-----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, OSQjgQkvFX1V8a18v/YCOToVv2ru7spLPzWLAsnzGttHK8vLYo/ysw387ACceFrK iwX0oH/2gwnWjjaILnEyhg== 0000950110-96-000617.txt : 19960520 0000950110-96-000617.hdr.sgml : 19960520 ACCESSION NUMBER: 0000950110-96-000617 CONFORMED SUBMISSION TYPE: 424B2 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19960517 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: TOSCO CORP CENTRAL INDEX KEY: 0000074091 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 951865716 STATE OF INCORPORATION: NV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 424B2 SEC ACT: 1933 Act SEC FILE NUMBER: 333-02521 FILM NUMBER: 96569178 BUSINESS ADDRESS: STREET 1: 72 CUMMINGS POINT RD CITY: STAMFORD STATE: CT ZIP: 06902 BUSINESS PHONE: 2039771000 MAIL ADDRESS: STREET 1: 72 CUMMINGS POINT RD CITY: STAMFORD STATE: CT ZIP: 06902 FORMER COMPANY: FORMER CONFORMED NAME: OIL SHALE CORP DATE OF NAME CHANGE: 19760810 424B2 1 PROSPECTUS SUPPLEMENT PROSPECTUS SUPPLEMENT (Subject to Completion, Issued May 17, 1996) (To Prospectus dated May 2, 1996) $200,000,000 TOSCO CORPORATION % NOTES DUE 2006 ------------------- Interest payable May 15 and November 15 ------------------- THE __% NOTES DUE 2006 (THE "NOTES") WILL BE REDEEMABLE IN WHOLE OR IN PART, AT THE OPTION OF TOSCO CORPORATION ("TOSCO" OR THE "COMPANY"), AT ANY TIME, AT A REDEMPTION PRICE EQUAL TO THE GREATER OF (I) 100% OF THEIR PRINCIPAL AMOUNT OR (II) THE SUM OF THE PRESENT VALUES OF THE REMAINING SCHEDULED PAYMENTS OF PRINCIPAL AND INTEREST THEREON DISCOUNTED TO THE DATE OF REDEMPTION ON A SEMI-ANNUAL BASIS (ASSUMING A 360-DAY YEAR CONSISTING OF TWELVE 30-DAY MONTHS) AT THE TREASURY YIELD (AS DEFINED HEREIN) PLUS __ BASIS POINTS, PLUS IN EACH CASE ACCRUED INTEREST TO THE DATE OF REDEMPTION. THE NOTES ARE SOMETIMES REFERRED TO HEREIN AS THE "OFFERED SECURITIES." THE OFFERED SECURITIES WILL BE ISSUED ONLY IN BOOK-ENTRY FORM THROUGH THE FACILITIES OF THE DEPOSITORY TRUST COMPANY (THE "DEPOSITARY"). SEE "DESCRIPTION OF THE NOTES" HEREIN. ------------------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------- PRICE ___% AND ACCRUED INTEREST UNDERWRITING PRICE TO DISCOUNTS AND PROCEEDS TO PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3) --------- -------------- ------------- Per Note ................ % % % Total ................... $__________ $__________ $__________ - -------------- (1) Plus accrued interest from May 15, 1996. (2) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriters." (3) Before deducting expenses payable by the Company, estimated at $190,000. ------------------- The Notes are offered, subject to prior sale, when, as and if accepted by the Underwriters and subject to approval of certain legal matters by Andrews & Kurth L.L.P., counsel for the Underwriters. It is expected that delivery of the Notes will be made on or about May __, 1996, through the book-entry facilities of The Depository Trust Company, New York, New York, against payment therefor in immediately available funds. ------------------- MORGAN STANLEY & CO. Incorporated DONALDSON, LUFKIN & JENRETTE Securities Corporation LEHMAN BROTHERS OPPENHEIMER & CO., INC. BA SECURITIES, INC. CHASE SECURITIES INC. FURMAN SELZ LLC May __, 1996 INFORMATION CONTAINED IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THAT A FINAL PROSPECTUS SUPPLEMENT IS DELIVERED. THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER, AGENT OR DEALER. THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS DO NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE NOTES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. --------------------------------- TABLE OF CONTENTS PROSPECTUS SUPPLEMENT PAGE ---- Prospectus Supplement Summary .......................................... S- 3 The Company ............................................................ S- 5 Use of Proceeds ........................................................ S- 5 Capitalization ......................................................... S- 6 Selected Consolidated Financial Data ................................... S- 7 Management's Discussion and Analysis of Financial Condition and Results of Operations .................... S- 8 Description of the Notes ............................................... S-16 Underwriters ........................................................... S-19 PROSPECTUS Available Information .................................................. 2 Incorporation of Certain Documents by Reference ........................ 3 The Company ............................................................ 4 The Circle K Corporation Acquisition ................................... 4 Recent Developments .................................................... 4 Use of Proceeds ........................................................ 4 Ratio of Earnings to Fixed Charges ..................................... 5 Description of Debt Securities ......................................... 5 Plan of Distribution ................................................... 10 Legal Matters .......................................................... 11 Experts ................................................................ 11 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES OFFERED HEREBY AT LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. S-2 PROSPECTUS SUPPLEMENT SUMMARY The following summary is qualified in its entirety by reference to the more detailed information and the Consolidated Financial Statements (including the Notes thereto) incorporated herein by reference. THE COMPANY Tosco, through divisions and subsidiaries, is a large independent refiner, wholesaler, and retail marketer of petroleum products, principally on the East and West Coasts of the United States. Tosco has extensive distribution facilities and also engages in related commercial activities throughout the United States and internationally. During 1995, Tosco focused its efforts on consolidating its 1993 and 1994 acquisitions of retail marketing assets in the Pacific Northwest, California and Arizona and expanding both the British Petroleum ("BP") brand in nine western states and the Exxon brand in Arizona, where Tosco has the right to market under those brands. Tosco continued to maintain and upgrade its three refineries, Avon, Bayway and Ferndale, to remain competitive in the domestic refining markets. Tosco also has interests in oil shale properties in Colorado and Utah. THE OFFERING Securities ............................ $200,000,000 of _% Notes due 2006. Maturity .............................. May 15, 2006. Interest Payment Dates ................ May 15 and November 15 commencing November 15, 1996. Optional Redemption ................... The Notes will be redeemable in whole or in part, at the option of the Company, at any time, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield (as defined herein) plus ____ basis points, plus in each case accrued interest to the date of redemption. Collateral ............................ None. Ranking ............................... The Notes will be unsecured senior obligations of the Company, and will rank pari passu in right of payment with all existing and future unsecured senior indebtedness of the Company and senior in right of payment to all existing and future subordinated indebtedness of the Company. At March 31, 1996, the Company had outstanding $300 million of first mortgage bonds collateralized by its Avon Refinery, $150 million of first mortgage bonds collateralized by its Bayway Refinery, a revolving credit facility (the "Credit Agreement") of up to $450 million collateralized by accounts receivable, inventory and investments, and $5 million of other collateralized debt. As of March 31, 1996, the Company had $159 million of cash borrowings and outstanding letters of credit of approximately $86 million under the Credit Agreement. In April 1996, the Credit Agreement was replaced by a $600 million unsecured revolving credit facility (the "New Credit Agreement"). See "Recent Developments" in the accompanying Prospectus. There is no other subsidiary debt which is effectively senior to the Notes. S-3 Use of Proceeds ....................... To pay a portion of the purchase price for the acquisition of The Circle K Corporation; however, if such acquisition is not consummated, the net proceeds will be used to repay indebtedness outstanding under the New Credit Agreement and for working capital and general corporate purposes. See "Use of Proceeds" below and "The Circle K Corporation Acquisition" in the accompanying Prospectus. Certain Covenants ..................... The Indenture contains certain covenants that, among other things, limit the ability of the Company and its Subsidiaries to (i) incur Debt collateralized by a lien on a Principal Property and (ii) enter into a sale and lease back transaction, and limit the ability of the Company's Subsidiaries having a Principal Property to incur debt with a maturity greater than twelve months or issue preferred stock. See "Description of the Notes." S-4 THE COMPANY Tosco, through divisions and subsidiaries, is a large independent refiner, wholesaler, and retail marketer of petroleum products, principally on the East and West Coasts of the United States. Tosco has extensive distribution facilities and also engages in related commercial activities throughout the United States and internationally. During 1995, Tosco focused its efforts on consolidating its 1993 and 1994 acquisitions of retail marketing assets in the Pacific Northwest, California and Arizona and expanding both the BP brand in nine western states and the Exxon brand in Arizona, where Tosco has the right to market under those brands. Tosco continued to maintain and upgrade its three refineries, Avon, Bayway and Ferndale, to remain competitive in the domestic refining markets. On February 16, 1996, Tosco entered into an agreement to acquire by merger (the "Merger") The Circle K Corporation ("Circle K"), a company which has approximately 2,500 convenience stores in the United States. See "The Circle K Corporation Acquisition" in the accompanying Prospectus. Tosco also has interests in oil shale properties in Colorado and Utah. Tosco was incorporated under the laws of the State of Nevada in 1955. Its principal executive offices are located at 72 Cummings Point Road, Stamford, Connecticut 06902, and its telephone number is (203) 977-1000. USE OF PROCEEDS The Company intends to use the net proceeds from the sale of the Notes to pay a portion of the purchase price for the acquisition of Circle K; however, if the Circle K acquisition is not consummated, the net proceeds will be used to repay indebtedness outstanding under the Company's New Credit Agreement and for working capital and general corporate purposes. The New Credit Agreement matures in April 2000 and bears interest at a margin over one of several fluctuating rates. The interest rate on loans under the Credit Agreement averaged 6.9% for the year ended December 31, 1995 and 6.3% for the quarter ended March 31, 1996. S-5 CAPITALIZATION The following table sets forth, as of March 31, 1996, (i) the actual unaudited consolidated capitalization of Tosco and its subsidiaries and (ii) the unaudited consolidated capitalization of Tosco and its subsidiaries as adjusted to reflect (x) the Merger with Circle K, (y) the issuance and sale of the Notes and (z) the application of the estimated net proceeds from the sale of the Notes of $197,250,000 to pay a portion of the purchase price for the acquisition of Circle K. The table assumes that approximately 6,941,000 shares of Tosco Common Stock will be issued in the Merger at an average price of $47.5125 per share. If the average price of a share of Tosco Common Stock is $51.00 per share, approximately 6,467,000 shares of Tosco Common Stock will be issued in the Merger. The following table should be read in conjunction with Tosco's Consolidated Financial Statements and related notes which are incorporated herein by reference.
MARCH 31, 1996 -------------------------------- HISTORICAL AS ADJUSTED (C) ---------- --------------- (IN THOUSANDS) Cash, cash equivalents, short-term investments and deposits(a) .............. $ 60,973 $ 67,561 Long-term debt-collateralized: Revolving credit facilities(b) ............................................. 159,000 456,737 Mortgage bonds guaranteed on a collateralized basis by the Bayway Refining Company ................................................... 150,000 150,000 Mortgage bonds collateralized by the Avon Refinery ......................... 300,000 300,000 Capital leases ............................................................. -- 72,778 Real estate installment purchase ............................................ -- 56,479 Other ....................................................................... 4,893 5,683 Long-term debt-uncollateralized: 7% Notes, $125 million face amount due 2000 ................................ 125,000 125,000 _% Notes, $200 million face amount due 2006 ................................ -- 200,000 ---------- ---------- Total debt, including current portion ...................................... 738,893 1,366,677 Less current portion ....................................................... 771 25,952 ---------- ---------- Total long-term debt ................................................... 738,122 1,340,725 ---------- ---------- Shareholders' equity: Common Stock, $.75 par value, 50,000,000 shares authorized, 39,675,269 shares issued; as adjusted, 46,616,658 shares (including treasury shares) ............................................... 29,757 34,963 Capital in excess of par value ............................................. 641,231 965,328 Retained earnings .......................................................... 45,925 45,925 Less common stock held in treasury, at cost (2,549,041 shares) ............. (71,833) (71,833) Total shareholders' equity ............................................... 645,080 974,383 ---------- ---------- Total capitalization ................................................... 1,383,202 2,315,108 Total capitalization, cash, cash equivalents, short-term investments and deposits .............................................. $1,444,175 $2,382,669 ========== ==========
- ------------------- (a) Includes approximately $14 million of restricted cash held by a wholly-owned subsidiary of Tosco. (b) At March 31, 1996, the Credit Agreement provided for an extension of up to $450 million in credit. At that date, the Company had $159 million of cash borrowings and outstanding letters of credit of approximately $86 million under the Credit Agreement. (c) The as adjusted capitalization of Tosco includes the historical balance sheet of Circle K as of January 31, 1996. S-6 SELECTED CONSOLIDATED FINANCIAL DATA The following table sets forth selected consolidated financial data of the Company for each of the five years in the period ended December 31, 1995 and for the three-month periods ended March 31, 1995 and 1996. The selected consolidated financial data for the interim periods have been derived from the unaudited interim financial statements and, in the opinion of management, include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. The selected consolidated financial data for the interim periods are not necessarily indicative of the results to be achieved for the full years. This table should be read in conjunction with the Company's Consolidated Financial Statements and related notes incorporated herein by reference.
THREE MONTHS ENDED YEAR ENDED DECEMBER 31,(a) MARCH 31,(a) --------------------------------------------------- --------------- 1991 1992 1993 1994 1995 1995 1996 ---- ---- ---- ---- ---- ---- ---- (UNAUDITED) (IN MILLIONS, EXCEPT FOR PER SHARE AND RATIO DATA) RESULTS OF OPERATIONS Sales .......................................... $1,608.7 $1,861.0 $3,559.2 $6,365.8 $7,284.0 $1,696.3 $2,020.0 ======== ======== ======== ======== ======== ======== ======== Gross profit on sales .......................... $ 121.2 $ 132.7 $ 251.8 $ 260.4 $ 284.8 $ 32.1 $ 82.6 Inventory valuation (recovery) writedown ....... 17.7 (17.7) Restructuring charge ........................... 5.2 2.2 Environmental cost accrual ..................... 4.0 25.0 6.0 -------- -------- -------- -------- -------- -------- -------- Operating contribution ......................... 117.2 107.7 234.1 272.1 279.6 29.9 $ 82.6 Selling, general and administrative expense .... 30.2 38.7 58.2 84.1 95.9 22.6 27.1 Interest expense, net .......................... 16.5 18.0 44.1 54.2 56.3 14.5 15.9 -------- -------- -------- -------- -------- -------- -------- Pre-tax income (loss) .......................... 70.5 51.0 131.8 133.8 127.4 (7.2) 39.6 Provision (credit) for income taxes (b) ........ 2.4 20.8 51.2 50.0 50.3 (2.9) 15.7 -------- -------- -------- -------- -------- -------- -------- Income (loss) from continuing operations before other items ................................... 68.1 30.2 80.6 83.8 77.1 (4.3) 24.0 Discontinued operations, net of income taxes: Income (loss) from operations ................ 7.3 (15.9) Estimated loss on disposal ................... (105.0) Cumulative effect of accounting changes ........ 16.2 -------- -------- -------- -------- -------- -------- -------- Net income (loss) .............................. $ 75.4 ($ 74.5) $ 80.6 $ 83.8 $ 77.1 ($ 4.3) $ 24.0 ======== ======== ======== ======== ======== ======== ======== INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE Primary: From continuing operations .................... $ 2.15 $ .68 $ 2.38 $ 2.27 $ 2.06 ($ .12) $ 0.63 From discontinued operations .................. .24 (4.08) From cumulative effect of accounting changes .. .55 -------- -------- -------- -------- -------- -------- -------- Net income (loss) .............................. $ 2.39 ($ 2.85) $ 2.38 $ 2.27 $ 2.06 ($ .12) $ 0.63 ======== ======== ======== ======== ======== ======== ======== Fully-diluted: From continuing operations .................... $ 2.12 $ .68 $ 2.33 $ 2.24 $ 2.04 ($ .12) $ 0.63 From discontinued operations .................. .23 (4.08) From cumulative effect of accounting changes .. .55 -------- -------- -------- -------- -------- -------- -------- Net income (loss) .............................. $ 2.35 ($ 2.85) $ 2.33 $ 2.24 $ 2.04 ($ .12) $ 0.63 ======== ======== ======== ======== ======== ======== ======== BALANCE SHEET DATA (AT END OF PERIOD) Total assets ................................... $ 871.0 $ 952.9 $1,492.9 $1,797.2 $2,003.1 $1,872.3 $2,136.4 ======== ======== ======== ======== ======== ======== ======== Long-term debt ................................. $ 211.9 $ 356.8 $ 603.3 $ 687.4 $ 624.0 $ 727.5 $ 738.1 Preferred stock ................................ 111.2 111.2 111.2 Common shareholders' equity .................... 385.6 270.2 410.4 575.5 627.1 565.0 645.1 -------- -------- -------- -------- -------- -------- -------- Total capitalization ........................... $ 708.7 $ 738.2 $1,124.9 $1,262.9 $1,251.1 $1,292.5 $1,383.2 ======== ======== ======== ======== ======== ======== ======== OTHER INFORMATION Ratio of long-term debt to total capitalization .30 .48 .54 .54 0.499 .56 0.53 Current ratio .................................. 1.6 2.6 2.2 1.8 1.3 1.6 1.4 Book value per share ........................... $ 12.78 $ 9.10 $ 12.60 $ 15.53 $ 16.92 $ 15.25 $ 17.38 Cash dividends per share ....................... $ .60 $ .60 $ .60 $ .62 $ 0.64 $ .16 $ 0.16 Ratio of earnings to fixed charges(c) .......... 3.55x 2.71x 3.28x 2.83x 2.49x .61x 2.81x _______________________________
(a) Reflects Seminole Fertilizer Corporation as a discontinued operation for all periods. (b) Reflects the provision for income taxes at regular tax rates effective January 1, 1992 pursuant to the provisions of SFAS No. 109. (c) The ratios of earnings to fixed charges represent the number of times "fixed charges" were covered by "earnings." "Fixed charges" consist of interest on outstanding debt, one-third (the proportion deemed representative of the interest factor) of net rentals and amortization of debt discount and expense. "Earnings" consist of consolidated income from operations before income taxes and fixed charges. Earnings for the first quarter of 1995 were less than fixed charges by approximately $8.2 million. S-7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Tosco earned $24.0 million, or $.63 per fully-diluted share, on sales of $2.0 billion for the first quarter of 1996, compared to a net loss of $4.3 million, or ($.12) per fully-diluted share, on sales of $1.7 billion for the first quarter of 1995. The improved results of operations was primarily attributable to strong East Coast operating margins, lower levels of scheduled maintenance, and lower cash operating expenses. For the year 1995, Tosco earned $77.1 million, or $2.04 per fully-diluted share, on sales of $7.3 billion compared to earnings of $83.8 million, or $2.24 per fully-diluted share, on sales of $6.4 billion for 1994. Excluding special items, operating results improved over 1994 despite lower refinery operating margins, primarily as a result of Tosco's strategy to diversify the Company's base by expanding downstream into retail operations. In February 1996, Tosco completed the acquisition of BP's northeast marketing and refining assets ("BP Northeast") and agreed to acquire Circle K. Tosco also took major steps to move to an unsecured debt structure. In 1995, Tosco paid down collateralized bank debt from the proceeds of a $125 million unsecured debt offering and a receivable transfer agreement. In April 1996, Tosco replaced its former $450 million collateralized credit facility with a $600 million unsecured revolving credit facility. Management's discussion and analysis of financial condition and results of operations contain references to Tosco's Consolidated Financial Statements and related notes contained in Tosco's Annual Report on Form 10-K for the year ended December 31, 1995 and Form 10-Q for the quarterly period ended March 31, 1996, which are incorporated herein by reference. RESULTS OF OPERATIONS--THREE MONTHS ENDED MARCH 31, 1996 THREE MONTHS ENDED MARCH 31, ---------------------------- 1996 1995 ---- ---- (THOUSANDS OF DOLLARS) Sales (a) ..................................... $2,020,023 $1,696,319 Cost of sales ................................. 1,937,412 1,664,173 Restructuring charge .......................... 2,200 ---------- ---------- Operating contribution ........................ 82,611 29,946 Selling, general, and administrative expense .. 27,070 22,602 Net interest expense .......................... 15,923 14,499 ---------- ---------- Pre-tax income (loss) ......................... 39,618 (7,155) Provision for income taxes .................... 15,652 2,882 ---------- ---------- Net income (loss) ............................. $ 23,966 $ (4,273) ========== ========== (a) The increase in sales for the first quarter of 1996 was primarily due to higher sales volumes and sales prices. Higher sales volumes were due to increased commercial activity (in response to higher demands for heating oil on the East Coast of the United States) and increased refinery production levels. REFINING DATA SUMMARY THREE MONTHS ENDED MARCH 31, 1996 AND 1995 (IN THOUSANDS OF BARRELS PER DAY (B/D) EXCEPT FOR OPERATING MARGINS)
AVON BAYWAY FERNDALE CONSOLIDATED ---------------- ----------------- ------------------ --------------- 1996 1995(a) 1996(b) 1995 1996 1995(a) 1996 1995 ---- ------- ------- ---- ---- ------- ---- ---- Crude oil ............... 159.8 161.2 227.2 226.3 83.9 56.1 470.9 443.6 Add'l refinery feeds .... 14.5 4.5 50.0 67.7 2.7 2.4 67.2 74.6 ----- ----- ----- ----- ----- ----- ----- ----- Total throughout ........ 174.3 165.7 277.2 294.0 86.6 58.5 538.1 518.2 ===== ===== ===== ===== ===== ===== ===== ===== Petroleum products produced: Clean products(c) ..... 137.5 107.5 233.5 245.8 61.0 36.3 432.0 389.6 Other finished products ............. 35.7 54.1 50.4 54.4 23.4 13.4 109.5 121.9 ----- ----- ----- ----- ----- ----- ----- ----- Total finished products produced .............. 173.2 161.6 283.9 300.2 84.4 49.7 541.5 511.5 ===== ===== ===== ===== ===== ===== ===== ===== Operating margin per charge barrel (d)(e) ................ $4.65 $4.54 $4.17 $2.43 $3.67 $2.32 $4.25 $3.09 ===== ===== ===== ===== ===== ===== ===== =====
S-8 - ---------- (a) Avon's cat cracker (the principal gasoline production unit) and the processing units at the Ferndale Refinery were shut down for scheduled maintenance during the first quarter of 1995. (b) Bayway improved its operating margin during the first quarter of 1996 by reducing the ratio of high-cost, partially refined feedstocks to total refinery charges, while improving the ratio of higher-valued clean products to total yields. Bayway's margins include the results of hedges designed to lock in a predetermined level of operating margins on a varying percentage of Bayway's production. (c) Clean products are defined as clean transportation fuels (gasoline, diesel and jet fuel) and heating oil. (d) Per-charge-barrel operating margin is defined as sales minus cost of sales, excluding refinery operating costs and non-operating items, divided by total refinery charges. (e) As illustrated by the table, operating margins vary significantly by refinery. This variance is due to a number of reasons including marketing conditions in the principal areas served by the refineries, their configuration and complexity (ability to convert raw materials into clean products), and maintenance schedules. Tosco earned $24.0 million, or $.63 per fully diluted share, on sales of $2.0 billion for the first quarter of 1996, compared to a net loss of $4.3 million, or ($.12) per fully diluted share, on sales of $1.7 billion for the first quarter of 1995. Results of operations for the first quarter of 1995 included a restructuring charge of $2.2 million ($1.3 million after-tax, $.04 per share), related to a major expense reduction program at the Avon Refinery. Tosco generated an operating contribution (income before selling, general and administrative expense, net interest expense, and income taxes) for the first quarter of 1996 of $82.6 million, an increase of $50.5 million from 1995. The increase was primarily attributable to strong operating margins at Bayway, lower levels of scheduled maintenance at the three refineries and lower cash operating expenses. Consolidated margins increased $1.16 per barrel to $4.25 per barrel but varied widely by refinery. Consolidated raw material throughput for the first quarter of 1996 increased by 19,900 barrels per day (B/D) to 538,100 B/D, and production of clean transportation fuels and heating oil increased by 42,400 B/D to 432,000 B/D over the first quarter of 1995. Avon's operating margin modestly improved by $.11 per barrel (2%) over year-ago levels to $4.65 per barrel. Higher production results and improved per barrel refinery operating costs were nearly offset by lower refining margins, as finished product price increases lagged higher costs of raw materials. The lag in product prices was primarily attributable to the destocking of conventional gasoline inventories to meet the cleaner burning reformulated gasoline standards of the California Air Resources Board (CARB) effective March 1, 1996 (CARB Phase II gasoline). Raw material throughput increased by 8,600 B/D to 174,300 B/D and yields of clean transportation fuels increased by 30,000 B/D to 137,500 B/D. Avon's fluid catalytic cracker, the refinery's principal gasoline production unit, was shut down for 55 days during the first quarter of 1995. Bayway's operating margins for the first quarter of 1996 increased $1.74 per barrel over the comparable 1995 quarter to $4.17 per barrel. Bayway achieved improved margins despite higher raw material costs, primarily because the cold winter weather in the Northeast created strong product demand. This was in sharp contrast to the weak market conditions of the first quarter of 1995 when mild winter conditions created a surplus of heating oil, and higher production costs of reformulated gasoline could not be fully recovered in highly competitive markets. Ferndale's operating margins improved by $1.35 per barrel to $3.67 per barrel. The improvement was primarily attributable to the refinery being fully operational for the first quarter of 1996. Ferndale's processing units were shutdown for 33 days in the first quarter of 1995 for scheduled turnaround maintenance. Retail marketing fuel margins averaged $.08 per gallon for the first three months of 1996, compared to $.09 for the comparable 1995 quarter. Retail fuel margins declined because increases in wholesale product costs could not be fully recovered in higher retail prices. These lower retail margins were partially offset by increased sales volumes due to the acquisition of BP's Northeast marketing system in February 1996. The increase in selling, general, and administrative expense for the first quarter of 1996 was primarily attributable to Tosco's expanded operations. S-9 In 1995, Tosco entered into a three-year agreement with a financial institution to sell on a revolving basis up to $100 million of an undivided percentage ownership interest in a designated pool of accounts receivable (Receivable Transfer Agreement). Costs of the Receivable Transfer Agreement are included in cost of sales. Interest expense increased in 1996, despite the reduction in interest costs resulting from the Receivable Transfer Agreement, due to higher average debt levels and higher price levels of raw materials and products. The acquisition of BP Northeast marketing and refinery assets was the principal reason for higher average debt levels. See Notes 2 and 3 to the Company's Consolidated Financial Statements which are incorporated herein by reference. RESULTS OF OPERATIONS--1995 FOR THE YEAR ENDED DECEMBER 31, ---------------------- 1995 1994 ---- ---- (THOUSANDS OF DOLLARS) Sales ........................................... $7,284,051 $6,365,757 Cost of sales ................................... 6,999,301 6,105,293 Restructuring charge ............................ 5,200 Inventory valuation recovery .................... (17,651) Environmental cost accrual ...................... 6,000 ---------- ---------- Operating contribution .......................... 279,550 272,115 Selling, general, and administrative expense .... 95,858 84,123 Net interest expense ............................ 56,253 54,143 ---------- ---------- Pre-tax income .................................. 127,439 133,849 Provision for income taxes ...................... 50,381 50,006 ---------- ---------- Net income ...................................... $ 77,058 $ 83,843 ========== ========== Tosco earned $77.1 million, or $2.04 per fully diluted share, on sales of $7.3 billion for 1995, compared to $83.8 million, or $2.24 per fully diluted share, on sales of $6.4 billion for 1994. Results of operations for 1995 include a restructuring charge totaling $5.2 million ($3.1 million after tax, $.08 per share) related to a major expense reduction program at the Avon Refinery. Results of operations for 1994 include the reversal of 1993's $17.7 million ($10.7 million after tax, $.29 per share) writedown of LIFO inventories, and a $6 million ($3.6 million after tax, $.10 per share) environmental cost accrual. See Notes 5 and 15 to the 1995 Consolidated Financial Statements incorporated herein by reference. Excluding special items, Tosco generated an operating contribution for 1995 of $285 million, an increase of $24 million over 1994. The increase was primarily attributable to the excellent production operations of the Avon and Bayway Refineries, lower production costs, moderately higher East Coast operating margins, and the strong performance of expanded retail operations, which more than offset declines in West Coast refinery operating margins and reduced production from the Ferndale Refinery. S-10 REFINING DATA SUMMARY YEAR ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS OF B/D EXCEPT FOR OPERATING MARGINS)
AVON BAYWAY FERNDALE CONSOLIDATED ---------------- ----------------- -------------- ------------- 1995(a) 1994(b) 1995(c) 1994(b) 1995(a) 1994 1995 1994 ------- ------- ------- ------- ------- ---- ---- ---- Crude and other raw materials 167.7 160.8 291.6 252.3 81.6 90.6 540.9 503.7 ===== ===== ===== ===== ==== ==== ===== ===== Petroleum products produced: Clean products 136.8 132.7 241.5 204.8 54.6 62.8 432.9 400.3 Other finished products 29.8 26.7 55.7 51.5 24.9 25.7 110.4 103.9 Total finished products produced 166.6 159.4 297.2 256.3 79.5 88.5 543.3 504.2 Operating margin per charge barrel $5.56 $6.23 $2.88 $2.63 $3.25 $3.62 $3.77 $3.96
- ---------- (a) Avon's cat cracker (the principal gasoline production unit) and the processing units at the Ferndale Refinery were shut down for scheduled maintenance during the first quarter of 1995. (b) Avon's fluid coker (the principal conversion unit) and Bayway's fluid cat cracker were shut down for scheduled turnaround maintenance in 1994. (c) Bayway's production results for 1995 reflect the benefit of expanded crude distillation capacity completed in the third quarter of 1994. The Avon Refinery's operating contribution declined from 1994 due to poor operating margins that overshadowed record production. The cat cracker, Avon's principal gasoline production unit, was shut down for major scheduled maintenance for 55 days in the first quarter of 1995, negatively impacting clean product yields for the year. Despite the cat cracker shutdown, raw materials processed averaged 167,700 B/D, an increase of 6,900 B/D over 1994 and the highest in Avon's history. Production of clean transportation fuels increased by 4,100 B/D to 136,800 B/D. However, Avon's operating margin per charge barrel declined by $.67 to $5.56 per barrel for 1995 as excess supply in highly competitive markets depressed product prices, particularly in the first quarter of 1995. In response to continuing poor operating margins, Tosco implemented a restructuring program to reduce costs and increase efficiency. The restructuring cost of $5.2 million, recorded in the first and second quarters of 1995, was primarily for the then-anticipated severance costs of approximately 175 people at the Avon Refinery and related support locations. Bayway's operating contribution for 1995 improved over 1994 due to record refinery production rates, higher margins, and lower production costs. Raw material throughput increased 39,300 B/D to a record 291,600 B/D, while production of clean transportation fuels and heating oil also increased 36,700 B/D to a record 241,500 B/D. Expanded crude distillation capacity completed in 1994 and record production unit rates of the fluid catalytic cracking unit, the world's largest and Bayway's principal gasoline production unit, were the principal reasons for the record production rates. The cat cracker was shut down for scheduled turnaround maintenance in 1994. Bayway's operating margin per charge barrel improved $.25 per barrel for the year, primarily during the second half of 1995 as a result of increased sale prices. Operating margins for the year were hurt by the exceptionally weak market conditions of the first quarter of 1995 caused by the combined impact of a surplus of heating oil and poor gasoline markets. Operating margins improved during the balance of the year as demand strengthened and uncertainty over the introduction of reformulated gasoline (RFG) subsided. Ferndale's operating contribution declined from 1994 primarily because of poor refining margins and the shutdown of the refinery for 33 days for turnaround maintenance. Ferndale's operating margin per charge barrel declined $.37 per barrel and refinery throughput declined 9,000 B/D to 81,600 B/D. Retail operations generated an operating contribution of $75 million for 1995, an increase of $11 million from 1994. Retail volumes sold increased 18,000 B/D to 68,000 B/D due to the acquisition of retail operations in Northern California and Arizona from British Petroleum (BP) and Exxon in August 1994 and December 1994, respectively. Retail gasoline margins remained approximately the same at $.10 per gallon for 1995 and 1994. Selling, general, and administrative (SG&A) expense increased by $11.7 million to $95.9 million due to Tosco's expanded retail operations and higher levels of incentive compensation (due to higher levels of operating income S-11 before special items), partially offset by certain benefit recoveries. SG&A expense for 1994 was reduced by insurance recoveries of $3.5 million (related to now-settled litigation with the predecessor owners of the Avon Refinery over environmental matters) and $1.0 million (related to a retroactive adjustment of prior-year medical costs based on favorable claim experience). See Note 15 to the 1995 Consolidated Financial Statements incorporated hereinby reference. In June 1995, Tosco entered into the Receivable Transfer Agreement. Costs of the Receivable Transfer Agreement totaled $3.1 million for six months (less than interest costs would have been on equivalent cash borrowings under Tosco's Credit Agreement). Interest expense increased in 1995, despite the reduction in interest costs resulting from the Receivable Transfer Agreement, due to higher debt levels related to Tosco's expanded operations. The provision for income taxes for 1995 increased by $.4 million despite lower pre-tax income because the tax provision for 1994 included recognition of revised income tax benefits of $2.9 million related to Tosco's discontinued fertilizer operations. ACQUISITIONS On February 2, 1996, Tosco completed the purchase of the U.S. Northeast marketing and refining assets from BP for $59 million, excluding inventories. Under the purchase agreement, Tosco obtained an exclusive license valid for fifteen years, with various renewal options, to market retail gasoline and diesel fuels under the BP brand. The license covers Delaware, Maryland, the Washington D.C. metropolitan area, Pennsylvania, New Jersey, New York, Connecticut, Rhode Island, Massachusetts, Vermont, New Hampshire and Maine. Portions of western Pennsylvania and Maryland are excluded. The term of Tosco's exclusive license in nine Western states was also extended to fifteen years. The purchase included the 180,000 B/D Marcus Hook Refinery near Philadelphia (which was taken over in a non-operating mode), petroleum product terminals and certain associated pipeline interests (some of which are surplus to Tosco's needs and will be sold). Tosco has also offered to buy BP's one-third interest in the Harbor pipeline, on which BP's partners have a right of first refusal to acquire BP's interest. BP retains environmental obligations relating to the Marcus Hook Refinery and other properties included in the sale. The purchase price was fully allocated to property, plant, and equipment ($40 million) and trademarks and licenses ($19 million) based upon their estimated fair values as of the date of acquisition. A final allocation of the purchase price will be determined by the end of 1996. The acquisition of Circle K is expected to be completed at the end of May 1996, subject to approval by Circle K's stockholders. The acquisition will be financed by the issuance of common stock of Tosco (Common Stock), the planned sale of $200 million of Notes offered hereby, borrowings under Tosco's $600 million New Credit Agreement and from cash and other credit resources. The Circle K acquisition will make Tosco the largest operator of company-owned convenience stores in the United States and will more than double the Company's present retail gasolines sales volume. Where appropriate, Circle K's sites will be rebranded to carry the BP brand. Many of Tosco's approximate 140 convenience stores will also be converted to Circle K stores with the BP gasoline brand. Tosco intends to further expand the Circle K convenience store chain by exploring opportunities to convert certain Tosco-owned but dealer-operated sites to company-operated Circle K convenience stores, and to license existing jobbers with the Circle K brand for their convenience stores. Tosco expects to achieve significant economies of scale from the Circle K acquisition. The management of Tosco's current retail operations, presently located in Seattle, will be combined with Circle K's operations in Phoenix. The costs of consolidation will be recorded in the second and third quarters as appropriate. In addition, Tosco's oil industry background and supply system for gasoline should result in improved purchasing of fuel for the Circle K stores, while Circle K's marketing expertise and convenience store supply and distribution system should improve Tosco's convenience store system. After completion of the integration of Circle K's operations, Tosco expects the Circle K acquisition to be additive to per share earnings. S-12 OUTLOOK Results of operations are determined by two principal factors: the operating efficiency of the refineries and refining and retail operating margins. The first quarter of 1996 had no major turnaround activity. Assuming reasonable margins, Tosco presently expects to run its operating refineries at high production levels for the balance of 1996. The Marcus Hook Refinery is expected to remain in a non-operating mode in 1996. Tosco is not able to predict the level or trend of refinery and retail operating margins because of the uncertainties associated with oil markets. Operating margins at the beginning of the second quarter of 1996 have improved over first quarter levels primarily because higher wholesale gasoline prices have outpaced increasing raw material costs, especially in California. The better margins are due to a variety of factors, including the completion of destocking of conventional gasoline to meet CARB Phase II standards and reduced supplies resulting from unscheduled industry shutdowns of processing units. These improved margins have allowed the partial recovery of costs of capital investments completed to meet the cleaner burning fuel standards. Higher wholesale gasoline prices have negatively impacted retail gasoline margins, as Tosco, as well as other marketers, have not been able to recover such higher costs in the retail market. Tosco, and other refiners, made significant capital expenditures to meet CARB Phase II gasoline standards, effective March 1, 1996. Tosco also entered into a seven-year arrangement with Chevron U.S.A. Products Company which provides Tosco 35,000 B/D of CARB Phase II gasoline for 35,000 B/D of conventional gasoline plus differentials. Tosco is not certain that the higher cost of CARB Phase II gasoline will be fully recovered in higher sales prices. In November 1995, the 22-year ban on the export of Alaskan North Slope (ANS) crude oil, a primary source of raw material for West Coast refineries, was lifted. This action may lead to higher costs for ANS and other domestic crude oils. In January 1996, Atlantic Richfield Company (ARCO) informed Tosco that it would not extend its ten-year exchange agreement when it expires at the end of 1996. Under the exchange agreement, ARCO presently delivers 50,000 B/D of ANS crude oil to the Avon Refinery in exchange for a variable quantity of gasoline. The economic effects of the termination are uncertain. However, Tosco expects to acquire alternative suppliers and customers (including its own expanded retail operations) to replace ARCO when the exchange agreement expires. In view of uncertain operating margins and highly competitive markets, Tosco is committed to improving its results by lowering costs in all areas of operation. Restructuring efforts taken in the first half of 1995 produced reductions in unit operating costs at the Avon Refinery. These efforts are continuing. West Coast operating and administrative functions were consolidated in late 1995 and the Company was reorganized into functional organizations in February 1996. The acquisition of Circle K is also expected to allow further economies of scale. CASH FLOWS AND LIQUIDITY--THREE MONTHS ENDED MARCH 31, 1996 As summarized in the Statement of Cash Flows incorporated herein by reference, cash decreased by $13 million during the first three months of 1996 as cash used in investing activities of $158 million exceeded cash provided by operations and financing activities of $7 million and $138 million, respectively. Cash provided by operating activities of $7 million was from cash earnings from operations of $68 million (net income plus depreciation, amortization and deferred income taxes) and other sources of $3 million, offset by a decrease in working capital of $64 million. Net cash used in investing activities totaled $158 million, primarily for capital additions of $93 million (including $40 million for the BP Northeast refining and marketing assets), increases in deferred charges and other assets of $39 million, and increases in short-term investments and deposits of $26 million. Cash provided by financing activities totalled $138 million, consisting of net borrowings under short-term bank lines and Tosco's revolving credit facility of $144 million, partially offset by dividends of $6 million. Liquidity (as measured by cash, short-term investments and deposits and unused credit facilities) decreased by $97 million during 1996 due to a decrease of $110 million in unused credit facilities and a decrease in cash and cash equivalents of $13 million, partially offset by an increase in short-term investments and deposits of $26 million. At March 31, 1996, liquidity totaled $266 million. Effective April 8, 1996, Tosco entered into the New Credit Agreement, expiring in April, 2000. The New Credit Agreement provides Tosco with an unsecured $600 million revolving credit facility, that is available for working S-13 capital and general corporate purposes, including the acquisition of Circle K. Tosco's former $450 million revolving credit agreement was a collateralized loan agreement, expiring in April 1998, which restricted borrowings to a percentage of a borrowing base. The New Credit Agreement is a major step in moving Tosco's capital structure to a fully unsecured basis. The New Credit Agreement and the Notes offered hereby provide the liquidity needed to complete the acquisition of Circle K. Tosco believes its cash and available credit resources are adequate to meets its expected liquidity demands for at least the next twelve months. CASH FLOWS AND LIQUIDITY--1995 As summarized in the Statement of Cash Flows incorporated herein by reference, cash decreased by $5 million during 1995 as cash used in investing and financing activities of $301 million and $111 million, respectively, exceeded cash provided by operating activities of $407 million. Cash provided by operating activities of $407 million was from cash earnings of $226 million (net income plus depreciation, amortization, and deferred income taxes), plus a decrease in working capital of $180 million, and $1 million from other sources. Net cash used in investing activities totaled $301 million, primarily for capital additions and deferred turnaround expenditures of $203 million and $48 million, respectively, and increases in other assets (primarily trademarks) of $51 million. Cash used in financing activities totaled $111 million as net repayments under short-term bank lines and the Credit Agreement of $210 million, dividend payments of $24 million, and debt and other payments totaling $2 million exceeded proceeds from the 7% Notes of $125 million which were issued in July 1995. Liquidity increased by $150 million during 1995 due to an increase of $156 million in unused credit facilities partially offset by a decrease in cash, cash equivalents, short-term deposits and investments of $6 million. At December 31, 1995, liquidity totaled $363 million. CAPITAL EXPENDITURES AND CAPITALIZATION On February 2, 1996, Tosco completed the purchase of the U.S. Northeast marketing and refining assets from British Petroleum (BP) for $40 million, excluding inventories and trademark licenses. Tosco's other capital expenditures for the first quarter of 1996 of $53 million were for budgeted capital projects, primarily at the Avon Refinery and retail outlets. Tosco spent $203 million on budgeted capital projects in 1995. Tosco and BP also entered into an agreement to settle contingent participation payments related to the acquisition of BP's Pacific Northwest refining and retail assets for $35 million. See Note 8 to the Company's 1995 Consolidated Financial Statements incorporated herein by reference. A large portion of capital spending on refinery projects was related to the Avon Refinery's clean fuels program to meet the CARB Phase II specifications. The multi-year project, which was completed on time and on budget, converts a significant portion of Avon's gasoline production to CARB Phase II gasoline. With the exchange of conventional gasoline for CARB Phase II gasoline with Chevron, approximately 85% of Avon's gasoline production will meet CARB Phase II specifications. Other refinery capital expenditures continued to address required environmental and safety programs. The balance of Tosco's refinery capital investments targeted discretionary low-cost, high-return projects to lower operating costs, improve refinery throughput or yields, or increase operating flexibility and reliability. Bayway's fuel products controls were improved with the installation of a modern "state of the art" refinery control system. The new computer system, which monitors and directs all refinery production processes, has resulted in better production levels and yields with greater reliability, safety and environmental compliance. Bayway Refining Company has entered into a contract to acquire a Solvent Deasphalter for approximately $32.5 million, plus the cost of agreed-upon modifications and interest, at mechanical completion (as defined). Construction of this unit began in 1995 and mechanical completion is expected in the third quarter of 1996. Tosco is responsible for other capital improvements to tie in the Solvent Deasphalter into the Bayway Refinery system, raising the total expected cost of the unit to approximately $48 million. When completed, this unit will process approximately 20,000 B/D of lower-valued residual fuel to produce feedstock for the refinery's fluid catalytic cracker and reduce the amount of higher-cost, partially refined feedstocks that Bayway currently purchases from third parties. S-14 In May 1995, Tosco announced a three-year, $200 million capital program to expand its Western retail operations through the development of new, and enhancement of existing, retail facilities in existing and new markets, the acquisition of existing stations or systems, and development of new jobber business. In August 1995, Tosco entered into an agreement to expand an existing lease facility to finance the acquisition and improvement of up to $15 million of service station properties in Arizona. At March 31, 1996, Tosco, as agent for the lessor, had spent approximately $4.4 million but had not yet entered into leases pending completion of construction. In November 1995, Tosco acquired under long-term lease the Brown Bear car wash facilities in the Puget Sound area. Tosco expects to fund its 1996 capital expenditures for its refineries from cash provided by operations, available credit, and other resources. In view of the pending acquisition of Circle K, capital spending for retail operations will be curtailed and refocused on enhancing existing retail sites and integrating both operations after the acquisition. To increase financial flexibility and reduce interest costs, Tosco amended its working capital agreement in April 1995, entered into a Receivable Transfer Agreement in June 1995, and issued $125 million of unsecured 7% notes in July 1995. In April 1996, Tosco entered into the New Credit Agreement. At March 31, 1996, total shareholders' equity was $645 million, an increase from December 31, 1995 of $18 million due to net income ($24 million) less dividend and other payments of $6 million. Debt, including current maturities and short-term bank borrowings, increased by $143 million to $788 million at March 31, 1996. IMPACT OF INFLATION The impact of inflation has been less significant during recent years because of the relatively low rates of inflation experienced in the United States. Raw material costs, energy costs, and labor costs are important components of Tosco's costs. Any or all of these components could be increased by inflation, with a possible adverse effect on profitability, especially in high inflation periods when raw material and energy cost increases generally lead finished product prices. In addition, a rapid escalation of raw material and finished products prices could result in credit restrictions if working capital requirements exceed the maximum availability under Tosco's working capital facilities. RISK MANAGEMENT Tosco uses a variety of strategies to reduce commodity price, interest and operational risks. As discussed in Note 2 to the Company's 1995 Consolidated Financial Statements incorporated herein by reference, Tosco, at times and when able, uses futures contracts to lock in what it believes to be favorable margins on a varying portion of Bayway's production by taking offsetting long (obligation to buy at a fixed price) positions in crude oil and short (obligation to deliver at a fixed price) positions in gasoline and heating oil futures and forward contracts. This strategy hedges Bayway's exposure to fluctuations in refining margins and therefore reduces the volatility of operating results. In addition, Tosco enters into swap contracts with counterparties (typically agreeing to sell at fixed forward prices, and to buy at future variable market prices, stated volumes of residual fuels) to hedge sales prices of the Bayway Refinery's residual fuels production. At March 31, 1996, Tosco had hedged approximately 18% and 9% of Bayway's expected second quarter and remaining 1996 production, respectively, at acceptable historical margins. Tosco utilizes futures and forward contracts to a lesser extent to hedge inventories stored for future sale and to hedge against adverse price movements between the cost of foreign crude oil that Bayway refines and the cost of domestic crude oil. Tosco manages its interest rate risk by maintaining a mix of fixed rate and floating rate debt. Currently, floating rate debt, primarily borrowings under the $600 million New Credit Agreement, is used to finance Tosco's working capital requirements. Existing fixed rate debt consists primarily of $125 million unsecured non-callable notes issued in July 1995 to repay indebtedness under the Credit Agreement and $450 million of mortgage bonds issued in 1992 and 1993 to refinance previously outstanding floating rate bank debt and to finance the acquisition of capital assets including the acquisition of the Bayway Refinery. As required by the Credit Agreement as previously in effect, Tosco entered into an interest rate swap agreement which converted a predetermined percentage of floating rate bank term debt ($28.3 million at March 31, 1996) to fixed rate term debt. The interest rate swap expires in the second quarter of 1996. Tosco carries insurance policies on insurable risks, which it believes to be at commercially reasonable rates. While Tosco believes that it is adequately insured, future losses could exceed insurance policy limits or, under adverse interpretations, be excluded from coverage. Future liability or costs, if any, incurred under such circumstances would S-15 have to be paid out of general corporate funds, if available. For a discussion of Tosco's strategy to reduce credit risk, see Note 2 to the Company's 1995 Consolidated Financial Statements, incorporated herein by reference. DESCRIPTION OF THE NOTES The following description of the particular terms of the Notes supplements, and to the extent inconsistent therewith replaces, the description of the general terms and provisions of the Debt Securities set forth in the Prospectus, to which description reference is hereby made. The Notes will be unsecured general obligations of the Company and will be issued under an indenture dated as of May 1, 1996 (the "Indenture"), between the Company and State Street Bank and Trust Company (the "Trustee"). The Notes will be limited to $200,000,000 aggregate principal amount and will mature on May 15, 2006. Each Note will bear interest from May 15, 1996, or from the most recent interest payment date to which interest has been paid, at the rate of _% per annum, payable semiannually on May 15 and November 15, commencing on November 15, 1996, to the person in whose name such Note is registered at the close of business on the preceding May 1 and November 1, respectively. The Notes are redeemable as set forth under "Optional Redemption." The Notes have no sinking fund provisions. COVENANTS The covenants summarized below will be applicable (unless waived or amended) so long as any of the Debt Securities (as defined in the accompanying Prospectus) are outstanding. LIMITATION ON LIENS The Company will not, and will not permit any Subsidiary to, incur any Debt secured by a Lien on any Principal Property without making effective provision for securing all Outstanding Debt Securities of each series having the benefit of this covenant equally and ratably with such Debt as to such Principal Property. The foregoing restrictions will not apply to: (i) Liens existing at the date of original issuance of the Notes; (ii) any Liens securing Debt owed by the Company to one or more Subsidiaries of the Company; (iii) Liens on any Principal Property of a Person existing prior to the time (A) such Person becomes a Subsidiary of the Company, (B) such Person merges into or consolidates with a Subsidiary of the Company or (C) another Subsidiary of the Company merges into or consolidates with such Person (in a transaction in which such Person becomes a Subsidiary of the Company); (iv) Liens on any Principal Property existing at the time of acquisition thereof; (v) Liens on any Principal Property to secure Debt incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of the Principal Property subject to such Liens in an aggregate principal amount not to exceed the fair market value of such property, construction or improvements; (vi) Liens on any Principal Property of the Company or any Subsidiary in favor of governmental bodies to secure certain advance or progress payments pursuant to any contract or statute; and (vii) Liens to secure any extension, renewal, refinancing or refunding (or successive extensions, renewals, refinancings or refundings), in whole or in part, of any Debt secured by Liens referred to in the foregoing clauses (i) through (vi), so long as such Lien does not extend to any other property and the Debt so secured is not increased. Notwithstanding the foregoing, the Company or any Subsidiary may incur Debt secured by Liens which otherwise would be subject to the foregoing restrictions, in an aggregate amount which, together with all other such Debt outstanding secured by Liens and all Attributable Debt outstanding in respect of Sale and Leaseback Transactions (other than as permitted by the first paragraph under the "Limitation on Sale and Leaseback Transactions" covenant below), does not exceed 10% of Consolidated Net Tangible Assets. LIMITATION ON SALE AND LEASEBACK TRANSACTIONS The Company will not, and will not permit any Subsidiary to, enter into any Sale and Leaseback Transaction on any Principal Property (except for a period not exceeding three years) unless: (i) the Company or such Subsidiary would be entitled to incur a Lien to secure Debt by reason of the provisions described in clauses (i) through (vii) of the second paragraph under the "Limitation on Liens" covenant in an amount equal to the Attributable Debt of such Sale and Leaseback Transaction without equally and ratably securing all Outstanding Debt Securities of each series having the benefit of this covenant or (ii) the Company or such Subsidiary applies within 180 days an amount equal to, in the S-16 case of a sale or transfer for cash, the net proceeds (not exceeding the net book value), and, otherwise, an amount equal to the fair value (as determined by its Board of Directors), of the property so leased to (A) the retirement of Debt Securities or other Funded Debt of the Company or such Subsidiary or (B) the acquisition of property which constitutes a Principal Property. Notwithstanding the foregoing, the Company or any Subsidiary may enter into a Sale and Leaseback Transaction which would otherwise be subject to the foregoing restriction, provided the amount of Attributable Debt in respect of such Sale and Leaseback Transaction, together with all other such Attributable Debt outstanding and all Debt outstanding secured by Liens (other than as permitted by the second paragraph under the "Limitations on Liens" covenant above), does not exceed 10% of Consolidated Net Tangible Assets. LIMITATION ON SUBSIDIARY FUNDED DEBT AND PREFERRED STOCK The Company will not permit any Subsidiary of the Company having a Principal Property to incur or suffer to exist any Funded Debt or issue any Preferred Stock except: (i) Funded Debt outstanding under the Bank Credit Facility; (ii) Funded Debt or Preferred Stock outstanding on the date of original issuance of the Notes; (iii) Funded Debt or Preferred Stock issued to and held by the Company or a Subsidiary of the Company; (iv) Funded Debt incurred or Preferred Stock issued by a Person prior to the time (A) such Person became a Subsidiary of the Company, (B) such Person merges into or consolidates with a Subsidiary of the Company or (C) another Subsidiary of the Company merges into or consolidates with such Person (in a transaction in which such Person becomes a Subsidiary of the Company); (v) Funded Debt or Preferred Stock incurred for the purpose of financing all or any part of the purchase price or the cost of construction of or improvements to the property of the Company or any of its Subsidiaries in an aggregate principal amount or liquidation preference, as the case may be, not to exceed the fair market value of such property, construction or improvements; and (vi) Funded Debt or Preferred Stock that is exchanged for, or the proceeds of which are used to refinance or refund, any Funded Debt or Preferred Stock permitted to be outstanding pursuant to clauses (i) through (v) (or any extension or renewal thereof) in an aggregate principal amount or liquidation preference, as the case may be (which, in the case of a Discount Security, shall be the issue price thereof), not to exceed the principal amount of the Funded Debt or the liquidation preference of the Preferred Stock, as the case may be, so exchanged, refinanced or refunded (which, in the case of a Discount Security, shall be the accreted value thereof). Notwithstanding the foregoing, the Company's Subsidiaries may incur Funded Debt and Preferred Stock in an aggregate principal amount and liquidation preference that does not exceed 10% of Consolidated Net Tangible Assets. CERTAIN DEFINITIONS. The terms set forth below are defined in the Indenture as follows (other terms are defined in the accompanying Prospectus and in the Indenture): "Attributable Debt" when used in connection with a Sale and Leaseback Transaction involving a Principal Property shall mean, at the time of determination, the present value of the total net amount of rent required to be paid under such lease during the remaining term thereof (including any renewal term or period for which such lease has been extended), discounted at the rate of interest set forth or implicit in the terms of such lease or, if not practicable to determine such rate, the weighted average interest rate per annum borne by the Debt Securities of each series outstanding pursuant to the Indenture compounded semi-annually. For purposes of the foregoing definition, rent shall not include amounts required to be paid by the lessee on account of insurance, taxes, assessments, utility, operating and labor costs and similar charges. In the case of any lease which is terminable by the lessee upon the payment of a penalty, such net amount shall also include the amount of the penalty, but no rent shall be considered as required to be paid under such lease subsequent to the first date upon which it may be so terminated. "Bank Credit Facility" means the bank facility provided for under the Third Amended and Restated Credit Agreement, dated as of April 8, 1996, among the Company and the banks that are or become parties from time to time thereto, as it may be amended, supplemented or otherwise modified from time to time, and any successor or replacement bank facility thereto, provided that the aggregate principal amount of borrowings thereunder does not exceed $600 million. "Consolidated Net Tangible Assets" means the total of all the assets appearing on the consolidated balance sheet of the Company and its Subsidiaries, less the following: (a) liabilities, (b) intangible assets, including, but without limitation, such items as goodwill, trademarks, trade names, patents and unamortized debt discount and expense carried as an asset on said balance sheet, and (c) appropriate adjustment on account of minority interests of other persons holding stock in any Subsidiary. Consolidated Net Tangible Assets shall be determined in accordance with generally S-17 accepted accounting principles applied on a consistent basis and shall be determined by reference to the most recent publicly available quarterly or annual, as the case may be, consolidated balance sheet of the Company. "Debt" of a Person means, all indebtedness of such Person which is for money borrowed. "Funded Debt" means Debt which by its terms matures at, or can be extended or renewed at the option of the obligor to, a date more than twelve months after the date of the Debt's creation, including, but not limited to, outstanding revolving credit loans. "Incur" means to issue, incur, assume, guarantee, become liable, contingently or otherwise, with respect to, or otherwise become responsible for the payment of, any Debt. "Lien" means any mortgage or deed of trust, pledge, assignment, security interest, lien, charge, or other encumbrance or preferential arrangement (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). "Preferred Stock", as applied to the Capital Stock of any Person, means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. "Principal Property" means (i) any refining or processing plant (together with any pipeline, terminal or other facility related to such refining or processing plant and necessary for its economic operation) or corporate offices, in any case owned or leased by the Company or any Subsidiary, or any interest of the Company or any Subsidiary in such property (in each case including the real estate related thereto) located within the United States of America and (ii) any Capital Stock of any Subsidiary that owns, directly or indirectly, a Principal Property of the type described in clause (i). "Sale and Leaseback Transaction" of any Person means an arrangement with any lender or investor or to which such lender or investor is a party providing for the leasing by such person of any property or asset of such Person which has been or is being sold or transferred by such Person more than one year after the acquisition thereof or the completion of construction or commencement of operation thereof to such lender or investor or to any person to whom funds have been or are to be advanced by such lender or investor on the security of such property or asset. The stated maturity of such arrangement shall be the date of the last payment of rent or any other similar amount due under such arrangement prior to the first date on which such arrangement may be terminated by the lessee without payment of a penalty. OPTIONAL REDEMPTION The Notes will be redeemable as a whole or in part, at the option of the Company at any time, at a redemption price equal to the greater of (i) 100% of their principal amount or (ii) the sum of the present values of the remaining scheduled payments of principal and interest thereon discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Yield plus __ basis points, plus in each case accrued interest to the date of redemption (the "Redemption Date"). "Treasury Yield" means, with respect to any Redemption Date, the rate per annum equal to the semiannual equivalent yield to maturity of the Comparable Treasury Issue, assuming a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date. "Comparable Treasury Issue" means the United States Treasury security selected and designated to the Company in writing by an Independent Investment Banker as having a maturity comparable to the remaining term of the Notes that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of comparable maturity to the remaining term of the Notes. "Independent Investment Banker" means Morgan Stanley & Co. Incorporated or, if such firm is unwilling or unable to select the Comparable Treasury Issue, an independent investment banking institution of national standing appointed by the Trustee. "Comparable Treasury Price" means, with respect to any Redemption Date: (i) the average of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) on the third business day preceding such Redemption Date, as set forth in the daily statistical release (or any successor release) published by the Federal Reserve Bank of New York and designated "Composite 3:30 p.m. Quotations for U.S. S-18 Government Securities" or (ii) if such release (or any successor release) is not published or does not contain such prices on such business day, (A) the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest such Reference Treasury Dealer Quotations, or (B) if the Trustee obtains fewer than four Reference Treasury Dealer Quotations, the average of all such Quotations. "Reference Treasury Dealer Quotations" means, with respect to each Reference Treasury Dealer and any Redemption Date, the average, as determined by the Trustee, of the bid and asked prices for the Comparable Treasury Issue (expressed in each case as a percentage of its principal amount) quoted in writing to the Trustee by such Reference Treasury Dealer at 5:00 p.m. on the third business day preceding such Redemption Date. "Reference Treasury Dealer" means each of Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Lehman Brothers, Oppenheimer & Co., Inc. and another Primary Treasury Dealer (as defined herein) at the option of the Company, provided, however, that if any of the foregoing shall cease to be a primary U.S. Government securities dealer in New York City (a "Primary Treasury Dealer"), the Company shall substitute therefor another Primary Treasury Dealer. Holders of Notes to be redeemed will receive notice thereof by first-class mail at least 30 and not more than 60 days prior to the date fixed for redemption. If less than all the Notes are to be redeemed, the Trustee will select Notes for redemption pro rata or by lot. If any Note is to be redeemed in part only, a new Note or Notes in principal amount equal to the unredeemed principal portion thereof will be issued. BOOK-ENTRY PROCEDURES Upon issuance, all Notes will be represented by a fully registered global note (the "Global Note"). The Global Note will be deposited with, or on behalf of, The Depository Trust Company, as Depositary (the "Depositary"), and registered in the name of the Depositary or a nominee thereof. Unless and until it is exchanged in whole or in part for Notes in definitive form, the Global Note may not be transferred except as a whole by the Depositary to a nominee of such Depositary or by a nominee of such Depositary to such Depositary. A further description of the Depositary's procedures with respect to the Global Note is set forth in the Prospectus under "Description of Debt Securities--Global Security." The Depositary has confirmed to the Company, the Underwriters and the Trustee that it intends to follow such procedures. SAME-DAY SETTLEMENT AND PAYMENT Settlement for the Notes will be made by the Underwriters in immediately available funds. All payments of principal and interest on the Global Notes will be made by the Company in immediately available funds. UNDERWRITERS Under the terms and subject to the conditions contained in the Underwriting Agreement dated the date hereof, the Underwriters named below have severally agreed to purchase, and the Company has agreed to sell to them, the respective principal amounts of the Notes set forth opposite their names below: PRINCIPAL AMOUNT NAME OF NOTES ---- -------- Morgan Stanley & Co. Incorporated ............................. $ Donaldson, Lufkin & Jenrette Securities Corporation ........... Lehman Brothers Inc. .......................................... Oppenheimer & Co., Inc. ....................................... BA Securities, Inc. ........................................... Chase Securities Inc. ......................................... Furman Selz LLC ............................................... ------------ Total ..................................................... $200,000,000 ============ The Underwriting Agreement provides that the obligations of the Underwriters to pay for and accept delivery of the Notes is subject to the approval of certain legal matters by their counsel and to certain other conditions. The Underwriters are obligated to take and pay for all the Notes offered hereby if any are taken. S-19 The Underwriters initially propose to offer all or part of the Notes directly to the public at the public offering price set forth on the cover page hereof and all or part to certain dealers at a price which represents a concession not in excess of __% of the principal amount of the Notes. Any Underwriter may allow, and any such dealer may reallow, concessions to certain other dealers not in excess of __% of the principal amount of the Notes. After the initial offering of the Notes, the offering price and other selling terms may from time to time be varied by the Underwriters. The Company has agreed to indemnify the Underwriters against certain civil liabilities, including liabilities under the Securities Act of 1933, as amended. The Company does not intend to apply for listing of the Notes on a national securities exchange, but has been advised by the Underwriters that they presently intend to make a market in the Notes as permitted by applicable laws and regulations. The Underwriters are not obligated, however, to make a market in the Notes, and any such market making may be discontinued at any time at the sole discretion of the Underwriters. Accordingly, no assurance can be given as to the liquidity of, or trading markets for, the Notes. The Underwriters and their affiliates engage in transactions with and perform services for the Company in the ordinary course of business. Certain of the Underwriters served as underwriters in connection with the Company's offering of $125 million principal amount of 7% Notes due 2000 completed in July 1995 and received customary compensation with respect thereto. Edmund A. Hajim, a Director of the Company, is also the Chairman of the Board and Chief Executive Officer of Furman Selz LLC. S-20 -----END PRIVACY-ENHANCED MESSAGE-----