10-K405 1 j9145102e10-k405.txt UNITED REFINING COMPANY & CO -FILERS 10-K405 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 THE FISCAL YEAR ENDED AUGUST 31, 2001 ( ) 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 29, 2001, 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
TABLE OF ADDITIONAL REGISTRANTS -------------------------------- ------------------------ ------------------------- --------------------- --------------------- State of Other Primary Standard IRS Employer Jurisdiction of Industrial Identification Commission File Name 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 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, 2001, the Company operated 302 units, of which, 185 units are owned, 68 units are leased and the remaining stores are operated under a management agreement. For the year ended August 31, 2001 (sometimes referred to as "fiscal 2001"), approximately 69% and 25% 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 the fiscal year ended August 31, 2001, the Company had total revenues of approximately $1.1 billion, of which approximately 52% were derived from gasoline sales, approximately 39% were from sales of other petroleum products and approximately 9% were from sales of merchandise and other revenue. The Company's capacity utilization rates have ranged from approximately 90% to approximately 100% over the last five years. In fiscal 2001, approximately 70% 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 it's refinery. For example, in Buffalo, New York over its last five fiscal years, the Company has experienced approximately 2.0 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 Enbridge Pipe Line system. 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. 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. 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 its primary market area. The Company's primary market area is western New York and northwestern Pennsylvania and its core market area encompasses its Warren County base and the eight contiguous counties in New York and Pennsylvania. The Company's retail gasoline and merchandise sales are split approximately 60% / 40% between rural and urban markets. Margins on gasoline sales are traditionally higher in rural markets, while gasoline sales volume is greater in urban markets. The Company's urban markets include Buffalo, Rochester and Syracuse, New York and Erie, Pennsylvania. As of August 31, 2001, the Company operated 302 retail units, of which 170 are located in New York, 123 in Pennsylvania and 9 in Ohio. In fiscal 2001, approximately 69% of the refinery's gasoline production was sold through the Company's retail network. In addition to gasoline, all units sell convenience merchandise, 36 are quick serve restaurants (QSR's) including franchise operations and seven 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. 3 RECENT DEVELOPMENTS During May 2001, the Company entered into an agreement to acquire the business of Country Fair, Inc. and its affiliate. Country Fair, Inc. is headquartered in Erie, PA and is a closely held private company. Country Fair, Inc. operates 67 convenience stores throughout northwestern Pennsylvania, southwestern New York, and eastern Ohio; consequently these stores fit well within United's retail marketing strategy. The stores will continue to be operated as "Country Fair" as a subsidiary of United Refining Company. Closing date for this transaction is presently anticipated to occur during the second quarter of fiscal year 2002. This transaction is subject to certain conditions. On September 29, 2000, the Company sold 42 retail units to an affiliate for the sum of $23,870,000. The excess of the sales price over the net historic cost of the assets and liabilities of $9,498,000 (net of income taxes) was credited to additional paid-in capital. Net revenues for these 42 retail units for the fiscal year ended August 31, 2000 were approximately $92 million. Concurrent with the asset sale, the Company entered into a management agreement with an affiliate to operate and manage the retail units. The Company's Board of Directors received a fairness opinion regarding the entire transaction's fairness to the Company from a financial point of view. Effective June 1, 2001, the Company sold certain intangible assets of Vulcan Asphalt Refining Company (a division of United Refining Company) to an unrelated entity and realized a $3,000,000 gain on the transaction. Concurrent with the sale, the Company entered into a 50% joint venture with the entity for the marketing of asphalt products. This joint venture is accounted for using the equity method of accounting. INDUSTRY OVERVIEW The Company is a regional refiner and marketer located primarily in Petroleum Administration for Defense District I ("PADD I"). As of January 1, 2001, there were 16 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 during calendar year 2000 in PADD I averaged 5.9 million bpd, representing approximately 30% of U.S. demand based on industry statistics reported by the U.S. Energy Information Administration (the "EIA"). According to the Lundberg Letter, an industry newsletter, total gasoline consumption in the region grew by approximately 1.0% during 2000. 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. The Company believes that domestic refining capacity utilization is close to maximum sustainable limits because of the existing high throughput coupled with a minimal change in refining capacity. 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. 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. 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. More specifically, the Company intends to: - Maximize the transportation cost advantage afforded the Company by its geographic location by increasing retail and wholesale market shares within its primary market area. - Expand sales of higher margin specialty products such as jet fuel, premium diesel, roofing asphalt and Strategic Highway Research Program ("SHRP") specification paving asphalt. 4 - 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. - Continue to investigate strategic acquisitions and capital improvements to its existing facilities. REFINING OPERATIONS The Company's refinery is located on a 92-acre site in Warren, Pennsylvania. The refinery has a rated capacity of 65,000 bpd of crude oil processing. The refinery averaged saleable production of approximately 63,900 bpd during fiscal 2000 and approximately 62,800 bpd during fiscal 2001. This minor reduction is attributable to a decline in refinery production resulting from the scheduled shutdown of certain refinery processing units for maintenance during portions of October 2000. 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. 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 2001, approximately 69% of the Company's gasoline production was sold through its retail network and the remaining 31% of such production was sold to wholesale customers. Middle distillates include kerosene, diesel fuel, heating oil (No. 2 oil) and jet fuel. In fiscal 2001 the Company sold approximately 83% of its middle distillate production to wholesale customers and the remaining 17% at its retail units, primarily at its seven 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 five fiscal years due to the Company's ability and decision to process a larger amount of less costly higher sulfur content crude oil in order to realize higher overall refining margins. 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 5 treated naphtha is then distilled into light and heavy naphtha at a prefractionator. Light naphtha is then sent to an isomerization unit and heavy naphtha is sent to a reformer in each case for octane enhancement. The isomerization unit converts the light naphtha catalytically into a gasoline component with 83 octane. The reformer unit converts the heavy naphtha into another gasoline component with up to 94 octane depending upon the desired octane requirement for the grade of gasoline to be produced. The reformer also produces as a co-product all the hydrogen needed to operate hydrotreating units in the refinery. Raw kerosene or heating oil is treated with hydrogen at a distillate hydrotreater to remove sulfur and make finished kerosene, jet fuels and No. 2 fuel oil. A new distillate hydrotreater built in 1993 also treats raw distillates to produce low sulfur diesel fuel. The long molecular chains of the heavy atmospheric and vacuum distillates are broken or "cracked" in the fluidized catalytic cracking unit and separated and recovered in the gas concentration unit to produce fuel gas, propylene, butylene, LPG, gasoline, light cycle oil and clarified oil. Fuel gas is burned within the refinery, propylene is fed to a polymerization unit which polymerizes its molecules into a larger chain to produce an 87 octane gasoline component, butylene is fed into an alkylation unit to produce a gasoline component and LPG is treated to remove trace quantities of water and then sold. Clarified oil is burned in the refinery or sold. Various refinery gasoline components are blended together in refinery tankage to produce 87 octane and 93 octane finished gasoline. Likewise, light cycle oil is blended with other distillates to produce low sulfur diesel and No. 2 fuel oil. The Company's refining configuration allows the processing of a wide variety of crude oil inputs. During the past five years the Company's inputs have been of Canadian origin and range from light low sulfur (38 degrees API, 0.5% sulfur) to high sulfur heavy asphaltic (21 degrees API, 3.5% sulfur). The Company's ability to market asphalt enables it to purchase selected heavier crude oils at a lower cost. Supply of Crude Oil Even though the Company's crude supply is currently nearly all Canadian, it is not dependent on this source alone. Within 60 days, the Company could shift up to 60% 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. Sixty-four 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-six percent of the Company's crude contracts are on an annual basis (with month to month pricing provisions). As of August 31, 2001, the Company had supply contracts with 20 different suppliers for an aggregate of 55,400 bpd of crude oil. The Company has contracts with three vendors amounting to 51% of daily crude oil supply (none more than 16,000 barrels per day). 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 Enbridge Pipe Line in West Seneca, New York, which is near Buffalo. The Enbridge Pipe Line system provides access to most North American and foreign crude oils through three primary routes: (i) Canadian crude oils are transported eastward from Alberta and other points in Canada; (ii) various mid-continent crude oils from Texas, Oklahoma and Kansas are transported northeast along the Cushing-Chicago Pipeline (foreign crude oils shipped on the Seaway system can also access this route), which connects to Enbridge at Griffith, Indiana; and (iii) foreign crude oils unloaded at the Louisiana Offshore Oil Port are transported north via the Capline and Chicago pipelines which connect to the Enbridge 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 70,000 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 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 of crude can be stored at the refinery. 6 Refinery Turnarounds Turnaround cycles vary for different refinery units. A planned turnaround of each of the two major refinery units (the crude unit and the fluid catalytic cracking unit) is conducted approximately every three or four years, during which time such units are shut down for internal inspection and repair. A turnaround, which generally takes two to four weeks to complete in the case of the two major refinery units, consists of a series of moderate to extensive maintenance exercises. Turnarounds are planned and accomplished in a manner that allows for reduced production during maintenance instead of a complete plant shutdown. The Company defers the cost of turnarounds when incurred and amortizes the costs to operations on a straight-line basis over the period of benefit. Thus, the Company charges costs to production over the period most clearly benefited by the turnaround. 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 it has steadily expanded its distribution network over the years. The Company maintains an approximate 60% / 40% split between sales at its rural and urban units. The Company believes this to be advantageous, balancing the higher gross margins and lower volumes often achievable due to decreased competition in rural areas with higher volumes and lower gross margins in urban areas. The Company believes that its rural convenience store units provide an important alternative to traditional grocery store formats. In fiscal 2001, approximately 69% and 25% of the Company's gasoline and diesel fuel production, respectively, was sold through this retail network. Effective June 1, 2001, the Company sold certain intangible assets of Vulcan Asphalt Refining Company (a division of United Refining Company) to an unrelated entity and realized a $3,000,000 gain on the transaction. Concurrent with the sale, the Company entered into a 50% joint venture with the entity for the marketing of asphalt products. This joint venture is accounted for using the equity method of accounting. Retail Operations As of August 31, 2001 the Company operated a retail marketing network (including those stores operated under a management agreement) that includes 302 retail units, of which 170 are located in western New York, 123 in northwestern Pennsylvania and 9 in eastern Ohio. The Company owns 185 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. Thirty-six of such units are QSR's 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 and one has a truck repair garage. As of August 31, 2001, the average sales areas of the Company's convenience stores, limited gasoline stations, truckstops and other stores were 2,000, 200, 1,500 and 2,500 square feet, respectively. Total merchandise sales for fiscal year 2001 were $68.7 million, with a gross profit of approximately $18.2 million. Over the last five fiscal years, merchandise gross margins have averaged approximately 28.4% and the Company believes that merchandise sales will continue to remain a stable source of gross profit. 7 Merchandise Supply The Company's primary merchandise vendor is Tripifoods, which is located in Buffalo, New York. During fiscal 2001, the Company purchased approximately 98% 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 coffee, 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. Wholesale Marketing and Distribution The Company sold in fiscal year 2001, on a wholesale basis, approximately 46,500 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 2001, the Company's production of gasoline, distillate and asphalt sold at wholesale was 31%, 83% and 100%, respectively. The Company sells 98.8% of its wholesale gasoline and distillate products from its refinery in Warren, PA and its Company-owned and operated product terminals. The remaining 1.2% are sold through third-party exchange terminals. The Company's wholesale gasoline customer base includes 50 branded dealer/distributor units operating under the Company's proprietary "Keystone(R)" and "Kwik Fill(R)" brand names. Long-term dealer/distributor contracts accounted for approximately 16% of the Company's wholesale gasoline sales in fiscal 2001. Supply contracts generally range from three to five years in length, with 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 2.0 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 210 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. In fiscal 2001, the Company sold 6.6 million barrels of asphalt while producing 5.7 million barrels. This difference is primarily attributed to the Company's purchasing product for resale as part of its wholesale distribution network. 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 8 network allows the Company to enter into product exchanges. The Company uses a network of six terminals to store and distribute refined products. This network provides gasoline, distillate and asphalt storage capacities (in thousands of barrels) of approximately 600, 850 and 1,650 barrels respectively as of August 31, 2001. During fiscal 2001, approximately 92% of the Company's refined products were transported from the refinery via truck transports, with the remaining 8% 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(R) 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 approximately 39 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 Clean Air Act ("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 Clean Air Act ("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 United States Environmental Protection Agency ("USEPA") issued rules under the CAA which became effective in October 1993 which limit the sulfur and aromatics content of diesel fuels nationwide. The rules required refiners to reduce the sulfur in on-highway diesel fuel from 0.5 Wt.% to 0.05 Wt.%. The Company meets these specifications of the CAA for all of its on-highway diesel production. The Company's on-road diesel represented 65% of its total distillate sales in fiscal 2001. 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 ("RFG") 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 are within the Company's marketing area. However, the CAA enabled the USEPA 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. 9 Conventional Gasoline Quality In addition to reformulated and oxygenated gasoline requirements, the USEPA 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. In February 2000, USEPA issued a final rule requiring the reduction of the sulfur content of gasoline to 30 parts per million (PPM). Many refiners will have to achieve this reduction by January 2004, but some smaller refiners and those in certain Western states will be allowed to phase down sulfur more slowly, reaching the 30 PPM level as late as January 2008. Although United Refining Company is of a comparable size to some of the small refiners granted more time to comply, United was not classified as a small refiner for this purpose, nor are the Company's operations located in any of the states given additional time. However, the rule allows individual refiners to seek additional time to comply on a case by case basis at the discretion of USEPA, and the Company applied for additional time on August 29, 2000. USEPA granted the Company's request for additional time in which to phase down gasoline sulfur to 30 PPM until January 2008. The Company anticipates that a material investment of funds will be required before 2008 to comply with this rule. Underground Storage Tank Upgrade As of December 22, 1998, the Company completed a tank replacement/retrofitting program at its retail units to comply with regulations promulgated by the USEPA. 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 required 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). The total cost of the program was over $11.0 million and resulted in full compliance with the USEPA regulations. COMPETITION Petroleum refining and marketing is highly competitive. The Company's major retail competitors include British Petroleum, Citgo, Amerada Hess, Mobil and Sunoco, Inc. With respect to wholesale gasoline and distillate sales, the Company competes with Sunoco, Inc., 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 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, 2001 the Company had approximately 1,652 full-time and 1,400 part-time employees. Approximately 2,409 persons were employed at the Company's retail units, 382 persons at the Company's refinery, Kiantone Pipeline and at terminals operated by the Company, with the remainder at the Company's office in Warren, 10 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 209, 7, 20 and 19 employees, respectively. The agreements expire on February 1, 2006, January 31, 2003, June 25, 2002 and July 31, 2005, 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 50 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. FINANCING 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, Stearns & 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 terms of the Series B Senior Notes are identical in all material respects to the form and terms of the Series A Senior Notes except that 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. During the fiscal year ending August 31, 2001, the Company purchased $19,865,000 of these notes for $14,185,000 in cash. An extraordinary gain of $3,029,000 was recorded as a result of the early retirement of debt, consisting of $5,680,000 less $470,000 of associated debt issuance costs, net of a tax charge of $2,181,000. ITEM 2. PROPERTIES. The Company owns a 92-acre site in Warren, Pennsylvania upon which it operates its refinery. The site also contains an office building housing the Company's principal executive office. The Company owns various real property in the states of Pennsylvania, New York and Ohio as of August 31, 2001, upon which it operates 185 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. 11 The Company also leases an aggregate of 68 sites in Pennsylvania, New York and Ohio upon which it operates retail units. As of August 31, 2001, the leases had an average remaining term of 35 months, exclusive of option terms. ITEM 3. LEGAL PROCEEDINGS. 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 USEPA has also issued a Notice of Violation dated October 18, 1999 asserting certain additional claims (collectively the "Additional Claims"). The Additional Claims allege certain violations of statutory and regulatory law in connection with (a) certain construction activities with the Company's Warren, Pennsylvania physical plant; and (b) operation by the Company of certain equipment within the Company's physical plant. The Claims and Additional 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 and Additional Claims seek civil money penalties in accordance with USEPA's penalty policies in an amount yet to be determined. Until the scope of the Additional Claims is known, the Company is unable to determine the aggregate effect of the Claims and Additional Claims upon its operations and consolidated financial condition. The Company has been named as a defendant in several lawsuits involving the marketing of petroleum products containing Methyl Tertiary Butyl Ether ("MTBE") and the alleged contamination of groundwater with MTBE within the State of New York. A portion of the litigation, together with other similar cases involving other parties, has been centralized before the U.S. District Court for the Southern District of New York pursuant to Transfer Order of the Judicial Panel on Multidistrict Litigation filed October 20, 2000. The remainder of the litigation is filed in New York state courts. The complaints seek, inter alia, compensatory and punitive damages and certification as a class action. Preliminary discovery has commenced and is continuing. No specific monetary demand has been made. Until the scope of the MTBE related claims is known, the Company is unable to determine their aggregate effect upon its operations and consolidated financial position. 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 these 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. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. NONE ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS. NONE 12 ITEM 6. SELECTED FINANCIAL DATA.
Year Ended August 31, 1997 1998 1999 2000 2001 ---- ---- ---- ---- ---- (Dollars in thousands) Income Statement Data: Net sales (2) $ 872,361 $ 759,525 $ 762,843 $ 1,123,439 $ 1,108,565 Gross margin (1) (2) 165,166 152,466 166,824 200,379 216,701 Refinery operating expenses (3) 60,746 60,840 60,990 70,812 90,271 Selling, general and administrative expenses 73,200 75,064 77,487 80,390 73,234 Operating income (2) 22,990 8,242 19,305 39,009 42,483 Interest expense 17,509 22,188 22,377 22,962 21,051 Interest income 1,296 2,701 1,027 288 1,606 Other income (expense) (2) (341) (1,587) (560) (2,822) 1,836 Costs associated with terminated acquisition - - - - (1,300) Equity in net earnings of affiliate - - - - 516 Income (loss) before income tax expense (benefit) 6,436 (12,832) (2,605) 13,513 24,090 Income tax expense (benefit) 2,588 (5,132) (1,006) 6,828 9,840 Income (loss) before extraordinary item and cumulative effect of accounting change 3,848 (7,700) (1,599) 6,685 14,250 Extraordinary item, net of tax (6,653) - - - 3,029 Cumulative effect of accounting change, net of tax - - 4,783 - - Net income (loss) (2,805) (7,700) 3,184 6,685 17,279 Balance Sheet Data (at end of period): Total assets 346,392 342,579 349,240 340,368 355,557 Total debt 201,272 201,309 206,173 201,111 181,100 Total stockholder's equity 52,937 45,237 48,421 55,106 75,966
-------------------------------------------- (1) Gross margin is defined as gross profit plus refining operating expenses. Refinery 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. (2) Certain amounts of prior year's consolidated financial statements have been reclassified to conform to the presentation in the current year. (3) Refinery operating expenses include refinery fuel produced and consumed in refinery operations and priced at purchased natural gas price. Refinery fuel consumption per barrel of refinery throughput has remained constant but fuel expense has increased with increased natural gas price. Refinery fuel expense for produced and purchased fuel is $25,268, $24,603, $21,260, $31,096 and $48,500 for fiscal years 1997, 1998, 1999, 2000 and 2001 respectively. 13 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 2001, approximately 69% and 25% of the Company's gasoline and diesel fuel production, respectively, was sold through the Company's network of service stations and truckstops. The balance of the Company's refined products were sold to wholesale customers. In addition to transportation and heating fuels, primarily gasoline and distillate, the Company is a major regional wholesale marketer of asphalt. The Company also sells convenience merchandise at convenience stores located at most of its service stations. The Company's profitability is influenced by fluctuations in the market prices of crude oils and refined products. Although the Company's product sales mix helps to reduce the impact of large short-term variations in crude oil price, net sales and costs of goods sold can fluctuate widely based upon fluctuations in crude oil prices. Specifically, the margins on wholesale gasoline and distillate tend to decline in periods of rapidly declining crude oil prices, while margins on asphalt and retail gasoline and distillate tend to improve. During periods of rapidly rising crude oil prices, margins on wholesale gasoline and distillate tend to improve, while margins on asphalt and retail gasoline and distillate tend to decline. Gross margins on the sale of convenience merchandise have been between 25% and 31% 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 in 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 costs 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. RECENT DEVELOPMENTS The Company's results in fiscal 2001 were impacted by the volatility of worldwide crude oil prices, as indicated by crude oil contracts traded on the New York Mercantile Exchange (NYMEX). NYMEX crude prices increased from a little under $25/BBL in December 1999 to over $34/BBL in December 2000, but decreased to a low of mid-$26/BBL in August 2001. For all of fiscal 2001, NYMEX crude oil prices averaged approximately $30/BBL versus approximately $27/BBL for fiscal 2000 contrasting to the approximately $15/BBL for fiscal 1999. Oil prices have faced downward pressure as a result of the September 11 terrorist attacks in the US, with market concerns of softening oil demand outweighing the potential risk to Mideast crude supplies. Current analyst estimates predict lower prices in 2002 compared to 2001. Although high worldwide crude oil prices have decreased, the Company continues to benefit from its ability to process a significant percentage of heavy sulfur grades of crude oil, as prices continue to stimulate production of these crude oil grades and encourage crude producers to continue a strong discount for these heavy high sulfur grades versus the light low sulfur crude oil traded via NYMEX contracts. During the fiscal year ended August 31, 2001, industry-wide margins on gasoline and distillate, as indicated by the difference between the prices of crude oil contracts traded on the New York Mercantile Exchange (NYMEX) and the prices of NYMEX gasoline and heating oil contracts, improved significantly for heating oil (120%) while decreasing slightly for gasoline (-2%), primarily for the months of April and May. This contributed to improved gross profit, operating income and net income for the Company, as was the case for many petroleum refiners. The improved margins have been attributed to an intermediate to long term shortage of refining capacity, particularly in the United States, as well as to shorter term factors including low levels of product inventories and operating problems at several U.S. refineries during this period. For October, industry margins as indicated by NYMEX 14 contracts fell from the strong levels seen during the third quarter and early part of the fourth quarter of fiscal year 2001, and in NYMEX trading for November and December, the indicated margins have continued to decrease. A number of industry analysts and government officials continue to express the opinion that there is an intermediate term shortage of U.S. refining capacity which could cause product prices and refinery margins to increase sharply again in the near future. Oil prices have faced downward pressure as a result of the September 11 terrorist attacks in the US, with market concerns of softening oil demand outweighing the potential risk to Mideast crude supplies. The recent uncertainty associated with OPEC production cuts and the pressure on non-OPEC producers will have a significant impact on crude prices for 2002. Analyst indications are that all members desire prices at or above $18/BB to avoid serious budgetary pressure related to the growing demands in their countries to expand economic and social spending. RESULTS OF OPERATIONS Comparison of Fiscal 2001 and Fiscal 2000. Net Sales. Net sales remained constant at approximately $1.1 billion for fiscal 2000 and for fiscal 2001. Retail sales decreased $71.9 million, or 12.2% from $588.4 million to $516.5 million, while wholesale sales increased $57.0 million or 10.7% from $535.0 million to $592.0 million. Retail sales volume was reduced and wholesale sales volume correspondingly increased by the transfer of 50 retail locations to a non-subsidiary affiliate by sale or lease terminations on September 29, 2000. The retail sales decrease was due to a 15.6% decrease in retail petroleum volume and a 15.2% decrease in merchandise sales, partially offset by a 5.5% increase in retail petroleum prices. The wholesale sales increase was due to an 8.3% increase in wholesale volume, as the Company now supplies these affiliate locations on a wholesale basis, partially offset by a 5.3% decrease in wholesale prices. On a same-store basis, excluding prior period retail sales by these 50 locations, same-store retail petroleum volume increased 0.4%, retail petroleum prices increased 6.1%, and retail merchandise sales increased 5.9%. On the same comparable basis, wholesale petroleum volume increased 1.4% and wholesale prices increased 12.1%. Costs of Goods Sold. Costs of goods sold decreased $11.8 million or 1.2% from $993.9 million for fiscal 2000 to $982.1 million for fiscal 2001. Retail costs of goods sold decreased $67.4 million or 13.0% from $517.4 million to $450.0 million, while wholesale costs of goods sold increased $55.8 million or 11.7% from $476.4 million to $532.2 million. The decrease in consolidated costs of goods sold was primarily the result of the strong price discounts received by the Company on heavy high sulfur crude oil grades. These discounts offset an increase in world crude oil prices and a decrease in the value of the Company's working inventories on a market valuation basis, which increased costs of goods sold. The increase in wholesale costs of goods sold was primarily due to the previously discussed sale or lease terminations involving 50 retail locations now owned by a non-subsidiary affiliate, since these locations were supplied on a retail basis for most of the prior year, but are now supplied on a wholesale basis. Costs of goods sold in fiscal 2001 were increased by an approximate $3.9 million decrease in the value of the Company's working inventories. The decrease in the value of the Company's working inventories on a market valuation basis was offset by a $5.1 million reduction in the LIFO reserve, which had the effect of increasing the value of the Company's inventories and reducing costs of goods sold. Operating Expenses. Operating expenses decreased $6.7 million or 7.4% from $90.6 million for fiscal 2000 to $83.9 million for fiscal 2001. This decrease was primarily due to the elimination of station operating expenses associated with the 50 retail locations now owned by a non-subsidiary affiliate and to the reduction of retail overhead expenses by application of payments received from the non-subsidiary affiliate under an agreement by which the Company will manage those locations for the affiliate. These reductions more than offset increased expenses for employee wage and health benefits, depreciation and bad debt expense. Operating Income. Operating income increased $3.4 million from $39.0 million for fiscal 2000 to $42.4 million for fiscal 2001. Retail operating income increased $5.0 million from $2.0 million to $7.0 million, while wholesale operating income decreased $1.6 million from $37.0 million to $35.4 million. The consolidated net income increase was primarily due to an increase in wholesale margins which accompanied an increase in worldwide crude oil prices, partially offset by a reduction of per gallon retail petroleum margins, which typically occur during periods of rapidly increasing crude oil prices. Interest Expense. Net interest expense (interest expense less interest income) decreased $3.3 million from $22.7 million for fiscal 2000 to $19.4 million for fiscal 2001. The decreased net interest expense was primarily due 15 to a reduction in long-term debt resulting from the Company's purchase of outstanding notes during fiscal year 2001, a reduction in borrowings on the Company's revolving credit facility and an increase in interest income earned. Income Taxes. The Company's effective tax rate for fiscal 2001 was approximately 40.9% compared to a rate of 50.5% for fiscal 2000. The higher rate for fiscal 2000 was primarily due to prior year tax audits. Extraordinary Item. During the fiscal year ending August 31, 2001, the Company purchased $19,865,000 of Senior Unsecured Notes for $14,185,000 in cash. An extraordinary gain of $3,029,000 was recorded as a result of the early retirement of debt, consisting of $5,680,000 less $470,000 of associated debt issuance costs, net of a tax charge of $2,181,000. Comparison of Fiscal 2000 and Fiscal 1999. Net Sales. Net sales increased $360.6 million or 47.2% from $762.8 million for fiscal 1999 to $1.1 billion for fiscal 2000. Retail sales increased $150.2 million, or 34.3% from $438.2 million to $588.4 million, while wholesale sales increased $210.4 million or 64.8% from $324.6 million to $535.0 million. Net sales increases were primarily due to price increases of 70.2% and 32.9% for wholesale and retail petroleum, respectively and to 4.9% and 16.4% increases in retail petroleum volume and merchandise sales, respectively, partially offset by a 2.3% decrease in wholesale petroleum volume. The price increases were primarily due to a 78.6% increase in worldwide crude oil prices for fiscal 2000 versus fiscal 1999, as indicated by the prices of NYMEX crude oil contracts. The decrease in wholesale petroleum volume was primarily due to a decrease in crude oil processed at the Company's refinery as the result of the shutdown of certain refinery processing units for maintenance during portions of April and May, 2000. Costs of Goods Sold. Costs of goods sold increased $336.9 million or 51.3% from $657.0 million for fiscal 1999 to $993.9 million for fiscal 2000. Retail costs of goods sold increased $149.6 million or 40.7% from $367.8 million to $517.4 million, while wholesale costs of goods sold increased $187.2 million or 64.7% from $289.2 million to $476.4 million. The increase in consolidated costs of goods sold was primarily the result of the increase in world crude oil prices, partially offset by a 5.0% decrease in crude processing and larger discounts received on heavy, high sulfur crude oil purchases. Costs of goods sold in fiscal 2000 were reduced by the beneficial effect of an increase of approximately $7.2 million in the value of the Company's working inventories. Had the same method been used to value petroleum inventories on August 31, 2000 and on August 31, 1999, the benefit to costs of goods sold from the increase in working inventory would have been approximately $13.4 million for fiscal 2000 versus approximately $10.5 million for fiscal 1999. However, the increase in working inventory value for fiscal 2000 was partially offset by the effect of valuing the Company's inventories on August 31, 2000 under the LIFO cost method, whereas on August 31, 1999, inventories had been valued at market, whereas LIFO had exceeded market. For all the Company's petroleum inventories, including the working inventories, the effect of using the LIFO method was to value the August 31, 2000 inventories approximately $6.2 million lower than if the FIFO method had been used. Operating Expenses. Operating expenses increased $4.1 million or 4.7% from $86.5 million for fiscal 1999 to $90.6 million for fiscal 2000. This increase was primarily due to the increased cost of providing employee health benefits, to retail expenses for sales promotions and credit card processing and to increased depreciation on new capital equipment installed under the Company's Capital Improvement Plan. Increased retail promotions expenses were primarily in connection with a "frequent fueler" program which has been effective in promoting customer loyalty. Increased credit card processing expense was primarily due to increased customer use of major credit cards at stations offering recently installed "Pay at the Pump" service and to higher retail gasoline selling prices which increased the processing fee per transaction. Operating Income. Operating income increased $19.7 million from $19.3 million for fiscal 1999 to $39.0 million for fiscal 2000. Retail operating income decreased $2.9 million from $4.9 million to $2.0 million, while wholesale operating income increased $22.6 million from $14.4 million to $37.0 million. The consolidated net income increase was primarily due to an increase in wholesale margins which accompanied an increase in worldwide crude oil prices, partially offset by a reduction of per gallon retail petroleum margins, which typically occur during periods of rapidly increasing crude oil prices. Interest Expense. Net interest expense (interest expense less interest income) increased $1.3 million from $21.4 million for fiscal 1999 to $22.7 million for fiscal 2000. The increased net interest expense was due to a decrease in interest income earned, as a result of lower balances of restricted cash and investments, and to increased 16 use of the Company's bank revolving credit facility to finance inventories at the higher crude oil and petroleum product prices. Income Taxes. The Company's effective tax rate for fiscal 2000 was approximately 50.5% compared to a rate of 38.6% for fiscal 1999. The higher rate for fiscal 2000 was primarily due to prior year tax audits. LIQUIDITY AND CAPITAL RESOURCES Working capital (current assets minus current liabilities) at August 31, 2001, was $93.2 million and at August 31, 2000 was $69.2 million. The Company's current ratio (current assets divided by current liabilities) was 2.6:1 at August 31, 2001, and was 2.3:1 at August 31, 2000. Net cash provided by operating activities totaled $34.8 million for fiscal 2001 and $8.7 for fiscal 2000. The net cash provided by operating activities for fiscal 2001 was achieved principally from an increase in cash generated by earnings (net income plus depreciation and amortization) of $31.7 million, net decreases in operating assets and liabilities (working capital) of $3.9 million, a change in deferred income taxes of $5.1 million, less a gain on the extinguishment of debt of ($5.2) million and a change in other items of ($.7) million. Net cash provided by investing activities totaled $13.3 million for the year ended August 31, 2001 as compared to net cash used in investing activities of $5.1 million for fiscal 2000. The net cash provided by investing activities for fiscal 2001 resulted from proceeds from asset dispositions of $23.6 million, sale of investment securities of $ 3.5 million, less net capital additions of ($10.1) million and the purchase of investment securities of ($3.7) million. For the fiscal year ended August 31, 2001 and 2000 respectively, cash and cash equivalents included $28.1 million and $2.1 million in government securities and commercial paper. The Company reviews its capital expenditures on an ongoing basis. During fiscal 2001, the Company invested approximately $10.1 million for capital improvements, which were funded from cash flow. The Company currently has budgeted approximately $6.0 million for capital expenditures in fiscal 2002. Maintenance and non-discretionary capital expenditures have averaged approximately $4 million annually over the last three years for the refining and marketing operations. Net cash used in financing activities totaled $20.2 million during fiscal 2001 primarily due to the early retirement of notes outstanding, scheduled principal payments on long-term debt and the payment of dividends. On September 29, 2000, the Company sold 42 retail units to an affiliate for the sum of $23,870,000. The excess of sales price over the net historic cost of the assets and liabilities of $9,498,000 (net of income taxes) was credited to additional paid-in capital. 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 secured revolving credit facility (the "Facility") with PNC Bank, N.A. as Agent Bank. Effective January 8, 2001, the Company renegotiated this facility to provide for an increase in its revolving credit commitment up to $50,000,000. The Facility expires on June 9, 2002 and is secured by certain qualifying cash accounts, accounts receivable, and inventory. 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 effective rate plus 1/2% for base rate borrowings and the LIBOR rate for Euro-Rate borrowings, which was 3.58% as of August 31, 2001. 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 17 to environmental matters cannot be reasonably quantified in many circumstances due to the uncertainties as to required remediation methods and related clean-up cost estimates. The Company cannot predict what additional environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied. SEASONAL FACTORS Seasonal factors affecting the Company's business may cause variation in the prices and margins of some of the Company's products. For example, demand for gasoline tends to be highest in spring and summer months, while demand for home heating oil and kerosene tends to be highest in winter months. As a result, the margin on gasoline prices versus crude oil costs generally tends to increase in the spring and summer, while margins on home heating oil and kerosene tend to increase in winter. INFLATION The effect of inflation on the Company has not been significant during the last five fiscal years. RECENT ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("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, as amended, is effective for all transactions entered into after June 15, 2000. The adoption of Statement 133 in fiscal 2001 did not have a material effect on the Company's financial position or results of operations. In June 2001, the FASB finalized Statements No. 141, "Business Combinations," ("Statement 141") and No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. Statement 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. Statement 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of Statement 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in Statement 141. Statement 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, Statement 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in Statement 142. Statement 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. Statement 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of Statement 142. The Company anticipates that the adoption of SFAS 141 and 142 will not have a material effect on the Company's financial position or results of operations. 18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. N/A 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS PAGE Report of Independent Certified Public Accountants 21 Consolidated Financial Statements: Balance Sheets 22 Statements of Operations 23 Statements of Stockholder's Equity 24 Statements of Cash Flows 25 Notes to Consolidated Financial Statements 26 thru 43 20 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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2001 in conformity with accounting principles generally accepted in the United States of America. BDO Seidman, LLP New York, New York October 26, 2001 21 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
--------------------------------------------------------------------------------------------------------------------------- AUGUST 31, ------------------------------------ 2001 2000 -------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT: Cash and cash equivalents $ 35,224 $ 7,430 Accounts receivable, net 41,937 44,304 Inventories 62,554 61,894 Prepaid expenses and other assets 13,312 8,877 ---------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 153,027 122,505 PROPERTY, PLANT AND EQUIPMENT, NET 190,951 207,746 INVESTMENT IN AFFILIATED COMPANY 1,529 - DEFERRED FINANCING COSTS, NET 4,102 5,497 OTHER ASSETS 5,948 4,620 ---------------------------------------------------------------------------------------------------------------- $ 355,557 $ 340,368 ---------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT: Current installments of long-term debt $ 121 $ 150 Accounts payable 22,206 18,434 Income taxes payable 2,373 538 Accrued liabilities 12,411 12,810 Sales, use and fuel taxes payable 16,686 15,809 Deferred income taxes 4,157 5,571 Amounts due affiliated companies 1,905 - ---------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 59,859 53,312 LONG TERM DEBT: LESS CURRENT INSTALLMENTS 180,979 200,961 DEFERRED INCOME TAXES 17,573 13,103 DEFERRED GAIN ON SETTLEMENT OF PENSION PLAN OBLIGATIONS 1,560 1,775 DEFERRED RETIREMENT BENEFITS 19,356 15,738 OTHER NONCURRENT LIABILITIES 264 373 ---------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 279,591 285,262 ---------------------------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $.10 par value per share - shares authorized 100; issued and outstanding 100 - - Additional paid-in capital 16,648 7,150 Retained earnings 59,318 47,956 ---------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 75,966 55,106 ---------------------------------------------------------------------------------------------------------------- $ 355,557 $ 340,368 ----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 22 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) -------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, ---------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------------------------------ NET SALES (INCLUDES CONSUMER EXCISE TAXES OF $134,218, $158,503 AND $148,007) $ 1,108,565 $ 1,123,439 $ 762,843 COSTS OF GOODS SOLD 982,135 993,872 657,009 ------------------------------------------------------------------------------------------------------------ GROSS PROFIT 126,430 129,567 105,834 ------------------------------------------------------------------------------------------------------------ EXPENSES: Selling, general and administrative expenses 73,234 80,390 77,487 Depreciation and amortization expenses 10,713 10,168 9,042 ------------------------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 83,947 90,558 86,529 ------------------------------------------------------------------------------------------------------------ OPERATING INCOME 42,483 39,009 19,305 ------------------------------------------------------------------------------------------------------------ OTHER INCOME (EXPENSE): Interest income 1,606 288 1,027 Interest expense (21,051) (22,962) (22,377) Other, net 1,836 (2,822) (560) Costs associated with terminated acquisition (1,300) -- -- Equity in net earnings of affiliate 516 -- -- ------------------------------------------------------------------------------------------------------------ (18,393) (25,496) (21,910) ------------------------------------------------------------------------------------------------------------ INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 24,090 13,513 (2,605) ------------------------------------------------------------------------------------------------------------ INCOME TAX EXPENSE (BENEFIT): Current 4,700 2,330 (194) Deferred 5,140 4,498 (812) ------------------------------------------------------------------------------------------------------------ 9,840 6,828 (1,006) ------------------------------------------------------------------------------------------------------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND EXTRAORDINARY ITEM 14,250 6,685 (1,599) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES OF $3,122 -- -- 4,783 EXTRAORDINARY ITEM, NET OF TAXES OF $2,181 3,029 -- -- ------------------------------------------------------------------------------------------------------------ NET INCOME $ 17,279 $ 6,685 $ 3,184 ============================================================================================================
See accompanying notes to consolidated financial statements. 23 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 August 31, 1998 100 $ - $ 7,150 $ 38,087 $ 45,237 Net income - - 3,184 3,184 ----------------------------------------------------------------------------------------------------------------- Balance at August 31, 1999 100 - 7,150 41,271 48,421 Net income - - 6,685 6,685 ----------------------------------------------------------------------------------------------------------------- Balance at August 31, 2000 100 - 7,150 47,956 55,106 Net income - - 17,279 17,279 Dividends - (5,917) (5,917) Excess of selling price over historical cost of net assets sold to an affiliated company - 9,498 - 9,498 ----------------------------------------------------------------------------------------------------------------- Balance at August 31, 2001 100 $ - $ 16,648 $ 59,318 $ 75,966 -----------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 24 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
--------------------------------------------------------------------------------------------------------- YEAR ENDED AUGUST 31, ------------------------------------------- 2001 2000 1999 --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 17,279 $ 6,685 $ 3,184 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Cumulative effect of accounting change -- -- (7,905) Depreciation and amortization 14,429 13,492 12,143 Post-retirement benefits 3,618 1,683 1,705 Change in deferred income taxes 5,140 4,498 2,311 Gain on extinguishment of debt (5,210) -- -- (Gain) loss on asset dispositions 382 621 (783) Cash provided by (used in) working capital items 3,865 (17,328) (24,489) Equity in net earnings of affiliate (516) -- -- Other, net (4,228) (920) 13 --------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS 17,480 2,046 (17,005) --------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 34,759 8,731 (13,821) --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Decrease in restricted cash and cash equivalents -- -- 15,289 and investments Purchase of investment securities (3,714) -- -- Sale of investment securities 3,497 -- -- Additions to property, plant and equipment (10,052) (5,900) (26,047) Proceeds from asset dispositions 23,550 807 2,417 --------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 13,281 (5,093) (8,341) --------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Dividends (5,917) -- -- Net (reductions) borrowings on revolving credit facility -- (5,000) 5,000 Principal reductions of long-term debt (14,329) (235) (313) Proceeds from issuance of long-term debt -- 152 -- Deferred financing costs -- (50) -- --------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (20,246) (5,133) 4,687 --------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 27,794 (1,495) (17,475) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 7,430 8,925 26,400 --------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 35,224 $ 7,430 $ 8,925 --------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED IN) WORKING CAPITAL ITEMS: Accounts receivable, net $ 2,367 $(11,065) $ (6,222) Inventories (1,673) 8,834 (15,499) Prepaid expenses and other assets (4,435) 1,269 (2,419) Accounts payable 3,772 (16,293) 9,429 Accrued liabilities (399) 436 (608) Amounts due affiliated companies 1,905 -- -- Income taxes payable 1,451 538 -- Sales, use and fuel taxes payable 877 (1,047) (9,170) --------------------------------------------------------------------------------------------------------- TOTAL CHANGE $ 3,865 $(17,328) $(24,489) --------------------------------------------------------------------------------------------------------- CASH PAID DURING THE PERIOD FOR: Interest $ 21,765 $ 23,043 $ 22,084 Income taxes $ 5,381 $ 125 $ 207 --------------------------------------------------------------------------------------------------------- NON-CASH INVESTING AND FINANCING ACTIVITIES: Capital leases $ -- $ 21 $ 177 Transfer of inventory to affiliated company $ 1,013 $ -- $ -- ---------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 25 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. As of August 31, 2001, had the Company utilized the FIFO inventory method, petroleum product inventories would have been higher by $1,062,000. As of August 31, 2001, the Company had a LIFO layer liquidation resulting in an inventory gain of approximately $526,000. As of August 31, 2000, the Company had a LIFO layer liquidation which resulted in an inventory reduction of approximately $1,400,000. Inventories consist of the following:
AUGUST 31, ------------------------- 2001 2000 --------------------------------------------------------------- (IN THOUSANDS) Crude Oil $ 15,236 $ 16,975 Petroleum Products 24,412 22,819 --------------------------------------------------------------- Total @ LIFO 39,648 39,794 --------------------------------------------------------------- Merchandise 10,099 9,020 Supplies 12,807 13,080 --------------------------------------------------------------- Total @ FIFO 22,906 22,100 --------------------------------------------------------------- Total Inventory $ 62,554 $ 61,894 ---------------------------------------------------------------
Included in petroleum product inventories are exchange balances either held for or due from other petroleum marketers. These balances are not significant. 26 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 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 deferred when incurred and amortized on a straight-line basis over the period of benefit. 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 ------------------------------------------------------ Revenue Recognition Revenues from wholesale sales are recognized upon shipment or when title passes. Retail revenues are recognized immediately upon sale to the customer. Income Taxes The Company accounts for income taxes using the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company joins with the Parent and the Parent's other subsidiaries in filing a Federal Income tax return on a consolidated basis. Income taxes are calculated on a separate return basis with consideration of the tax sharing agreement between the Parent and its subsidiaries. As of August 31, 2001 and 2000, there were no amounts due from the Parent pursuant to the terms of the tax sharing agreement. 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. 27 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 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. 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 conditions resulting from past or current operations and from which no current or future benefit is discernible. Expenditures, which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. The Company determines its liability on a site by site basis and records a liability at the time when it is probable and can be reasonably estimated. The Company's estimated liability is reduced to reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is discounted, but is not reduced for possible recoveries from insurance carriers. 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. Segment Disclosures Effective in 1999, the Company adopted Statement of Financial Accounting Standards No. 131 ("Statement 131"), "Disclosure about Segments of an Enterprise and Related Information." Statement 131 standardizes the way that public companies report information about operating segments in annual and interim financial statements issued to the public. It also establishes standards for disclosures regarding products and services, geographic areas and major customers. Statement 131 requires segments to be determined based upon how operations are managed and evaluated internally (See Note 14). Change in Accounting Principle Effective September 1, 1998, the Company changed its method of accounting for major maintenance turnarounds and recorded a $4,783,000 credit, net of income taxes of $3,122,000 as the cumulative effect change as of September 1, 1998. Under the new accounting principle, the Company defers the cost of turnarounds when incurred and amortizes the costs to operations on a straight-line basis over the period of benefit. Previously, 28 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- turnaround costs were estimated and accrued and charged to operations over the period preceding the next scheduled turnaround. The change was due to the increasingly difficult estimation process of determining the accurate costs charged to operations, due in part to the numerous and ever changing environmental rules and regulations. This change enables the Company to more accurately charge costs to production over the period most clearly benefited by the turnaround. As of August 31, 2001, net deferred turnaround costs included in other assets amounted to $4,985,000, net of accumulated amortization of $5,829,000. Employee Benefit Plan Disclosures Effective in 1999, the Company adopted Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and other Post-retirement Benefits," which standardizes the disclosure requirements for pension and other post-retirement benefit plans. In addition, the statement requires additional information on changes in the benefit obligations and fair values of plan assets. Recent Accounting Standards In June 1998, the Financial Accounting Standards Board ("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, as amended, is effective for all transactions entered into after June 15, 2000. The adoption of Statement 133 in fiscal 2001 did not have a material effect on the Company's financial position or results of operations. In June 2001, the FASB finalized Statements No. 141, "Business Combinations," ("Statement 141") and No. 142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141 requires the use of the purchase method of accounting and prohibits the use of the pooling-of-interests method of accounting for business combinations initiated after June 30, 2001. Statement 141 also requires that the Company recognize acquired intangible assets apart from goodwill if the acquired intangible assets meet certain criteria. Statement 141 applies to all business combinations initiated after June 30, 2001 and for purchase business combinations completed on or after July 1, 2001. It also requires, upon adoption of Statement 142 that the Company reclassify the carrying amounts of intangible assets and goodwill based on the criteria in Statement 141. Statement 142 requires, among other things, that companies no longer amortize goodwill, but instead test goodwill for impairment at least annually. In addition, Statement 142 requires that the Company identify reporting units for the purposes of assessing potential future impairments of goodwill, reassess the useful lives of other existing recognized intangible assets, and cease amortization of intangible assets with an indefinite useful life. An intangible asset with an indefinite useful life should be tested for impairment in accordance with the guidance in Statement 142. Statement 142 is required to be applied in fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recognized at that date, regardless of when those assets were initially recognized. Statement 142 requires the Company to complete a transitional goodwill impairment test six months from the date of adoption. The Company is also required to reassess the useful lives of other intangible assets within the first interim quarter after adoption of Statement 142. The Company anticipates that the adoption of SFAS 141 and 142 will not have a material effect on the Company's financial position or results of operations. 29 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 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, 2001 and 2000, accounts receivable were net of allowance for doubtful accounts of $1,370,000 and $460,000 respectively. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows:
AUGUST 31, ----------------------------- 2001 2000 -------------------------------------------------------------------------------- (IN THOUSANDS) Refinery equipment, Including construction-in-progress $ 179,232 $172,947 Marketing (i.e. retail outlets) 82,186 101,152 Transportation 7,171 7,136 -------------------------------------------------------------------------------- 268,589 281,235 Less: Accumulated depreciation 77,638 73,489 -------------------------------------------------------------------------------- $190,951 $207,746 --------------------------------------------------------------------------------
4. ACCRUED LIABILITIES Accrued liabilities include the following:
AUGUST 31, -------------------------- 2001 2000 ----------------------------------------------------------------------------------------- (IN THOUSANDS) Interest $ 4,129 $ 4,842 Payrolls and benefits 5,731 5,649 Other 2,551 2,319 ----------------------------------------------------------------------------------------- $ 12,411 $ 12,810 -----------------------------------------------------------------------------------------
30 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. As of August 31, 2001 and 2000, capitalized lease obligations, included in long-term debt, amounted to $613,000 and $656,000, respectively, net of current portion of $24,000 and $47,000 respectively. The related assets (retail gas stations and convenience stores) as of August 31, 2001 and 2000 amounted to $448,000 and $502,000, net of accumulated amortization of $253,000 and $354,000, respectively. Lease amortization amounting to $46,000, $70,000, and $72,000 for the years ended August 31, 2001, 2000, and 1999 respectively, is included in depreciation and amortization expense. Future minimum lease payments as of August 31, 2001 are summarized as follows:
CAPITAL OPERATING YEAR ENDED AUGUST 31, LEASES LEASES ------------------------------------------------------------------------------------------ (IN THOUSANDS) 2002 $ 112 $ 3,201 2003 114 2,449 2004 118 1,854 2005 957 2006 121 124 564 Thereafter 847 1,648 ------------------------------------------------------------------------------------------ Total minimum lease payments 1,436 10,673 Less: Minimum sublease rents - 138 ------------------------------------------------------------------------------------------ Net minimum sublease payments 1,436 $ 10,535 ============= Less: Amount representing interest 823 -------------------------------------------------------------------------- Present value of net minimum lease payments $ 613 ==========================================================================
Net rent expense for operating leases amounted to $3,217,000, $3,324,000 and $3,386,000 for the years ended August 31, 2001, 2000 and 1999 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 with PNC Bank, N.A. as Agent Bank. The facility provides for revolving credit loans and for the issuance of letters of credit. During February 2000, the Company renegotiated the facility to provide for a temporary increase in its revolving credit commitment up to $45,000,000. Effective January 8, 2001, the Company again renegotiated this facility to provide for an increase in its revolving credit commitment up to $50,000,000. The facility expires on June 9, 2002 and is secured by certain qualifying cash accounts, accounts receivable, and inventory, which amounted to $85,136,000 as of August 31, 2001. 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 plus up to .75% or the federal funds effective rate plus .50% for base rate borrowings and the LIBOR rate plus 1.25% to 2.5% for Euro-Rate borrowings, which was 5.08% as of August 31, 2001. As of August 31, 2001 and 2000 no letters of credit or borrowings were outstanding under the agreement. The Company pays a commitment fee of 3/8% per annum on the unused balance of the facility. 31 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. During the fiscal year ending August 31, 2001, the Company purchased $19,865,000 of these notes for $14,185,000 in cash. An extraordinary gain of $3,029,000 was recorded as a result of this early retirement of debt, consisting of $5,680,000 less $470,000 of associated debt issuance costs, net of a tax charge of $2,181,000. Such notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company's subsidiaries (Note 15). 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, ------------------------------- 2001 2000 ---------------------------------------------------------------------------------------------------- (IN THOUSANDS) Long-term debt: 10.75% senior unsecured notes due June 9, 2007, Series B $ 180,135 $200,000 Other long-term debt 965 1,111 ---------------------------------------------------------------------------------------------------- 181,100 201,111 Less: Current installments of long-term debt 121 150 ---------------------------------------------------------------------------------------------------- Total long-term debt, less current installments $ 180,979 $200,961 ----------------------------------------------------------------------------------------------------
The principal amount of long-term debt outstanding as of August 31, 2001, matures as follows: YEAR ENDED AUGUST 31, ------------------------------------------------------------------------------- (IN THOUSANDS) 2002 $ 121 2003 103 2004 118 2005 89 2006 78 Thereafter 180,591 ------------------------------------------------------------------------------- $181,100 ------------------------------------------------------------------------------- The following financing costs have been deferred and are being amortized to expense over the term of the related debt: 32 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------
AUGUST 31, ---------------------------- 2001 2000 --------------------------------------------------------------------------------------------- (IN THOUSANDS) Deferred financing costs $ 8,390 $ 8,390 Less: Accumulated amortization 3,818 2,893 Write-off associated with debt extinguishment 470 - --------------------------------------------------------------------------------------------- $ 4,102 $ 5,497 ---------------------------------------------------------------------------------------------
8. EMPLOYEE BENEFIT 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. In addition to the above, the Company provides certain post-retirement healthcare benefits to salaried and certain hourly employees. These post-retirement benefit plans are unfunded and the costs are shared by the Company and its retirees. Net periodic pension cost and post-retirement healthcare benefit cost consist of the following components for the years ended August 31, 2001, 2000, and 1999:
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS ------------------------------ ------------------------------- 2001 2000 1999 2001 2000 1999 ------------------------------------------------------------------------------------------------------ (IN THOUSANDS) Service cost $ 1,611 $ 1,487 $ 1,430 $ 1,050 $ 747 $ 689 Interest cost on benefit obligation 2,482 2,149 2,014 1,508 1,064 931 Expected return on plan assets (3,148) (2,762) (2,315) -- -- -- Amortization of transition obligation 140 140 140 597 597 597 Amortization and deferrals (245) (252) (121) -- (124) (179) ------------------------------------------------------------------------------------------------------ Net periodic benefit cost $ 840 $ 762 $ 1,148 $ 3,155 $ 2,284 $ 2,038 ------------------------------------------------------------------------------------------------------
The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended August 31, 2001 and 2000: 33
OTHER POST-RETIREMENT PENSION BENEFITS BENEFITS --------------- -------------- ---------------- -------------- 2001 2000 2001 2000 ----------------------------------------------------- ----------------------------------------------------------------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION: Benefit obligation @ beginning of year $ 31,879 $ 29,975 $ 15,726 $ 13,796 Service cost 1,611 1,487 1,050 747 Interest cost 2,482 2,149 1,508 1,064 Plan amendments 882 - - - Actuarial (gains) losses 843 (955) 5,792 1,027 Benefits paid (861) (777) (623) (908) ----------------------------------------------------- --------------- -------------- -- ---------------- -------------- Benefit obligation @ end of year 36,836 31,879 23,453 15,726 ----------------------------------------------------- --------------- -------------- -- ---------------- -------------- CHANGE IN PLAN ASSETS: Fair values of plan assets @ beginning of year 35,391 30,150 - - Actual return on plan assets (5,360) 5,082 - - Company contributions - 936 623 908 Benefits paid (861) (777) (623) (908) ----------------------------------------------------- --------------- -------------- -- ---------------- -------------- Fair values of plan assets @ end of year 29,170 35,391 - - ----------------------------------------------------- --------------- -------------- -- ---------------- -------------- Funded status 7,666 (3,512) 23,453 15,726 Unrecognized actuarial gains (loss) 456 10,181 (2,639) 3,152 Unrecognized prior service cost (1,521) (768) - - Unrecognized transition obligation (911) (1,051) (7,162) (7,758) ----------------------------------------------------- --------------- -------------- -- ---------------- -------------- Accrued benefit cost $ 5,690 $ 4,850 $ 13,652 $ 11,120 ----------------------------------------------------- --------------- -------------- -- ---------------- -------------- WEIGHTED AVERAGE ASSUMPTIONS: Discount rate 7.5% 7.5% 7.5% 7.5% ---------------- -------------- Expected return on plan assets 9.0% 9.0% Rate of compensation increase 3.0%-4.5% 3.0%-4.5% ----------------------------------------------------- --------------- --------------
For measurement purposes, the assumed annual rate of increase in the per capita cost of covered medical and dental benefits was 8.0% and 5%, respectively for 2001; 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, a 1 percentage point change in the assumed healthcare cost trend rate would have the following effects:
1% POINT 1% POINT INCREASE DECREASE --------- ---------- Effect on total of service and interest cost components $ 478 $ (381) Effect on post-retirement benefit obligation 3,905 (3,165)
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 $665,000, $607,000 and $576,000 for the years ended August 31, 2001, 2000 and 1999, respectively. 34 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 9. INCOME TAXES Income tax expense (benefit) consists of:
YEAR ENDED AUGUST 31, ------------------------------------- 2001 2000 1999 -------------------------------------------------------------------- (IN THOUSANDS) Federal: Current $ 3,050 $ 1,525 $ (185) Deferred 4,981 3,743 (668) -------------------------------------------------------------------- 8,031 5,268 (853) -------------------------------------------------------------------- State: Current 1,650 805 (9) Deferred 159 755 (144) -------------------------------------------------------------------- 1,809 1,560 (153) -------------------------------------------------------------------- $ 9,840 $ 6,828 $ (1,006) --------------------------------------------------------------------
Reconciliation of the differences between income taxes computed at the Federal statutory rate and the provision for income taxes attributable to income (loss) before income tax expense (benefit) and cumulative effect of accounting change is as follows:
YEAR ENDED AUGUST 31, --------------------------------------- 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) U. S. federal income taxes at the statutory rate of 34% $8,190 $4,595 $ (886) State income taxes, net of Federal benefit 1,257 1,118 (172) Federal income tax audit 4 966 - Nondeductible expenses 112 170 16 Other 277 (21) 36 ----------------------------------------------------------------------------------------------------------------------- Income tax attributable to income (loss) before income tax expense (benefit) and cumulative effect of accounting change and extraordinary item $9,840 $6,828 $(1,006) -----------------------------------------------------------------------------------------------------------------------
35 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- Deferred income tax liabilities (assets) are comprised of the following:
AUGUST 31, ----------------------------- 2001 2000 --------------------------------------------------------------------------------------- (IN THOUSANDS) Current deferred income tax liabilities (assets): Inventory valuation $ 5,895 $ 6,536 Accounts receivable allowance (351) (85) Accrued liabilities (1,380) (872) Other (7) (8) --------------------------------------------------------------------------------------- 4,157 5,571 --------------------------------------------------------------------------------------- Deferred income tax liabilities: Property, plant and equipment 28,310 29,373 Accrued liabilities (8,623) (7,492) Tax credits and carryforwards (713) (6,181) State net operating loss carryforwards (1,683) (3,287) Valuation allowance 7 644 Other 275 46 --------------------------------------------------------------------------------------- 17,573 13,103 --------------------------------------------------------------------------------------- Net deferred income tax liability $ 21,730 $ 18,674 =======================================================================================
The Company's results of operations are included in the consolidated Federal tax return of the Parent. For financial reporting purposes, valuation allowances of $7,000 and $644,000 at August 31, 2001 and 2000 were recognized for state net operating loss carryforwards not anticipated to be realized before expiration. 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 $700,000 that is available to offset the regular tax liability in the future years. 10. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instrument for which it is practicable to estimate that value. The carrying amount of cash and cash equivalents, trade accounts 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, 2001, the carrying amount and estimated fair value of these debt instruments approximated $181,100,000 and $142,308,000, respectively. 36 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- 11. CONTINGENCIES In addition to the environmental matters discussed in Note 13, 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. 12. TRANSACTIONS WITH AFFILIATED COMPANIES On September 29, 2000, the Company sold 42 retail units to an affiliate for $23,870,000. The excess of the sales price over the net historic cost of the assets and liabilities of $9,498,000 (net of income taxes) was credited to additional paid-in capital during the fiscal year ended August 31, 2001. The Company has used $12,150,000 of the proceeds to purchase $17,165,000 of 10.75% Senior Unsecured Notes due June 9, 2007 (Note 7). The balance of the proceeds has been used for capital expenditures. Concurrent with the asset sale, the Company terminated the leases on 8 additional retail locations which it had previously leased from a non-subsidiary affiliate. The Company has entered into a management agreement with the non-subsidiary affiliate to operate and manage the retail units owned by the non-subsidiary affiliate on a turnkey basis. For the year ended August 31, 2001, the Company billed the affiliate $1,301,000 for management fees and overhead expenses incurred in the management and operation of the 50 retail units which amount was deducted from expenses. For the fiscal year ended August 31, 2001, net sales to the affiliate amounted to $41,768,000. As of August 31, 2001, the Company was indebted to the affiliate for $410,000 under the terms of the agreement. Effective June 1, 2001, the Company sold certain intangible assets to an unrelated entity and realized a $3,000,000 gain on the transaction which is recorded in other income. Concurrent with the sale, the Company entered into a 50% joint venture with the entity for the marketing of asphalt products. The joint venture is accounted for using the equity method of accounting. As part of its investment in the joint venture, the Company transferred $1,013,000 of inventory to it. For the year ended August 31, 2001, net sales to the joint venture amounted to $1,810,000. As of August 31, 2001, the Company owed the joint venture $1,495,000 under the terms of the agreement. 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, 2001, 2000 and 1999, such fees amounted to approximately $991,000, $1,000,000 and $995,000 respectively. An affiliate of the Company leased eight retail gas stations and convenience stores to the Company under various operating leases which expired in 2001. Rent expense relating to these leases amounted to $20,000, $248,000, and $264,000 for the years ended August 31, 2001, 2000 and 1999 respectively. 13. ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES 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. The Company entered into a Consent Order and Agreement (the "Agreement") with the Pennsylvania Department of Environmental Protection ("DEP") on July 31, 2000. The Agreement resolves certain claims arising out of discharges from the Company's Industrial Wastewater Treatment Plant ("IWTP) as well as other sources. 37 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- The Agreement covers all discharges between approximately September 24, 1997 and May 4, 2000 alleged by DEP to be in violation of applicable law, regulation and permits issued to the Company. The Agreement requires the Company to evaluate and consider the upgrade of certain physical components associated with the Company's Warren, Pennsylvania refining facility. Failure by the Company to comply with the Agreement carries a $250 per day stipulated civil penalty. The Company believes it has complied in all respects with the ongoing requirements of the Agreement and that the future cost of compliance with the Agreement, if any, will not have a material adverse effect upon the operations or consolidated financial position of the Company. 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. The Company is unable to determine the aggregate effect of the claims asserted by the United States Environmental Protection Agency pursuant to certain Notices of Violation and an Administrative Order or the effect of Methyl Tertiary Butyl Ether ("MTBE")-related litigation upon its operations or consolidated financial condition until the scope of the claims is fully known. In the opinion of management, all other 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 or operations of the Company. 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 these 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. 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. Management of the Company believes that remediation and related environmental costs incurred during the normal course of business are not expected to be material. 14. SEGMENTS OF BUSINESS The Company is a petroleum refiner and marketer in its primary market area of Western New York and Northwestern Pennsylvania. Operations are organized into two business segments: wholesale and retail. The wholesale segment is responsible for the acquisition of crude oil, petroleum refining, and the marketing of petroleum products to wholesale and industrial customers. The retail segment sells petroleum products and convenience and grocery items through company owned gasoline stations and convenience stores under the Kwik Fill(R) and Red Apple Food Mart(R) brand names. The accounting policies of the reportable segments are the same as those described in Note 1 to the consolidated financial statements. Intersegment revenues are calculated using estimated market prices and are eliminated upon consolidation. Summarized financial information regarding the Company's reportable segments is presented in the following table. 38 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------
YEAR ENDED AUGUST 31, ------------------------------------------- 2001 2000 1999 ------------------------------------------------------------------------------------ (IN THOUSANDS) Net Sales Retail $ 516,541 $ 588,398 $ 438,235 Wholesale 592,024 535,041 324,608 ------------------------------------------- $1,108,565 $1,123,439 $ 762,843 ------------------------------------------- Intersegment Sales Wholesale $ 236,539 $ 264,698 $ 142,039 ------------------------------------------- Operating income Retail $ 7,014 $ 2,040 $ 4,889 Wholesale 35,469 36,969 14,416 ------------------------------------------- $ 42,483 $ 39,009 $ 19,305 ------------------------------------------- Total Assets Retail $ 103,161 $ 108,925 $ 113,599 Wholesale 252,396 231,443 235,641 ------------------------------------------- $ 355,557 $ 340,368 $ 349,240 ------------------------------------------- Depreciation and Amortization Retail $ 2,916 $ 2,938 $ 2,310 Wholesale 7,797 7,230 6,732 ------------------------------------------- $ 10,713 $ 10,168 $ 9,042 ------------------------------------------- Capital Expenditures Retail $ 3,704 $ 1,455 $ 18,698 Wholesale 6,348 4,445 7,526 ------------------------------------------- $ 10,052 $ 5,900 $ 26,224 -------------------------------------------
During FYE 2000, the Company changed its methodology for allocating administrative overhead and its accounting classification of commission income resulting in the reclassification of prior period data. 15. SUBSIDIARY GUARANTORS Certain of United Refining Company's (the "issuer") subsidiaries function as guarantors under the terms of the $200,000,000 Senior Unsecured Note Indenture due June 9, 2007. Financial information for the Company's wholly-owned subsidiary guarantors (Note 7) is as follows: 39 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- CONDENSED CONSOLIDATING BALANCE SHEETS (in thousands)
August 31, 2001 ------------------------------------------------------- Issuer Guarantors Eliminations Consolidated ------------------------------------------------------- Assets Current: Cash and cash equivalents $ 29,197 $ 6,027 $ -- $ 35,224 Accounts receivable, net 32,669 9,268 -- 41,937 Inventories 47,177 15,377 -- 62,554 Prepaid expenses and other assets 11,154 2,158 -- 13,312 Intercompany 81,308 18,345 (99,653) -- ----------------------------------------------------- Total current assets 201,505 51,175 (99,653) 153,027 Property, plant and equipment, net 121,074 69,877 -- 190,951 Investment in affiliated company 1,529 -- -- 1,529 Deferred financing costs, net 4,102 -- -- 4,102 Other assets 6,665 454 (1,171) 5,948 ----------------------------------------------------- $ 334,875 $ 121,506 $(100,824) $ 355,557 ----------------------------------------------------- Liabilities and Stockholder's Equity Current: Current installments of long-term debt $ -- $ 121 $ -- $ 121 Accounts payable 16,857 5,349 -- 22,206 Income taxes payable 2,413 (40) -- 2,373 Accrued liabilities 9,739 2,672 -- 12,411 Sales, use and fuel taxes payable 16,542 144 -- 16,686 Deferred income taxes 4,507 (350) -- 4,157 Amounts due affiliated companies 1,495 410 -- 1,905 Intercompany -- 99,653 (99,653) -- ----------------------------------------------------- Total current liabilities 51,553 107,959 (99,653) 59,859 Long term debt: less current installments 180,135 844 -- 180,979 Deferred income taxes 11,009 6,564 -- 17,573 Deferred gain on settlement of pension plan obligations 1,560 -- -- 1,560 Deferred retirement benefits 18,610 746 -- 19,356 Other noncurrent liabilities -- 264 -- 264 ----------------------------------------------------- Total liabilities 262,867 116,377 (99,653) 279,591 ----------------------------------------------------- Commitment and contingencies Stockholder's equity Common stock, $.10 par value per share - shares authorized 100; issued and outstanding 100 -- 18 (18) -- Additional paid-in capital 7,150 10,651 (1,153) 16,648 Retained earnings 64,858 (5,540) -- 59,318 ----------------------------------------------------- Total stockholder's equity 72,008 5,129 (1,171) 75,966 ----------------------------------------------------- $ 334,875 $ 121,506 $(100,824) $ 355,557 ----------------------------------------------------- August 31, 2000 ------------------------------------------------------ Issuer Guarantors Eliminations Consolidated ------------------------------------------------------ Assets Current: Cash and cash equivalents $ 4,107 $ 3,323 $ -- $ 7,430 Accounts receivable, net 34,975 9,329 -- 44,304 Inventories 47,938 13,956 -- 61,894 Prepaid expenses and other assets 6,856 2,021 -- 8,877 Intercompany 103,904 16,675 (120,579) -- ----------------------------------------------------- Total current assets 197,780 45,304 (120,579) 122,505 Property, plant and equipment, net 122,394 85,352 -- 207,746 Investment in affiliated company -- -- -- -- Deferred financing costs, net 5,497 -- -- 5,497 Other assets 5,700 91 (1,171) 4,620 ----------------------------------------------------- $ 331,371 $ 130,747 $(121,750) $ 340,368 ----------------------------------------------------- Liabilities and Stockholder's Equity Current: Current installments of long-term debt $ -- $ 150 $ -- $ 150 Accounts payable 11,551 6,883 -- 18,434 Income taxes payable 3,488 (2,950) -- 538 Accrued liabilities 10,502 2,308 -- 12,810 Sales, use and fuel taxes payable 15,436 373 -- 15,809 Deferred income taxes 5,734 (163) -- 5,571 Amounts due affiliated companies -- -- -- -- Intercompany -- 120,579 (120,579) -- ----------------------------------------------------- Total current liabilities 46,711 127,180 (120,579) 53,312 Long term debt: less current installments 200,000 961 -- 200,961 Deferred income taxes 5,952 7,151 -- 13,103 Deferred gain on settlement of pension plan obligations 1,775 -- -- 1,775 Deferred retirement benefits 14,923 815 -- 15,738 Other noncurrent liabilities -- 373 -- 373 ----------------------------------------------------- Total liabilities 269,361 136,480 (120,579) 285,262 ----------------------------------------------------- Commitment and contingencies Stockholder's equity Common stock, $.10 par value per share - shares authorized 100; issued and outstanding 100 -- 18 (18) -- Additional paid-in capital 7,150 1,153 (1,153) 7,150 Retained earnings 54,860 (6,904) -- 47,956 ----------------------------------------------------- Total stockholder's equity 62,010 (5,733) (1,171) 55,106 ----------------------------------------------------- $ 331,371 $ 130,747 $(121,750) $ 340,368 -----------------------------------------------------
40 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS (in thousands)
Year Ended August 31, 2001 ------------------------------------------------------------------------- Issuer Guarantors Eliminations Consolidated ------------------------------------------------------------------------- Net sales $ 828,563 $ 521,276 $ (241,274) $ 1,108,565 Costs of goods sold 770,943 452,466 (241,274) 982,135 ------------------------------------------------------------------------------------------------------------ Gross profit 57,620 68,810 -- 126,430 ------------------------------------------------------------------------------------------------------------ Expenses: Selling, general and administrative expenses 16,257 56,977 -- 73,234 Depreciation and amortization 7,626 3,087 -- 10,713 expenses ------------------------------------------------------------------------------------------------------------ Total operating expenses 23,883 60,064 -- 83,947 ------------------------------------------------------------------------------------------------------------ Operating income 33,737 8,746 -- 42,483 ------------------------------------------------------------------------------------------------------------ Other income (expense): Interest income 9,493 1,587 (9,474) 1,606 Interest expense (22,459) (8,066) 9,474 (21,051) Other, net 1,816 20 -- 1,836 Costs associated with (1,300) -- -- (1,300) acquisition Equity in net earnings of 516 -- -- 516 affiliate ------------------------------------------------------------------------------------------------------------ (11,934) (6,459) -- (18,393) ------------------------------------------------------------------------------------------------------------ Income (loss) before income 21,803 2,287 -- 24,090 tax expense (benefit) ------------------------------------------------------------------------------------------------------------ Income tax expense (benefit): Current 5,070 (370) -- 4,700 Deferred 3,847 1,293 -- 5,140 ------------------------------------------------------------------------------------------------------------ 8,917 923 -- 9,840 ------------------------------------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting change and extraordinary item 12,886 1,364 -- 14,250 Cumulative effect of accounting change, net of taxes of $3,122 -- -- -- -- Extraordinary item, net of taxes of $2,181 3,029 -- -- 3,029 ------------------------------------------------------------------------------------------------------------ Net income (loss) $ 15,915 $ 1,364 $ -- $ 17,279 ------------------------------------------------------------------------------------------------------------ Year Ended August 31, 2000 ------------------------------------------------------------------------- Issuer Guarantors Eliminations Consolidated ------------------------------------------------------------------------- Net sales $ 799,379 $ 593,535 $ (269,475) $ 1,123,439 Costs of goods sold 743,321 520,026 (269,475) 993,872 ------------------------------------------------------------------------------------------------------------ Gross profit 56,058 73,509 -- 129,567 ------------------------------------------------------------------------------------------------------------ Expenses: Selling, general and administrative expenses 13,686 66,704 -- 80,390 Depreciation and amortization 7,042 3,126 -- 10,168 expenses ------------------------------------------------------------------------------------------------------------ Total operating expenses 20,728 69,830 -- 90,558 ------------------------------------------------------------------------------------------------------------ Operating income 35,330 3,679 -- 39,009 ------------------------------------------------------------------------------------------------------------ Other income (expense): Interest income 10,754 1,559 (12,025) 288 Interest expense (24,273) (10,714) 12,025 (22,962) Other, net (2,033) (789) -- (2,822) Costs associated with -- -- -- -- acquisition Equity in net earnings of -- -- -- -- affiliate ------------------------------------------------------------------------------------------------------------ (15,552) (9,944) -- (25,496) ------------------------------------------------------------------------------------------------------------ Income (loss) before income 19,778 (6,265) -- 13,513 tax expense (benefit) ------------------------------------------------------------------------------------------------------------ Income tax expense (benefit): Current 5,240 (2,910) -- 2,330 Deferred 4,763 (265) -- 4,498 ------------------------------------------------------------------------------------------------------------ 10,003 (3,175) -- 6,828 ------------------------------------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting change and extraordinary item 9,775 (3,090) -- 6,685 Cumulative effect of accounting change, net of taxes of -- -- -- -- Extraordinary item, net of taxes of $2,181 -- -- -- -- ------------------------------------------------------------------------------------------------------------ Net income (loss) $ 9,775 $ (3,090) $ -- $ 6,685 ------------------------------------------------------------------------------------------------------------ Year Ended August 31, 1999 ------------------------------------------------------------------------- Issuer Guarantors Eliminations Consolidated ------------------------------------------------------------------------- Net sales $ 466,120 $ 443,786 $ (147,063) $ 762,843 Costs of goods sold 433,910 370,162 (147,063) 657,009 ------------------------------------------------------------------------------------------------------------ Gross profit 32,210 73,624 -- 105,834 ------------------------------------------------------------------------------------------------------------ Expenses: Selling, general and administrative expenses 9,581 67,906 -- 77,487 Depreciation and amortization 6,536 2,506 -- 9,042 expenses ------------------------------------------------------------------------------------------------------------ Total operating expenses 16,117 70,412 -- 86,529 ------------------------------------------------------------------------------------------------------------ Operating income 16,093 3,212 -- 19,305 ------------------------------------------------------------------------------------------------------------ Other income (expense): Interest income 8,903 1,244 (9,120) 1,027 Interest expense (23,383) (8,114) 9,120 (22,377) Other, net (1,395) 835 -- (560) Costs associated with -- -- -- -- acquisition Equity in net earnings of -- -- -- -- affiliate ------------------------------------------------------------------------------------------------------------ (15,875) (6,035) -- (21,910) ------------------------------------------------------------------------------------------------------------ Income (loss) before income 218 (2,823) -- (2,605) tax expense (benefit) ------------------------------------------------------------------------------------------------------------ Income tax expense (benefit): Current 1,336 (1,530) -- (194) Deferred (1,212) 400 -- (812) ------------------------------------------------------------------------------------------------------------ 124 (1,130) -- (1,006) ------------------------------------------------------------------------------------------------------------ Income (loss) before cumulative effect of accounting change and extraordinary item 94 (1,693) -- (1,599) Cumulative effect of accounting change, net of taxes of 4,783 -- -- 4,783 Extraordinary item, net of taxes of $2,181 -- -- -- -- ------------------------------------------------------------------------------------------------------------ Net income (loss) $ 4,877 $ (1,693) $ -- $ 3,184 ------------------------------------------------------------------------------------------------------------
41 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------------------------------------------- CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS (in thousands)
Year Ended August 31, 2001 -------------------------------------------------------------- Issuer Guarantors Eliminations Consolidated -------------------------------------------------------------- Net cash provided by (used in) operating $ 51,718 $(16,959) $ -- $ 34,759 activities -------------------------------------------------------------- Cash flows from investing activities: Decrease in restricted cash and cash -- -- -- - equivalents and investments Purchase of investment securities (3,714) - -- (3,714) Sale of investment securities 3,497 - -- 3,497 Additions to property, plant and (6,313) (3,739) -- (10,052) equipment Proceeds from asset dispositions 2 23,548 -- 23,550 -------------------------------------------------------------- Net cash provided by (used in) (6,528) 19,809 -- 13,281 investing activities -------------------------------------------------------------- Cash flows from financing activities: Dividends (5,917) - -- (5,917) Net (reductions) borrowings on revolving - - -- - credit facility Principal reductions of long-term debt (14,183) (146) -- (14,329) Proceeds from issuance of long-term debt - - -- - Deferred financing costs - - -- - -------------------------------------------------------------- Net cash provided by (used in) (20,100) (146) -- (20,246) financing activities -------------------------------------------------------------- Net increase (decrease) in cash and cash 25,090 2,704 -- 27,794 equivalents Cash and cash equivalents, beginning of 4,107 3,323 -- 7,430 year -------------------------------------------------------------- Cash and cash equivalents, end of year $29,197 $ 6,027 $ -- $ 35,224 -------------------------------------------------------------- Year Ended August 31, 2000 ---------------------------------------------------------------- Issuer Guarantors Elimination Consolidated ---------------------------------------------------------------- Net cash provided by (used in) operating $8,508 $ 223 $ -- $ 8,731 activities ---------------------------------------------------------------- Cash flows from investing activities: Decrease in restricted cash and cash equivalents and investments -- -- -- -- Purchase of investment securities -- -- -- -- Sale of investment securities -- -- -- -- Additions to property, plant and equipment (4,357) (1,543) -- (5,900) Proceeds from asset dispositions 202 605 -- 807 ---------------------------------------------------------------- Net cash provided by (used in) investing activities (4,155) (938) -- (5,093) ---------------------------------------------------------------- Cash flows from financing activities: Dividends -- -- -- -- Net (reductions) borrowings on revolving (5,000) -- -- (5,000) credit facility Principal reductions of long-term debt (48) (187) -- (235) Proceeds from issuance of long-term debt -- 152 -- 152 Deferred financing costs (50) -- -- (50) ---------------------------------------------------------------- Net cash provided by (used in) (5,098) (35) -- (5,133) financing activities ---------------------------------------------------------------- Net increase (decrease) in cash and cash (745) (750) -- (1,495) equivalents Cash and cash equivalents, beginning of 4,852 4,073 -- 8,925 year ---------------------------------------------------------------- Cash and cash equivalents, end of year $4,107 $ 3,323 $ -- $ 7,430 ---------------------------------------------------------------- Year Ended August, 1999 ---------------------------------------------------------------- Issuer Guarantors Eliminations Consolidated ---------------------------------------------------------------- Net cash provided by (used in) operating $(28,470) $ 14,649 $ -- $ (13,821) activities ---------------------------------------------------------------- Cash flows from investing activities: Decrease in restricted cash and cash 15,289 -- -- 15,289 equivalents and investments Purchase of investment securities -- -- -- -- Sale of investment securities -- -- -- -- Additions to property, plant and (7,384) (18,663) -- (26,047) equipment Proceeds from asset dispositions 87 2,330 -- 2,417 ---------------------------------------------------------------- Net cash provided by (used in) investing activities 7,992 (16,333) -- (8,341) ---------------------------------------------------------------- Cash flows from financing activities: Dividends -- -- -- -- Net (reductions) borrowings on revolving 5,000 -- -- 5,000 credit facility Principal reductions of long-term debt (72) (241) -- (313) Proceeds from issuance of long-term debt -- -- -- -- Deferred financing costs -- -- -- -- ---------------------------------------------------------------- Net cash provided by (used in) 4,928 (241) -- 4,687 financing activities ---------------------------------------------------------------- Net increase (decrease) in cash and cash (15,550) (1,925) -- (17,475) equivalents Cash and cash equivalents, beginning of 20,402 5,998 -- 26,400 year ---------------------------------------------------------------- Cash and cash equivalents, end of year $ 4,852 $ 4,073 $ -- $ 8,925 ----------------------------------------------------------------
42 UNITED REFINNING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -------------------------------------------------------------------------------- 16. QUARTERLY FINANCIAL DATA (UNAUDITED)
---------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE AND GROSS EXTRAORDINARY NET SALES PROFIT ITEM ---------------------------------------------------------------------------------------------------- (IN THOUSANDS) 2001 First Quarter $ 296,183 $ 30,647 $ 1,429 Second Quarter 248,973 26,166 242 Third Quarter 274,155 40,183 8,319 Fourth Quarter 289,254 29,434 4,260 2000 First Quarter $ 246,365 $ 28,273 $ 65 Second Quarter 251,785 29,355 206 Third Quarter 277,799 32,205 1,851 Fourth Quarter 347,490 39,734 4,563 ----------------------------------------------------------------------------------------------------
In the fourth quarter of 2000, the Company revised its accounting classification of commission income, resulting in the reclassification of prior quarterly data presented in the above table. 43 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 29, 2001 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 53 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 the Company and Director corporations which operate supermarkets in New York); Chief Executive Officer and Director of Gristede's Foods, 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 49 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 67 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 60 --- Senior Vice Senior Vice President - Marketing of the President - Company since July 1990. Marketing
44
DIRECTOR NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS ---- --- ----- -------- ----------------------------------------- Thomas E. Skarada 59 --- Vice President - Vice President - Refining of the Company Refining since February 1996. From September 1994 to February 1996 he was Assistant Vice President - Refining. Frederick J. Martin, Jr. 47 --- Vice President - Vice President - Supply and Transportation Supply and of the Company since February 1993. Transportation James E. Murphy 56 --- Vice President Chief Financial Officer of the Company since and Chief January 1997. He was Vice President Financial - Finance from April 1995 to December 1996. Officer John R. Wagner 42 --- Vice President, Vice President, General Counsel and General Secretary of the Company since August 1997. Counsel and Prior to joining the Company, Mr. Wagner Secretary served as Counsel to Dollar Bank, F.S.B. from 1988 until assuming his current position. Dennis E. Bee, Jr. 59 --- Treasurer Treasurer of the Company since May 1988. Martin R. Bring 58 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 Foods, Inc., a supermarket chain. Evan Evans 75 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 54 1997 Director Director of Gristede's Foods, Inc., since October 1997. Consultant to Red Apple Group Inc. from January 1997 to October 1997. Private investor from June 1994 to December 1996.
45
DIRECTOR NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS ---- --- ----- -------- ----------------------------------------- Douglas Lemmonds 54 1997 Director Independent consultant since August of 1999. Prior to becoming a consultant, he was Managing Director and the Chief Operating Officer, Private Banking-Americas of the Deutsche Bank Group from May 1996. 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. Counsel to Kramer Levin Naftalis & Frankel, LLP in New York since April 1998. Partner of Brown & Wood Andrew Maloney 69 1997 Director LLP, a New York law firm, from December 1992 to April 1998. From June 1986 to December 1992 he was the United States Attorney for the Eastern District of New York. Dennis Mehiel 58 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. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Not Applicable
46 ITEM 11. EXECUTIVE COMPENSATION The following table sets forth for the three fiscal years ended August 31, 1999, 2000 and 2001 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 $100,000 for the fiscal year ended August 31, 2001.
SUMMARY COMPENSATION TABLE --------------------------------------------------------------------------------------- OTHER ANNUAL OTHER ANNUAL COMPENSATION COMPENSATION COMPENSATION NAME & PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) ($)(2) ------------------------- ---- --------- -------- ------ ------ John A. Catsimatidis 2001 $360,000 $355,000 $ -- $8,985 Chairman of the Board & 2000 360,000 225,000 -- 9,056 Chief Executive Officer 1999 360,000 290,000 -- 8,488 Myron L. Turfitt 2001 $235,000 $300,000 $5,354 $6,096 President & 2000 235,000 190,000 5,107 6,257 Chief Operating Officer 1999 235,000 225,000 4,780 6,796 Ashton L. Ditka 2001 $148,400 $ 16,500 $2,013 $7,682 Senior Vice President 2000 142,100 7,000 2,464 7,427 Marketing 1999 140,000 20,000 2,712 7,427 Thomas E. Skarada 2001 $121,000 $ 18,000 $6,376 $6,399 Vice President 2000 112,750 5,500 6,647 5,893 Refining 1999 110,000 20,000 6,750 5,893 Frederick J. Martin, Jr. 2001 $106,200 $ 16,500 $5,446 $4,357 Vice President 2000 101,550 5,000 4,151 4,213 Supply & Transportation 1999 100,000 8,000 5,564 4,042
(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. 47 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 25 30 35 ---------------- $100,000 $17,036 $22,714 $28,393 $34,071 $39,750 $125,000 21,723 28,964 36,205 43,446 50,687 $150,000 26,411 35,214 44,018 52,821 61,625 $170,000 or more 30,161 40,214 50,268 60,321 70,375
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 $170,000 per year. Benefits are calculated by multiplying the sum of (a) 1.1% 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. Effective May 2001, for purposes of calculating retirement benefits, the Company has fixed the Social Security compensation base at $76,200. 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 NAME OF INDIVIDUAL OF SERVICE AT AGE 65 ------------------ ---------- --------- John A. Catsimatidis 15 27 Myron L. Turfitt 23 39 Ashton L. Ditka 25 30 Thomas E. Skarada 8 14 Frederick J. Martin Jr. 21 39
COMPENSATION OF DIRECTORS Non-officer directors receive a stipend of $15,000 per year and $1,000 for each meeting attended. 48 EMPLOYMENT AND CONSULTING AGREEMENTS Mr. Thomas C. Covert has 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 29, 2001 by: (i) each stockholder known to the Company to own beneficially, directly or indirectly, 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 indirect parent, Red Apple Group, Inc., ("RAG"), for the Company's New York office for fiscal 2001 amounting to approximately $991,000. 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 between the Parent and its subsidiaries. As of August 31, 2001 and 2000, there were no amounts due from the Parent pursuant to the terms of the tax sharing agreement. During fiscal 2001, 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. On September 29, 2000, the Company sold 42 retail units to an affiliate for $23,870,000. The excess of the sales price over the net historic cost of the assets and liabilities of $9,498,000 (net of income taxes) was credited to additional paid-in capital during the fiscal year ended August 31, 2001. The Company has used $12,150,000 of the proceeds to purchase $17,165,000 of 10.75% Senior Unsecured Notes due June 9, 2007 (Note 7). The balance of the proceeds has been used for capital expenditures. Concurrent with the asset sale, the Company terminated the leases on 8 additional retail locations which it had previously leased from a non-subsidiary affiliate. The Company has entered into a management agreement with the non-subsidiary affiliate to operate and manage the retail units owned by the non-subsidiary affiliate on a turnkey basis. For the year ended August 31, 2001, the Company billed the affiliate $1,301,000 for management fees and overhead expenses incurred in the management and operation of the 50 retail units which amount was deducted from expenses. For the fiscal year ended August 31, 2001, net sales to the affiliate amounted to $41,768,000. As of August 31, 2001, the Company was indebted to the affiliate for $410,000 under the terms of the agreement. 49 Effective June 1, 2001, the Company sold certain intangible assets to an unrelated entity and realized a $3,000,000 gain on the transaction which is recorded in other income. Concurrent with the sale, the Company entered into a 50% joint venture with the entity for the marketing of asphalt products. The joint venture is accounted for using the equity method of accounting. As part of its investment in the joint venture, the Company transferred $1,013,000 of inventory to it. For the year ended August 31, 2001, net sales to the joint venture amounted to $1,810,000. As of August 31, 2001, the Company owed the joint venture $1,495,000 under the terms of the agreement. 50 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) (1) FINANCIAL STATEMENTS A list of all financial statements filed as part of this report is contained in the index to Item 8, which index is incorporated herein by reference. (2) FINANCIAL STATEMENT SCHEDULES Report of Independent Certified Public Accountants Schedule II - Valuation and Qualifying Accounts (3) EXHIBITS NUMBER Description 3.1 Certificate of Incorporation of United Refining Company ("URC"). Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-35083) (the "Registration Statement"). 3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration Statement. 3.3 Certificate of Incorporation of United Refining Company of Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration Statement. 3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the Registration Statement. 3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC"). Incorporated by reference to Exhibit 3.5 to the Registration Statement. 3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration Statement. 3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY"). Incorporated by reference to Exhibit 3.7 to the Registration Statement. 3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the registration Statement. 3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by reference to Exhibit 3.9 to the Registration Statement. 3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the Registration Statement. 3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to the Registration Statement. 3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the Registration Statement. 3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by reference to Exhibit 3.13 to the Registration Statement. 3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the Registration Statement. 3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by reference to Exhibit 3.15 to the Registration Statement. 3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the Registration Statement. 3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI"). Incorporated by reference to Exhibit 3.17 to the Registration Statement. 3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the Registration Statement. 3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by reference to Exhibit 3.19 to the Registration Statement. 3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the Registration Statement. 3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation ("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration Statement. 3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the Registration Statement. 51 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. Incorporated by reference to Exhibit 10.14 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1998. 10.15 Consulting Agreement dated September 1, 1996 with Thomas C. Covert. Incorporated by reference to Exhibit 10.14 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1998. 10.16 Deferred Compensation Agreement dated September 1, 1996 with Thomas C. Covert. Incorporated by reference to Exhibit 10.14 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1998. 10.17 Waiver and Amendment to Credit Agreement dated as of April 13, 1999 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.17 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1999. 10.18 Amendment to Credit Agreement dated as of February 4, 2000 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.18 of Registrant's Quarterly Report on Form 10Q for fiscal quarter ended February 28, 2000. 10.19 Waiver and Amendment to Credit Agreement dated as of September 29, 2000 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.19 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 2000. 52 10.20 Fifth Amendment to Credit Agreement dated as of January 8, 2001 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.20 of Registrant's Quarterly Report on Form 10Q for fiscal quarter ended November 30, 2000. 21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement. (b) Reports on Form 8-K NONE 53 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 26, 2001 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, 2001. 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 26, 2001 54 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, 1999: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $405 $ 195 $ (235) $ 365 ==== ====== ====== ====== Year ended August 31, 2000: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $365 $ 697 $ (602) $ 460 ==== ====== ====== ====== Year ended August 31, 2001: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $460 $1,455 $(545) $1,370 ==== ====== ====== ======
55 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 29, 2001 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 29, 2001 ------------------------------- John A. Catsimatidis President, Chief Operating Officer /s/ Myron L. Turfitt and Director November 29, 2001 ------------------------------- Myron L. Turfitt /s/ Thomas C. Covert Vice Chairman and Director November 29, 2001 ------------------------------- Thomas C. Covert /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001 /s/ Martin R. Bring Director November 29, 2001 ------------------------------- Martin R. Bring /s/ Evan Evans Director November 29, 2001 ------------------------------- Evan Evans /s/ Kishore Lall Director November 29, 2001 ------------------------------- Kishore Lall /s/ Douglas Lemmonds Director November 29, 2001 ------------------------------- Douglas Lemmonds /s/ Andrew Maloney Director November 29, 2001 ------------------------------- Andrew Maloney /s/ Dennis Mehiel Director November 29, 2001 ------------------------------- Dennis Mehiel
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 OF PENNSYLVANIA Dated: November 29, 2001 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 29, 2001 ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt President, Chief Operating Officer November 29, 2001 ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. KIANTONE PIPELINE CORPORATION Dated: November 29, 2001 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 29, 2001 ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt President, Chief Operating Officer November 29, 2001 ------------------------------- and Director Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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 COMPANY Dated: November 29, 2001 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 29, 2001 ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt November 29, 2001 ------------------------------- Executive Vice President Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. UNITED JET CENTER, INC. Dated: November 29, 2001 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 29, 2001 ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt November 29, 2001 ------------------------------- Executive Vice President Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. VULCAN ASPHALT REFINING CORPORATION Dated: November 29, 2001 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 29, 2001 ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt November 29, 2001 ------------------------------- Executive Vice President Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. KWIK-FIL, INC. Dated: November 29, 2001 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 29, 2001 John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 2001 ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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-FILL, INC. Dated: November 29, 2001 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 29, 2001 John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 2001 ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. INDEPENDENT GASOLINE & OIL COMPANY OF ROCHESTER, INC. Dated: November 29, 2001 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 29, 2001 John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 2001 ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. BELL OIL CORP. Dated: November 29, 2001 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 29, 2001 ------------------------------- Executive Officer and Director John A. Catsimatidis /s/ Myron L. Turfitt November 29, 2001 ------------------------------- Executive Vice President Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. PPC, INC. Dated: November 29, 2001 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 29, 2001 ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 2001 ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
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. SUPER TEST PETROLEUM, INC. Dated: November 29, 2001 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 29, 2001 John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 2001 ------------------------------- Myron L. Turfitt /s/ James E. Murphy Vice President and Chief Financial ------------------------------- Officer (Principal Accounting James E. Murphy Officer) November 29, 2001
67 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, 2001.
EXHIBITS NUMBER DESCRIPTION 3.1 Certificate of Incorporation of United Refining Company ("URC"). Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-35083) (the "Registration Statement"). 3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration Statement. 3.3 Certificate of Incorporation of United Refining Company of Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration Statement. 3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the Registration Statement. 3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC"). Incorporated by reference to Exhibit 3.5 to the Registration Statement. 3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration Statement. 3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY"). Incorporated by reference to Exhibit 3.7 to the Registration Statement. 3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the registration Statement. 3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by reference to Exhibit 3.9 to the Registration Statement. 3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the Registration Statement. 3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to the Registration Statement. 3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the Registration Statement. 3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by reference to Exhibit 3.13 to the Registration Statement. 3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the Registration Statement. 3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by reference to Exhibit 3.15 to the Registration Statement. 3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the Registration Statement. 3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI"). Incorporated by reference to Exhibit 3.17 to the Registration Statement. 3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the Registration Statement. 3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by reference to Exhibit 3.19 to the Registration Statement. 3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the Registration Statement. 3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation ("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration Statement. 3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the Registration Statement. 3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI"). Incorporated by reference to Exhibit 3.23 to the Registration Statement. 3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the Registration Statement. 4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder Bank & Trust Company ("Schroder"), relating to the 10 3/4% Series A Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to the Registration Statement. 4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the Registration Statement. 10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co. Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated by reference to Exhibit 10.1 to the Registration Statement. 10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI, and BSCI. Incorporated by reference to Exhibit 10.2 to the Registration Statement.
68 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. Incorporated by reference to Exhibit 10.14 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1998. 10.15 Consulting Agreement dated September 1, 1996 with Thomas C. Covert. Incorporated by reference to Exhibit 10.14 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1998. 10.16 Deferred Compensation Agreement dated September 1, 1996 with Thomas C. Covert. Incorporated by reference to Exhibit 10.14 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1998. 10.17 Waiver and Amendment to Credit Agreement dated as of April 13, 1999 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.17 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 1999. 10.18 Amendment to Credit Agreement dated as of February 4, 2000 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.18 of Registrant's Quarterly Report on Form 10Q for fiscal quarter ended February 28, 2000. 10.19 Waiver and Amendment to Credit Agreement dated as of September 29, 2000 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.19 of Registrant's Annual Report on Form 10K for fiscal year ended August 31, 2000. 10.20 Fifth Amendment to Credit Agreement dated as of January 8, 2001 by and among URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.20 of Registrant's Quarterly Report on Form 10Q for fiscal quarter ended November 30, 2000. 21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement. (c) Reports on Form 8-K NONE
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