.
Interest Expense. Net interest expense (interest expense less interest income) declined $0.2 million from $16.4 million for fiscal 1996 to $16.2 million for fiscal 1997. The decrease was due to a reduction in the amount of long-term debt outstanding for most of fiscal 1997, prior to the sale in June 1997 of $200 million of Senior Notes.
Income Taxes. The Company's effective tax rate for fiscal 1997 was approximately 40.2% compared to a rate of 39.3% for fiscal 1996.
Extraordinary Item. In June 1997, the Company incurred an extraordinary loss of $6.7 million (net of an income tax benefit of $4.2 million) as a result of "make-whole premiums" paid and financing costs written-off in connection with the early retirement of its 11.50% and 13.50% Senior Unsecured Notes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (current assets minus current liabilities) at August 31, 1998, was $57.9 million and at August 31, 1997 was $59.3 million. The Company's current ratio (current assets divided by current liabilities) was 1.9:1 at August 31, 1998, and was 2.1:1 at August 31, 1997.
Net cash provided by operating activities totaled $15.4 million for fiscal 1998 compared to net cash used in operating activities of $2.3 million in fiscal 1997. This increase is primarily the result of a decrease in accounts receivable and inventories, and an increase in sales, use and fuel taxes payable, offset by a decrease in accounts payable and accrued liabilities and an increase in deferred income tax assets. Changes in the carrying value of the Company's inventory are the result of fluctuations in world petroleum prices and do not have a material effect on the Company's operating cash flow.
Net cash provided by investing activities totaled $.3 million for the year ended August 31, 1998 as compared to net cash used in investing activities of $53.6 million for fiscal 1997. For the fiscal year ended August 31, 1998 and 1997 respectively, investments included $15.3 million and $48.2 million in government securities and commercial paper maturing through December 1998 and 1997 respectively. Net cash used in investing activities for purchases of property, plant and equipment and other assets totaled $33.5 million and $5.8 million for fiscal 1998 and 1997 respectively. Fiscal 1998 included improvements and upgrades to the refinery of approximately $16.6 million and to the Company's retail outlets of approximately $16.9 million.
The Company reviews its capital expenditures on an ongoing basis. During fiscal 1998, the Company invested approximately $33.5 million for capital improvements; of which approximately $32.9 million (including reimbursement of approximately $7.4 million for eligible turnaround expenditures) was funded from the capital expenditure escrow account established in conjunction with the Company's offering in 1997 and the remaining expenditures were funded from cash flow. The Company currently has budgeted approximately $20.0 million for capital expenditures in fiscal 1999, of which approximately $3.1 million is for the completion of projects relating to underground storage tanks. The remaining $16.9 million for fiscal 1999 is budgeted for the refinery and retail capital improvement program and routine maintenance. The refinery and retail capital improvement program is expected to be completed in fiscal 1999. Maintenance and non-discretionary capital expenditures have averaged approximately $4 million annually over the last three years for the refining and marketing operations.
Future liquidity, both short and long-term, will continue to be primarily dependent on realizing a refinery margin sufficient to cover fixed and variable expenses, including planned capital expenditures. The Company expects to be able to meet its working capital, capital expenditure and debt service requirements out of cash flow from operations, cash on hand and borrowings under the Company's bank credit facility with PNC Bank as Agent Bank. Although the Company is not aware of any pending circumstances which would change its expectation, changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements and other changes in environmental laws and regulations may also increase future capital expenditure levels. Future capital expenditures are also subject to business conditions affecting the industry. The Company continues to investigate strategic acquisitions and capital improvements to its existing facilities.
Federal, state and local laws and regulations relating to the environment affect nearly all the operations of the Company. As is the case with all the companies engaged in similar industries, the Company faces significant exposure from actual or potential claims and lawsuits involving environmental matters. Future expenditures related to environmental matters cannot be reasonably quantified in many circumstances due to the uncertainties as to required remediation methods and related clean-up cost estimates. The Company cannot predict what additional environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied.
SEASONAL FACTORS
Seasonal factors affecting the Company's business may cause variation in the prices and margins of some of the Company's products. For example, demand for gasoline tends to be highest in spring and summer months, while demand for home heating oil and kerosene tends to be highest in winter months. As a result, the margin on gasoline prices versus crude oil costs generally tends to increase in the spring and summer, while margins on home heating oil and kerosene tend to increase in winter.
INFLATION
The effect of inflation on the Company has not been significant during the last five fiscal years.
YEAR 2000 COMPUTER ISSUES
The year 2000 presents many challenges to our industry with respect to, among other things, date-related functions in some computer systems. Historically, certain computer programs have been written using two digits rather than four to define the applicable year, which could result in the computer recognizing a date using "00" as the year 1900 rather than the year 2000. This in turn could result in major system failures or miscalculations and is generally referred to as the "Year 2000" problem.
The Company is examining all areas of our business to ensure Year 2000 readiness, including computer hardware and software applications. The Company is addressing Year 2000 issues primarily with internal resources to ensure that the transition to the Year 2000 will not disrupt the Company's operations. The Company anticipates that essentially all of its systems will be compliant by calendar year end 1998, including its non-information technology systems. In addition, the Company has communicated with and evaluated the systems of its customers, suppliers, financial institutions and others with which it does business to identify any Year 2000 issues. Costs incurred by the Company to date to implement its plan have not been material and are not expected to have a material effect on the Company's financial condition or results of operations. There can be no assurance, however, that the Year 2000 issue will not adversely affect the Company and its business.
RECENT ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.130 ("Statement 130"), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
Statement 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by the implementation of this standard.
Also in June 1997, The FASB issued Statement of Financial Accounting Standards No. 131 ("Statement 131"), "Disclosures about Segments of an Enterprise and Related Information," which supersedes Statement 14, "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.
Statement 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by implementation of this standard.
In February 1998, the FASB issued Statement of Financial Accounting Standard No. 132 ("Statement 132"), "Employers' Disclosures about Pensions and Other Post-Retirement Benefits". Statement 132 standardizes the disclosure requirements for pensions and other post-retirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful.
Statement 132 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and Hedging Activities". Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The accounting for changes in the fair value of a derivative, that is, gains and losses, depends on the intended use of the derivative and its resulting designation.
Statement 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures.
ITEM 7A.
ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Page ----
Report of Independent Certified Public Accountants 23 Consolidated Financial Statements: Balance Sheets 24 Statements of Operations 25 Statements of Stockholder's Equity 26 Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28 - 45
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholder United Refining Company
We have audited the accompanying consolidated balance sheets of United Refining Company and subsidiaries as of August 31, 1998 and 1997, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended August 31, 1998. These consolidated financial statements are the responsibility of the management of United Refining Company and its subsidiaries. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Refining Company and subsidiaries as of August 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1998 in conformity with generally accepted accounting principles.
/s/ BDO SEIDMAN, LLP
New York, New York October 29, 1998
UNITED REFINING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
UNITED REFINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
See accompanying notes to consolidated financial statements.
UNITED REFINING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See accompanying notes to consolidated financial statements.
UNITED REFINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
1. ACCOUNTING POLICIES
Basis of Presentation
United Refining Company is a wholly-owned subsidiary of United Refining, Inc. ("United"), a wholly-owned subsidiary of United Acquisition Corporation ("UAC") which, in turn is a wholly-owned subsidiary of Red Apple Group, Inc. (the "Parent").
The consolidated financial statements include the accounts of United Refining Company and its subsidiaries (collectively, the "Company"), United Refining Company of Pennsylvania and its subsidiaries, and Kiantone Pipeline Corporation.
All significant intercompany balances and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investment securities with maturities of three months or less at date of acquisition to be cash equivalents.
Inventories and Exchanges
Inventories are stated at the lower of cost or market, with cost being determined under the Last-in, First-out (LIFO) method for crude oil and petroleum product inventories and the First-in, First-out (FIFO) method for merchandise. Supply inventories are stated at either lower of cost or market or replacement cost and include various parts for the refinery operations. If the cost of inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value. Due to fluctuating market conditions for certain petroleum product inventories, LIFO cost exceeded market by approximately $11,200,000 and $1,800,000 as of August 31, 1998 and 1997, respectively, resulting in the valuation of certain inventories at market.
Inventories consist of the following:
UNITED REFINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Included in petroleum product inventories are exchange balances either held for or due from other petroleum marketers. These balances are not significant.
The Company does not own sources of crude oil and depends on outside vendors for its needs.
Property, Plant and Equipment
Property, plant and equipment is stated at cost and depreciated by the straight-line method over the respective estimated useful lives.
Routine current maintenance, repairs and replacement costs are charged against income. Turnaround costs, which consist of complete shutdown and inspection of significant units of the refinery at intervals of two or more years for necessary repairs and replacements, are estimated during the units' operating cycles and charged against income currently. Expenditures which materially increase values, expand capacities or extend useful lives are capitalized. A summary of the principal useful lives used in computing depreciation expense is as follows:
ESTIMATED USEFUL LIVES (YEARS) ------------------------------------------------------
Refinery Equipment 20-30 Marketing 15-30 Transportation 20-30 ------------------------------------------------------
Restricted Cash and Cash Equivalents and Investments
Restricted cash and cash equivalents and investments consist of cash and cash equivalents and investments in government securities and commercial paper held in trust and committed only for expanding and upgrading the refinery, rebuilding and refurbishing existing retail units and for acquiring new retail units and other capital projects. These funds represent the unused proceeds from the $200,000,000 10-3/4% Senior Unsecured Notes offering completed in June, 1997 and are carried at cost, which approximates market.
Revenue Recognition
Revenues from wholesale sales are recognized upon shipment or when title passes. Retail revenues are recognized immediately upon sale to the customer.
UNITED REFINING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
Income Taxes
The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company joins with the Parent and the Parent's other subsidiaries in filing a Federal Income tax return on a consolidated basis. Income taxes are calculated on a separate return basis with consideration of the tax sharing agreement among the Parent and its subsidiaries. Pursuant to the tax sharing agreement, included in prepaid expenses and other assets are amounts due from the Parent of approximately $1,600,000 and $650,000 as of August 31, 1998 and 1997, respectively.
Post-retirement Healthcare Benefits
The Company provides at no cost to retirees, post-retirement healthcare benefits to salaried and certain hourly employees. The benefits provided are hospitalization, medical coverage and dental coverage for the employee and spouse until age 65. After age 65, benefits continue until the death of the retiree, which results in the termination of benefits for all dependent coverage. If an employee leaves the Company as a terminated vested member of a pension plan prior to normal retirement age, the person is not entitled to any post-retirement healthcare benefits.
The Company accrues post-retirement benefits other than pensions during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. The Company has elected to amortize the transition obligation of approximately $12,000,000 on a straight-line basis over a 20-year period.
Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
In August 1997, the Company recorded a charge to earnings of $1,251,000 relating to a change in estimate. This accounting change results from the write-off of a portion of an insurance claim receivable and is included in cost of goods sold.
UNITED REFINING COMPANY AND SUBSIDIARIES
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Concentrations of Credit Risk
The Company extends credit based on evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses.
Environmental Matters
The Company expenses environmental expenditures related to existing condition resulting from past or current operations and from which no current or future benefit is discernible. Expenditures, which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site by site basis and records a liability at the time when it is probable and can be reasonably estimated. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is discounted, but is not reduced for possible recoveries from insurance carriers. (Note 15).
Long-Lived Assets
Long-lived assets, such as intangible assets and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value.
Recent Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.130 ("Statement 130"), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements.
Statement 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by the implementation of this standard.
Also in June 1997, The FASB issued Statement of Financial Accounting Standards No. 131 ("Statement 131"), "Disclosures about Segments of an Enterprise and Related Information," which supersedes Statement 14, "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards for the way that public companies report information about operating segments in
UNITED REFINING COMPANY AND SUBSIDIARIES
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annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance.
Statement 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by implementation of this standard.
In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132 ("Statement 132"), "Employers' Disclosures about Pensions and Other Post-Retirement Benefits". Statement 132 standardizes the disclosure requirements for pensions and other post-retirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful.
Statement 132 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard.
In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and Hedging Activities". Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The accounting for changes in the fair value of a derivative, that is, gains and losses, depends on the intended use of the derivative and its resulting designation.
Statement 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures.
Reclassification
Certain amounts in the prior year's consolidated financial statements have been reclassified to conform with the presentation in the current year.
2. ACCOUNTS RECEIVABLE, NET
As of August 31, 1998 and 1997, accounts receivable were net of allowance for doubtful accounts of $405,000 and $511,000 respectively.
UNITED REFINING COMPANY AND SUBSIDIARIES
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3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
4. ACCRUED LIABILITIES
Accrued liabilities include the following:
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5. LEASES
The Company occupies premises, primarily retail gas stations and convenience stores and office facilities under long-term leases which require minimum annual rents plus, in certain instances, the payment of additional rents based upon sales. The leases generally are renewable for one to three five-year periods.
Future minimum lease payments as of August 31, 1998 are summarized as follows:
Net rent expense for operating leases amounted to $3,338,000, $3,238,000 and $3,265,000 for the years ended August 31, 1998, 1997 and 1996 respectively.
6. CREDIT FACILITY
In June 1997, the Company negotiated a $35,000,000 secured revolving credit facility (the "Facility") with a syndicate of banks that provides for revolving credit loans and for the issuance of letters of credit. The Facility expires on June 9, 2002 and is secured by certain qualifying cash accounts, accounts receivable, and inventory, which amounted to $52,397,000 as of August 31, 1998. Until maturity, the Company may borrow, repay and reborrow on an amount not exceeding certain percentages of secured assets. The interest rate on borrowings varies with the Company's earnings and is based on the higher of the bank's prime rate or Federal funds rate plus 1/2% for base rate borrowings and the LIBOR rate for Euro-Rate borrowings, which was 7.9% as of August 31, 1998. As of August 31, 1998, no letters of credit and no borrowings were outstanding under the agreement. No other borrowings or letters of credit were outstanding for any other period presented. The Company pays a commitment fee of 3/8% per annum on the unused balance of the Facility.
UNITED REFINING COMPANY AND SUBSIDIARIES
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7. LONG-TERM DEBT
During June 1997, the Company sold $200,000,000 of 10-3/4% Senior Unsecured Notes due 2007, Series A. Subsequent to this issue, the Company exchanged these notes for its 10-3/4% Senior Unsecured Notes due 2007, Series B. Such notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company's subsidiaries (Note 18). The proceeds of the offering were used to retire all of its outstanding senior notes, pay prepayment penalties related thereto and to retire the amount outstanding under the Company's existing secured revolving credit facility. The excess proceeds from the offering of approximately $48,100,000 were deposited in an escrow account to be used for expanding and upgrading the refinery, rebuilding and refurbishing existing retail units, and for acquiring new retail units and other capital expenditure projects. As of August 31, 1998 and 1997, the unused funds were classified as "Restricted Cash and Cash Equivalents and Investments".
Both the senior unsecured notes and secured credit facility require that the Company maintain certain minimum levels of tangible net worth, working capital ratios and cash flow and restrict the amount available to distribute dividends. The Company is currently in compliance with its loan covenants.
A summary of long-term debt is as follows:
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The principal amount of long-term debt outstanding as of August 31, 1998, matures as follows:
The following financing costs have been deferred and are being amortized to expense over the term of the related debt:
UNITED REFINING COMPANY AND SUBSIDIARIES
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8. RETIREMENT PLANS
Substantially all employees of the Company are covered by noncontributory defined benefit retirement plans. The benefits are based on each employee's years of service and compensation. The Company's policy is to contribute the minimum amounts required by the Employee Retirement Income Security Act of 1974, as amended. The assets of the plans are invested in an investment trust fund and consist of interest-bearing cash and bank common/collective trust funds.
Net periodic pension cost included the following components:
Assumptions used in the calculation of the projected benefit obligation are as follows:
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The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheets.
The Company's deferred gain on settlement of past pension plan obligations amounted to $2,205,000 and $2,420,000 as of August 31, 1998 and 1997, respectively, and is being amortized over 23 years.
9. OTHER BENEFIT PLANS
As discussed in Note 1, the Company accrues for certain post-retirement healthcare benefits to salaried and certain hourly employees. The Company funds such benefits as they become payable. The Company made benefit payments of $412,000, $331,000 and $497,000 for the years ended August 31, 1998, 1997 and 1996, respectively. Benefit payments are reflected as a reduction of the accrued post-retirement healthcare benefit costs.
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The following table sets forth the post-retirement healthcare benefits status reconciled with the amounts on the Company's consolidated balance sheets.
Net periodic post-retirement healthcare benefit cost for the year includes the following components:
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered medical and dental benefits was 7.4% and 5%, respectively for 1998; the rates were assumed to decrease gradually to 5% for both medical and dental benefits until 2007 and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed healthcare cost trend rates by 1 percentage point in each year would increase the accumulated post-retirement healthcare benefit obligation as of August 31, 1998, by $2,126,000 and the aggregate of the service and interest cost components of net periodic post-retirement healthcare benefit cost for the year then ended by $286,000.
The weighted average discount rate used in determining the accumulated post retirement healthcare benefit obligation for August 31, 1998 and 1997, was 8.0%.
The Company also contributes to voluntary employee savings plans through regular monthly contributions equal to various percentages of the amounts invested by the participants. The Company's contributions to these plans amounted to $548,000, $498,000 and $491,000 for the years ended August 31, 1998, 1997 and 1996, respectively.
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10. INCOME TAXES
Income tax expense (benefit) consists of:
Reconciliation of the differences between income taxes computed at the Federal statutory rate and the provision for income taxes attributable to income before income tax expense (benefit) and extraordinary item is as follows:
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Deferred income tax liabilities (assets) are comprised of the following:
The Company's results of operations are included in the consolidated Federal tax return of the Parent.
The Tax Reform Act of 1986 created a separate parallel tax system called the Alternative Minimum Tax ("AMT") system. AMT is calculated separately from the regular U.S. Federal income tax and is based on a flat rate of 20% applied to a broader tax base. The higher of the two taxes is paid. The excess AMT over regular tax is a tax credit, which can be carried forward indefinitely to reduce regular tax liabilities in excess of AMT liabilities of future years. The Company generated AMT credits in prior years of approximately $4,000,000 that is available to offset the regular tax liability in the future years.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
The carrying amount of cash and cash equivalents, trade accounts and notes receivable and current liabilities approximate fair value because of the short maturity of these instruments.
The fair value of long-term debt (Note 7) was determined using the fair market value of the individual debt instruments. As of August 31, 1998, the carrying amount and estimated fair value of these debt instruments approximated $201,309,000 and $179,153,000, respectively.
UNITED REFINING COMPANY AND SUBSIDIARIES
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12. CONTINGENCIES
The Company is a defendant in various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance, or if not so covered, are without merit or are of such kind, or involve such amounts that an unfavorable disposition would not have a material adverse effect on the consolidated financial position of the Company.
13. TRANSACTIONS WITH AFFILIATED COMPANIES
In June 1997, the Company declared a dividend of $28,285,000 of which $5,000,000 was paid in cash and $23,285,000 was forgiveness of debt from related parties. Additionally, the Company offset $2,017,000 of amounts due from related parties with deferred tax benefits previously received.
The Company paid a service fee relating to certain costs incurred by its Parent for the Company's New York office. During the years ended August 31, 1998, 1997 and 1996, such fees amounted to approximately $980,000, $2,712,000 and $2,424,000 respectively.
An affiliate of the Company leases nine retail gas station and convenience stores to the Company under various operating leases which all expire in 2001. Rent expense relating to these leases was $264,000 for each of the years ended August 31, 1998, 1997 and 1996.
14. ENVIRONMENTAL MATTERS
The Company is subject to federal, state, and local laws and regulations relating to pollution and protection of the environment such as those governing releases of certain materials into the environment and the storage, treatment, transportation, disposal and clean-up of wastes, including, but not limited to, the Federal Clean Water Act, as amended, the Clean Air Act, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and analogous state and local laws and regulations.
Due to the nature of the Company's business, the Company is and will continue to be subject to various environmental claims, legal actions and complaints. In the opinion of management, all current matters are without merit or are of such kind or involve such amounts that an unfavorable disposition would not have a material adverse effect on the consolidated financial position and results of operations of the Company. Management of the Company believes that remediation or related environmental costs incurred during the normal course of business are not expected to be material.
UNITED REFINING COMPANY AND SUBSIDIARIES
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15. OTHER EXPENSE
During 1994, the Company incurred a loss of $1,598,000 in connection with the settlement of a claim dating back to a period prior to the acquisition by the Parent (Note 1). The related settlement amount of $2,300,000 ($1,598,000 after being discounted at 13% per annum) is payable in quarterly installments of $125,000 commencing on January 13, 1995, and continuing to October 13, 1998, at which time annual payments of $160,000 will be required until the remaining outstanding balance is liquidated on October 13, 2002.
The undiscounted amounts due as of August 31, 1998 are as follows:
16. EXTRAORDINARY ITEM
In June 1997, the Company incurred an extraordinary loss of $6,653,000 (net of an income tax benefit of $4,200,000) as a result of "make-whole premiums" paid and financing costs written-off in connection with the early retirement of its 11.50% and 13.50% senior unsecured notes.
17. SEGMENTS OF BUSINESS
The Company operates in two industry segments. The retail segment sells petroleum products and convenience store merchandise to the general public. The wholesale segment sells petroleum products to other oil companies and distributors. Intersegment sales are primarily from the wholesale segment to the retail segment and are accounted for in a manner similar to third party sales and are eliminated in consolidation.
UNITED REFINING COMPANY AND SUBSIDIARIES
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18. SUBSIDIARY GUARANTORS
Summarized financial information for the Company's wholly-owned subsidiary guarantors (Note 7) is as follows:
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Separate financial statements of the wholly-owned subsidiary guarantors are not presented because management believes they would not be meaningful to investors.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
NONE
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth below is certain information as of November 30, 1998 with respect to all directors and executive officers of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not Applicable
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the three fiscal years ended August 31, 1996, 1997 and 1998 the compensation paid by the Company to its Chairman of the Board and Chief Executive Officer and each of the four other executive officers of the Company whose salary and bonus exceeded $100,000 for the fiscal year ended August 31, 1998.
SUMMARY COMPENSATION TABLE - --------------------------------------------------------------------------------
(1) Amounts include automobile allowances. (2) Amounts include Company matching contributions under the Company's 401(K) Incentive Savings Plan and health and term life insurance benefits.
PENSION PLAN
The Company maintains a defined benefit pension plan for eligible employees. The following table shows estimated annual benefits payable upon retirement in specified compensation categories and years of service classifications.
PENSION PLAN TABLE
The benefit formula is based on the average earnings of the participant for the three years in which such participant's earnings were the highest. Earnings include salary and bonus up to a maximum of $160,000 per year. Benefits are calculated by multiplying the sum of (a) 1% of average earnings up to the Social Security compensation base, plus (b) 1.25% of average earnings in excess of the Social Security compensation base, by (c) the number of years of service. Payments of retirement benefits are not reduced by any Social Security benefits received by the participant. The Social Security compensation base for 1998 is $31,128.
Assuming that the following officers continue to be employed by the Company until they reach age 65, their credited years of service will be as follows:
COMPENSATION OF DIRECTORS
Non-officer directors receive a stipend of $15,000 per year and $1,000 for each meeting attended.
EMPLOYMENT AND CONSULTING AGREEMENTS
Thomas C. Covert entered into a consulting agreement with the Company, the initial term of which commenced on September 1, 1996 and expired on August 31, 1998. The Agreement provides that its term shall be extended for two additional one year periods unless the Company or Mr. Covert gives written notice of cancellation to the other party within specified time periods. Under such provision the term of the Agreement has been extended to August 31, 1999. Under the agreement Mr. Covert is obligated to render services to the Company on a limited time basis of between 30-40 hours per month in such capacities as the Board of Directors of the Company may designate. Under the agreement the Company has agreed to pay Mr. Covert $170 per hour for services rendered, but in no event less than $6,800 per month for each month during the term of the agreement.
Mr. Covert has also entered into a Deferred Compensation Agreement with the Company pursuant to which since the date of his retirement on September 1, 1996, the Company has been paying Mr. Covert a retirement benefit at the rate of approximately $12,300 per year. The benefit is payable to Mr. Covert until his death, whereupon Mr. Covert's wife is entitled to a benefit of approximately $6,150 per year until her death if she does not predecease him.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding ownership of Common Stock on November 30, 1998 by: (i) each stockholder known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's directors; and (iii) all officers and directors of the Company as a group. The Company believes that ownership of the shares by the persons named below is both of record and beneficial and such persons have sole voting and investing power with respect to the shares indicated.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company paid a service fee relating to certain costs incurred by its parent, Red Apple Group, Inc., ("RAG"), for the Company's New York office for fiscal 1998 amounting to approximately $980,000. Pursuant to a Servicing Agreement entered into between the Company and RAG in June 1997, the Company will pay up to a $1,000,000 per year fee relating to these costs. The term of the Servicing Agreement expires on June 9, 2000, but the term shall be automatically extended for periods of one year if neither party gives notice of termination of the Servicing Agreement prior to the expiration of the then current term.
As of the date hereof, United Refining, Inc., owned by John A. Catsimatidis, was leasing to the Company nine retail units. The term of each lease expires on April 1, 2001. The annual rentals payable under the leases aggregate $264,000, which the Company believes are market rates. As of the date hereof, the Company was current on all rent obligations under such leases.
RAG files a consolidated tax return with affiliated entities, including the Company. Commencing in June 1997, RAG, the Company and certain of their affiliates entered into a tax sharing agreement (the "Tax Sharing Agreement"). Under the Tax Sharing Agreement the parties established a method for allocating the consolidated federal income tax liability and combined state tax liability of the RAG affiliated group among its members; for reimbursing RAG for payment of such tax liability; for compensating any member for use of its net operating loss or tax credits in arriving at such tax liability; and to provide for the allocation and payment of any refund arising from a
carryback of net operating loss or tax credits from subsequent taxable years. Pursuant to the tax sharing agreement included in prepaid expenses and other assets are amounts due from the Parent of approximately $1,600,000 and $650,000 as of August 31, 1998 and 1997, respectively.
During fiscal 1998, the Company made payments for services rendered to it by Wolf, Block, Schorr and Solis-Cohen, LLP, ("WBS&S-C"), a law firm of which Martin R. Bring, a director of the Company, is a member. The Company believes that the fees paid to WBS&S-C for legal services are comparable to fees it would pay to a law firm for similar services, none of whose members are officers, directors or principal stockholders of the Company.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
A list of all financial statements filed as part of this report is contained in the index to Item 8, which index is incorporated herein by reference.
(2) Financial Statement Schedules
Report of Independent Certified Public Accountants Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
Number Description - ------ -----------
3.1 Certificate of Incorporation of United Refining Company ("URC"). Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-35083) (the "Registration Statement").
3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration Statement.
3.3 Certificate of Incorporation of United Refining Company of Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration Statement.
3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the Registration Statement.
3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC"). Incorporated by reference to Exhibit 3.5 to the Registration Statement.
3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration Statement.
3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY"). Incorporated by reference to Exhibit 3.7 to the Registration Statement.
3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the registration Statement.
3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by reference to Exhibit 3.9 to the Registration Statement.
3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the Registration Statement.
3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to the Registration Statement.
3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the Registration Statement.
3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by reference to Exhibit 3.13 to the Registration Statement.
3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the Registration Statement.
3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by reference to Exhibit 3.15 to the Registration Statement.
3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the Registration Statement.
3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI"). Incorporated by reference to Exhibit 3.17 to the Registration Statement.
3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the Registration Statement.
3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by reference to Exhibit 3.19 to the Registration Statement.
3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the Registration Statement.
3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation ("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration Statement.
3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the Registration Statement.
3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI"). Incorporated by reference to Exhibit 3.23 to the Registration Statement.
3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the Registration Statement.
4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder Bank & Trust Company ("Schroder"), relating to the 10-3/4% Series A Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to the Registration Statement.
4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the Registration Statement.
10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co. Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated by reference to Exhibit 10.1 to the Registration Statement.
10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI, and BSCI. Incorporated by reference to Exhibit 10.2 to the Registration Statement.
10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow Agent, Schroder, as Trustee, and URC. Incorporated by reference to Exhibit 10.3 to the Registration Statement.
10.4 Servicing Agreement dated June 9, 1997 between URC and Red Apple Group, Inc. Incorporated by reference to Exhibit 10.4 to the Registration Statement.
10.5 Collective Bargaining Agreement dated February 1, 1996 between URC and International Union of Operating Engineers, Local No. 95. Incorporated by reference to Exhibit 10.5 to the Registration Statement.
10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and International Union, United Plant Guard Workers of America and Local No. 502. Incorporated by reference to Exhibit 10.6 to the Registration Statement.
10.7 Collective Bargaining Agreement dated February 1, 1997 between URC and United Steel Workers of America Local Union No. 2122-A. Incorporated by reference to Exhibit 10.7 to the Registration Statement.
10.8 Collective Bargaining Agreement dated August 1, 1995 between URC and General Teamsters Local Union No. 397. Incorporated by reference to Exhibit 10.8 to the Registration Statement.
10.9 Credit Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.9 to the Registration Statement.
10.10 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URC. Incorporated by reference to Exhibit 10.10 to the Registration Statement.
10.11 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URCP. Incorporated by reference to Exhibit 10.11 to the Registration Statement.
10.12 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by KPC. Incorporated by reference to Exhibit 10.12 to the Registration Statement.
10.13 Security Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.13 to the Registration Statement.
10.14 Waiver and Amendment to Credit Agreement dated as of July 15, 1998 by and among, URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent.*
10.15 Consulting Agreement dated September 1, 1996 with Thomas C. Covert.*
10.16 Deferred Compensation Agreement dated September 1, 1996 with Thomas C. Covert. *
21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement.
27.1 Financial data schedule for the twelve months ended August 31, 1998.*
(b) Reports on Form 8-K
NONE
* Filed herewith
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholder of United Refining Company
The audits referred to in our report dated October 29, 1998 relating to the consolidated financial statements of United Refining Company and Subsidiaries included the audits of the financial statement Schedule II Valuation and Qualifying Accounts for each of the three years in the period ended August 31, 1998. This financial statement schedule is the responsibility of management. Our responsibility is to express an opinion on this schedule based on our audits.
In our opinion, such financial statement Schedule - Valuation and Qualifying Accounts, presents fairly, in all material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP New York, New York October 29, 1998
UNITED REFINING COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED REFINING COMPANY
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------ Myron L. Turfitt President and Chief Operating Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED REFINING COMPANY OF PENNSYLVANIA
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------------- Myron L. Turfitt President and Chief Operating Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KIANTONE PIPELINE CORPORATION
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------------- Myron L. Turfitt President and Chief Operating Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KIANTONE PIPELINE COMPANY
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ---------------------------------------- Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UNITED JET CENTER, INC.
Dated: November 30, 1998 By: /s/ Myron L. Turfitt -------------------------------------- Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VULCAN ASPHALT REFINING CORPORATION
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------- Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KWIK-FIL, INC.
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------- Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KWIK-FILL, INC.
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------- Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
INDEPENDENT GASOLINE & OIL COMPANY OF ROCHESTER, INC.
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------ Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BELL OIL CORP.
Dated: November 30, 1998 By: /s/ Myron L. Turfitt --------------------------------- Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PPC, INC.
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------ Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SUPER TEST PETROLEUM, INC.
Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------- Myron L. Turfitt Executive Vice President
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT
No annual report or proxy material was sent to security holders by the Corporation during the fiscal year ended August 31, 1998.
EXHIBITS
Number Description - ------ -----------
3.1 Certificate of Incorporation of United Refining Company ("URC"). Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-35083) (the "Registration Statement").
3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration Statement.
3.3 Certificate of Incorporation of United Refining Company of Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration Statement.
3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the Registration Statement.
3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC"). Incorporated by reference to Exhibit 3.5 to the Registration Statement.
3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration Statement.
3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY"). Incorporated by reference to Exhibit 3.7 to the Registration Statement.
3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the registration Statement.
3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by reference to Exhibit 3.9 to the Registration Statement.
3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the Registration Statement.
3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to the Registration Statement.
3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the Registration Statement.
3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by reference to Exhibit 3.13 to the Registration Statement.
3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the Registration Statement.
3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by reference to Exhibit 3.15 to the Registration Statement.
3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the Registration Statement.
3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI"). Incorporated by reference to Exhibit 3.17 to the Registration Statement.
3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the Registration Statement.
3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by reference to Exhibit 3.19 to the Registration Statement.
3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the Registration Statement.
3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation ("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration Statement.
3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the Registration Statement.
3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI"). Incorporated by reference to Exhibit 3.23 to the Registration Statement.
3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the Registration Statement.
4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder Bank & Trust Company ("Schroder"), relating to the 10-3/4% Series A Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to the Registration Statement.
4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the Registration Statement.
10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co. Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated by reference to Exhibit 10.1 to the Registration Statement.
10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI, and BSCI. Incorporated by reference to Exhibit 10.2 to the Registration Statement.
10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow Agent, Schroder, as Trustee, and URC. Incorporated by reference to Exhibit 10.3 to the Registration Statement.
10.4 Servicing Agreement dated June 9, 1997 between URC and Red Apple Group, Inc. Incorporated by reference to Exhibit 10.4 to the Registration Statement.
10.5 Collective Bargaining Agreement dated February 1, 1996 between URC and International Union of Operating Engineers, Local No. 95. Incorporated by reference to Exhibit 10.5 to the Registration Statement.
10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and International Union, United Plant Guard Workers of America and Local No. 502. Incorporated by reference to Exhibit 10.6 to the Registration Statement.
10.7 Collective Bargaining Agreement dated February 1, 1997 between URC and United Steel Workers of America Local Union No. 2122-A. Incorporated by reference to Exhibit 10.7 to the Registration Statement.
10.8 Collective Bargaining Agreement dated August 1, 1995 between URC and General Teamsters Local Union No. 397. Incorporated by reference to Exhibit 10.8 to the Registration Statement.
10.9 Credit Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.9 to the Registration Statement.
10.10 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URC. Incorporated by reference to Exhibit 10.10 to the Registration Statement.
10.11 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URCP. Incorporated by reference to Exhibit 10.11 to the Registration Statement.
10.12 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by KPC. Incorporated by reference to Exhibit 10.12 to the Registration Statement.
10.13 Security Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.13 to the Registration Statement.
10.14 Waiver and Amendment to Credit Agreement dated as of July 15, 1998 by and among, URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent.*
10.15 Consulting Agreement dated September 1, 1996 with Thomas C. Covert.*
10.16 Deferred Compensation Agreement dated September 1, 1996 with Thomas C. Covert. *
21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement.
27.1 Financial data schedule for the twelve months ended August 31, 1998.*
(c) Reports on Form 8-K
NONE
* Filed herewith