UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999 Commission File Number 333-45093
HUNTWAY REFINING COMPANY
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4680045
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
25129 The Old Road, #322
Newhall, California 91381
(Address of Principal Executive Offices) (Zip Code)
Registrants Telephone Number Including Area Code: (661) 286-1582
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock New York Stock Exchange
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 considered, to the
best of registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to
this Form 10-K. [ ]
At March 20, 2000, the aggregate market value of the Common Stock held by
persons other than directors and officers of the registrant and beneficial
owners of 5% or more of the Common Stocks was approximately $6,662,000 based
upon the closing price on the New York Stock Exchange Composite tape. At
March 20, 2000, there were 15,004,771 shares outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Document Form 10-K Part
Specified portions of registrants Proxy
Statement to be filed for the annual meeting
of stockholders to be held on May 10, 2000. Part III
Huntway Refining Company
Index to Annual Report on Form 10-K
For the Year Ended December 31, 1999
Part I Page
Item 1 Business 3
Item 2 Properties 8
Item 3 Legal 9
Item 4 Submission of Matters to a Vote of Security Holders 9
Part II
Item 5 Market for Registrants Common Equity and Related 10
Stockholder Matters
Item 6 Selected Financial Data 11
Item 7 Managements Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 7A Quantitative and Qualitative Disclosures About 23
Market Risk
Item 8 Financial Statements and Supplementary Data 24
Item 9 Changes in and Disagreements with Accountants 40
on Accounting and Financial Disclosure
Part III
Item 10 Directors and Executive Officers of the Registrant 41
Item 11 Executive Compensation 41
Item 12 Security Ownership of Certain Beneficial Owners 41
and Management
Item 13 Certain Relationships and Related Transactions 41
Part IV
Item 14 Exhibits, Financial Statements, Financial Statement 42
Schedules, and Reports on Form 8-K
Signatures 46
PART I
Item 1. Business
Introduction
Huntway Refining Company, a Delaware corporation (the Company), owns and
operates two crude oil refineries located in California. The Company also
owns a facility in Arizona that is currently being held for future use as a
refined products terminal.
The Company was formed for the purpose of effecting the conversion of Huntway
Partners, L.P., a Delaware limited partnership (the Partnership), from a
publicly-traded limited partnership to a publicly-traded corporation (the
Conversion) on June 1, 1998 through the merger of the Partnership into the
Company. As a result of the merger, the Company succeeded to the Partnerships
assets, liabilities and operations.
The principal executive offices of the Company are located at 25129 The Old
Road, Suite 322, Newhall, California 91381 and the telephone number is (661)
286-1582.
General
The two refineries owned by the Company are located in Wilmington, California
near Los Angeles Harbor and in Benicia, California near San Francisco Bay.
The Arizona facility is located near Coolidge, Arizona, which is midway
between Phoenix and Tucson. The Wilmington, and Benicia refineries have
refining capacities of 6,000 barrels per day (bpd) and 12,500 bpd,
respectively (see Item 2. Properties).
The two California refineries produce liquid asphalt products and light-end
products from crude oil primarily obtained from onshore and offshore
California production sources. The liquid asphalt is sold to hot mix asphalt
producers, material supply companies, contractors and government agencies,
principally for use in road paving in California and to a lesser extent
Nevada, Arizona, Utah, Oregon and Mexico. The light-end products consist of
intermediate refinery feedstocks and are sold to other refiners for further
processing into gasoline, diesel fuel and jet fuel. The Arizona facility is
owned by a subsidiary of the Company, Sunbelt Refining Company, L.P. (Sunbelt)
and is currently being held for future use as a refined products terminal.
The refining business conducted by the Company (and, prior to the Conversion,
by the Partnership) and its subsidiary is referred to herein as Huntway.
Some competing refineries typically produce liquid asphalt as a residual by-
product from refining higher-cost, light crude oil into products such as
gasoline. In contrast, Huntways California refineries were designed
specifically to produce liquid asphalt from lower-cost, heavy crude oil
produced primarily in California.
Products and Markets
Market Area
Huntway markets liquid asphalt primarily in California and, to a lesser
extent, in Nevada, Arizona, Utah, Oregon, certain South Pacific islands and
Mexico. The market area served by the Wilmington refinery includes the
southern portion of California from Bakersfield to San Diego, into Baja
California in Mexico, and east into southern Nevada and Arizona (the Southern
Market). The market area covered by the Benicia refinery includes northern
California from Monterey and Modesto north to southern Oregon and east to
northern Nevada and Utah (the Northern Market).
Liquid Asphalt
Liquid asphalt is one of Huntways two principal products and accounted for
approximately 54%, 61% and 51% of its revenues in 1999, 1998 and 1997
respectively. The principal uses of liquid asphalt are in road paving and, to
a lesser extent, manufacturing roofing products. About 95% of Huntways liquid
asphalt sales by volume is used for pavement applications. The remaining 5%
is sold for use in producing roofing products, such as tarpaper, roofing
shingles and built-up roofing products, and as a component of fuel oil and
other specialty products.
Paving grade liquid asphalt, including grades set by standards developed by
the National Highway and Transportation Administrations Strategic Highway
Research Program (SHRP) or set by the American Association of State Highway
and Transportation Officials, is sold by Huntway to hot mix asphalt producers,
material supply companies, contractors and government agencies. These
customers, in turn, mix liquid asphalt with sand and gravel to produce hot mix
asphalt which is used for road paving. In addition to conventional paving
grade asphalt, Huntway also produces modified and cutback asphalt products.
Modified asphalt is a blend of recycled plastics, rubber and polymer materials
with liquid asphalt, which produces a more durable product that can withstand
greater changes in temperature. Cutback asphalt is a blend of liquid asphalt
and lighter petroleum products and is used primarily to repair asphalt road
surfaces. In addition, some of Huntways paving grade and modified asphalts
are sold as base stocks for emulsified asphalt products that are primarily
used for pavement maintenance.
Demand for liquid asphalt is generally lowest in the first quarter of the
year, somewhat higher in the second and fourth quarters and peaks in the third
quarter. Liquid asphalt sales in the Northern Market are somewhat more
seasonal than sales in the Southern Market due to the rain and cold weather
usually experienced in the Northern Market during the winter months, which
limits road paving activities.
Liquid asphalt customers primarily take delivery via trucks at the refineries.
Light-End Products
In addition to liquid asphalt, Huntways two California refineries produce
certain light-end products. These products, described below, constitute
approximately one-half of total production (as measured by barrels produced),
with liquid asphalt comprising the other half. Huntways light-end product
revenues are generally priced at a discount from the wholesale price of
finished gasoline and diesel fuel in California and accounted for
approximately 46%, 39% and 49% of revenues in 1999, 1998 and 1997
respectively. Light-end customers primarily take delivery of the product via
pipelines, rail cars or barges.
Gas Oil
Gas oil is used either as a blending stock to make marine diesel fuel or
bunker fuel or by other refiners as a feedstock for producing gasoline and
diesel fuel. It is generally priced at a discount to a combination of
wholesale gasoline and diesel fuel prices.
Kerosene Distillate and Naphtha
Kerosene distillate is primarily sold to customers to be used as a refinery
feedstock and is generally priced at a discount to wholesale diesel fuel
prices. Huntway also produces gasoline range naphtha, which is sold to other
refiners for further processing into finished gasoline products. It is
generally priced at a discount to wholesale gasoline prices.
Bunker Fuel Blend Stock
This product is blended with lower viscosity blend stock to make finished
marine fuels used by oceangoing ships and barges, and is sold primarily to
ship bunkering companies. Bunker fuel sales were insignificant in 1999, 1998
and 1997.
Major Customers
In 1999, Ultramar Diamond Shamrock accounted for 30% of revenues. Ultramar
Diamond Shamrock and Mobil Corporation accounted for 17% and 11% of revenues,
respectively, in 1998. In 1997, Ultramar Diamond Shamrock accounted for 25% of
revenues. Sales to these customers was for light-end products.
Factors Affecting Demand for Liquid Asphalt
General
Demand for liquid paving asphalt products is primarily affected by federal,
state and local highway spending, as well as the general state of the
California economy, which drives commercial construction. Another factor is
weather, as asphalt paving projects are usually shut down in cold, wet weather
conditions. All of these demand factors are beyond the control of the
Company. Government highway spending provides a source of demand which has
been relatively unaffected by normal business cycles but is dependent on
appropriations. During 1999, approximately 70% of liquid asphalt sales were
ultimately funded by the public sector as compared to approximately 75% in
1998.
The California economy continued to improve in 1999, fueled by growth in
foreign trade as well as growth in high technology, tourism and entertainment.
This growth in business activity resulted in increases in road construction
and repair activity in both the private and public sectors. Further expansion
is being forecast for California in 2000, as growth rates as measured by
growth in jobs, personal income, consumer spending and construction are
expected to exceed national averages. Growth in the California economy
generally bodes well for the Company, as increased business activity results
in increased construction activity, including increased new road construction
and increased repair efforts on existing roads in both the public and private
sectors. Private asphalt demand rebounded slightly in 1997 and continued to
improve through 1998 and 1999 due to the improvement in the California
economy. Historically, private sector demand has accounted for approximately
30% of Huntways liquid asphalt sales during periods of economic prosperity and
returned to that level in 1999. In 1997 and 1998 such sales accounted for
approximately 20% to 25% of Huntways liquid asphalt sales.
Government Funding
General
As Huntways refineries are located in California, the following discussion
focuses on government highway funds available in California.
Federal Funding
Federal funding of highway projects is accomplished through the Federal Aid
Highway Program. The Federal Aid Highway Program is a federally-assisted,
state-administered program that distributes federal funds to the states to
construct and improve urban and rural highway systems. The program is
administered by the Federal Highway Administration (FHWA), an agency of the
Department of Transportation. Nearly all federal highway funds are derived
from gasoline user taxes assessed at the pump.
In June 1998, the $217 billion federal highway bill, officially known as the
Transportation Equity Act for the 21st Century or TEA-21 was enacted. The bill
is estimated to increase transportation-related expenditures by $850 million a
year in California alone over a six fiscal year period beginning October 1,
1997. This will equate to a 51% increase over previous funding levels. For
fiscal 1998 and 1999 funding apportioned to California under this legislation
was $2.07 billion and $2.42 billion respectively. The average California
apportionment over the six year period ending in October 2003 is estimated to
be $2.50 billion per year or a total of $15,000 billion. Of this amount,
approximately $4.65 billion has been designated for Interstate Maintenance and
the National Highway System while another $4.56 billion has been designated
for the Surface Transportation and the Congestion Mitigation and Air Quality
Improvement programs, which concentrate on state and local roadways. However,
while Huntway believes it has benefited from and should benefit in the future
from such funding increases there can be no guarantee that it will in fact do
so in the future.
State and Local Funding
In addition to federal funding for highway projects, states individually fund
transportation improvements with the proceeds of a variety of gasoline and
other taxes. In California, the California Department of Transportation
(CALTRANS) administers state expenditures for highway projects. According to
the Department of Finance for the State of California funding available from
the State Highway Account is estimated to average $1.13 billion per year over
the next 10 years excluding the Seismic Retrofit Bond Fund. This compares to
an average of $0.36 billion over the previous ten years.
In November 1998, the California electorate passed Proposition 2. Proposition
2 protects the State Transportation Fund by requiring that any funds borrowed
from the California State Transportation Fund be repaid with interest within
one year except in the case of a fiscal emergency. In that case funds must be
repaid within three years with interest. Such emergencies have been
infrequent, occurring only twice in California since 1900.
Local governmental units (such as cities, counties and townships) provide
additional funding for road and highway projects through various taxes and
bond issues.
Crude Oil Supply
Huntways refineries require approximately 19,000 bpd of crude oil when
operating at their full capacities. According to the 1999 Refining Survey
published by the Oil & Gas Journal, total refinery crude oil processing
capacity in California is approximately 1.95 million-bpd and refinery capacity
for the Western United States, excluding Hawaii, is 2.57 million bpd.
Management believes that these refineries generally run at an average of 90%
of their capacity.
California refineries (including Huntways) are supplied primarily by onshore
and offshore California production and by crude oil transported from Alaska
with some imports from South America, Mexico, the Far East and Persian Gulf.
Current production of crude oil in California and Alaska totals approximately
1.9 million-bpd. However, production from existing fields in California and
Alaska has been gradually declining and competition for it has been
increasing.
Although Huntways refineries are located near substantial reserves of heavy,
high sulfur crude oil, which is well suited for liquid asphalt production due
to the higher percentage yield of liquid asphalt per barrel competition for
this crude oil from other refiners is increasing as production rates decline.
As a result of this competition Huntway may be required to pay increasingly
higher prices to meet its crude oil requirements.
Huntway coordinates its purchases of crude oil to meet the supply needs of its
refineries. Huntway meets most of its crude oil requirements under variable
price contracts with a variety of crude oil producers for terms ranging from
30 days to 10 years. In addition, from time to time, Huntway supplements its
contract purchases with purchases of crude oil on the spot market. Nearly all
of Huntways crude oil supply is delivered to its refineries by pipeline.
Competition
The markets for refined petroleum products are highly competitive and pricing
is a primary competitive factor. With respect to liquid asphalt, Huntways
management believes that Huntways reputation for consistently high product
quality, its ability to provide high levels of service and its long-standing
relationships with its major customers are important to its continued success.
Huntways five-state market area is served by numerous refineries, including
refineries operated by major integrated oil companies and by other independent
refiners. All of Huntways primary competitors are located in California.
Many have larger refining capacity and greater financial resources than does
Huntway. Huntways management believes that in 1999 Shell Oil Company
accounted for a majority of the volume of liquid asphalt sales in the Northern
Market and that Huntway accounted for 20% to 25% of liquid asphalt sales in
this market area. The remaining 10% to 20% estimated market share is
apportioned among several other competitors located outside of the Northern
California area. Huntways management believes that Paramount Petroleum Company
accounted for approximately 50% of the liquid asphalt sales in the Southern
Market, that Huntway accounted for approximately 15% of such sales and that
the remaining 30% to 35% estimated market share is apportioned among several
other competitors.
Employees
Huntway currently has 79 full-time and 11 part-time employees. None of
Huntways employees is represented by a union, and management believes that
labor relations are excellent.
Environmental Matters
Huntways refinery activities involve the transportation, storage, handling and
processing of crude oil and petroleum products which contain substances
regulated under various federal and state environmental laws and regulations.
Huntway is also subject to federal, state and local laws and regulations
relating to air emissions and disposal of wastewater and hazardous waste, as
well as other environmental laws and regulations, including those governing
the handling, treatment, release and cleanup of hazardous materials and
wastes.
Huntway has from time to time expended significant resources, both financial
and management, to comply with environmental regulations and permitting
requirements and anticipates that it will continue to be required to expend
increasing financial and management resources for this purpose in the future.
Stringent environmental regulations have been adopted which require most
refiners in Huntways market area to expend substantial sums of money in order
to comply. While these regulations principally impact refiners that produce
motor vehicle fuels, which Huntway does not produce, in 1998 the Company
expended approximately $2,500,000 on projects primarily relating to
environmental regulations, the largest of which was the completion in 1998 of
a waste water treatment facility at the Wilmington refinery. In each of 1998
and 1997, the Company spent less than $5,000 on environmentally-related
remediation expenditures. In 1999 remediation expenditures were approximately
$125,000 primarily for the cleanup of a small oil spill onto an unnamed creek
bed at the Benicia refinery. This incident involved the discharge of
approximately 250 gallons of crude oil, which did not reach marine waters, and
has been successfully remediated.
Item 2. Properties
Wilmington Refinery
The Wilmington refinery and its related facilities are located on a seven-acre
site under a lease expiring on December 31, 2003. This ground lease covers
three contiguous parcels: (a) land owned by and leased directly from Vulcan
Materials Company, on which Huntways tank farm is located; (b) land owned by
the Southern Pacific Railroad leased to Vulcan Materials Company for a term
ending June 1, 2031, on which the processing facility is located; and (c) two
strip parcels bordering the facility owned by Southern Pacific and leased to
Vulcan Materials Company under a lease cancelable upon 30 days notice, which
are used for access to the refinery. In addition, the ground lease grants
Huntway a non-exclusive license in Vulcan Materials Companys rights of access
to the properties under an agreement with Southern Pacific. The Company has
the right to (i) purchase from Vulcan Materials Company an undivided interest
in the land under the tank farm at fair market value and (ii) assume the two
Southern Pacific leases from Vulcan Materials Company. Wilmington has storage
capacity of 103,000 gross barrels of crude oil on site. Huntway also owns
refined product tankage for storage of liquid asphalt and other refined
products, which management believes is adequate for its needs.
Benicia Refinery
The Benicia refinery is located adjacent to the Carquinez Strait, near San
Francisco Bay. The refinery and related facilities are located on nineteen
acres of land owned by Huntway. Crude oil tankage at Benicia totals 214,000
gross barrels, while refined product tankage for storage of liquid asphalt and
light oils totals 408,000 gross barrels. To enhance Benicias ability to
receive crude oil by water and to ship finished products by ship and barge,
Huntway leases dock and loading facilities for a term expiring February 2031.
The dock facilities are connected to the refinery by two two-mile pipelines.
During 1999, the Company expanded the production and storage capacity of the
Benicia refinery at a cost of approximately $5,800,000. The project expanded
the refinerys production capacity to approximately 12,500 barrels per day and
increased product storage capacity by approximately 74,000 gross barrels. The
project also improved product quality due to increased fractionation while
reducing air emissions by more than 15%. New operating permits were also
obtained which allow production of a maximum of 18,000 barrels in any one day
and to an annual average of 10,000 barrels per day as opposed to the previous
production limit of 9,000 barrels in any one day.
In late 1999 ground was broken for the construction of a new 155,000 gross
barrel asphalt storage tank and related equipment. This project is expected
to cost approximately $3,000,000 and will be completed in the second quarter
of 2000.
Huntway has seen an increase in the demand for SHRP-grade performance-based
asphalt products in recent years by both the public and private sectors. This
increased demand for better performing, more durable paving, roofing and other
specialty products has caused Huntway to expand its production capabilities in
this area. As a result, in 1997, approximately $2,500,000 was invested to
expand the production capacity of the modified plant and to allow the Company
to utilize low-cost recycled modifiers. This facilitys larger production and
storage capacity has improved the economics of production and allows for the
production of a higher quality product for the Companys customers.
Arizona Facility
The Arizona facility is located on a thirty-seven acre parcel leased from the
City of Mesa under a lease expiring on April 12, 2008 (with options to renew
for up to an additional twenty years until 2028). During 1999, certain pieces
of process equipment located at the facility were sold to a third party. As a
result, while the facility can no longer be operated as a refinery it has
295,000 barrels of storage capacity for petroleum products along with loading
racks, pumps and other equipment necessary for operation as a petroleum
products terminal. Refining operations at the Arizona facility were
terminated in 1993 due to adverse market conditions.
Item 3. Legal Proceedings
In 1992, Huntway entered into a civil consent judgement with the State of
Arizona to settle certain environmental compliance issues related to the
Arizona facility. The Company has complied with all of the applicable
conditions of the consent judgement and is working with the Arizona Attorney
Generals office to have the consent judgement terminated.
The Company is party to a number of additional lawsuits and other proceedings
arising in the ordinary course of its business. While the results of such
lawsuits and proceedings cannot be predicted with certainty, management does
not expect that the ultimate liability, if any, will have a material adverse
effect on the consolidated financial condition, results of operations or cash
flow of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrants Common Equity and Related Stockholder Matters
Market
As of March 20, 2000 there were approximately 200 holders of record and
approximately 1,600 other beneficial holders of the Companys shares. The
shares are traded on the New York Stock Exchange under the ticker symbol HWY.
The following table indicates the high, low and period end sale prices as
reported by the New York Stock Exchange for the periods indicated of the
shares of Huntway Refining Company on or after June 1, 1998 and of the limited
partner units of the Partnership prior to that date.
<TABLE>
<CAPTION>
Dividends
1999 High Low Close Paid
<S> <C> <C> <C> <C>
1st Quarter 2.1250 1.5000 1.5000 --
2nd Quarter 1.8750 1.2500 1.5000 --
3rd Quarter 2.0000 1.3750 1.7500 --
4th Quarter 1.8750 0.9375 1.1875 --
</TABLE>
<TABLE>
<CAPTION>
Dividends
1998 High Low Close Paid
<S> <C> <C> <C> <C>
1st Quarter 2.7500 1.6250 1.8125 --
2nd Quarter 2.1875 1.4375 1.6250 --
3rd Quarter 1.9375 1.2500 1.3125 --
4th Quarter 1.8125 1.0000 1.6875 --
</TABLE>
Dividend Policy
The Companys board of directors currently believes that earnings will create
greater long-term value if reinvested in the Company to create growth. The
Company does not anticipate paying cash dividends on its common stock for the
foreseeable future. In addition, the Companys agreements with its principal
lenders prohibit cash dividends until the payment in full of all obligations
to its senior lenders.
Item 6. Selected Financial Data
(In thousands except diluted per share or unit data and per barrel data)
The following historical selected financial data as of and for each of the
years ended December 31, 1997, 1998 and 1999, are derived from the audited
consolidated financial statements of Huntway Refining Company and its
predecessor, Huntway Partners, L.P., which have been audited by Deloitte &
Touche LLP, independent auditors, which are included elsewhere herein. The
selected historical financial data as of and for each of the years ended
December 31, 1995 and 1996 are derived from our audited consolidated financial
statements, which are not included herein. All of the selected information
should be read in conjunction with the audited consolidated financial
statements and related notes thereto and with Managements Discussion and
Analysis of Financial Condition and Results of Operations.
<TABLE>
Huntway Refining Company
Year Ended December 31,
<CAPTION>
1999 1998 1997 1996 1995
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Revenues $111,170 $79,050 $96,715 $99,021 $83,069
Costs and Expenses
Material &
Processing Costs 93,627 61,719 85,201 87,683 76,643
Selling and
Administrative
Expenses 5,634 6,143 4,476 4,297 3,819
Interest Expense, net 3,420 3,368 3,492 4,916 5,177
Plant Closure and
Write Down -- -- -- -- 9,492 (c)
Depreciation and
Amortization 2,715 2,605 2,414 2,219 2,399
Income (Loss)
Before Income
Taxes and
Extraordinary Items 5,774 5,215 1,132 (94) (14,461)
Provision for
Income Taxes (f) 2,080 2,071 - - -
Income (Loss)
Before
Extraordinary Items 3,694 3,144 1,132 (94) (14,461)
Extraordinary Gain
on Refinancing -- -- -- 58,668 --
Related Costs
of Refinancing -- -- -- (2,180) --
Net Income (Loss) $3,694 $3,144 $1,132 $56,394 $(14,461)
Income (Loss)
Per Diluted
Share or Unit
From Operations(a) $0.16 $0.15 $0.04 $(0.01) $(1.24)
Income Per Diluted
Share or Unit from
Extraordinary Gain
and Related Costs -- -- -- 4.37 --
Net Income (Loss)
Per Diluted Share
or Unit (a) $0.16 $0.15 $0.04 $4.36 $(1.24)
Barrels Sold 5,102 4,565 4,547 4,566 4,400
Revenues Per Barrel $21.79 $17.32 $21.27 $21.69 $18.88
BALANCE SHEET DATA
Working Capital (b) $11,293 $11,939 (d) $8,375 $5,798 $(91,796)
Total Assets (b) 90,996 81,644 80,243 75,891 74,393
Long-term Obligations 34,905 36,110 (d) 36,668 28,174 350
Total Capital
(Deficiency) (e) 41,649 37,590 (d) 33,779 39,041 (30,514)
</TABLE>
a)11,673 Limited Partner Equivalent Units were outstanding in 1995, an average
of 12,871 Limited Partner Equivalent Units were outstanding in 1996 and an
average of 23,787 Limited Partner Equivalent Units were outstanding in
1997. Average outstanding common shares in 1999 and 1998 were 14,971 and
14,806, respectively.
b) After the cumulative LIFO reserve of $1,170, $2,192, $1,028, $0 and $2,093
at December 31, 1995, 1996, 1997, 1998 and 1999, respectively.
c) Write down of Sunbelt refinery assets to reflect expected operation as a
crude or product terminal in the future rather than as a petroleum
refinery.
d) Reflects impact of 1996 Restructuring decreasing debt and accrued interest
by $71,748 as measured at November 30, 1996 (see Managements Discussion and
Analysis).
e) No distributions have been paid since 1990.
f) Prior to June 1, 1998 Huntway operated as a partnership and taxable income
or loss was passed through to its partners. Accordingly, no provision for
income taxes was made. Had the operations of Huntway been carried on under
corporate form as of the beginning of each of the years presented, net
income before extraordinary items would have been $(14,461), $(94), $679
and $3,129 in 1995, 1996, 1997 and 1998, respectively.
Item 7. Managements Discussion and Analysis of Financial Condition and
Results of Operations
Throughout the following discussion, the business operated by Huntway Refining
Company is referred to as Huntway and all per share data is diluted per share
data. On June 1, 1998, Huntway merged the partnership, Huntway Partners L.P.,
into a newly formed corporation, Huntway Refining Company, effectively
converting the business to corporate status.
The following should be read in conjunction with the foregoing Selected
Financial Data and the historical financial statements and notes included
elsewhere in this report.
This Form 10-K contains certain forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended, and we intend that such
forward-looking statements be subject to the safe harbors created thereby.
Such forward-looking statements involve risks and uncertainties and include,
but are not limited to, such statements regarding future events and our plans,
goals and objectives. Such statements are generally accompanied by words such
as intend, anticipate, believe, estimate, expect, looks, probably or similar
statements. Our actual results or events may differ materially from such
statements. Factors that could cause or contribute to such differences are
set forth under Outlook and Factors that Affect Future Results below as well
as those factors and qualifications mentioned elsewhere in this Form 10-K;
such factors include without limitation the price and availability of crude
oil, demand for liquid asphalt and light-end products and government and
private funding for road construction and repair. Although we believe that
the assumptions underlying our forward-looking statements are reasonable, any
of the assumptions could prove inaccurate and, therefore, there can be no
assurance that the results contemplated in such forward-looking statements
will be realized. The inclusion of such forward-looking information should
not be regarded as a representation by us or any other person that the future
events, plans or expectations contemplated by us will be achieved.
RESULTS OF OPERATIONS
Huntway is principally engaged in the processing and sale of liquid asphalt
products, as well as the production of other refined petroleum products such
as gas oil, naphtha, kerosene distillate and bunker fuel.
Huntways ability to generate income depends principally upon the margins
between the prices for its refined petroleum products and the cost of crude
oil, as well as upon demand for liquid asphalt, which affects both price and
sales volume.
Historically, refined petroleum product prices (including prices for liquid
asphalt, although to a lesser degree than for Huntways other refined petroleum
products) generally fluctuate with crude oil price levels. There has not been
a relationship between total revenues and income due to the volatile commodity
character of crude oil prices. As a result, management believes that
increases or decreases in revenues is not a meaningful basis for comparing
historical results of operations.
1999 COMPARED TO 1998
In 1999, Huntway reported net income of $3,694,000 ($.16 per diluted share)
versus pro forma net income of $3,129,000 ($.14 per diluted share) in 1998
after an additional pro forma provision for income taxes. Recorded net income
in 1998 was $3,144,000 ($.15 per diluted share). Earnings before interest,
depreciation and amortization and income taxes increased 6% to $11,909,000 in
1999 versus $11,188,000 in 1998. Pre-tax income increased in 1999 to
$5,774,000 from $5,215,000 in 1998 primarily due to lower incentive plan
accruals. The overall provision for income taxes was flat between periods
despite the increased level of pre-tax income in 1999 as a result of tax
credits associated with increased capital expenditures.
The following table sets forth the effects of changes in price and volume on
sales and materials (primarily crude oil) and processing costs for the year
ended December 31, 1999 as compared to the year ended December 31, 1998:
<TABLE>
<CAPTION>
Material & Net Barrels
Sales Processing Margin Sold
<S> <C> <C> <C> <C>
Year ended
December 31,
1998 $79,050,000 $61,719,000 $17,331,000 4,565,000
Effect of
changes in
price 22,821,000 24,648,000 (1,827,000)
Effect of
changes in volume 9 ,299,000 7,260,000 2,039,000 537,000
Year ended
December 31,
1999 $111,170,000 $93,627,000 $17,543,000 5,102,000
</TABLE>
Revenues increased to $111,170,000 in 1999 from $79,050,000 in 1998 while
total barrels sold increased 12% to 5,102,000 barrels in 1999 from 4,565,000
barrels in 1998. The increase in revenues between periods of $32,120,000 or
41% was primarily caused by higher average product prices, which moved upwards
with sharply higher crude oil costs. Average per barrel product selling
prices increased from $17.32 in 1998 to $21.79 in 1999, an increase of $4.47
or 26%. Sales volume increased by 537,000 barrels or 12% between periods and
was also a significant contributor to the revenue increase. Average per
barrel product prices did not increase to the same degree as the increase in
average per barrel crude oil prices primarily because asphalt selling prices
tend to lag crude price movements. The increase in sales volume can be
attributed to increased demand supplied by additional production from our
Benicia refinery due to the modernization project as well as purchased
asphalt.
Asphalt pricing tends to be less volatile than both crude oil or gasoline and
diesel prices, which are more readily transported and reflect the impact of a
large and active commodity market. As a result, asphalt pricing and margins
tend to lag behind crude oil price changes either up or down. Accordingly,
despite stronger asphalt demand due to improved public and private
construction activity in California in 1999 as well as increased sales of
higher margin specialty asphalt products, our average asphalt selling prices
increased only 10% between years despite the 56% increase in our average per
barrel crude oil costs before the impact of hedging activities.
In contrast, light product prices increased by 49% between periods, reflecting
their common commodity nature with crude oil. This increase, however, also
did not exceed the percentage increase of crude oil due to excess refining
capacity relative to the demand for fuels and heating oil, which resulted in
high diesel and gasoline inventories in Huntways market areas through much of
1999 and especially in the third and fourth quarters which experienced the
bulk of the crude oil price increase for the year. None-the-less, light
product margins increased in the period as the increase in light product
prices of $7.00 per barrel exceeded the increase in average per barrel crude
oil costs.
Huntways average per barrel crude oil costs increased 40% in 1999 and would
have increased 56% absent the impact of hedging activities. Huntways higher
per barrel crude oil costs reflect higher average California crude oil posted
prices in 1999 versus 1998 partially offset by Huntways mix of crude oil and
its crude hedging activities. California average crude oil postings increased
between years as a result of higher world crude oil prices. Management
believes these prices increased in response to increased world demand for
crude oil due to improving national economies (particularly in Asia) and a
decrease in supply due to deliberately lower production by certain oil
producing nations. As a result, in contrast to 1998, world crude oil
inventories decreased in 1999 and the perception that the demand for crude oil
will continue to exceed supply in the near future caused world oil prices to
soar in 1999 (the price of West Texas Intermediate WTI increased by
approximately 115% during 1999) with continuing sharp increases through mid-
March 2000.
Processing costs generally include production wages and benefits, utility
costs, repairs and maintenance, insurance, property taxes and environmental
compliance costs as well as depreciation and amortization. Such costs
increased between 1999 and 1998 on an aggregate basis by 24% and on a per
barrel basis by 15% primarily due to higher planned repair and maintenance
costs associated with tank refurbishment and inspection. In addition, the
increase also reflects higher labor and benefits expense due to normal cost of
living increases and higher head count. Higher heating costs due to increased
natural gas prices also contributed to the increase.
In summary, net margins increased nominally by $212,000 to $17,543,000 in 1999
from $17,331,000 in 1998. This was entirely due to the 12% increase in volume
as net margin on a per barrel basis fell 9% from $3.80 to $3.44 between
periods.
Selling, general and administrative expenses declined $509,000 or 8% between
periods due to reduced incentive plan accruals partially offset by higher
costs for salaries and wages, investor relations, professional services and
promotional costs, including trade organizations. The reduction in incentive
plan accruals reflects changes made to the accrual formulas to take into
account the expected improvement in results from the expansion and
modernization of the Benicia refinery. Salaries and wages increased as a
result of normal increases while the increase in investor relations and
professional fees reflects operation of Huntway as a corporation rather than a
partnership.
Net interest expense was flat between years, increasing by a nominal $52,000.
Depreciation and amortization increased by $110,000 between periods due to
increased levels of capital expenditures, primarily associated with the
expansion and modernization of the Benicia refinery.
1998 COMPARED TO 1997
In 1998, Huntway reported pro forma net income of $3,129,000 ($.14 per diluted
share) versus pro forma net income of $679,000 ($.02 per diluted share) in
1997 after additional pro forma provisions for income taxes of $15,000 and
$453,000, respectively. Recorded net income in 1998 of $3,144,000 was net of
a $2,071,000 income tax provision as Huntway converted to corporate form
effective June 1, 1998. No income tax provision was recorded in 1997 because
Huntway was operating as a partnership and accordingly, recorded net income
was $1,132,000 ($.04 per diluted share). Pre-tax income increased to
$5,215,000 in 1998 from $1,132,000 in 1997. This 360 percent improvement in
pre-tax income of $4,083,000 between years was primarily caused by increased
asphalt gross profit as a result of lower crude oil prices and increased
demand.
The following table sets forth the effects of changes in price and volume on
sales and materials (mostly crude) and processing costs for the year ended
December 31, 1998 as compared to the year ended December 31, 1997:
<TABLE>
<CAPTION>
Materials & Net Barrels
Sales Processing Margin Sold
<S> <C> <C> <C> <C>
Year Ended
December 31,
1997 $96,715,000 $85,201,000 $11,514,000 4,547,000
Effect of
Changes in
Price (18,048,000) (23,819,000) 5,771,000
Effect of
Changes in
Volume 383,000 337,000 46,000 18,000
Year Ended
December 31,
1998 $79,050,000 $61,719,000 $17,331,000 4,565,000
</TABLE>
Revenues declined to $79,050,000 in 1998 from $96,715,000 in 1997 while total
barrels sold increased slightly to 4,565,000 barrels in 1998 from 4,547,000
barrels in 1997. The decline in revenues between periods of $17,665,000 or
18% was caused by lower average product prices, which moved down with lower
crude oil costs. Average per barrel product selling prices declined from
$21.27 in 1997 to $17.32 in 1998, a decline of $3.95 or 19%. Average per
barrel product prices did not decline to the same degree as the decline in
average per barrel crude oil prices due to fairly stable asphalt selling
prices between periods, partially offsetting the decline in light end selling
prices that declined commensurate with the fall in crude oil costs.
Average asphalt selling prices declined only slightly (5%) between years
despite the decline in average per barrel crude oil costs. This was caused by
stronger asphalt demand due to improved public and private construction
activity in California in 1998 as well as increased sales of higher margin
specialty asphalt products. The combination of fairly stable asphalt pricing
and significantly lower crude oil costs caused asphalt per barrel margins and
total asphalt gross profit to increase between years.
Light end margins, on the other hand, continued to decline in 1998 versus 1997
as they had in 1997 versus 1996. The lack of any major refinery problems in
1998 and the impact of less expensive crude oil caused an oversupply of
finished gasoline and diesel products in California. Relatively inexpensive
crude oil costs caused refiners to run incremental barrels despite lower per
barrel refining margins. The resultant oversupply of these finished fuels
reduced prices for Huntways unfinished light end products as these products
are priced off of finished gasoline and diesel prices.
Huntways average per barrel crude oil costs declined 34% in 1998. Huntways
lower per barrel crude oil costs reflect lower average California crude oil
posted prices in 1998 versus 1997 partially offset by Huntways mix of crude
oil and its crude hedging costs. California average crude oil postings
decreased between years as a result of lower world crude oil prices. These
costs declined in response to reduced world demand for crude oil due to lower
Asian demand as a result of economic problems in that area of the world and
overproduction (relative to demand) by oil producing nations. As a result,
world oil inventories increased in 1998. This fact and the perception that
the supply of crude oil would continue to exceed demand in the near future
caused world oil prices to collapse in 1998.
Processing costs generally include production wages and benefits, utility
costs, repairs and maintenance, insurance, property taxes and environmental
compliance costs as well as depreciation and amortization. Such costs
increased on an aggregate and on a per barrel basis in 1998. This increase
reflects higher labor and benefits and higher heating costs due to increased
natural gas prices as well as increased repair and maintenance expenditures.
Other increases were due to higher environmental compliance costs.
Net margin increased 51% in 1998 due to the decline in crude oil costs
exceeding the decline in average product prices. This favorable impact on
margins reflects improved asphalt margins more than offsetting lower light end
margins. On a per barrel basis, net margin was $3.80 in 1998 versus $2.53 in
1997.
Selling, general and administrative expenses increased 37% to $6,143,000 in
1998 from $4,476,000 in 1997. The $1,667,000 increase was primarily due to
higher incentive plan accruals, higher wage and salary costs, and higher
professional fee expenses. Professional fee expenses increased due to costs
incurred in converting to corporate form effective June 1, 1998. Incentive
plan accruals increased due to increased levels of profitability. Wage and
salary costs increased due to the addition of a new refinery manager at the
Benicia refinery and normal wage increases.
Net interest expense declined between years by $124,000 due to higher levels
of interest income. Depreciation and amortization increased $191,000 between
years due to the accounting for employee stock options issued in January 1998.
Effective with the conversion to corporate form on June 1, 1998, the
operations of Huntway became subject to corporate Federal and state taxes on
income and a provision for income taxes of $2,071,000 was provided for the
results of operations subsequent to that date. No such provision was made
prior to that date as the taxable income or loss of the Partnership was passed
on to its partners.
OUTLOOK AND FACTORS THAT AFFECT FUTURE RESULTS
A number of uncertainties exist that may affect Huntways future operations,
including availability and cost of crude oil, pricing of and demand for liquid
asphalt and light end products, disruptions in operations as a result of
extended periods of inclement weather or natural disaster and increased
competition from other refiners.
California refineries (including Huntways) are supplied primarily by onshore
and offshore California production and by crude oil transported from Alaska
with some imports from South America, Mexico, the Far East and Persian Gulf.
Current production of crude oil in California and Alaska totals approximately
1.9 million-bpd. However, production from existing fields in California and
Alaska has been gradually declining and competition for it has been
increasing.
Huntways refineries are located near substantial reserves of heavy, high
sulfur crude oil, which is better suited for liquid asphalt production than
for gasoline or diesel fuel due to the higher percentage yield of liquid
asphalt per barrel. However, as production rates for this and other crude
oils produced in California and Alaska declines competition for this crude oil
from other refiners is increasing. As a result of this competition Huntway
may be required to pay increasingly higher prices to meet its crude oil
requirements.
Crude oil supply and costs are also impacted by various political and economic
events such as under and over production by the major producing nations, war
or political uncertainty in the major oil producing regions and regional and
national economic recessions and recoveries. These events could cause crude
oil prices to rise to such an extent that Huntway may not have sufficient
letter of credit availability to purchase all the crude oil it needs to
sustain operations to capacity, especially during the summer season. If this
occurred, Huntway may be forced to prepay for crude oil or curtail refining
operations, either of which could adversely impact results of operations.
To partially mitigate the impact of fluctuations in crude oil prices, Huntway
has negotiated heavy San Joaquin Valley crude oil hedge arrangements.
Huntways net cost of crude oil increased in 1998 as a result of the hedge
arrangements (due to falling crude oil prices). The Companys net cost of
crude oil was reduced in 1999 and 1997 from what it otherwise would have been
as a result of these hedge arrangements. Such hedging acts to smooth out but
does not eliminate the ultimate impact of crude oil price swings.
The Companys primary product is liquid asphalt. Some of Huntways competitors
produce liquid asphalt as a by-product and are of greater size and have larger
financial resources than the Company. In addition, competition in the asphalt
market is intense and could increase. Accordingly, the Company has in the
past, and may in the future, have difficulty raising prices in the face of
increasing crude oil costs. To some of Huntways competitors, the margins they
receive on asphalt are not as important to their operations as asphalt margins
are to Huntway.
Another potential risk factor concerns the demand for the Companys light-end
products. These products, which include naphtha, kerosene distillate and gas
oil, are manufactured as part of the refining process in conjunction with
liquid asphalt. These light-end products are usually sold to larger refiners
as feed stocks for their operations and are priced at a discount to wholesale
finished gasoline and diesel prices. If demand for Huntways light-end
products were to decline it would create downward pressure on the Companys
light-end margins or potentially stop operations if light-end production could
not be sold. Increasing regulatory pressures of an environmental nature could
negatively impact the demand for finished fuels in California, which, in turn,
would reduce demand for Huntways light-end products. While historically the
Company has had little difficulty in moving its light-end production at
profitable margins, the potential exists that this demand could be reduced
through factors beyond the Companys control.
Both of Huntways California refineries are vulnerable to disruption in
operations and reduced operating results due to the possibility of additional
earthquakes in California. For example, the January 1994 Northridge
earthquake destroyed a major pipeline bringing crude oil into Southern
California and destroyed or severely damaged many bridges, overpasses and
freeways in Southern California. The work to repair this damage was
substantially completed by early 1998 but the road way repairs required
primarily concrete and steel and comparatively little liquid asphalt. Future
earthquakes could temporarily reduce crude supplies and asphalt demand if
substantial damage were sustained by concrete road structures and crude oil
pipelines.
Demand for liquid paving asphalt products is primarily affected by federal,
state and local highway spending, commercial construction and the level of
housing starts, all of which are beyond the control of the Company.
Government highway spending provides a source of demand which has been
relatively unaffected by normal business cycles but is dependent upon
appropriations. Historically, approximately 70% of Huntways liquid asphalt
sales have been made to purchasers whose business is directly tied to these
various governmental expenditures. Over the long-term, the demand for liquid
asphalt will also tend to be influenced by changes in population, the level of
commercial construction, and housing activity.
Federal funding of highway projects is accomplished through the Federal Aid
Highway Program. The Federal Aid Highway Program is a Federally assisted,
state administered program that distributes federal funds to the states to
construct and improve urban and rural highway systems. Substantially all
federal highway funds are derived from gasoline user taxes assessed at the
pump. In addition to federal funding for highway projects, states
individually fund transportation improvements with the proceeds of a variety
of gasoline and other taxes. In California, CALTRANS administers state
expenditures for highway projects.
In June 1998 the $217 billion federal highway bill, officially known as the
Transportation Equity Act for the 21st Century, or TEA-21 was enacted. The
bill is estimated to increase transportation related expenditures in
California by $850 million a year over a six year period beginning October 1,
1997 as compared to the comparable six year period that began October 1, 1991.
This equates to a 51% increase over previous funding levels. The average
California apportionment over the six year period ending in October 2003 is
estimated to be $2.50 billion per year or a total of $15,000 billion. Of
this amount, approximately $4.65 billion has been designated for Interstate
Maintenance and the National Highway System while another $4.56 billion has
been designated for the Surface Transportation and the Congestion Mitigation
and Air Quality Improvement programs, which concentrate on state and local
roadways.
Actual and estimated apportionments to California under TEA-21 as reported by
the Federal Highway Administration are as follows:
Fiscal 1998 Actual $2.07 billion
Fiscal 1999 Actual $2.42 billion
Fiscal 2000 Actual $2.66 billion
Fiscal 2001 Estimated $2.58 billion
Fiscal 2002 Estimated $2.63 billion
Fiscal 2003 Estimated $2.63 billion
This represents an average apportionment level of approximately $2.50 billion
per year as compared to an average of approximately $1.65 billion over the
fiscal 1992 through fiscal 1997 period.
The State of California provides additional funding for the construction and
maintenance of California roads and highways. According to the Department of
Finance for the State of California funding available from the State Highway
Account is estimated to average $1.13 billion per year over the next 10 years
excluding the Seismic Retrofit Bond Fund. This compares to an average of
$0.36 billion over the previous ten years.
In November 1998 the California electorate passed Proposition 2. Proposition
2 protects the State Transportation Fund by requiring that any funds borrowed
from the California State Transportation Fund be repaid with interest within
one year except in the case of a fiscal emergency. In that case funds must be
repaid within three years with interest. Such emergencies have been
infrequent, occurring only twice in the 20th century in California.
Increased asphalt demand in 1999 reflected the impact of both the 1998 Federal
highway bill and California Proposition 2 which, the Company believes, bodes
well for road construction and repair funding in California into the
foreseeable future.
Demographic studies suggest continued rapid growth in the population of
California. Recent studies suggest Californias population will increase to
approximately 50 million people by 2020 up from approximately 33 million
today. This population growth should translate into increased private and
public transportation expenditures including road construction and repair.
In recent years a substantial amount of public transportation dollars
(financed by CALTRANS) were diverted to complete earthquake-related bridge
retrofit work. By early 1998 the majority of the earthquake bridge retrofit
work was completed. This work was designed to strengthen many of the bridges
and overpasses in the state in advance of the next earthquake, the timing of
which is unknown. As expected, CALTRANS expenditures on road construction and
repair did increase in 1999 over 1998 and 1998 versus 1997.
CALTRANS is also increasingly specifying higher margin specialized asphalt
products in its projects as these products last longer and perform better than
conventional paving asphalts.
Even if sufficient funding is available at the state and federal level to
finance needed road construction and repair activities into the foreseeable
future, limiting factors that potentially could prevent these funds from being
fully spent include the availability of necessary equipment and personnel in
California to complete the work as well as extended period of inclement
weather.
The strength of the California economy also influences demand for Huntways
asphalt and light-end products. The California economy began to recover in
1995 and has experienced continued growth through 1999. This has stimulated
private demand for Huntways asphalt products. Private demand for asphalt,
however, currently constitutes approximately 30% of Huntways annual asphalt
demand (up from approximately 20% to 25% in 1998 and 1997). The improved
California economy caused private construction to increase in 1999. The
Company believes private demand for asphalt will continue to expand for the
next several years commensurate with the expected continued expansion of the
California economy. Long-term, Huntway remains optimistic about the outlook
for future growth in California, based on the level of existing expansion
already underway and forecasts by several prominent economic studies. This
expected growth in the California economy should support continued growth in
the demand for Huntways products. There can be no assurance, however, that
the California economy will continue to expand as it has since 1995 or as
forecasted by economic studies.
Generally, cold, wet weather is not conducive to asphalt road construction.
Accordingly, the Company almost always experiences a loss in the first quarter
of the year as a result of weak demand. Periods of unusually heavy rainfall
such as occurred in the last quarter of 1997 and first five months of 1998
associated with the El Nino weather phenomenon also depress asphalt demand and
negatively impact profitability. However, heavy rainfall does damage asphalt
roads, increasing the backlog of needed road repairs.
Barriers to entry in the asphalt market are limited. The sophistication level
of the required facilities is low, indicating that existing refineries could
enter the market if they chose to do so. The capital needed to undertake
asphalt manufacturing at an existing California refinery operation is small by
refinery standards. Permit issues for these existing refineries, while they
exist, are not of such a nature that they are likely to be a significant
deterrent to new entrants. If a major existing California refinery operation
decided to produce liquid asphalt in any meaningful volume, the supply/demand
relationship for asphalt in California could be severely disrupted with a
resultant decline in asphalt prices and margins. However, construction of new
asphalt refineries is unlikely due to the significant difficulty of obtaining
required permits. Newly constructed refineries would have high barriers to
entry due to environmental regulations and the limited size of the market.
The Company is subject to federal, state and local laws, regulations and
ordinances that govern activities or operations that might have adverse
environmental effects, and that impose liability for the costs of cleaning up,
and certain damages resulting from sites of past spills, disposals or other
releases of hazardous substances. Although management believes that the
Companys operations procedures and safety precautions are enforced, there can
be no assurance that environmental problems will not occur in the future.
In summary, asphalt demand by both the public and private sector has increased
over the past several years commensurate with increased public sourced funding
and with the improving business climate in California. Public demand for
asphalt funded primarily by CALTRANS increased in 1998 over 1997 as a result
of substantial completion by early 1998 of earthquake related bridge retrofit
work. Bridge retrofit projects utilize concrete and steel and use
comparatively little asphalt. In 1998, as this work was nearing completion,
more funds were available to be expended for road construction and repair.
Moreover, in June 1998, the $217 billion Federal Highway Bill was enacted.
California appropriations under this legislation over the next four years are
expected to average approximately $2.63 billion as compared to an average of
only $1.65 billion for the six years prior to 1998. Private demand for
asphalt has also increased commensurate with the expanding California economy.
This growth in private demand for asphalt is expected to continue as long as
the growth in the California economy continues. Accordingly, the Company
anticipates that it should be able to pass increases in crude oil costs along
to its customers in the form of higher prices within reasonable time periods.
Additionally, the Company estimates that approximately 15% of its asphalt
sales are tied to state highway department contracts that are subject to
escalators or deescalators relating to the cost of crude oil.
As a result of the factors described above, while the Company is generally
optimistic regarding its future business prospects, the outlook is uncertain
due to the nature of the business in which the Company operates. For example
crude oil costs represent a large percentage of the total annual cash costs of
the Company (ranging from 65% to 80% of costs depending on the cost of crude
oil). The Company remains optimistic regarding growth in the sale of higher
margin polymer based asphalt products. As with conventional asphalt products,
growth in the area of polymer sales is also dependent on funding availability
that can rise and fall with the economic climate. We expect the impact of the
1998 Federal highway bill and the passage of Proposition 2 in California in
1998 to result in sufficient public funding for road construction and repair
to keep asphalt demand strong. At the present time, private demand for
asphalt also looks strong as the California economy continues to expand. This
demand probably would decline however, with any downturn in the California
economic environment.
Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any computer programs
that have time-sensitive software may recognize a date using 00 as the year
1900 rather than the year 2000. This could have resulted in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Management had previously determined that the year 2000 issue would not pose
significant operational problems for either its computer systems (IT systems)
or its process controls (Non-IT systems) and experienced no disruption of its
business as a result of the rollover from 1999 to 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Companys cash requirements and liquidity position are affected by various
factors, including the selling prices for its refined products (liquid asphalt
and light-end products) and the price of crude oil. The selling prices for
asphalt products are influenced by the price of crude oil and by local market
supply and demand factors for asphalt, including public and private demand for
road construction and improvements. The selling prices for Huntways light end
products (naphtha, kerosene distillate and gas oil) are also strongly impacted
by the price of crude oil and by supply and demand factors for finished
gasoline and diesel products in California. Fluctuations in the cost of crude
oil are impacted by a myriad of market factors, both foreign and domestic.
The other primary factors that affect the Companys investment requirements and
liquidity position generally include the timing and funding of capital
expenditures either to improve operations and business growth or to comply
with environmental regulations, to provide for the funding of inventories and
accounts receivables during periods of increasing crude costs and to provide
for the funding of increasing inventory and accounts receivable during the
months prior to and during the initial start of the annual paving season
(generally December through June).
Cash Flows
Cash decreased modestly to $10,445,000 at December 31, 1999 from $10,910,000
at December 31, 1998. This decline was principally the result of funding
$7,077,000 of capital expenditures with internally generated cash flow. Cash
increased to $10,910,000 at December 31, 1998 from $9,406,000 at December 31,
1997. This $1,504,000 increase in cash can be primarily attributed to
improved operating results.
Following is a summary of the major sources and uses of cash during 1999, 1998
and 1997:
1999
Net cash provided by operating activities totaled $7,910,000 in 1999. Net
income of $3,694,000 plus depreciation and amortization of $2,715,000,
deferred income taxes of $1,843,000 and interest expense paid by the issuance
of notes of $278,000 provided a combined $8,530,000 in cash. Increases in
accounts payable relating to increased crude oil prices and a decrease in
inventories resulting from an extended paving season due to dry warm weather
through all of the fourth quarter in California provided an additional
$5,792,000 in cash. Accounts receivable increased and used $4,462,000 in cash
also as a result of the extended paving season as well as increased product
prices due to the increase in crude oil costs. Prepaid expenses increased and
used $851,000 in cash reflecting incurred turnaround costs. Accrued
liabilities fell, using $1,099,000 in cash, as a result of lower incentive
plan accruals and the utilization of tax credits associated with the increased
level of capital expenditures to offset current income taxes payable. The
reduction in incentive plan accruals reflects changes made to the accrual
formulas to take into account the expected improvement in results from the
expansion and modernization of the Benicia refinery.
Investing activities used $7,757,000 in cash in 1999. Property additions were
primarily comprised of the expansion and modernization of the Benicia
refinery, as well as other smaller improvements at both refineries.
Improvements to the Benicia refinery consisted of a 25% increase in process
capacity, the construction of 74,000 gross barrels of production and storage
tankage, improvements to the modified asphalt facility and other smaller
additions. Additions to other assets primarily consisted of loan costs
associated with both the new revolving credit facility from Bank of America
and the new senior debt facility. To a lesser extent, additions to computer
software also contributed to the increase in other assets. These expenditures
were offset by $331,000 in proceeds from the sale of certain pieces of process
equipment located at the Arizona facility.
Financing activities used $618,000 in cash in 1999 primarily due to net
repayment of long-term obligations of $741,000 offset by the proceeds from the
exercise of stock options.
1998
Net cash provided by operating activities totaled $5,741,000 in 1998. Net
income of $3,144,000 plus depreciation and amortization of $2,605,000,
deferred income taxes of $940,000 and interest expense paid by the issuance of
notes of $248,000 provided a combined $6,937,000 in cash. Increases in
accrued liabilities primarily relating to increased incentive plan accruals
and higher pension and profit sharing (401K) accruals provided $1,164,000 in
cash. Incentive plan accruals increased due to increased levels of
profitability. Cash was also generated from decreases in inventory of
$634,000. The decrease in inventory reflects the 34% decrease in the average
cost of crude oil between years. Accounts receivable decreased and provided
$83,000 in cash and reflected lower light end revenues due to depressed
finished fuel prices. Prepaid expenses decreased and provided $138,000 in
cash and reflected lower insurance and turnaround costs. Accounts payable
declined using $3,215,000 in cash and reflects lower crude oil costs.
Investing activities used $2,935,000 in cash in 1998. Property additions were
comprised of completion of the waste water treatment facility at the
Wilmington refinery as well as other smaller improvements at the Wilmington
refinery. Improvements at the Benicia refinery consisted of engineering and
other costs relating to the Benicia improvement project, storage tank
improvements, improvements to the modified asphalt facility and other smaller
additions. Additions to other assets primarily consisted of deposits,
additions to computer software and environmental manuals and plans.
Financing activities used $1,302,000 in cash in 1998 and related to reductions
of debt of $1,548,000. In addition, a net $246,000 in cash was generated from
the sale of 150,000 shares in June 1998 commensurate with conversion to
corporate form.
1997
Net cash provided by operating activities totaled $4,634,000 in 1997. Net
income of $1,132,000 plus depreciation and amortization of $2,414,000 and
interest expense paid by the issuance of notes of $894,000 provided a combined
$4,440,000 in cash. Decreases in accounts receivable generated $1,082,000 in
cash and were caused by the timing of light end sales between years.
Inventory increased using $700,000 in cash. This increase reflects higher
crude and finished goods inventory at Benicia due to the timing of light end
sales and lower than expected asphalt sales in December 1997 due to effects of
wet weather. Prepaid expenses decreased providing $41,000 in cash and
primarily reflects lower prepaid turnaround expenses as no major repair
projects were incurred in 1997. Accounts payable decreased using $183,000 in
cash primarily due to the effect of lower crude oil prices between years.
Accrued liabilities decreased using $46,000 in cash. This decline reflects
lower Sunbelt related accruals substantially offset by higher interest expense
accruals.
Investment activities used $2,815,000 in cash in 1997. Property additions
reflect construction of the wastewater treatment facility at the Wilmington
refinery, construction of a pipeline to a customer at the Wilmington refinery
and costs to relocate the railroad loading rack at the Wilmington refinery.
At Benicia costs were incurred to improve the asphalt storage and delivery
systems, to double-bottom certain storage tanks, to replace heat exchangers,
to purchase new heaters, to construct new pipelines and several other
projects. In addition, other assets increased $769,000 in 1997 and primarily
relate to costs associated with raising $21,750,000 in convertible debt.
Cash flows from financing activities in 1997 generated $2,300,000 in cash.
The October sale of convertible debt generated $2,500,000 in cash while
$200,000 in payments were made to the State of Arizona relating to the 1993
Sunbelt environmental compliance agreement.
Capital Resources
The Companys outstanding long-term debt was $36,453,000 at December 31, 1999.
Of this amount, $1,548,000 was due within one year and the remainder has an
average maturity of approximately 6.5 years. As of December 31, 1999 total
long-term debt amounted to 47% of total capitalization (shareholders equity
plus borrowings) and the Company believes that it has additional long-term
borrowing capacity.
Over the past three years the Company has generated average cash flows from
operations of $6,095,000 per year and the Company believes that such
internally generated liquidity, together with access to external resources
will be sufficient to satisfy existing commitments and plans and also to
provide some opportunity for additional growth.
The Company believes its current level of letter of credit facility is
sufficient to guarantee requirements for crude oil purchases,
collateralization of other obligations and for hedging activities at current
crude price levels. However, due to the volatility in the price of crude oil
there can be no assurance that these facilities will be adequate in the
future. If crude oil prices increased beyond the level of the Companys letter
of credit facilities, it would be required to prepay for crude oil or reduce
its crude oil purchases, either of which would adversely impact profitability.
Management continues to address all areas of the Companys operations in an
effort to improve profitability and shareholder value through growth in the
business, improvement in operations, as well as reduction in costs.
The following summarizes the significant changes in the Companys
capitalization both currently planned and over the past three years:
The Company presently anticipates that it will borrow an additional $2,500,000
from its existing senior lender in April 2000 to provide funding for a new
155,000 gross barrel storage tank at its Benicia refinery. This borrowing is
anticipated to be amortized over a three year period with a final principal
payment of $1,250,000. It is expected that additional storage capacity will
enable the Company to increase asphalt and light end production at its Benicia
refinery during periods of lower asphalt demand.
On October 29, 1999 the Company terminated its then existing $17,500,000
letter of credit facility and entered into a new $20,000,000 revolving credit
facility with Bank of America, N.A. (The Bank). The new facility is
collateralized by the Companys current assets and is subject to a borrowing
base limitation. Up to $10,000,000 of the facility may be borrowed for
working capital purposes but it will primarily be used for the issuance of
standby letters of credit for the purchase of crude oil. Borrowings under the
facility generally bear interest at The Banks reference rate, 8.5% at December
31, 1999, while letter of credit fees are 1.5% (versus 2.0% under the old
facility) on the face amount. There is also a .25% fee (versus .50% under the
old facility) on the unused portion of the facility. Up to $2,000,000 of this
facility may be used for the issuance of standby letters of credit supporting
crude oil hedging arrangements. The facility expires on June 1, 2001.
On January 21, 1999 the Company obtained a new seven year, $13,390,000 senior
debt facility. The facility bears interest at a fixed rate of 9.234%.
Proceeds from the borrowings were used to retire all $12,798,000 of Huntways
then existing senior debt, to pay transaction costs and to provide the Company
with a small amount of working capital. This borrowing amortizes over an 84
month period beginning in February 1999. Monthly payments on the debt
including principal and interest total approximately $218,000.
On June 1, 1998 the Company converted to corporate form. Accordingly,
earnings generated subsequent to that date are subject to state and federal
taxes.
In October 1997 the Company issued $21,750,000 in 9.25% Senior Subordinated
Secured Convertible Debt due 2007. The holders of the convertible debt can
convert into equity at $1.50 a share at any time. Huntway can force
conversion after October 15, 2000 assuming certain trading criteria are met.
Interest on the convertible debt notes is due on a semi-annual basis payable
$1,006,000 on June 30 and $1,006,000 on December 31. This transaction
significantly improved Huntways capital structure and provided the Company
with $2,500,000 in cash. In addition it reduced required principal payments
by $2,480,000 in 1998. On conversion of the convertible debt, total debt would
decline $21,750,000 while annual interest expense would decline by $2,012,000.
The average interest rate and weighted average debt outstanding during each of
the past three years was as follows:
<TABLE>
<CAPTION>
Average
Interest Weighted Average
Rate Debt Outstanding
<S> <C> <C>
1997 11.13% $29,597,375
1998 11.08% $37,465,950
1999 9.51% $37,117,004
</TABLE>
Scheduled fixed principal and cash interest payments in 2000 total $4,631,000.
Principal and cash interest payments totaled $4,428,000 in 1999 and $4,547,000
in 1998.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
As previously noted, the Companys profitability depends largely on the spread
between market prices for its refined products and its crude oil costs. A
substantial and prolonged decrease in this overall spread would have a
significant negative effect on the Companys earnings, financial position and
cash flows. Approximately half of Huntways production consists of light
products and half of asphalts. The prices of Huntways light products have
historically followed changes in crude oil prices over 12 to 18 month time
periods despite high short-term volatility. Management believes that
approximately 15% of Huntways asphalt unit sales volume will be covered by
contractual escalation and deescalation clauses with various state highway
agencies, which are based upon various crude oil cost indexes. In an effort
to mitigate the remaining risk, the Company enters into contracts intended to
partially hedge its exposure to crude oil price fluctuations. Historically,
such contracts are zero cost collars under which the Company receives or makes
a monthly payment if crude oil prices for the month rise above, or fall below,
the contracts ceiling or floor levels, respectively. The Company has entered
into such arrangements covering approximately 55% of its expected crude oil
requirements for all of 2000. These arrangements provide that the Company
will receive approximately $450,000 per month so long as average monthly
posted prices for California heavy San Joaquin Valley (SJV) crude oil exceeds
$15.50 and increasing by approximately $75,000 for every dollar by which the
average posted price exceeds $22.00. As of December 31, 1999 the posted price
for such crude oil was approximately $20.00 and the WTI reference price was
approximately $25.50. The Company begins to pay, on an accelerating basis when
the average posted price of SJV falls below $13.49. Should the posted price
of SJV crude oil fall to $9.50 the Companys monthly exposure (payments) under
these contracts would be approximately $600,000.
To a lesser extent, the Company is also exposed to risks associated with
interest rate fluctuations. However, because the Company invests only in
short-term investment grade securities and, as discussed in Note 2 to the
financial statements, has only fixed rate debt, such risks to its cash flows
are not material. However, the fixed rate debt does expose the Company to
losses in fair value when interest rates decline. This fair value loss
represents the opportunity cost of not obtaining financing in the lower rate
environment. A 10% increase or decrease in interest rates would lower or
raise the fair value of the Companys currently outstanding debt instruments by
approximately $2,000,000, respectively.
Item 8. Financial Statements and Supplementary Data
INDEPENDENT AUDITORS REPORT
Board of Directors and Shareholders,
We have audited the accompanying consolidated balance sheets of Huntway
Refining Company, successor to Huntway Partners, L.P. (a limited partnership),
and subsidiary as of December 31, 1999 and 1998, and the related consolidated
statements of operations, capital, and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these 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 our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Huntway Refining Company and
subsidiary as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Los Angeles, California
February 18, 2000
<TABLE>
HUNTWAY REFINING COMPANY
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, December 31,
1999 1998
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents $10,445,000 $10,910,000
Accounts Receivable - Net 8,444,000 3,983,000
Inventories 2,754,000 3,551,000
Prepaid Expenses 1,309,000 449,000
Total Current Assets 22,952,000 18,893,000
PROPERTY - Net 64,398,000 59,827,000
OTHER ASSETS - Net 2,059,000 1,280,000
GOODWILL - Net 1,587,000 1,644,000
TOTAL ASSETS $90,996,000 $81,644,000
CURRENT LIABILITIES:
Accounts Payable $8,528,000 $3,515,000
Current Portion of Long-Term Debt 1,548,000 757,000
Accrued Interest 608,000 593,000
Other Accrued Liabilities 975,000 2,089,000
Total Current Liabilities 11,659,000 6,954,000
Long-Term Debt 34,905,000 36,110,000
Deferred Income Taxes and
Other Long-Term Obligations 2,783,000 990,000
CAPITAL:
Preferred Stock (1,000,000 shares
authorized, none issued) - -
Common Stock (75,000,000 shares
authorized, 15,004,771 and 14,881,271
outstanding at December 31, 1999
and 1998 respectively) 150,000 149,000
Additional Paid-In Capital 34,698,000 34,334,000
Retained Earnings 6,801,000 3,107,000
Total Capital 41,649,000 37,590,000
TOTAL LIABILITIES AND CAPITAL $90,996,000 $81,644,000
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HUNTWAY REFINING COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
<S> <C> <C>
Sales $111,170,000 $79,050,000 $96,715,000
Costs & Expenses:
Material & Processing Costs 93,627,000 61,719,000 85,201,000
Selling and Administration Expenses 5,634,000 6,143,000 4,476,000
Interest Expense, net 3,420,000 3,368,000 3,492,000
Depreciation and Amortization 2,715,000 2,605,000 2,414,000
Total Costs and Expenses 105,396,000 73,835,000 95,583,000
Income before Income Taxes 5,774,000 5,215,000 1,132,000
Provision for Income Taxes 2,080,000 2,071,000 -
Net Income $3,694,000 $3,144,000 $1,132,000
Basic Earnings per Share or Unit: $0.25 $0.21 $0.05
Diluted Earnings per Share or Unit: $0.16 $0.15 $0.04
Pro Forma Financial Information:
(See Note 1 to Consolidated Financial Statements)
Income before Income Taxes $5,215,000 $1,132,000
Pro Forma Income Tax Provision 2,086,000 453,000
Pro Forma Net Income $3,129,000 $679,000
Pro Forma Basic Earnings per Share $0.21 $0.03
Pro Forma Diluted Earnings per Share $0.14 $0.02
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HUNTWAY REFINING COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999, 1998 and 1997
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income
$3,694,000 $3,144,000 $1,132,000
Adjustments to Reconcile Net Income
to Net Cash Provided by Operating Activities:
Interest Expense Paid by the Issuance of Notes 278,000 248,000
894,000
Depreciation and Amortization 2,715,000 2,605,000 2,414,000
Deferred Income Taxes 1,843,000 940,000 -
Changes in Operating Assets and Liabilities:
Decrease (Increase) in Accounts Receivable (4,462,000) 83,000 1,082,000
Decrease (Increase) in Inventories 779,000 634,000 (700,000)
Decrease (Increase) in Prepaid Expenses (851,000) 138,000 41,000
Increase (Decrease) in Accounts Payable 5,013,000 (3,215,000) (183,000)
Increase (Decrease) in Accrued Liabilities (1,099,000) 1,164,000 (46,000)
NET CASH PROVIDED BY OPERATING ACTIVITIES 7,910,000 5,741,000 4,634,000
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property (7,077,000) (2,554,000) (2,046,000)
Sale of Surplus Property 331,000 - -
Other Assets (1,011,000) (381,000) (769,000)
NET CASH USED BY INVESTING ACTIVITIES (7,757,000) (2,935,000) (2,815,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Sale of Common Stock 123,000 262,000 -
Issuance Costs and Expenses - (16,000) -
Proceeds from Issuance of Long-Term Debt 13,408,000 - 2,500,000
Repayment of Long-Term Obligations (14,149,000) (1,548,000) (200,000)
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (618,000) (1,302,000)
2,300,000
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (465,000) 1,504,000
4,119,000
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD 10,910,000 9,406,000 5,287,000
CASH AND CASH EQUIVALENTS - END OF PERIOD $10,445,000 $10,910,000 $9,406,000
SUPPLEMENTAL DISCLOSURES:
Interest Paid in Cash During the Period $3,127,000 $3,098,000 $2,343,000
Income Taxes Paid in Cash During the Period $503,000 $1,131,000
Issuance (Redemption) of Units Not Involving Cash $(6,596,000)
Issuance of Notes Not Involving Cash $278,000 $248,000 $19,250,000
Retirement of Notes Not Involving Cash $11,707,000
See accompanying notes to consolidated financial statements.
</TABLE>
<TABLE>
HUNTWAY REFINING COMPANY
CONSOLIDATED STATEMENT OF CAPITAL
<CAPTION>
Additional Treasury
Partners Common Paid In Retained Stock Total
Capital Stock Capital Earnings (at cost) Capital
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $39,041,000 $39,041,000
Earned Portion of
Option Awards 268,000 268,000
Net Income for the Year
Ended December 31, 1997 1,132,000 1,132,000
Capital Redemption (6,662,000) (6,662,000)
Balance at December 31, 1997 33,779,000 33,779,000
Earned Portion of Option Awards 212,000 $209,000 421,000
Net Income for the Year
Ended December 31, 1998 37,000 $3,107,000 3,144,000
Issuance of 14,731,271 shares
in exchange for partnership
interests (34,028,000) $147,000 33,881,000 -
Sale and Issuance of 150,000
shares 2,000 260,000 262,000
Issuance Costs (16,000) (16,000)
Sale and Issuance of 850,000
shares to Huntway Partners L.P.
and reclassified to Treasury
Stock upon Merger 8,000 1,000 $(9,000) -
Balance at December 31, 1998 - 157,000 34,335,000 3,107,000 (9,000)
37,590,000
Earned Portion of Option Awards 242,000 242,000
Net Income for the Year
Ended December 31, 1999 3,694,000 3,694,000
Sale and Issuance of 123,500
shares from Exercise of
Stock Options - 1,000 122,000 - - 123,000
Balance at December 31, 1999 $- $158,000 $34,699,000 $6,801,000 $(9,000)
$41,649,000
See accompanying notes to consolidated financial statements.
</TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. GENERAL AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Huntway Refining Company (the Company) was formed for the purpose of effecting
the conversion of Huntway Partners, L.P. (the Partnership) from a publicly
traded limited partnership to a publicly traded corporation on June 1, 1998
through the merger of the Partnership into the Company (the Conversion). The
Company issued 14,583,958 shares of $0.01 par value common stock to the
Partnerships limited partners in a one for one exchange for their limited
partner units. The Company also issued 147,313 shares of common stock to the
Partnerships general partners in exchange for their 1% general partner
interest. As a result of the merger, the Company succeeded to the
Partnerships assets, liabilities and operations. The transaction has been
accounted for as a reorganization of affiliated entities with the assets and
liabilities of the Company recorded at their historical cost basis.
General. Huntway Refining Company, a Delaware corporation, is engaged
primarily in the operation of the 6,000 barrel-per-day Wilmington refinery
located in Southern California and the 12,500 barrel-per-day Benicia refinery
located in Northern California, which produce and sell refined petroleum
products. The Company also owns a facility in Arizona that is being held for
use as a petroleum products terminal.
Principles of Consolidation. The consolidated financial statements include
the accounts of Huntway Refining Company and its subsidiary, Sunbelt Refining
Company, L.P. (Sunbelt). All significant inter-company items have been
eliminated in consolidation.
Cash and Cash Equivalents. Short-term, highly liquid investments with
original maturities of three months or less are classified as cash and cash
equivalents. These investments are stated at cost, which approximates fair
value.
Exchange Transactions. In connection with its refinery activities, the
Company engages from time to time in exchange transactions common to the
industry where crude oil or refined product is exchanged with other unrelated
entities for similar commodities. The accounting of such exchanges is based
on the recorded value of the commodities relinquished. At December 31, 1999
and 1998 Huntway Refining Company owed balances, which were included in
inventories, for commodities on exchange valued at approximately $133,000 and
$63,000, respectively.
Environmental Costs. The Company is subject to various environmental laws
and regulations of the United States and the states of California and Arizona.
As is the case with other companies engaged in similar industries, the Company
faces exposure from potential claims and lawsuits involving environmental
matters. These matters may involve alleged soil and water contamination and
air pollution. The Companys policy is to accrue environmental and clean-up
costs when it is probable that a liability has been incurred and the amount of
the liability is reasonably estimable. The Company expenses or capitalizes
costs associated with environmental clean-up and other repairs and maintenance
at its refineries in accordance with Emerging Issues Task Force Topic 90-8 and
exhibits thereto.
Turnaround Costs. Costs of turnarounds, which consist of complete shutdown
and inspection of a refinery unit for repair and maintenance, are deferred and
amortized over the estimated period of benefit, generally 18 months.
Accounts Receivable. Included in Accounts Receivable are allowances for
doubtful accounts of $143,000 and $301,000 at December 31, 1999 and 1998
respectively.
Income Taxes. Effective with the Conversion on June 1, 1998, the operations
of Huntway became subject to corporate federal and state taxes on income and
provision for such taxes has been made subsequent to that date. Deferred
income taxes result primarily from temporary differences between financial
reporting and tax reporting. Determination of deferred tax assets and
liabilities is based on the difference between the financial statement bases
and tax bases of assets and liabilities using enacted tax rates. Pro forma
information is presented to assist in comparing the results of operations as
if the Conversion had occurred at the beginning of each period for which
financial statements are presented. The pro forma provision for income taxes
has been calculated at an estimated combined federal and state rate of 40%.
No provision has been made for income taxes in the accompanying consolidated
financial statements for periods prior to June 1, 1998 when the operations of
the Company were carried on in partnership form as the taxable income or loss
of the Partnership was allocated to each partner in accordance with the
provisions of the partnership agreement. The partnership agreement generally
provided that income, loss and cash distributions be allocated 1 percent to
the general partners and 99 percent to the limited partners. In turn, each
partners tax status determined the appropriate income tax for that partners
allocated share of Partnerships taxable income or loss.
Inventories. Crude oil and finished product inventories are stated at cost
determined by the last-in, first-out method (LIFO), which is not in excess of
market. Management believes the LIFO method of accounting for inventories is
preferable because it more closely matches revenues and expenses and reflects
the prevailing practice in the petroleum industry.
LIFO decreased net income for 1999 by approximately $1,256,000 or
approximately $.04 per diluted share. The effect of LIFO in 1998 was to
increase net income by approximately $1,028,000 or approximately $.07 per
diluted share. For 1997 the effect was to increase net income and net income
per diluted limited partner unit by approximately $1,164,000 and approximately
$0.05, respectively.
<TABLE>
Inventories at December 31, 1999 and 1998 were as follows:
<CAPTION>
1999 1998
<S> <C> <C>
Finished Products $2,264,000 $2,180,000
Crude Oil and Supplies 2,583,000 1,371,000
4,847,000 3,551,000
Less LIFO Reserve (2,093,000) -
Total $2,754,000 $3,551,000
</TABLE>
Hedging Activities. From time to time, the Company enters into contracts
intended to partially hedge its exposure to crude oil price fluctuations.
Historically, such contracts are zero cost collars under which the Company
receives or makes a monthly payment if crude oil prices for the month rise
above, or fall below, the contracts ceiling or floor levels, respectively.
Because these contracts relate to the Companys basic raw material and cover
amounts significantly less than the Companys actual usage, cash flows
associated with such hedging transactions are considered an integral part of
the cost of acquiring crude oil and are included in the cost when purchased.
In 1999 and 1997, such hedges reduced the cost of crude oil acquired by
$2,044,000 or approximately 3% and $262,000 or less than 1%, respectively. In
contrast, during 1998, such hedges increased the cost of crude oil acquired by
$2,187,000 or approximately 5%. The Companys current arrangements are
effective for all of 2000 and cover approximately 55% of its expected crude
oil requirements over that period. These arrangements provide that the
Company will receive approximately $450,000 per month so long as average
monthly posted prices for California heavy San Joaquin Valley (SJV) crude oil
exceeds $15.50 and increasing by approximately $75,000 for every dollar by
which the average posted price exceeds $22.00. As of December 31, 1999 the
posted price for such crude oil was approximately $20.00 and the price for
West Texas Intermediate crude on the New York Mercantile Exchange was
approximately $25.50. The Company begins to pay, on an accelerating basis when
the average posted price of SJV falls below $13.49. Should the posted price
of SJV crude oil fall to $9.50 the Companys monthly exposure (payments) under
these contracts would be approximately $600,000. The Company does not enter
into such arrangements for trading or other speculative purposes.
Property and Depreciation. Property is stated at cost and depreciated using
the straight-line method over the estimated useful lives of the assets.
Facilities which are temporarily closed are retained in the property accounts
as idle facilities and are depreciated.
<TABLE>
Property at December 31, 1999 and 1998 consisted of:
<CAPTION>
Depreciable
Life 1999 1998
<S> <C> <C> <C>
Land $2,176,000 $2,176,000
Buildings 40 yrs. 887,000 887,000
Refineries and Related
Equipment 40 yrs. 79,964,000 73,429,000
Other 5 - 10 yrs. 1,291,000 1,257,000
Construction in Progress 1,217,000 708,000
Idle Facilities 896,000 1,227,000
86,431,000 79,684,000
Less Accumulated Depreciation
and Amortization (22,033,000) (19,857,000)
Property - Net $64,398,000 $59,827,000
</TABLE>
In August 1993, the Company suspended operations at its Sunbelt refinery
located in Coolidge, Arizona. The primary factors involved in this decision
were poor margins at the facility, limited working capital availability and,
to a lesser extent, the impact of an environmental lawsuit and investigation
filed by the State of Arizona, which was settled in 1993. Pursuant to an
evaluation of the operating potential of the facility, the plant was
subsequently written down to $1,227,000 in 1995. This write down considered,
among other things, the outlook for the asphalt market in Arizona, the
regulatory environment impacting both the plant operations as well as the
formulation requirements of diesel and jet fuel in the markets the plant would
serve and the ability of the Company to market those products. This
evaluation indicated that the likelihood of operation as a petroleum refinery
in the future was remote, but that the facility might be operated effectively
as a crude or products terminal and storage facility at some time in the
future. In 1999, certain pieces of process equipment located at the facility
were sold to a third party. As a result, while the facility may no longer be
operated as a refinery it does have 295,000 barrels of storage capacity for
petroleum products along with loading racks, pumps and other equipment
necessary for operation as a petroleum products terminal and continues to be
held for that purpose. The net proceeds from the sale of $331,000 were
charged against the carrying value of the facility and no gain or loss was
recognized.
Other Assets. Other assets are stated at cost and amortized over 2 to 10
years, where appropriate, using various methods over the useful lives of the
assets.
<TABLE>
Other assets at December 31, 1999 and 1998 consisted of:
<CAPTION>
1999 1998
<S> <C> <C>
Computer Software $ 893,000 $658,000
Loan Costs 1,366,000 604,000
Deposits 416,000 459,000
Other 739,000 682,000
3,414,000 2,403,000
Less Accumulated Amortization (1,355,000) (1,123,000)
Other Assets - Net $2,059,000 $1,280,000
</TABLE>
Goodwill. Goodwill is stated at cost and amortized using the straight-line
method over a period of 40 years and relates to the Companys California
refineries. Huntway Refining Companys refineries are designed to produce
asphalt and unfinished light-end products and, accordingly, are not prone to
obsolescence to the same degree as more sophisticated refineries. The Company
evaluates such goodwill and other long-lived assets for impairment whenever
changes in circumstances indicate that the carrying value may not be fully
recoverable from projected, undiscounted net cash flows of the two refineries.
The related accumulated amortization at December 31, 1999 and 1998 was
$700,000 and $643,000, respectively.
Interest Capitalization. The Company capitalizes interest incurred in
connection with the construction of refinery facilities. In 1999 $82,000 of
interest was capitalized in connection with the expansion and modernization of
the Benicia refinery. In 1998, $68,000 of interest was capitalized relating
to the waste water treatment facility at the Wilmington refinery. No interest
was capitalized in 1997.
Other Accrued Liabilities. Included in other accrued liabilities at December
31, 1999 and 1998 are accrued compensation-related costs of $1,142,000 and
$1,987,000, respectively.
Deferred Income Taxes and Other Long-Term Obligations. Included in deferred
income taxes and other long-term obligations at December 31, 1999 and 1998 are
deferred income tax liabilities of $2,783,000 and $940,000, respectively. At
December 31, 1998 an amount due to the state of Arizona under an agreement
reached in 1993 relating to the Sunbelt Refinery of $50,000 was also included.
Fair Value of Financial Instruments. The recorded values of accounts
receivable, accounts payable and accrued expenses approximate their fair
values based on their short-term nature. The recorded values of the
convertible debt, the senior secured notes and the junior subordinated
debentures approximate fair value as the contractual rates of interest
approximate market rates. The combined fair value of the 12% Senior Secured
Notes and the Industrial Development Bonds was approximately $12,000,000 at
December 31, 1998. The fair value of crude oil hedging instruments was
approximately $3,800,000 at December 31, 1999. The fair value of such
arrangements at December 31, 1998 was not determinable.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results would differ from these estimates.
Reclassifications and New Accounting Standards. Certain items in the prior
years financial statements have been reclassified to conform to the current
year presentation.
In June 1999 the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137 which delays the effective
date of SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities. SFAS 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. It is effective for years
beginning after June 15, 1999 and generally requires that an entity recognize
all derivatives as either assets or liabilities in the balance sheet measured
at fair value. The Company has not determined the impact this pronouncement
may have upon its financial statements.
NOTE 2. FINANCING ARRANGEMENTS
On October 29, 1999 the Company terminated its then existing $17,500,000
letter of credit facility and entered into a new $20,000,000 revolving credit
facility with Bank of America, N.A. (The Bank). The new facility is
collateralized by the Companys current assets and is subject to a borrowing
base limitation. Up to $10,000,000 of the facility may be borrowed for
working capital purposes but it will primarily be used for the issuance of
standby letters of credit securing the purchase of crude oil. Borrowings
under the facility generally bear interest at The Banks reference rate, 8.5%
at December 31, 1999, while letter of credit fees are 1.5% (versus 2.0% under
the old facility) on the face amount. There is also a .25% fee (versus .50%
under the old facility) on the unused portion of the facility. Up to
$2,000,000 may be used for the issuance of standby letters of credit
supporting crude oil hedging arrangements. The facility expires on June 1,
2001. At December 31, 1999 there were no outstanding borrowings under the
facility.
<TABLE>
The Companys long term debt as of December 31, 1999 and 1998 consisted of the
following:
<CAPTION>
1999 1998
<S> <C> <C>
9.25% Senior Subordinated Convertible Notes
Due October 15, 2007 $21,750,000 $21,750,000
9.234% Senior Secured Notes due
January 21, 2006 12,089,000 -
12% Senior Secured Notes due
December 31, 2005 4,599,000
12% Junior Subordinated Debentures due
December 31, 2005 2,597,000 2,318,000
Series 1988 Variable Rate Demand Industrial
Development Bonds (IDB) due September 1, 2005,
Interest on the IDB is Payable Monthly at Rates
Determined Weekly Based on Market Rates for
Comparable Interest (4.20% and 3.95% at
December 31, 1998 and 1997, Respectively) and
Collateralized by a Standby Letter of Credit
Issued by a Bank. - 8,100,000
Other 17,000 -
Total 36,453,000 36,767,000
Less Amount Classified as Current 1,548,000 657,000
Net Long-Term Debt $34,905,000 $36,110,000
All of the Companys assets serve as collateral under these arrangements.
</TABLE>
On January 21, 1999, the Company obtained a new seven-year, $13,390,000 senior
debt facility. The facility amortizes monthly and bears interest at a fixed
rate determined at the time of funding. Initial proceeds of $13,390,000 from
the facility, bearing interest at 9.234%, were used to retire all $12,798,000
of Huntways then existing senior debt, to pay transaction costs and to provide
the Company with a small amount of working capital.
The $21,750,000 in 9.25% Senior Subordinated Secured Convertible Notes (the
Convertible Debt) due on October 15, 2007, are convertible into equity at
$1.50 per share (subject to adjustment). The Company can force conversion
after October 15, 2000 providing that the price of Huntways stock exceeds
$2.50 for at least 10 consecutive trading days during which the cumulative
sales volume of the Companys common stock is at least 200,000 shares. On an as
converted basis, total shares would increase to 29,504,771. Interest on the
Convertible Debt is due on June 30 and December 31 and the principal balance
is due October 15, 2007 unless earlier converted.
The 12% junior subordinated debentures mature on December 31, 2005. No
principal payments or prepayments will be made on the junior subordinated
debentures until all senior secured notes are paid in full. Interest on the
junior subordinated debt at 12% is payable only in kind.
<TABLE>
Minimum required principal payments, as of December 31, 1999 (assuming the
Convertible Debt does not convert), under the Companys debt agreements are as
follows:
<S> <C>
2000 $ 1,548,000
2001 1,703,000
2002 1,869,000
2003 2,052,000
2004 2,250,000
thereafter 27,031,000
$36,453,000
</TABLE>
In the event some or all of the Convertible Debt is converted into common
shares, the amount of minimum required cash principal payments subsequent to
2004 would be reduced by the amount of the debt so converted.
NOTE 3. INCOME TAXES
Prior to the conversion to corporate form on June 1, 1998, the Partnership (a
publicly-traded partnership for federal and state income tax purposes) was not
subject to income taxes rather, the Partnerships income or loss was allocated
directly to its partners.
The Conversion was structured as a merger of affiliated entities; it did not
have an impact on the book basis of Huntways assets. However, it did result
in a step-up in the tax basis of those assets to an amount, which was
approximately equal to their book bases. Accordingly, no deferred tax asset
or liability was recorded as a result of the Conversion.
<TABLE>
The provision for income taxes consisted of the following:
Current:
<CAPTION>
1999 1998
<S> <C> <C>
Federal $222,000 $1,024,000
State 15,000 107,000
Total Current Tax Provision 237,000 1,131,000
Deferred:
Federal 1,657,000 724,000
State 186,000 216,000
Total Deferred Tax Provision 1,843,000 940,000
Total Provision for Income Taxes $2,080,000 $2,071,000
</TABLE>
The provision for state income taxes for 1999 has been reduced by the impact
of estimated investment credits of approximately $284,000.
A reconciliation of the significant differences between the federal statutory
income tax rate and the effective tax rate on pre-tax income is as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Provision at Federal statutory rate $1,963,000 $1,773,000
State income taxes net of federal tax benefit 133,000 213,000
Other (16,000) 85,000
Provision for Income Taxes $2,080,000 $2,071,000
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts for income tax purposes. The primary components of
the Companys deferred tax liability are as follows:
<TABLE>
<CAPTION>
1999 1998
<S> <C> <C>
Depreciation and Amortization $2,682,000 $1,032,000
Other 101,000 (92,000)
Deferred Tax Liability $2,783,000 $940,000
</TABLE>
NOTE 4. LEASE COMMITMENTS
The Company has entered into certain ground leases for its refinery
facilities. Such leases range from one to 32 years in duration. All such
leases are classified as operating leases.
The Company also leases a deep-water terminal facility in Benicia, California.
Under terms of the lease agreement, the Company pays minimum annual lease
payments of approximately $385,000 through the year 2031, subject to an
escalation clause. This lease is cancelable upon one years notice and is
accounted for as an operating lease.
<TABLE>
<CAPTION>
Future minimum annual rental payments required under operating leases, which
have non-cancelable lease terms of one year or more, as of December 31, 1999,
are:
<S> <C>
2000 $ 749,000
2001 321,000
2002 230,000
2003 230,000
2004 12,000
Thereafter 48,000
Total $ 1,590,000
</TABLE>
Rental expense for all operating leases (some of which have terms of less than
a year) was $1,164,000, $1,011,000 and $1,042,000 for the years ended
December 31, 1999, 1998 and 1997, respectively.
NOTE 5. BASIC AND DILUTED SHARES/UNITS OUTSTANDING, EARNINGS PER SHARE/UNIT
AND ALLOCATION OF INCOME AND LOSS
<TABLE>
<CAPTION>
The following table summarizes the changes in the equity interests over each
of the past three years:
Interest of Limited Total Outstanding Outstanding
General Partner Equivalent Common Preferred
Partners Units Units Stock Stock
<S> <C> <C> <C> <C> <C>
Balance at
January 1, 1997 255,987 25,342,654 25,598,641 - -
Redemption of Limited
Partner Units
On October 31, 1997 108,674) (10,758,696) (10,867,370) - -
Balance at
December 31, 1997 147,313 14,583,958 14,731,271 - -
Issuance of Common
Shares in Exchange
for Partnership
Interests (147,313) (14,583,958) (14,731,271) 14,731,271 -
Sale and Issuance
of Common Shares - - - 1,000,000 -
Treasury Stock Acquired
in Merger - - - (850,000) -
Balance at
December 31, 1998 - - - 14,881,271 -
Sale and Issuance of
Common Shares - - - 123,500 -
Balance at
December 31, 1999 - - - 15,004,771 -
</TABLE>
On October 31, 1997, pursuant to the issuance of the Convertible Debt, the
Company redeemed 10,758,696 units, reducing the total number of units
outstanding to 14,583,958 from 25,342,654.
On June 1, 1998, Huntway merged the partnership, Huntway Partners L.P., into a
newly formed corporation, Huntway Refining Company, effectively converting the
business to corporate status. Earnings for the years ended December 31, 1998
and 1999 are shown on a per share basis while earnings for the year ended
December 31, 1997 are shown on a per unit basis.
Earnings per share is calculated based upon the weighted average number of
common equivalent shares outstanding. Earnings per unit was calculated based
upon the weighted average number of limited partner equivalent units
outstanding. Limited partner equivalent units was calculated by adding to
actual limited common units outstanding a general partner interest
representing an overall 1% interest.
Generally, through May 31, 1998, Partnership income and loss was allocated 1%
to the general partners and 99% to the limited partners.
<TABLE>
<CAPTION>
The following table reconciles the calculation of basic and fully diluted
earnings per share or unit (000s omitted):
For the Year Ended For the Year Ended For the Year Ended
December 31, 1999 December 31, 1998 December 31, 1997
Income Shares Per-Share Income Shares Per-Share Income Units Per-Unit
(Numerator(Denominator)Amount (Numerator)(Denominator)Amount(Numerator)
(Denominator)Amount
<S> <C> <C> <C>
Net Income $3,694 $3,144 $1,132
Weighted Average
Shares or Units
Outstanding:
Unit Equivalent
of General
Partner Interest - - 238
Limited Partner Units - - 23,549
Common Shares 14,971 14,806 -
Basic Earnings
Per Share
or Unit 3,694 14,971 $0.25 3,144 14,806 $0.21 1,132 23,787 $0.05
Effect of
Dilutive
Securities:
Share or
Unit Options 1,885 1,888 2,695
Convertible
Debt 1,207 14,500 1,542 14,500 - -
Diluted
Earnings
Per Share
or Unit $4,901 31,356 $0.16 $4,686 31,194 $0.15 $1,132 26,482
$0.04
</TABLE>
For 1999 and 1998 options to purchase 1,451,000 and 1,273,000 shares
respectively at prices, which ranged from $1.50 to $1.625, were not included
in the computation of diluted earnings per share because their effect was
antidilutive.
During 1997, the Company issued convertible notes, which may be converted into
equity at $1.50 per unit. These notes were not included in the computation of
diluted earnings per unit in 1997 because the effect of their assumed exercise
was antidilutive. These notes mature on October 15, 2007.
NOTE 6. PROFIT SHARING AND TAX DEFERRED SAVINGS (401K) PLAN AND PENSION PLAN
The Company has a profit sharing and tax deferred savings (401K) plan and a
defined contribution pension plan. The Companys contributions to the plans
generally vest to participants on the basis of length of employment. The
Company matches up to 2% of participants base compensation to the tax deferred
savings (401K) plan. Profit sharing contributions by the Company may be made
from profits, not to exceed the Companys current net income. For 1999 and
1998, 4% was accrued for profit sharing contributions. No such contribution
was accrued in 1997. The Company also makes a minimum pension contribution
equal to 4% of participants base compensation, which is made each year
regardless of current profits or losses.
The amounts of the Companys contributions to the plans charged to income for
the years ended December 31, 1999, 1998 and 1997 were $568,000, $444,000, and
$286,000, respectively.
NOTE 7. STOCK OPTIONS
In 1998, the Company created the 1998 stock option plan (the Share Plan) to
compensate certain directors, officers and employees of the Corporation. The
Share Plan, provides for the issuance of up to 2,000,000 common shares and
does not have a fixed termination date.
In 1996, the Partnership created an option plan for its employees and
management entitled the 1996 Huntway Employee Incentive Option Plan (the Unit
Plan). Effective with the Conversion, Huntway Refining Company assumed the
obligation to issue securities under the Unit Plan and will issue one share
for each unit option exercised. As of the Conversion on June 1, 1998 there
were 3,957,750 unit options outstanding under the Unit Plan and no additional
options may be granted subsequent to that date.
The Compensation Committee of Huntways Board of Directors administers both
plans. No member of the Compensation Committee may be an employee of Huntway
Refining Company.
<TABLE>
<CAPTION>
The following summarizes stock option activity for the years ended December
31, 1997, 1998 and 1999:
Non- Weighted
Incentive Qualified Other Average
Stock Stock Stock Exercise
Options Options Options Price
<S> <C> <C> <C> <C>
Outstanding at January 1, 1997 - 2,815,850 1,146,059 $0.50
Granted - - - $-
Excercised - - - $-
Canceled - (21,850) - $0.50
Balance at December 31, 1997 - 2,794,000 1,146,059 $0.50
Granted - 1,368,500 - $1.52
Excercised - - - $-
Canceled - (3,000) - $0.92
Balance at December 31, 1998 - 4,159,500 1,146,059 $0.76
Granted 300,000 - $1.63
Excercised (123,500) - $0.50
Canceled - (62,500) - $1.13
Balance at December 31, 1999 - 4,273,500 1,146,059 $0.85
</TABLE>
<TABLE>
<CAPTION>
The following summarizes pricing and term information for options outstanding
at December 31, 1999:
Weighted
Number Average
Outstanding at Remaining Exercisable at
Exercise Prices December 31, 1999 Contractual Life December 31, 1999
<C> <C> <C> <C>
$0.500 3,790,559 7.0 years 3,790,559
$1.500 1,154,000 8.1 years -
$1.625 175,000 8.6 years 25,000
$1.625 300,000 9.8 years 150,000
5,419,559 8.4 years 3,965,559
</TABLE>
On January 7, 2000 options for 200,000 shares were issued under the Share Plan
at a price of $1.25, which was the closing price of the underlying shares on
that date. Of these options, 100,000 vested on March 1, 2000 and the remaining
100,000 vest no earlier than October 15, 2001 and no later than October 15,
2002.
On August 5, 1999 options for 300,000 shares were issued under the Share Plan
at a price of $1.625, which was the closing price of the underlying shares on
that date. 150,000 of these options vested upon grant and the remaining
150,000 vest on October 15, 2000.
On June 16, 1998 options for 200,000 shares were issued under the Share Plan
at a price of $1.625, which was the closing price of the underlying shares on
that date. The options vest 25% on each of the first four anniversary dates
of the grants and expire on June 16, 2008.
On January 27, 1998, 1,098,500 unit options were granted at $1.50. These
options vest on October 15, 2000 and expire on October 15, 2010. On the grant
date, the market price of the units was $2.125. On April 1, 1998 an
additional 70,000 unit options were granted at $1.50 that vest on October 15,
2000 and expire on October 15, 2010. On the grant date the market price of
the units was $1.8125. As a result of these transactions, $708,000 in deferred
compensation expense will be charged to income through 2000.
During 1997, no options were granted and options for 21,850 units were
canceled.
The Company accounts for its plans in accordance with Accounting Principles
Board Opinion No. 25 and recorded compensation expense related to stock and
unit option grants of $242,000, $421,000 and $268,000 in 1999, 1998 and 1997
respectively. Had compensation cost for the plans been determined in a manner
consistent with Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, pro forma net income and net income
per diluted share or unit would have been $3,324,000 and $0.14, respectively,
for 1999, $2,751,000 and $0.14 respectively, for 1998 and $572,000 and $0.02,
respectively, for 1997.
The fair value of stock options granted during 1999 was $300,000. The fair
value of stock options was estimated on the grant date using the Black Scholes
option pricing model with the following weighted average assumptions: Risk
free interest rate of 6.46%; expected life of five years; and expected
volatility of 66%.
The weighted average fair value of stock options granted during 1998 was
$1,787,000. The fair value of stock options was estimated on the grant date
using the Black Scholes option pricing model with the following weighted
average assumptions: Risk free interest rate of 5%; expected life of five
years; and expected volatility of 70%.
The weighted average fair value of unit options granted during 1996 was
$1,380,000. The fair value of stock options was estimated on the grant date
using the Black Scholes option pricing model with the following weighted
average assumptions: Risk free interest rate of 7%; expected life of five
years; and expected volatility of 73%.
NOTE 8. CONTINGENCIES
As the Companys business is the refining of crude oil into liquid asphalt and
other light-end products, it is subject to certain environmental laws and
regulations. Adherence to environmental laws and regulations creates the
opportunity for unknown costs and loss contingencies to arise in the future.
Unknown costs and loss contingencies could also occur due to the nature of the
Companys business. The Company is not aware of any costs or loss
contingencies relating to environmental laws and regulations that have not
been recorded in its financial statements. However, future environmental
costs cannot be reasonably estimated due to unknown factors. Although
environmental costs may have a significant impact on results of operations for
any single period, the Company believes that such costs will not have a
material adverse effect on the Companys financial position, results of
operations or cash flows.
The Company is party to a number of lawsuits and other proceedings arising in
the ordinary course of its business. While the results of such lawsuits and
proceedings cannot be predicted with certainty, management does not expect
that the ultimate liability, if any, will have a material adverse effect on
the financial position, results of operations, or cash flows of the Company.
NOTE 9. SEGMENT INFORMATION AND SIGNIFICANT CUSTOMERS
The Company operates in the single reportable business segment of petroleum
refining.
Export sales were less than 10% of total sales in all periods.
Sales of liquid asphalt were approximately $60,032,000, $48,221,000 and
$49,325,000 in 1999, 1998 and 1997 respectively. Sales of light-end products
were approximately $51,138,000, $30,829,000 and $47,390,000 in 1999, 1998 and
1997 respectively.
One unrelated customer, Ultramar Diamond Shamrock, accounted for approximately
30% and 25% of revenues in 1999 and 1997, respectively. Two unrelated
customers, Ultramar Diamond Shamrock and Mobil Oil, accounted for
approximately 17% and 11% of revenues in 1998, respectively.
NOTE 10. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
The following is a summary of selected quarterly financial data for the years
ended December 31, 1999 and 1998:
<CAPTION>
Quarter
First Second Third Fourth
<S> <C> <C> <C> <C>
Revenues:
1999 $12,599,000 $22,655,000 $41,527,000 $34,389,000
1998 $12,553,000 $20,277,000 $25,592,000 $20,628,000
Operating Income:
1999 $ 891,000 $ 1,971,000 $ 4,387,000 $ 1,945,000
1998 $ 166,000 $ 2,209,000 $ 3,805,000 $ 2,403,000
Net Income:
1999 $ 21,000 666,000 2,070,000 $ 937,000
1998 $ (666,000) 1,084,000 1,764,000 $ 962,000
Basic Income per Share:
1999 $ - $0.04 $0.14 $0.06
1998 $ (0.05) $ 0.07 $ 0.12 $ 0.06
Diluted Income pe Share:
1999 $ - $ 0.03 $ 0.08 $ 0.04
1998 $ (0.05) $ 0.05 $ 0.07 $ 0.04
</TABLE>
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Information required to be furnished in this part of the Form 10-K has been
omitted because the Registrant will file with the Securities and Exchange
Commission a definitive proxy statement pursuant to Regulation 14A under the
Securities Exchange Act of 1934 which involves the election of directors not
later than April 29, 2000.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the headings Election of Directors, Executive
Officers and Section 16(a) Beneficial Ownership Reporting Compliance in the
Registrants Proxy Statement for the annual meeting of stockholders to be held
on May 10, 2000 is incorporated herein by reference.
Item 11. Executive Compensation
The information set forth under the headings Compensation Committee Interlocks
and Insider Participation, Compensation, Compensation Committee Report on
Executive Compensation and Performance Graph in the Registrants Proxy
Statement for the annual meeting of stockholders to be held on May 10, 2000 is
incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the heading Security Ownership of Certain
Beneficial Owners and Management in the Registrants Proxy Statement for the
annual meeting of stockholders to be held on May 10, 2000 is incorporated
herein by reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the heading Certain Transactions in the
Registrants Proxy Statement for the annual meeting of stockholders to be held
on May 10, 2000 is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statements, Financial Statement Schedules, and
Reports on Form 8-K
The financial statements, schedules and exhibits listed below are filed as a
part of this annual report.
(a)(1) Financial Statements
1) Balance Sheet as of the end of the two most recent fiscal years
2) Consolidated statements of operations, statements of cash flows,
and statement of capital for each of the three fiscal years
preceding the date of the most recent audited balance sheet
(a)(2) Financial Statements Schedules
None
The financial statements schedules are omitted because of the absence of the
conditions under which they are required or because the required information
is included in the financial statements or notes thereto.
(a)(3) Exhibits
Exhibit
Number Description of Exhibit
3.1 Certificate of Incorporation of Huntway Refining Company
(incorporated by reference to Exhibit 3.1 of the Registrants
Registration Statement on Form S-4, Registration File No. 333-
45093, filed January 28, 1998)
3.2 Bylaws of Huntway Refining Company (incorporated by reference to
Exhibit 3.2 of the Registrants Registration Statement on Form S-4,
Registration File No. 333-45093, filed January 28, 1998)
4.1 Indenture dated as of October 31, 1997 between Huntway Partners,
L.P.
and State Street Bank and Trust Company, as trustee, pursuant to
which the 9.25% Senior Subordinated Secured Convertible Notes due
2007 were issued (incorporated by reference herein to Exhibit 4.1
of the
Report of Huntway Partners, L.P. on Form 8-K, filed November 17,
1997,
Commission file No. 1-10091)
4.2 Form of 9.25% Senior Subordinated Secured Convertible Note due 2007
(included
in Exhibit 4.1) (incorporated by reference herein to Exhibit 4.2
of the
Report of Huntway Partners, L.P. on Form 8-K, filed November 17,
1997,
Commission file No. 1-10091)
4.3 First Supplemental Indenture dated as of January 14, 1998 between
Huntway Partners,
L.P. and State Street Bank and Trust Company, as trustee, relating
to the 9.25% Senior
Subordinated Secured Convertible Notes due 2007 (incorporated by
reference herein
to Exhibit 10.4 of the Report of Huntway Partners, L.P. on Form 8-
K, filed March 31,
1998, Commission file No. 1-10091)
4.4 Second Supplemental Indenture dated as of March 30, 1998 between
Huntway
Partners, L.P., and State Street Bank and Trust Company, as
trustee, relating to the
9.25% Senior Subordinated Secured Convertible Notes due 2007
4.6 Exchange and Purchase Agreement entered into as of October 31,
1997, by
and among Huntway Partners, L.P., Lighthouse Investors, L.L.C., B
III Capital
Partners, L.P., Contrarian Capital Fund I, L.P., Contrarian
Capital Fund II, L.P.,
Oppenheimer Horizon Partners, L.P., Oppenheimer Institutional
Horizon Partners,
L.P., Oppenheimer International Horizon Fund II, Ltd., Oppenheimer
& Co.,
and The & Trust, First Plaza Group Trust and The IBM Retirement
Plan
Trust (incorporated by reference herein to Exhibit 10.2 of the
Report of Huntway
Partners, L.P. on Form 8-K, filed November 17, 1997, Commission
file No. 1-10091)
4.7 Indenture dated as of December 12, 1996 between Huntway Partners,
L.P. and
IBJ Schroder Bank & Trust Company (n/k/a IBJ Whitehall Bank &
Trust Company), as trustee, relating to the Junior Subordinated
Notes due 2005,
including the forms of security (incorporated by reference herein
to Exhibit 4.2 of the Report of Huntway Partners, L.P. on Form 8-
K,
filed December 27, 1996, Commission File No. 1-0091)
4.8 First Supplemental Indenture dated as of October 31, 1997 between
Huntway Partners,
L.P. and IBJ Schroder Bank & Trust (n/k/a IBJ Whitehall Bank &
Trust Company),
as trustee, relating to the Junior Subordinated Notes due 2005
(incorporated by
reference herein to Exhibit 10.3 of the Report of Huntway
Partners, L.P. on Form 8-K,
filed March 31, 1998, Commission file No. 1-10091)
4.10 Sequencing and Amendatory Agreement dated as of October 31, 1997
among Huntway Partners, L.P., Sunbelt Refining Company, L.P.,
Lighthouse Investors, L.L.C., B III Capital Partners, L.P.,
Contrarian
Capital Fund I, L.P., Contrarian Capital Fund II, L.P., Bankers
Trust
Company, Massachusetts Mutual Life Insurance Company, Mellon Bank,
N.A., as trustee for First Plaza Group Trust, Oppenheimer &
Company,
Inc., as agent for itself and as agent for Oppenheimer Horizon
Partners,
L.P., Oppenheimer Institutional Horizon Partners, L.P.,
Oppenheimer
International Horizon Fund II Ltd. and The & Trust, The IBM
Retirement
Plan Trust, Lindner Growth Fund, Madison Dearborn Partners III
First Chicago Equity Corporation, United States Trust Company of
New
York, as Collateral Agent under the Intercreditor Agreement, State
Street
Bank and Trust Company, as trustee under the indenture pursuant to
which the 9.25% Senior Subordinated Secured Convertible
Notes due 2007 were issued, and Fleet National Bank, as trustee
under the
indenture pursuant to which the 12% Senior Notes (Other) were
issued
(incorporated by reference herein to Exhibit 10.1 of the Report of
Huntway
Partners, L.P. on Form 8-K, filed November 17, 1997, Commission
file No. 1-10091)
4.11 Refinancing and Amendatory Agreement dated as of January 20, 1999
among Huntway Refining Company, Sunbelt Refining Company, L.P.,
Lighthouse Investors, L.L.C., BIII Capital Partners, L.P.,
Contrarian
Capital Fund I, L.P., Contrarian Capital Fund II, L.P., Mellon
Bank,
N.A., as trustee for First Plaza Group Trust, Contrarian Capital
Advisors,
L.L.C., as agent for the entities listed under its signature
thereon, and The
IBM Retirement Plan Trust, Bankers Trust Company, Oppenheimer &
Co., Inc., Lindner Growth Fund, Madison Dearborn Partners III and
First Chicago Equity Corporation, United States Trust Company of
New York, as Collateral Agent under the Intercreditor Agreement,
State Street Bank and Trust Company, as trustee under the Senior
Subordinated Indenture, State Street Bank and Trust Company, as
successor in interest to Fleet National Bank, as trustee under the
Senior Indenture, and Boeing Capital Corporation (incorporated by
reference herein to Exhibit 4.11 of the Report of Huntway Refining
Company on Form 10-K, filed March 31, 1999, Commission file
No. 001-14159)
4.12 Loan Agreement entered into as of January 20, 1999, between Boeing
Capital Corporation and Huntway Refining Company (incorporated by
reference herein to Exhibit 4.12 of the Report of Huntway Refining
Company on Form 10-K, filed March 31, 1999, Commission file
No. 001-14159)
4.13 Amendment Number One to Loan Agreement dated as of January 31,
1999 between Boeing Capital Corporation and Huntway Refining
Company
(incorporated by reference herein to Exhibit 4.13 of the Report of
Huntway
Refining Company on Form 10-K, filed March 31, 1999, Commission
file
No. 001-14159)
10.1 Second Amended and Restated Agreement of Limited Partnership of
Sunbelt Refining Company, L.P. (incorporated by reference herein
to
Exhibit 10.8 of the Annual Report of Huntway Partners, L.P. on
Form
10-K, filed March 30, 1990, Commission file No. 1-10091)
10.2 Amended and Restated Ground Lease dated as of July 31, 1987 by and
between Industrial Asphalt and Huntway Partners, L.P.
(incorporated
by reference herein to Exhibit 10.7 of the Registration Statement
of
Huntway Partners, L.P. on Form S-1, filed September 26, 1988,
Registration No. 33-24445).
10.3 Amended and Restated Letter of Credit and Reimbursement Agreement
dated as of January 20, 1999 by and among Huntway Refining
Company,
Sunbelt Refining Company, L.P. and Bankers Trust Company (included
as Exhibit C to Exhibit 4.11)
10.4 First Amendment to Amended and Restated Letter of Credit and
Reimbursement Agreement dated as of February 1, 1999 by and
among Huntway Refining Company, Sunbelt Refining Company,
L.P., and Bankers Trust Company
10.5 Huntway Partners, L.P. 1996 Employee Incentive Option Plan dated
as of December 12, 1996 (incorporated by reference herein to
Appendix C of the Consent Solicitation and Disclosure Statement of
Huntway Partners, L.P. on Schedule 14A, filed October 15, 1996,
Commission file No. 1-10091)
10.6 Huntway Refining Company 1998 Stock Incentive Plan (incorporated
by reference to Exhibit B to the Proxy Statement/Prospectus
included in Exhibit 10.28 of the Report of Huntway Refining
Company on Form S-4/A, filed April 13, 1998, Commission file
No. 333-45093)
10.7 Amended and Restated Registration Rights Agreement entered into as
of October 31, 1997, by and among Huntway Partners, L.P.,
Lighthouse Investors, L.L.C., B III Capital Partners, L.P.,
Contrarian Capital Fund I, L.P., Contrarian Capital
Fund II, L.P., Mellon Bank, N.A., as trustee for First Plaza Group
Trust, Oppenheimer & Company, Inc., for itself and as agent for
Oppenheimer Horizon Partners, L.P., Oppenheimer Institutional
Horizon Partners, L.P., Oppenheimer Horizon Fund II, Ltd. and The
& Trust, The IBM Retirement Plan Trust, First Chicago Equity
Corporation and Madison Dearborn Partners, III (incorporated by
reference herein to Exhibit 10.3 of the Report of Huntway
Partners, L.P. on Form 8-K, filed November 17, 1997, Commission
file No. 1-10091)
10.8 Settlement and Release dated November 30, 1998, by and between
Andre Danesh and Huntway Refining Company.
10.9 Separation and Consulting Agreement dated February 23, 2000 but
effective as of November 17, 1999 by and between Huntway Refining
Company and Juan Y. Forster.
21 Schedule of Subsidiaries (incorporated by reference herein to
Exhibit 22 of the Registration Statement of Huntway Partners, L.P.
on Form S-1, as amended by Amendment No. 2, filed November 2,
1988, Registration No. 33-24445).
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Huntway Refining Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 30th day of March, 2000.
HUNTWAY REFINING COMPANY
By: /s/ Warren J. Nelson
Warren J. Nelson
President and Chief Executive Officer
Pursuant to the requirements 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 indicated on March 30, 2000.
Signature Title
/s/ Warren J. Nelson
Warren J. Nelson Member of the Board of Directors and
President and Chief Executive Officer
/s/ Earl G. Fleisher
Earl G. Fleisher Chief Financial Officer (Principal
Accounting Officer)
/s/ Juan Y. Forster
Juan Y. Forster Chairman of the Board of Directors
/s/ Harris Kaplan
Harris Kaplan Member of the Board of Directors
/s/ John C. McFarland
John C. McFarland Member of the Board of Directors
/s/ Richard Spencer
Richard Spencer Member of the Board of Directors
SEPARATION AND CONSULTING AGREEMENT
THIS SEPARATION AND CONSULTING AGREEMENT (the Agreement) executed
on February 23, 2000 but effective as of November 17, 1999 (the Effective
Date), by and between Huntway Refining Company (the Company) and Juan Y.
Forster (the Executive);
W I T N E S S E T H:
WHEREAS, the Executive currently serves as the Chairman of the
Board and President and Chief Executive Officer of the Company; and
WHEREAS, the Executive has submitted his resignation from the
positions of President and Chief Executive Officer effective as of February
29, 2000 (the Termination Date); and
WHEREAS, in consideration of the mutual promises contained herein,
the parties hereto are willing to enter into this Agreement upon the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the premises, the terms and
provisions set forth herein, the mutual benefits to be gained by the
performance thereof and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Resignation of Employment: Effective as of the Termination
Date, the Executive will resign employment and his positions as President and
Chief Executive Officer of the Company. Executive shall remain Chairman of
the Board of Directors of the Company (the Board) until the expiration of his
current term in that office at the regularly scheduled meeting of the Companys
shareholders in May 2000. Executive shall remain a member of the Board until
the expiration of his term at the regularly scheduled meeting of the Companys
shareholders in May 2001.
2. Compensation and Benefits:
(a) Until the Termination Date, Executive shall continue to be
paid his base salary as in effect on the Effective Date. Executives salary
shall be paid in accordance with the Companys normal payroll practices.
(b) On the Termination Date, the Company will pay Executive a
cash payment equal to the value of any unused accrued vacation.
(c) Depending on the Companys performance and subject to such
terms and conditions as may be provided in the Companys annual bonus plans,
the Executive will receive a bonus payment for the 1999 calendar year at the
time that such bonuses would ordinarily be paid. Executive shall not be
eligible for any bonus payments with respect to the 2000 calendar year or any
subsequent calendar year.
(d) Executive has been granted options (the Options) to purchase
shares of common stock of the Company. Notwithstanding the provisions of any
applicable plan or grant agreement, Executives options shall continue to vest
and become exercisable, and shall remain exercisable, until the date that is
six months after the expiration (i.e., August 28, 2002) or early termination
of the Consulting Term.
(e) Except as specifically provided otherwise in Section 3 below
and in this Section 2, Executive shall cease to participate in all employee
benefit plans, policies and arrangements of the Company effective as of the
Termination Date.
3. Engagement as Consultant: Following Executives termination
of employment, the Company agrees to retain Executive commencing March 1,
2000, as an independent consultant, and Executive agrees to render consulting
services until February 28, 2002 unless such consulting arrangement is
terminated earlier pursuant to Section 3(e) hereof (the Consulting Term).
(a) Terms and Responsibilities: During the period of his
service as an independent contractor hereunder, Executive shall devote such of
his time and his efforts as may be required by the Company from time to time
to perform his duties hereunder. Subject to the procedures outlined below,
Executive may perform Executive services for other companies or organizations,
which, in the judgment of the Company will not present any conflict of
interest with the Company or any of its subsidiaries or affiliates or
divisions, violate the provisions of Section 5, or materially affect the
performance of Executives duties pursuant to this Agreement. If Executive
desires to perform services for another company, organization or other entity
then, prior to performing such services, he shall submit a written request to
the Chief Executive Officer (CEO) of the Company identifying such entity and
the nature of services to be performed. Within 10 working days, the CEO shall
inform Executive in writing whether or not the Company has determined that the
performance of such services presents a conflict of interest.
(b) Duties:
(1) The Company hereby engages Executive to provide during
the Consulting Term such services of a consulting or advisory nature as the
Company may reasonably request with respect to its business. Executive will
primarily provide consulting services with respect to executive officer
transition, industry and lobbying activities, or such other activities as the
Board and other appropriately designated officers of the Company may direct
from time to time. Executive shall devote his efforts and such time as shall
be necessary to perform his duties and to advance the interests of the
Company, but the Company shall not require more than 50% of Executives
business time.
(2) Executive shall act solely in a consulting capacity
hereunder and shall not have authority to act for the Company or to give
instructions or orders on behalf of the Company or otherwise to make
commitments for or on behalf of the Company.
(3) Executive shall not be an employee of the Company
during the Consulting Term, but shall act in the capacity of an independent
contractor.
(4) The Company shall not exercise control over the
detail, manner or methods of the performance of the services by Executive
during the Consulting Term.
(c) Remuneration:
(1) As full and complete compensation for any and all
services which Executive may render during the Consulting Term, the Company
shall pay Executive a consulting fee at the rate of $15,000.00 per month of
services performed.
(2) Except as is expressly provided in this Agreement,
Executive shall not receive nor be entitled to participate in any benefits or
benefit plans with respect to the work done during the Consulting Term;
provided, however, that Executive will be provided health insurance and life
insurance coverage equivalent to his Company-provided coverage on his
Termination Date (subject to changes in coverage generally applicable to the
Companys employees) during the Consulting Term.
(3) During the Consulting Term, Executive shall be
provided reasonable access to office space and secretarial services, and shall
be reimbursed for reasonable expenses directly related to his consulting
duties.
(d) Terms of Payment: Executive shall submit monthly invoices
for any reasonable a necessary reimbursable expenses to the accounts payable
department of the Company. Each invoice shall detail said expenses incurred
by Executive in performing his obligation under the Agreement and include any
other information the Company reasonably requests. Payment for said invoiced
amounts shall be paid by the Company within 15 days after receipt of invoice
by the Company. Should the Company dispute any portion of the Executives
monthly invoice, the Company shall pay the undisputed portion of the invoice
and advise the Executive in writing of the disputed portion.
(e) Termination of Service: The Executives engagement as a
consultant will terminate automatically upon Executives death, or upon
Executives disability rendering him unable to perform services hereunder for a
period of 60 days. The Company may terminate Executives engagement as a
consultant hereunder upon five days written notice for Cause. For this
purpose, Cause shall mean Executives conviction of a felony or, after notice
and a reasonable opportunity to cure, Executives willful failure to perform
the services contemplated by this Agreement, or any other material breach of
this Agreement. If the Company terminates Executives engagement as a
consultant for reasons other than Cause, death or disability, the Company
shall pay Executive a lump sum payment within thirty days of termination equal
to the consulting fees that Executive would have received pursuant to Section
3(c)(1) for the remainder of the original Consulting Term, and health and life
insurance coverage as described in Section 3(c)(2) shall continue for the
remainder of the original Consulting Term, but any other obligations to
provide compensation or benefits shall cease. Upon any termination or
expiration of Executives engagement as a consultant hereunder, Executive shall
continue to be subject to the provisions of Sections 4, 5, 6 and 7 hereof (it
being understood and agreed that such provisions shall survive any termination
or expiration of Executives engagement as a consultant hereunder for any
reason).
4. Waiver and Release: As a material inducement to the
Company to enter into this Agreement, the Executive does hereby release and
forever discharge the Company and their past, present and future officers,
directors, employees, agents, shareholders and their respective predecessors,
successors, assigns, heirs, executors and administrators (collectively,
Releasees), of and from all manner of actions and causes of action, suits,
debts, claims and demands whatsoever at law or in equity, known or unknown,
actual or contingent, including, but not limited to, any claims against any
and each of the Releasees which have been asserted, or could be asserted now
or in the future, arising under any and all federal, state or local laws and
any common law claims, including, but not limited to, claims under the
California Labor Code and California Government Code, and any claims to
benefits under any and all bonus agreements, incentive plans, benefit plans,
offer letters, employment agreements, separation agreements, severance,
workforce reduction, early retirement, out-placement, or any other similar
type plans or arrangements sponsored by the Company, now or hereafter
recognized (collectively, Claims), which he ever had or now has or may in the
future have against any and each of the Releasees by reason of any matter,
cause or thing arising out of or resulting from his employment relationship
and privileges, his serving as an employee of the Company, or the separation
from his employment relationship or affiliation as an employee of the Company;
provided, however, that the foregoing shall not release the Company from any
of its obligations under this Agreement or any obligations it may have (under
Labor Code 2802 or otherwise) to indemnify and defend Executive from any
claims asserted against him as a result of his good faith performance of
services for the Company during his employment.
5. Confidentiality; Non-Competition:
(a) Confidentiality:
The Executive recognizes and acknowledges that in the course of
his employment with the Company (and during his engagement as a consultant)
and as a result of the position of trust he has held with the Company he has
obtained private or confidential information and proprietary data relating to
the Company and its affiliates including, without limitation, financial
information, customer lists, patent information and other data which are
valuable assets and property rights of the Company and its affiliates. All of
such private or confidential information and proprietary data is referred to
herein as Confidential Information; provided, however, that Confidential
Information will not include any information known generally to the public
(other than as a result of unauthorized disclosure by the Executive). The
Executive agrees that he will not at any time, directly or indirectly,
disclose or use Confidential Information acquired during his employment with
the Company and its affiliates (or during his engagement as a consultant)
except with the prior written consent of the Chief Executive Officer of the
Company.
(b) Non-Solicitation: The Executive agrees that he will not,
during the Consulting Term, in the Executives individual capacity or on behalf
of another (i) hire or offer to hire any of the officers, employees, directors
or agents of the Company or its affiliates, (ii) persuade or attempt to
persuade in any manner any officer, employees, directors or agent of the
Company to discontinue any relationship with the Company or its affiliates or
(iii) solicit or divert or attempt to divert any customer or supplier of the
Company or its affiliates.
(c) Non-Competition: The Executive acknowledges that his
employment with the Company (and his engagement as a consultant) has (and will
have) provided him with specialized knowledge concerning the business of the
Company (Company Business) which, if used in competition with the Company
could cause serious harm to the Company, and the covenants contained in this
Agreement are essential to protect the business and goodwill of the Company.
Accordingly, the Executive agrees that during the Consulting Term, the
Executive will not in the United States or any other country where the Company
conducts operations related to the Company Business, directly or indirectly,
either as an individual, proprietor, stockholder (other than as a holder of up
to one (1%) percent of the outstanding shares of a corporation whose shares
are listed on a stock exchange or traded in accordance with the automated
quotation system of the National Association of Securities Dealers), partner,
officer, employee, director or otherwise:
(1) work for, become an employee of, invest in, provide
consulting services or in any way engage in any business which provides,
produces, leases or sells products or services of the same or similar type
provided, produced, leased or sold by the Company and with regard to which the
Executive was engaged, or over which the Executive had direct or indirect
supervision or control, within three years preceding the Executives
termination of employment (or during the Consulting Term), in any area where
the Company provided, produced, leased or sold such products or services at
any time during the three years preceding such termination of employment, or
(2) provide, sell, offer to sell, lease, offer to lease,
or solicit any orders for any products or services which the Company provided
and with regard to which the Executive had direct or indirect supervision or
control, within three years preceding the Executives termination of employment
(or during the Consulting Term), to or from any person, firm or entity which
was a customer for such products or services of the Company during the three
years preceding such termination from whom the Company had solicited business
during such three years.
6. Nondisparagement:
(a) The Company and Executive agree to refrain from any
criticisms or disparaging comments about each other or in any way relating to
Executives employment or separation, and the Company and Executive
specifically acknowledge that their willingness to enter into this Agreement
is in anticipation of their fidelity to this commitment. In addition, as a
material inducement to the Company to enter into this Agreement, the Executive
agrees that he will not (i) publicly criticize or disparage the Company or any
affiliate, or privately criticize or disparage the Company or any affiliate in
a manner intended or reasonably calculated to result in public embarrassment
to, or injury to the reputation of, the Company or any affiliate in any
community in which the Company or any affiliate is engaged in business; (ii)
directly or indirectly, acting alone or acting in concert with others,
institute or prosecute, or assist any person in any manner in instituting or
prosecuting, any legal proceedings of any nature against the Company or any
affiliate; (iii) engage in any misconduct which is injurious to the business
or reputation of the Company or any affiliate; or (iv) take any other action,
either willfully or after being advised by the Company to refrain, that is
adverse to the interests of the Company or any affiliate or inconsistent with
fostering the goodwill of the Company or any affiliate; provided, however,
that the Executive will not be in breach of the covenant contained in (ii)
above solely by reason of his testimony which is compelled by process of law.
(b) Enforcement: The Executive hereby agrees that a violation
of the provisions of Section 5 or 6 would cause irreparable injury to the
Company and its affiliates, for which they would have no adequate remedy at
law. Any controversy or claim arising out of or relating to the provisions of
this Section 5 or 6, or any alleged breach of Section 5 or 6, shall be
settled by binding arbitration in accordance with Section 11. Notwithstanding
the foregoing, however, the Company specifically retains the right before,
during or after the pendency of any arbitration to seek injunctive relief from
a court having jurisdiction for any actual or threatened breach of Section 5
or 6 without necessity of complying with any requirement as to the posting of
a bond or other security (it being understood that the Executive hereby waives
any such requirement). Any such injunctive relief shall be in addition to any
other remedies to which the Company may be entitled at law or in equity or
otherwise, and the institution and maintenance of an action or judicial
proceeding for, or pursuit of, such injunctive relief shall not constitute a
waiver of the right of the Company to submit the dispute to arbitration.
If any provision of Section 5 or 6 is found by either a court of
competent jurisdiction or the arbitrators to be unreasonably broad, oppressive
or unenforceable, such court or arbitrators (i) shall narrow the scope of the
Agreement in order to ensure that the application thereof is not unreasonably
broad, oppressive or unenforceable and (ii) to the fullest extent permitted by
law, shall enforce such Agreement as though reformed.
(c) As used in Sections 5 and 6 of this Agreement, the term
affiliate means the Company, any subsidiary, any officer, director or
executive of the Company or any subsidiary, and any former officer, director
or executive of the Company or any subsidiary.
7. Assistance with Litigation: The Executive agrees that during
the Consulting Term and for a period of five years after the end of the
Consulting Term, the Executive will furnish such information and proper
assistance as may be reasonably necessary in connection with any litigation in
which the Company or any subsidiary is then or may become involved.
8. Nonassignability: Neither this Agreement nor any right or
interest hereunder shall be subject, in any manner, to anticipation,
alienation, sale, transfer, assignment, pledge, encumbrance or charge, whether
voluntary or involuntary, by operation of law or otherwise, any attempt at
such shall be void; and further provided, that any such benefit shall not in
any way be subject to the debts, contract, liabilities, engagements or torts
of the Executive, nor shall it be subject to attachment or legal process for
or against the Executive.
9. Amendment of Agreement: This Agreement may not be modified
or amended except by an instrument in writing signed by the parties hereto.
10. Waiver: No term or condition of this Agreement shall be
deemed to have been waived, nor shall there be an estoppel against the
enforcement of any provision of this Agreement, except by written instrument
of the party charged with such waiver or estoppel.
11. Arbitration: Any dispute, controversy or claim arising out
of or relating to the obligations under this Agreement, shall be settled by
final and binding arbitration in accordance with the American Arbitration
Association Employment Dispute Resolution Rules. The arbitrator shall be
selected by mutual agreement of the parties, if possible. If the parties fail
to reach agreement upon appointment of an arbitrator within 30 days following
receipt by one party of the other partys notice of desire to arbitrate, the
arbitrator shall be selected from a panel or panels submitted by the American
Arbitration Association (the AAA). The selection process shall be that which
is set forth in the AAA Employment Dispute Resolution Rules, except that, if
the parties fail to select an arbitrator from one or more panels, AAA shall
not have the power to make an appointment but shall continue to submit
additional panels until an arbitrator has been selected. All fees and
expenses of the arbitration, including a transcript if requested, will be
borne by the parties equally.
12. Notices: All notices or communications hereunder shall be
in writing, addressed as follows:
To the Company:
Huntway Refining Company.
25129 The Old Road, Suite 322
Newhall, CA 91381
Attention: Chief Executive Officer
To the Executive:
Juan Y. Forster
12245 Circula Panorama
Santa Ana, CA 92705
All such notices shall be conclusively deemed to be received and shall be
effective; (i) if sent by hand delivery, upon receipt, (ii) if sent by
telecopy or facsimile transmission, upon confirmation of receipt by the sender
of such transmission or (iii) if sent by registered or certified mail, on the
fifth day after the day on which such notice is mailed.
13. Source of Payments: All cash payments provided in this
Agreement will be paid from the general funds of the Company. The Executives
status with respect to amounts owed under this Agreement will be that of a
general unsecured creditor of the Company, and the Executive will have no
right, title or interest whatsoever in or to any investments which the Company
may make to aid the Company in meeting its obligations hereunder. Nothing
contained in this Agreement, and no action taken pursuant to this provision,
will create or be construed to create a trust of any kind or a fiduciary
relationship between the Company and the Executive or any other person.
14. Federal Income Tax Withholding: The Company may withhold
from any benefits payable under this Agreement all federal, state, city or
other taxes that will be required pursuant to any law or governmental
regulation or ruling. During the Consulting Term, since Executive will not be
an employee of the Company, but shall act as an independent contractor, the
Company will not withhold from any amounts payable any federal, state, city or
any other taxes. It is the responsibility of Executive to pay all such taxes
that shall be required pursuant to applicable law.
15. Severability: If any provision of this Agreement is held to
be invalid, illegal or unenforceable, in whole or part, such invalidity will
not affect any otherwise valid provision, and all other valid provisions will
remain in full force and effect.
16. Counterparts: This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, and all of which
together will constitute one document.
17. Titles: The titles and headings preceding the text of the
paragraphs and subparagraphs of this Agreement have been inserted solely for
convenience of reference and do not constitute a part of this Agreement or
affect its meaning, interpretation or effect.
18. Governing Law: This Agreement will be construed and
enforced in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties have executed this Agreement on
February 23, 2000, but effective as of the Effective Date.
HUNTWAY REFINING COMPANY
By: /s/ J.C. McFarland
J.C. McFarland
Member of the Compensation Committee
of the Board of Directors
/s/ Juan Y. Forster
EXECUTIVE - Juan Y. Forster
- - 1 -
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