-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, ASfRP8v2bXFEnPfFbKNtlDgozURY3K3JqQibgSNvJFJgoEOjx99VhJ/eCrg7Sk+D dLo71jlhwSpPdGX1cILlDA== 0000950128-99-001151.txt : 19991130 0000950128-99-001151.hdr.sgml : 19991130 ACCESSION NUMBER: 0000950128-99-001151 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990831 FILED AS OF DATE: 19991129 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED REFINING CO CENTRAL INDEX KEY: 0000101462 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 251411751 STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-06198 FILM NUMBER: 99765456 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIANTONE PIPELINE CORP CENTRAL INDEX KEY: 0000830253 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 251211902 STATE OF INCORPORATION: NY FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-01 FILM NUMBER: 99765457 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED REFINING CO /PA/ CENTRAL INDEX KEY: 0001040270 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 250850960 STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-02 FILM NUMBER: 99765458 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KIANTONE PIPELINE CO CENTRAL INDEX KEY: 0001045539 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-03 FILM NUMBER: 99765459 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KWIK FIL INC CENTRAL INDEX KEY: 0001045540 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-04 FILM NUMBER: 99765460 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KWIK FILL INC CENTRAL INDEX KEY: 0001045541 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-05 FILM NUMBER: 99765461 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITED JET CENTER INC CENTRAL INDEX KEY: 0001045542 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-06 FILM NUMBER: 99765462 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BELL OIL CORP CENTRAL INDEX KEY: 0001045543 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-07 FILM NUMBER: 99765463 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PPC INC CENTRAL INDEX KEY: 0001045544 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-08 FILM NUMBER: 99765464 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SUPER TEST PETROLEUM INC CENTRAL INDEX KEY: 0001045545 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-09 FILM NUMBER: 99765465 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: VULCAN ASPHALT REFINING CORP CENTRAL INDEX KEY: 0001045546 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-10 FILM NUMBER: 99765466 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INDEPENDENT GASOLINE & OIL CO OF ROCHESTER CENTRAL INDEX KEY: 0001045547 STANDARD INDUSTRIAL CLASSIFICATION: [] STATE OF INCORPORATION: PA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-35083-11 FILM NUMBER: 99765467 BUSINESS ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 BUSINESS PHONE: 8147231500 MAIL ADDRESS: STREET 1: 15 BRADLEY ST CITY: WARREN STATE: PA ZIP: 16365 10-K 1 UNITED REFINING COMPANY 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR FISCAL YEAR ENDED AUGUST 31, 1999 ( ) 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, 1999, 100 shares of the Registrant's common stock, $0.10 par value per share, were outstanding. All shares of common stock of the Registrant's are held by an affiliate. Therefore, the aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant is zero. DOCUMENTS INCORPORATED BY REFERENCE: NONE 2 TABLE OF ADDITIONAL REGISTRANTS
State of Other Primary Standard IRS Employer 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 3 ITEM 1. BUSINESS. INTRODUCTION The Company is a leading integrated refiner and marketer of petroleum products in its primary market area, which encompasses western New York and northwestern Pennsylvania. The Company owns and operates a medium complexity 65,000 barrel per day ("bpd") petroleum refinery in Warren, Pennsylvania where it produces a variety of products, including various grades of gasoline, diesel fuel, kerosene, jet fuel, No. 2 heating oil, and asphalt. The Company sells gasoline and diesel fuel under the "Kwik Fill(R)" brand name at a network of Company-operated retail units. As of August 31, 1999, the Company operated 303 units, 227 of which it owned. For the year ended August 31, 1999 (sometimes referred to as "fiscal 1999"), approximately 60% and 21% 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, 1999, the Company had total revenues of approximately $757.3 million, of which approximately 53% were derived from gasoline sales, approximately 34% were from sales of other petroleum products and approximately 13% were from sales of non-petroleum products. The Company's capacity utilization rates have ranged from approximately 90% to approximately 101% over the last five years. In fiscal 1999, approximately 73% 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 an approximately 2.1 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo. The Company owns and operates the Kiantone Pipeline, a 78-mile long crude oil pipeline which connects the refinery to Canadian, U.S. and world crude oil sources through the 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, 1999, the Company operated 303 retail units, of which 171 are located in New York, 123 in Pennsylvania and 9 in Ohio. The Company owned 227 of these units. In fiscal 1999, approximately 60% of the refinery's gasoline production was sold through the Company's retail network. In addition to gasoline, all units sell convenience merchandise, 37 have delicatessens 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. 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 3 4 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. Simultaneously with the consummation of the Private Offering, PNC Bank provided the Company and one of its subsidiaries a new bank credit facility (the "New Bank Credit Facility"). Subject to borrowing base limitations and the satisfaction of customary borrowing conditions, the Company and such subsidiary may borrow up to $35 million under the New Bank Credit Facility. INDUSTRY OVERVIEW The Company is a regional refiner and marketer located primarily in Petroleum Administration for Defense District ("PADD I"). As of January 1, 1999, there were 17 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 1998 in PADD I averaged 5.7 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 3.0% during 1998 in response to improving economic conditions. Refined petroleum production in PADD I is insufficient to satisfy demand for such products in the region, making PADD I a net importer of such products. The Company believes that domestic refining capacity utilization is close to maximum sustainable limits because of the existing high throughput coupled with a reduction in refining capacity. The 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: o Maximize the transportation cost advantage afforded the Company by its geographic location by increasing retail and wholesale market shares within its primary market area. o Expand sales of higher margin specialty products such as jet fuel, premium diesel, roofing asphalt and Strategic Highway Research Program ("SHRP") specification paving asphalt. o 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. 4 5 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 59,400 bpd during fiscal 1998 and approximately 65,000 bpd during fiscal 1999. The increase is attributable to greater refinery production since regularly scheduled maintenance turnarounds and concurrent installation of components of the Company's upgrade program occurred during fiscal year 1998. The Company produces three primary petroleum products: gasoline, middle distillates and asphalt. The Company believes its geographic location in the product short PADD I is a marketing advantage. The Company's refinery is located in northwestern Pennsylvania and is geographically distant from the majority of PADD I refining capacity. The nearest fuels refinery is over 160 miles from Warren, Pennsylvania and the Company believes that no significant production from such refinery is currently shipped into the Company's primary market area. 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 1999, approximately 60% of the Company's gasoline production was sold through its retail network and the remaining 40% of such production was sold to wholesale customers. Middle distillates include kerosene, diesel fuel, heating oil (No. 2 oil) and jet fuel. In fiscal 1999 the Company sold approximately 85% of its middle distillate production to wholesale customers and the remaining 15% 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 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 5 6 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. Historically, its inputs have been of Canadian origin and range from light low sulfur (38 degrees API, 0.5% sulfur) to high sulfur heavy asphaltic (25 degrees API, 2.8% sulfur). The Company's ability to market asphalt enables it to purchase selected heavier crude oils at a lower cost. The Company's saleable yield has been in excess of 96% for the past five years. The Company attributes this fact in part to its Capital Improvement Program (discussed in detail on page 8) along with its planned refinery turnarounds during fiscal year 1998. 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. The Company processes Canadian crude because it affords the Company the highest refinery margins currently available. Sixty 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-five percent of the Company's crude contracts are on an annual basis (with month to month pricing provisions). As of August 31, 1999, the Company had supply contracts with 19 different suppliers for an aggregate of 68,400 bpd of crude oil. The Company has contracts with four vendors amounting to 48% of daily crude oil supply (none more than 9,000 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 can be stored at the refinery. 6 7 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. 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 1999, approximately 60% and 21% of the Company's gasoline and diesel fuel production, respectively, was sold through this retail network. Retail Operations As of August 31, 1999 the Company operated a retail marketing network that includes 303 retail units, of which 171 are located in western New York, 123 in northwestern Pennsylvania and 9 in eastern Ohio. The Company owns 227 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-seven of such units also have delicatessens where food (primarily submarine sandwiches, pizza, chicken and lunch platters) is prepared on the premises for retail sales and also distribution to other nearby Company units which do not have in-store delicatessens. Mini convenience stores sell snacks, cigarettes and beverages and self-service gasoline. Limited gasoline stations sell gasoline, cigarettes, oil and related car care products and provide full service for gasoline customers. Truckstop facilities sell gasoline and diesel fuel on a self-service and full-service basis. All truckstops include either a full or mini convenience store and one has a truck repair garage. As of August 31, 1999, 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 1999 were $96.6 million, with a gross profit of approximately $27.5 million. Over the last five fiscal years, merchandise gross margins have averaged approximately 30% and the Company believes that merchandise sales will continue to remain a stable source of gross profit. 7 8 Merchandise Supply The Company's primary merchandise vendor is Tripifoods, which is located in Buffalo, New York. During fiscal 1999, the Company purchased approximately 82% of its convenience merchandise from this vendor. Tripifoods supplies the Company with tobacco products, candy, deli foods, grocery, health and beauty products, and sundry items on a cost plus basis for resale. The Company also purchases dairy products, beer, soda, snacks, and novelty goods from direct store vendors for resale. The Company annually reviews its suppliers' costs and services versus those of alternate suppliers. The Company believes that alternative sources of merchandise supply at competitive prices are readily available. Location Performance Tracking The Company maintains a store tracking mechanism whereby transmissions are made three times a week to collect operating data including sales and inventory levels. Data transmissions are made using personal computers, which are available at each location. Once verified, the data interfaces with a variety of retail accounting systems, which support daily, weekly and monthly performance reports. These different reports are then provided to both the field management and office staff. Upon completion of a capital project, management tracks "before and after" performance, to evaluate the return on investment which has resulted from the improvements. Capital Improvement Program During the fiscal year ended August 31, 1999, the Company spent approximately $3.4 million from the capital expenditure escrow account on capital improvements for the refinery upgrade and $11.9 million on the retail portion of its Capital Improvement Program. The Company has spent the entire $48.1 million originally escrowed for capital improvement. The scope of the retail capital improvement expenditures for the fiscal year ended August 31, 1999 included: o Twenty-one rebuilds that included ground up construction of a new building and a complete petroleum upgrade. Five of these locations also provide fast food and seven of these locations also include a smoke shop. As of August 31, 1999 three locations were still under construction with projected retail opening dates early next fiscal year. o Ten petroleum upgrades. These upgrades include new drive pads, canopy, lighting, multi-product dispensers with pay at the pump technology, new petroleum lines and signage. Petroleum upgrades have been performed simultaneously with the required underground storage tank upgrades. o Underground Storage Tank Compliance. As of December 22, 1998 all required upgrades were completed and the Company met all deadlines. o Eight convenience stores were upgraded, as well as, remodeled to include the addition of smoke shops. o An aggressive lighting upgrade and capital maintenance program has been completed. Wholesale Marketing and Distribution The Company sold in fiscal year 1999, on a wholesale basis, approximately 46,900 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 1999, the Company's production of gasoline, distillate and asphalt sold at wholesale was 40%, 85% and 100%, respectively. The Company sells 97.5% of its wholesale gasoline and distillate products from its Company-owned and operated product terminals. The remaining 2.5% are sold through third-party exchange terminals. 8 9 The Company's wholesale gasoline customer base includes 50 branded dealer/distributor units operating under the Company's proprietary "Keystone(R)" brand name. Long-term Keystone(R) dealer/distributor contracts accounted for approximately 12% of the Company's wholesale gasoline sales in fiscal 1999. Supply contracts generally range from three to five years in length, with Keystone(R) branded prices based on the prevailing Company wholesale rack price in Warren. The Company believes that the location of its refinery provides it with a transportation cost advantage over its competitors, which is significant within an approximately 100-mile radius of the Company's refinery. For example, in Buffalo, New York over its last five fiscal years, the Company has experienced an approximately 2.1 cents per gallon transportation cost advantage over those competitors who are required to ship gasoline by pipeline and truck from New York Harbor sources to Buffalo. In addition to this transportation cost advantage, the Company's proximity to local accounts allows it a greater range of shipment options, including the ability to deliver truckload quantities of approximately 200 barrels versus much larger 25,000 barrel pipeline batch deliveries, and faster response time, which the Company believes help it provide enhanced service to its customers. The Company's ability to market asphalt is critical to the performance of its refinery, since such marketing ability enables the Company to process lower cost higher sulfur content crude oils which in turn affords the Company higher refining margins. Sales of paving asphalt generally occur during the summer months due primarily to weather conditions. In order to maximize its asphalt sales, the Company has made substantial investments to increase its asphalt storage capacity through the installation of additional tanks, as well as through the purchase or lease of outside terminals. Partially mitigating the seasonality of the asphalt paving business is the Company's ability to sell asphalt year-round to roofing shingle manufacturers, which accounted for approximately 23% of its total asphalt sales over the Company's last five fiscal years. In fiscal 1999, the Company sold 5.9 million barrels of asphalt while producing 5.5 million barrels. The refinery was unable to produce enough asphalt to satisfy the demand and, therefore, purchased .4 million barrels for resale. The Company has a significant share of the asphalt market in the cities of Pittsburgh, Pennsylvania and Rochester and Buffalo, New York. The Company distributes asphalt from the refinery by railcar and truck transport to its owned and leased asphalt terminals in such cities or their suburbs. The Company also operates a terminal at Cordova, Alabama giving it a presence in the Southeast. Asphalt can be purchased in the Gulf Coast area and delivered by barge to third party or Company-owned terminals near Pittsburgh. The Company's asphalt terminal network allows the Company to enter into product exchanges. The Company uses a network of seven terminals to store and distribute refined products. This network provides gasoline, distillate and asphalt storage capacities (in thousands of barrels) of approximately 750, 825 and 1,700 barrels respectively as of August 31, 1999. During fiscal 1999, approximately 91% of the Company's refined products were transported from the refinery via truck transports, with the remaining 9% 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 40 sources located throughout the Company's retail marketing area. The Company seeks to minimize retail distribution costs through the use of a system wide distribution model. ENVIRONMENTAL CONSIDERATIONS General The Company is subject to federal, state and local laws and regulations relating to pollution and protection of the environment such as those governing releases of certain materials into the environment and the storage, treatment, transportation, disposal and clean-up of wastes, including, but not limited to, the Federal Clean Water Act as amended, the 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. 9 10 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 68% of its total distillate sales in fiscal 1999. 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 is 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. Conventional Gasoline Quality In addition to reformulated and oxygenated gasoline requirements, the United States Environmental Protection Agency has promulgated regulations under the CAA which relate to the quality of "conventional" gasoline and which require expanded reporting of the quality of such gasoline by refiners. Substantially all of the Company's gasoline sales are of conventional gasoline. The Company closely monitors the quality of the gasoline it produces to assure compliance at the lowest possible cost with CAA regulations. Underground Storage Tank Upgrade 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 10 11 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, 1999 the Company had approximately 1,682 full-time and 1,400 part-time employees. Approximately 2,428 persons were employed at the Company's retail units, 379 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, Pennsylvania. The Company has entered into collective bargaining agreements with International Union of Operating Engineers Local No. 95, United Steel Workers of America Local No. 2122-A, the International Union of Plant Guard Workers of America Local No. 502 and General Teamsters Local Union No. 397 covering 216, 7, 20 and 18 employees, respectively. The agreements expire on February 1, 2001, January 31, 2000, June 25, 2001 and July 31, 2000, respectively. The Company believes that its relationship with its employees is good. INTELLECTUAL PROPERTY The Company owns various federal and state service marks used by the Company, including Kwik-Fill(R), United(R) and Keystone(R). The Company has obtained the right to use the Red Apple Food Mart(R) service mark to identify its retail units under a royalty-free, nonexclusive, nontransferable license from Red Apple Supermarkets, Inc., a corporation which is indirectly wholly owned by John A. Catsimatidis, the sole stockholder, Chairman of the Board and Chief Executive Officer of the Company. The license is for an indefinite term. The licensor has the right to terminate this license in the event that the Company fails to maintain quality acceptable to the licensor. The Company licenses the right to use the Keystone(R) trademark to approximately 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. ITEM 2. PROPERTIES. The Company owns a 92-acre site in Warren, Pennsylvania upon which it operates its refinery. The site also contains a building housing the Company's principal executive office. 11 12 The Company owns various real property in the states of Pennsylvania, New York and Ohio upon which it operates 227 retail units and two crude oil and six refined product storage terminals. The Company also owns the 78 mile long Kiantone Pipeline, a pipeline which connects the Company's crude oil storage terminal to the refinery's tank farm. The Company's right to maintain the pipeline is derived from approximately 265 separate easements, right-of-way agreements, leases, permits, and similar agreements. The Company also has easements, right-of-way agreements, leases, permits and similar agreements that would enable the Company to build a second pipeline on property contiguous to the Kiantone Pipeline. The Company also leases an aggregate of 76 sites in Pennsylvania, New York and Ohio upon which it operates retail units. As of August 31, 1999, the leases had an average remaining term of 42 months, exclusive of option terms. Annual rents on such retail units range from $3,600 to $79,500. ITEM 3. LEGAL PROCEEDINGS. In 1995, the Pennsylvania Environmental Defense Foundation ("PEDF") commenced a lawsuit in the United States District Court for the Western District of Pennsylvania under Section 505 of the federal Water Pollution Control Act, 33 U.S.C. Section 1251, et. seq. The complaint alleges a series of discharges to the Allegheny River at the Company's refining facility in Warren, Pennsylvania exceeding the limits contained in the Company's waste water discharge permits. PEDF seeks to enjoin future discharges in excess of permitted limits, an assessment of civil penalties up to $25,000 per day as provided in the Act, and an award of attorneys' fees. The case has been tried to the Court and post-trial briefs have been filed, and the parties are awaiting the decision of the Court. The Company believes that this action will not have any material adverse effect upon its operations or consolidated financial condition. The United States Environmental Protection Agency ("USEPA") has issued certain Notices of Violation, an Administrative Order, and has asserted certain additional claims arising under federal and state statutory and regulatory law through and including August 5, 1998 (collectively the "Claims"). The Claims arise from allegations that (1) the Company failed to properly and consistently monitor, report and control emissions of Volatile Organic Compounds ("VOCs") from its refining facility in Warren, Pennsylvania; (2) fuel gas used in the refining process has in the past contained levels of hydrogen sulfide in excess of permitted parameters, and; (3) the Company in the past has failed to properly calculate and report emissions of benzene from its refining facility. The 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. 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. 12 13 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 ITEM 6. SELECTED FINANCIAL DATA.
Year Ended August 31, 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- (Dollars in thousands) Income Statement Data: Net sales $783,686 $ 833,818 $ 871,348 $ 758,623 $ 757,326 Gross margin (1) 151,852 168,440 164,153 151,564 165,946 Refinery operating expenses 56,665 63,218 60,746 60,840 60,990 Selling, general and administrative expenses 69,292 70,968 73,200 75,064 77,487 Operating income 17,696 26,038 21,977 7,340 18,427 Interest expense 18,523 17,606 17,509 22,188 22,377 Interest income 1,204 1,236 1,296 2,701 1,027 Other income (expense) 571 (40) 672 (685) 318 Income (loss) before income tax expense (benefit) 948 9,628 6,436 (12,832) (2,605) Income tax expense (benefit) 487 3,787 2,588 (5,132) (1,006) Income (loss) before extraordinary item and cumulative effect of accounting change 461 5,841 3,848 (7,700) (1,599) Extraordinary item, net of tax benefit of $4,200 -- -- (6,653) -- -- Cumulative effect of accounting change, net of taxes of $3,122 -- -- -- -- 4,783 Net income (loss) 461 5,841 (2,805) (7,700) 3,184 Balance Sheet Data (at end of period): Total assets 301,494 306,104 346,392 342,579 349,240 Total debt 154,095 136,777 201,272 201,309 206,173 Total stockholder's equity 78,186 84,027 52,937 45,237 48,421
- -------------------------------------------- (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. 13 14 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 1999, approximately 60% and 21% of the Company's gasoline and diesel fuel production was sold through the Company's network of service stations and truckstops. The balance of the Company's refined products were sold to wholesale customers. In addition to transportation and heating fuels, 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 consistently been between 28% 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 of the total change in the Company's inventory value which is due to changes in the pricing of working inventory volumes. Working inventory volumes are those volumes of inventory of the Company's various products and feedstocks necessary to support normal operations. While changes in the value of working inventory affect the Company's reported gross profit, operating income and net income, they have no material effect on the Company's operating cash flow. The Company includes in 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 1999 were significantly impacted by a large and sustained decline in worldwide crude oil prices, as indicated by crude oil contracts traded on the New York Mercantile Exchange (NYMEX). NYMEX crude oil prices declined from more than $21 per barrel in November 1997 to less than $12 per barrel for January 1999. While there were some benefits associated with lower feedstock costs, there were also some offsetting negative impacts associated with corresponding declines in product prices. Also, the Company's crude oil cost advantage associated with its ability to process heavy, high sulfur, Western Canadian crude oils was significantly diminished. Producers of these crude oils reduced the discounts they offered for such grades of crude oil versus lighter, lower sulfur grades as crude oil traded in the low price range in the first half of fiscal 1999 and drilling and exploration for these crude oils were curtailed. Even though worldwide crude oil prices as of early November 1999 had recovered to more than $22, the Company believes the availability of heavy Western Canadian crude oils and the Company's crude oil cost advantage is still being negatively affected by the impact of the low crude oil prices earlier in 1999. The Company believes that, if relatively stable worldwide crude oil prices can be maintained, availability of heavy, high sulfur crude oils will expand and the Company's crude oil cost advantage will increase. However, the Company anticipates that reduced crude oil price discounts will negatively impact results for the first quarter of fiscal 2000, which ends November 30, 1999, and may continue to negatively impact subsequent fiscal quarters. 14 15 RESULTS OF OPERATIONS Comparison of Fiscal 1999 and Fiscal 1998. Net Sales. Net sales decreased $1.3 million or 0.2% from $758.6 million for fiscal 1998 to $757.3 million for fiscal 1999. Retail sales increased $2.7 million, or 0.6% from $435.2 million to $437.9 million, while wholesale sales decreased $4.0 million or 1.2% from $323.4 million to $319.4 million. Sales volume increases of 9.2%, 2.6% and 18.5% for wholesale petroleum, retail petroleum and retail merchandise, respectively, were slightly more than offset by per unit price decreases of 9.6% and 5.9% for wholesale and retail petroleum, respectively. Costs of Goods Sold. Costs of goods sold decreased $15.5 million or 2.3% from $667.9 million for fiscal 1998 to $652.4 million for fiscal 1999. Retail costs of goods sold decreased $2.4 million or 0.7% from $370.4 million to $368.0 million, resulting in a retail gross margin of $64.7 million for fiscal 1998 compared to $69.8 million for fiscal 1999. Wholesale costs of goods sold decreased $13.1 million or 4.4% from $297.4 million to $284.3 million, resulting in a wholesale gross margin of $26.0 million for fiscal 1998 compared to $35.1 million for fiscal 1999. The decrease in consolidated costs of goods sold was primarily the result of a decrease in world crude oil prices and reduction of costs of goods sold by changes in inventory prices, which more than offset a 12.7% increase in crude processing and smaller discounts received on heavy, high sulfur crude oil purchases. Worldwide crude oil prices, as indicated by NYMEX contracts ended a prolonged decline in January 1999 and recovered by the end of fiscal 1999 to levels significantly higher than at the end of fiscal 1998. This resulted in an increase of $10.5 million in the value of the Company's working inventories, which reduced costs of goods sold. In fiscal 1998, declining worldwide crude oil prices had resulted in a $12.8 million decrease in the value of the Company's working inventories, which increased the Company's costs of goods sold. Operating Expenses. Operating expenses increased $3.1 million or 3.7% from $83.4 million for 1998 to $86.5 million for fiscal 1999. This increase was primarily due to increased retail expenses for sales promotions and for 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 increasing retail gasoline volume. 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. Operating Income. Operating income increased $11.1 million from $7.3 million for fiscal 1998 to $18.4 million for fiscal 1999. This was primarily due to a decrease in costs of goods sold as the result of lower worldwide crude oil prices and the result of the reduction to costs of goods sold from a $10.5 million increase in working inventory value. Interest Expense. Net interest expense (interest expense less interest income) increased $1.9 million from $19.5 million for fiscal 1998 to $21.4 million for fiscal 1999. 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. Income Taxes. The Company's effective tax rate for fiscal 1999 was approximately 38.6% compared to a rate of 40.0% for fiscal 1998. Comparison of Fiscal 1998 and Fiscal 1997. Net Sales. Net sales decreased $112.7 million or 12.9% from $871.3 million for fiscal 1997 to $758.6 million for fiscal 1998. Retail sales decreased $28.7 million or 6.2% from $463.9 million to $435.2 million, while wholesale sales decreased $84.0 million or 20.6% from $407.5 million to $323.5 million. The consolidated sales decrease was primarily due to a 22.6% decrease in wholesale gasoline and distillate weighted average net selling prices, 17.4% lower retail petroleum selling prices, and a 14.5% decrease in average asphalt selling prices. Also contributing to the revenue decrease was a 4.8% decrease in wholesale gasoline and distillate volume. However the wholesale gasoline and distillate volume declines were slightly more than offset by a 1.0% increase in retail petroleum volume and a 15.5% increase in asphalt sales volume, as overall petroleum product sales volume increased slightly from 23.69 million barrels in fiscal 1997 to 23.74 million barrels in fiscal 1998. Also offsetting lower petroleum selling prices was a 9.5% increase in retail merchandise sales from $74.5 million in fiscal 1997 to $81.5 million in fiscal 1998. The decreases in the Company's product prices were primarily due to lower worldwide prices for petroleum products which accompanied a 23.1% decrease in world crude oil prices, as indicated by prices of NYMEX crude 15 16 oil contracts. The decreased wholesale gasoline and distillate volume was due primarily to a 5.9% decrease in crude oil processing resulting from the planned shutdown of certain refinery processing units for maintenance and upgrading in October 1997 and May 1998. Costs of Goods Sold. Costs of goods sold decreased $100.0 million or 13.0% from $767.9 million for fiscal 1997 to $667.9 million for fiscal 1998. Retail costs of goods sold decreased $27.5 million or 6.9% from $398.0 million to $370.5 million, resulting in a retail gross margin of $65.9 million for fiscal 1997 compared to $64.7 million for fiscal 1998. Wholesale costs of goods sold decreased $72.6 million or 19.6% from $370.0 million to $297.4 million, resulting in a wholesale gross margin of $37.5 million for fiscal 1997 compared to $26.0 million for fiscal 1998. The decrease in consolidated costs of goods sold was primarily the result of a 23.1% decrease in world crude oil prices, as well as lower refinery crude oil input volume. Partially offsetting lower crude oil prices were increases in costs of goods sold from changes in inventory prices. The per barrel value of the Company's inventories declined during fiscal 1998 as a result of declining world petroleum prices. The declining prices reduced the value of the Company's working inventories by approximately $12.8 million. These reductions in inventory value contributed to corresponding increases to costs of goods sold. For fiscal 1997, the corresponding changes in inventory prices had the effect of decreasing the Company's costs of goods sold by approximately $0.3 million. The Company maintains certain volumes of working inventory necessary to support normal operations, and changes in valuation of this inventory occur with fluctuations in world petroleum prices. The lower pricing of the Company's working inventories at the end of fiscal 1998, for example, was the result of world petroleum prices which ended fiscal 1998 approximately 32% below their level at the end of fiscal 1997. Operating Expenses. Operating expenses increased $2.0 million or 2.4% from $81.4 million for 1997 to $83.4 million for fiscal 1998. This increase was primarily due to increased retail expenses for sales promotions, retail station wages and maintenance and environmental expense. Increased retail station wages were primarily due to an increase in the federal minimum wage, while increased retail environmental expenses were primarily connected with the upgrading of underground storage tanks to new federal standards. Increased retail promotions expenses were primarily in connection with a "frequent fueler" program which has been effective in increasing retail gasoline volume. Operating Income. Operating income decreased $14.6 million from $22.0 million for fiscal 1997 to $7.3 million for fiscal 1998. This was primarily due to a decline in gross profit as the result of a $12.8 million negative impact on costs of goods sold for changes in working inventory value. Also contributing to the decline in gross profit and operating income was the reduction in refinery production resulting from the scheduled maintenance shutdowns in October 1997 and May 1998. Interest Expense. Net interest expense (interest expense less interest income) increased $3.3 million from $16.2 million for fiscal 1997 to $19.5 million for fiscal 1998. The increase was primarily due to an increase in the amount of long-term debt outstanding following the Company's sale of $200 million of Senior Unsecured Notes in June 1997. This was partially offset by a reduction in the average interest rate for long-term debt outstanding and by interest income received on restricted cash and investment. Income Taxes. The Company's effective tax rate for fiscal 1998 was approximately 40.0% compared to a rate of 40.2% for fiscal 1997. LIQUIDITY AND CAPITAL RESOURCES Working capital (current assets minus current liabilities) at August 31, 1999, was $53.2 million and at August 31, 1998 was $57.9 million. The Company's current ratio (current assets divided by current liabilities) was 1.8:1 at August 31, 1999, and was 1.9:1 at August 31, 1998. Net cash used in operating activities totaled $13.8 million for fiscal 1999 compared to net cash provided by operating activities of $15.4 million in fiscal 1998. This decrease is primarily the result of an increase in accounts receivable and inventories, and a decrease in sales, use and fuel taxes payable, offset by an increase in accounts payable. Changes in the carrying value of the Company's inventory are the result of fluctuations in world petroleum prices and do not have a material effect on the Company's operating cash flow. Net cash used in investing activities totaled $8.3 million for the year ended August 31, 1999 as compared to net cash provided by investing activities of $.3 million for fiscal 1998. For the fiscal year ended August 31, 1999 16 17 and 1998 respectively, investments included $17.6 million and $15.3 million in government securities and commercial paper maturing through December 1999 and 1998 respectively. Net cash used in investing activities for purchases of property, plant and equipment and other assets totaled $26.0 million and $33.5 million for fiscal 1999 and 1998 respectively. The Company reviews its capital expenditures on an ongoing basis. During fiscal 1999, the Company invested approximately $26.0 million for capital improvements; of which approximately $15.3 million was funded from the capital expenditure escrow account established in conjunction with the Company's offering in 1997 and the remaining expenditures were funded from cash flow. The Company currently has budgeted approximately $5.0 million for capital expenditures in fiscal 2000. Maintenance and non-discretionary capital expenditures have averaged approximately $4 million annually over the last three years for the refining and marketing operations. Future liquidity, both short and long-term, will continue to be primarily dependent on realizing a refinery margin sufficient to cover fixed and variable expenses, including planned capital expenditures. The Company expects to be able to meet its working capital, capital expenditure and debt service requirements out of cash flow from operations, cash on hand and borrowings under the Company's $35,000,000 secured revolving credit facility (the "Facility") with PNC Bank as Agent Bank. 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 rate plus 1/2% for base rate borrowings and the LIBOR rate for Euro-Rate borrowings, which was 7.63%, as of August 31, 1999. Although the Company is not aware of any pending circumstances which would change its expectation, changes in the tax laws, the imposition of and changes in federal and state clean air and clean fuel requirements and other changes in environmental laws and regulations may also increase future capital expenditure levels. Future capital expenditures are also subject to business conditions affecting the industry. The Company continues to investigate strategic acquisitions and capital improvements to its existing facilities. Federal, state and local laws and regulations relating to the environment affect nearly all the operations of the Company. As is the case with all the companies engaged in similar industries, the Company faces significant exposure from actual or potential claims and lawsuits involving environmental matters. Future expenditures related to environmental matters cannot be reasonably quantified in many circumstances due to the uncertainties as to required remediation methods and related clean-up cost estimates. The Company cannot predict what additional environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied. SEASONAL FACTORS Seasonal factors affecting the Company's business may cause variation in the prices and margins of some of the Company's products. For example, demand for gasoline tends to be highest in spring and summer months, while demand for home heating oil and kerosene tends to be highest in winter months. As a result, the margin on gasoline prices versus crude oil costs generally tends to increase in the spring and summer, while margins on home heating oil and kerosene tend to increase in winter. INFLATION The effect of inflation on the Company has not been significant during the last five fiscal years. YEAR 2000 COMPUTER ISSUES The year 2000 presents many challenges to our industry with respect to, among other things, date-related functions in some computer systems. Historically, certain computer programs have been written using two digits rather than four to define the applicable year, which could result in the computer recognizing a date using "00" as the year 1900 rather than the year 2000. This in turn could result in major system failures or miscalculations and is generally referred to as the "year 2000" problem. Year 2000 risks exist in both information technology ("IT") systems which employ computer hardware and 17 18 software and in non-information technology systems such as embedded computer chips or microcontrollers that control the operation of the equipment in which they are installed. Potential computer failures due to the Year 2000 problem could adversely affect the Company either in its operations and record keeping or from suppliers and/or customers of the Company that experience Year 2000 computer problems. The Company is examining all areas of our business to ensure Year 2000 readiness, including computer hardware and software application testing. The Company is addressing Year 2000 issues primarily with internal resources to ensure that the transition to the Year 2000 will not disrupt the Company's operations or record keeping. The Company has completed an inventory of its non-IT systems for Year 2000 compliance relative to embedded equipment used in the Company's operations. The Company believes that these systems have been identified and those at risk for failure due to Year 2000 problems have been corrected through replacement or remediation with Year 2000 compliant third party software and/or devices. Because of the nature of the non-IT systems, there can be no assurance that the Company has correctly identified all non-IT systems that are subject to failure due to the Year 2000 problem. Any failure of non-IT systems resulting from the Year 2000 problem could adversely affect the Company's operations and record keeping. Costs incurred by the Company to date to implement its plan have not been material and are not expected to have a material effect on the Company's financial condition or results of operations. The Company has a contingency plan to respond to the possible effects of the Year 2000 problem on third parties that are important to the Company's operations. The Company has communicated with its critical suppliers, vendors, customers, utilities, financial institutions and telecommunication providers with whom it does significant business to identify any Year 2000 issues. The Company will continue to communicate with and review the progress of these third party enterprises in resolving their Year 2000 issues. The ability to accurately assess the Company's third parties' readiness is dependent in large part upon the reliability and completeness of their representations. The Company feels the most significant risk to its results of operations and financial condition is that third party supplier(s) of essential inputs (such as power to operate the refinery) would be unable to perform their normal services for an extended period of time because of difficulties created by the Year 2000 problem. This type scenario could cause the Company to suspend the affected operations until the supplier solves the problem or in some cases until an alternative supply could be arranged. The Company, in the event that a particular supplier appears to be vulnerable, will seek to obtain alternative supplies to the extent they are available. However, in the case of some inputs, alternative supplies may not realistically be available even if the supply problem is identified months in advance. In other cases, an unexpected third party failure could occur despite extensive prior communication and assurances from key suppliers. To the extent possible, the Company has either tested or received certifications with respect to all significant IT and non-IT systems. While the Company believes that it has made adequate arrangements to deal with these contingencies, it continues to update such plans as additional information becomes available. 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 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management believes that the adoption of Statement 133 will not have a material effect on the Company's financial position or results of operations. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. N/A 18 19 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Certified Public Accountants 20 Consolidated Financial Statements: Balance Sheets 21 Statements of Operations 22 Statements of Stockholder's Equity 23 Statements of Cash Flows 24 Notes to Consolidated Financial Statements 25 thru 40 19 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, 1999 and 1998, 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, 1999. These consolidated financial statements are the responsibility of the management of United Refining Company and its subsidiaries. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of United Refining Company and subsidiaries as of August 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 1999 in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for turnaround costs in 1999. /s/ BDO SEIDMAN, LLP New York, New York October 29, 1999 20 21 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS) ================================================================================
AUGUST 31, ------------------------ 1999 1998 ----------------------------------------------------------------------------------------------- ASSETS CURRENT: Cash and cash equivalents $ 8,925 $ 26,400 Accounts receivable, net 33,239 27,017 Inventories 70,728 55,124 Prepaid expenses and other assets 10,146 7,727 Deferred income taxes -- 5,024 ----------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 123,038 121,292 ----------------------------------------------------------------------------------------------- PROPERTY, PLANT AND EQUIPMENT: Cost 279,895 256,895 Less: accumulated depreciation 66,473 58,918 ----------------------------------------------------------------------------------------------- NET PROPERTY, PLANT AND EQUIPMENT 213,422 197,977 ----------------------------------------------------------------------------------------------- RESTRICTED CASH AND CASH EQUIVALENTS AND INVESTMENTS -- 15,289 DEFERRED FINANCING COSTS, NET 6,370 7,244 OTHER ASSETS 6,410 777 ----------------------------------------------------------------------------------------------- $349,240 $342,579 =============================================================================================== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT: Revolving credit facility $ 5,000 $ -- Current installments of long-term debt 217 283 Accounts payable 34,727 25,298 Accrued liabilities 12,374 11,823 Sales, use and fuel taxes payable 16,856 26,026 Deferred income taxes 661 -- ----------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 69,835 63,430 LONG TERM DEBT: LESS CURRENT INSTALLMENTS 200,956 201,026 DEFERRED INCOME TAXES 13,515 16,889 DEFERRED GAIN ON SETTLEMENT OF PENSION PLAN OBLIGATIONS 1,990 2,205 DEFERRED RETIREMENT BENEFITS 14,055 12,350 OTHER NONCURRENT LIABILITIES 468 1,442 ----------------------------------------------------------------------------------------------- TOTAL LIABILITIES 300,819 297,342 ----------------------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, $.10 par value per share - shares authorized 100; issued and outstanding 100 -- -- Additional paid-in capital 7,150 7,150 Retained earnings 41,271 38,087 ----------------------------------------------------------------------------------------------- TOTAL STOCKHOLDER'S EQUITY 48,421 45,237 ----------------------------------------------------------------------------------------------- $349,240 $342,579 ===============================================================================================
See accompanying notes to consolidated financial statements. 21 22 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS) ================================================================================
YEAR ENDED AUGUST 31, ------------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ NET SALES (INCLUDES CONSUMER EXCISE TAXES OF $148,007, $145,316 AND $139,371) $ 757,326 $ 758,623 $ 871,348 COSTS OF GOODS SOLD 652,370 667,899 767,941 - ------------------------------------------------------------------------------------------------------ GROSS PROFIT 104,956 90,724 103,407 - ------------------------------------------------------------------------------------------------------ EXPENSES: Selling, general and administrative expenses 77,487 75,064 73,200 Depreciation and amortization expenses 9,042 8,320 8,230 - ------------------------------------------------------------------------------------------------------ TOTAL OPERATING EXPENSES 86,529 83,384 81,430 - ------------------------------------------------------------------------------------------------------ OPERATING INCOME 18,427 7,340 21,977 - ------------------------------------------------------------------------------------------------------ OTHER INCOME (EXPENSE): Interest income 1,027 2,701 1,296 Interest expense (22,377) (22,188) (17,509) Other, net 318 (685) 672 - ------------------------------------------------------------------------------------------------------ (21,032) (20,172) (15,541) - ------------------------------------------------------------------------------------------------------ INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (2,605) (12,832) 6,436 - ------------------------------------------------------------------------------------------------------ INCOME TAX EXPENSE (BENEFIT): Current (194) (319) 3,463 Deferred (812) (4,813) (875) - ------------------------------------------------------------------------------------------------------ (1,006) (5,132) 2,588 - ------------------------------------------------------------------------------------------------------ INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (1,599) (7,700) 3,848 EXTRAORDINARY ITEM, NET OF TAX BENEFIT OF $4,200 -- -- (6,653) CUMULATIVE EFFECT OF ACCOUNTING CHANGE, NET OF TAXES OF $3,122 4,783 -- -- - ------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $ 3,184 $ (7,700) $ (2,805) ======================================================================================================
See accompanying notes to consolidated financial statements. 22 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 September 1, 1996 100 $ -- $ 7,150 $ 76,877 $ 84,027 Net loss -- -- (2,805) (2,805) Dividends -- -- (28,285) (28,285) -------------------------------------------------------------------------------------------------------------- Balance at August 31, 1997 100 -- 7,150 45,787 52,937 Net loss -- -- (7,700) (7,700) -------------------------------------------------------------------------------------------------------------- Balance at August 31, 1998 100 -- 7,150 38,087 45,237 Net income -- -- 3,184 3,184 -------------------------------------------------------------------------------------------------------------- Balance at August 31, 1999 100 $ -- $ 7,150 $ 41,271 $ 48,421 --------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 23 24 UNITED REFINING COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) ================================================================================
YEAR ENDED AUGUST 31, ------------------------------------------ 1999 1998 1997 ---------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 3,184 $ (7,700) $ (2,805) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Cumulative effect of accounting change (7,905) -- -- Depreciation and amortization 12,143 8,973 8,564 Write-off of deferred financing costs -- -- 1,118 Post-retirement benefits 1,705 1,553 2,413 Change in deferred income taxes 2,311 (4,813) (875) Write-off of insurance claim -- -- 1,251 (Gain) loss on asset dispositions (783) 503 4 Cash provided by (used in) working capital items (24,489) 16,892 (11,676) Other, net 13 (42) (305) ---------------------------------------------------------------------------------------------------------------------- TOTAL ADJUSTMENTS (17,005) 23,066 494 ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (13,821) 15,366 (2,311) ====================================================================================================================== CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) decrease in restricted cash and cash equivalents 15,289 32,879 (48,168) and investments Additions to property, plant and equipment (26,047) (33,516) (5,824) Proceeds from asset dispositions 2,417 913 422 ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (8,341) 276 (53,570) ====================================================================================================================== CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings on revolving credit facility 5,000 -- -- Cash dividends -- -- (5,000) Principal reductions of long-term debt (313) (250) (135,512) Proceeds from issuance of long-term debt -- 287 200,000 Deferred financing costs -- (303) (8,094) ---------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,687 (266) 51,394 ---------------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (17,475) 15,376 (4,487) CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 26,400 11,024 15,511 ---------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 8,925 $ 26,400 $ 11,024 ====================================================================================================================== CASH PROVIDED BY (USED IN) WORKING CAPITAL ITEMS: Accounts receivable, net $ (6,222) $ 2,745 $ (2,686) Inventories (15,499) 11,972 (14,852) Prepaid expenses and other assets (2,419) (941) (344) Accounts payable 9,429 (3,712) 6,623 Accrued liabilities (608) (6,142) 1,354 Sales, use and fuel taxes payable (9,170) 12,970 (1,771) ---------------------------------------------------------------------------------------------------------------------- TOTAL CHANGE $(24,489) $ 16,892 $ (11,676) ====================================================================================================================== CASH PAID DURING THE PERIOD FOR: Interest $ 22,084 $ 22,454 $ 16,280 Income taxes $ 207 $ 266 $ 195 ====================================================================================================================== NON-CASH FINANCING ACTIVITIES: Dividends $ -- $ -- $ 23,285 Capital leases $ 177 $ -- $ -- ======================================================================================================================
See accompanying notes to consolidated financial statements. 24 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. Due to fluctuating market conditions for certain petroleum product inventories, LIFO cost exceeded market by approximately $3,800,000 and $11,200,000 as of August 31, 1999 and 1998, respectively, resulting in the valuation of certain inventories at market. Inventories consist of the following:
AUGUST 31, ------------------------- 1999 1998 - --------------------------------------------------------------- (IN THOUSANDS) Crude Oil $24,222 $12,042 Petroleum Products 23,277 22,513 - --------------------------------------------------------------- Total @ LIFO 47,499 34,555 - --------------------------------------------------------------- Merchandise 9,953 7,479 Supplies 13,276 13,090 - --------------------------------------------------------------- Total @ FIFO 23,229 20,569 - --------------------------------------------------------------- Total Inventory $70,728 $55,124 - ---------------------------------------------------------------
25 26 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Included in petroleum product inventories are exchange balances either held for or due from other petroleum marketers. These balances are not significant. The Company does not own sources of crude oil and depends on outside vendors for its needs. Property, Plant and Equipment Property, plant and equipment is stated at cost and depreciated by the straight-line method over the respective estimated useful lives. Routine current maintenance, repairs and replacement costs are charged against income. Turnaround costs, which consist of complete shutdown and inspection of significant units of the refinery at intervals of two or more years for necessary repairs and replacements, are deferred when incurred and amortized on a straight-line basis over the period of benefit (see Change in Accounting Principle). Expenditures which materially increase values, expand capacities or extend useful lives are capitalized. A summary of the principal useful lives used in computing depreciation expense is as follows:
ESTIMATED USEFUL LIVES (YEARS) - ------------------------------------------------------ Refinery Equipment 20-30 Marketing 15-30 Transportation 20-30 - ------------------------------------------------------
Restricted Cash and Cash Equivalents and Investments Restricted cash and cash equivalents and investments consisted of cash and cash equivalents and investments in government securities and commercial paper held in trust and committed only for expanding and upgrading the refinery, rebuilding and refurbishing existing retail units and for acquiring new retail units and other capital projects. These funds represented the unused proceeds from the $200,000,000 10 3/4% Senior Unsecured Notes offering completed in June, 1997 and were carried at cost, which approximates market. Revenue Recognition Revenues from wholesale sales are recognized upon shipment or when title passes. Retail revenues are recognized immediately upon sale to the customer. 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 26 27 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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. Pursuant to the tax sharing agreement, included in prepaid expenses and other assets are amounts due from the Parent of approximately $1,600,000 as of August 31, 1999 and 1998, respectively. Post-retirement Healthcare Benefits The Company provides at no cost to retirees, post-retirement healthcare benefits to salaried and certain hourly employees. The benefits provided are hospitalization, medical coverage and dental coverage for the employee and spouse until age 65. After age 65, benefits continue until the death of the retiree, which results in the termination of benefits for all dependent coverage. If an employee leaves the Company as a terminated vested member of a pension plan prior to normal retirement age, the person is not entitled to any post-retirement healthcare benefits. The Company accrues post-retirement benefits other than pensions during the years that the employee renders the necessary service, of the expected cost of providing those benefits to an employee and the employee's beneficiaries and covered dependents. The Company has elected to amortize the transition obligation of approximately $12,000,000 on a straight-line basis over a 20-year period. Use of Estimates The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In August 1997, the Company recorded a charge to earnings of $1,251,000 relating to a change in estimate. This accounting change results from the write-off of a portion of an insurance claim receivable and is included in cost of goods sold. 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 27 28 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ reflect the anticipated participation of other potentially responsible parties in those instances where it is probable that such parties are legally responsible and financially capable of paying their respective shares of the relevant costs. The estimated liability of the Company is discounted, but is not reduced for possible recoveries from insurance carriers (Note 14). 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. 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, 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, 1999, net deferred turnaround costs included in other assets amounted to $5,743,000, net of accumulated amortization of $3,528,000. Pro forma amounts assuming the new accounting method is applied retroactively are as follows (in thousands):
YEAR ENDED AUGUST 31, 1998 1997 ----------------------------- ------------------------- As Proforma As Proforma reported adjusted reported adjusted - -------------------------------------------------------------- ------------- --------------- ------------ ------------ Income (loss) before income tax expense (benefit) and extraordinary item $ (12,832) $ (11,916) $ 6,436 $ 7,140 Net income (loss) before extraordinary item $ (7,700) $ (7,150) $ 3,848 $ 4,282 ======================================================================================================================
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. Prior years results have been restated to conform to the 1999 presentation (Note 16). 28 29 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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 and eliminates certain disclosures that are no longer useful. Certain prior period disclosures have been restated to conform to the new reporting requirements and additional information has been added. 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 is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Management believes that the adoption of Statement 133 will not have a material effect on the Company's financial position or results of operations. 2. ACCOUNTS RECEIVABLE, NET As of August 31, 1999 and 1998, accounts receivable were net of allowance for doubtful accounts of $365,000 and $405,000 respectively. 3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment is summarized as follows:
AUGUST 31, ----------------------------- 1999 1998 - -------------------------------------------------------------------------------- (IN THOUSANDS) Refinery equipment, Including construction-in-progress $169,941 $162,703 Marketing (i.e. retail outlets) 102,905 87,230 Transportation 7,049 6,962 - -------------------------------------------------------------------------------- 279,895 256,895 Less: Accumulated depreciation 66,473 58,918 - -------------------------------------------------------------------------------- $213,422 $197,977 ================================================================================
29 30 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 4. ACCRUED LIABILITIES Accrued liabilities include the following:
AUGUST 31, -------------------------- 1999 1998 - ----------------------------------------------------------------------------------------- (IN THOUSANDS) Interest $ 4,923 $ 4,631 Payrolls and benefits 6,197 6,359 Other 1,254 833 - ----------------------------------------------------------------------------------------- $12,374 $11,823 =========================================================================================
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, 1999 and 1998, capitalized lease obligations, included in long-term debt, amounted to $719,000 and $635,000, respectively, net of current portion of $88,000 and $93,000 respectively. The related assets (retail gas stations and convenience stores) as of August 31, 1999 and 1998 amounted to $550,000 and $448,000 respectively, net of accumulated amortization of $196,000 and $123,000, respectively. Lease amortization amounting to $72,000, $85,000, and $117,000 for the years ended August 31, 1999, 1998, and 1997 respectively, is included in depreciation and amortization expense. 30 31 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Future minimum lease payments as of August 31, 1999 are summarized as follows:
CAPITAL OPERATING YEAR ENDED AUGUST 31, LEASES LEASES - ------------------------------------------------------------------------------------------ (IN THOUSANDS) 2000 $ 186 $ 2,899 2001 131 2,166 2002 108 1,580 2003 110 970 2004 115 645 Thereafter 1,071 1,012 - ------------------------------------------------------------------------------------------ Total minimum lease payments 1,721 9,272 Less: Minimum sublease rents -- 184 - ------------------------------------------------------------------------------------------ Net minimum sublease payments 1,721 $ 9,088 ============= Less: Amount representing interest 1,002 - -------------------------------------------------------------------------- Present value of net minimum lease payments $ 719 ==========================================================================
Net rent expense for operating leases amounted to $3,386,000, $3,338,000 and $3,238,000 for the years ended August 31, 1999, 1998 and 1997 respectively. 6. CREDIT FACILITY In June 1997, the Company negotiated a $35,000,000 secured revolving credit facility (the "Facility") with a syndicate of banks that provides for revolving credit loans and for the issuance of letters of credit. The Facility expires on June 9, 2002 and is secured by certain qualifying cash accounts, accounts receivable, and inventory, which amounted to $54,964,000 as of August 31, 1999. Until maturity, the Company may borrow, repay and reborrow on an amount not exceeding certain percentages of secured assets. The interest rate on borrowings varies with the Company's earnings and is based on the higher of the bank's prime rate or Federal funds rate plus 1/2% for base rate borrowings and the LIBOR rate for Euro-Rate borrowings, which was 7.63% as of August 31, 1999. As of August 31, 1999 no letters of credit and $5,000,000 of borrowings were outstanding under the agreement. No other borrowings or letters of credit were outstanding for any other period presented. The Company pays a commitment fee of 3/8% per annum on the unused balance of the Facility. 7. LONG-TERM DEBT During June 1997, the Company sold $200,000,000 of 10 3/4% Senior Unsecured Notes due 2007, Series A. Subsequent to this issue, the Company exchanged these notes for its 10 3/4% Senior Unsecured Notes due 2007, Series B. Such notes are fully and unconditionally guaranteed on a senior unsecured basis by all of the Company's subsidiaries (Note 17). The proceeds of the offering were used to retire all of its outstanding senior notes, pay prepayment penalties related thereto and to retire the amount outstanding under the Company's existing secured revolving credit facility. The excess proceeds from the offering of approximately $48,100,000 were deposited in an escrow account to be used for expanding and upgrading the refinery, rebuilding and refurbishing existing retail units, and for acquiring new retail units and other capital expenditure projects. As of August 31, 1998 the unused funds were classified as "Restricted Cash and Cash Equivalents and Investments". 31 32 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 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, ------------------------------- 1999 1998 - ---------------------------------------------------------------------------------------------------- (IN THOUSANDS) Long-term debt: 10.75% senior unsecured notes due June 9, 2007, Series B $ 200,000 $ 200,000 Other long-term debt 454 674 Capitalized lease obligations (Note 5) 719 635 - ---------------------------------------------------------------------------------------------------- 201,173 201,309 Less: Current installments of long-term debt 217 283 - ---------------------------------------------------------------------------------------------------- Total long-term debt, less current installments $ 200,956 $ 201,026 ====================================================================================================
The principal amount of long-term debt outstanding as of August 31, 1999, matures as follows:
YEAR ENDED AUGUST 31, - ------------------------------------------------------------------------------- (IN THOUSANDS) 2000 $ 217 2001 121 2002 95 2003 76 2004 84 Thereafter 200,580 - ------------------------------------------------------------------------------- $201,173 ===============================================================================
32 33 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The following financing costs have been deferred and are being amortized to expense over the term of the related debt:
AUGUST 31, ---------------------------- 1999 1998 - ------------------------------------------------------------------------------- (IN THOUSANDS) Beginning balance $ 7,244 $ 7,807 Current year additions -- 303 - ------------------------------------------------------------------------------- Total financing costs 7,244 8,110 Amortization (874) (866) - ------------------------------------------------------------------------------- $ 6,370 $ 7,244 ===============================================================================
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, 1999, 1998, and 1997:
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS ----------------------------------- -------------------------------------- 1999 1998 1997 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------- (IN THOUSANDS) Service cost $ 1,430 $ 1,381 $ 1,283 $ 689 $ 620 $ 670 Interest cost on benefit obligation 2,014 1,897 1,632 931 892 905 Expected return on plan assets (2,315) (1,921) (1,509) -- -- -- Amortization of transition obligation 140 140 140 597 597 597 Amortization and deferrals (121) (175) (105) (179) (211) (140) - ------------------------------------------------------------------------------------------------------------------------- Net periodic benefit cost $ 1,148 $ 1,322 $ 1,441 $ 2,038 $ 1,898 $ 2,032 =========================================================================================================================
33 34 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The following table summarizes the change in benefit obligations and fair values of plan assets for the years ended August 31, 1999 and 1998:
OTHER POST-RETIREMENT PENSION BENEFITS BENEFITS ------------------------------------------------------- 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------------------------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION: Benefit obligation @ beginning of year $ 25,079 $ 24,017 $ 12,450 $ 12,668 Service cost 1,430 1,381 689 620 Interest cost 2,014 1,897 931 892 Actuarial (gains) losses 2,434 (1,401) 195 (1,295) Benefits paid (982) (815) (469) (435) - ---------------------------------------------------------------------------------------------------------- Benefit obligation @ end of year 29,975 25,079 13,796 12,450 - ---------------------------------------------------------------------------------------------------------- CHANGE IN PLAN ASSETS: Fair values of plan assets @ beginning of year 24,965 23,534 -- -- Actual return on plan assets 5,059 1,436 -- -- Company contributions 1,108 810 469 435 Benefits paid (982) (815) (469) (435) - ---------------------------------------------------------------------------------------------------------- Fair values of plan assets @ end of year 30,150 24,965 -- -- - ---------------------------------------------------------------------------------------------------------- Funded status (175) 114 13,796 12,450 Unrecognized actuarial gains 7,233 7,120 4,303 4,677 Unrecognized prior service cost (844) (920) -- -- Unrecognized transition obligation (1,190) (1,330) (8,355) (8,952) - ---------------------------------------------------------------------------------------------------------- Accrued benefit cost $ 5,024 $ 4,984 $ 9,744 $ 8,175 ========================================================================================================== WEIGHTED AVERAGE ASSUMPTIONS: Discount rate 7.5% 8.0% 7.5% 8.0% ========================= Expected return on plan assets 9.0% 8.0% 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 7.1% and 5%, respectively for 1999; the rates were assumed to decrease gradually to 5% for both medical and dental benefits until 2008 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 $ 297 $ (267) Effect on post-retirement benefit obligation 2,283 (2,088)
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 $576,000, $548,000 and $498,000 for the years ended August 31, 1999, 1998 and 1997, respectively. 34 35 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 9. INCOME TAXES Income tax expense (benefit) consists of:
YEAR ENDED AUGUST 31, ----------------------------------- 1999 1998 1997 - ---------------------------------------------------------- (IN THOUSANDS) Federal: Current $ (185) $ (600) $ 2,928 Deferred (668) (2,971) (491) - ---------------------------------------------------------- (853) (3,571) 2,437 - ---------------------------------------------------------- State: Current (9) 281 535 Deferred (144) (1,842) (384) - ---------------------------------------------------------- (153) (1,561) 151 - ---------------------------------------------------------- $(1,006) $(5,132) $ 2,588 ==========================================================
Reconciliation of the differences between income taxes computed at the Federal statutory rate and the provision for income taxes attributable to income before income tax expense (benefit) and extraordinary item is as follows:
YEAR ENDED AUGUST 31, ------------------------------------ 1999 1998 1997 - ------------------------------------------------------------------------------------------------------ (IN THOUSANDS) U. S. federal income taxes at the statutory rate of 34% $ (886) $(4,363) $ 2,188 State income taxes, net of Federal benefit (172) (664) 363 Reduction of taxes provided in prior year -- (51) (62) Nondeductible expenses 16 174 317 Other 36 (228) (218) - ------------------------------------------------------------------------------------------------------ Income tax attributable to income (loss) before income tax expense, extraordinary item and cumulative effect $(1,006) $(5,132) $ 2,588 ======================================================================================================
35 36 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ Deferred income tax liabilities (assets) are comprised of the following:
AUGUST 31, ------------------------ 1999 1998 - ----------------------------------------------------------------------- (IN THOUSANDS) Current deferred income tax liabilities (assets): Inventory valuation $ 2,610 $ (2,501) Accounts receivable allowance (141) (165) Accrued liabilities (1,775) (2,513) Other (33) 155 - ----------------------------------------------------------------------- 661 (5,024) - ----------------------------------------------------------------------- Deferred income tax liabilities: Property, plant and equipment 29,898 28,971 Accrued liabilities (6,725) (6,216) Tax credits and carryforwards (7,146) (4,300) State net operating loss carryforwards (3,437) (2,513) Valuation allowance 854 870 Other 71 77 - ----------------------------------------------------------------------- 13,515 16,889 - ----------------------------------------------------------------------- Net deferred income tax liability $ 14,176 $ 11,865 =======================================================================
The Company's results of operations are included in the consolidated Federal tax return of the Parent. The Company has a net operating loss for regular tax purposes of $8,000,000 which will expire after 2019. For financial reporting purposes, valuation allowances of $854,000 and $870,000 at August 31, 1999 and 1998 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 $4,200,000 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 instruments for which it is practicable to estimate that value. The carrying amount of cash and cash equivalents, trade accounts and notes receivable and current liabilities approximate fair value because of the short maturity of these instruments. The fair value of long-term debt (Note 7) was determined using the fair market value of the individual debt instruments. As of August 31, 1999, the carrying amount and estimated fair value of these debt instruments approximated $201,173,000 and $149,447,000, respectively. 36 37 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ 11. CONTINGENCIES In addition to the environmental matter discussion 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 In June 1997, the Company declared a dividend of $28,285,000 of which $5,000,000 was paid in cash and $23,285,000 was forgiveness of debt from related parties. Additionally, the Company offset $2,017,000 of amounts due from related parties with deferred tax benefits previously received. The Company paid a service fee relating to certain costs incurred by its Parent for the Company's New York office. During the years ended August 31, 1999, 1998 and 1997, such fees amounted to approximately $995,000, $980,000 and $2,712,000 respectively. An affiliate of the Company leases nine retail gas station and convenience stores to the Company under various operating leases which all expire in 2001. Rent expense relating to these leases was $264,000 for each of the years ended August 31, 1999, 1998 and 1997. 13. ENVIRONMENTAL MATTERS The Company is subject to federal, state, and local laws and regulations relating to pollution and protection of the environment such as those governing releases of certain materials into the environment and the storage, treatment, transportation, disposal and clean-up of wastes, including, but not limited to, the Federal Clean Water Act, as amended, the Clean Air Act, as amended, the Resource Conservation and Recovery Act of 1976, as amended, the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, and analogous state and local laws and regulations. Due to the nature of the Company's business, the Company is and will continue to be subject to various environmental claims, legal actions and complaints. 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 upon its operations or consolidated financial condition until the scope of the claims is fully known. In the opinion of management, all current matters are without merit or are of such kind or involve such amounts that an unfavorable disposition would not have a material adverse effect on the consolidated financial position and results of operations of the Company. Management of the Company believes that remediation or related environmental costs incurred during the normal course of business are not expected to be material. 14. OTHER EXPENSE During 1994, the Company incurred a loss of $1,598,000 in connection with the settlement of a claim dating back to a period prior to the acquisition by the Parent (Note 1). The related settlement amount of $2,300,000 ($1,598,000 after being discounted at 13% per annum) is payable in quarterly installments of $125,000 commencing on January 13, 1995, and continuing to October 13, 1998, at which time annual payments of $160,000 will be required until the remaining outstanding balance is liquidated on October 13, 2002. 37 38 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================ The undiscounted amounts due as of August 31, 1999 are as follows:
YEAR ENDED AUGUST 31, --------------------------------------------------------- (IN THOUSANDS) 2000 $ 160 2001 160 2002 160 2003 160 --------------------------------------------------------- $ 640 =========================================================
15. EXTRAORDINARY ITEM In June 1997, the Company incurred an extraordinary loss of $6,653,000 (net of an income tax benefit of $4,200,000) as a result of "make-whole premiums" paid and financing costs written-off in connection with the early retirement of its 11.50% and 13.50% senior unsecured notes. 16. 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 39 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
YEAR ENDED AUGUST 31, ------------------------------------- 1999 1998 1997 - ----------------------------------------------------------------------- (IN THOUSANDS) Net Sales Retail $437,884 $ 435,151 $463,895 Wholesale 319,442 323,472 407,453 - ----------------------------------------------------------------------- $757,326 $ 758,623 $871,348 ======================================================================= Intersegment Sales Wholesale $142,039 $ 156,959 $198,129 ======================================================================= Operating income (Loss) Retail $ 91 $ (2,333) $ 3,267 Wholesale 18,336 9,673 18,710 - ----------------------------------------------------------------------- $ 18,427 $ 7,340 $ 21,977 ======================================================================= Total Assets Retail $113,599 $ 95,654 $ 80,124 Wholesale 235,641 246,925 266,268 - ----------------------------------------------------------------------- $349,240 $ 342,579 $346,392 ======================================================================= Depreciation and Amortization Retail $ 2,341 $ 1,985 $ 1,906 Wholesale 6,701 6,335 6,324 - ----------------------------------------------------------------------- $ 9,042 $ 8,320 $ 8,230 ======================================================================= Capital Expenditures Retail $ 18,698 $ 16,880 $ 3,095 Wholesale 7,526 16,636 2,729 - ----------------------------------------------------------------------- $ 26,224 $ 33,516 $ 5,824 =======================================================================
17. SUBSIDIARY GUARANTORS Summarized financial information for the Company's wholly-owned subsidiary guarantors (Note 7) is as follows:
AUGUST 31, -------------------------------- 1999 1998 - ------------------------------------------------------------------------- (IN THOUSANDS) Current Assets $ 45,027 $ 39,901 Noncurrent Assets 88,431 73,666 Current Liabilities 125,789 103,977 Noncurrent Liabilities 10,312 10,651 =========================================================================
39 40 UNITED REFINING COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ================================================================================
YEAR ENDED AUGUST 31, --------------------------------------- 1999 1998 1997 - ------------------------------------------------------------------- (IN THOUSANDS) Net Sales $ 442,908 $ 439,563 $468,570 Gross Profit 72,746 66,157 68,524 Operating Income (Loss) 2,334 (1,582) 5,185 Net Income (Loss) (1,693) (4,129) 1,624 - -------------------------------------------------------------------
Separate financial statements of the wholly-owned subsidiary guarantors are not presented because management believes they would not be meaningful to investors. 18. QUARTERLY FINANCIAL DATA (UNAUDITED)
=============================================================================== INCOME (LOSS) BEFORE GROSS CUMULATIVE NET SALES PROFIT EFFECT CHANGE - ------------------------------------------------------------------------------- (IN THOUSANDS) 1999 First Quarter $187,092 $25,209 $ (450) Second Quarter 144,662 16,954 (6,435) Third Quarter 185,313 32,845 4,214 Fourth Quarter 240,259 29,948 1,072 1998 First Quarter $213,302 $27,181 $ 725 Second Quarter 163,263 8,949 (9,557) Third Quarter 175,246 22,705 (2,314) Fourth Quarter 206,812 31,889 3,446 ===============================================================================
40 41 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, 1999 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 51 1986 Chairman of the Chairman of the Board, Chief Executive Board, Chief Officer and President of Red Apple Group, Executive Inc. (a holding company for certain Officer, businesses, including corporations which Director operate supermarkets in New York); Chief Executive Officer and Director of Gristede's 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 47 1988 President, Chief President and Chief Operating Officer of the Operating Company since September 1996. From June Officer, 1987 to September 1996 he was Chief Director Financial Officer and Executive Vice President of the Company. Thomas C. Covert 65 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 58 --- Senior Vice Senior Vice President - Marketing of the President - Company since July 1990. Marketing
41 42
Director Name Age Since Position Principal Occupation for the Past 5 Years ---- --- ----- -------- ----------------------------------------- Thomas E. Skarada 56 --- 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. 45 --- Vice President - Vice President - Supply and Transportation Supply and of the Company since February 1993. Transportation James E. Murphy 54 --- Vice President Chief Financial Officer of the Company and Chief since January 1997. He was Vice President Financial - Finance from April 1995 to December 1996. Officer John R. Wagner 40 --- Vice President, Vice President, General Counsel and General Secretary of the Company since August Counsel and 1997. Prior to joining the Company, Mr. Secretary Wagner served as Counsel to Dollar Bank, F.S.B. from 1988 until assuming his current position. Dennis E. Bee, Jr. 57 --- Treasurer Treasurer of the Company since May 1988. Martin R. Bring 56 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 73 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 52 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.
42 43
Director Name Age Since Position Principal Occupation for the Past 5 Years ---- --- ----- -------- ----------------------------------------- Douglas Lemmonds 52 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. Andrew Maloney 67 1997 Director Partner of Brown & Wood LLP, a New York law firm, since December 1992. From June 1986 to December 1992 he was the United States Attorney for the Eastern District of New York. Dennis Mehiel 56 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 43 44 SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Not Applicable ITEM 11. EXECUTIVE COMPENSATION The following table sets forth for the three fiscal years ended August 31, 1996, 1997 and 1998 the compensation paid by the Company to its Chairman of the Board and Chief Executive Officer and each of the four other executive officers of the Company whose salary and bonus exceeded $100,000 for the fiscal year ended August 31, 1999. SUMMARY COMPENSATION TABLE - --------------------------------------------------------------------------------
OTHER ANNUAL OTHER ANNUAL COMPENSATION COMPENSATION COMPENSATION NAME & PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($) (2) - ------------------------- ---- -------------------------- ------- ------- John A. Catsimatidis 1999 $360,000 $290,000 $ - $8,488 Chairman of the Board & 1998 360,000 265,000 - 8,052 Chief Executive Officer 1997 360,000 265,000 - 7,802 Myron L. Turfitt 1999 $235,000 $225,000 $4,780 $6,796 President & 1998 235,000 200,000 5,325 6,932 Chief Operating Officer 1997 235,000 280,000 2,780 6,562 Ashton L. Ditka 1999 $140,000 $ 20,000 $2,712 $7,427 Senior Vice President 1998 140,000 11,200 2,985 7,214 Marketing 1997 135,042 31,405 3,241 6,731 Thomas E. Skarada 1999 $110,000 $ 20,000 $6,750 $5,893 Vice President 1998 110,000 8,800 6,781 5,490 Refining 1997 105,000 29,900 7,580 4,470 Frederick J. Martin, Jr. 1999 $100,000 $ 8,000 $5,564 $4,042 Vice President 1998 100,000 8,000 4,915 4,036 Supply & Transportation 1997 94,300 4,620 4,210 3,835
(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. 44 45 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 $16,027 $21,370 $26,712 $32,055 $37,397 $125,000 20,715 27,620 34,525 41,430 48,335 $150,000 25,402 33,870 42,337 50,805 59,272 $160,000 or more 27,277 36,370 45,462 54,555 63,647
The benefit formula is based on the average earnings of the participant for the three years in which such participant's earnings were the highest. Earnings include salary and bonus up to a maximum of $160,000 per year. Benefits are calculated by multiplying the sum of (a) 1% of average earnings up to the Social Security compensation base, plus (b) 1.25% of average earnings in excess of the Social Security compensation base, by (c) the number of years of service. Payments of retirement benefits are not reduced by any Social Security benefits received by the participant. The Social Security compensation base for 1999 is $72,600. 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 13 27 MYRON L. TURFITT 21 39 ASHTON L. DITKA 23 30 THOMAS E. SKARADA 6 14 FREDERICK J. MARTIN, JR. 19 39
COMPENSATION OF DIRECTORS Non-officer directors receive a stipend of $15,000 per year and $1,000 for each meeting attended. 45 46 EMPLOYMENT AND CONSULTING AGREEMENTS Thomas C. Covert entered into a consulting agreement with the Company, the initial term of which commenced on September 1, 1996 and expired on August 31, 1998. The Agreement provides that its term shall be extended for two additional one year periods unless the Company or Mr. Covert gives written notice of cancellation to the other party within specified time periods. Under such provision the term of the Agreement has been extended to August 31, 2000. Under the agreement Mr. Covert is obligated to render services to the Company on a limited time basis of between 30-40 hours per month in such capacities as the Board of Directors of the Company may designate. Under the agreement the Company has agreed to pay Mr. Covert $170 per hour for services rendered, but in no event less than $6,800 per month for each month during the term of the agreement. Mr. Covert has also entered into a Deferred Compensation Agreement with the Company pursuant to which since the date of his retirement on September 1, 1996, the Company has been paying Mr. Covert a retirement benefit at the rate of approximately $12,300 per year. The benefit is payable to Mr. Covert until his death, whereupon Mr. Covert's wife is entitled to a benefit of approximately $6,150 per year until her death if she does not predecease him. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth certain information regarding ownership of Common Stock on November 29, 1999 by: (i) each stockholder known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each of the Company's directors; and (iii) all officers and directors of the Company as a group. The Company believes that ownership of the shares by the persons named below is both of record and beneficial and such persons have sole voting and investing power with respect to the shares indicated.
Name and Address of Beneficial Owner Number of Shares Percent of Class John Catsimatidis 823 Eleventh Avenue 100 100% New York, NY 10019 All officers and directors 100 100% as a group (15 persons)
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The Company paid a service fee relating to certain costs incurred by its parent, Red Apple Group, Inc., ("RAG"), for the Company's New York office for fiscal 1999 amounting to approximately $995,000. Pursuant to a Servicing Agreement entered into between the Company and RAG in June 1997, the Company will pay up to a $1,000,000 per year fee relating to these costs. The term of the Servicing Agreement expires on June 9, 2000, but the term shall be automatically extended for periods of one year if neither party gives notice of termination of the Servicing Agreement prior to the expiration of the then current term. As of the date hereof, United Refining, Inc., owned by John A. Catsimatidis, was leasing to the Company nine retail units. The term of each lease expires on April 1, 2001. The annual rentals payable under the leases aggregate $264,000, which the Company believes are market rates. As of the date hereof, the Company was current on all rent obligations under such leases. RAG files a consolidated tax return with affiliated entities, including the Company. Commencing in June 1997, RAG, the Company and certain of their affiliates entered into a tax sharing agreement (the "Tax Sharing Agreement"). Under the Tax Sharing Agreement the parties established a method for allocating the consolidated federal income tax liability and combined state tax liability of the RAG affiliated group among its members; for reimbursing RAG for payment of such tax liability; for compensating any member for use of its net operating loss or tax credits in arriving at such tax liability; and to provide for the allocation and payment of any refund arising from a 46 47 carryback of net operating loss or tax credits from subsequent taxable years. Pursuant to the tax sharing agreement included in prepaid expenses and other assets are amounts due from the Parent of approximately $1,600,000 as of August 31, 1999 and 1998, respectively. During fiscal 1999, the Company made payments for services rendered to it by Wolf, Block, Schorr and Solis-Cohen, LLP, ("WBS&S-C"), a law firm of which Martin R. Bring, a director of the Company, is a member. The Company believes that the fees paid to WBS&S-C for legal services are comparable to fees it would pay to a law firm for similar services, none of whose members are officers, directors or principal stockholders of the Company. PART IV ITEM 14. EXHIBITS AND REPORTS ON FORM 8-K. (a) (1) Financial Statements A list of all financial statements filed as part of this report is contained in the index to Item 8, which index is incorporated herein by reference. (2) Financial Statement Schedules Report of Independent Certified Public Accountants Schedule II - Valuation and Qualifying Accounts (3) Exhibits Number Description - ------ ----------- 3.1 Certificate of Incorporation of United Refining Company ("URC"). Incorporated by reference to Exhibit 3.1 to the Registrant's Registration Statement on Form S-4 (File No. 333-35083) (the "Registration Statement"). 3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the Registration Statement. 3.3 Certificate of Incorporation of United Refining Company of Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to the Registration Statement. 3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the Registration Statement. 3.5 Certificate of Incorporation of Kiantone Pipeline Corporation ("KPC"). Incorporated by reference to Exhibit 3.5 to the Registration Statement. 3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the Registration Statement. 3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY"). Incorporated by reference to Exhibit 3.7 to the Registration Statement. 3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the registration Statement. 3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI"). Incorporated by reference to Exhibit 3.9 to the Registration Statement. 3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the Registration Statement. 3.11 Certificate of Incorporation of Independent Gasoline & Oil Company of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit 3.11 to the Registration Statement. 3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the Registration Statement. 3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC"). Incorporated by reference to Exhibit 3.13 to the Registration Statement. 3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the Registration Statement. 3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by reference to Exhibit 3.15 to the Registration Statement. 3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the Registration Statement. 3.17 Certificate of Incorporation of Super Test Petroleum, Inc. ("STPI"). Incorporated by reference to Exhibit 3.17 to the Registration Statement. 3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the Registration Statement. 47 48 3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI"). Incorporated by reference to Exhibit 3.19 to the Registration Statement. 3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the Registration Statement. 3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation ("VARC"). Incorporated by reference to Exhibit 3.21 to the Registration Statement. 3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the Registration Statement. 3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI"). Incorporated by reference to Exhibit 3.23 to the Registration Statement. 3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the Registration Statement. 4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder Bank & Trust Company ("Schroder"), relating to the 10 3/4% Series A Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to the Registration Statement. 4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the Registration Statement. 10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co. Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated by reference to Exhibit 10.1 to the Registration Statement. 10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP, KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI, and BSCI. Incorporated by reference to Exhibit 10.2 to the Registration Statement. 10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow Agent, Schroder, as Trustee, and URC. Incorporated by reference to Exhibit 10.3 to the Registration Statement. 10.4 Servicing Agreement dated June 9, 1997 between URC and Red Apple Group, Inc. Incorporated by reference to Exhibit 10.4 to the Registration Statement. 10.5 Collective Bargaining Agreement dated February 1, 1996 between URC and International Union of Operating Engineers, Local No. 95. Incorporated by reference to Exhibit 10.5 to the Registration Statement. 10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and International Union, United Plant Guard Workers of America and Local No. 502. Incorporated by reference to Exhibit 10.6 to the Registration Statement. 10.7 Collective Bargaining Agreement dated February 1, 1997 between URC and United Steel Workers of America Local Union No. 2122-A. Incorporated by reference to Exhibit 10.7 to the Registration Statement. 10.8 Collective Bargaining Agreement dated August 1, 1995 between URC and General Teamsters Local Union No. 397. Incorporated by reference to Exhibit 10.8 to the Registration Statement. 10.9 Credit Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.9 to the Registration Statement. 10.10 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URC. Incorporated by reference to Exhibit 10.10 to the Registration Statement. 10.11 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by URCP. Incorporated by reference to Exhibit 10.11 to the Registration Statement. 10.12 Continuing Agreement of Guaranty and Suretyship dated as of June 9, 1997 by KPC. Incorporated by reference to Exhibit 10.12 to the Registration Statement. 10.13 Security Agreement dated as of June 9, 1997 by and among, URC, URCP, KPC and the Banks party thereto and PNC Bank, National Association, as Agent. Incorporated by reference to Exhibit 10.13 to the Registration Statement. 10.14 Waiver and Amendment to Credit Agreement dated as of July 15, 1998 by and among, URC, URCP, KPC and the banks party thereto and PNC Bank, National Association, as Agent. 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. 48 49 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.* 21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement. 27.1 Financial data schedule for the twelve months ended August 31, 1999.* (b) Reports on Form 8-K NONE * Filed herewith 49 50 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors and Stockholder of United Refining Company The audits referred to in our report dated October 29, 1999 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, 1999. This financial statement schedule is the responsibility of management. Our responsibility is to express an opinion on this schedule based on our audits. In our opinion, such financial statement Schedule - Valuation and Qualifying Accounts, presents fairly, in all material respects, the information set forth therein. /s/ BDO SEIDMAN, LLP New York, New York October 29, 1999 50 51 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, 1997: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $541 $407 $(437) $511 ==== ==== ===== ==== Year ended August 31, 1998: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $511 $258 $(364) $405 ==== ==== ===== ==== Year ended August 31, 1999: Reserves and allowances deducted from asset accounts: Allowance for uncollectible Accounts $405 $195 $(235) $365 ==== ==== ===== ====
51 52 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, 1999 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, 1999 - ------------------------------- John A. Catsimatidis President, Chief Operating Officer /s/ Myron L. Turfitt and Director November 29, 1999 - ------------------------------- Myron L. Turfitt /s/ Thomas C. Covert Vice Chairman and Director November 29, 1999 - ------------------------------- Thomas C. Covert Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999 /s/ Martin R. Bring Director November 29, 1999 - ------------------------------- Martin R. Bring /s/ Evan Evans Director November 29, 1999 - ------------------------------- Evan Evans /s/ Kishore Lall Director November 29, 1999 - ------------------------------- Kishore Lall /s/ Douglas Lemmonds Director November 29, 1999 - ------------------------------- Douglas Lemmonds /s/ Andrew Maloney Director November 29, 1999 - ------------------------------- Andrew Maloney /s/ Dennis Mehiel Director November 29, 1999 - ------------------------------- Dennis Mehiel
52 53 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, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt President, Chief Operating Officer November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
53 54 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, 1999 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, 1999 - ------------------------------- John A. Catsimatidis President, Chief Operating Officer /s/ Myron L. Turfitt and Director November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
54 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. KIANTONE PIPELINE COMPANY Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
55 56 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. UNITED JET CENTER, INC. Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
56 57 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. VULCAN ASPHALT REFINING CORPORATION Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
57 58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KWIK-FIL, INC. Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
58 59 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. KWIK-FILL, INC. Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
59 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INDEPENDENT GASOLINE & OIL COMPANY OF ROCHESTER, INC. Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
60 61 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BELL OIL CORP. Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
61 62 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PPC, INC. Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
62 63 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SUPER TEST PETROLEUM, INC. Dated: November 29, 1999 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, 1999 - ------------------------------- John A. Catsimatidis /s/ Myron L. Turfitt Executive Vice President November 29, 1999 - ------------------------------- Myron L. Turfitt Vice President and Chief Financial /s/ James E. Murphy Officer (Principal Accounting - ------------------------------- Officer) James E. Murphy November 29, 1999
63 64 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, 1999. 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. 64 65 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.* 21.1 Subsidiaries of the Registrants. Incorporated by reference to Exhibit 21.1 to the Registration Statement. 27.1 Financial data schedule for the twelve months ended August 31, 1999.* (c) Reports on Form 8-K NONE * Filed herewith 65 EX-10.17 2 WAIVER AND AMENDMENT TO CREDIT AGREEMENT 1 EXHIBIT 10.17 WAIVER AND AMENDMENT AGREEMENT This Waiver and Amendment Agreement (the "Waiver") is dated as of April 13,1999 and is made by and among UNITED REFINING COMPANY, a Pennsylvania corporation ("United Refining"), UNITED REFINING COMPANY OF PENNSYLVANIA, a Pennsylvania Corporation ("United Refining PA"), KIANTONE PIPELINE CORPORATION, a New York Corporation ("Kiantone, and hereinafter together with United Refining and United Refining PA sometimes collectively referred to as the "Borrowers" and individually as a "Borrower") the BANKS under the Credit Agreement (as hereinafter defined) and PNC BANK, NATIONAL ASSOCIATION, in its capacity as agent for the Banks under the Credit Agreement (hereinafter referred to in such capacity as the "Agent"). RECITALS: WHEREAS, Borrowers, the Banks, and the Agent are parties to that certain Credit Agreement dated as of June 9, 1997 (as previously amended, restated, supplemented or modified, the "Credit Agreement"); and WHEREAS, unless otherwise defined herein, capitalized terms used herein shall have the meanings given to them in the Credit Agreement; and WHEREAS, Borrowers have not complied with the covenant that Consolidated Net Worth may not be less than Base Net Worth contained in Section 7.2.17 (Minimum Net Worth) of the Credit Agreement (the "Section 7.2.17 Violation") during some or all of the period of the fiscal quarter ended February 28, 1999 as more fully disclosed in the Compliance Certificate which Borrowers have delivered or will deliver to the Banks for such fiscal quarter (the "Delivered Compliance Certificate"); and WHEREAS, the Borrowers have requested that the Banks waive the Section 7.2.17 Violation for the fiscal quarter ended February 28, 1999 and amend Section 4.9 of the Credit Agreement, as more fully provided herein. NOW, THEREFORE, in consideration of the foregoing and intending to be legally bound, the parties hereto agree as follows: 1. Warranty. The Borrowers represent and warrant to the Banks that the Delivered Compliance Certificate correctly discloses Borrowers' Consolidated Net Worth to be $38,082,000 and Base Net Worth to be $40,171,000 as of the date and periods set forth in such Delivered Compliance Certificate and that except for the Section 7.2.17 Violation, the Borrowers were in full compliance with the Credit Agreement during the fiscal quarter ended February 28, 1999. 2. Waiver With Respect To Section 7.2.17 Violation. The Banks hereby waive the violation of Section 7.2.17 for the fiscal quarter ended February 28, 1999 subject to Borrowers' warranty in paragraph 1 and the acknowledgments and agreements by the Borrowers in paragraph 4 hereof. 1 2 3. Amendment of Section 4.9. The parties hereto hereby amend and restate Section 4.9 (Receipt and Application of Payment; Cash Collateral Account; Collections; Agent's Right to Notify Account Debtors) to read as follows: The provisions of this Section 4.9 shall apply immediately: 4.9.1 Receipt and Application of Payment. At all times now and hereafter (i) the Agent shall instruct Chase and National City pursuant to the Wire Transfer Agreements to deposit via wire transfer into the Cash Collateral Account all cash, checks and other items of payment received in the Chase Lockbox or National City Lockbox, as the case may be, within 24 hours of Chase's or National City's receipt thereof, net of any items presented for payment (ii) all cash, checks or other items of payment received in the PNC Lockbox shall be immediately deposited into the Cash Collateral Account promptly upon PNC's receipt thereof, and (iii) the Borrowers shall deposit into the Cash Collateral Account within 24 hours of Borrowers' receipt thereof all cash, checks or other items of payment received from those Account Debtors not currently making payment into a Lockbox or, promptly upon request of the Agent, shall cause such Account Debtors to deposit such cash, checks or other items of payment directly into one of the Lockboxes. In the event a Borrower (or any of its Affiliates, shareholders, directors, officers, employees, agents or those persons acting for or in concert with a Borrower) shall receive any cash, checks, notes, drafts or other similar items of payment relating to or constituting the Collateral (or proceeds thereof), no later than the first Business Day following receipt thereof, such Borrower shall (i) deposit or cause the same to be deposited, in kind, in the Cash Collateral Account established by such Borrower with the Agent or such other depository as may be designated in writing by the Agent (the "Depository"), from which account the Agent alone shall have the power of withdrawal, and with respect to which the Depository shall waive any rights of set off, and (ii) at the Agent's request, forward to the Agent, on a daily basis, a collection report in form and substance satisfactory to the Agent and copies of all such items and deposit slips related thereto. 4.9.2 Cash Collateral Account The Agent alone shall have the sole power of withdrawal from the Cash Collateral Account, to be exercised as follows: (a) Provided no Event of Default shall have occurred and be continuing, and provided that no Potential Default with respect to the covenants set forth in Sections 7.1.2, 7.2.1, 7.2.16 and 7.2.17 shall have occurred and be continuing, the Agent shall withdraw all funds in the Cash Collateral Account at the end of each Business Day and deposit such funds into a designated general deposit account maintained by Borrowers with the Agent. 2 3 (b) Upon the occurrence of an Event of Default, or upon the occurrence of a Potential Default with respect to the covenants set forth in Sections 7.1.2, 7.2.1, 7.2.16 and 7.2.17, and for so long as such Event of Default or Potential Default shall be continuing, the Agent in the exercise of its sole discretion may withdraw all funds in the Cash Collateral Account at the end of each Business Day ad deposit such funds into a designated general deposit account maintained by Borrowers with the Agent. All cash notes, checks, drafts or similar items of payment by or for the account of a Borrower deposited into the Cash Collateral Account and not withdrawn at the end of any Business Day in accordance with the previous sentence shall be deemed the sole and exclusive property of the Banks immediately upon the earlier of the receipt of such items by the Agent or the Depository or the receipt of such items by such Borrower; provided, however, that for the purpose of computing interest hereunder such items shall be deemed to have been collected and shall be applied by the Agent on account of the Revolving Credit Loans outstanding to such Borrower one (1) Business Day after receipt by the Agent (subject to correction for any items subsequently dishonored for any reason whatsoever). Notwithstanding anything to the contrary herein, all such items of payment shall, solely for purposes of determining the occurrence of such Event of Default, be deemed received upon actual receipt by the Agent, unless the same are subsequently dishonored for any reason whatsoever, and all funds in the Cash Collateral Account, including all payments made by or on behalf of and all credits due a Borrower, may be applied and reapplied in whole or in part to any of the Revolving Credit Loans to the extent and in the manner the Agent deems advisable. 4.9.3 Collections: Agent's Right to Notify Account Debtors. The Borrowers hereby authorize the Agent now and at all times hereafter, to (i) after the occurrence of an Event of Default, notify any or all Account Debtors that the Accounts have been assigned to the Banks and that the Banks have a security interest therein, and to (ii) direct such Account Debtors to make all payments due from them to each Borrower upon the Accounts directly to the Agent, to the Lockboxes or to any other lockbox designated by the Agent. The Agent shall promptly furnish the Borrowers with a copy of any such notice sent. Any such notice, in the Agent's sole discretion, may be sent on the Borrowers' stationery, in which event the appropriate Borrower shall co-sign such notice with the Agent. To the extent that any Law or custom or any contract with any Account Debtor requires notice to or the approval of the Account Debtor in order to perfect such assignment of a security interest in Accounts, each Borrower agrees to give such notice or obtain such approval. 4. Full Force and Effect. All provisions of the Credit Agreement remain in full force and effect on and after the date hereof. The Banks do not amend or waive any provisions of the Credit Agreement except as expressly amended or waived hereby. Without limiting the foregoing, the Banks retain all rights given to the Banks under the Credit Agreement and under applicable law in connection with any failure by the Borrower to comply with the Credit Agreement as amended hereby. The foregoing rights expressly include, without limitation, any rights given 3 4 to the Banks under Section 8.2 if a Potential Default or an Event of Default arises as a result of any such failure to comply. 5. Borrowing Base. The definition of "Borrowing Base" contained in Section 1.1 of the Credit Agreement is hereby amended and restated to read as follows: Borrowing Base shall mean at any time the sum of (i) one hundred percent (100%) of cash held in the Cash Collateral Account, the Borrower's general deposit account into which funds withdrawn from the Cash Collateral Account are deposited pursuant to Section 4.9.2 hereof and any overnight sweep investment account into which any of Borrower's funds swept from such accounts are deposited, plus (ii) eighty percent (80%) of Qualified Accounts ("Accounts Portion"), plus (iii) the lesser of (A) seventy percent (70%) of Qualified Inventory ("Inventory Portion"), or (B) one hundred fifty percent (150%) of the Accounts Portion. 6. Waiver and Amendment Fee. The Borrowers' shall pay to the Agent for the accounts of the Banks based on their Ratable Shares, as consideration for the Banks' waiver of the Section 7.2.17 Violation and the other changes being made to the Credit Agreement hereunder, a nonrefundable fee equal to $17,500 payable on the Effective Date as hereinafter defined. 7. Counterparts: Effective Date. This Waiver may be signed in counterparts. This Waiver shall become effective as of the date first above written when it has been executed by the Borrowers, the Agent and the Required Banks. The Borrowers agree to cooperate with the Agent to implement the provisions of Section 4.9 as amended hereby as soon as practicable, but in any event no later than May 13, 1999. [SIGNATURES BEGIN ON NEXT PAGE] 4 5 [SIGNATURE PAGE 1 OF 1 TO WAIVER AND AMENDMENT AGREEMENT] The undersigned have executed this Waiver as of the date first above written. UNITED REFINING COMPANY, a Pennsylvania corporation By: /s/ James E. Murphy --------------------------------------------- Title: V.P. - Finance and Chief Financial Officer UNITED REFINING COMPANY OF PENNSYLVANIA, a Pennsylvania corporation By: /s/ James E. Murphy --------------------------------------------- Title: V.P. - Finance and Chief Financial Officer KIANTONE PIPELINE CORPORATION, a New York corporation By: /s/ James E. Murphy --------------------------------------------- Title: V.P. - Finance and Chief Financial Officer PNC BANK, NATIONAL ASSOCIATION, Individually and as Agent By: /s / Richard Munsick --------------------------------------------- Title: Vice President MANUFACTURERS AND TRADERS TRUST COMPANY By: /s/ C. Gregory Vogelsang --------------------------------------------- Title: Assistant Vice President NATIONAL BANK OF CANADA By: /s/ Eric L. Moore --------------------------------------------- Title: Vice President By: /s/ Donald P. Haddad --------------------------------------------- Title: Vice President 5 EX-27.1 3 FINANCIAL DATA SCHEDULE
5 This schedule contains financial information extracted from the Company's Form 10-K for the fiscal year ended August 31, 1999 and is qualified in its entirety by reference to such financial statements. 0000101462 UNITED REFINING CO. 1,000 YEAR AUG-31-1999 SEP-01-1998 AUG-31-1999 8,925 0 33,239 365 70,728 123,038 279,895 66,473 349,240 69,835 200,956 0 0 0 48,421 349,240 757,326 757,326 652,370 77,487 0 195 23,251 (2,605) (1,006) (1,599) 0 0 4,783 3,184 0 0
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