10-Q 1 c59110e10-q.txt QUARTERLY REPORT 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 For quarter ended OCTOBER 31, 2000 Commission file number 1-14990 ---------------- ------- GETTY PETROLEUM MARKETING INC. ------------------------------ (Exact name of registrant as specified in its charter) MARYLAND 11-3339235 (State or other jurisdiction of (I.R.S. Employer --------------------------------- ------------------- incorporation or organization) Identification No.) 125 JERICHO TURNPIKE, JERICHO, NEW YORK 11753 ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) (516) 338 - 6000 ---------------- (Registrant's telephone number, including area code) 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 Registrant has 14,033,685 shares of Common Stock, par value $.01 per share, outstanding as of December 8, 2000. ================================================================================ 2 GETTY PETROLEUM MARKETING INC. INDEX Part I. FINANCIAL INFORMATION Page Number ----------- Item 1. Financial Statements Consolidated Balance Sheets as of October 31, 2000 and January 31, 2000 1 Consolidated Statements of Operations for the three and nine months ended October 31, 2000 and 1999 2 Consolidated Statements of Cash Flows for the nine months ended October 31, 2000 and 1999 3 Notes to Consolidated Financial Statements 4 - 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 - 12 Part II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 13 Signatures 13 3 GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)

See accompanying notes. -1- 4 GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (unaudited)

See accompanying notes. -2- 5 GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) (unaudited)

See accompanying notes. -3- 6 GETTY PETROLEUM MARKETING INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. General: The accompanying consolidated financial statements include the accounts of Getty Petroleum Marketing Inc. and its wholly-owned subsidiaries (the "Company"). The consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's best estimates and judgments. While all available information has been considered, actual amounts could differ from those estimates. The consolidated financial statements are unaudited but, in the opinion of management, reflect all adjustments (consisting of normal recurring accruals) necessary for a fair presentation. These statements should be read in conjunction with the consolidated financial statements and related notes which appear in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2000. 2. Earnings (loss) per share: Basic earnings (loss) per share is computed by dividing net earnings (loss) by the weighted average number of shares of common stock outstanding during the periods presented. For the quarter and nine months ended October 31, 2000, diluted loss per share amounts do not reflect the potential dilution from the exercise of stock options since such inclusion would be antidilutive. For the quarter and nine months ended October 31, 1999, diluted earnings per share reflects the potential dilution from the exercise of stock options in the amounts of 23,000 shares and 18,000 shares, respectively. -4- 7 3. Stockholders' equity: A summary of the changes in stockholders' equity for the nine months ended October 31, 2000 is as follows (in thousands):

(*) Represents net unrealized loss on equity securities. For the three months ended October 31, 2000, the Company had a net unrealized loss on equity securities of $11. For the three and nine months ended October 31, 1999, the Company had a net unrealized loss on equity securities of $70 and $389, respectively. -5- 8 4. Segment information: The Company has two reportable segments: Petroleum Marketing and Heating Oil. The Petroleum Marketing segment distributes, markets and sells gasoline and diesel fuel to consumers through a network of 1,277 Getty and other branded retail outlets. The Heating Oil segment sells fuel oil, kerosene and propane, and provides oil burner and related services to residential and commercial customers in the New York Mid-Hudson Valley region. The financial results of the Petroleum Marketing and Heating Oil segments for the quarters and nine month periods ended October 31, 2000 and 1999 are set forth below (in thousands):

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5. Subsequent event: On November 2, 2000, the Company entered into an Agreement and Plan of Merger (the "Merger Agreement") with OAO Lukoil, a Russian open joint stock company ("Lukoil"), Lukoil International GmbH, an Austrian corporation, Lukoil Americas Corporation, a Delaware corporation, and Mikecon Corp., a Delaware corporation, which provided for the acquisition of the Company by Mikecon Corp. at a price of $5.00 per common share in cash. The closing of the tender offer occurred on December 8, 2000 and approximately 72% of the outstanding shares of common stock were tendered. As provided in the Merger Agreement, the Company intends to call a shareholders' meeting to be held in late January 2001, for the purpose of approving the merger of Mikecon Corp. with and into the Company, after which the Company will become a wholly owned subsidiary of Lukoil Americas Corporation. Those persons holding of record shares of common stock on December 27, 2000 will be entitled to vote at the meeting. -7- 10 Also on November 2, 2000, the Company entered into a consolidated, amended and restated master lease and related agreements (collectively, the "restated master lease") with Getty Realty Corp., which became effective on December 9, 2000. -8- 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations - Quarter ended October 31, 2000 compared with quarter ended October 31, 1999 Sales and operating revenues for the third fiscal quarter ended October 31, 2000 were $306.8 million as compared with $227.7 million for the same quarter last year. The 34.7% increase in sales and operating revenues was primarily due to a 36.7% increase in average selling prices (net of taxes) to $1.18 per gallon from $.87 per gallon, partially offset by a .6% decrease in sales volume to 250.0 million gallons from 251.6 million gallons. Gross profit before depreciation and amortization was $9.5 million for the three months ended October 31, 2000 as compared to $9.8 million for the three months ended October 31, 1999. The decrease was principally due to higher operating expenses of $2.3 million (primarily maintenance, credit card, trucking and rent expenses) and a higher LIFO inventory charge of $.8 million in the current quarter related to higher product costs, partially offset by an increase in retail product margins of approximately .9 cents per gallon which resulted in $2.0 million of higher gross profit, and $.9 million of higher rental income. Other income (expense) was $(.2) million for the three months ended October 31, 2000 as compared with $.1 million for the three months ended October 31, 1999. Included in other income (expense) for each of the three month periods ended October 31, 2000 and 1999 were $.2 million of net fees received from Getty Realty Corp. ("Realty") for administrative and technical services the Company has provided to Realty pursuant to the services agreement since the March 1997 spin-off. The quarter ended October 31, 2000 also included $.4 million of expenses related to the sale of the Company. Selling, general and administrative expenses were $5.7 million for the three months ended October 31, 2000, an increase of $.3 million or 4.7% as compared with the three months ended October 31, 1999. The increase was primarily due to higher salary and benefit costs. Depreciation and amortization was $4.2 million for the three month period ended October 31, 2000 as compared with $4.0 million for the three months ended October 31, 1999. The increase was due to higher depreciation as a result of capital expenditures and acquisitions. Our financial results are largely dependent on retail marketing margins and rental income from dealers. The petroleum marketing industry has been and continues to be volatile and highly competitive. Petroleum products are commodities whose prices depend on numerous factors beyond our control, and, accordingly, their prices may vary substantially over time. From time to time, competitive market conditions may limit our ability to pass on to our customers changes in the price we pay for products and, accordingly, our operating margins may vary. Because our operating margins may vary significantly from time to time while certain of our expenses do not, -9 - 12 our earnings may fluctuate substantially. As a result of the historic volatility of product margins and the fact that they are affected by numerous diverse factors, we cannot predict with any degree of accuracy future product margin levels. However, we believe that over time we have only been modestly affected by inflation since increased costs are passed along to customers to the extent permitted by competition. Results of Operations - Nine months ended October 31, 2000 compared with nine months ended October 31, 1999 Sales and operating revenues for the nine months ended October 31, 2000 were $902.9 million as compared with $581.7 million for the nine months ended October 31, 1999. The 55.2% increase in sales and operating revenues was primarily due to a 54.8% increase in average selling prices (net of taxes) to $1.14 per gallon from $.74 per gallon and a 1.7% increase in sales volume to 762.4 million gallons from 749.3 million gallons. Gross profit before depreciation and amortization was $21.9 million for the nine months ended October 31, 2000 as compared to $29.9 million for the nine months ended October 31, 1999. The decrease was principally due to higher operating expenses of $11.5 million (primarily maintenance, credit card, trucking, environmental and rent expenses) and a higher LIFO inventory charge of $6.7 million in the current period related to higher product costs. The decrease was partially offset by an increase in retail product margins of approximately .8 cents per gallon which contributed $5.1 million of additional gross profit, higher retail volumes which contributed $1.9 million of additional gross profit and $3.0 million of higher rental income. Other income was $.5 million for the nine months ended October 31, 2000 as compared with $.7 million for the nine months ended October 31, 1999. Included in other income for the nine months ended October 31, 2000 and 1999 were $.5 million and $.6 million, respectively, of net fees received from Realty for administrative and technical services the Company has provided to Realty pursuant to the services agreement since the March 1997 spin-off. The nine months ended October 31, 2000 also included $.4 million of expenses related to the sale of the Company. The nine months ended October 31, 1999 also included a charge of $.3 million related to the early termination of eight leases under a master lease agreement with Realty. Selling, general and administrative expenses were $17.7 million for the nine months ended October 31, 2000 as compared with $16.7 million for the nine months ended October 31, 1999, an increase of 6.1%. The increase was primarily due to higher salary and benefit costs, and a stock compensation charge of $.2 million resulting from changes in Getty's stock price during the current nine month period. Depreciation and amortization was $13.1 million for the nine month period ended October 31, 2000 as compared with $12.3 million for the nine months ended October 31, 1999. The increase was primarily due to higher depreciation as a result of capital expenditures and acquisitions. - 10 - 13 Liquidity and Capital Resources As of October 31, 2000, we had a working capital deficit of $13.9 million as compared with a deficit of $10.6 million as of January 31, 2000. The decrease in working capital was primarily due to $11.2 million of capital expenditures at existing locations and $.8 million of capital expended at newly leased locations, partially offset by working capital generated during the period from operations. We are able to operate our business with negative working capital, principally because most of our product sales are for cash, payment terms are received from vendors and there is a time interval in the payment of motor fuel taxes. Management believes that cash requirements for operations, including rental payments required under the master leases with Realty and capital expenditures, can be met by cash flows from operations, cash and equivalents and credit lines. We have uncommitted lines of credit with two banks in the aggregate amount of $35.0 million, which may be utilized for working capital borrowings and letters of credit. As of October 31, 2000, we utilized $3.1 million of the lines of credit in connection with outstanding letters of credit to support insurance programs. Borrowings under the lines of credit are unsecured and principally bear interest at the applicable bank's prime rate or, at our option, 1.1% above LIBOR. The lines of credit are subject to renewal at the discretion of the banks. As of October 31, 2000, we leased 1,079 retail outlets (1,000 from Realty) and 9 terminal facilities from Realty. Rent expense aggregated $44.7 million for the nine months ended October 31, 2000, including $42.1 million under the master leases with Realty. Our capital expenditures for the nine months ended October 31, 2000 were $11.2 million. Our capital expenditures include discretionary expenditures to improve the image of the retail outlets, to replace service station equipment and to improve the terminal facilities. In addition, during the nine months ended October 31, 2000, we spent $.8 million for improvements to properties which we commenced leasing during the past year. Special Factors Regarding Forward-Looking Statements Certain statements in this Quarterly Report on Form 10-Q may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When we use the words "believes", "expects", "plans", "estimates" and similar expressions, we intend to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance and achievements to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, but are not limited to: volatility of petroleum marketing margins; maturity of the petroleum marketing industry; the impact of economic growth, energy efficiency and technology; natural and political events that may affect the supply of petroleum products; competition; and the effects of regulation. -11- 14 As a result of these and other factors, we may experience material fluctuations in future operating results on a quarterly or annual basis, which could materially and adversely affect our business, financial condition, operating results and stock price. An investment in our common stock involves various risks, including those mentioned above and elsewhere in this report and those which are detailed from time to time in our other filings with the Securities and Exchange Commission. You should not place undue reliance on forward-looking statements, which reflect our view only as of the date hereof. We undertake no obligation to publicly release revisions to these forward-looking statements that reflect future events or circumstances or reflect the occurrence of unanticipated events. -12- 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: Designation of Exhibit in this Quarterly Report on Form 10-Q Description of Exhibit ------------------------ -------------------------- 27 Financial Data Schedule (b) Reports on Form 8-K: Registrant filed a Current Report on Form 8-K dated November 2, 2000 reporting under Item 2, Acquisitions or Dispositions of Assets, that the Company had entered into an Agreement and Plan of Merger with OAO LUKOIL and certain of its subsidiaries (collectively, "Lukoil"), pursuant to which Lukoil agreed to acquire all of the outstanding common stock of the Company at a price of $5.00 per share. On November 2, 2000, the Company also entered into a consolidated, amended and restated master lease and related agreements with Getty Realty Corp., which became effective upon completion of the tender offer on December 9, 2000. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. GETTY PETROLEUM MARKETING INC. ------------------------------ (Registrant) Dated: December 15, 2000 BY: /s/ Michael K. Hantman -------------------------------------- (Signature) MICHAEL K. HANTMAN Vice President and Corporate Controller (Principal Financial and Accounting Officer) Dated: December 15, 2000 BY: /s/ Vincent J. DeLaurentis -------------------------------------- (Signature) VINCENT J. DELAURENTIS President and Chief Operating Officer -13-

GETTY PETROLEUM MARKETING INC /MD/ 10-Q