-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, A+X+z67gBH/uvj6FIBQxW9tI2QR7jsMVRyyDoYXQTV+vpXcfesiWunMeKoVZCx1K Tfzptw5rPduZwEiRJS32Kw== 0000950128-98-001166.txt : 19981201 0000950128-98-001166.hdr.sgml : 19981201 ACCESSION NUMBER: 0000950128-98-001166 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19980831 FILED AS OF DATE: 19981130 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED REFINING CO CENTRAL INDEX KEY: 0000101462 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 251411751 STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-06198 FILM NUMBER: 98761161 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIANTONE PIPELINE CORP CENTRAL INDEX KEY: 0000830253 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 251211902 STATE OF INCORPORATION: NY FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-01 FILM NUMBER: 98761162 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED REFINING CO /PA/ CENTRAL INDEX KEY: 0001040270 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 250850960 STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-02 FILM NUMBER: 98761163 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIANTONE PIPELINE CO CENTRAL INDEX KEY: 0001045539 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-03 FILM NUMBER: 98761164 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KWIK FIL INC CENTRAL INDEX KEY: 0001045540 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-04 FILM NUMBER: 98761165 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KWIK FILL INC CENTRAL INDEX KEY: 0001045541 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-05 FILM NUMBER: 98761166 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED JET CENTER INC CENTRAL INDEX KEY: 0001045542 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-06 FILM NUMBER: 98761167 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL OIL CORP CENTRAL INDEX KEY: 0001045543 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-07 FILM NUMBER: 98761168 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPC INC CENTRAL INDEX KEY: 0001045544 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-08 FILM NUMBER: 98761169 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPER TEST PETROLEUM INC CENTRAL INDEX KEY: 0001045545 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-09 FILM NUMBER: 98761170 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VULCAN ASPHALT REFINING CORP CENTRAL INDEX KEY: 0001045546 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-10 FILM NUMBER: 98761171 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT GASOLINE & OIL CO OF ROCHESTER CENTRAL INDEX KEY: 0001045547 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-35083-11 FILM NUMBER: 98761172 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 10-K405 1 UNITED REFINING COMPANY 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED AUGUST 31, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _____________ Commission File No. 333-35083 UNITED REFINING COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 25-1411751 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) See Table of Additional Subsidiary Guarantor Registrants 15 BRADLEY STREET, WARREN, PA 16365 (Address of principal executive offices) (Zip Code) (814) 723-1500 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12 (b) of the Act: NONE Securities registered pursuant to Section 12 (g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13, or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------ ------ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] As of November 30, 1998, 100 shares of the Registrant's common stock, $0.10 par value per share, were outstanding. All shares of common stock of the Registrant's are held by an affiliate. Therefore, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant is zero. DOCUMENTS INCORPORATED BY REFERENCE: NONE 2
- ---------------------------------------------------------------------------------------------------------------------------- TABLE OF ADDITIONAL REGISTRANTS - ---------------------------------------------------------------------------------------------------------------------------- State of Other Primary Standard IRS Employer Name Jurisdiction of Industrial Identification Commission File Incorporation Classification Number Number Number - ---------------------------------------------------------------------------------------------------------------------------- Kiantone Pipeline Corporation New York 4612 25-1211902 333-35083-01 - ---------------------------------------------------------------------------------------------------------------------------- Kiantone Pipeline Company Pennsylvania 4600 25-1416278 333-35083-03 - ---------------------------------------------------------------------------------------------------------------------------- United Refining Company Of Pennsylvania 5541 25-0850960 333-35083-02 Pennsylvania - ---------------------------------------------------------------------------------------------------------------------------- United Jet Center, Inc. Delaware 4500 52-1623169 333-35083-06 - ---------------------------------------------------------------------------------------------------------------------------- Kwik-Fill, Inc. Pennsylvania 5541 25-1525543 333-35083-05 - ---------------------------------------------------------------------------------------------------------------------------- Independent Gas and Oil New York 5170 06-1217388 333-35083-11 Company of Rochester, Inc. - ---------------------------------------------------------------------------------------------------------------------------- Bell Oil Corp. Michigan 5541 38-1884781 333-35083-07 - ---------------------------------------------------------------------------------------------------------------------------- PPC, Inc. Ohio 5541 31-0821706 333-35083-08 - ---------------------------------------------------------------------------------------------------------------------------- Super Test Petroleum Inc. Michigan 5541 38-1901439 333-35083-09 - ---------------------------------------------------------------------------------------------------------------------------- Kwik-Fil, Inc. New York 5541 25-1525615 333-35083-04 - ---------------------------------------------------------------------------------------------------------------------------- Vulcan Asphalt Refining Delaware 2911 23-2486891 333-35083-10 Corporation - ----------------------------------------------------------------------------------------------------------------------------
2 3 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. 3 4 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 4 5 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:
1993 1994 1995 1996 1997 ---- ---- ---- ---- ---- Operable annual average refining capacity (million bpd)* 15.1 15.1 15.4 15.3 15.6 Crude input to refineries (million 13.6 13.9 14.0 14.2 14.6 bpd) Utilization (in percent) 89.9 91.5 90.9 92.3 93.6
* 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. 5 6 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. 6 7 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,
1994 1995 1996 1997 1998 Volume Percent Volume Percent Volume Percent Volume Percent Volume Percent Gasoline Regular (87 octane) 7,413 33.8% 8,770 37.0% 8,952 36.9% 9,106 38.3% 8,703 38.4% Midgrade (89 octane) - - 288 1.2% 249 1.0% - - - - Premium (93 octane) 2,681 12.2% 1,918 8.1% 1,741 7.2% 1,485 6.2% 1,332 5.9% Middle distillates Kerosene 336 1.5% 322 1.4% 377 1.6% 431 1.8% 237 1.0% Diesel fuel 2,049 9.4% 4,195 17.7% 4,177 17.2% 4,485 18.9% 4,014 17.7% No. 2 heating oil 3,287 15.0% 1,609 6.8% 1,770 7.3% 1,510 6.4% 1,334 5.9% Jet fuel 24 0.1% 253 1.1% 445 1.8% 428 1.8% 357 1.6% Asphalt 3,636 16.6% 4,228 17.9% 4,479 18.5% 4,409 18.5% 4,441 19.6% Other 1,437 6.6% 1,076 4.5% 1,043 4.3% 1,031 4.3% 1,249 5.5% ----- --- ----- --- ----- --- ----- --- ----- --- (2) Saleable yield 20,863 95.2% 22,659 95.7% 23,233 95.8% 22,885 96.3% 21,668 95.6% Refining fuel 1,605 7.3% 1,559 6.6% 1,603 6.6% 1,496 6.3% 1,479 6.5% ----- --- ----- --- ----- --- ----- --- ----- --- Total product yield (3) 22,468 102.5% 24,218 102.3% 24,836 102.4% 24,381 102.6% 23,147 102.1%
(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 7 8 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. 8 9 Turnarounds: Refinery Expansion and Improvement Turnaround cycles vary for different refinery units. A planned turnaround of each of the two major refinery units - the crude unit and the fluid catalytic cracking unit - is conducted approximately every three or four years, during which time such units are shut down for internal inspection and repair. A turnaround, which generally takes two to four weeks to complete in the case of the two major refinery units, consists of a series of moderate to extensive maintenance exercises. Turnarounds are planned and accomplished in a manner that allows for reduced production during maintenance instead of a complete plant shutdown. The Company accrues on a monthly basis a charge for the maintenance work to be conducted as part of turnarounds of major units. The costs of turnarounds of other units are expensed as incurred. In accordance with the Capital Improvement Plan of the Company's $200 Million Senior Notes due 2007 during fiscal 1998, the Company used $18.8 million for refinery improvements and maintenance turnaround expenses. Of the $22.2 million originally escrowed for the refinery, the remaining $3.4 million is included in the Company's capital budget for fiscal 1999. MARKETING AND DISTRIBUTION General The Company has a long history of service within its market area. The Company's first retail service station was established in 1927 near the Warren refinery and over the next seventy years its distribution network has steadily expanded. Major acquisitions of competing retail networks occurred in 1983, with the acquisition of 78 sites from Ashland Oil Company and in 1989 to 1991, with the acquisition of 53 sites from Sun Oil Company and Busy Bee Stores, Inc. The Company maintains an approximate 59% / 41% split between sales at its rural and urban units. The Company believes this to be advantageous, balancing the higher gross margins often achievable due to decreased competition in rural areas with higher volumes in urban areas. The Company believes that its rural convenience store units provide an important alternative to traditional grocery store formats. In fiscal 1998, approximately 63% and 24% of the Company's gasoline and diesel fuel production, respectively, was sold through this retail network. Retail Operations As of August 31, 1998 the Company operated a retail marketing network that includes 309 retail units, of which 175 are located in western New York, 124 in northwestern Pennsylvania and 10 in eastern Ohio. The Company owns 230 of these units. Gasoline at these retail units is sold under the brand name "Kwik Fill(R)". Most retail units operate under the brand name Red Apple Food Mart(R). The Company believes that Red Apple Food Mart(R) and Kwik Fill(R) are well-recognized names in the Company's marketing areas. The Company believes that the operation of its retail units provides it with a significant advantage over competitors that operate wholly or partly through dealer arrangements because the Company has greater control over pricing and operating expenses, thus establishing a potential for improved margins. The Company classifies its stores into four categories: convenience stores, limited gasoline stations, truck stop facilities and other stores. Full convenience stores have a wide variety of foods, snacks, cigarettes and beverages and self-service gasoline. Forty-five of such units also have delicatessens where food (primarily submarine sandwiches, pizza, chicken and lunch platters) is prepared on the premises for retail sales and also distribution to other nearby Company units which do not have in-store delicatessens. Mini convenience stores sell snacks, cigarettes and beverages and self-service gasoline. Limited gasoline stations sell gasoline, cigarettes, oil and related car care products and provide full service for gasoline customers. Truckstop facilities sell gasoline and diesel fuel on a self-service and full-service basis. All truckstops include either a full or mini convenience store. Two of the truck stops have stand alone restaurants and one has a truck repair garage. These three facilities are classified separately in the table below as "other stores." As of August 31, 1998, the average sales areas of the Company's convenience stores, limited gasoline stations, truckstops and other stores were 750, 200, 1,200 and 2,520 square feet, respectively. 9 10 The table below sets forth certain information concerning the stores as of, and for the fiscal years ended August 31, 1996, 1997 and 1998:
Average Monthly Average Monthly Average Monthly Gasoline Gallonage Diesel Fuel Gallonage Merchandise Sales (Thousands) (Thousands) (Thousands) Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended Store Format and Number of August 31, August 31, August 31, --------------------------- ------------------------- ---------------------------- Stores at August 31, 1998 1996 1997 1998 1996 1997 1998 1996 1997 1998 =================================== ============================ ========================= ============================ Convenience (179) 12,554 12,034 12,605 345 335 445 $4,671 $4,888 $5,540 Limited Gasoline Stations (119) 9,734 9,275 8,964 177 190 104 749 792 727 Truck Stops (8) 586 573 585 2,916 2,837 2,801 377 349 355 Other Stores (3) -- -- -- -- -- -- 176 176 171 Total (309) 22,874 21,882 22,154 3,438 3,362 3,350 $5,973 $6,205 $6,793
The Company's strategy has been to maintain diversification between rural and urban markets within its region. Retail gasoline and merchandise sales are split approximately 59% / 41% between rural and urban markets. Margins on gasoline sales are traditionally higher in rural markets, while gasoline sales volume is greater in urban markets. In addition, more opportunities for convenience store sales have arisen with the closing of local independent grocery stores in the rural areas of New York and Pennsylvania. Total merchandise sales for fiscal year 1998 were $81.5 million, with a gross profit of approximately $23.8 million. Over the last five fiscal years, merchandise gross margins have averaged approximately 30% and the Company believes that merchandise sales will continue to remain a stable source of gross profit. Merchandise Supply The Company's primary merchandise vendor is Tripifoods, which is located in Buffalo, New York. During fiscal 1998, the Company purchased approximately 71% of its convenience merchandise from this vendor. Tripifoods supplies the Company with tobacco products, candy, deli foods, grocery, health and beauty products, and sundry items on a cost plus basis for resale. The Company also purchases dairy products, beer, soda, snacks, and novelty goods from direct store vendors for resale. The Company annually reviews its suppliers' costs and services versus those of alternate suppliers. The Company believes that alternative sources of merchandise supply at competitive prices are readily available. Location Performance Tracking The Company maintains a store tracking mechanism whereby transmissions are made three times a week to collect operating data including sales and inventory levels. Data transmissions are made using personal computers, which are available at each location. Once verified, the data interfaces with a variety of retail accounting systems, which support daily, weekly and monthly performance reports. These different reports are then provided to both the field management and office staff. Upon completion of a capital project, management tracks "before and after" performance, to evaluate the return on investment which has resulted from the improvements. Capital Improvement Program During the fiscal year ended August 31, 1998, the Company spent approximately $14.0 million from the capital expenditure escrow account on the retail portion of its Capital Improvement Program. Of the $25.9 million originally escrowed for retail improvements, the remaining $11.9 million is included in the Company's fiscal 1999 capital budget. The scope of the project work completed as of August 31, 1998 included: o Eleven petroleum upgrades. These upgrades include new drive pads, canopy, lighting, multi-product dispensers (most with pay-at-the-pump), new petroleum lines and signage. Petroleum upgrades will be performed simultaneously with the underground storage tank upgrades, which must be completed prior to December 22, 1998. o Thirteen rebuilds that include ground-up construction of a new building and a complete petroleum upgrade (not included above). Two of these locations also provide fast food and one includes a smoke shop. Also, six rebuilds are currently in progress. 10 11 o Three convenience stores rehabs (two locations also have complete petroleum upgrades not included above). o One "touchless" car wash was installed and one new retail location was purchased. Wholesale Marketing and Distribution The Company sold in fiscal year 1998, on a wholesale basis, approximately 43,200 bpd of gasoline, distillate and asphalt products to distributor, commercial and government accounts. In addition, the Company sells approximately 1,000 bpd of propane to liquefied petroleum gas marketers. In fiscal 1998, the Company's production of gasoline, distillate and asphalt sold at wholesale was 37%, 84% and 100%, respectively. The Company sells 98% of its wholesale gasoline and distillate products from its Company-owned and operated product terminals. The remaining 2% are sold through third-party exchange terminals. The Company's wholesale gasoline customer base includes 57 branded dealer/distributor units operating under the Company's proprietary "Keystone(R)" brand name. Long-term Keystone(R) dealer/distributor contracts accounted for approximately 13% of the Company's wholesale gasoline sales in fiscal 1998. Supply contracts generally range from three to five years in length, with Keystone(R) branded prices based on the prevailing Company wholesale rack price in Warren. The Company believes that the location of its refinery provides it with a transportation cost advantage over its competitors, which is significant within an approximately 100-mile radius of the Company's refinery. For example, in Buffalo, New York over its last five fiscal years, the Company has experienced an approximately 2.1 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo. In addition to this transportation cost advantage, the Company's proximity to local accounts allows it a greater range of shipment options, including the ability to deliver truckload quantities of approximately 200 barrels versus much larger 25,000 barrel pipeline batch deliveries, and faster response time, which the Company believes help it provide enhanced service to its customers. The Company's ability to market asphalt is critical to the performance of its refinery, since such marketing ability enables the Company to process lower cost higher sulfur content crude oils which in turn affords the Company higher refining margins. Sales of paving asphalt generally occur during the summer months due primarily to weather conditions. In order to maximize its asphalt sales, the Company has made substantial investments to increase its asphalt storage capacity through the installation of additional tanks, as well as through the purchase or lease of outside terminals. Partially mitigating the seasonality of the asphalt paving business is the Company's ability to sell asphalt year-round to roofing shingle manufacturers, which accounted for approximately 23% of its total asphalt sales over the Company's last five fiscal years. In fiscal 1998, the Company sold 5.5 million barrels of asphalt while producing 4.5 million barrels. The refinery was unable to produce enough asphalt to satisfy the demand and, therefore, purchased 1.0 million barrels for resale. The Company has a significant share of the asphalt market in the cities of Pittsburgh, Pennsylvania and Rochester and Buffalo, New York. The Company distributes asphalt from the refinery by railcar and truck transport to its owned and leased asphalt terminals in such cities or their suburbs. The Company also operates a terminal at Cordova, Alabama giving it a presence in the Southeast. Asphalt can be purchased in the Gulf Coast area and delivered by barge to third party or Company-owned terminals near Pittsburgh. The Company's asphalt terminal network allows the Company to enter into product exchanges. 11 12 The Company uses a network of eight terminals to store and distribute refined products. The Company's gasoline, distillate and asphalt terminals and their respective capacities (in thousands of barrels) as of August 31, 1998 were as follows:
Gasoline Distillate Asphalt Total Terminal Location Capacity Capacity Capacity Capacity ----------------- -------- --------- -------- -------- Cordova, Alabama - bbls - bbls 200 bbls 200 bbls Tonawanda, New York 60 190 75 325 Rochester, New York - 190 - 190 Pittsford, New York * - - 170 170 Springdale, Pennsylvania - - 130 130 Dravosburg, Pennsylvania* - - 100 100 Warren, Pennsylvania 697 451 1,004 2,152 Butler, Pennsylvania - - 10 10 ---------- --------- --------- ---------- Total 757 bbls 831 bbls 1,689 bbls 3,277 bbls ========== ========= ========= ========== * Leased
During fiscal 1998, approximately 89% of the Company's refined products were transported from the refinery via truck transports, with the remaining 11% transported by rail. The majority of the Company's wholesale and retail gasoline distribution is handled by common carrier trucking companies at competitive costs. The Company also operates a fleet of ten gasoline tank trucks that supply approximately 25% of its Kwik Fill retail stations. Product distribution costs to both retail and wholesale accounts are minimized through product exchanges. Through these exchanges, the Company has access to product supplies at 40 sources located throughout the Company's retail marketing area. The Company seeks to minimize retail distribution costs through the use of a system wide distribution model. ENVIRONMENTAL CONSIDERATIONS General The Company is subject to federal, state and local laws and regulations relating to pollution and protection of the environment such as those governing releases of certain materials into the environment and the storage, treatment, transportation, disposal and clean-up of wastes, including, but not limited to, the Federal Clean Water Act as amended, the CAA, the Resource Conservation and Recovery Act of 1976 as amended, Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended ("CERCLA"), and analogous state and local laws and regulations. The Clean Air Act Amendments of 1990 In 1990 the CAA was amended to greatly expand the role of the government in controlling product quality. The legislation included provisions that have significantly impacted the manufacture of both gasoline and diesel fuel including the requirement for significantly lower sulfur content and a limit on aromatics content in diesel fuel. The Company is able to satisfy these requirements. Diesel Fuel Sulfur and Aromatics Content The EPA issued rules under the CAA which became effective in October 1993 which limit the sulfur and aromatics content of diesel fuels nationwide. The rules required refiners to reduce the sulfur in on-highway diesel fuel from 0.5 Wt.% to 0.05 Wt.%. The Company meets these specifications of the CAA for all of its on-highway diesel production. 12 13 The Company's on-road diesel represented 67% of its total distillate sales in fiscal 1998. Since the reduction of sulfur in diesel required some new investment at most refineries, a two-tier market has developed in distillate sales. Due to capital constraints and timing issues, as well as strategic decisions not to invest in diesel fuel desulfurization, some other refineries are unable to produce specification highway diesel. Reformulated Gasoline The CAA required that by January 1, 1995 RFG be sold in the nine worst ozone non-attainment areas of the U.S. None of these areas is within the Company's marketing area. However, the CAA enabled the EPA to specify 87 other, less serious ozone non-attainment areas that could opt into this program. In 1994, the Company spent approximately $7.4 million to enable its refinery to produce RFG for its marketing area because the Governors of Pennsylvania and New York had opted into the RFG program. In December 1994 such states elected to "opt out" of the program. The CAA also contains provisions requiring oxygenated fuels in carbon monoxide non-attainment areas to reduce pollution. There are currently no carbon monoxide non-attainment areas in the Company's primary marketing area. Conventional Gasoline Quality In addition to reformulated and oxygenated gasoline requirements, the Environmental Protection Agency has promulgated regulations under the CAA which relate to the quality of "conventional" gasoline and which require expanded reporting of the quality of such gasoline by refiners. Substantially all of the Company's gasoline sales are of conventional gasoline. The Company closely monitors the quality of the gasoline it produces to assure compliance at the lowest possible cost with CAA regulations. Underground Storage Tank Upgrade The Company is currently undergoing a tank replacement/retrofitting program at its retail units to comply with regulations promulgated by the EPA. These regulations require new tanks to meet all performance standards at the time of installation. Existing tanks can be upgraded to meet such standards. The upgrade requires retrofitting for corrosion protection (cathodic protection, interior lining or a combination of the two), spill protection (catch basins to contain spills from delivery hoses) and overfill protection (automatic shut off devices or overfill alarms). As of August 31, 1998, approximately 77% of the total sites had been completed, and the Company expects to be in total compliance with the regulations by the December 22, 1998 mandated deadline. As of August 31, 1998 the total remaining cost of the upgrade was estimated to be $3.1 million. COMPETITION Petroleum refining and marketing is highly competitive. The Company's major retail competitors include British Petroleum, Citgo, Amerada Hess, Mobil and Sun Oil Company. With respect to wholesale gasoline and distillate sales, the Company competes with Sun Oil Company, Mobil and other major refiners. The Company primarily competes with Marathon Oil Company and Ashland Oil Company in the asphalt market. Many of the Company's principal competitors are integrated multinational oil companies that are substantially larger and better known than the Company. Because of their diversity, integration of operations, larger capitalization and greater resources, these major oil companies may be better able to withstand volatile market conditions, compete on the basis of price and more readily obtain crude oil in times of shortages. The principal competitive factors affecting the Company's refining operations are crude oil and other feedstock costs, refinery efficiency, refinery product mix and product distribution and transportation costs. Certain of the Company's larger competitors have refineries which are larger and more complex and, as a result, could have lower per barrel costs or higher margins per barrel of throughput. The Company has no crude oil reserves and is not engaged in exploration. The Company believes that it will be able to obtain adequate crude oil and other feedstocks at generally competitive prices for the foreseeable future. The withdrawal of retail marketing operations in New York in the early 1980's by Ashland, Texaco, Gulf and Exxon significantly reduced competition from major oil companies in New York and substantially enhanced the Company's market position. The Company believes that the high construction costs and stringent regulatory 13 14 requirements inherent in petroleum refinery operations make it uneconomical for competing refineries to be constructed in the Company's primary market area. The Company believes that the location of its refinery provides it with a transportation cost advantage over its competitors, which is significant within an approximately 100-mile radius of the Company's refinery. For example, in Buffalo, New York over the last five fiscal years, the Company has experienced an approximately 2.1 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo. The principal competitive factors affecting the Company's retail marketing network are location of stores, product price and quality, appearance and cleanliness of stores and brand identification. Competition from large, integrated oil companies, as well as from convenience stores which sell motor fuel, is expected to continue. The principal competitive factors affecting the Company's wholesale marketing business is product price and quality, reliability and availability of supply and location of distribution points. EMPLOYEES As of August 31, 1998 the Company had approximately 1,660 full-time and 1,400 part-time employees. Approximately 2,410 persons were employed at the Company's retail units, 580 persons at the Company's refinery, and the balance at the Kiantone pipeline and at terminals operated by the Company and at the Company's corporate offices in Warren, Pennsylvania. The Company has entered into collective bargaining agreements with International Union of Operating Engineers Local No. 95, United Steel Workers of America Local No. 2122-A, the International Union of Plant Guard Workers of America Local No. 502 and General Teamsters Local Union No. 397 covering 216, 7, 21 and 18 employees, respectively. The agreements expire on February 1, 2001, January 31, 2000, June 25, 1999 and July 31, 2000, respectively. The Company believes that its relationship with its employees is good. INTELLECTUAL PROPERTY The Company owns various federal and state service marks used by the Company, including Kwik-Fill(R), United(R) and Keystone(R). The Company has obtained the right to use the Red Apple Food Mart(R) service mark to identify its retail units under a royalty-free, nonexclusive, nontransferable license from Red Apple Supermarkets, Inc., a corporation which is indirectly wholly owned by John A. Catsimatidis, the sole stockholder, Chairman of the Board and Chief Executive Officer of the Company. The license is for an indefinite term. The licensor has the right to terminate this license in the event that the Company fails to maintain quality acceptable to the licensor. The Company licenses the right to use the Keystone(R) trademark to approximately 57 independent distributors on a non-exclusive royalty-free basis for contracted wholesale sales of gasoline and distillates. The Company does not own any patents. Management believes that the Company does not infringe upon the patent rights of others, nor does the Company's lack of patents have a material adverse effect on the business of the Company. GOVERNMENTAL APPROVALS The Company has obtained all necessary governmental approvals, licenses and permits to operate the refinery and convenience stores. ITEM 2. PROPERTIES. The Company owns a 92-acre site in Warren, Pennsylvania upon which it operates its refinery. The site also contains a building housing the Company's principal executive offices. The Company owns various real property in the states of Pennsylvania, New York and Ohio upon which it operates 230 retail units and two crude oil and six refined product storage terminals. The Company also owns the 78 mile long Kiantone Pipeline, a pipeline which connects the Company's crude oil storage terminal to the refinery's tank farm. The Company's right to maintain the pipeline is derived from approximately 265 separate easements, right-of-way agreements, leases, permits, and similar agreements. The Company also has easements, right-of-way agreements, leases, permits and similar agreements that would enable the Company to build a second pipeline on property contiguous to the Kiantone Pipeline. 14 15 The Company also leases an aggregate of 79 sites in Pennsylvania, New York and Ohio upon which it operates retail units. As of August 31, 1998, the leases had an average remaining term of 43 months, exclusive of option terms. Annual rents on such retail units range from $2,400 to $74,500. ITEM 3. LEGAL PROCEEDINGS. In 1995, the Pennsylvania Environmental Defense Foundation ("PEDF") commenced a lawsuit in the United States District Court for the Western District of Pennsylvania under Section 505 of the federal Water Pollution Control Act, 33 U.S.C. Section 1251, et. seq. The complaint alleges a series of discharges to the Allegheny River at the Company's refining facility in Warren, Pennsylvania exceeding the limits contained in the Company's waste water discharge permits. PEDF seeks to enjoin future discharges in excess of permitted limits, an assessment of civil penalties up to $25,000 per day as provided in the Act, and an award of attorneys' fees. The case has been tried to the Court and post-trial proceedings are continuing. No judgement has been rendered. The Company believes that this action will not have any material adverse effect upon its operations or consolidated financial condition. The United States Environmental Protection Agency ("USEPA") has issued certain Notices of Violation, an Administrative Order, and has asserted certain additional claims arising under federal and state statutory and regulatory law through and including August 5, 1998 (collectively the "Claims"). The Claims arise from allegations that (1) the Company failed to properly and consistently monitor, report and control emissions of Volatile Organic Compounds ("VOCs") from its refining facility in Warren, Pennsylvania; (2) fuel gas used in the refining process has in the past contained levels of hydrogen sulfide in excess of permitted parameters, and ; (3) the Company in the past has failed to properly calculate and report emissions of benzene from its refining facility. The Claims allege violations of the federal Clean Air Act, as amended, and associated federal and state regulatory requirements. USEPA's review of the Company's operations is continuing. The Claims seek civil money penalties in accordance with USEPA's penalty policies in an amount yet to be determined. The Company believes that the Claims and the results of USEPA's continuing review will not have any material adverse effect upon its operations or consolidated financial condition. In addition to the foregoing proceedings, the Company and its subsidiaries are from time to time parties to various legal proceedings that arise in the ordinary course of their respective business operations. These proceedings include various administrative actions relating to federal, state and local environmental laws and regulations. The Company believes that if the legal proceedings in which it is currently involved are determined against the Company, they would not result in a material adverse effect on the Company's operations or its consolidated financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS. NONE ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS. NONE 15 16 ITEM 6. SELECTED FINANCIAL DATA.
Year Ended August 31, 1994 1995 1996 1997 1998 ---- ---- ---- ---- ---- (Dollars in thousands) Income Statement Data: Net sales $ 729,128 $ 783,686 $ 833,818 $ 871,348 $ 758,623 Gross margin (1) 156,898 151,852 168,440 164,153 151,564 Refining operating expenses 56,121 56,665 63,218 60,746 60,840 Selling, general and administrative expenses 70,028 69,292 70,968 73,200 75,064 Operating income 21,710 17,696 26,038 21,977 7,340 Interest expense 17,100 18,523 17,606 17,509 22,188 Interest income 1,134 1,204 1,236 1,296 2,701 Other income (expense) (2,387) 571 (40) 672 (685) Income (loss) before income tax expense and extraordinary item 3,357 948 9,628 6,436 (12,832) Income tax expense (benefit) 1,337 487 3,787 2,588 (5,132) Income (loss) before extraordinary item 2,020 461 5,841 3,848 (7,700) Extraordinary item, net of tax benefit of $4,200 - - - (6,653) - Net income (loss) 490 461 5,841 (2,805) (7,700) Balance Sheet Data (at end of period): Total assets 315,194 310,494 306,104 346,392 342,579 Total debt 158,491 154,095 136,777 201,272 201,309 Total stockholder's equity 77,725 78,186 84,027 52,937 45,237
- ---------------------------------------------------- (1) Gross margin is defined as gross profit plus refining operating expenses. Refining operating expenses are expenses incurred in refining and included in cost of goods sold in the Company's financial statements. Refining operating expense equals refining operating expenses per barrel, multiplied by the volume of total saleable products per day, multiplied by the number of days in the period. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. COMPANY BACKGROUND General The Company is engaged in the refining and marketing of petroleum products. In fiscal 1998, approximately 63% and 24% of the Company's gasoline and diesel fuel production was sold through the Company's network of service stations and truckstops. The balance of the Company's refined products were sold to wholesale customers. In addition to transportation and heating fuels, the Company is a major regional wholesale marketer of asphalt. The Company also sells convenience merchandise at convenience stores located at most of its service stations. The Company's profitability is influenced by fluctuations in the market prices of crude oil and refined products. Although the Company's product sales mix helps to reduce the impact of large short-term variations in crude oil 16 17 price, net sales and costs of goods sold can fluctuate widely based upon fluctuations in crude oil prices. For example, the margins on wholesale gasoline and distillate tend to decline in periods of rapidly declining crude oil prices, while margins on asphalt and retail gasoline and distillate tend to improve. During periods of rapidly rising crude oil prices, margins on wholesale gasoline and distillate tend to improve, while margins on asphalt and retail gasoline and distillate tend to decline. Gross margins on the sale of convenience merchandise have been consistently near 30% for the last five years and are essentially unaffected by variations in crude oil and petroleum products prices. In addition to their effect on petroleum product margins, fluctuations in crude oil prices can affect the Company's reported financial results by producing significant changes in the value of the Company's working inventories. The change in the value of working inventory is that portion of the total change in the Company's inventory value which is due to changes in the pricing of working inventory volumes. Working inventory volumes are those volumes of inventory of the Company's various products and feedstocks necessary to support normal operations. While changes in the value of working inventory affect the Company's reported gross profit, operating income and net income, they have no material effect on the Company's operating cash flow. The Company includes in cost of goods sold operating expenses incurred in the refining process. Therefore, operating expenses reflect only selling, general and administrative expenses, including all expenses of the retail network, and depreciation and amortization. RESULTS OF OPERATIONS Comparison of Fiscal 1998 and Fiscal 1997. Net Sales. Net sales decreased $112.7 million or 12.9% from $871.3 million for fiscal 1997 to $758.6 million for fiscal 1998. The decrease was primarily due to an 22.6% decrease in wholesale gasoline and distillate weighted average net selling prices, 17.4% lower retail petroleum selling prices, and a 14.5% decrease in average asphalt selling prices. Also contributing to the revenue decrease was a 4.8% decrease in wholesale gasoline and distillate volume. However the wholesale gasoline and distillate volume declines were slightly more than offset by a 1.0% increase in retail petroleum volume and a 15.5% increase in asphalt sales volume, as overall petroleum product sales volume increased slightly from 23.69 million barrels in fiscal 1997 to 23.74 million barrels in fiscal 1998. Also offsetting lower petroleum selling prices was a 9.5% increase in retail merchandise sales from $74.5 million in fiscal 1997 to $81.5 million in fiscal 1998. The decreases in the Company's product prices were primarily due to lower worldwide prices for petroleum products which accompanied a 23.1% decrease in world crude oil prices, as indicated by prices of NYMEX crude oil contracts. The decreased wholesale gasoline and distillate volume was due primarily to a 5.9% decrease in crude oil processing resulting from the planned shutdown of certain refinery processing units for maintenance and upgrading in October 1997 and May 1998. Cost of Goods Sold. Cost of goods sold decreased $100.0 million or 13.0% from $767.9 million for fiscal 1997 to $667.9 million for fiscal 1998. The decrease was primarily the result of a 23.1% decrease in world crude oil prices, as well as lower refinery crude oil input volume. Partially offsetting lower crude oil prices were increases in costs of goods sold from changes in inventory prices. The per barrel value of the Company's inventories declined during fiscal 1998 as a result of declining world petroleum prices. The declining prices reduced the value of the Company's working inventories by approximately $12.8 million. These reductions in inventory value contributed to corresponding increases to cost of goods sold. For fiscal 1997, the corresponding changes in inventory prices had the effect of decreasing the Company's cost of goods sold by approximately $0.3 million. The Company maintains certain volumes of working inventory necessary to support normal operations, and changes in valuation of this inventory occur with fluctuations in world petroleum prices. The lower pricing of the Company's working inventories at the end of fiscal 1998, for example, was the result of world petroleum prices which ended fiscal 1998 approximately 32% below their level at the end of fiscal 1997. Operating Expenses. Operating expenses increased $2.0 million or 2.4% from $81.4 million for 1997 to $83.4 million for fiscal 1998. This increase was primarily due to increased retail expenses for sales promotions, retail station wages and maintenance and environmental expense. Increased retail station wages were primarily due to an increase in the federal minimum wage, while increased retail environmental expenses were primarily connected with the upgrading of underground storage tanks to new federal standards. Increased retail promotions expenses were primarily in connection with a "frequent fueler" program which has been effective in increasing retail gasoline volume. 17 18 Operating Income. Operating income decreased $14.6 million from $22.0 million for fiscal 1997 to $7.3 million for fiscal 1998. This was primarily due to a decline in gross profit as the result of a $12.8 million negative impact on cost of goods sold for changes in working inventory value. Also contributing to the decline in gross profit and operating income was the reduction in refinery production resulting from the scheduled maintenance shutdowns in October 1997 and May 1998. Interest Expense. Net interest expense (interest expense less interest income) increased $3.3 million from $16.2 million for fiscal 1997 to $19.5 million for fiscal 1998. The increase was primarily due to an increase in the amount of long-term debt outstanding following the Company's sale of $200 million of Senior Unsecured Notes in June 1997. This was partially offset by a reduction in the average interest rate for long-term debt outstanding and by interest income received on restricted cash and investment. Income Taxes. The Company's effective tax rate for fiscal 1998 was approximately 40.0% compared to a rate of 40.2% for fiscal 1997. Comparison of Fiscal 1997 and Fiscal 1996. Net Sales. Net sales increased $37.5 million or 4.5% from $833.8 million for fiscal 1996 to $871.3 million for fiscal 1997. The increase was primarily due to an 8.1% increase in wholesale gasoline and distillate weighted average net selling prices, 5.8% higher retail refined product selling prices, and a 16.3% increase in average asphalt selling prices. Also contributing to the revenue increase was a 3.9% increase in retail merchandise sales. These increases were partially offset by a 1.1% decrease in wholesale gasoline and distillate volume and by a 4.1% decrease in retail refined products volume. The lower sales volumes were primarily the result of lower refinery input and production in the first half of fiscal 1997. Cost of Goods Sold. Cost of goods sold increased $39.3 million or 5.4% from $728.6 million for fiscal 1996 to $767.9 million for fiscal 1997. The increase was primarily the result of a 12.7% increase in annual average per barrel crude oil costs, partially offset by lower refinery crude oil input volume. The Company's higher crude cost resulted from a rapid increase in world crude oil prices, which peaked in February 1997 at the highest level since the Gulf War. For the first half of fiscal 1997 (ending February 28), the average cost of crude processed by the Company was 36.6% above the same months of fiscal 1996. Subsequent to February, world crude oil prices decreased substantially. This decrease was reflected in the Company's crude costs for the second half of fiscal 1997, which were 7.0% below the second half of fiscal 1996. The Company's crude costs for the fourth quarter of fiscal 1997 were 11.6% below the same quarter of fiscal 1996. Additionally, cost of goods sold includes a write-off of $1,251,000 relating to a change in estimate of an insurance claim receivable. Operating Expenses. Operating expenses increased $2.2 million or 2.8% from $79.2 million for 1996 to $81.4 million for fiscal 1997. This increase was primarily due to a special one-time bonus of approximately $1 million. Operating Income. Operating income decreased $4.1 million or 15.6% from $26.0 million for fiscal 1996 to $22.0 million for fiscal 1997. The Company's product margins and operating income were negatively affected by the high world crude oil prices in the first half of fiscal 1997. In the second half of fiscal 1997, lower world crude oil prices and accompanying strong product margins, particularly for gasoline and asphalt, led to substantial recovery in terms of operating income. Interest Expense. Net interest expense (interest expense less interest income) declined $0.2 million from $16.4 million for fiscal 1996 to $16.2 million for fiscal 1997. The decrease was due to a reduction in the amount of long-term debt outstanding for most of fiscal 1997, prior to the sale in June 1997 of $200 million of Senior Notes. Income Taxes. The Company's effective tax rate for fiscal 1997 was approximately 40.2% compared to a rate of 39.3% for fiscal 1996. Extraordinary Item. In June 1997, the Company incurred an extraordinary loss of $6.7 million (net of an income tax benefit of $4.2 million) as a result of "make-whole premiums" paid and financing costs written-off in connection with the early retirement of its 11.50% and 13.50% Senior Unsecured Notes. 18 19 LIQUIDITY AND CAPITAL RESOURCES Working capital (current assets minus current liabilities) at August 31, 1998, was $57.9 million and at August 31, 1997 was $59.3 million. The Company's current ratio (current assets divided by current liabilities) was 1.9:1 at August 31, 1998, and was 2.1:1 at August 31, 1997. Net cash provided by operating activities totaled $15.4 million for fiscal 1998 compared to net cash used in operating activities of $2.3 million in fiscal 1997. This increase is primarily the result of a decrease in accounts receivable and inventories, and an increase in sales, use and fuel taxes payable, offset by a decrease in accounts payable and accrued liabilities and an increase in deferred income tax assets. Changes in the carrying value of the Company's inventory are the result of fluctuations in world petroleum prices and do not have a material effect on the Company's operating cash flow. Net cash provided by investing activities totaled $.3 million for the year ended August 31, 1998 as compared to net cash used in investing activities of $53.6 million for fiscal 1997. For the fiscal year ended August 31, 1998 and 1997 respectively, investments included $15.3 million and $48.2 million in government securities and commercial paper maturing through December 1998 and 1997 respectively. Net cash used in investing activities for purchases of property, plant and equipment and other assets totaled $33.5 million and $5.8 million for fiscal 1998 and 1997 respectively. Fiscal 1998 included improvements and upgrades to the refinery of approximately $16.6 million and to the Company's retail outlets of approximately $16.9 million. The Company reviews its capital expenditures on an ongoing basis. During fiscal 1998, the Company invested approximately $33.5 million for capital improvements; of which approximately $32.9 million (including reimbursement of approximately $7.4 million for eligible turnaround expenditures) was funded from the capital expenditure escrow account established in conjunction with the Company's offering in 1997 and the remaining expenditures were funded from cash flow. The Company currently has budgeted approximately $20.0 million for capital expenditures in fiscal 1999, of which approximately $3.1 million is for the completion of projects relating to underground storage tanks. The remaining $16.9 million for fiscal 1999 is budgeted for the refinery and retail capital improvement program and routine maintenance. The refinery and retail capital improvement program is expected to be completed in fiscal 1999. Maintenance and non-discretionary capital expenditures have averaged approximately $4 million annually over the last three years for the refining and marketing operations. Future liquidity, both short and long-term, will continue to be primarily dependent on realizing a refinery margin sufficient to cover fixed and variable expenses, including planned capital expenditures. The Company expects to be able to meet its working capital, capital expenditure and debt service requirements out of cash flow from operations, cash on hand and borrowings under the Company's bank credit facility with PNC Bank as Agent Bank. Although the Company is not aware of any pending circumstances which would change its expectation, changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements and other changes in environmental laws and regulations may also increase future capital expenditure levels. Future capital expenditures are also subject to business conditions affecting the industry. The Company continues to investigate strategic acquisitions and capital improvements to its existing facilities. Federal, state and local laws and regulations relating to the environment affect nearly all the operations of the Company. As is the case with all the companies engaged in similar industries, the Company faces significant exposure from actual or potential claims and lawsuits involving environmental matters. Future expenditures related to environmental matters cannot be reasonably quantified in many circumstances due to the uncertainties as to required remediation methods and related clean-up cost estimates. The Company cannot predict what additional environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied. 19 20 SEASONAL FACTORS Seasonal factors affecting the Company's business may cause variation in the prices and margins of some of the Company's products. For example, demand for gasoline tends to be highest in spring and summer months, while demand for home heating oil and kerosene tends to be highest in winter months. As a result, the margin on gasoline prices versus crude oil costs generally tends to increase in the spring and summer, while margins on home heating oil and kerosene tend to increase in winter. INFLATION The effect of inflation on the Company has not been significant during the last five fiscal years. YEAR 2000 COMPUTER ISSUES The year 2000 presents many challenges to our industry with respect to, among other things, date-related functions in some computer systems. Historically, certain computer programs have been written using two digits rather than four to define the applicable year, which could result in the computer recognizing a date using "00" as the year 1900 rather than the year 2000. This in turn could result in major system failures or miscalculations and is generally referred to as the "Year 2000" problem. The Company is examining all areas of our business to ensure Year 2000 readiness, including computer hardware and software applications. The Company is addressing Year 2000 issues primarily with internal resources to ensure that the transition to the Year 2000 will not disrupt the Company's operations. The Company anticipates that essentially all of its systems will be compliant by calendar year end 1998, including its non-information technology systems. In addition, the Company has communicated with and evaluated the systems of its customers, suppliers, financial institutions and others with which it does business to identify any Year 2000 issues. Costs incurred by the Company to date to implement its plan have not been material and are not expected to have a material effect on the Company's financial condition or results of operations. There can be no assurance, however, that the Year 2000 issue will not adversely affect the Company and its business. RECENT ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.130 ("Statement 130"), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by the implementation of this standard. Also in June 1997, The FASB issued Statement of Financial Accounting Standards No. 131 ("Statement 131"), "Disclosures about Segments of an Enterprise and Related Information," which supersedes Statement 14, "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards for the way that public companies report information about operating segments in annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. 20 21 Statement 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by implementation of this standard. In February 1998, the FASB issued Statement of Financial Accounting Standard No. 132 ("Statement 132"), "Employers' Disclosures about Pensions and Other Post-Retirement Benefits". Statement 132 standardizes the disclosure requirements for pensions and other post-retirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. Statement 132 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and Hedging Activities". Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The accounting for changes in the fair value of a derivative, that is, gains and losses, depends on the intended use of the derivative and its resulting designation. Statement 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures. ITEM 7A. QUANITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. N/A 21 22 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants 23 Consolidated Financial Statements: Balance Sheets 24 Statements of Operations 25 Statements of Stockholder's Equity 26 Statements of Cash Flows 27 Notes to Consolidated Financial Statements 28 - 45 22 23 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors and Stockholder United Refining Company We have audited the accompanying consolidated balance sheets of United Refining Company and subsidiaries as of August 31, 1998 and 1997, and the related consolidated statements of operations, stockholder's equity and cash flows for each of the three years in the period ended August 31, 1998. These consolidated financial statements are the responsibility of the management of United Refining Company and its subsidiaries. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Refining Company and subsidiaries as of August 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1998 in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP New York, New York October 29, 1998 23 24 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
========================================================================================= August 31, --------------------- 1998 1997 - ----------------------------------------------------------------------------------------- ASSETS CURRENT: Cash and cash equivalents $ 26,400 $ 11,024 Accounts receivable, net 27,017 29,762 Inventories 55,124 67,096 Prepaid expenses and other assets 7,727 6,786 Deferred income taxes 5,024 712 - ----------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 121,292 115,380 - ----------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Cost 256,895 234,956 Less: accumulated depreciation 58,918 60,757 - ----------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 197,977 174,199 - ----------------------------------------------------------------------------------------- RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS 15,289 48,168 DEFERRED FINANCING COSTS, NET 7,244 7,807 OTHER ASSETS 777 838 - ----------------------------------------------------------------------------------------- $342,579 $346,392 ========================================================================================= LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT: Current installments of long-term debt $ 283 $ 218 Accounts payable 25,298 29,010 Accrued liabilities 11,823 13,753 Sales, use and fuel taxes payable 26,026 13,056 - ----------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 63,430 56,037 LONG TERM DEBT: LESS CURRENT INSTALLMENTS 201,026 201,054 DEFERRED INCOME TAXES 16,889 17,390 DEFERRED GAIN ON SETTLEMENT OF PENSION PLAN OBLIGATIONS 2,205 2,420 DEFERRED RETIREMENT BENEFITS 12,350 10,797 OTHER NONCURRENT LIABILITIES 1,442 5,757 - ----------------------------------------------------------------------------------------- TOTAL LIABILITIES 297,342 293,455 - ----------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $.10 par value per share - shares authorized 100; issued and outstanding 100 -- -- Additional paid-in capital 7,150 7,150 Retained earnings 38,087 45,787 - ----------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 45,237 52,937 - ----------------------------------------------------------------------------------------- $342,579 $346,392 =========================================================================================
See accompanying notes to consolidated financial statements. 24 25 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS)
=============================================================================================== YEAR ENDED AUGUST 31, --------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------- NET SALES (includes consumer excise taxes of $145,316, $139,371 and $142,791) $ 758,623 $ 871,348 $ 833,818 COST OF GOODS SOLD 667,899 767,941 728,596 - ----------------------------------------------------------------------------------------------- GROSS PROFIT 90,724 103,407 105,222 - ----------------------------------------------------------------------------------------------- EXPENSES: Selling, general and administrative expenses 75,064 73,200 70,968 Depreciation and amortization expenses 8,320 8,230 8,216 - ----------------------------------------------------------------------------------------------- TOTAL OPERATING EXPENSES 83,384 81,430 79,184 - ----------------------------------------------------------------------------------------------- OPERATING INCOME 7,340 21,977 26,038 - ----------------------------------------------------------------------------------------------- OTHER INCOME (EXPENSE): Interest income 2,701 1,296 1,236 Interest expense (22,188) (17,509) (17,606) Other, net (685) 672 (40) - ----------------------------------------------------------------------------------------------- (20,172) (15,541) (16,410) - ----------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) AND EXTRAORDINARY ITEM (12,832) 6,436 9,628 - ----------------------------------------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT): Current (319) 3,463 200 Deferred (4,813) (875) 3,587 - ----------------------------------------------------------------------------------------------- (5,132) 2,588 3,787 - ----------------------------------------------------------------------------------------------- NET INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (7,700) 3,848 5,841 - ----------------------------------------------------------------------------------------------- EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $4,200 -- (6,653) -- - ----------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (7,700) $ (2,805) $ 5,841 ===============================================================================================
See accompanying notes to consolidated financial statements. 25 26 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE DATA)
================================================================================================ Additional Total Common Stock Paid-In Retained Stockholder's Shares Amount Capital Earnings Equity - ------------------------------------------------------------------------------------------------ Balance at September 1, 1995 100 $ -- $ 7,150 $71,036 $ 78,186 Net income -- -- 5,841 5,841 - ------------------------------------------------------------------------------------------------ Balance at August 31, 1996 100 -- 7,150 76,877 84,027 Net loss -- -- (2,805) (2,805) Dividends -- -- (28,285) (28,285) - ------------------------------------------------------------------------------------------------ Balance at August 31, 1997 100 -- 7,150 45,787 52,937 Net loss -- -- (7,700) (7,700) - ------------------------------------------------------------------------------------------------ Balance at August 31, 1998 100 $ -- $ 7,150 $38,087 $ 45,237 ================================================================================================
See accompanying notes to consolidated financial statements. 26 27 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
============================================================================================================================ YEAR ENDED AUGUST 31, ------------------------------------------- 1998 1997 1996 ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (7,700) $ (2,805) $ 5,841 Adjustments to reconcile net income/(loss) to net cash provided by (used in) operating activities: Depreciation and amortization 8,973 8,564 8,505 Write-off of deferred financing costs - 1,118 - Post-retirement benefits 1,553 2,413 2,000 Change in deferred income taxes (4,813) (875) 3,587 Write-off of insurance claim - 1,251 - (Gain) loss on asset dispositions 503 4 (132) Cash provided by (used in) working capital items 16,892 (11,676) 5,614 Other, net (42) (305) (440) ----------------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 23,066 494 19,134 ----------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 15,366 (2,311) 24,975 ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in restricted cash and cash equivalents 32,879 (48,168) - and investments Additions to property, plant and equipment (33,516) (5,824) (4,562) Proceeds from asset dispositions 913 422 653 ----------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 276 (53,570) (3,909) ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Cash dividends - (5,000) - Principal reductions of long-term debt (250) (135,512) (17,939) Proceeds from issuance of long-term debt 287 200,000 - Deferred financing costs (303) (8,094) (30) ----------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (266) 51,394 (17,969) ----------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 15,376 (4,487) 3,097 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 11,024 15,511 12,414 ----------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 26,400 $ 11,024 $ 15,511 ======================================================================================================================= CASH PROVIDED BY (USED IN) WORKING CAPITAL ITEMS: Accounts receivable, net $ 2,745 $ (2,686) $ (3,585) Inventories 11,972 (14,852) 4,859 Prepaid expenses and other assets (941) (344) 2,277 Accounts payable (3,712) 6,623 5,864 Accrued liabilities (6,142) 1,354 (3,974) Sales, use and fuel taxes payable 12,970 (1,771) 173 ----------------------------------------------------------------------------------------------------------------------- TOTAL CHANGE $ 16,892 $ (11,676) $ 5,614 ======================================================================================================================= CASH PAID DURING THE PERIOD FOR: Interest $ 22,454 $ 16,280 $ 18,480 Income taxes $ 266 $ 195 $ 929 ======================================================================================================================= NON-CASH FINANCING ACTIVITIES: Dividends $ - $ 23,285 $ - =======================================================================================================================
See accompanying notes to consolidated financial statements. 27 28 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 1. ACCOUNTING POLICIES Basis of Presentation United Refining Company is a wholly-owned subsidiary of United Refining, Inc. ("United"), a wholly-owned subsidiary of United Acquisition Corporation ("UAC") which, in turn is a wholly-owned subsidiary of Red Apple Group, Inc. (the "Parent"). The consolidated financial statements include the accounts of United Refining Company and its subsidiaries (collectively, the "Company"), United Refining Company of Pennsylvania and its subsidiaries, and Kiantone Pipeline Corporation. All significant intercompany balances and transactions have been eliminated in consolidation. Cash and Cash Equivalents For purposes of the consolidated statements of cash flows, the Company considers all highly liquid investment securities with maturities of three months or less at date of acquisition to be cash equivalents. Inventories and Exchanges Inventories are stated at the lower of cost or market, with cost being determined under the Last-in, First-out (LIFO) method for crude oil and petroleum product inventories and the First-in, First-out (FIFO) method for merchandise. Supply inventories are stated at either lower of cost or market or replacement cost and include various parts for the refinery operations. If the cost of inventories exceeds their market value, provisions are made currently for the difference between the cost and the market value. Due to fluctuating market conditions for certain petroleum product inventories, LIFO cost exceeded market by approximately $11,200,000 and $1,800,000 as of August 31, 1998 and 1997, respectively, resulting in the valuation of certain inventories at market. Inventories consist of the following:
AUGUST 31, ------------------------- 1998 1997 --------------------------------------------------------------- (IN THOUSANDS) Crude Oil $12,042 $18,169 Petroleum Products 22,513 31,306 --------------------------------------------------------------- Total @ LIFO 34,555 49,475 --------------------------------------------------------------- Merchandise 7,479 6,372 Supplies 13,090 11,249 --------------------------------------------------------------- Total @ FIFO 20,569 17,621 --------------------------------------------------------------- Total Inventory $55,124 $67,096 ===============================================================
28 29 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Included in petroleum product inventories are exchange balances either held for or due from other petroleum marketers. These balances are not significant. The Company does not own sources of crude oil and depends on outside vendors for its needs. Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciated by the straight-line method over the respective estimated useful lives. Routine current maintenance, repairs and replacement costs are charged against income. Turnaround costs, which consist of complete shutdown and inspection of significant units of the refinery at intervals of two or more years for necessary repairs and replacements, are estimated during the units' operating cycles and charged against income currently. Expenditures which materially increase values, expand capacities or extend useful lives are capitalized. A summary of the principal useful lives used in computing depreciation expense is as follows: ESTIMATED USEFUL LIVES (YEARS) ------------------------------------------------------ Refinery Equipment 20-30 Marketing 15-30 Transportation 20-30 ------------------------------------------------------ Restricted Cash and Cash Equivalents and Investments Restricted cash and cash equivalents and investments consist of cash and cash equivalents and investments in government securities and commercial paper held in trust and committed only for expanding and upgrading the refinery, rebuilding and refurbishing existing retail units and for acquiring new retail units and other capital projects. These funds represent the unused proceeds from the $200,000,000 10-3/4% Senior Unsecured Notes offering completed in June, 1997 and are carried at cost, which approximates market. Revenue Recognition Revenues from wholesale sales are recognized upon shipment or when title passes. Retail revenues are recognized immediately upon sale to the customer. 29 30 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company joins with the Parent and the Parent's other subsidiaries in filing a Federal Income tax return on a consolidated basis. Income taxes are calculated on a separate return basis with consideration of the tax sharing agreement among the Parent and its subsidiaries. Pursuant to the tax sharing agreement, included in prepaid expenses and other assets are amounts due from the Parent of approximately $1,600,000 and $650,000 as of August 31, 1998 and 1997, respectively. Post-retirement Healthcare Benefits The Company provides at no cost to retirees, post-retirement healthcare benefits to salaried and certain hourly employees. The benefits provided are hospitalization, medical coverage and dental coverage for the employee and spouse until age 65. After age 65, benefits continue until the death of the retiree, which results in the termination of benefits for all dependent coverage. If an employee leaves the Company as a terminated vested member of a pension plan prior to normal retirement age, the person is not entitled to any post-retirement healthcare benefits. The Company accrues post-retirement benefits other than pensions during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. The Company has elected to amortize the transition obligation of approximately $12,000,000 on a straight-line basis over a 20-year period. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In August 1997, the Company recorded a charge to earnings of $1,251,000 relating to a change in estimate. This accounting change results from the write-off of a portion of an insurance claim receivable and is included in cost of goods sold. 30 31 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Concentrations of Credit Risk The Company extends credit based on evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company monitors its exposure for credit losses and maintains allowances for anticipated losses. Environmental Matters The Company expenses environmental expenditures related to existing condition resulting from past or current operations and from which no current or future benefit is discernible. Expenditures, which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site by site basis and records a liability at the time when it is probable and can be reasonably estimated. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is discounted, but is not reduced for possible recoveries from insurance carriers. (Note 15). Long-Lived Assets Long-lived assets, such as intangible assets and property and equipment, are evaluated for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable through the estimated undiscounted future cash flows from the use of these assets. When any such impairment exists, the related assets will be written down to fair value. Recent Accounting Standards In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No.130 ("Statement 130"), "Reporting Comprehensive Income," which establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Among other disclosures, Statement 130 requires that all items that are required to be recognized under current accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. Statement 130 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by the implementation of this standard. Also in June 1997, The FASB issued Statement of Financial Accounting Standards No. 131 ("Statement 131"), "Disclosures about Segments of an Enterprise and Related Information," which supersedes Statement 14, "Financial Reporting for Segments of a Business Enterprise." Statement 131 establishes standards for the way that public companies report information about operating segments in 31 32 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ annual financial statements and requires reporting of selected information about operating segments in interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 defines operating segments as components of a company about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Statement 131 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Results of operations, financial position and financial statement disclosures will be unaffected by implementation of this standard. In February 1998, the FASB issued Statement of Financial Accounting Standards No. 132 ("Statement 132"), "Employers' Disclosures about Pensions and Other Post-Retirement Benefits". Statement 132 standardizes the disclosure requirements for pensions and other post-retirement benefits, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures that are no longer useful. Statement 132 is effective for financial statements for periods beginning after December 15, 1997 and requires comparative information for earlier years to be restated. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures. Results of operations and financial position, however, will be unaffected by implementation of this standard. In June 1998, the FASB issued Statement of Financial Accounting Standards No. 133 ("Statement 133"), "Accounting for Derivative Instruments and Hedging Activities". Statement 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure these instruments at fair value. The accounting for changes in the fair value of a derivative, that is, gains and losses, depends on the intended use of the derivative and its resulting designation. Statement 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Because of the recent issuance of this standard, management has been unable to fully evaluate the impact, if any, it may have on future financial disclosures. Reclassification Certain amounts in the prior year's consolidated financial statements have been reclassified to conform with the presentation in the current year. 2. ACCOUNTS RECEIVABLE, NET As of August 31, 1998 and 1997, accounts receivable were net of allowance for doubtful accounts of $405,000 and $511,000 respectively. 32 33 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows:
AUGUST 31, ----------------------------- 1998 1997 ------------------------------------------------------------------------------- (IN THOUSANDS) Refinery equipment, Including construction-in-progress $162,703 $155,618 Marketing (i.e. retail outlets) 87,230 72,463 Transportation 6,962 6,875 ------------------------------------------------------------------------------- 256,895 234,956 Less: Accumulated depreciation 58,918 60,757 ------------------------------------------------------------------------------- $197,977 $174,199 ===============================================================================
4. ACCRUED LIABILITIES Accrued liabilities include the following:
AUGUST 31, ----------------------------- 1998 1997 ------------------------------------------------------------------------------- (IN THOUSANDS) Interest $ 4,631 $ 4,906 Payrolls and benefits 6,359 7,657 Other 833 1,190 ------------------------------------------------------------------------------- $11,823 $13,753 ===============================================================================
33 34 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 5. LEASES The Company occupies premises, primarily retail gas stations and convenience stores and office facilities under long-term leases which require minimum annual rents plus, in certain instances, the payment of additional rents based upon sales. The leases generally are renewable for one to three five-year periods. Future minimum lease payments as of August 31, 1998 are summarized as follows:
CAPITAL OPERATING YEAR ENDED AUGUST 31, LEASES LEASES ------------------------------------------------------------------------------------ (IN THOUSANDS) 1999 $ 177 $3,096 2000 156 2,118 2001 102 1,247 2002 79 815 2003 81 529 Thereafter 510 790 ------------------------------------------------------------------------------------ Total minimum lease payments 1,105 8,595 Less: Minimum sublease rents - 25 ------------------------------------------------------------------------------------ Net minimum sublease payments 1,105 $8,570 ======== Less: Amount representing interest 470 ------------------------------------------------------------------------- Present value of net minimum lease payments $ 635 =========================================================================
Net rent expense for operating leases amounted to $3,338,000, $3,238,000 and $3,265,000 for the years ended August 31, 1998, 1997 and 1996 respectively. 6. CREDIT FACILITY In June 1997, the Company negotiated a $35,000,000 secured revolving credit facility (the "Facility") with a syndicate of banks that provides for revolving credit loans and for the issuance of letters of credit. The Facility expires on June 9, 2002 and is secured by certain qualifying cash accounts, accounts receivable, and inventory, which amounted to $52,397,000 as of August 31, 1998. Until maturity, the Company may borrow, repay and reborrow on an amount not exceeding certain percentages of secured assets. The interest rate on borrowings varies with the Company's earnings and is based on the higher of the bank's prime rate or Federal funds rate plus 1/2% for base rate borrowings and the LIBOR rate for Euro-Rate borrowings, which was 7.9% as of August 31, 1998. As of August 31, 1998, no letters of credit and no borrowings were outstanding under the agreement. No other borrowings or letters of credit were outstanding for any other period presented. The Company pays a commitment fee of 3/8% per annum on the unused balance of the Facility. 34 35 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 7. LONG-TERM DEBT During June 1997, the Company sold $200,000,000 of 10-3/4% Senior Unsecured Notes due 2007, Series A. Subsequent to this issue, the Company exchanged these notes for its 10-3/4% Senior Unsecured Notes due 2007, Series B. Such notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company's subsidiaries (Note 18). The proceeds of the offering were used to retire all of its outstanding senior notes, pay prepayment penalties related thereto and to retire the amount outstanding under the Company's existing secured revolving credit facility. The excess proceeds from the offering of approximately $48,100,000 were deposited in an escrow account to be used for expanding and upgrading the refinery, rebuilding and refurbishing existing retail units, and for acquiring new retail units and other capital expenditure projects. As of August 31, 1998 and 1997, the unused funds were classified as "Restricted Cash and Cash Equivalents and Investments". Both the senior unsecured notes and secured credit facility require that the Company maintain certain minimum levels of tangible net worth, working capital ratios and cash flow and restrict the amount available to distribute dividends. The Company is currently in compliance with its loan covenants. A summary of long-term debt is as follows:
AUGUST 31, -------------------------------- 1998 1997 ---------------------------------------------------------------------------------------------------- (IN THOUSANDS) Long-term debt: 10.75% senior unsecured notes due June 9, 2007, Series B $200,000 $200,000 Other long-term debt 674 503 Capitalized lease obligations 635 769 ---------------------------------------------------------------------------------------------------- 201,309 201,272 Less: Current installments of long-term debt 283 218 ---------------------------------------------------------------------------------------------------- Total long-term debt, less current installments $201,026 $201,054 ====================================================================================================
35 36 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The principal amount of long-term debt outstanding as of August 31, 1998, matures as follows:
YEAR ENDED AUGUST 31, ----------------------------------------------------- (IN THOUSANDS) 1999 $ 283 2000 232 2001 123 2002 98 2003 78 Thereafter 200,495 ----------------------------------------------------- $201,309 =====================================================
The following financing costs have been deferred and are being amortized to expense over the term of the related debt:
AUGUST 31, ---------------------------- 1998 1997 -------------------------------------------------------------------- (IN THOUSANDS) Beginning balance $7,807 $1,380 Current year additions 303 8,094 -------------------------------------------------------------------- Total financing costs 8,110 9,474 Write-off of deferred financing costs - (1,118) Amortization (866) (549) -------------------------------------------------------------------- $7,244 $7,807 ====================================================================
36 37 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 8. RETIREMENT PLANS Substantially all employees of the Company are covered by noncontributory defined benefit retirement plans. The benefits are based on each employee's years of service and compensation. The Company's policy is to contribute the minimum amounts required by the Employee Retirement Income Security Act of 1974, as amended. The assets of the plans are invested in an investment trust fund and consist of interest-bearing cash and bank common/collective trust funds. Net periodic pension cost included the following components:
YEAR ENDED AUGUST 31, -------------------------------------------- 1998 1997 1996 ------------------------------------------------------------------------------------------------- (IN THOUSANDS) Service cost $ 1,381 $ 1,283 $ 1,166 Interest cost on projected benefit obligation 1,897 1,632 1,442 Return on assets (1,921) (1,509) (1,227) Net amortization and deferral (35) 35 45 ------------------------------------------------------------------------------------------------- Net periodic pension cost $ 1,322 $ 1,441 $ 1,426 =================================================================================================
Assumptions used in the calculation of the projected benefit obligation are as follows:
YEAR ENDED AUGUST 31, -------------------------------------------- 1998 1997 1996 ------------------------------------------------------------------------------------------------- Discount rates 8.0% 8.0% 8.0% Salary increases 3.0% - 4.5% 3.0% - 4.5% 3.0% - 4.5% Expected long-term rate of return on assets 8.0% 8.0% 8.0% =================================================================================================
37 38 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The following table sets forth the plans' funded status and amounts recognized in the Company's consolidated balance sheets.
AUGUST 31, ------------------------------------ 1998 1997 ================================================================================================================== (In Thousands) Actuarial present value of benefit obligations: Vested benefit obligation $ 19,359 $ 16,840 ================================================================================================================== Accumulated benefit obligation $ 20,239 $ 17,414 ================================================================================================================== Projected benefit obligation $ 26,696 $ 23,074 Plan assets at fair value (25,665) (20,195) - ------------------------------------------------------------------------------------------------------------------ Projected benefit obligation in excess of plan assets 1,031 2,879 Unrecognized net obligation as of September 1, 1985 (1,330) (1,470) Unrecognized prior service cost (920) (995) Unrecognized net gain 6,203 4,058 - ------------------------------------------------------------------------------------------------------------------ Pension liability recognized on the consolidated balance sheets $ 4,984 $ 4,472 ==================================================================================================================
The Company's deferred gain on settlement of past pension plan obligations amounted to $2,205,000 and $2,420,000 as of August 31, 1998 and 1997, respectively, and is being amortized over 23 years. 9. OTHER BENEFIT PLANS As discussed in Note 1, the Company accrues for certain post-retirement healthcare benefits to salaried and certain hourly employees. The Company funds such benefits as they become payable. The Company made benefit payments of $412,000, $331,000 and $497,000 for the years ended August 31, 1998, 1997 and 1996, respectively. Benefit payments are reflected as a reduction of the accrued post-retirement healthcare benefit costs. 38 39 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The following table sets forth the post-retirement healthcare benefits status reconciled with the amounts on the Company's consolidated balance sheets.
AUGUST 31, ----------------------------- 1998 1997 - --------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Retirees $ 3,080 $ 3,174 Fully eligible active plan participants 9,369 9,494 Unrecognized net gain 4,678 3,593 Unrecognized transition obligation, being recognized over 20 years (8,952) (9,549) - --------------------------------------------------------------------------------------------------------- Accrued post-retirement healthcare benefit cost $ 8,175 $ 6,712 =========================================================================================================
Net periodic post-retirement healthcare benefit cost for the year includes the following components:
YEAR ENDED AUGUST 31, -------------------------------------------- 1998 1997 1996 - ------------------------------------------------------------------------------------------------------------------------ (IN THOUSANDS) Service cost $ 620 $ 670 $ 545 Interest cost on accumulated post-retirement healthcare Benefit obligation 892 905 919 Amortization of transition obligation 597 597 597 Amortization of net gain (211) (140) (107) - ------------------------------------------------------------------------------------------------------------------------ Net periodic post-retirement healthcare benefit cost $1,898 $2,032 $1,954 ========================================================================================================================
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered medical and dental benefits was 7.4% and 5%, respectively for 1998; the rates were assumed to decrease gradually to 5% for both medical and dental benefits until 2007 and remain at that level thereafter. The healthcare cost trend rate assumption has a significant effect on the amounts reported. To illustrate, increasing the assumed healthcare cost trend rates by 1 percentage point in each year would increase the accumulated post-retirement healthcare benefit obligation as of August 31, 1998, by $2,126,000 and the aggregate of the service and interest cost components of net periodic post-retirement healthcare benefit cost for the year then ended by $286,000. The weighted average discount rate used in determining the accumulated post retirement healthcare benefit obligation for August 31, 1998 and 1997, was 8.0%. The Company also contributes to voluntary employee savings plans through regular monthly contributions equal to various percentages of the amounts invested by the participants. The Company's contributions to these plans amounted to $548,000, $498,000 and $491,000 for the years ended August 31, 1998, 1997 and 1996, respectively. 39 40 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 10. INCOME TAXES Income tax expense (benefit) consists of:
YEAR ENDED AUGUST 31, ------------------------------------- 1998 1997 1996 ------------------------------------------------------------ (IN THOUSANDS) Federal: Current $ (600) $2,928 $ (44) Deferred (2,971) (491) 2,868 ------------------------------------------------------------ (3,571) 2,437 2,824 ------------------------------------------------------------ State: Current 281 535 244 Deferred (1,842) (384) 719 ------------------------------------------------------------ (1,561) 151 963 ------------------------------------------------------------ $(5,132) $2,588 $3,787 ------------------------------------------------------------
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:
YEAR ENDED AUGUST 31, ----------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) U. S. federal income taxes at the statutory rate of 34% $(4,363) $2,188 $3,274 State income taxes, net of Federal benefit (664) 363 716 Reduction of taxes provided in prior year (51) (62) (201) Nondeductible expenses 174 317 62 Other (228) (218) (64) - ----------------------------------------------------------------------------------------------------------------- Income tax attributable to income before income tax expense and extraordinary item $(5,132) $2,588 $3,787 =================================================================================================================
40 41 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Deferred income tax liabilities (assets) are comprised of the following:
AUGUST 31, ----------------------------- 1998 1997 -------------------------------------------------------------------------------------- (IN THOUSANDS) Deferred income tax assets: Inventory valuation $(2,501) $ 3,343 Accounts receivable allowance (165) (196) Accrued liabilities (2,513) (3,996) Other 155 137 -------------------------------------------------------------------------------------- (5,024) (712) -------------------------------------------------------------------------------------- Deferred income tax liabilities: Property, plant and equipment 28,971 28,264 Accrued liabilities (6,216) (5,785) Tax credits and carryforwards (4,300) (4,370) State net operating loss carryforwards (2,513) (2,197) Valuation allowance 870 1,084 Other 77 394 -------------------------------------------------------------------------------------- 16,889 17,390 -------------------------------------------------------------------------------------- Net deferred income tax liability $11,865 $16,678 ======================================================================================
The Company's results of operations are included in the consolidated Federal tax return of the Parent. The Tax Reform Act of 1986 created a separate parallel tax system called the Alternative Minimum Tax ("AMT") system. AMT is calculated separately from the regular U.S. Federal income tax and is based on a flat rate of 20% applied to a broader tax base. The higher of the two taxes is paid. The excess AMT over regular tax is a tax credit, which can be carried forward indefinitely to reduce regular tax liabilities in excess of AMT liabilities of future years. The Company generated AMT credits in prior years of approximately $4,000,000 that is available to offset the regular tax liability in the future years. 11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value. The carrying amount of cash and cash equivalents, trade accounts and notes receivable and current liabilities approximate fair value because of the short maturity of these instruments. The fair value of long-term debt (Note 7) was determined using the fair market value of the individual debt instruments. As of August 31, 1998, the carrying amount and estimated fair value of these debt instruments approximated $201,309,000 and $179,153,000, respectively. 41 42 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 12. CONTINGENCIES The Company is a defendant in various claims, legal actions and complaints arising in the ordinary course of business. In the opinion of management, all such matters are adequately covered by insurance, or if not so covered, are without merit or are of such kind, or involve such amounts that an unfavorable disposition would not have a material adverse effect on the consolidated financial position of the Company. 13. TRANSACTIONS WITH AFFILIATED COMPANIES In June 1997, the Company declared a dividend of $28,285,000 of which $5,000,000 was paid in cash and $23,285,000 was forgiveness of debt from related parties. Additionally, the Company offset $2,017,000 of amounts due from related parties with deferred tax benefits previously received. The Company paid a service fee relating to certain costs incurred by its Parent for the Company's New York office. During the years ended August 31, 1998, 1997 and 1996, such fees amounted to approximately $980,000, $2,712,000 and $2,424,000 respectively. An affiliate of the Company leases nine retail gas station and convenience stores to the Company under various operating leases which all expire in 2001. Rent expense relating to these leases was $264,000 for each of the years ended August 31, 1998, 1997 and 1996. 14. ENVIRONMENTAL MATTERS The Company is subject to federal, state, and local laws and regulations relating to pollution and protection of the environment such as those governing releases of certain materials into the environment and the storage, treatment, transportation, disposal and clean-up of wastes, including, but not limited to, the Federal Clean Water Act, as amended, the Clean Air Act, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and analogous state and local laws and regulations. Due to the nature of the Company's business, the Company is and will continue to be subject to various environmental claims, legal actions and complaints. In the opinion of management, all current matters are without merit or are of such kind or involve such amounts that an unfavorable disposition would not have a material adverse effect on the consolidated financial position and results of operations of the Company. Management of the Company believes that remediation or related environmental costs incurred during the normal course of business are not expected to be material. 42 43 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 15. OTHER EXPENSE During 1994, the Company incurred a loss of $1,598,000 in connection with the settlement of a claim dating back to a period prior to the acquisition by the Parent (Note 1). The related settlement amount of $2,300,000 ($1,598,000 after being discounted at 13% per annum) is payable in quarterly installments of $125,000 commencing on January 13, 1995, and continuing to October 13, 1998, at which time annual payments of $160,000 will be required until the remaining outstanding balance is liquidated on October 13, 2002. The undiscounted amounts due as of August 31, 1998 are as follows:
YEAR ENDED AUGUST 31, --------------------------------------------------------------- (IN THOUSANDS) 1999 $160 2000 160 2001 160 2002 160 2003 160 --------------------------------------------------------------- $800 ===============================================================
16. EXTRAORDINARY ITEM In June 1997, the Company incurred an extraordinary loss of $6,653,000 (net of an income tax benefit of $4,200,000) as a result of "make-whole premiums" paid and financing costs written-off in connection with the early retirement of its 11.50% and 13.50% senior unsecured notes. 17. SEGMENTS OF BUSINESS The Company operates in two industry segments. The retail segment sells petroleum products and convenience store merchandise to the general public. The wholesale segment sells petroleum products to other oil companies and distributors. Intersegment sales are primarily from the wholesale segment to the retail segment and are accounted for in a manner similar to third party sales and are eliminated in consolidation. 43 44 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
YEAR ENDED AUGUST 31, ------------------------------------------- 1998 1997 1996 ------------------------------------------------------------------------------------ (IN THOUSANDS) Net Sales Retail $435,151 $463,895 $460,869 Wholesale 323,472 407,453 372,949 ------------------------------------------- $758,623 $871,348 $833,818 =========================================== Intersegment Sales Wholesale $156,959 $198,129 $189,631 =========================================== Income (Loss) from Operations Retail $ (2,333) $ 3,267 $ 4,056 Wholesale 9,673 18,710 21,982 ------------------------------------------- $ 7,340 $ 21,977 $ 26,038 =========================================== Identifiable Assets Retail $ 95,654 $ 80,124 $ 97,548 Wholesale 246,925 266,268 208,556 ------------------------------------------- $342,579 $346,392 $306,104 =========================================== Depreciation and Amortization Retail $ 1,985 $ 1,906 $ 1,893 Wholesale 6,335 6,324 6,323 ------------------------------------------- $ 8,320 $ 8,230 $ 8,216 =========================================== Capital Expenditures Retail $ 16,880 $ 3,095 $ 2,122 Wholesale 16,636 2,729 2,440 ------------------------------------------- $ 33,516 $ 5,824 $ 4,562 ===========================================
18. SUBSIDIARY GUARANTORS Summarized financial information for the Company's wholly-owned subsidiary guarantors (Note 7) is as follows:
AUGUST 31, -------------------------------- 1998 1997 ------------------------------------------------------------------------ (IN THOUSANDS) Current Assets $ 39,901 $35,653 Noncurrent Assets 73,666 60,131 Current Liabilities 103,977 82,131 Noncurrent Liabilities 10,651 10,474 ========================================================================
44 45 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
YEAR ENDED AUGUST 31, ----------------------------------------------- 1998 1997 1996 ---------------------------------------------------------------------------------------- (IN THOUSANDS) Net Sales $439,563 $468,570 $465,656 Gross Profit 66,157 68,524 68,484 Operating Income (Loss) (1,582) 5,185 5,413 Net Income (Loss) (4,129) 1,624 1,351 ----------------------------------------------------------------------------------------
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) ================================================================================
NET INCOME (LOSS) BEFORE GROSS EXTRAORDINARY NET SALES PROFIT ITEM - --------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) 1998 First Quarter $213,302 $27,181 $ 725 Second Quarter 163,263 8,949 (9,557) Third Quarter 175,246 22,705 (2,314) Fourth Quarter 206,812 31,889 3,446 1997 First Quarter $227,264 $25,539 $ 902 Second Quarter 207,812 17,528 (3,382) Third Quarter 203,644 24,415 371 Fourth Quarter 232,628 35,925 5,957 1996 First Quarter $204,089 $29,712 $2,982 Second Quarter 185,904 25,433 1,143 Third Quarter 208,070 28,114 2,309 Fourth Quarter 235,755 21,963 (593) =====================================================================================================================
45 46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. NONE PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. Set forth below is certain information as of November 30, 1998 with respect to all directors and executive officers of the Company.
DIRECTOR NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS ---- --- ----- -------- ----------------------------------------- John A. Catsimatidis 50 1986 Chairman of the Chairman of the Board, Chief Executive Board, Chief Officer and President of Red Apple Group, Executive Inc. (a holding company for certain Officer, businesses, including corporations which Director operate supermarkets in New York); Chief Executive Officer and Director of Gristede's Sloan's, Inc., a public company whose common stock is listed on the American Stock Exchange and operates supermarkets in New York; a director of News Communications, Inc., a public company whose stock is traded over-the-counter; and Fonda Paper Company, Inc., a privately held company. Myron L. Turfitt 46 1988 President, Chief President and Chief Operating Officer of the Operating Company since September 1996. From June 1987 Officer, to September 1996 he was Chief Financial Director Officer and Executive Vice President of the Company. Thomas C. Covert 64 1988 Vice Chairman Vice Chairman of the Company since September And Director 1996. From December 1987 to September 1996 he was Executive Vice President and Chief Operating Officer of the Company. Ashton L. Ditka 57 --- Senior Vice Senior Vice President - Marketing of the President - Company since July 1990. From December Marketing 1989 to July 1990 he was Vice President - Wholesale & Retail Marketing and from August 1976 until December 1989 he was Vice President - Wholesale Marketing. Mr. Ditka has over 30 years of experience in the petroleum industry, including 11 years in retail marketing with Atlantic Richfield Company.
46 47
DIRECTOR NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS ---- --- ----- -------- ----------------------------------------- Thomas E. Skarada 55 --- Vice President - Vice President - Refining of the Company Refining since February 1996. From September 1994 to February 1996 he was Assistant Vice President - Refining and from March 1993, when he joined the Company, to September 1994 he was Director of Regulatory Compliance. From March 1992 to March 1993, he was a consultant with Muse, Stancil and Co., in Dallas, Texas. Frederick J. Martin, Jr. 44 --- Vice President - Vice President - Supply and Transportation Supply and of the Company since February 1993. From Transportation 1980 to January 1993 he held other positions in the Company involving transportation, product supply, crude supply and pipeline and terminal administration. James E. Murphy 53 --- Vice President Chief Financial Officer of the Company and Chief since January 1997. He was Vice President Financial - Finance from April 1995 to December 1996 Officer and since May 1982 has held other accounting and internal auditing positions with the Company, including Director of Internal Auditing since April 1986. John R. Wagner 39 --- Vice President - Vice President - General Counsel and General Counsel, Secretary of the Company since August Secretary 1997. Prior to joining the Company, Mr. Wagner served as Counsel to Dollar Bank, F.S.B. from 1988 until assuming his current position. Dennis E. Bee, Jr. 56 --- Treasurer Treasurer of the Company since May 1988. Martin R. Bring 55 1988 Director A member of the law firm of Wolf, Block, Schorr and Solis-Cohen, LLP, New York since 1978. He also serves as a Director of Gristede's Sloan's, Inc., a supermarket chain.
47 48
DIRECTOR NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS ---- --- ----- -------- ----------------------------------------- Evan Evans 72 1997 Director Chairman of Holvan Properties, Inc., a privately owned petroleum industry consulting firm since 1983. He is also a director of U.S. Energy Systems, Inc., a public company whose common stock is quoted on the Nasdaq SmallCap Market, and of Alexander-Allen, Inc., a privately owned company which owns a refinery in Alabama which is currently shutdown. He has been a director of both of these companies since 1994. Kishore Lall 51 1997 Director Director of Gristede's Sloan's, Inc. since October 1997. Consultant to Red Apple Group Inc. from January 1997 to October 1997. Private investor from June 1994 to December 1996. Senior Vice President and head of commercial banking of ABN AMRO Bank, New York branch from January 1991 to May 1994. Douglas Lemmonds 51 1997 Director Managing Director and the Chief Operating Officer, Private Banking-Americas of the Deutsche Bank Group since May 1996. Private Banking-Americas operates across four separate legal entities, including a registered investment advisor, a broker-dealer, a trust company and a commercial bank. From June 1991 to May 1996 Mr. Lemmonds was the Regional Director of Private Banking of the Northeast Regional Office of the Bank of America and from August 1973 to June 1991 he held various other positions with Bank of America. Andrew Maloney 66 1997 Director Partner of Brown & Wood LLP, a New York law firm, since December 1992. From June 1986 to December 1992 he was the United States Attorney for the Eastern District of New York. Dennis Mehiel 55 1997 Director Chairman and Chief Executive Officer of The Fonda Group, Inc., since 1988. Since 1966 he has been the Chairman of Four M, a converter and seller of interior packaging, corrugated sheets and corrugated containers which he co-founded, and since 1977 (except during a leave of absence from April 1994 through July 1995) he has been the Chief Executive Officer of Four M. Mr. Mehiel is also the Chairman of MannKraft Corporation, a manufacturer of corrugated containers, and Chief Executive Officer and Chairman of Creative Expressions, Group, Inc.
48 49 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Not Applicable ITEM 11. EXECUTIVE COMPENSATION The following table sets forth for the three fiscal years ended August 31, 1996, 1997 and 1998 the compensation paid by the Company to its Chairman of the Board and Chief Executive Officer and each of the four other executive officers of the Company whose salary and bonus exceeded $100,000 for the fiscal year ended August 31, 1998. SUMMARY COMPENSATION TABLE - --------------------------------------------------------------------------------
OTHER ANNUAL OTHER ANNUAL COMPENSATION COMPENSATION COMPENSATION NAME & PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($) (2) - ------------------------- ---- -------------------------- ------- ------- John A. Catsimatidis 1998 $360,000 $265,000 $ - $8,052 Chairman of the Board & 1997 360,000 265,000 - 7,802 Chief Executive Officer 1996 360,000 205,000 - 7,802 Myron L. Turfitt 1998 $235,000 $200,000 $5,325 $6,932 President & 1997 235,000 280,000 2,780 6,562 Chief Operating Officer 1996 235,000 120,000 2,600 6,218 Ashton L. Ditka 1998 $140,000 $ 11,200 $2,985 $7,214 Senior Vice President 1997 135,042 31,405 3,241 6,731 Marketing 1996 125,558 6,100 3,262 5,879 Thomas E. Skarada 1998 $110,000 $ 8,800 $6,781 $5,490 Vice President 1997 105,000 29,900 7,580 4,470 Refining 1996 94,250 4,500 7,536 4,060 Frederick J. Martin, Jr. 1998 $100,000 $ 8,000 $4,915 $4,036 Vice President 1997 94,300 4,620 4,210 3,835 Supply & Transportation 1996 90,567 4,500 3,390 3,713
(1) Amounts include automobile allowances. (2) Amounts include Company matching contributions under the Company's 401(K) Incentive Savings Plan and health and term life insurance benefits. 49 50 PENSION PLAN The Company maintains a defined benefit pension plan for eligible employees. The following table shows estimated annual benefits payable upon retirement in specified compensation categories and years of service classifications. PENSION PLAN TABLE
YEARS OF SERVICE ---------------- AVERAGE EARNINGS 15 20 30 - ---------------- $100,000 $17,583 $23,444 $35,165 $150,000 26,958 35,944 53,915 $200,000 28,833 38,444 57,665 $250,000 28,833 38,444 57,665 $300,000 28,833 38,444 57,665
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:
CURRENT YEARS YEARS OF SERVICE OF SERVICE AT AGE 65 NAME OF INDIVIDUAL JOHN A. CATSIMATIDIS 12 27 MYRON L. TURFITT 20 39 ASHTON L. DITKA 22 30 THOMAS E. SKARADA 5 14 FREDERICK J. MARTIN, JR. 18 39
COMPENSATION OF DIRECTORS Non-officer directors receive a stipend of $15,000 per year and $1,000 for each meeting attended. 50 51 EMPLOYMENT AND CONSULTING AGREEMENTS Thomas C. Covert entered into a consulting agreement with the Company, the initial term of which commenced on September 1, 1996 and expired on August 31, 1998. The Agreement provides that its term shall be extended for two additional one year periods unless the Company or Mr. Covert gives written notice of cancellation to the other party within specified time periods. Under such provision the term of the Agreement has been extended to August 31, 1999. Under the agreement Mr. Covert is obligated to render services to the Company on a limited time basis of between 30-40 hours per month in such capacities as the Board of Directors of the Company may designate. Under the agreement the Company has agreed to pay Mr. Covert $170 per hour for services rendered, but in no event less than $6,800 per month for each month during the term of the agreement. Mr. Covert has also entered into a Deferred Compensation Agreement with the Company pursuant to which since the date of his retirement on September 1, 1996, the Company has been paying Mr. Covert a retirement benefit at the rate of approximately $12,300 per year. The benefit is payable to Mr. Covert until his death, whereupon Mr. Covert's wife is entitled to a benefit of approximately $6,150 per year until her death if she does not predecease him. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding ownership of Common Stock on November 30, 1998 by: (i) each stockholder known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's directors; and (iii) all officers and directors of the Company as a group. The Company believes that ownership of the shares by the persons named below is both of record and beneficial and such persons have sole voting and investing power with respect to the shares indicated.
Name and Address of Beneficial Owner Number of Shares Percent of Class John Catsimatidis 823 Eleventh Avenue 100 100% New York, NY 10019 All officers and directors 100 100% as a group (15 persons)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company paid a service fee relating to certain costs incurred by its parent, Red Apple Group, Inc., ("RAG"), for the Company's New York office for fiscal 1998 amounting to approximately $980,000. Pursuant to a Servicing Agreement entered into between the Company and RAG in June 1997, the Company will pay up to a $1,000,000 per year fee relating to these costs. The term of the Servicing Agreement expires on June 9, 2000, but the term shall be automatically extended for periods of one year if neither party gives notice of termination of the Servicing Agreement prior to the expiration of the then current term. As of the date hereof, United Refining, Inc., owned by John A. Catsimatidis, was leasing to the Company nine retail units. The term of each lease expires on April 1, 2001. The annual rentals payable under the leases aggregate $264,000, which the Company believes are market rates. As of the date hereof, the Company was current on all rent obligations under such leases. RAG files a consolidated tax return with affiliated entities, including the Company. Commencing in June 1997, RAG, the Company and certain of their affiliates entered into a tax sharing agreement (the "Tax Sharing Agreement"). Under the Tax Sharing Agreement the parties established a method for allocating the consolidated federal income tax liability and combined state tax liability of the RAG affiliated group among its members; for reimbursing RAG for payment of such tax liability; for compensating any member for use of its net operating loss or tax credits in arriving at such tax liability; and to provide for the allocation and payment of any refund arising from a 51 52 carryback of net operating loss or tax credits from subsequent taxable years. Pursuant to the tax sharing agreement included in prepaid expenses and other assets are amounts due from the Parent of approximately $1,600,000 and $650,000 as of August 31, 1998 and 1997, respectively. During fiscal 1998, the Company made payments for services rendered to it by Wolf, Block, Schorr and Solis-Cohen, LLP, ("WBS&S-C"), a law firm of which Martin R. Bring, a director of the Company, is a member. The Company believes that the fees paid to WBS&S-C for legal services are comparable to fees it would pay to a law firm for similar services, none of whose members are officers, directors or principal stockholders of the Company. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K. (a) (1) Financial Statements A list of all financial statements filed as part of this report is contained in the index to Item 8, which index is incorporated herein by reference. (2) Financial Statement Schedules Report of Independent Certified Public Accountants Schedule II - Valuation and Qualifying Accounts (3) Exhibits Number Description - ------ ----------- 3.1 Certificate of Incorporation of United Refining Company ("URC"). Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-35083) (the "Registration Statement"). 3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration Statement. 3.3 Certificate of Incorporation of United Refining Company of Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration Statement. 3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the Registration Statement. 3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC"). Incorporated by reference to Exhibit 3.5 to the Registration Statement. 3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration Statement. 3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY"). Incorporated by reference to Exhibit 3.7 to the Registration Statement. 3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the registration Statement. 3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by reference to Exhibit 3.9 to the Registration Statement. 3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the Registration Statement. 3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to the Registration Statement. 3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the Registration Statement. 3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by reference to Exhibit 3.13 to the Registration Statement. 3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the Registration Statement. 3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by reference to Exhibit 3.15 to the Registration Statement. 3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the Registration Statement. 3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI"). Incorporated by reference to Exhibit 3.17 to the Registration Statement. 3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the Registration Statement. 3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by reference to Exhibit 3.19 to the Registration Statement. 52 53 3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the Registration Statement. 3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation ("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration Statement. 3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the Registration Statement. 3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI"). Incorporated by reference to Exhibit 3.23 to the Registration Statement. 3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the Registration Statement. 4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder Bank & Trust Company ("Schroder"), relating to the 10-3/4% Series A Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to the Registration Statement. 4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the Registration Statement. 10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co. Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated by reference to Exhibit 10.1 to the Registration Statement. 10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI, and BSCI. Incorporated by reference to Exhibit 10.2 to the Registration Statement. 10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow Agent, Schroder, as Trustee, and URC. Incorporated by reference to Exhibit 10.3 to the Registration Statement. 10.4 Servicing Agreement dated June 9, 1997 between URC and Red Apple Group, Inc. Incorporated by reference to Exhibit 10.4 to the Registration Statement. 10.5 Collective Bargaining Agreement dated February 1, 1996 between URC and International Union of Operating Engineers, Local No. 95. Incorporated by reference to Exhibit 10.5 to the Registration Statement. 10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and International Union, United Plant Guard Workers of America and Local No. 502. Incorporated by reference to Exhibit 10.6 to the Registration Statement. 10.7 Collective Bargaining Agreement dated February 1, 1997 between URC and United Steel Workers of America Local Union No. 2122-A. Incorporated by reference to Exhibit 10.7 to the Registration Statement. 10.8 Collective Bargaining Agreement dated August 1, 1995 between URC and General Teamsters Local Union No. 397. Incorporated by reference to Exhibit 10.8 to the Registration Statement. 10.9 Credit Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.9 to the Registration Statement. 10.10 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URC. Incorporated by reference to Exhibit 10.10 to the Registration Statement. 10.11 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URCP. Incorporated by reference to Exhibit 10.11 to the Registration Statement. 10.12 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by KPC. Incorporated by reference to Exhibit 10.12 to the Registration Statement. 10.13 Security Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.13 to the Registration Statement. 10.14 Waiver and Amendment to Credit Agreement dated as of July 15, 1998 by and among, URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent.* 10.15 Consulting Agreement dated September 1, 1996 with Thomas C. Covert.* 10.16 Deferred Compensation Agreement dated September 1, 1996 with Thomas C. Covert. * 21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement. 27.1 Financial data schedule for the twelve months ended August 31, 1998.* (b) Reports on Form 8-K NONE * Filed herewith 53 54 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of United Refining Company The audits referred to in our report dated October 29, 1998 relating to the consolidated financial statements of United Refining Company and Subsidiaries included the audits of the financial statement Schedule II Valuation and Qualifying Accounts for each of the three years in the period ended August 31, 1998. This financial statement schedule is the responsibility of management. Our responsibility is to express an opinion on this schedule based on our audits. In our opinion, such financial statement Schedule - Valuation and Qualifying Accounts, presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP New York, New York October 29, 1998 54 55 UNITED REFINING COMPANY AND SUBSIDIARIES SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS (in thousands)
Balance at Charged to Beginning of Costs and Balance at End Description Period Expenses Deductions Of Period - ----------------------------------------- ---------------- --------------- ---------------- -------------------- Year ended August 31, 1996: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $ 541 $ 369 $ (369) $ 541 ================ =============== ================ ==================== Year ended August 31, 1997: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $ 541 $ 407 $ (437) $ 511 ================ =============== ================ ==================== Year ended August 31, 1998: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $ 511 $ 258 $ (364) $ 405 ================ =============== ================ ====================
55 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED REFINING COMPANY Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------ Myron L. Turfitt President and Chief Operating Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chairman of the Board, Chief /s/ John A. Catsimatidis Executive Officer and Director November 30, 1998 - ------------------------------- John A. Catsimatidis President, Chief Operating Officer /s/ Myron L. Turfitt and Director November 30, 1998 - ------------------------------- Myron L. Turfitt /s/ Thomas C. Covert Vice Chairman and Director November 30, 1998 - ------------------------------- Thomas C. Covert /s/ James E. Murphy Vice President and Chief Financial - ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 30, 1998 /s/ Martin R. Bring Director November 30, 1998 - ------------------------------- Martin R. Bring /s/ Evan Evans Director November 30, 1998 - ------------------------------- Evan Evans /s/ Kishore Lall Director November 30, 1998 - ------------------------------- Kishore Lall /s/ Douglas Lemmonds Director November 30, 1998 - ------------------------------- Douglas Lemmonds /s/ Andrew Maloney Director November 30, 1998 - ------------------------------- Andrew Maloney /s/ Dennis Mehiel Director November 30, 1998 - ------------------------------- Dennis Mehiel
56 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED REFINING COMPANY OF PENNSYLVANIA Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------------- Myron L. Turfitt President and Chief Operating Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE /s/ John A. Catsimatidis Chairman of the Board, Chief November 30, 1998 - ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt President, Chief Operating Officer November 30, 1998 - ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial - ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 30, 1998
57 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KIANTONE PIPELINE CORPORATION Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------------- Myron L. Turfitt President and Chief Operating Officer Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chairman of the Board, Chief /s/ John A. Catsimatidis Executive Officer and Director November 30, 1998 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt President, Chief Operating Officer November 30, 1998 - ------------------------------- and Director Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial - ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 30, 1998
58 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KIANTONE PIPELINE COMPANY Dated: November 30, 1998 By: /s/ Myron L. Turfitt ---------------------------------------- Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE /s/ John A. Catsimatidis Chairman of the Board, Chief November 30, 1998 - ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial - ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 30, 1998
59 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED JET CENTER, INC. Dated: November 30, 1998 By: /s/ Myron L. Turfitt -------------------------------------- Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE /s/ John A. Catsimatidis Chairman of the Board, Chief November 30, 1998 - ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial - ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 30, 1998
60 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VULCAN ASPHALT REFINING CORPORATION Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------- Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE /s/ John A. Catsimatidis Chairman of the Board, Chief - ------------------------------- Executive Officer and Director November 30, 1998 John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial - ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 30, 1998
61 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KWIK-FIL, INC. Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------- Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE /s/ John A. Catsimatidis Chairman of the Board, Chief - ------------------------------- Executive Officer and Director November 30, 1998 John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) November 30, 1998 James E. Murphy
62 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KWIK-FILL, INC. Dated: November 30, 1998 By: /s/ Myron L. Turfitt ----------------------------------- Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chairman of the Board, Chief /s/ John A. Catsimatidis Executive Officer and Director November 30, 1998 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) November 30, 1998 James E. Murphy
63 64 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDEPENDENT GASOLINE & OIL COMPANY OF ROCHESTER, INC. Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------ Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chairman of the Board, Chief /s/ John A. Catsimatidis Executive Officer and Director November 30, 1998 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) November 30, 1998 James E. Murphy
64 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BELL OIL CORP. Dated: November 30, 1998 By: /s/ Myron L. Turfitt --------------------------------- Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chairman of the Board, Chief /s/ John A. Catsimatidis Executive Officer and Director November 30, 1998 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) November 30, 1998 James E. Murphy
65 66 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PPC, INC. Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------ Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chairman of the Board, Chief /s/ John A. Catsimatidis Executive Officer and Director November 30, 1998 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) November 30, 1998 James E. Murphy
66 67 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUPER TEST PETROLEUM, INC. Dated: November 30, 1998 By: /s/ Myron L. Turfitt ------------------------------------- Myron L. Turfitt Executive Vice President Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
SIGNATURE TITLE DATE Chairman of the Board, Chief /s/ John A. Catsimatidis Executive Officer and Director November 30, 1998 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 30, 1998 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) November 30, 1998 James E. Murphy
67 68 SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(d) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT No annual report or proxy material was sent to security holders by the Corporation during the fiscal year ended August 31, 1998. EXHIBITS Number Description - ------ ----------- 3.1 Certificate of Incorporation of United Refining Company ("URC"). Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-35083) (the "Registration Statement"). 3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration Statement. 3.3 Certificate of Incorporation of United Refining Company of Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration Statement. 3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the Registration Statement. 3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC"). Incorporated by reference to Exhibit 3.5 to the Registration Statement. 3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration Statement. 3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY"). Incorporated by reference to Exhibit 3.7 to the Registration Statement. 3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the registration Statement. 3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by reference to Exhibit 3.9 to the Registration Statement. 3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the Registration Statement. 3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to the Registration Statement. 3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the Registration Statement. 3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by reference to Exhibit 3.13 to the Registration Statement. 3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the Registration Statement. 3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by reference to Exhibit 3.15 to the Registration Statement. 3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the Registration Statement. 3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI"). Incorporated by reference to Exhibit 3.17 to the Registration Statement. 3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the Registration Statement. 3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by reference to Exhibit 3.19 to the Registration Statement. 3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the Registration Statement. 3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation ("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration Statement. 3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the Registration Statement. 3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI"). Incorporated by reference to Exhibit 3.23 to the Registration Statement. 3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the Registration Statement. 4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder Bank & Trust Company ("Schroder"), relating to the 10-3/4% Series A Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to the Registration Statement. 4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the Registration Statement. 10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co. Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated by reference to Exhibit 10.1 to the Registration Statement. 68 69 10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI, and BSCI. Incorporated by reference to Exhibit 10.2 to the Registration Statement. 10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow Agent, Schroder, as Trustee, and URC. Incorporated by reference to Exhibit 10.3 to the Registration Statement. 10.4 Servicing Agreement dated June 9, 1997 between URC and Red Apple Group, Inc. Incorporated by reference to Exhibit 10.4 to the Registration Statement. 10.5 Collective Bargaining Agreement dated February 1, 1996 between URC and International Union of Operating Engineers, Local No. 95. Incorporated by reference to Exhibit 10.5 to the Registration Statement. 10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and International Union, United Plant Guard Workers of America and Local No. 502. Incorporated by reference to Exhibit 10.6 to the Registration Statement. 10.7 Collective Bargaining Agreement dated February 1, 1997 between URC and United Steel Workers of America Local Union No. 2122-A. Incorporated by reference to Exhibit 10.7 to the Registration Statement. 10.8 Collective Bargaining Agreement dated August 1, 1995 between URC and General Teamsters Local Union No. 397. Incorporated by reference to Exhibit 10.8 to the Registration Statement. 10.9 Credit Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.9 to the Registration Statement. 10.10 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URC. Incorporated by reference to Exhibit 10.10 to the Registration Statement. 10.11 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URCP. Incorporated by reference to Exhibit 10.11 to the Registration Statement. 10.12 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by KPC. Incorporated by reference to Exhibit 10.12 to the Registration Statement. 10.13 Security Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.13 to the Registration Statement. 10.14 Waiver and Amendment to Credit Agreement dated as of July 15, 1998 by and among, URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent.* 10.15 Consulting Agreement dated September 1, 1996 with Thomas C. Covert.* 10.16 Deferred Compensation Agreement dated September 1, 1996 with Thomas C. Covert. * 21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement. 27.1 Financial data schedule for the twelve months ended August 31, 1998.* (c) Reports on Form 8-K NONE * Filed herewith 69 EX-10.14 2 UNITED REFINING COMPANY 1 Exhibit 10.14 WAIVER AND AMENDMENT AGREEMENT This Waiver and Amendment Agreement (the "Waiver") is dated as of July 15,1998 and is made by and among UNITED REFINING COMPANY, a Pennsylvania corporation ("United Refining"), UNITED REFINING COMPANY OF PENNSYLVANIA, a Pennsylvania Corporation ("United Refining PA"), KIANTONE PIPELINE CORPORATION, a New York Corporation ("Kiantone, and hereinafter together with United Refining and United Refining PA sometimes collectively referred to as the "Borrowers" and individually as a "Borrower") the BANKS under the Credit Agreement (as hereinafter defined) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for the Banks under the Credit Agreement (hereinafter referred to in such capacity as the "Agent"). RECITALS: WHEREAS, Borrowers, the Banks, and the Agent are parties to that certain Credit Agreement dated as of June 9, 1997 (as previously amended, restated, supplemented or modified, the "Credit Agreement"); and WHEREAS, unless otherwise defined herein, capitalized terms used herein shall have the meanings given to them in the Credit Agreement; and WHEREAS, Borrowers have not complied with the covenant contained in Section 7.2.16 (Minimum Fixed Charge Coverage Ratio) of the Credit Agreement (the "Section 7.2.16 Violation") during some or all of the period of the fiscal quarter ended May 31,1998 as more fully disclosed in the Compliance Certificate which Borrowers have delivered to the Banks for such fiscal quarter (the "Delivered Compliance Certificate); and WHEREAS, the Borrowers have requested that the Banks waive the Section 72.16 Violation for the fiscal quarter ended May 31,1998 and amend Section 7.2.16, as more fully provided herein. NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties hereto agree as follows; 1. Warranty. The Borrowers represent and warrant to the Banks that the Delivered Compliance Certificate correctly discloses Borrowers' Fixed Charge Coverage Ratio as of the date and periods set forth in such Delivered Compliance Certificate and that except for the Section 7.2.16 Violation, the Borrowers were in full compliance with the Credit Agreement during the fiscal quarter ended May 31, 1998. 2. Waiver and Amendment With Respect To Section 7.2.16 Violation. (i) Waiver Under Section 7.2.16. The Banks hereby waive the violation of Section 7.2.16 for the fiscal quarter ended May 31, 1998 subject to Borrowers' warranty in paragraph and the acknowledgments and agreements by the Borrowers in paragraph 3 hereof. 1 2 (ii) The parties hereto hereby amend and restate Section 7.2.16 (Minimum Fixed Charge Coverage Ratio) to read as follows: "The Loan Parties shall not permit the Fixed Charge Coverage Ratio calculated as of the end of each fiscal quarter set forth below (each a "Measurement Date") for the period set forth below (each a "Measurement Period") to be less than the ratio set forth below:
Measurement Date Measurement Period Minimum Ratio ---------------- ------------------ ------------- August 31, 1997 Quarter then ended 1.1 to 1.0 November 30, 1997 2 Quarters then ended 1.1 to 1.0 February 28, 1998 3 Quarters then ended 1.1 to 1.0 May 31, 1998 4 Quarters then ended 1.25 to 1.0 August 31, 1998 Quarter then ended 1.0 to 1.0 November 30, 1998 2 Quarters then ended 1.0 to 1.0 February 28, 1999 3 Quarters then ended 1.0 to 1.0 May 31, 1999 and 4 Quarters then ended 1.25 to 1.0 each fiscal quarter thereafter
3. Full Force and Effect All provisions of the Credit Agreement remain in full force and effect on and after the date hereof. The Banks do not amend or waive any provisions of the Credit Agreement except as expressly amended or waived hereby. Without limiting the foregoing, the Banks retain all rights given to the Banks under the Credit Agreement and under applicable law in connection with any failure by the Borrower to comply with the Credit Agreement as amended hereby. The foregoing rights expressly include, without limitation, any rights given to the Banks under Section 8.2 if a Potential Default or an Event of Default arises as a result of any such failure to comply. 4. Counterparts: Effective Date. This Waiver may be signed in counterparts. This Waiver shall become effective when it has been executed by the Borrowers and the Banks. [SIGNATURES BEGIN ON NEXT PAGE] 2 3 [SIGNATURE PAGE 1 OF I TO WAIVER AND AMENDMENT AGREEMENT] The undersigned have executed this Waiver as of the date first above written. UNITED REFINING COMPANY, a Pennsylvania corporation By: /s/ James E. Murphy ----------------------------------------------- Title: V.P. - Finance and Chief Financial Officer UNITED REFINING COMPANY OF PENNSYLVANIA, a Pennsylvania corporation By: /s/ James E. Murphy ----------------------------------------------- Title: V.P. - Finance and Chief Financial Officer KIANTONE PIPELINE CORPORATION, a New York corporation By: /s/ James E. Murphy ----------------------------------------------- Title: V.P. - Finance and Chief Financial Officer THE SUMITOMO BANK, LIMITED By: /s/ Brian M. Smith ----------------------------------------------- Title: Senior Vice President By: ----------------------------------------------- Title: General Manager PNC BANK, NATIONAL ASSOCIATION, individually and as Agent By: /s/ Richard C. Munsick ----------------------------------------- Title: Vice President 3 EX-10.15 3 UNITED REFINING COMPANY 1 EXHIBIT 10.15 CONSULTING AGREEMENT AGREEMENT made as of the 1st day of September 1996, by and between UNITED REFINING COMPANY, a Pennsylvania corporation (hereinafter referred to as the "Company"), and THOMAS C. COVERT (hereinafter referred to as the "Consultant"). W I T N E S S E T H : WHEREAS, the Consultant has served as the Executive Vice President, Chief Operating Officer and a director of the Company for a number of years and has a unique knowledge of the business of the Company and of the oil petroleum industry generally; and WHEREAS, since the Consultant is retiring as the Executive Vice President and Chief Operating Officer of the Company as of the date hereof and the Company and the Consultant desire to enter into this Agreement whereby the Company will be assured of the right to the Consultant's services for the period and on the terms and conditions hereinafter set forth, and the Consultant will be assured of his engagement on such terms and conditions. NOW, THEREFORE, in consideration of the foregoing, and of the mutual covenants contained in this Agreement, the Company and the Consultant hereby agree as follows: 1. Engagement. (a) Subject to the terms and conditions hereinafter set forth, the Company hereby retains the Consultant and the Consultant hereby agrees to render services to the Company in such capacities as the Board of Directors of the Company may, from time to time, designate. The Consultant shall have the honorary title of Vice Chairman of the Board of the Company. The Consultant shall also hold such directorships in the Company and/or any subsidiary of the Company to which, from time to time during the term of his retention, the Consultant may be elected or appointed. Nothing contained in this Agreement shall restrict the right of the Consultant to serve as an employee, officer, agent or member of the boards of directors of corporations which are engaged in businesses which are not competitive with any businesses then conducted or knowingly contemplated by the Company or any of its subsidiaries, if any, or the right of the Consultant to manage his private investments, if such directorships or such investment activities do not interfere with the performance by the Consultant of his duties under this Agreement. The Consultant shall render his services with due regard for the prompt, efficient and economical operation of the business of the Company and its subsidiaries to the end of maximizing the profitability of the Company and its subsidiaries. (b) The Consultant shall perform services hereunder on a limited-time basis (not to be less than an average of 30 hours per month nor to exceed an average of 40 hours per month), as an independent contractor to , and not as an employee of, the Company. Subject to the authority delegated to him by the Board of Directors on each matter to which he is assigned, the Consultant shall be granted authority to make decisions with respect to any matter he is assigned and to which he renders services. The Company will give consideration, insofar as reasonably practicable, to the convenience of the consultant in respect of the times and places at which it shall request the performance of services by the Consultant. 1 2 2. Term: Company's Option to Extend Term. The term of the engagement of the Consultant by the Company pursuant to this Agreement shall be for a period of two years commencing on the date hereof, subject to earlier termination as provided in Paragraph 5 hereof. This Agreement will be extended for two additional one year periods unless the Company or the Consultant give written notice of cancellation to the other party not less than thirty (30) nor more than one hundred eighty (180) days prior to the next yearly anniversary of the date of this Agreement. 3. Compensation. In consideration of the services to be rendered by the Consultant pursuant to this Agreement, including, without limitation, any services rendered by the Consultant as a director of the Company or any subsidiary of the Company, the Company agrees to pay to the Consultant monthly, in arrears, compensation at the rate of $170.00 per hour of services rendered, but in no event less than $6,800.00 per month for each month during the term of this Agreement. 4. Expenses. During the term of this Agreement, the Company will reimburse the Consultant, for expenses incurred during the execution of assignments authorized by the Company for all travel, entertainment and other out-of-pocket expenses which are reasonably and necessarily incurred by the Consultant in the performance of his duties hereunder. Such expenses shall include, but not be limited to, the reasonable cost of setting up an office in the Consultant's home, including the purchase of a personal computer, fax machine, printer and other equipment reasonably necessary for a home office, and travel expenses. All office equipment and supplies paid for by the Company or for the purchase of which the Consultant is reimbursed by the Company, shall be the property of the Company and upon the termination of this Agreement, at the Company's request, the Consultant shall promptly return to the Company all remaining equipment and supplies. 5. Termination. (a) This Agreement shall terminate immediately upon the death of the Consultant. This Agreement may also be terminated upon thirty (30) days written notice by the Company to the Consultant, if the Consultant becomes disabled or fails to diligently perform the services the Company requests him to perform under Paragraph 1 hereof; provided, that the Company has given the Consultant written notice of such failure and the Consultant does not within thirty (30) days thereafter adequately perform the required services in the reasonable opinion of the Company. (b) In the event that at any time during the stated term of this Agreement, this Agreement is terminated for any reason, including the Consultant's death or disability, the Company shall pay to Consultant, his estate or his legal representative, as the case may be, the Consultant's compensation through the end of the month in which his employment is terminated (and any additional amount as shall be required so that the Consultant's average monthly compensation hereunder through the date of termination of this Agreement is at least $6,800.00). Thereafter, the Company shall have no obligation to the Consultant to make any further payments to him, his estate or legal representatives hereunder. This does not affect other pension, insurance or medical benefits paid by the Company to which the Consultant is entitled. 6. Non-Disclosure of Confidential Information and Non-Competition. (a) The Consultant acknowledges that it is the policy of the Company to maintain as secret and confidential certain valuable and unique information heretofore and hereafter acquired, developed or used by the Company relating to the business, operations, employees, suppliers, dealers and customers of the Company, which gives the Company or its subsidiaries a competitive advantage in is industry (all such information is hereinafter referred to as "Confidential Information"). The parties recognize that the services to be performed by the Consultant pursuant to this Agreement are special and unique, and that by reason of his prior employment and present engagement by the Company, the Consultant has acquired and will acquire Confidential Information. The 2 3 Consultant recognizes that all such Confidential Information is the property of the Company. In consideration of the Consultant's retention by the Company pursuant to this Agreement, the Consultant agrees that: (i) except as required by his duties hereunder, the Consultant shall never, directly or indirectly use, publish, disseminate or otherwise disclose any Confidential Information obtained during the term of this Agreement without the prior written consent of the Board of Directors of the Company, it being understood that the provisions of this subparagraph (a)(i) shall survive the termination of this Agreement; and (ii) during the term of this Agreement, the Consultant shall exercise all due and diligent precautions to protect the integrity of business plans, customer, supplier and dealer lists, statistical data and compilations, agreements, contracts, manuals or other documents of the Company and embodying any Confidential Information and, upon termination of this Agreement the Consultant shall return to the Company any and all such documents (and copies thereof) which are in the possession or under the control of the Consultant. The Consultant agrees that the provisions of this Paragraph (a) are reasonably necessary to protect the proprietary rights of the Company and the subsidiaries of the Company in the Confidential Information and their trade secrets, good will and reputation. (b) During the term of this Agreement, the Consultant shall not, in any manner, be engaged, directly or indirectly, within the United States of America (its territories and possessions) and Canada (or for such lesser geographical area as may be determined by a court of law or equity to be a reasonable limitation on the competitive activities of the Consultant) as an employee, partner, officer, director, representative, consultant, agent or stockholder of any corporation, partnership, proprietorship or other form of business entity which is competitive with the Company. The Consultant shall not, either during the term of this Agreement, seek to persuade any director or officer or employee of the Company or any subsidiary or affiliate of the Company, to discontinue that individual's status or employment with the Company, nor to become employed in any activity similar to or competitive with the activities of the Company or any subsidiary or affiliate of the Company, nor will the Consultant hire or retain any such person, nor will he solicit (or cause or authorize), directly or indirectly, to be solicited, for or on behalf of himself or any third party, any competitive business from others who are, at any time within three (3) years prior to the cessation of his employment hereunder, customers of the Company or any subsidiary or affiliate of the Company. Not withstanding the foregoing, the Consultant may provide advisory services to other companies in a business similar to that of the Company. (c) The Consultant acknowledges that any breach or threatened breach or alleged breach or threatened alleged breach by the Consultant of any of the provisions of Paragraph 6 of this Agreement can cause irreparable harm to the Company, for which the Company would have no adequate remedy at law. In the event of a breach or threatened breach or an alleged breach or alleged threatened breach by the Consultant of any of the provisions of Paragraph 5, the Company, in addition to any and all other rights and remedies it may have under this Agreement or otherwise, may immediately seek any judicial action which the Company may deem necessary or advisable including, without limitation, the obtaining of temporary and preliminary injunctive relief. 7. Notices Any notice, request, instruction or other document to be given under this Agreement to any party hereunder by any other party hereunder shall be in writing and delivered personally, or sent by registered or certified mail, postage prepaid, to the following addresses: 3 4 If to the Company: United Refining Company 15 Bradley Street Warren, Pennsylvania 16365 Attention: Myron Turfitt If to the Consultant: Mr. Thomas C. Covert 29439 Summit Ridge Drive Fair Oaks Ranch, Texas 78015 or to such other address as a party hereto may hereafter designate in writing to the other party, provided that any notice of a change of address shall become effective only upon receipt thereof. 8. Benefit: Assignment. (a) This Agreement shall be binding upon and shall inure to the benefit of the Company, its successors and assigns, and the Consultant and his heirs, legal representatives, successors and permitted assigns. (b) This Agreement is personal to the Consultant and the Consultant may not assign any of this rights or delegate any of his duties under this Agreement. 9. Entire Agreement: Amendment. This Agreement contains the entire understanding between the Company and the Consultant with respect to the retention of the Consultant and supersedes all prior negotiations and understandings between the Company and the Consultant with respect to the retention of the Consultant by the Company. This Agreement may not be amended or modified except by a written instrument signed by both the Company and the Consultant. 10. Severability. In the event any one or more provisions of this Agreement is held to be invalid or unenforceable, such illegality or unenforceability shall not affect the validity or enforceability of the other provisions hereof, and such other provisions shall remain in full force and effect, unaffected by such invalidity or unenforceability. 11. Governing Law. This Agreement shall be construed and governed in accordance with the laws of the Commonwealth of Pennsylvania. 4 5 12. Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF the parties hereto have caused this Agreement to be executed as of the day and year first above written. UNITED REFINING COMPANY By: /s/ JOHN A. CATSIMATIDIS ---------------------------- John A. Catsimatidis /s/ THOMAS C. COVERT ------------------------------- Thomas C. Covert 5 EX-10.16 4 UNITED REFINING COMPANY 1 EXHIBIT 10.16 DEFERRED COMPENSATION AGREEMENT THIS AGREEMENT is made effective as of September 1, 1996, by and between United Refining Company, a Pennsylvania corporation with principal offices at 15 Bradley Street, Warren, Pennsylvania 16365 (the "Company"), and Thomas C. Covert (the "Executive"). WHEREAS, the Executive is a key employee of the Company, possessing substantial knowledge and experience in the business of the Company, and such knowledge and experience have been, and continue to be, of great value to the Company in the conduct of its business; WHEREAS, the Executive has been employed by the Company as the Vice President and Chief Operating Officer for many years, during which time, based upon his performance, his compensation has been less than which was otherwise deserved; WHEREAS, the Company desires to secure for itself the continued services of Executive until Executive retires, and to provide certain deferred compensation benefits for Executive, to become payable upon his retirement, in consideration of the Executive's past and future services to the Company; NOW THEREFORE, in consideration of the above premises and the agreements and covenants hereinafter contained, the Company and the Executive, intending to be legally bound, mutually agrees as follows: 1. DEFINITIONS. For the purposes of this Agreement, the following terms shall be defined as set forth in this Section 1. Retirement Age: "Retirement Age" shall mean the date upon which the Executive elects to retire; provided that Executive remains continuously in the employ of the Company from the date hereof until such date. 2. RETIREMENT OF EXECUTIVE. Deferred Compensation. Upon attaining Retirement Age, Executive shall retire, whereupon the Company shall pay the Executive a joint and fifty percent survivor retirement benefit of Twelve Thousand Three Hundred Three Dollars and Eighty-Four Cents ($12,303.84) per year payable in equal monthly installments of One Thousand Twenty Five Dollars and Thirty-Two Cents $(1,025.32) for a period ending at the end of the month in which Executive's death occurs and a fifty percent survivor benefit payable to your spouse, if she survives you, for her life ending at the end of the month in which her death occurs. The fifty percent survivor benefit shall equal Six Thousand One Hundred Fifty-One Dollars and Ninety-Two Cents ($6,151.92) per year and shall continue to be paid in equal monthly installments of Five Hundred Twelve Dollars and Sixty-Six Cents ($512.66). The retirement benefits will be payable on the 15th day of the month with the first payment due on the first day of the month following the date on which the Executive reaches Retirement Age. 3. NONDISCLOSURE, NONCOMPETITION AND NONINTERFERENCE 3.1 Nondisclosure: Executive shall at all times hold in strictest confidence any and all confidential information within his knowledge concerning the products, services, businesses, suppliers, and customers of the Company. Such confidential information includes, without limitation, financial information, sales and distribution information, price lists, customer lists and technical information, all to the extent that such information is not intended by the Company for dissemination to the general public. 3.2 Noncompetition. While employed by the Company, and for ten (10) years thereafter, Executive shall not, without the prior written consent of the Company, either directly or indirectly operate or perform any advisory or consulting services for, invest in (other than stock in a publicly-held corporation which is 1 2 traded on a recognized securities exchange or over the counter, provided that the ownership of such equity interest does not give Executive the right to control or substantially influence the policy or operational decisions of such corporation, or otherwise become associated with in any capacity, any corporation, partnership, organization, proprietorship, or other entity which develops, manufactures, prepares, sells or distributes products or performs services then in competition with the products developed, manufactured, prepared, sold or distributed or services performed by the Company within those geographical areas in which the Company then develops, manufactures, sells or distributes such products or performs such services. 3.3 Noninterference. Executive shall not, at any time, without the prior written consent of the Company, directly or indirectly induce or attempt to induce any employee, agent or other representative or associate of the Company to terminate his or its relationship with the Company, or in any way directly or indirectly interfere with such a relationship or any relationship between the Company and any of its suppliers or customers. 3.4 Remedy for Certain Breaches. Executive acknowledges that the restrictions on his activities under this Section 3 are required for the reasonable protection of the Company. Executive further acknowledges and agrees that a breach of these continuing damage to the Company for which there will be no adequate remedy at law and agrees that in the event of any said breach, the Company, and its successors and assigns, shall be entitled to injunctive relief and to such further relief as is proper in the circumstances. 4. MISCELLANEOUS 4.1 No Assignment Without Consent of Company. Except as set forth herein, no rights of any kind under this Agreement shall, without the written consent of the Company, be transferable or assignable by the Executive, the Executive's Spouse or any other person, or be subject to alienation, encumbrance, garnishment, attachment, execution or levy of any kind, voluntary or involuntary. This Agreement shall be binding upon and shall inure to the benefit of the Company, the Executive, the Executive's Spouse and their permitted successors and assigns. 4.2 Interpretation. All questions of interpretation, construction or application arising under this Agreement shall be decided by the Board of Directors of the Company, whose decision shall be final and conclusive upon all persons. 4.3 Savings Clause. In the event that any provision or term of this Agreement is determined by any judicial, quasi-judicial or administrative body to be void or not enforceable for any reason, it is the agreed upon intent of the parties hereto that all other provisions or terms of the Agreement shall remain in full force and effect and that the Agreement shall be enforceable as if such void or nonenforceable provision or term had never been a part hereof. In addition, if any provision continued in Section 3 hereof is determined by any judicial, quasi-judicial or administrative body to be void or not enforceable for any reason, such body is hereby authorized and directed by the parties hereto to exercise its discretion in reforming such provision for the purpose of imposing nondisclosure, noncompetition and noninterference covenants on the Executive that are reasonable under the circumstances and enforceable by the Company. 4.4 No Rights In Any Property of Company. The undertakings of the Company herein constitute merely the unsecured promise of the Company to make the payments as provided for herein. No property of the Company is or shall, by reason of this Agreement, be held in trust for the Executive, or any other person, and neither the Executive or any other person shall have by reason of this Agreement, any rights, title or interest of any kind in or to any property of the Company. 4.5 Governing Law. This Agreement is executed in and shall be construed in accordance with and governed by the laws of the State of Pennsylvania, without regard to conflict of laws principles. 4.6 Employment of Executive by Company. Nothing herein shall be construed as an offer or commitment by the Company to continue the Executive's employment with the Company for any period of time. 2 3 IN WITNESS WHEREOF, the parties hereto have hereunto set their hands as of the day and year first above written. United Refining Company By: /s/ MYRON L. TURFITT --------------------------------------- Myron L. Turfitt, President /s/ THOMAS C. COVERT --------------------------------------- Thomas C. Covert 3 EX-27.1 5 UNITED REFINING COMPANY WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S FORM 10-K FOR THE FISCAL YEAR ENDED AUGUST 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT. 1,000 12-MOS AUG-31-1998 SEP-01-1997 AUG-31-1998 26,400 0 27,017 405 55,124 121,292 256,895 58,918 342,579 63,430 201,026 0 0 0 45,237 342,579 758,623 758,623 667,899 75,064 0 259 23,055 (12,832) (5,132) (7,700) 0 0 0 (7,700) 0 0
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