SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 27, 2002, 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
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TABLE OF ADDITIONAL REGISTRANTS
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State of Other IRS Employer
Jurisdiction of Identification Commission File
Name Incorporation Number Number
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Kiantone Pipeline Corporation New York 25-1211902 333-35083-01
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Kiantone Pipeline Company Pennsylvania 25-1416278 333-35083-03
- ----------------------------------- ----------------------- --------------------- ---------------------
United Refining Company of Pennsylvania 25-0850960 333-35083-02
Pennsylvania
- ----------------------------------- ----------------------- --------------------- ---------------------
United Jet Center, Inc. Delaware 52-1623169 333-35083-06
- ----------------------------------- ----------------------- --------------------- ---------------------
Kwik-Fill, Inc. Pennsylvania 25-1525543 333-35083-05
- ----------------------------------- ----------------------- --------------------- ---------------------
Independent Gas and Oil Company New York 06-1217388 333-35083-11
of Rochester, Inc.
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Bell Oil Corp. Michigan 38-1884781 333-35083-07
- ----------------------------------- ----------------------- --------------------- ---------------------
PPC, Inc. Ohio 31-0821706 333-35083-08
- ----------------------------------- ----------------------- --------------------- ---------------------
Super Test Petroleum Inc. Michigan 38-1901439 333-35083-09
- ----------------------------------- ----------------------- --------------------- ---------------------
Kwik-Fil, Inc. New York 25-1525615 333-35083-04
- ----------------------------------- ----------------------- --------------------- ---------------------
Vulcan Asphalt Refining Delaware 23-2486891 333-35083-10
Corporation
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ITEM 1. BUSINESS.
INTRODUCTION
United Refining Company (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), Citgo(R)
(through the Company's Country Fair(R) locations) and Keystone(R) brand names at
a network of Company-operated retail units. As of August 31, 2002, the Company
operated 370 units, of which, 184 units are owned, 126 units are leased and the
remaining stores are operated under a management agreement. For the year ended
August 31, 2002 (sometimes referred to as "fiscal 2002"), approximately 77% and
26% 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) and Country Fair(R)
brand names. The Company also sells its petroleum products to long-standing
regional wholesale customers.
For the fiscal year ended August 31, 2002, the Company had total
revenues of approximately $1.1 billion, of which approximately 52% were derived
from gasoline sales, approximately 34% were from sales of other petroleum
products and approximately 14% were from sales of merchandise and other revenue.
The Company's capacity utilization rates have ranged from approximately 90% to
approximately 100% over the last five years. In fiscal 2002, approximately 71%
of the Company's refinery output consisted of higher value products such as
gasoline and distillates.
The Company believes that the location of its 65,000 bpd refinery in
Warren, Pennsylvania provides it with a transportation cost advantage over its
competitors, which is significant within an approximately 100-mile radius of
it's refinery. For example, in Buffalo, New York over its last five fiscal
years, the Company has experienced approximately 1.8 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 59% / 41% between rural
and urban markets. Margins on gasoline sales are traditionally higher in rural
markets, while gasoline sales volume is greater in urban markets. The Company's
urban markets include Buffalo, Rochester and Syracuse, New York and Erie,
Pennsylvania.
As of August 31, 2002, the Company operated 370 retail units, of which
178 are located in New York, 179 in Pennsylvania and 13 in Ohio. In fiscal 2002,
approximately 77% of the refinery's gasoline production was sold through the
Company's retail network. In addition to gasoline, all units sell convenience
merchandise, 93 are quick serve restaurants (QSR's) including franchise
operations and seven of the units are full-service truck stops. Customers may
pay for purchases with credit cards including the Company's own Kwik Fill(R)
credit card. In addition to this credit card, the Company maintains a fleet
credit card catering to regional truck and automobile fleets. Sales of
convenience products, which tend to have constant margins throughout the year,
have served to reduce the effects of the seasonality inherent in gasoline retail
margins. The Company has consolidated its entire retail network under the Red
Apple Food Mart(R), Kwik Fill(R), and Country Fair(R) brand names, providing the
chain with a greater regional brand awareness.
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RECENT DEVELOPMENTS
In July 2002, the Company renewed a $50,000,000 secured revolving
credit facility (the "facility") with a syndicate of banks with PNC Bank, N.A.
as Agent Bank. The facility provides for revolving credit loans and for the
issuance of letters of credit, expires on May 9, 2007 and is secured by certain
cash accounts, accounts receivable, and inventory. Until maturity, the Company
may borrow on a borrowing base formula as set forth in the facility. For Base
Rate borrowings, interest is calculated at the greater of the bank's prime rate
or federal fund rate plus 1%, plus an applicable margin of .25% to .75%. For
Euro-Rate borrowings, interest is calculated at the LIBOR rate plus an
applicable margin of 1.75% to 3.00%. The applicable margin varies with the
Company's revolving credit facility leverage ratio calculation. As of August 31,
2002, $24,314,000 of Base Rate borrowings and $850,000 of letters of credit were
outstanding under the agreement. The Company must pay a commitment fee of 3/8%
per annum on the unused balance of the facility. The weighted average interest
rate for Base Rate borrowings for the years ended August 31, 2002 and 2001 was
5.5% and 10.25%, respectively. No amounts were borrowed under the Euro-Rate
option for the fiscal years ending August 31, 2002 and 2001. See Footnote 7 to
Consolidated Financial Statements, Item 8.
The Company completed the acquisition of Country Fair, Inc. ("Country
Fair") on December 21, 2001. United Refining Company acquired the operations and
working capital assets of Country Fair for approximately $16.9 million. The
fixed assets of Country Fair, which consist of 69 convenience stores throughout
northwestern Pennsylvania, southwestern New York and eastern Ohio, were acquired
by related entities controlled by John Catsimatidis, the indirect sole
shareholder of United Refining Company. The assets are being leased to United
Refining Company at an annual aggregate rental of approximately $5.2 million
over a period ranging from 10 to 20 years. United Refining Company is not a
guarantor of the underlying mortgages on the properties. The acquisition was
accounted for by the purchase method of accounting and, accordingly, the results
of operations for the period subsequent to the acquisition are included in the
consolidated financial statements. See Footnote 18 to Consolidated Financial
Statements, Item 8.
INDUSTRY OVERVIEW
The Company is a regional refiner and marketer located primarily in
Petroleum Administration for Defense District I ("PADD I"). As of January 1,
2002, there were 16 refineries operating in PADD I with a combined crude
processing capacity of 1.8 million bpd, representing approximately 10% of U.S.
refining capacity. Petroleum product consumption during calendar year 2001 in
PADD I averaged 5.9 million bpd, representing approximately 30% of U.S. demand
based on industry statistics reported by the U.S. Energy Information
Administration (the "EIA"). According to the Lundberg Letter, an industry
newsletter, total gasoline consumption in the region grew by approximately 2.2%
during 2001. Refined petroleum production in PADD I is insufficient to satisfy
demand for such products in the region, making PADD I a net importer of such
products.
The Company believes that domestic refining capacity utilization is
close to maximum sustainable limits because of the existing high throughput
coupled with a minimal change in refining capacity. The Company believes that
high utilization rates coupled with little anticipated crude capacity expansion
is likely to result in improved operating margins in the refining industry over
the long term.
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:
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- Maximize the transportation cost advantage afforded the Company by its
geographic location by increasing retail and wholesale market shares
within its primary market area.
- Expand sales of higher margin specialty products such as premium
diesel, roofing asphalt and Strategic Highway Research Program ("SHRP")
specification paving asphalt.
- Optimize profitability by managing feedstock costs, product yields, and
inventories through its refinery feedstock linear programming model and
its system wide distribution model.
- Continue to investigate strategic acquisitions and capital improvements
to its existing facilities.
REFINING OPERATIONS
The Company's refinery is located on a 92-acre site in Warren,
Pennsylvania. The refinery has a rated capacity of 65,000 bpd of crude oil
processing. The refinery averaged saleable production of approximately 62,800
bpd during fiscal 2001 and approximately 63,000 bpd during fiscal 2002. 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 2002, approximately
77% of the Company's gasoline production was sold through its retail network and
the remaining 23% of such production was sold to wholesale customers.
Middle distillates include kerosene, diesel fuel, heating oil (No. 2
oil) and jet fuel. In fiscal 2002 the Company sold approximately 82% of its
middle distillate production to wholesale customers and the remaining 18% 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,
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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
are blended to produce finished products. A naphtha hydrotreater treats naphtha
with hydrogen across a fixed bed catalyst to remove sulfur before further
treatment. The treated naphtha is then distilled into light and heavy naphtha at
a prefractionator. Light naphtha is then sent to an isomerization unit and heavy
naphtha is sent to a reformer in each case for octane enhancement. The
isomerization unit converts the light naphtha catalytically into a gasoline
component with 83 octane. The reformer unit converts the heavy naphtha into
another gasoline component with up to 94 octane depending upon the desired
octane requirement for the grade of gasoline to be produced. The reformer also
produces as a co-product all the hydrogen needed to operate hydrotreating units
in the refinery.
Raw kerosene or heating oil is treated with hydrogen at a distillate
hydrotreater to remove sulfur and make finished kerosene, jet fuels and No. 2
fuel oil. A distillate hydrotreater built in 1993 also treats raw distillates to
produce low sulfur diesel fuel.
The long molecular chains of the heavy atmospheric and vacuum
distillates are broken or "cracked" in the fluidized catalytic cracking unit and
separated and recovered in the gas concentration unit to produce fuel gas,
propylene, butylene, LPG, gasoline, light cycle oil and clarified oil. Fuel gas
is burned within the refinery, propylene is fed to a polymerization unit which
polymerizes its molecules into a larger chain to produce an 87 octane gasoline
component, butylene is fed into an alkylation unit to produce a gasoline
component and LPG is treated to remove trace quantities of water and then sold.
Clarified oil is burned in the refinery or sold. Various refinery gasoline
components are blended together in refinery tankage to produce 87 octane and 93
octane finished gasoline. Likewise, light cycle oil is blended with other
distillates to produce low sulfur diesel and No. 2 fuel oil.
The Company's refining configuration allows the processing of a wide
variety of crude oil inputs. During the past five years the Company's inputs
have been of Canadian origin and range from light low sulfur (38 degrees API,
0.5% sulfur) to high sulfur heavy asphaltic (21 degrees API, 3.5% sulfur). The
Company's ability to market asphalt enables it to purchase selected heavier
crude oils at a lower cost.
SUPPLY OF CRUDE OIL
Even though the Company's crude supply is currently nearly all
Canadian, it is not dependent on this source alone. Within 60 days, the Company
could shift up to 70% 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. Seventy-two 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; twenty-eight percent
of the Company's crude contracts are on an annual basis (with month to month
pricing provisions). As of August 31, 2002, the Company had supply contracts
with 29 different suppliers for an aggregate of 64,100 bpd of crude oil. The
Company has contracts with three vendors amounting to 53% of daily crude oil
supply (none more than 16,000 barrels per day). As of such date, the Company had
no other contract covering more than 10% of its crude oil supply.
The Company accesses crude through the Kiantone Pipeline, which
connects with the Enbridge Pipe Line in West Seneca, New York, which is near
Buffalo. The Enbridge Pipe Line system provides access to most North American
and foreign crude oils through three primary routes: (i) Canadian crude oils are
transported eastward from Alberta and other points in Canada; (ii) various
mid-continent crude oils from Texas, Oklahoma and Kansas are transported
northeast along the Cushing-Chicago Pipeline (foreign crude oils shipped on the
Seaway system can also access this route), which connects to Enbridge at
Griffith, Indiana; and (iii) foreign crude oils unloaded at the Louisiana
Offshore Oil Port are transported north via the Cap line 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.
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The pipeline operation is monitored by a computer at the refinery.
Shipments of crude arriving at the West Seneca terminal are separated and
stored in one of the terminal's three storage tanks, which have an aggregate
storage capacity of 485,000 barrels. The refinery tank farm has two
additional crude storage tanks with a total capacity of 200,000 barrels. An
additional 35,000 barrels of crude can be stored at the refinery.
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 to five years,
during which time such units are shut down for internal inspection and repair.
The most recent turnaround occurred in October and November 2002. 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 on a
straight-line basis over the period of benefit, which ranges from 3 to 10 years.
Thus, the Company charges costs to production over the period most clearly
benefited by the turnaround.
The scheduled maintenance turnaround during late October and early
November 2002 resulted in an inventory build-up (starting in August 2002) of
petroleum products to meet minimum sales demand during the maintenance shutdown
period.
MARKETING AND DISTRIBUTION
GENERAL
The Company has a long history of service within its market area. The
Company's first retail service station was established in 1927 near the Warren
refinery, and it has steadily expanded its distribution network over the years.
The Company maintains an approximate 59% / 41% 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 network of rural convenience store
units provide an important alternative to traditional grocery store formats. In
fiscal 2002, approximately 77% and 26% of the Company's gasoline and diesel fuel
production, respectively, was sold through this retail network.
The Company also has a 50% interest in a joint venture with an entity
for the marketing of asphalt products. This joint venture is accounted for using
the equity method of accounting.
RETAIL OPERATIONS
As of August 31, 2002 the Company operated a retail marketing network
(including those stores operated under a management agreement) that includes 370
retail units, of which 178 are located in western New York, 179 in northwestern
Pennsylvania and 13 in eastern Ohio. The Company owns 184 of these units.
Gasoline at these retail units is sold under the brand names Kwik Fill(R),
Citgo(R) (through the Company's Country Fair(R) locations) and Keystone(R). Most
retail units operate under the brand names Red Apple Food Mart(R) and Country
Fair(R). The Company believes that Red Apple Food Mart(R), Kwik Fill(R), Country
Fair(R), Keystone(R) and Citgo(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. Ninety-three of such units are QSR's where
food (primarily submarine sandwiches, pizza, chicken and lunch platters) is
prepared on the premises for retail sales and also distribution to other nearby
Company units which do not have in-store delicatessens. Mini convenience stores
sell snacks, cigarettes and beverages and self-service gasoline. Limited
gasoline stations sell gasoline, cigarettes, oil and related
7
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.
Total merchandise sales for fiscal year 2002 were $149.8 million, with
a gross profit of approximately $42.5 million. Fiscal 2001 merchandise sales
were $95.4 million, with a gross profit of approximately $22.2 million. Over the
last five fiscal years, merchandise gross margins have averaged approximately
28.4% and the Company believes that merchandise sales will continue to remain a
stable source of gross profit.
MERCHANDISE SUPPLY
The Company's primary merchandise vendor is Tripifoods, which is
located in Buffalo, New York. During fiscal 2002, the Company purchased
approximately 97% of its convenience merchandise from this vendor. Tripifoods
supplies the Company with tobacco products, candy, deli foods, grocery, health
and beauty products, and sundry items on a cost plus basis for resale. The
Company also purchases coffee, dairy products, beer, soda, snacks, and novelty
goods from direct store vendors for resale. The Company annually reviews its
suppliers' costs and services versus those of alternate suppliers. The Company
believes that alternative sources of merchandise supply at competitive prices
are readily available.
LOCATION PERFORMANCE TRACKING
The Company maintains a store tracking mechanism to collect operating
data including sales and inventory levels for the Company's retail network. Data
transmissions are made using personal computers, which are available at each
location. Once verified, the data interfaces with a variety of retail accounting
systems, which support daily, weekly and monthly performance reports. These
different reports are then provided to both the field management and office
staff. Upon completion of a capital project, management tracks "before and
after" performance, to evaluate the return on investment which has resulted from
the improvements.
WHOLESALE MARKETING AND DISTRIBUTION
The Company sold in fiscal year 2002, on a wholesale basis,
approximately 46,300 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 2002, the Company's production of gasoline, distillate and asphalt sold
at wholesale was 23%, 82% and 100%, respectively. The Company sells
approximately 98% of its wholesale gasoline and distillate products from its
refinery in Warren, PA and its Company-owned and operated product terminals. The
remaining 2% are sold through third-party exchange terminals.
The Company's wholesale gasoline customer base includes 50 branded
dealer/distributor units operating under the Company's proprietary "Keystone(R)"
(including one Company operated location) and "Kwik Fill(R)" brand names.
Long-term dealer/distributor contracts accounted for approximately 16% of the
Company's wholesale gasoline sales in fiscal 2002. Supply contracts generally
range from three to five years in length, with branded prices based on the
prevailing Company wholesale rack price in Warren.
The Company believes that the location of its refinery provides it with
a transportation cost advantage over its competitors, which is significant
within an approximately 100-mile radius of the Company's refinery. For example,
in Buffalo, New York over its last five fiscal years, the Company has
experienced an approximately 1.8 cents per gallon transportation cost advantage
over those competitors who are required to ship gasoline by pipeline and truck
from New York Harbor sources to Buffalo. In addition to this transportation cost
advantage, the Company's proximity to local accounts allows it a greater range
of shipment options, including the ability to deliver truckload quantities of
approximately 210 barrels versus much larger 25,000 barrel pipeline batch
deliveries, and faster response time, which the Company believes help it provide
enhanced service to its customers.
The Company's ability to market asphalt is critical to the performance
of its refinery, since such marketing ability enables the Company to process
lower cost higher sulfur content crude oils which in turn affords the Company
higher refining margins. Sales of paving asphalt generally occur during the
summer months due primarily to weather conditions. In order to maximize its
asphalt sales, the Company has made substantial investments to increase its
asphalt storage capacity through the installation of additional tanks, as well
as through the purchase or
8
lease of outside terminals. Partially mitigating the seasonality of the asphalt
paving business is the Company's ability to sell asphalt year-round to roofing
shingle manufacturers. In fiscal 2002, the Company sold 6.9 million barrels of
asphalt while producing 5.9 million barrels. This difference is primarily
attributed to the Company's purchasing product for resale as part of its
wholesale distribution network.
The Company has a significant share of the asphalt market in the cities
of Pittsburgh, Pennsylvania and Rochester and Buffalo, New York. The Company
distributes asphalt from the refinery by railcar and truck transport to its
owned and leased asphalt terminals in such cities or their suburbs. Asphalt can
be purchased in the Gulf Coast area and delivered by barge to third party or
Company-owned terminals near Pittsburgh.
The Company also has a 50% interest in a joint venture with an entity
for the marketing of asphalt products. This joint venture is accounted for using
the equity method of accounting.
The Company uses a network of six terminals to store and distribute
refined products. This network provides gasoline, distillate and asphalt storage
capacities (in thousands of barrels) of approximately 505, 785 and 1,750 barrels
respectively as of August 31, 2002.
During fiscal 2002, approximately 95% of the Company's refined products
were transported from the refinery via truck transports, with the remaining 5%
transported by rail. The majority of the Company's wholesale and retail gasoline
distribution is handled by common carrier trucking companies at competitive
costs. The Company also operates a fleet of ten gasoline tank trucks that supply
approximately 25% of its Kwik Fill(R) retail stations.
Product distribution costs to both retail and wholesale accounts are
minimized through product exchanges. Through these exchanges, the Company has
access to product supplies at approximately 39 sources located throughout the
Company's retail marketing area. The Company seeks to minimize retail
distribution costs through the use of a system wide distribution model.
ENVIRONMENTAL CONSIDERATIONS
GENERAL
The Company is subject to extensive 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, the
Comprehensive Environmental Response Compensation and Liability Act of 1980 as
amended ("CERCLA"), and analogous state and local laws and regulations. As with
the industry in general, compliance with existing and anticipated environmental
laws and regulations increases the overall cost of business, including capital
costs to construct, maintain and upgrade equipment and facilities.
THE CLEAN AIR ACT AMENDMENTS OF 1990
In 1990 the CAA was amended to greatly expand the role of the
government in controlling product quality and air emissions. The legislation
included provisions that have significantly impacted the manufacture of both
gasoline and diesel fuel including the requirement for significantly lower
sulfur content. In regards to emissions, the government has required
increasingly stringent emission controls on process equipment. For example, the
Company will need to comply with the second phase of regulations establishing
Maximum Achievable Control Technologies for petroleum refineries. These
regulations, adopted in April 2002, may require additional emission controls on
certain refinery units. The Company believes it will be able to satisfy these
requirements.
GASOLINE AND DIESEL FUEL SULFUR CONTENT
In February 2000, the United States Environmental Protection Agency
("USEPA") issued a final rule requiring a phased reduction of the sulfur content
in gasoline to ultimately achieve 30 Parts Per Million ("PPM"). Many refiners
will have to make this reduction by January 2004, but some smaller refiners and
those in certain Western states will be allowed to phase down sulfur more
slowly, reaching the 30 PPM level as late as January 2008. Although the Company
is of comparable size to some of the small refiners granted more time to comply,
the
9
Company was not classified as a small refiner for this purpose, nor are the
Company's operations located in any of the Western states given additional time.
However, the rule allows individual refiners to seek additional time to comply
on a case-by-case basis at the discretion of the USEPA. The Company applied for
and was granted additional time to phase down the sulfur content of gasoline.
USEPA granted this relief in the form of a three-phase compliance approach
giving the Company until January 2008 to meet the 30 PPM sulfur limit.
The USEPA promulgated another set of regulations under the CAA in
January 2001 that limits allowable sulfur content in highway diesel fuel. By
June 1, 2006, the sulfur content in highway diesel fuel must be reduced to 15
PPM.
The Company anticipates that a material investment of funds will be
required before 2008 to comply with the low sulfur fuel requirements for both
gasoline and highway diesel. It is believed that compliance with the low sulfur
gasoline and diesel fuel mandates will require an estimated expenditure of
approximately $30 million in capital improvements.
COMPETITION
Petroleum refining and marketing is highly competitive. The Company's
major retail competitors include British Petroleum, Amerada Hess, Mobil and
Sunoco, Inc. With respect to wholesale gasoline and distillate sales, the
Company competes with Sunoco, Inc., Mobil and other major refiners. The Company
primarily competes with Marathon Oil Company and Ashland Oil Company in the
asphalt market. Many of the Company's principal competitors are integrated
multinational oil companies that are substantially larger and better known than
the Company. Because of their diversity, integration of operations, larger
capitalization and greater resources, these major oil companies may be better
able to withstand volatile market conditions, compete on the basis of price and
more readily obtain crude oil in times of shortages.
The principal competitive factors affecting the Company's refining
operations are crude oil and other feedstock costs, refinery efficiency,
refinery product mix and product distribution and transportation costs. Certain
of the Company's larger competitors have refineries which are larger and more
complex and, as a result, could have lower per barrel costs or higher margins
per barrel of throughput. The Company has no crude oil reserves and is not
engaged in exploration. The Company believes that it will be able to obtain
adequate crude oil and other feedstocks at generally competitive prices for the
foreseeable future.
The principal competitive factors affecting the Company's retail
marketing network are location of stores, product price and quality, appearance
and cleanliness of stores and brand identification. Competition from large,
integrated oil companies, as well as from convenience stores which sell motor
fuel, is expected to continue. The principal competitive factors affecting the
Company's wholesale marketing business is product price and quality, reliability
and availability of supply and location of distribution points.
EMPLOYEES
As of August 31, 2002 the Company had approximately 2,504 full-time and
2,133 part-time employees. Approximately 3,990 persons were employed at the
Company's retail units, 389 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 202, 6, 24 and 19 employees, respectively. The agreements
expire on February 1, 2006, January 31, 2003, June 25, 2005 and July 31, 2005,
respectively. The Company believes that its relationship with its employees is
good.
INTELLECTUAL PROPERTY
The Company owns various federal and state service and trade marks used
by the Company, including Kwik-Fill(R), United(R), Country Fair(R),
SuperKwik(R), Keystone(R), SubFare(R) and PizzaFare(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 indirect 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
10
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.
The Company, through its subsidiary Country Fair, licensed from Citgo
Petroleum Corporation ("Citgo") the right to use Citgo's applicable brand names,
trademarks and other forms of Citgo's identification for petroleum products
purchased under a distributor franchise agreement covering Country Fair
locations.
GOVERNMENTAL APPROVALS
The Company has obtained all necessary governmental approvals, licenses
and permits to operate the refinery and convenience stores.
FINANCING
On June 9, 1997, the Company completed the sale (the "Private
Offering") of $200 million principal amount 10 3/4% Series A Senior Notes due
2007 to Dillon, Read & Co. Inc. and Bear, Stearns & Co. Inc. in a transaction
exempt from registration under the Securities Act of 1933, as amended.
Subsequent to this issue, the Company exchanged the Series A Senior Notes for
its 10 3/4% Series B Senior Notes due 2007 which were previously registered
under the Securities Act of 1933, as amended. An aggregate of $200 million in
principal amount of Series A Senior Notes were exchanged for Series B Senior
Notes effective January 16, 1998. The form and terms of the Series B Senior
Notes are identical in all material respects to the form and terms of the Series
A Senior Notes except that the Series B Senior Notes are registered under the
Securities Act and, therefore, do not bear legends restricting the transfer
thereof. The Series B Senior Notes do not represent additional indebtedness of
the Company and are entitled to the benefits of the Indenture, which is the same
Indenture as the one under which the Series A Senior Notes were issued. During
the fiscal year ending August 31, 2001, the Company purchased $19,865,000 of
these notes for $14,185,000 in cash. An extraordinary gain of $3,029,000 was
recorded as a result of the early retirement of debt, consisting of $5,680,000
less $470,000 of associated debt issuance costs, net of a tax charge of
$2,181,000. See Recent Accounting Standards in Item 7.
In July 2002, the Company renewed a $50,000,000 secured revolving
credit facility (the "facility") with a syndicate of banks with PNC Bank, N.A.
as Agent Bank. The facility provides for revolving credit loans and for the
issuance of letters of credit, expires on May 9, 2007 and is secured by certain
cash accounts, accounts receivable, and inventory. Until maturity, the Company
may borrow on a borrowing base formula as set forth in the facility. For Base
Rate borrowings, interest is calculated at the greater of the bank's prime rate
or federal fund rate plus 1%, plus an applicable margin of .25% to .75%. For
Euro-Rate borrowings, interest is calculated at the LIBOR rate plus an
applicable margin of 1.75% to 3.00%. The applicable margin varies with the
Company's revolving credit facility leverage ratio calculation. As of August 31,
2002, $24,314,000 of Base Rate borrowings and $850,000 of letters of credit were
outstanding under the agreement. The Company must pay a commitment fee of 3/8%
per annum on the unused balance of the facility. The weighted average interest
rate for Base Rate borrowings for the years ended August 31, 2002 and 2001 was
5.5% and 10.25%, respectively. No amounts were borrowed under the Euro-Rate
option for the fiscal years ending August 31, 2002 and 2001. See Footnote 7 to
Consolidated Financial Statements, Item 8.
ITEM 2. PROPERTIES.
The Company owns a 92-acre site in Warren, Pennsylvania upon which it
operates its refinery. The site also contains an office building housing the
Company's principal executive office.
The Company owns various real property in the states of Pennsylvania,
New York, Ohio and Alabama as of August 31, 2002, upon which it operates 184
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
11
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 126 sites in Pennsylvania, New
York and Ohio upon which it operates retail units. As of August 31, 2002, 67 of
these leases had an average remaining term of 42 months, exclusive of option
terms and 59 leased Country Fair locations had terms from 10 to 20 years
remaining.
ITEM 3. LEGAL PROCEEDINGS.
The United States Environmental Protection Agency ("USEPA") has issued
certain Notices of Violation, an Administrative Order, and has asserted certain
additional claims arising under federal and state statutory and regulatory law
through and including August 5, 1998 (collectively the "Claims"). The Claims
arise from allegations that (1) the Company failed to properly and consistently
monitor, report and control emissions of Volatile Organic Compounds ("VOCs")
from its refining facility in Warren, Pennsylvania; (2) fuel gas used in the
refining process has in the past contained levels of hydrogen sulfide in excess
of permitted parameters, and; (3) the Company in the past has failed to properly
calculate and report emissions of benzene from its refining facility. The USEPA
has also issued a Notice of Violation dated October 18, 1999 asserting certain
additional claims (collectively the "Additional Claims"). The Additional Claims
allege certain violations of statutory and regulatory law in connection with (a)
certain construction activities with the Company's Warren, Pennsylvania physical
plant; and (b) operation by the Company of certain equipment within the
Company's physical plant. The Claims and Additional Claims allege violations of
the federal Clean Air Act, as amended, and associated federal and state
regulatory requirements. The Company believes that the resolution of the Claims
and Additional Claims will not have a material adverse effect upon the
operations or consolidated financial position of the Company.
The Company has been named as a defendant in several lawsuits involving
the marketing of petroleum products containing Methyl Tertiary Butyl Ether
("MTBE") and the alleged contamination of groundwater with MTBE within the State
of New York. A portion of the litigation, together with other similar cases
involving other parties, has been centralized before the U.S. District Court for
the Southern District of New York pursuant to Transfer Order of the Judicial
Panel on Multidistrict Litigation filed October 20, 2000. The remainder of the
litigation is filed in New York state courts. The complaints seek, inter alia,
compensatory and punitive damages and certification as a class action. The
Southern District cases were denied class certification and the state court
actions naming the Company as a defendant have been dismissed. An appeal of the
state court actions has been filed. Until the scope of the MTBE related claims
and potential claims are known, the Company is unable to determine their
aggregate potential effect, if any, upon its operations and consolidated
financial position.
In addition to the foregoing proceedings, the Company and its
subsidiaries are from time to time parties to various legal proceedings that
arise in the ordinary course of their respective business operations. These
proceedings include various administrative actions relating to federal, state
and local environmental laws and regulations. The Company believes that if these
legal proceedings in which it is currently involved are determined against the
Company, they would not result in a material adverse effect on the Company's
operations or its consolidated financial condition. In the opinion of
management, all such matters are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve such amounts that an
unfavorable disposition would not have a material adverse effect on the
consolidated financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
NONE
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS.
NONE
12
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended August 31,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(dollars in thousands)
INCOME STATEMENT DATA:
Net sales(2) $ 759,525 $ 762,843 $ 1,123,439 $ 1,108,565 $ 1,052,016
Gross margin(1)(2) 152,466 166,824 200,379 216,701 163,192
Refinery operating expenses(3) 60,840 60,990 70,812 90,271 77,821
Selling, general and administrative expenses 75,064 77,487 80,390 73,234 94,297
Operating income/(loss)(2) 8,242 19,305 39,009 42,483 (20,700)
Interest expense 22,188 22,377 22,962 21,051 20,064
Interest income 2,701 1,027 288 1,606 330
Other income (expense)(2) (1,587) (560) (2,822) 1,836 (1,345)
Costs associated with terminated acquisition - - - (1,300) -
Equity in net earnings of affiliate - - - 516 1,242
Income (loss) before income tax expense (benefit) (12,832) (2,605) 13,513 24,090 (40,537)
Income tax expense (benefit) (5,132) (1,006) 6,828 9,840 (15,596)
Income (loss) before extraordinary item and
cumulative effect of accounting change (7,700) (1,599) 6,685 14,250 (24,941)
Extraordinary item, net of tax - - - 3,029 -
Cumulative effect of accounting change, net of tax - 4,783 - - -
Net income (loss) (7,700) 3,184 6,685 17,279 (24,941)
BALANCE SHEET DATA (AT END OF PERIOD):
Total assets 342,579 349,240 340,368 355,557 371,440
Total debt 201,309 206,173 201,111 181,100 206,413
Total stockholder's equity 45,237 48,421 55,106 75,966 48,196
(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 consolidated financial statements.
Refining operating expense equals refining operating expenses per barrel,
multiplied by the volume of total saleable products per day, multiplied by
the number of days in the period.
(2) Certain amounts in fiscal year 2000 and prior year consolidated financial
statements have been reclassified to conform to the presentation in the
current year.
(3) Refinery operating expenses include refinery fuel produced and consumed in
refinery operations and priced at purchased natural gas price. Refinery fuel
consumption per barrel of refinery throughput has remained constant but fuel
expense has increased with increased natural gas price. Refinery fuel
expense for produced and purchased fuel is $24,603, $21,260, $31,096,
$48,500, and $32,201 for fiscal years 1998, 1999, 2000, 2001 and 2002,
respectively.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
FORWARD LOOKING STATEMENTS
THIS ANNUAL REPORT ON FORM 10K INCLUDES STATEMENTS THAT CONSTITUTE
"FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 AND THAT ARE
INTENDED TO COME WITHIN THE SAFE HARBOR PROTECTION PROVIDED BY THOSE SECTIONS.
BY THEIR NATURE, ALL FORWARD LOOKING STATEMENTS INVOLVE RISK AND UNCERTAINTIES.
ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CONTEMPLATED BY THE FORWARD
LOOKING STATEMENTS FOR A NUMBER OF REASONS.
ALTHOUGH THE COMPANY BELIEVES THAT ITS EXPECTATIONS ARE BASED ON
REASONABLE ASSUMPTIONS WITHIN THE BOUNDS OF ITS KNOWLEDGE, INVESTORS AND
PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY PROJECTIONS
AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED IN
ANY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION TO THE FACTORS DISCUSSED
ELSEWHERE IN THIS REPORT, THE COMPANY'S ACTUAL CONSOLIDATED QUARTERLY OR ANNUAL
OPERATING RESULTS HAVE BEEN AFFECTED IN THE PAST, OR COULD BE AFFECTED IN THE
FUTURE, BY ADDITIONAL FACTORS, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC,
BUSINESS AND MARKET CONDITIONS; RISKS AND UNCERTAINTIES WITH RESPECT TO THE
ACTIONS OF ACTUAL OR POTENTIAL COMPETITIVE SUPPLIERS OF REFINED PETROLEUM
PRODUCTS IN THE COMPANY'S MARKETS, THE DEMAND FOR AND SUPPLY OF CRUDE OIL AND
REFINED PRODUCTS, THE SPREAD BETWEEN MARKET PRICES FOR REFINED PRODUCTS AND
MARKET PRICES FOR CRUDE OIL, THE POSSIBILITY OF INEFFICIENCIES OR SHUTDOWNS IN
REFINERY OPERATIONS OR PIPELINES, THE AVAILABILITY AND COST OF FINANCING TO THE
COMPANY, ENVIRONMENTAL, TAX AND TOBACCO LEGISLATION OR REGULATION; VOLATILITY OF
GASOLINE PRICES, MARGINS AND SUPPLIES; MERCHANDISING MARGINS; CUSTOMER TRAFFIC;
WEATHER CONDITIONS; LABOR COSTS AND THE LEVEL OF CAPITAL EXPENDITURES.
COMPANY BACKGROUND
CRITICAL ACCOUNTING POLICIES
The accompanying consolidated financial statements and supplementary
information were prepared in accordance with accounting principles generally
accepted in the United States of America. Significant accounting policies are
discussed in Footnote 1 to the Consolidated Financial Statements, Item 8.
Inherent in the application of many of these accounting policies is the need for
management to make estimates and judgments in the determination of certain
revenues, expenses, assets and liabilities. As such, materially different
financial results can occur as circumstances change and additional information
becomes known. The policies with the greatest potential effect on our results of
operation and financial position include:
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
For accounts receivable we estimate the net collectibility considering
both historical and anticipated trends relating to our customers and the
possibility of non-collection due to their financial position.
ENVIRONMENTAL REMEDIATION AND LITIGATION RESERVE ESTIMATIONS
Management also makes judgments and estimates in recording liabilities
for environmental cleanup and litigation. Liabilities for environmental
remediation are subject to change because of matters such as changes in laws,
regulations and their interpretation; the determination of additional
information on the extent and nature of site contamination; and improvements in
technology. Likewise, actual litigation costs can vary from estimates based on
the facts and circumstance and application of laws in individual cases.
The above assessment of critical accounting policies is not meant to be
an all-inclusive discussion of the uncertainties to financial results that occur
from the application of the full range of the Company's accounting policies.
Materially different financial results could occur in the application of other
accounting policies as well. Likewise, materially different results can occur
upon the adoption of new accounting standards promulgated by the various
rule-making bodies.
14
GENERAL
The Company is engaged in the refining and marketing of petroleum
products. In fiscal 2002, approximately 77% and 26% of the Company's gasoline
and diesel fuel production, respectively, was sold through the Company's network
of service stations and truckstops. The balance of the Company's refined
products were sold to wholesale customers. The Company is also 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, 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 averaged
28.3% for fiscal 2002 and have been between 25% and 31% for the last five years
and are essentially unaffected by variations in crude oil and petroleum products
prices.
In addition to their effect on petroleum product margins, fluctuations
in crude oil prices can affect the Company's reported financial results by
producing significant changes in the value of the Company's working inventories.
The change in the value of working inventory is that portion in the total change
in the Company's inventory value, which is due to changes in the pricing of
working inventory volumes. Working inventory volumes are those volumes of
inventory of the Company's various products and feedstocks necessary to support
normal operations. While changes in the value of working inventory affect the
Company's reported gross profit, operating income and net income, they have no
material effect on the Company's operating cash flow.
The Company includes in costs of goods sold operating expenses incurred
in the refining process. Therefore, operating expenses reflect only selling,
general and administrative expenses, including all expenses of the retail
network, and depreciation and amortization.
RECENT DEVELOPMENTS
The Company's results in fiscal 2002 were impacted by the
volatility of worldwide crude oil prices, as indicated by crude oil contracts
traded on the New York Mercantile Exchange (NYMEX). NYMEX crude pricing for
December 2000 was a little over $34/BBL but decreased to a low of mid-$19/BBL
for December 2001. NYMEX crude price for April 2002 averaged $24.44/BBL after a
$3.68/BL increase from March 2002 before ending fiscal 2002 with an average
price for August 2002 of $26.94/BBL. For all of fiscal 2002, NYMEX crude oil
prices averaged $23.74/BBL compared to $29.76/BBL and $26.70/BBL in fiscal 2001
and 2000, respectively.
Although the first quarter of fiscal 2003 has seen crude price average
almost $29/BBL, oil prices have lost nearly 10% of their value during the first
half of November 2002 due to the erosion of the so-called "war premium" as the
immediacy of the Iraqi conflict eases and more evidence of OPEC exceeding
production quotas. Several industry experts believe oil prices have peaked and
the current market fundamentals should relieve the upward pressure on prices
seen during the third quarter of calendar 2002. However, the situation in Iraq
and its effect on oil prices are unpredictable.
Based on weak supply-demand fundamentals, oil-price analysts expect
calendar 2003 crude prices to be lower than for 2002 - even if a war in Iraq
materializes, unless OPEC restores production discipline quickly. It is
questionable whether the often diverse-goal producer group can control supplies
after spending months pumping up volume. The state of the world economy and
winter weather effects will also play a major part in demand.
Although high worldwide crude oil prices have varied significantly this
past year, the Company continues to benefit from its ability to process a
significant percentage of heavy sulfur grades of crude oil. However, in fiscal
2002, the price spread between heavy high sulfur crude oils and the light low
sulfur crude oil was well below fiscal 2001 levels, reducing the profit margins
the Company tends to normally experience due to this crude price differential. A
widening of heavy high sulfur crude oil discounts is expected in fiscal 2003
which should lead to improved margins.
15
During the fiscal year ended August 31, 2002, industry-wide margins on
gasoline and distillate, as indicated by the difference between the prices of
crude oil contracts traded on the New York Mercantile Exchange (NYMEX) and the
prices of NYMEX gasoline and heating oil contracts decreased 20% for gasoline
and decreased 51% for heating oil, primarily for May through August. This
contributed to lower gross profit, operating income and net income for the
Company, as was the case for many petroleum refiners. The lower margins have
been attributed to high product inventory levels, rising crude oil prices in the
last half of fiscal 2002, narrow light to heavy crude differentials and record
gasoline imports from foreign producers.
For September and October 2002, industry margins as indicated by NYMEX
contracts were about 25% lower than observed during the third and fourth
quarters of fiscal 2002, but long-term fiscal 2003 margins are expected to be
better than fiscal 2002. In contrast, several refiners have reported (and United
has also experienced) improved margins in October noting that refined product
inventories have dropped to "more normalized" levels.
Persistently weak refining margins since late calendar 2001 are putting
greater pressure on downstream businesses to meet upcoming tougher requirements
to produce low sulfur gasoline and diesel. Gasoline sulfur content must be
reduced from the current 1000 ppm to 120 ppm in 2004, 90 ppm in 2005 and 30 ppm
in 2006. The EPA has also mandated that refiners produce diesel with no more
than 15 ppm sulfur by June 1, 2006. The risk of over-taxing the refining
industry's ability to complete projects to produce both low-sulfur gasoline and
low-sulfur diesel within the same time frame has lead to concerns for supply
disruptions and price spikes. Recent surveys indicate that preliminary work has
not been done on an estimated 40% of U.S. refining capacity. Industry sources
have estimated a cost of $16 billion to comply with EPA low sulfur gasoline and
ultra-low sulfur diesel rules. Funding for environmental capital projects has
been extremely difficult since product margins have been at or near breakeven
levels for the last 12 months.
RESULTS OF OPERATIONS
The following table summarizes the results of the Company's operations
for each of the past three fiscal years. All percentage amounts were derived
using the underlying data in thousands.
FISCAL YEAR ENDED AUGUST 31,
---------------------------------------------------------------------------------------
2002 % CHANGE 2001 % CHANGE 2000
---------------------------------------------------------------------------------------
Net Sales
Retail $ 580,078 12% $ 516,541 (12%) $ 588,398
Wholesale 471,938 (20%) 592,024 11% 535,041
------------------ -------------------- -------------------
$ 1,052,016 $ 1,108,565 $ 1,123,439
================== ==================== ===================
Gross Profit/(Loss)
Retail $ 85,585 29% $ 66,566 (6%) $ 70,971
Wholesale (214) (100%) 59,864 2% 58,596
------------------ -------------------- -------------------
$ 85,371 $ 126,430 $ 129,567
================== ==================== ===================
Operating Expenses
Retail $ 80,929 36% $ 59,552 (14%) $ 68,931
Wholesale 25,142 3% 24,395 13% 21,627
------------------ -------------------- -------------------
$ 106,071 $ 83,947 $ 90,558
================== ==================== ===================
Operating Income (Loss)
Retail $ 4,656 (34%) $ 7,014 244% $ 2,040
Wholesale (25,356) (171%) 35,469 (4%) 36,969
------------------ -------------------- -------------------
$ (20,700) $ 42,483 $ 39,009
================== ==================== ===================
16
NET SALES
2002 vs. 2001
Retail sales increased during 2002 by $63.6 million, or 12% from $516.5
million to $580.1 million. The retail sales increase was primarily due to a
$54.5 million increase in merchandise sales and a $9.1 million increase in
petroleum sales. The petroleum sales increase results from an 18.3% increase in
retail petroleum volume (on a same store basis and including the Country Fair
locations) offset by a 13.1% decrease in retail selling prices (on a same store
basis and including the Country Fair locations).
Retail sales were increased by the acquisition of Country Fair in
December 2001. Since December 22, 2001 (date of acquisition), Country Fair
retail sales totaled $121.7 million for the fiscal year ended 2002. Country Fair
sales volume contributed 52.6 million gallons to the total retail sales volume
of 328.7 million gallons for the fiscal year ended 2002.
Wholesale sales decreased during 2002 by $120.1 million or 20% from
$592.0 million to $471.9 million. The wholesale sales decrease was due to a
18.4% decrease in wholesale prices and by a 1.2% decrease in wholesale volume.
2001 vs. 2000
Retail sales decreased during 2001 by $71.9 million, or 12% from $588.4
million to $516.5 million. Retail sales volume was reduced and wholesale sales
volume correspondingly increased by the transfer of 50 retail locations to a
non-subsidiary affiliate by sale or lease terminations on September 29, 2000.
The retail sales decrease was due to a 15.6% decrease in retail petroleum volume
and a 15.2% decrease in merchandise sales, partially offset by a 5.5% increase
in retail petroleum prices.
On a same-store basis, excluding prior period retail sales by these 50
locations, same-store retail petroleum volume increased 0.4%, retail petroleum
prices increased 6.1%, and retail merchandise sales increased 5.9%. On the same
comparable basis, wholesale petroleum volume increased 1.4% and wholesale prices
increased 12.1%.
Wholesale sales increased during 2001 by $57.0 million or 10.7% from
$535.0 million to $592.0 million. The wholesale sales increase was due to an
8.3% increase in wholesale volume, as the Company now supplies these affiliate
locations on a wholesale basis, partially offset by a 5.3% decrease in wholesale
prices.
COSTS OF GOODS SOLD
2002 vs. 2001
Retail costs of goods sold increased during 2002 by $44.5 million or
9.9% from $450.0 million to $494.5 million. The increase in retail costs of
goods sold is largely attributed to the acquisition of Country Fair. Country
Fair's costs of goods sold for the fiscal year 2002 was $97.0 million.
Wholesale costs of goods sold decreased during 2002 by $60.0 million or
11.3% from $532.2 million to $472.2 million. The decrease in wholesale costs of
goods was primarily due to the 14.4% decrease in the Company's average crude oil
purchase price for the fiscal year ended 2002 as compared to the prior year
period. Worldwide crude oil prices, as indicated by NYMEX crude oil contract
prices, decreased 20.2% as compared to the prior year period. Costs of goods
sold was positively impacted by an approximate $1.5 million increase in the
value of the Company's working inventories on a market valuation basis, which
decreased costs of goods sold. For the fiscal year 2001, costs of goods was
negatively impacted by an approximately $3.9 million decrease in the value of
the Company's working inventories on a market valuation basis, which increased
costs of goods sold. However, costs of goods sold was increased during fiscal
2002 by the effect of valuing the Company's inventories under the LIFO cost
method, which decreased the value of the Company's total inventories
approximately $4.6 million lower than if the FIFO method had been used.
17
2001 vs. 2000
Retail costs of goods sold decreased during 2001 by $67.4 million or
13.0% from $517.4 million to $450.0 million. The decrease in retail costs of
goods sold was primarily due to the previously discussed sale or lease
terminations involving 50 retail locations now owned by a non-subsidiary
affiliate, since these locations were supplied on a retail basis for most of the
prior year, but are now supplied on a wholesale basis.
Wholesale costs of goods sold increased during 2001 by $55.8 million or
11.7% from $476.4 million to $532.2 million. The decrease in consolidated costs
of goods sold was primarily the result of the strong price discounts received by
the Company on heavy high sulfur crude oil grades. These discounts offset an
increase in world crude oil prices and a decrease in the value of the Company's
working inventories on a market valuation basis, which increased costs of goods
sold. The increase in wholesale costs of goods sold was primarily due to the
previously discussed sale or lease terminations involving 50 retail locations
now owned by a non-subsidiary affiliate, since these locations were supplied on
a retail basis for most of the prior year, but are now supplied on a wholesale
basis. Costs of goods sold in fiscal 2001 were increased by an approximate $3.9
million decrease in the value of the Company's working inventories. The decrease
in the value of the Company's working inventories on a market valuation basis
was offset by a $5.1 million reduction in the LIFO reserve, which had the effect
of increasing the value of the Company's inventories and reducing costs of goods
sold.
GROSS PROFIT/(LOSS)
2002 vs. 2001
Retail gross profit increased during 2002 by $19.0 million or 29%.
Inclusive of Country Fair, the Company increased its petroleum margins by $1.8
million and its merchandise margin by $17.2 million. These margin increases were
a result of 46.7 million gallons of additional volume sold and $54.4 million in
increased merchandise sales.
Wholesale gross profit decreased $60.0 million from $59.8 million for
fiscal year ended 2001 to ($.2) million for the fiscal year ended 2002. This
decrease was primarily due to 37% lower discounts on heavy high-sulfur crude oil
grades processed by the Company, the decrease in wholesale volume and the
decrease in wholesale selling prices.
2001 vs. 2000
Retail gross profit decreased during 2001 by $4.4 million or 6%. This
can be attributed to reduced sales from the transfer of 50 retail locations to a
non-subsidiary affiliate by sale or lease terminations on September 29, 2000.
Merchandise sales decreased $17.1 million and resulted in a $3.1 million or 11%
drop in merchandise margin. A 15.6% drop in petroleum volume as a result of this
transfer, partially offset by a 5.5% increase in retail prices, caused a $1.3
million decline in retail petroleum margin.
Wholesale gross profit increased from $58.6 million for fiscal 2000 to
$59.9 million for fiscal 2001 or 2%. This increase is primarily the result of
the previously mentioned transfer of 50 retail locations to a non-subsidiary
affiliate, resulting in a 10.7% increase in wholesale sales.
OPERATING EXPENSES
The following table presents certain information relative to the
Company's operating expenses during each of the last three fiscal years:
18
FISCAL YEAR ENDED AUGUST 31,
-----------------------------------------------------------------
2002 2001 2000
-----------------------------------------------------------------
(IN THOUSANDS)
Selling, General and Administrative
Retail $ 77,291 $ 56,636 $ 65,993
Wholesale 17,006 16,598 14,397
-----------------------------------------------------------------
$ 94,297 $ 73,234 $ 80,390
=================================================================
Depreciation and Amortization
Retail $ 3,638 $ 2,916 $ 2,938
Wholesale 8,136 7,797 7,230
-----------------------------------------------------------------
$ 11,774 $ 10,713 $ 10,168
=================================================================
Total Operating Expenses
Retail $ 80,929 $ 59,552 $ 68,931
Wholesale 25,142 24,395 21,627
-----------------------------------------------------------------
$ 106,071 $ 83,947 $ 90,558
=================================================================
2002 vs. 2001
Retail operating expenses increased during 2002 by $21.4 million or
36%. This increase was primarily due to the acquisition of Country Fair. Country
Fair's operating expenses for the fiscal year ended 2002 were $20.7 million.
Country Fair's operating expenses included $4.2 million of rental expense
primarily for the lease of fixed assets from related entities, as well as leases
to third parties. The remaining increases to operating expenses were due to
increased payroll and payroll costs of $.7 million, increased pension/post
retirement costs of $.6 million, increased depreciation of $.2 million and
increased advertising costs of $.3 million offset by lower utility costs of $.4
million, lower maintenance costs of $.2 million, and lower utilities, taxes and
other of $.5 million. Increased depreciation was primarily due to capital
equipment installed as part of the Company's on-going maintenance and project
upgrades.
Wholesale operating expenses increased during 2002 by $.7 million or
3%. The net increase to operating expenses results from increased payroll and
payroll costs, increased pension/post retirement costs, increased professional
services offset by a reduction in bad debt expense.
2001 vs. 2000
Retail operating expenses decreased during 2001 by $9.4 million or 14%.
This decrease was primarily due to the elimination of station operating expenses
associated with the 50 retail locations now owned by a non-subsidiary affiliate
and to the reduction of retail overhead expenses by application of payments
received from the non-subsidiary affiliate under an agreement by which the
Company will manage those locations for the affiliate. These reductions more
than offset increased expenses for employee wage and health benefits,
depreciation and bad debt expense.
Wholesale operating expenses increased during 2001 by $2.8 million or
13%. The net increase to operating expenses results from increased bad debt
expense of $1.0 million, payroll and payroll costs of $.7 million, increased
pension/post retirement costs of $.3 million, increased legal and audit costs of
$.4 million and increased insurance and utilities costs of $.1 million, and
other of $.3 million.
INTEREST EXPENSE
Net interest expense (interest expense less interest income) increased
during fiscal 2002 by $0.3 million from $19.4 million for the fiscal year ended
2001 to $19.7 million for the fiscal year ended 2002. The increased net interest
expense was due to a $1.3 million reduction in interest income earned and $0.4
million increased interest expense for
19
borrowings on the Company's revolving credit facility offset by a $1.4 million
interest expense reduction relating to the Company's outstanding amount of long
term Senior Unsecured Notes.
Net interest expense (interest expense less interest income) decreased
$3.3 million from $22.7 million for fiscal 2000 to $19.4 million for fiscal
2001. The decreased net interest expense was primarily due to a reduction in
long-term debt resulting from the Company's purchase of outstanding notes during
fiscal year 2001, a reduction in borrowings on the Company's revolving credit
facility and an increase in interest income earned.
INCOME TAX EXPENSE/(BENEFIT)
The Company's effective tax rate for fiscal 2002 was approximately
38.5% compared to a rate of 40.9% for fiscal 2001.
The Company's effective tax rate for fiscal 2001 was approximately
40.9% compared to a rate of 50.5% for fiscal 2000. The higher rate for fiscal
2000 was primarily due to prior year tax audits.
EXTRAORDINARY ITEM
During the fiscal year ending August 31, 2001, the Company purchased
$19,865,000 of Senior Unsecured Notes for $14,185,000 in cash. An extraordinary
gain of $3,029,000 was recorded as a result of the early retirement of debt,
consisting of $5,680,000 less $470,000 of associated debt issuance costs, net of
a tax charge of $2,181,000.
LIQUIDITY AND CAPITAL RESOURCES
Working capital (current assets minus current liabilities) at August
31, 2002 was $42.2 million and at August 31, 2001 was $93.2 million. The
Company's current ratio (current assets divided by current liabilities) was
1.4:1 at August 31, 2002 and 2.6:1 at August 31, 2001.
Net cash used in operating activities totaled $18.0 million for fiscal
2002 and net cash provided by operating activities totaled $34.8 for fiscal
2001. The net cash used in operating activities for fiscal 2002 results from
cash used by earnings (net loss plus depreciation and amortization) of ($10.1)
million, a change in deferred income taxes of ($12.9) million, a change in
post-retirement benefits of $4.3 million and asset dispositions loss of $.6
million.
Net cash used in investing activities totaled $26.0 million for the
year ended August 31, 2002 as compared to net cash provided by investing
activities of $13.3 million for fiscal 2001. The net cash used in investing
activities for fiscal 2002 included $16.9 million for the acquisition of all
outstanding shares of stock of Country Fair and $9.1 million for purchase of
property, plant and equipment.
The Company reviews its capital expenditures on an ongoing basis.
Maintenance and non-discretionary capital expenditures have averaged
approximately $4 million annually over the last three years for the refining and
marketing operations. Management does not foresee any increase in maintenance
and non-discretionary capital expenditures during fiscal 2003. The Company
anticipates spending approximately $5 million as part of its Tier 2 Gasoline
Sulfur Program under 40 CFR Part 80, Subpart H during fiscal year 2003. Since
the bulk of this anticipated expenditure is near the fiscal year end, it is
possible a portion of this $5 million could actually occur during fiscal 2004.
Net cash provided by financing activities totaled $22.3 million during
fiscal 2002 primarily due from borrowings of $24.3 million on the Company's
revolving credit facility offset by a $2.1 million payment of dividends.
Future liquidity, both short and long-term, will continue to be
primarily dependent on realizing a refinery margin sufficient to cover fixed and
variable expenses, including planned capital expenditures. The Company expects
to be able to meet its working capital, capital expenditure and debt service
requirements out of cash flow from operations, cash on hand and borrowings under
the Company's secured revolving credit facility (the "facility") with PNC Bank,
N.A. as Agent Bank. This is a $50,000,000 revolving credit facility which was
renewed on July 12, 2002 and expires on May 9, 2007. At August 31, 2002, there
was approximately $25,000,000 unused and available on the facility. The facility
is secured by certain cash accounts, accounts receivable, and inventory.
20
The following is a summary of our significant contractual cash
obligations for the periods indicated that existed as of August 31, 2002 and is
based on information appearing in the Notes to the Consolidated Financial
Statements (in thousands):
2003 2004-2005 2006-2007 After 2007 Total
---- --------- --------- ---------- -----
Long-term Debt $ 236 $ 508 $180,557 $ 798 $182,099
Operating leases 9,251 16,278 13,914 70,342 109,785
Capital lease obligations 234 479 484 1,246 2,443
--- --- --- ----- -----
Total contractual cash $9,721 $17,265 $194,955 $72,386 $294,327
obligations
In addition to these obligations, the Company had outstanding letters
of credit of $850,000.
We believe that funds generated by operations and the facility will
provide the financial resources sufficient to meet our foreseeable working
capital, letter of credit, contractual obligations, debt repayment, and capital
expenditure requirements.
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.
RECENT ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB")
finalized Statements No. 141, "Business Combinations" ("Statement 141"), and No.
142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141
requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. Statement 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. Statement 141 applies to all business
combinations initiated after June 30, 2001 and for purchase
21
business combinations completed on or after July 1, 2001. It also requires, upon
adoption of Statement 142 that the Company reclassify the carrying amounts of
intangible assets and goodwill based on the criteria in Statement 141.
Statement 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, Statement 142 requires that the Company identify reporting units
for the purposes of assessing potential future impairments of goodwill, reassess
the useful lives of other existing recognized intangible assets, and cease
amortization of goodwill and other intangible assets with an indefinite useful
life. Goodwill and other intangible assets with indefinite useful lives should
be tested for impairment in accordance with the guidance in Statement 142.
Statement 142 is required to be applied in fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. Statement 142
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. The Company is also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of Statement 142.
The Company anticipates that the adoption of Statement 142 will not
have a material effect on the Company's financial position or results of
operations.
In June 2001, the FASB also issued Statement No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("Statement
143"). The objective of Statement 143 is to establish an accounting standard for
the recognition and measurement of an asset retirement obligation on certain
long-lived assets. The retirement obligation must be one that results from the
acquisition, construction or normal operation of a long-lived asset. Statement
143 requires the legal obligation associated with the retirement of a tangible
long-lived asset to be recognized at fair value as a liability when incurred,
and the cost to be capitalized by increasing the carrying amount of the related
long-lived asset. Statement 143 will be effective for the Company's fiscal year
beginning September 1, 2002.
The Company is currently evaluating the effect of implementing
Statement 143.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144"). Statement 144
supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("Statement 121") and
retains the basic requirements of Statement 121 regarding when and how to
measure an impairment loss. Statement 144 provides additional implementation
guidance on accounting for an impairment loss. Statement 144 is effective for
all fiscal years beginning after December 15, 2001.
The Company anticipates that the adoption of Statement 144 will not
have a material effect on the Company's financial position or results of
operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Correction" ("Statement 145"). Statement 145 eliminates extraordinary accounting
treatment for reporting gains or losses on debt extinguishments, and amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability under changed
conditions. The provisions of this Statement are effective for fiscal years
beginning after May 15, 2002; however, early application of Statement 145 is
encouraged. Debt extinguishments reported as extraordinary items prior to
scheduled or early adoption of this Statement would be reclassified to other
income in most cases following adoption.
The Company is currently evaluating the impact the adoption of
Statement 145 would have on its consolidated results of operations subject
to the evaluation in accordance with APB 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("Statement 146"), which changes
the accounting for costs such as lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity initiated after
December 31, 2002. The standard requires companies to recognize the fair value
22
of costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
The Company anticipates that the adoption of Statement 146 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
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Certified Public Accountants 25
Consolidated Financial Statements:
Balance Sheets 26
Statements of Operations 27
Statements of Comprehensive Income (Loss) 28
Statements of Stockholder's Equity 29
Statements of Cash Flows 30
Notes to Consolidated Financial Statements 31 thru 51
24
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, 2002 and 2001, and the related
consolidated statements of operations, comprehensive income (loss),
stockholder's equity and cash flows for each of the three years in the period
ended August 31, 2002. These consolidated financial statements are the
responsibility of the management of United Refining Company and its
subsidiaries. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of United Refining
Company and subsidiaries as of August 31, 2002 and 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended August 31, 2002 in conformity with accounting principles generally
accepted in the United States of America.
/s/ BDO Seidman, LLP
New York, New York
October 25, 2002
25
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------
AUGUST 31,
------------------------
2002 2001
- ---------------------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 13,515 $ 35,224
Accounts receivable, net 33,865 41,937
Inventories 93,567 62,554
Prepaid expenses and other assets 11,179 13,312
Refundable income taxes 3,300 -
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 155,426 153,027
PROPERTY, PLANT AND EQUIPMENT, NET 189,894 190,951
INVESTMENT IN AFFILIATED COMPANY 1,707 1,529
DEFERRED FINANCING COSTS, NET 3,641 4,102
GOODWILL AND OTHER NON-AMORTIZABLE ASSETS 11,849 -
AMORTIZABLE INTANGIBLE ASSETS, NET 4,170 -
DEFERRED TURNAROUND COSTS AND OTHER ASSETS, NET 4,753 5,948
- ---------------------------------------------------------------------------------------------
$ 371,440 $ 355,557
=============================================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT:
Revolving credit facility $ 24,314 $ -
Current installments of long-term debt 236 121
Accounts payable 50,647 22,206
Income taxes payable - 2,373
Accrued liabilities 14,002 12,411
Sales, use and fuel taxes payable 18,517 16,686
Deferred income taxes 5,323 4,157
Amounts due to affiliated companies, net 140 1,905
- ---------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 113,179 59,859
LONG TERM DEBT: LESS CURRENT INSTALLMENTS 181,863 180,979
DEFERRED INCOME TAXES 360 17,573
DEFERRED GAIN ON SETTLEMENT OF PENSION PLAN OBLIGATIONS 1,345 1,560
DEFERRED RETIREMENT BENEFITS 24,147 19,356
OTHER NONCURRENT LIABILITIES 2,350 264
- ---------------------------------------------------------------------------------------------
TOTAL LIABILITIES 323,244 279,591
- ---------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $.10 par value per share - shares authorized
100; issued and outstanding 100 - -
Additional paid-in capital 16,648 16,648
Retained earnings 31,638 59,318
Accumulated other comprehensive loss (90) -
- ---------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 48,196 75,966
- ---------------------------------------------------------------------------------------------
$ 371,440 $ 355,557
=============================================================================================
See accompanying notes to consolidated financial statements.
26
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
(IN THOUSANDS)
--------------
- --------------------------------------------------------------------------------------------------
YEAR ENDED
AUGUST 31,
- --------------------------------------------------------------------------------------------------
2002 2001 2000
- --------------------------------------------------------------------------------------------------
NET SALES (INCLUDES CONSUMER EXCISE TAXES OF
$156,489, $134,218 AND $158,503) $ 1,052,016 $ 1,108,565 $ 1,123,439
COSTS OF GOODS SOLD 966,645 982,135 993,872
- --------------------------------------------------------------------------------------------------
GROSS PROFIT 85,371 126,430 129,567
- --------------------------------------------------------------------------------------------------
EXPENSES:
Selling, general and administrative expenses 94,297 73,234 80,390
Depreciation and amortization expenses 11,774 10,713 10,168
- --------------------------------------------------------------------------------------------------
TOTAL OPERATING EXPENSES 106,071 83,947 90,558
- --------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (20,700) 42,483 39,009
- --------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE):
Interest income 330 1,606 288
Interest expense (20,064) (21,051) (22,962)
Other, net (1,345) 1,836 (2,822)
Costs associated with terminated acquisition - (1,300) -
Equity in net earnings of affiliate 1,242 516 -
- --------------------------------------------------------------------------------------------------
(19,837) (18,393) (25,496)
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) (40,537) 24,090 13,513
- --------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT):
Current (2,702) 4,700 2,330
Deferred (12,894) 5,140 4,498
- --------------------------------------------------------------------------------------------------
(15,596) 9,840 6,828
- --------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM (24,941) 14,250 6,685
EXTRAORDINARY ITEM, NET OF TAXES OF $ 2,181 - 3,029 -
- --------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (24,941) $ 17,279 $ 6,685
==================================================================================================
See accompanying notes to consolidated financial statements.
27
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
------------------------------------------------------
(IN THOUSANDS)
YEAR ENDED
AUGUST 31,
--------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $(24,941) $ 17,279 $ 6,685
OTHER COMPREHENSIVE LOSS:
Minimum pension liability,
net of taxes (90) - -
- -----------------------------------------------------------------------------------------------------------------
Other comprehensive loss (90) - -
- -----------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE INCOME (LOSS) $(25,031) $ 17,279 $ 6,685
=================================================================================================================
See accompanying notes to consolidated financial statements.
28
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
-----------------------------------------------
(IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED
COMMON STOCK ADDITIONAL OTHER TOTAL
------------------- PAID-IN RETAINED COMPREHENSIVE STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS INCOME (LOSS) EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 1999 100 $ - $ 7,150 $ 41,271 $ - $ 48,421
Net income - 6,685 - 6,685
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2000 100 - 7,150 47,956 - 55,106
Net income - 17,279 - 17,279
Dividends - (5,917) - (5,917)
Excess of selling price over
historical cost of net assets
sold to an affiliated company 9,498 - - 9,498
- ----------------------------------------------------------------------------------------------------------------- -----------------
Balance at August 31, 2001 100 - 16,648 59,318 - 75,966
Dividends - (2,130) - (2,130)
Net loss - (24,941) - (24,941)
Distribution to Parent under the Tax
Sharing Agreement - (609) - (609)
Other comprehensive income (loss) - - (90) (90)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at August 31, 2002 100 $ - $ 16,648 $ 31,638 $ (90) $ 48,196
===================================================================================================================================
See accompanying notes to consolidated financial statements.
29
UNITED REFINING COMPANY
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
----------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(24,941) $ 17,279 $ 6,685
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 14,830 14,429 13,492
Post-retirement benefits 4,336 3,618 1,683
Change in deferred income taxes (12,894) 5,140 4,498
Gain on extinguishment of debt - (5,210) -
Loss on asset dispositions 630 382 621
Cash provided by (used in) working capital items 2,279 3,865 (17,328)
Equity in net earnings of affiliate, net of dividends received (178) (516) -
Other, net (2,084) (4,228) (920)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 6,919 17,480 2,046
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (18,022) 34,759 8,731
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired (16,900) - -
Purchase of investment securities - (3,714) -
Sale of investment securities - 3,497 -
Additions to property, plant and equipment (9,061) (10,052) (5,900)
Proceeds from asset dispositions 3 23,550 807
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (25,958) 13,281 (5,093)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (reductions) on revolving credit facility 24,314 - (5,000)
Dividends (2,130) (5,917) -
Principal reductions of long-term debt (227) (14,329) (235)
Proceeds from issuance of long-term debt - - 152
Deferred financing costs 314 - (50)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 22,271 (20,246) (5,133)
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (21,709) 27,794 (1,495)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 35,224 7,430 8,925
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 13,515 $ 35,224 $ 7,430
=================================================================================================================================
CASH PROVIDED BY (USED IN) WORKING CAPITAL ITEMS:
Accounts receivable, net $ 8,877 $ 2,367 $(11,065)
Inventories (25,014) (1,673) 8,834
Prepaid expenses and other assets 3,518 (4,435) 1,269
Refundable income taxes (3,300) - -
Accounts payable 21,944 3,772 (16,293)
Accrued liabilities 376 (399) 436
Amounts due affiliated companies (2,210) 1,905 -
Income taxes payable (2,473) 1,451 538
Sales, use and fuel taxes payable 561 877 (1,047)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL CHANGE $ 2,279 $ 3,865 $(17,328)
=================================================================================================================================
CASH PAID DURING THE PERIOD FOR:
Interest $ 19,728 $ 21,765 $ 23,043
Income taxes $ 2,723 $ 5,381 $ 125
=================================================================================================================================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Property additions and capital leases $ 1,238 $ - $ 21
Transfer of inventory to affiliated company $ - $ 1,013 $ -
=================================================================================================================================
See accompanying notes to consolidated financial statements.
30
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
United Refining Company and subsidiaries (the "Company") is a petroleum
product refiner and marketer in its primary market area of Western New York and
Northwestern Pennsylvania. The Company operates in two principal business
segments: wholesale and retail. The wholesale segment produces gasoline,
distillate and asphalt products and markets these products to distributors and
commercial and governmental customers. The retail segment sells gasoline, diesel
fuel and convenience merchandise through a network of Company-operated retail
units.
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, United Refining Company of Pennsylvania
and its subsidiaries, and Kiantone Pipeline Corporation.
All significant intercompany balances and transactions have been
eliminated in consolidation.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid investment securities with maturities of three
months or less at date of acquisition to be cash equivalents.
Inventories and Exchanges
Inventories are stated at the lower of cost or market, with cost being
determined under the Last-in, First-out (LIFO) method for crude oil and
petroleum product inventories and the First-in, First-out (FIFO) method for
merchandise. Supply inventories are stated at either lower of cost or market or
replacement cost and include various parts for the refinery operations. If the
cost of inventories exceeds their market value, provisions are made currently
for the difference between the cost and the market value. As of August 31, 2002,
had the Company utilized the FIFO inventory method, petroleum product
inventories would have been higher by $4,613,000. As of August 31, 2001, the
Company had a LIFO layer liquidation resulting in an inventory gain of
approximately $526,000.
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.
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
-------------------------------------
31
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Amortizable Intangible Assets
The Company amortizes identifiable intangible assets such as brand
names, non-compete agreements, leasehold covenants and deed restrictions on a
straight line basis over their estimated useful lives which range from 5 to 25
years. Amortization expense on these assets amounted to $390,000, $0, and $0 for
the fiscal years ending August 31, 2002, 2001, and 2000, respectively.
Deferred Maintenance Turnarounds
The cost of maintenance turnarounds, 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, which ranges from
3 to 10 years. As of August 31, 2002 and 2001, deferred turnaround costs
included in deferred turnaround costs and other assets, net amounted to
$4,360,000 and $5,398,000, net of accumulated amortization of $2,605,000 and
$5,829,000, respectively. Amortization expense included in costs of goods sold
for the fiscal years ended August 31, 2002, 2001 and 2000 amounted to
$2,455,000, $3,007,000 and $2,615,000, respectively.
Revenue Recognition
Revenues from wholesale sales are recognized upon shipment or when
title passes. Retail revenues are recognized immediately upon sale to the
customer.
Income Taxes
The Company accounts for income taxes using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The Company joins with the Parent and the Parent's other subsidiaries
in filing a Federal Income tax return on a consolidated basis. Income taxes are
calculated on a separate return basis with consideration of the Tax Sharing
Agreement between the Parent and its subsidiaries.
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.
32
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Use of Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations of Credit Risk
The Company extends credit based on evaluation of the customer's
financial condition, generally without requiring collateral. Exposure to losses
on receivables is principally dependent on each customer's financial condition.
The Company monitors its exposure for credit losses and maintains allowances for
anticipated losses.
Environmental Matters
The Company expenses environmental expenditures related to existing
conditions resulting from past or current operations and from which no current
or future benefit is discernible. Expenditures, which extend the life of the
related property or mitigate or prevent future environmental contamination are
capitalized. The Company determines its liability on a site by site basis and
records a liability at the time when it is probable and can be reasonably
estimated. The Company's estimated liability is reduced to reflect the
anticipated participation of other potentially responsible parties in those
instances where it is probable that such parties are legally responsible and
financially capable of paying their respective shares of the relevant costs. The
estimated liability of the Company is discounted, but is not reduced for
possible recoveries from insurance carriers.
Long-Lived Assets
Long-lived assets, such as intangible assets and property and
equipment, are evaluated for impairment when events or changes in circumstances
indicate that the carrying amount of the assets may not be recoverable through
the estimated undiscounted future cash flows from the use of these assets. When
any such impairment exists, the related assets will be written down to fair
value.
Segment Disclosures
Effective in 1999, the Company adopted Statement of Financial
Accounting Standards No. 131 ("Statement 131"), "Disclosure about Segments of an
Enterprise and Related Information." Statement 131 standardizes the way that
public companies report information about operating segments in annual and
interim financial statements issued to the public. It also establishes standards
for disclosures regarding products and services, geographic areas and major
customers. Statement 131 requires segments to be determined based upon how
operations are managed and evaluated internally (See Footnote 15 to Consolidated
Financial Statements, Item 8).
Other Comprehensive Income (Loss)
The Company reports comprehensive income (loss) in accordance with
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" ("Statement 130"). Statement 130 establishes guidelines for the
reporting and display of comprehensive income (loss) and its components in
financial statements. Comprehensive income (loss) includes charges and credits
to equity that are not the result of transactions with the shareholder. Included
in other comprehensive income (loss) for the Company is a minimum pension
liability adjustment, which is net of taxes.
33
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Recent Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB")
finalized Statements No. 141, "Business Combinations" ("Statement 141"), and No.
142, "Goodwill and Other Intangible Assets" ("Statement 142"). Statement 141
requires the use of the purchase method of accounting and prohibits the use of
the pooling-of-interests method of accounting for business combinations
initiated after June 30, 2001. Statement 141 also requires that the Company
recognize acquired intangible assets apart from goodwill if the acquired
intangible assets meet certain criteria. Statement 141 applies to all business
combinations initiated after June 30, 2001 and for purchase business
combinations completed on or after July 1, 2001. It also requires, upon adoption
of Statement 142 that the Company reclassify the carrying amounts of intangible
assets and goodwill based on the criteria in Statement 141.
Statement 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least annually.
In addition, Statement 142 requires that the Company identify reporting units
for the purposes of assessing potential future impairments of goodwill, reassess
the useful lives of other existing recognized intangible assets, and cease
amortization of goodwill and other intangible assets with an indefinite useful
life. Goodwill and other intangible assets with indefinite useful lives should
be tested for impairment in accordance with the guidance in Statement 142.
Statement 142 is required to be applied in fiscal years beginning after December
15, 2001 to all goodwill and other intangible assets recognized at that date,
regardless of when those assets were initially recognized. Statement 142
requires the Company to complete a transitional goodwill impairment test six
months from the date of adoption. The Company is also required to reassess the
useful lives of other intangible assets within the first interim quarter after
adoption of Statement 142.
The Company anticipates that the adoption of Statement 142 will not
have a material effect on the Company's financial position or results of
operations.
In June 2001, the FASB also issued Statement No. 143, "Accounting for
Obligations Associated with the Retirement of Long-Lived Assets" ("Statement
143"). The objective of Statement 143 is to establish an accounting standard for
the recognition and measurement of an asset retirement obligation on certain
long-lived assets. The retirement obligation must be one that results from the
acquisition, construction or normal operation of a long-lived asset. Statement
143 requires the legal obligation associated with the retirement of a tangible
long-lived asset to be recognized at fair value as a liability when incurred,
and the cost to be capitalized by increasing the carrying amount of the related
long-lived asset. Statement 143 will be effective for the Company's fiscal year
beginning September 1, 2002.
The Company is currently evaluating the effect of implementing
Statement 143.
In October 2001, the FASB issued Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("Statement 144"). Statement 144
supersedes Statement No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of" ("Statement 121") and
retains the basic requirements of Statement 121 regarding when and how to
measure an impairment loss. Statement 144 provides additional implementation
guidance on accounting for an impairment loss. Statement 144 is effective for
all fiscal years beginning after December 15, 2001.
The Company anticipates that the adoption of Statement 144 will not
have a material effect on the Company's financial position or results of
operations.
In April 2002, the FASB issued Statement No. 145, "Rescission of
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Correction" ("Statement 145"). Statement 145 eliminates extraordinary accounting
treatment for reporting gains or losses on debt extinguishments, and amends
other existing authoritative pronouncements to make various technical
corrections, clarify meanings, or describe their applicability
34
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
under changed conditions. The provisions of this Statement are effective for
fiscal years beginning after May 15, 2002; however, early application of
Statement 145 is encouraged. Debt extinguishments reported as extraordinary
items prior to scheduled or early adoption of this Statement would be
reclassified to other income in most cases following adoption.
The Company is currently evaluating the impact the adoption of
Statement 145 would have on its consolidated results of operations subject
to the evaluation in accordance with APB 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
In June 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("Statement 146"), which changes
the accounting for costs such as lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity initiated after
December 31, 2002. The standard requires companies to recognize the fair value
of costs associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
The Company anticipates that the adoption of Statement 146 will not
have a material effect on the Company's financial position or results of
operations.
Reclassification
Certain amounts in fiscal year 2000 and prior year consolidated
financial statements have been reclassified to conform to the presentation in
the current year.
2. ACCOUNTS RECEIVABLE, NET
As of August 31, 2002 and 2001, accounts receivable were net of
allowance for doubtful accounts of $1,395,000 and $1,370,000 respectively.
3. INVENTORIES
Inventories consist of the following:
AUGUST 31,
-------------------------
2002 2001
- ---------------------------------------------------------------
(IN THOUSANDS)
Crude Oil $ 26,384 $ 15,236
Petroleum Products 38,407 24,412
- ---------------------------------------------------------------
Total @ LIFO 64,791 39,648
- ---------------------------------------------------------------
Merchandise 15,362 10,099
Supplies 13,414 12,807
- ---------------------------------------------------------------
Total @ FIFO 28,776 22,906
- ---------------------------------------------------------------
Total Inventory $ 93,567 $ 62,554
===============================================================
Included in petroleum product inventories are exchange balances either
held for or due from other petroleum marketers. These balances are not
significant.
35
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Company does not own sources of crude oil and depends on outside
vendors for its needs.
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is summarized as follows:
AUGUST 31,
--------------------------
2002 2001
- ------------------------------------------------------------------------------
(IN THOUSANDS)
Refinery equipment,
including construction-in-progress $ 184,889 $ 179,232
Marketing (i.e. retail outlets) 85,981 82,186
Transportation 7,178 7,171
- ------------------------------------------------------------------------------
278,048 268,589
Less: Accumulated depreciation 88,154 77,638
- ------------------------------------------------------------------------------
$ 189,894 $ 190,951
===============================================================================
5. ACCRUED LIABILITIES
Accrued liabilities include the following:
AUGUST 31,
-------------------------
2002 2001
- -----------------------------------------------------------------------------
(IN THOUSANDS)
Interest $ 4,493 $ 4,129
Payrolls and benefits 7,508 5,731
Other 2,001 2,551
- -----------------------------------------------------------------------------
$ 14,002 $ 12,411
===============================================================================
6. 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, 2002 and 2001, capitalized lease obligations, included
in long-term debt, amounted to $1,219,000 and $589,000, respectively, net of
current portion of $76,000 and $24,000 respectively. The related assets (retail
gas stations and convenience stores) as of August 31, 2002 and 2001 amounted to
$1,093,000 and $448,000, net of accumulated amortization of $349,000 and
$253,000, respectively.
Lease amortization amounting to $94,000, $46,000, and $70,000 for the
years ended August 31, 2002, 2001, and 2000 respectively, is included in
depreciation and amortization expense.
36
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Future minimum lease payments as of August 31, 2002 are summarized as
follows:
CAPITAL OPERATING
YEAR ENDED AUGUST 31, LEASES LEASES
- -----------------------------------------------------------------------------
(IN THOUSANDS)
2003 $ 234 $ 9,251
2004 238 8,669
2005 241 7,609
2006 244 7,077
2007 240 6,837
Thereafter 1,246 70,342
- -------------------------------------------------------------------------
Total minimum lease payments 2,443 109,785
Less: Minimum sublease rents - 155
- -------------------------------------------------------------------------
Net minimum sublease payments 2,443 $ 109,630
==========
Less: Amount representing interest 1,148
- ----------------------------------------------------------
Present value of net minimum
lease payments $ 1,295
==========================================================
Net rent expense for operating leases amounted to $7,786,000,
$3,217,000 and $3,324,000 for the years ended August 31, 2002, 2001 and 2000
respectively.
7. CREDIT FACILITY
In January of 2001, the Company renewed its secured revolving credit
facility, ("the facility") with a syndicate of banks, with PNC Bank, N.A., as
Agent Bank increasing its revolving credit commitment up to $50,000,000. Upon
its expiration in July 2002, the Company renewed the facility, which provides
for revolving credit loans and for the issuance of letters of credit. The
facility expires on May 9, 2007 and is secured by certain cash accounts,
accounts receivable, and inventory, which amounted to $62,245,000 as of August
31, 2002. Until maturity, the Company may borrow on a borrowing base formula as
set forth in the facility. For Base Rate borrowings, interest is calculated at
the greater of the bank's prime rate or federal fund rate plus 1%, plus an
applicable margin of .25% to .75%, which was 5.50% and 6.50% at August 31, 2002
and 2001, respectively. For Euro-Rate borrowings, interest is calculated at the
LIBOR rate plus an applicable margin of 1.75% to 3.00%. The applicable margin
varies with the Company's revolving credit facility leverage ratio calculation.
As of August 31, 2002, $24,314,000 of Base Rate borrowings and $850,000 of
letters of credit were outstanding under the agreement. As of August 31, 2001 no
borrowings or letters of credit were outstanding under the agreement. The
weighted average interest rate for Base Rate borrowings for the years ended
August 31, 2002 and 2001 was 5.5% and 10.25%, respectively. No amounts were
borrowed under the Euro-Rate option for the fiscal years ending August 31, 2002
and 2001. The Company pays a commitment fee of 3/8% per annum on the unused
balance of the facility.
8. LONG-TERM DEBT
During June 1997, the Company sold $200,000,000 of 10 3/4% Senior
Unsecured Notes due 2007, Series A. Subsequent to this issue, the Company
exchanged these notes for its 10 3/4% Senior Unsecured Notes due 2007, Series B.
During the fiscal year ending August 31, 2001, the Company purchased $19,865,000
of these notes for $14,185,000 in cash. An extraordinary gain of $3,029,000 was
recorded as a result of this early retirement of debt, consisting of $5,680,000
less $470,000 of associated debt issuance costs, net of a tax charge of
$2,181,000. Such
37
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
notes are fully and unconditionally guaranteed on a senior unsecured basis by
all of the Company's subsidiaries (See Footnote 16 to Consolidated Financial
Statements, Item 8).
Both the senior unsecured notes and secured credit facility require
that the Company maintain certain financial covenants The facility requires the
Company to meet certain financial covenants, as defined in the facility: a
minimum Fixed Charge Coverage Ratio and a minimum Consolidated Net Worth. In
addition, the facility limits the amount the Company can distribute for capital
and operating leases. Both the facility and the Indenture of the Senior
Unsecured Notes restrict the amount of dividends payable and the incurrence of
additional Indebtedness. The Company is currently in compliance with covenants
under the facility and the Indenture.
A summary of long-term debt is as follows:
-------------------------------
2002 2001
- ----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Long-term debt:
10.75% senior unsecured notes due June 9, 2007,
Series B $ 180,135 $ 180,135
Other long-term debt 1,964 965
- ----------------------------------------------------------------------------------------------------
182,099 181,100
Less: Current installments of long-term debt 236 121
- ----------------------------------------------------------------------------------------------------
Total long-term debt, less current installments $ 181,863 $ 180,979
====================================================================================================
The principal amount of long-term debt outstanding as of August 31,
2002, matures as follows:
YEAR ENDED AUGUST 31,
- -------------------------------------------------------------------------------
(IN THOUSANDS)
2003 $ 236
2004 261
2005 247
2006 244
2007 180,313
Thereafter 798
- -------------------------------------------------------------------------------
$ 182,099
===============================================================================
38
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,
-----------------
2002 2001
- -----------------------------------------------------------------------------
(IN THOUSANDS)
Beginning balance $7,358 $8,390
Current year additions 314 -
-----------------
Total financing costs 7,672 8,390
Less: Accumulated amortization 4,031 3,818
Write-off associated with debt extinguishment - 470
- -----------------------------------------------------------------------------
$3,641 $4,102
=============================================================================
9. 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, 2002, 2001,
and 2000:
PENSION BENEFITS OTHER POST-RETIREMENT BENEFITS
----------------------------------- --------------------------------
2002 2001 2000 2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
Service cost $ 2,013 $ 1,611 $ 1,487 $ 1,178 $ 1,050 $ 747
Interest cost on benefit obligation 2,848 2,482 2,149 1,920 1,508 1,064
Expected return on plan assets (2,583) (3,148) (2,762) - - -
Amortization of transition obligation 140 140 140 597 597 597
Amortization and deferrals 207 (245) (252) 146 - (124)
- -----------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2,625 $ 840 $ 762 $ 3,841 $ 3,155 $ 2,284
=================================================================================================================
39
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, 2002 and 2001:
OTHER
POST-RETIREMENT
PENSION BENEFITS BENEFITS
---------------------------------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation @ beginning of year $ 36,836 $ 31,879 $ 23,453 $ 15,726
Service cost 2,013 1,611 1,178 1,050
Interest cost 2,848 2,482 1,920 1,508
Plan amendments 1,401 882 - -
Actuarial (gains) losses 2,638 843 6,978 5,792
Benefits paid (1,034) (861) (821) (623)
- ------------------------------------------------------------------------------------------------------------------------------
Benefit obligation @ end of year 44,702 36,836 32,708 23,453
- ------------------------------------------------------------------------------------------------------------------------------
CHANGE IN PLAN ASSETS:
Fair values of plan assets @ beginning of year 29,170 35,391 - -
Actual return on plan assets (2,814) (5,360) - -
Company contributions - - 821 623
Benefits paid (1,034) (861) (821) (623)
- ------------------------------------------------------------------------------------------------------------------------------
Fair values of plan assets @ end of year 25,322 29,170 - -
- ------------------------------------------------------------------------------------------------------------------------------
Funded status 19,380 7,666 32,708 23,453
Unrecognized net actuarial gain (loss) (7,605) 456 (9,472) (2,639)
Unrecognized prior service cost (2,689) (1,521) - -
Unrecognized transition obligation (771) (911) (6,565) (7,162)
- ------------------------------------------------------------------------------------------------------------------------------
Net amount recognized $ 8,315 $ 5,690 $ 16,671 $ 13,652
==============================================================================================================================
AMOUNTS RECOGNIZED IN THE BALANCE SHEET
CONSIST OF:
Accrued benefit cost $ 8,315 $ 5,690
Additional minimum liability 3,596 -
Intangible asset (3,448) -
Accumulated other comprehensive loss (148) -
- -------------------------------------------------------------------------------------------
Net amount recognized $ 8,315 $ 5,690
===========================================================================================
Note: For plans with assets less than the accumulated benefit obligation (ABO),
the aggregate ABO is $36,911,000 while the aggregate asset value is $25,322,000.
=============================================================================================================================
WEIGHTED AVERAGE ASSUMPTIONS:
Discount rate 7.0% 7.5% 7.0% 7.5%
Expected return on plan assets 9.0% 9.0% ==============================
Rate of compensation increase 3.0% - 3.5% 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 10% and 5%,
respectively for 2002; the rates were assumed to decrease gradually to 5% for
both medical and dental benefits until 2013 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 $ 534 $ (425)
Effect on post-retirement benefit obligation 5,462 (4,415)
40
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
A reconciliation of the above accrued benefit costs to the consolidated
amounts reported on the Company's balance sheets follows:
AUGUST 31,
--------------------------
2002 2001
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Accrued pension benefits $ 8,315 $ 5,690
Accrued other post-retirement benefits 16,671 13,652
- --------------------------------------------------------------------------------
24,986 19,342
Current portion of above benefits, included in
payrolls and benefits in accrued liabilities (2,002) (650)
Supplemental pension and other deferred
compensation benefits 1,163 664
- --------------------------------------------------------------------------------
Deferred retirement benefits $ 24,147 $ 19,356
================================================================================
The Company's deferred gain on settlement of past pension plan
obligations amounted to $1,345,000 and $1,560,000 as of August 31, 2002 and 2001
respectively, and is being amortized over 23 years. The related amortization
amounted to $215,000 for each of the years ended August 31, 2002, 2001 and 2000.
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 $751,000, $665,000 and $607,000 for the years ended August 31, 2002,
2001 and 2000, respectively.
10. INCOME TAXES
Income tax expense (benefit) consists of:
YEAR ENDED AUGUST 31,
-------------------------------------
2002 2001 2000
- --------------------------------------------------------------------
(IN THOUSANDS)
Federal:
Current $ (2,953) $ 3,050 $ 1,525
Deferred (9,019) 4,981 3,743
- --------------------------------------------------------------------
(11,972) 8,031 5,268
- --------------------------------------------------------------------
State:
Current 251 1,650 805
Deferred (3,875) 159 755
- --------------------------------------------------------------------
(3,624) 1,809 1,560
- --------------------------------------------------------------------
$ (15,596) $ 9,840 $ 6,828
====================================================================
41
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Reconciliation of the differences between income taxes computed at the
Federal statutory rate and the provision for income taxes attributable to income
(loss) before income tax expense (benefit) and cumulative effect of accounting
change is as follows:
YEAR ENDED AUGUST 31,
---------------------------------------
2002 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
(IN THOUSANDS)
U. S. federal income taxes at the statutory rate of 34% $ (13,783) $ 8,190 $ 4,595
State income taxes, net of Federal benefit (2,338) 1,257 1,118
Federal income tax audit 188 4 966
Nondeductible expenses 259 112 170
Other 78 277 (21)
- -----------------------------------------------------------------------------------------------------------------------
Income tax attributable to income (loss) before
income tax expense (benefit) and extraordinary item $ (15,596) $ 9,840 $ 6,828
=======================================================================================================================
Deferred income tax liabilities (assets) are comprised of the following:
AUGUST 31,
-----------------------------
2002 2001
- ---------------------------------------------------------------------------------------
(IN THOUSANDS)
Current deferred income tax liabilities (assets):
Inventory valuation $ 7,675 $ 5,895
Accounts receivable allowance (649) (351)
Accrued liabilities (2,037) (1,380)
Other 334 (7)
- ---------------------------------------------------------------------------------------
5,323 4,157
- ---------------------------------------------------------------------------------------
Deferred income tax liabilities:
Property, plant and equipment 31,659 28,310
Accrued liabilities (13,027) (8,623)
Tax credits and carryforwards (12,565) (713)
State net operating loss carryforwards (6,223) (1,683)
Valuation allowance 304 7
Other 212 275
- ---------------------------------------------------------------------------------------
360 17,573
- ---------------------------------------------------------------------------------------
Net deferred income tax liability $ 5,683 $ 21,730
=======================================================================================
The Company's results of operations are included in the consolidated
Federal tax return of the Parent (See Footnote 13 to Consolidated Financial
Statements, Item 8). The Company has a net operating loss carryfoward for
regular tax purposes of $18,400,000 which will expire after 2022. For financial
reporting purposes, valuation allowances of $304,000 and $7,000 at August 31,
2002 and 2001, respectively, were recognized for state net operating loss
carryforwards not anticipated to be realized before expiration.
42
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 $4,500,000
that is available to offset the regular tax liability in the future years.
11. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument for which it is practicable to
estimate that value.
The carrying amount of cash and cash equivalents, trade accounts
receivable, the revolving credit facility and current liabilities approximate
fair value because of the short maturity of these instruments.
The fair value of long-term debt (See Footnote 8 to Consolidated
Financial Statements, Item 8) was determined using the fair market value of the
individual debt instruments. As of August 31, 2002, the carrying amount and
estimated fair value of these debt instruments approximated $182,099,000 and
$143,827,000, respectively.
12. CONTINGENCIES
In addition to the environmental matters discussed see Footnote 14 to
Consolidated Financial Statements, Item 8, the Company is a defendant in various
claims, legal actions and complaints arising in the ordinary course of business.
In the opinion of management, all such matters are adequately covered by
insurance, or if not so covered, are without merit or are of such kind, or
involve such amounts that an unfavorable disposition would not have a material
adverse effect on the consolidated financial position of the Company.
13. TRANSACTIONS WITH AFFILIATED COMPANIES
On December 21, 2001, the Company acquired the operations and working
capital assets of Country Fair (See Footnote 18 to Consolidated Financial
Statements, Item 8). The fixed assets of Country Fair were acquired by related
entities controlled by John Catsimatidis, the indirect sole shareholder of the
Company. These assets are being leased to the Company at an annual aggregate
rental of approximately $5,200,000, which management, based on an independent
third party valuation believes is fair, over a period ranging from 10 to 20
years. During the fiscal year ended August 31, 2002, $3,481,000 of rent payments
were made to these related entities. The Company is not a guarantor on the
underlying mortgages on the properties.
Concurrent with the above acquisition of Country Fair, the Company
entered into a management agreement with a non-subsidiary affiliate to operate
and manage 18 of the retail units owned by the non-subsidiary affiliate on a
turn-key basis. For the year ended August 31, 2002, the Company billed the
affiliate $525,000 for management fees and overhead expenses incurred in the
management and operation of the 18 retail units which amount was deducted from
expenses. As of August 31, 2002, the Company owed the affiliate $69,000 under
the terms of the agreement.
Effective June 1, 2001, the Company sold certain intangible assets to
an unrelated entity and realized a $3,000,000 gain on the transaction which was
recorded in other income. Concurrent with the sale, the Company entered into a
50% joint venture with the entity for the marketing of asphalt products. The
joint venture is accounted for using the equity method of accounting. As part of
its investment in the joint venture, the Company transferred $1,013,000 of
inventory to it. For the years ended August 31, 2002 and 2001, net sales to the
joint venture
43
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
amounted to $4,756,000 and $1,810,000 respectively. As of August 31, 2002 and
2001, the Company had a receivable from (payable to) the joint venture of
$1,085,000 and ($1,495,000), respectively, under the terms of the agreement.
On September 29, 2000, the Company sold 42 retail units to an affiliate
for $23,870,000. The excess of the sales price over the net historic cost of the
assets and liabilities of $9,498,000 (net of income taxes) was credited to
additional paid-in capital during the fiscal year ended August 31, 2001. The
Company used $12,150,000 of the proceeds to purchase $17,165,000 of 10.75%
Senior Unsecured Notes due June 9, 2007 (See Footnote 8 to Consolidated
Financial Statements, Item 8). The balance of the proceeds were used for capital
expenditures.
Concurrent with this asset sale, the Company terminated the leases on 8
additional retail locations which it had previously leased from a non-subsidiary
affiliate. The Company has entered into a management agreement with the
non-subsidiary affiliate to operate and manage the retail units owned by the
non-subsidiary affiliate on a turnkey basis. For the years ended August 31, 2002
and 2001, the Company billed the affiliate $1,436,000 and $1,301,000,
respectively, for management fees and overhead expenses incurred in the
management and operation of the 50 retail units, which amount was deducted from
expenses. For the fiscal years ended August 31, 2002 and 2001, net sales to the
affiliate amounted to $35,486,000 and $41,768,000, respectively. As of August
31, 2002 and 2001, the Company owed the affiliate $711,000 and $410,000,
respectively, under the terms of the agreement.
The Company paid a service fee relating to certain costs incurred by
its Parent for the Company's New York office. During the years ended August 31,
2002, 2001 and 2000, such fees amounted to approximately $1,000,000, $991,000
and $1,000,000, respectively.
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. Amounts related to the Tax
Sharing Agreement for the utilization by the Company of certain tax attributes
of the Parent and other subsidiaries related to tax years ended August 31, 1997
- - August 31, 2001, totaled $609,000 and have been recorded as a distribution.
An affiliate of the Company leased eight retail gas stations and
convenience stores to the Company under various operating leases which expired
in 2001. Rent expense relating to these leases amounted to $20,000 and $248,000
for the years ended August 31, 2001 and 2000, respectively.
14. ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
The Company is subject to federal, state and local laws and regulations
relating to pollution and protection of the environment such as those governing
releases of certain materials into the environment and the storage, treatment
transportation, disposal and clean-up of wastes, including, but not limited to,
the Federal Clean Water Act, as amended, the Clean Air Act, as amended, the
Resource Conservation and Recovery Act of 1976, as amended, the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, and
analogous state and local laws and regulations.
The Company entered into a Consent Order and Agreement (the
"Agreement") with the Pennsylvania Department of Environmental Protection
("DEP") on July 31, 2000. The Agreement resolves certain claims arising out of
discharges from the Company's Industrial Wastewater Treatment Plant ("IWTP") as
well as other sources. The Agreement covers all discharges between approximately
September 24, 1997 and May 4, 2000 alleged by DEP to be in violation of
applicable laws, regulations and permits issued to the Company. The Agreement
requires the Company to evaluate and consider the upgrade of certain physical
components associated with the Company's Warren, Pennsylvania refining facility.
Failure by the Company to comply with the Agreement carries a $250 per day
stipulated civil penalty. The Company believes it has complied in all respects
with the ongoing requirements of
44
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
the Agreement and that the future cost of compliance with the Agreement, if any,
will not have a material adverse effect upon the consolidated operations or
financial position of the Company.
Due to the nature of the Company's business, the Company is and will
continue to be subject to various environmental claims, legal actions and
complaints. The Company believes that the claims asserted by the United States
Environmental Protection Agency pursuant to certain Notices of Violation and an
Administrative Order will not have a material adverse effect upon the
consolidated operations or financial condition of the Company. The Company is
unable to determine the effect of Methyl Tertiary Butyl Ether ("MTBE")-related
litigation upon its operations or consolidated financial condition until the
scope of the claims is fully known. In the opinion of management, all other
current matters are without merit or are of such kind or involve such amounts
that an unfavorable disposition would not have a material adverse effect on the
consolidated financial position or operations of the Company.
In addition to the foregoing proceedings, the Company and its
subsidiaries are from time to time parties to various legal proceedings that
arise in the ordinary course of their respective business operations. These
proceedings include various administrative actions relating to federal, state
and local environmental laws and regulations. The Company believes that if these
legal proceedings in which it is currently involved are determined against the
Company, they would not result in a material adverse effect on the Company's
operations or its consolidated financial condition. In the opinion of
management, all such matters are adequately covered by insurance, or if not so
covered, are without merit or are of such kind, or involve such amounts that an
unfavorable disposition would not have a material adverse effect on the
consolidated financial position of the Company.
Management of the Company believes that remediation and related
environmental costs incurred during the normal course of business are not
expected to be material.
15. 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), Red Apple Food Mart(R) and Country
Fair(R) brand names.
The accounting policies of the reportable segments are the same as
those described in Footnote 1 to Consolidated Financial Statements, Item 8.
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.
45
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
YEAR ENDED AUGUST 31,
--------------------------------------
2002 2001 2000
- -------------------------------------------------------------------------------
(IN THOUSANDS)
Net Sales
Retail $ 580,078 $ 516,541 $ 588,398
Wholesale 471,938 592,024 535,041
-------------------------------------------
$ 1,052,016 $ 1,108,565 $ 1,123,439
===========================================
Intersegment Sales
Wholesale $ 182,834 $ 236,539 $ 264,698
===========================================
Operating Income (Loss)
Retail $ 4,656 $ 7,014 $ 2,040
Wholesale (25,356) 35,469 36,969
-------------------------------------------
$ (20,700) $ 42,483 $ 39,009
===========================================
Total Assets
Retail $ 127,712 $ 103,161 $ 108,925
Wholesale 243,728 252,396 231,443
-------------------------------------------
$ 371,440 $ 355,557 $ 340,368
===========================================
Depreciation and Amortization
Retail $ 3,638 $ 2,916 $ 2,938
Wholesale 8,136 7,797 7,230
-------------------------------------------
$ 11,774 $ 10,713 $ 10,168
===========================================
Capital Expenditures
Retail $ 4,552 $ 3,704 $ 1,455
Wholesale 5,747 6,348 4,445
-------------------------------------------
$ 10,299 $ 10,052 $ 5,900
===========================================
During FYE 2000, the Company changed its methodology for allocating
administrative overhead and its accounting classification of commission income
resulting in the reclassification of prior period data.
16. SUBSIDIARY GUARANTORS
Certain of United Refining Company's (the "issuer") subsidiaries
function as guarantors under the terms of the $200,000,000 Senior Unsecured Note
Indenture due June 9, 2007. Financial information for the Company's wholly-owned
subsidiary guarantors (See Footnote 8 to Consolidated Financial Statements, Item
8) is as follows:
46
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING BALANCE SHEETS
(in thousands)
August 31, 2002
-----------------------------------------------------
Issuer Guarantors Eliminations Consolidated
-----------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 4,254 $ 9,261 $ - $ 13,515
Accounts receivable, net 22,584 11,281 - 33,865
Refundable income taxes 3,300 - - 3,300
Inventories 71,939 21,628 - 93,567
Prepaid expenses and other assets 8,574 2,605 - 11,179
Intercompany 93,867 18,892 (112,759) -
-----------------------------------------------------
Total current as 204,518 63,667 (112,759) 155,426
Property, plant and equipment, net 118,840 71,054 - 189,894
Investment in affiliated company 1,707 - - 1,707
Deferred financing costs, net 3,641 - - 3,641
Goodwill and other non-amortizable assets - 11,849 - 11,849
Amortizable intangible assets - 4,170 - 4,170
Deferred turnaround costs & other assets 4,891 1,033 (1,171) 4,753
-----------------------------------------------------
$ 333,597 $ 151,773 $(113,930) $ 371,440
=====================================================
Liabilities and Stockholder's Equity
Current:
Revolving credit facility $ 24,314 $ - $ - $ 24,314
Current installments of long-term debt 86 150 - 236
Accounts payable 34,384 16,263 - 50,647
Income taxes payable - - - -
Accrued liabilities 10,083 3,919 - 14,002
Sales, use and fuel taxes payable 15,228 3,289 - 18,517
Deferred income taxes 5,746 (423) - 5,323
Amounts due affiliated companies (640) 780 - 140
Intercompany - 112,759 (112,759) -
-----------------------------------------------------
Total current liabilities 89,201 136,737 (112,759) 113,179
Long term debt: less current installments 180,462 1,401 - 181,863
Deferred income taxes (3,227) 3,587 - 360
Deferred gain on settlement of pension
plan obligations 1,345 - - 1,345
Deferred retirement benefits 22,643 1,504 - 24,147
Other noncurrent liabilities - 2,350 - 2,350
-----------------------------------------------------
Total liabilities 290,424 145,579 (112,759) 323,244
-----------------------------------------------------
Commitment and contingencies
Stockholder's equity
Common stock, $.10 par value per
share - shares authorized 100;
issued and outstanding 100 - 18 (18) -
Additional paid-in capital 7,150 10,651 (1,153) 16,648
Retained earnings 36,113 (4,475) - 31,638
Accumulated other
comprehensive loss (90) - - (90)
-----------------------------------------------------
Total stockholder's equity 43,174 6,194 (1,171) 48,196
-----------------------------------------------------
$ 333,597 $ 151,773 $(113,930) $ 371,440
=====================================================
August 31, 2001
-----------------------------------------------------
Issuer Guarantors Eliminations Consolidated
-----------------------------------------------------
Assets
Current:
Cash and cash equivalents $ 29,197 $ 6,027 $ - $ 35,224
Accounts receivable, net 32,669 9,268 - 41,937
Refundable income taxes - - - -
Inventories 47,177 15,377 - 62,554
Prepaid expenses and other assets 11,154 2,158 - 13,312
Intercompany 81,308 18,345 (99,653) -
-----------------------------------------------------
Total current as 201,505 51,175 (99,653) 153,027
Property, plant and equipment, net 121,074 69,877 - 190,951
Investment in affiliated company 1,529 - - 1,529
Deferred financing costs, net 4,102 - - 4,102
Goodwill and other non-amortizable assets - - - -
Amortizable intangible assets - - - -
Deferred turnaround costs & other assets 6,665 454 (1,171) 5,948
-----------------------------------------------------
$ 334,875 $ 121,506 $(100,824) $ 355,557
=====================================================
Liabilities and Stockholder's Equity
Current:
Revolving credit facility $ - $ - $ - $ -
Current installments of long-term debt - 121 - 121
Accounts payable 16,857 5,349 - 22,206
Income taxes payable 2,413 (40) - 2,373
Accrued liabilities 9,739 2,672 - 12,411
Sales, use and fuel taxes payable 16,542 144 - 16,686
Deferred income taxes 4,507 (350) - 4,157
Amounts due affiliated companies 1,495 410 - 1,905
Intercompany - 99,653 (99,653) -
-----------------------------------------------------
Total current liabilities 51,553 107,959 (99,653) 59,859
Long term debt: less current installments 180,135 844 - 180,979
Deferred income taxes 11,009 6,564 - 17,573
Deferred gain on settlement of pension
plan obligations 1,560 - - 1,560
Deferred retirement benefits 18,610 746 - 19,356
Other noncurrent liabilities - 264 - 264
-----------------------------------------------------
Total liabilities 262,867 116,377 (99,653) 279,591
-----------------------------------------------------
Commitment and contingencies
Stockholder's equity
Common stock, $.10 par value per
share - shares authorized 100;
issued and outstanding 100 - 18 (18) -
Additional paid-in capital 7,150 10,651 (1,153) 16,648
Retained earnings 64,858 (5,540) - 59,318
Accumulated other
comprehensive loss - - - -
-----------------------------------------------------
Total stockholder's equity 72,008 5,129 (1,171) 75,966
-----------------------------------------------------
$ 334,875 $ 121,506 $(100,824) $ 355,557
=====================================================
47
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
(in thousands)
Year Ended August 31, 2002 Year Ended August 31, 2001
----------------------------------------------------------- ------------------------------
Issuer Guarantors Eliminations Consolidated Issuer Guarantors
----------------------------------------------------------- ------------------------------
Net sales $ 654,772 $ 584,801 $ (187,557) $ 1,052,016 $ 828,563 $ 521,276
Costs of goods sold 656,695 497,507 (187,557) 966,645 770,943 452,466
----------------------------------------------------------- ------------------------------
Gross profit (loss) (1,923) 87,294 - 85,371 57,620 68,810
----------------------------------------------------------- ------------------------------
Expenses:
Selling, general and
administrative expenses 16,670 77,627 - 94,297 16,257 56,977
Depreciation and
amortization expenses 7,964 3,810 - 11,774 7,626 3,087
----------------------------------------------------------- ------------------------------
Total operating expenses 24,634 81,437 - 106,071 23,883 60,064
----------------------------------------------------------- ------------------------------
Operating income (loss) (26,557) 5,857 - (20,700) 33,737 8,746
----------------------------------------------------------- ------------------------------
Other income (expense):
Interest income 5,339 1,025 (6,034) 330 9,493 1,587
Interest expense (20,883) (5,215) 6,034 (20,064) (22,459) (8,066)
Other, net (1,926) 581 - (1,345) 1,816 20
Costs associated with
terminated acquisition - - - - (1,300) -
Equity in net earnings of
affiliate 1,242 - - 1,242 516 -
----------------------------------------------------------- ------------------------------
(16,228) (3,609) - (19,837) (11,934) (6,459)
----------------------------------------------------------- ------------------------------
Income (loss) before income (42,785) 2,248 - (40,537) 21,803 2,287
tax expense (benefit)
----------------------------------------------------------- ------------------------------
Income tax expense (benefit):
Current (3,840) 1,138 - (2,702) 5,070 (370)
Deferred (12,939) 45 - (12,894) 3,847 1,293
----------------------------------------------------------- ------------------------------
(16,779) 1,183 - (15,596) 8,917 923
----------------------------------------------------------- ------------------------------
Income (loss) before
extraordinary item (26,006) 1,065 - (24,941) 12,886 1,364
Extraordinary item, net of
taxes of $2,181 - - - - 3,029 -
----------------------------------------------------------- ------------------------------
Net income (loss) $ (26,006) $ 1,065 $ - $ (24,941) $ 15,915 $ 1,364
=========================================================== ==============================
Year Ended August 31, 2001 Year Ended August 31, 2000
----------------------------- ------------------------------------------------------------
Eliminations Consolidated Issuer Guarantors Eliminations Consolidated
----------------------------- ------------------------------------------------------------
Net sales $ (241,274) $ 1,108,565 $ 799,379 $ 593,535 $ (269,475) $ 1,123,439
Costs of goods sold (241,274) 982,135 743,321 520,026 (269,475) 993,872
----------------------------- ------------------------------------------------------------
Gross profit (loss) - 126,430 56,058 73,509 - 129,567
----------------------------- ------------------------------------------------------------
Expenses:
Selling, general and
administrative expenses - 73,234 13,686 66,704 - 80,390
Depreciation and
amortization expenses - 10,713 7,042 3,126 - 10,168
----------------------------- ------------------------------------------------------------
Total operating expenses - 83,947 20,728 69,830 - 90,558
----------------------------- ------------------------------------------------------------
Operating income (loss) - 42,483 35,330 3,679 - 39,009
----------------------------- ------------------------------------------------------------
Other income (expense):
Interest income (9,474) 1,606 10,754 1,559 (12,025) 288
Interest expense 9,474 (21,051) (24,273) (10,714) 12,025 (22,962)
Other, net - 1,836 (2,033) (789) - (2,822)
Costs associated with
terminated acquisition - (1,300) - - - -
Equity in net earnings of
affiliate - 516 - - - -
- (18,393) (15,552) (9,944) - (25,496)
----------------------------- ------------------------------------------------------------
Income (loss) before income - 24,090 19,778 (6,265) - 13,513
tax expense (benefit)
----------------------------- ------------------------------------------------------------
Income tax expense (benefit):
Current - 4,700 5,240 (2,910) - 2,330
Deferred - 5,140 4,763 (265) - 4,498
----------------------------- ------------------------------------------------------------
- 9,840 10,003 (3,175) - 6,828
----------------------------- ------------------------------------------------------------
Income (loss) before
extraordinary item - 14,250 9,775 (3,090) - 6,685
Extraordinary item, net of
taxes of $2,181 - 3,029 - - - -
----------------------------- ------------------------------------------------------------
Net income (loss) $ - $ 17,279 $ 9,775 $ (3,090) $ - $ 6,685
============================= ============================================================
48
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended August 31, 2002 Year Ended August 31, 2001
------------------------------------------------ --------------------------
Issuer Guarantors Eliminations Consolidated Issuer Guarantors
------------------------------------------------ -------------------------
Net cash provided by (used in)
operating activities $(42,119) $ 24,097 $ - $(18,022) $ 51,718 $(16,959)
------------------------------------------------ -------------------------
Cash flows from investing activities:
Purchase of business, net of
cash acquired - (16,900) - (16,900) - -
Purchase of investment
securities - - - - (3,714) -
Sale of investment securities - - - - 3,497 -
Additions to property, plant
and equipment (5,251) (3,810) - (9,061) (6,313) (3,739)
Proceeds from asset
dispositions - 3 - 3 2 23,548
------------------------------------------------ -------------------------
Net cash provided by
(used in) investing
activities (5,251) (20,707) - (25,958) (6,528) 19,809
------------------------------------------------ -------------------------
Cash flows from financing activities:
Net borrowings (reductions)
on revolving credit facility 24,314 - - 24,314 - -
Dividends (2,130) - - (2,130) (5,917) -
Principal reductions of long-
term debt (71) (156) - (227) (14,183) (146)
Proceeds from issuance of
long-term debt - - - - - -
Deferred financing costs 314 - - 314 - -
------------------------------------------------ -------------------------
Net cash provided by
(used in) financing
activities 22,427 (156) - 22,271 (20,100) (146)
------------------------------------------------ -------------------------
Net increase (decrease) in cash
and cash equivalents (24,943) 3,234 - (21,709) 25,090 2,704
Cash and cash equivalents,
beginning of year 29,197 6,027 - 35,224 4,107 3,323
------------------------------------------------ -------------------------
Cash and cash equivalents, end
of year $ 4,254 $ 9,261 $ - $ 13,515 $ 29,197 $ 6,027
================================================ =========================
Year Ended August 31, 2001 Year Ended August 31, 2000
----------------------------- -------------------------------------------------------
Eliminations Consolidated Issuer Guarantors Eliminations Consolidated
----------------------------- -------------------------------------------------------
Net cash provided by (used in)
operating activities $ - $ 34,759 $ 8,508 $ 223 $ - $ 8,731
----------------------------- -------------------------------------------------------
Cash flows from investing activities:
Purchase of business, net of
cash acquired - - - - - -
Purchase of investment
securities - (3,714) - - - -
Sale of investment securities - 3,497 - - - -
Additions to property, plant
and equipment - (10,052) (4,357) (1,543) - (5,900)
Proceeds from asset
dispositions - 23,550 202 605 - 807
----------------------------- -------------------------------------------------------
Net cash provided by
(used in) investing
activities - 13,281 (4,155) (938) - (5,093)
----------------------------- -------------------------------------------------------
Cash flows from financing activities:
Net borrowings (reductions)
on revolving credit facility - - (5,000) - - (5,000)
Dividends - (5,917) - - - -
Principal reductions of long-
term debt - (14,329) (48) (187) - (235)
Proceeds from issuance of
long-term debt - - - 152 - 152
Deferred financing costs - - (50) - - (50)
----------------------------- -------------------------------------------------------
Net cash provided by
(used in) financing
activities - (20,246) (5,098) (35) - (5,133)
----------------------------- -------------------------------------------------------
Net increase (decrease) in cash
and cash equivalents - 27,794 (745) (750) - (1,495)
Cash and cash equivalents,
beginning of year - 7,430 4,852 4,073 - 8,925
----------------------------- -------------------------------------------------------
Cash and cash equivalents, end
of year $ - $ 35,224 $ 4,107 $ 3,323 $ - $ 7,430
============================= =======================================================
49
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
GROSS INCOME (LOSS) BEFORE
NET SALES PROFIT EXTRAORDINARY ITEM
- -----------------------------------------------------------------------------------------------------
(IN THOUSANDS)
2002
First Quarter $ 228,504 $ 5,120 $ (12,620)
Second Quarter 214,728 25,418 (3,852)
Third Quarter 278,408 33,669 129
Fourth Quarter 330,376 21,164 (8,598)
2001
First Quarter $ 296,183 $ 30,647 $ 1,429
Second Quarter 248,973 26,166 242
Third Quarter 274,155 40,183 8,319
Fourth Quarter 289,254 29,434 4,260
======================================================================================================
Gross profit during the first quarter of 2002 was abnormally low due to
lower industry wholesale margins and slightly lower discounts on heavy
high-sulfur crude oil grades processed by the Company.
18. ACQUISITION
On December 21, 2001, the Company acquired 100% of the operations and
working capital assets of Country Fair for approximately $17,300,000 in cash.
Country Fair operates 69 convenience stores in northwestern Pennsylvania,
southwestern New York, and eastern Ohio. The fixed assets of Country Fair were
acquired by related entities controlled by John Catsitmatidis, the indirect sole
shareholder of the Company (See Footnote 13 to Consolidated Financial
Statements, Item 8).
The acquisition was accounted for under the purchase method of
accounting and, accordingly, the consolidated financial statements include the
results of operation of Country Fair from the acquisition date. The cost of the
acquisition was allocated on the basis of the estimated fair value of the assets
acquired over the liabilities assumed, based on an independent appraisal. The
excess of the purchase price over the net assets acquired of approximately
$1,300,000 has been recorded as goodwill.
50
UNITED REFINING COMPANY
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The following table summarizes the fair values of the assets acquired
and liabilities assumed at the date of acquisition.
AT DECEMBER 21, 2001
(IN THOUSANDS)
Current assets $ 8,012
Property, plant and equipment 400
Deferred taxes 3,361
Intangible assets not subject to amortization:
Trade name 10,500
Intangible assets subject to amortization:
Vendor contracts (7 year weighted average life) 2,600
Deed restrictions (25 year weighted average life) 800
Non-compete agreements (5 year weighed average life) 400
Leasehold covenants (17 year weighted average life) 1,537 5,337
Goodwill (not deductible for tax) ---------------
1,362
-------------
Total assets acquired 28,972
-------------
Current liabilities (8,877)
Other long-term liabilities (2,795)
-------------
Total liabilities assumed (11,672)
-------------
Net assets acquired $ 17,300
=============
The following unaudited pro forma information presents the Company's
consolidated results of operations as if the Country Fair acquisition had
occurred on September 1, 2000. These pro forma amounts have been prepared for
comparative purposes only and do not purport to be indicative of the results of
operations which actually would have resulted had the acquisition occurred on
September 1, 2000, or which may result in the future.
YEAR ENDED AUGUST 31,
---------------------------------------
2002 2001
- --------------------------------------------------------------------------------
(IN THOUSANDS)
Net sales $ 1,103,329 $ 1,282,829
Net income (loss) $ (24,326) $ 19,297
51
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 27, 2002 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 54 1986 Chairman of the Board, Chairman of the Board, Chief Executive Officer and
Chief Executive President of Red Apple Group, Inc. (a holding company
Officer, Director for certain businesses, including the Company and
corporations which operate supermarkets in New York);
Chief Executive Officer and Director of Gristede's
Foods, Inc., a public company whose common stock is
listed on the American Stock Exchange and operates
supermarkets in New York; a director of News
Communications, Inc., a public company whose stock is
traded over-the-counter and Fonda Paper Company,
Inc., a privately held company.
Myron L. Turfitt 50 1988 President, Chief Operating President and Chief Operating Officer of the Company
Officer, Director since September 1996. From June 1987 to September
1996 he was Chief Financial Officer and Executive
Vice President of the Company.
Thomas C. Covert 68 1988 Vice Chairman Vice Chairman of the Company since September 1996.
And Director From December 1987 to September 1996 he was Executive
Vice President and Chief Operating Officer of the
Company.
Ashton L. Ditka 61 --- Senior Vice President - Senior Vice President - Marketing of the Company
Marketing since July 1990.
Thomas E. Skarada 60 --- Vice President - Refining Vice President - Refining of the Company since
February 1996. From September 1994 to February 1996
he was Assistant Vice President - Refining.
Frederick J. Martin, Jr. 48 --- Vice President - Vice President - Supply and Transportation of the
Supply and Transportation Company since February 1993.
James E. Murphy 57 --- Vice President and Chief Chief Financial Officer of the Company since January
Financial Officer 1997. He was Vice President - Finance from April
1995 to December 1996.
52
NAME AGE DIRECTOR
SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS
----- -------- -----------------------------------------
John R. Wagner 43 --- Vice President, General Vice President, General Counsel and Secretary of the
Counsel and Secretary Company since August 1997. Prior to joining the
Company, Mr. Wagner served as Counsel to Dollar Bank,
F.S.B. from 1988 until assuming his current position.
Dennis E. Bee, Jr. 60 --- Treasurer Treasurer of the Company since May 1988.
Martin R. Bring 59 1988 Director Stockholder in the law firm of Anderson Kill & Olick,
P.C., since February 1, 2002; Partner in the law firm
of Wolf, Block, Schorr and Solis-Cohen LLP and
predecessor firm for more than five years prior
thereto. He has also served as a Director of
Gristede's Foods, Inc since 1988.
Evan Evans 76 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 55 1997 Director Executive Vice President - Finance and Administration
and Secretary of Gristede's Foods, Inc. since May
2002; Director of Gristede's Foods, Inc. since 1997;
Director of the Company since October 1997;
consultant to Red Apple Group, Inc. from January 1997
to October 1997; private investor from June 1994 to
December 1996; Senior Vice President and Head of
Commercial Banking of ABN AMRO Bank, New York branch
from January 1991 until May 1994.
Douglas Lemmonds 55 1997 Director Executive Vice President, SunTrust Bank, Washington,
DC since 2002. Previously, Mr. Lemmonds was Managing
Director and Chief Operating Officer, Private Banking-
Americas of the Deutsche Bank Group from May 1996,
until August 1999 when he served as an independent
consultant. Before working for Deutsche Bank, he was
Regional Director of the Northeast Regional Office of
The Private Bank, Bank of America NT&SA.
Andrew Maloney 70 1997 Director Counsel to Kramer Levin Naftalis & Frankel, LLP in
New York since April 1998. Partner of Brown & Wood
LLP, a New York law firm, from December 1992 to
April 1998. From June 1986 to December 1992 he was
the United States Attorney for the Eastern District
of New York. He has also served as a Director of
Gristede's Foods, Inc., since May 2002.
53
DIRECTOR
NAME AGE SINCE POSITION PRINCIPAL OCCUPATION FOR THE PAST 5 YEARS
---- --- ----- -------- -----------------------------------------
Dennis Mehiel 59 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 (1) (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.
(1) Mr. Mehiel resigned from the Board to pursue outside interests on February
28, 2002. He has been renominated, and has accepted the nomination, to resume
his position as Director.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Not Applicable
54
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth for the three fiscal years ended August
31, 2000, 2001 and 2002 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 $100,000 for the fiscal
year ended August 31, 2002.
SUMMARY COMPENSATION TABLE
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER ANNUAL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION
NAME & PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) ($) (1) ($) (2)
- ------------------------- ---- --------------------------- ------- -------
JOHN A. CATSIMATIDIS 2002 $360,000 $355,000 $ - $ 7,864
CHAIRMAN OF THE BOARD & 2001 360,000 355,000 - 8,985
CHIEF EXECUTIVE OFFICER 2000 360,000 225,000 - 9,056
MYRON L. TURFITT 2002 $235,000 $300,000 $ 5,460 $ 6,231
PRESIDENT & 2001 235,000 300,000 5,354 6,096
CHIEF OPERATING OFFICER 2000 235,000 190,000 5,107 6,257
ASHTON L. DITKA 2002 $158,817 $ 25,000 $ 2,117 $ 7,530
SENIOR VICE PRESIDENT 2001 148,400 16,500 2,013 7,682
MARKETING 2000 142,100 7,000 2,464 7,427
THOMAS E. SKARADA 2002 $133,604 $ 25,000 $ 6,813 $ 6,235
VICE PRESIDENT 2001 121,000 18,000 6,376 6,399
REFINING 2000 112,750 5,500 6,647 5,893
JOHN R. WAGNER 2002 $112,458 $ 30,000 $ 8,204 $ 3,777
VICE PRESIDENT, GENERAL COUNSEL 2001 101,000 30,000 7,617 3,510
AND SECRETARY 2000 96,500 4,750 7,638 3,417
(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.
55
PENSION PLAN
The Company maintains a defined benefit pension plan for eligible
employees. The following table shows estimated annual benefits payable upon
retirement in specified compensation categories and years of service
classifications.
PENSION PLAN TABLE
YEARS OF SERVICE
----------------
AVERAGE EARNINGS 15 20 25 30 35
- ----------------
$100,000 $17,036 $22,714 $28,393 $34,071 $39,750
$125,000 21,723 28,964 36,205 43,446 50,687
$150,000 26,411 35,214 44,018 52,821 61,625
$200,000 or more 30,161 40,214 50,268 60,321 70,375
The benefit formula is based on the average earnings of the participant
for the three years in which such participant's earnings were the highest.
Earnings include salary and bonus up to a maximum of $200,000 per year. Benefits
are calculated by multiplying the sum of (a) 1.1% of average earnings up to the
Social Security compensation base, plus (b) 1.25% of average earnings in excess
of the Social Security compensation base, by (c) the number of years of service.
Payments of retirement benefits are not reduced by any Social Security benefits
received by the participant. Effective May 2001, for purposes of calculating
retirement benefits, the Company has fixed the Social Security compensation base
at $76,200.
Assuming that the following officers continue to be employed by the
Company until they reach age 65, their credited years of service will be as
follows:
CURRENT YEARS YEARS OF SERVICE
NAME OF INDIVIDUAL OF SERVICE AT AGE 65
------------------ ---------- ---------
John A. Catsimatidis 16 27
Myron L. Turfitt 24 39
Ashton L. Ditka 26 30
Thomas E. Skarada 9 14
John R. Wagner 5 27
COMPENSATION OF DIRECTORS
Non-officer directors receive a stipend of $15,000 per year and $1,000
for each meeting attended.
56
EMPLOYMENT AND CONSULTING AGREEMENTS
Mr. Thomas C. Covert has entered into a Deferred Compensation Agreement
with the Company pursuant to which since the date of his retirement on September
1, 1996, the Company has been paying Mr. Covert a retirement benefit at the rate
of approximately $12,300 per year. The benefit is payable to Mr. Covert until
his death, whereupon Mr. Covert's surviving spouse, if any, is entitled to a
benefit of approximately $6,150 per year until her death.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding ownership
of Common Stock on November 27, 2002 by: (i) each stockholder known to the
Company to own beneficially, directly or indirectly, more than 5% of the
outstanding shares of Common Stock; (ii) each of the Company's directors; and
(iii) all officers and directors of the Company as a group. The Company believes
that ownership of the shares by the persons named below is both of record and
beneficial and such persons have sole voting and investing power with respect to
the shares indicated.
Name and Address of
Beneficial Owner Number of Shares Percent of Class
---------------- ---------------- ----------------
John Catsimatidis
823 Eleventh Avenue
New York, NY 10019 100 100%
All officers and directors
as a group (15 persons) 100 100%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
On December 21, 2001, the Company acquired the operations and working
capital assets of Country Fair (See Footnote 18 to Consolidated Financial
Statements, Item 8). The fixed assets of Country Fair were acquired by related
entities controlled by John Catsimatidis, the indirect sole shareholder of the
Company. These assets are being leased to the Company at an annual aggregate
rental of approximately $5,200,000, which management, based on an independent
third party valuation believes is fair, over a period ranging from 10 to 20
years. During the fiscal year ended August 31, 2002, $3,481,000 of rent payments
were made to these related entities. The Company is not a guarantor on the
underlying mortgages on the properties.
Concurrent with the above acquisition of Country Fair, the Company
entered into a management agreement with a non-subsidiary affiliate to operate
and manage 18 of the retail units owned by the non-subsidiary affiliate on a
turn-key basis. For the year ended August 31, 2002, the Company billed the
affiliate $525,000 for management fees and overhead expenses incurred in the
management and operation of the 18 retail units which amount was deducted from
expenses. As of August 31, 2002, the Company owed the affiliate $69,000 under
the terms of the agreement.
Effective June 1, 2001, the Company sold certain intangible assets to
an unrelated entity and realized a $3,000,000 gain on the transaction which was
recorded in other income. Concurrent with the sale, the Company entered into a
50% joint venture with the entity for the marketing of asphalt products. The
joint venture is accounted for using the equity method of accounting. As part of
its investment in the joint venture, the Company transferred $1,013,000 of
inventory to it. For the years ended August 31, 2002 and 2001, net sales to the
joint venture amounted to $4,756,000 and $1,810,000 respectively. As of August
31, 2002 and 2001, the Company had a receivable from (payable to) the joint
venture of $1,085,000 and ($1,495,000), respectively, under the terms of the
agreement.
On September 29, 2000, the Company sold 42 retail units to an affiliate
for $23,870,000. The excess of the sales price over the net historic cost of the
assets and liabilities of $9,498,000 (net of income taxes) was credited to
additional paid-in capital during the fiscal year ended August 31, 2001. The
Company used $12,150,000 of the
57
proceeds to purchase $17,165,000 of 10.75% Senior Unsecured Notes due June 9,
2007 (See Footnote 8 to Consolidated Financial Statements, Item 8). The balance
of the proceeds were used for capital expenditures.
Concurrent with this asset sale, the Company terminated the leases on 8
additional retail locations which it had previously leased from a non-subsidiary
affiliate. The Company has entered into a management agreement with the
non-subsidiary affiliate to operate and manage the retail units owned by the
non-subsidiary affiliate on a turnkey basis. For the years ended August 31, 2002
and 2001, the Company billed the affiliate $1,436,000 and $1,301,000,
respectively, for management fees and overhead expenses incurred in the
management and operation of the 50 retail units, which amount was deducted from
expenses. For the fiscal years ended August 31, 2002 and 2001, net sales to the
affiliate amounted to $35,486,000 and $41,768,000, respectively. As of August
31, 2002 and 2001, the Company owed the affiliate $711,000 and $410,000,
respectively, under the terms of the agreement.
The Company paid a service fee relating to certain costs incurred by
its Parent for the Company's New York office. During the years ended August 31,
2002, 2001 and 2000, such fees amounted to approximately $1,000,000, $991,000
and $1,000,000, respectively.
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. Amounts related to the Tax
Sharing Agreement for the utilization by the Company of certain tax attributes
of the Parent and other subsidiaries related to tax years ended August 31, 1997
- - August 31, 2001, totaled $609,000 and have been recorded as a distribution.
An affiliate of the Company leased eight retail gas stations and
convenience stores to the Company under various operating leases which expired
in 2001. Rent expense relating to these leases amounted to $20,000 and $248,000
for the years ended August 31, 2001 and 2000, respectively.
58
ITEM 14. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer (its
principal executive officer and principal financial officer, respectively) have
concluded, based on their evaluation as of a date within 90 days prior to the
filing date of this report, that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports filed or submitted by it under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms, and include controls and procedures designed to
ensure that information required to be disclosed by the Company in such reports
is accumulated and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of such evaluation including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) (1) Financial Statements
--------------------
A list of all financial statements filed as part of this report is contained in
the index to Item 8, which index is incorporated herein by reference.
(2) Financial Statement Schedules
-----------------------------
Report of Independent Certified Public Accountants
Schedule II - Valuation and Qualifying Accounts
(3) Exhibits
---------
Number Description
- ------
3.1 Certificate of Incorporation of United Refining Company ("URC").
Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-35083) (the
"Registration Statement").
3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the
Registration Statement.
3.3 Certificate of Incorporation of United Refining Company of
Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to
the Registration Statement.
3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the
Registration Statement.
3.5 Certificate of Incorporation of Kiantone Pipeline Corporation
("KPC"). Incorporated by reference to Exhibit 3.5 to the
Registration Statement.
3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the
Registration Statement.
3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY").
Incorporated by reference to Exhibit 3.7 to the Registration
Statement.
3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the
registration Statement.
3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI").
Incorporated by reference to Exhibit 3.9 to the Registration
Statement.
3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the
Registration Statement.
3.11 Certificate of Incorporation of Independent Gasoline & Oil Company
of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit
3.11 to the Registration Statement.
3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the
Registration Statement.
3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC").
Incorporated by reference to Exhibit 3.13 to the Registration
Statement.
3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the
Registration Statement.
3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by
reference to Exhibit 3.15 to the Registration Statement.
3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the
Registration Statement.
59
3.17 Certificate of Incorporation of Super Test Petroleum, Inc.
("STPI"). Incorporated by reference to Exhibit 3.17 to the
Registration Statement.
3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the
Registration Statement.
3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI").
Incorporated by reference to Exhibit 3.19 to the Registration
Statement.
3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the
Registration Statement.
3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation
("VARC"). Incorporated by reference to Exhibit 3.21 to the
Registration Statement.
3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the
Registration Statement.
3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI").
Incorporated by reference to Exhibit 3.23 to the Registration
Statement.
3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the
Registration Statement.
4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY,
KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder
Bank & Trust Company ("Schroder"), relating to the 10 3/4% Series A
Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to
the Registration Statement.
4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the
Registration Statement.
10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY,
KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co.
Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated
by reference to Exhibit 10.1 to the Registration Statement.
10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP,
KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI,
and BSCI. Incorporated by reference to Exhibit 10.2 to the
Registration Statement.
10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow
Agent, Schroder, as Trustee, and URC. Incorporated by reference to
Exhibit 10.3 to the Registration Statement.
10.4 Servicing Agreement dated June 9, 1997 between URC and Red Apple
Group, Inc. Incorporated by reference to Exhibit 10.4 to the
Registration Statement.
10.5 Collective Bargaining Agreement dated February 1, 1996 between URC
and International Union of Operating Engineers, Local No. 95.
Incorporated by reference to Exhibit 10.5 to the Registration
Statement.
10.6 Collective Bargaining Agreement dated June 23, 1993 between URC and
International Union, United Plant Guard Workers of America and
Local No. 502. Incorporated by reference to Exhibit 10.6 to the
Registration Statement.
10.7 Collective Bargaining Agreement dated February 1, 1997 between URC
and United Steel Workers of America Local Union No. 2122-A.
Incorporated by reference to Exhibit 10.7 to the Registration
Statement.
10.8 Collective Bargaining Agreement dated August 1, 1995 between URC
and General Teamsters Local Union No. 397. Incorporated by
reference to Exhibit 10.8 to the Registration Statement.
10.9 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.
10.10 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.
10.11 Amended and Restated Credit Agreement dated July 12, 2002 by and
among URC, URCP, KPC, Country Fair and the Banks party thereto
and PNC Bank, National Association, as Agent. Incorporated by
reference to Exhibit 10.21 of Registrant's Quarterly Report on
Form 10Q for fiscal quarter ended May 31, 2002.
10.12* Amendment to Credit Agreement dated as of July 12, 2002 by and
among URC, URCP, KPC, Country Fair and the Banks party thereto
and PNC Bank, National Association, as Agent.
21.1 Subsidiaries of the Registrants. A) Incorporated by reference to
Exhibit 21.1 to the Registration Statement. B) Country Fair, Inc.
Incorporated in the Commonwealth of Pennsylvania in 1965, doing
business as "Country Fair".
99.1* Principal Executive Officer Certification pursuant to 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
99.2* Principal Financial Officer Certification pursuant to 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
* Filed herewith
(b) Reports on Form 8-K
NONE
60
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 25, 2002 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,
2002. 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 25, 2002
61
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, 2000:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
Accounts $ 365 $ 697 $ (602) $ 460
====== ====== ====== ======
Year ended August 31, 2001:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
Accounts $ 460 $1,455 $ (545) $1,370
====== ====== ====== ======
Year ended August 31, 2002:
Reserves and allowances deducted
from asset accounts:
Allowance for uncollectible
Accounts $1,370 $ 420 $ (395) $1,395
====== ====== ====== ======
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.
UNITED REFINING COMPANY
Dated: November 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 27, 2002
- -------------------------------
Myron L. Turfitt
/s/ Thomas C. Covert Vice Chairman and Director November 27, 2002
- -------------------------------
Thomas C. Covert
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
/s/ Martin R. Bring Director November 27, 2002
- -------------------------------
Martin R. Bring
/s/ Evan Evans Director November 27, 2002
- -------------------------------
Evan Evans
/s/ Kishore Lall Director November 27, 2002
- -------------------------------
Kishore Lall
/s/ Douglas Lemmonds Director November 27, 2002
- -------------------------------
Douglas Lemmonds
/s/ Andrew Maloney Director November 27, 2002
- -------------------------------
Andrew Maloney
/s/ Dennis Mehiel Director November 27, 2002
- -------------------------------
Dennis Mehiel
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.
UNITED REFINING COMPANY OF
PENNSYLVANIA
Dated: November 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt President, Chief Operating Officer November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- -------------------------------
James E. Murphy Officer) November 27, 2002
64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KIANTONE PIPELINE CORPORATION
Dated: November 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
President, Chief Operating Officer
/s/ Myron L. Turfitt and Director November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- -------------------------------
James E. Murphy Officer) November 27, 2002
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
KIANTONE PIPELINE COMPANY
Dated: November 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
UNITED JET CENTER, INC.
Dated: November 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
67
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
VULCAN ASPHALT REFINING
CORPORATION
Dated: November 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
68
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 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
69
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 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
70
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 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
71
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 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
72
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 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- ------------------------------- Officer) November 27, 2002
James E. Murphy
73
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 27, 2002 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 27, 2002
- -------------------------------
John A. Catsimatidis
/s/ Myron L. Turfitt Executive Vice President November 27, 2002
- -------------------------------
Myron L. Turfitt
Vice President and Chief Financial
/s/ James E. Murphy Officer (Principal Accounting
- -------------------------------
James E. Murphy Officer) November 27, 2002
74
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, John A. Catsimatidis certify that:
1. I have reviewed this annual report on Form 10-K of United Refining Company
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared:
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 27, 2002 Signature: /s/ John A. Catsimatidis
----------------- -------------------------
Principal Executive Officer
75
CERTIFICATION
Pursuant to 18 U.S.C. Section 1350,
As adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James E. Murphy certify that:
1. I have reviewed this annual report on Form 10-K of United Refining Company
(the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared:
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons fulfilling the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 27, 2002 Signature: /s/ James E. Murphy
------------------ --------------------
Principal Financial Officer
76
16. 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, 2002.
EXHIBITS
Number Description
- ------ -----------
3.1 Certificate of Incorporation of United Refining Company ("URC").
Incorporated by reference to Exhibit 3.1 to the Registrant's
Registration Statement on Form S-4 (File No. 333-35083) (the
"Registration Statement").
3.2 Bylaws of URC. Incorporated by reference to Exhibit 3.2 to the
Registration Statement.
3.3 Certificate of Incorporation of United Refining Company of
Pennsylvania ("URCP"). Incorporated by reference to Exhibit 3.3 to
the Registration Statement.
3.4 Bylaws of URCP. Incorporated by reference to Exhibit 3.4 to the
Registration Statement.
3.5 Certificate of Incorporation of Kiantone Pipeline Corporation
("KPC"). Incorporated by reference to Exhibit 3.5 to the
Registration Statement.
3.6 Bylaws of KPC. Incorporated by reference to Exhibit 3.6 to the
Registration Statement.
3.7 Certificate of Incorporation of Kiantone Pipeline Company ("KPCY").
Incorporated by reference to Exhibit 3.7 to the Registration
Statement.
3.8 Bylaws of KPCY. Incorporated by reference to Exhibit 3.8 to the
registration Statement.
3.9 Certificate of Incorporation of Kwik Fill, Inc. ("KFI").
Incorporated by reference to Exhibit 3.9 to the Registration
Statement.
3.10 Bylaws of KFI. Incorporated by reference to Exhibit 3.10 to the
Registration Statement.
3.11 Certificate of Incorporation of Independent Gasoline & Oil Company
of Rochester, Inc. ("IGOCRI"). Incorporated by reference to Exhibit
3.11 to the Registration Statement.
3.12 Bylaws of IGOCRI. Incorporated by reference to Exhibit 3.12 to the
Registration Statement.
3.13 Certificate of Incorporation of Bell Oil Corp. ("BOC").
Incorporated by reference to Exhibit 3.13 to the Registration
Statement.
3.14 Bylaws of BOC. Incorporated by reference to Exhibit 3.14 to the
Registration Statement.
3.15 Certificate of Incorporation of PPC, Inc. ("PPCI"). Incorporated by
reference to Exhibit 3.15 to the Registration Statement.
3.16 Bylaws of PPCI. Incorporated by reference to Exhibit 3.16 to the
Registration Statement.
3.17 Certificate of Incorporation of Super Test Petroleum, Inc.
("STPI"). Incorporated by reference to Exhibit 3.17 to the
Registration Statement.
3.18 Bylaws of STPI. Incorporated by reference to Exhibit 3.18 to the
Registration Statement.
3.19 Certificate of Incorporation of Kwik-Fil, Inc. ("K-FI").
Incorporated by reference to Exhibit 3.19 to the Registration
Statement.
3.20 Bylaws of K-FI. Incorporated by reference to Exhibit 3.20 to the
Registration Statement.
3.21 Certificate of Incorporation of Vulcan Asphalt Refining Corporation
("VARC"). Incorporated by reference to Exhibit 3.21 to the
Registration Statement.
3.22 Bylaws of VARC. Incorporated by reference to Exhibit 3.22 to the
Registration Statement.
3.23 Certificate of Incorporation of United Jet Center, Inc. ("UJCI").
Incorporated by reference to Exhibit 3.23 to the Registration
Statement.
3.24 Bylaws of UJCI. Incorporated by reference to Exhibit 3.24 to the
Registration Statement.
4.1 Indenture dated as of June 9, 1997 between URC, URCP, KPC, KPCY,
KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI and IBJ Schroder
Bank & Trust Company ("Schroder"), relating to the 10 3/4% Series A
Senior Notes due 2007. Incorporated by reference to Exhibit 4.1 to
the Registration Statement.
4.2 Form of Note. Incorporated by reference to Exhibit 4.2 to the
Registration Statement.
10.1 Purchase Agreement dated June 4, 1997 between URC, URCP, KPC, KPCY,
KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, Dillion, Read & Co.
Inc. ("DRCI") and Bear, Stearns & Co. Inc. ("BSCI"). Incorporated
by reference to Exhibit 10.1 to the Registration Statement.
10.2 Registration Rights Agreement dated June 9, 1997 between URC, URCP,
KPC, KPCY, KFI, IGOCRI, BOC, PPCI, STPI, K-FI, VARC, UJCI, DRCI,
and BSCI. Incorporated by reference to Exhibit 10.2 to the
Registration Statement.
10.3 Escrow Agreement dated June 9, 1997 between Schroder, as Escrow
Agent, Schroder, as Trustee, and
77
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 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.
10.10 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.
10.11 Amended and Restated Credit Agreement dated July 12, 2002 by and
among URC, URCP, KPC, Country Fair and the Banks party thereto
and PNC Bank, National Association, as Agent. Incorporated by
reference to Exhibit 10.21 of Registrant's Quarterly Report on
Form 10Q for fiscal quarter ended May 31, 2002.
10.12* Amendment to Credit Agreement dated as of July 12, 2002 by and
among URC, URCP, KPC, Country Fair and the Banks party thereto
and PNC Bank, National Association, as Agent.
21.1 Subsidiaries of the Registrants. A) Incorporated by reference to
Exhibit 21.1 to the Registration Statement. B) Country Fair, Inc.
Incorporated in the Commonwealth of Pennsylvania in 1965, doing
business as "Country Fair".
99.1* Principal Executive Officer Certification pursuant to 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
99.2* Principal Financial Officer Certification pursuant to 18 U.S.C.
Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
* Filed herewith
78