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Filed Pursuant to Rule 424(b)(4)
Registration Number 333-47745
PROSPECTUS
FRONTIER OIL CORPORATION
(FORMERLY KNOWN AS WAINOCO OIL CORPORATION)
OFFER TO EXCHANGE
$1,000 PRINCIPAL AMOUNT OF 9 1/8% SENIOR NOTES DUE 2006, SERIES A
FOR EACH $1,000 PRINCIPAL AMOUNT OF OUTSTANDING
9 1/8% SENIOR NOTES DUE 2006
($70,000,000 IN AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
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THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME, ON FRIDAY, JUNE 19, 1998, UNLESS EXTENDED
----------------
Frontier Oil Corporation (formerly known as Wainoco Oil Corporation), a
Wyoming corporation (the "Company"), hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus and the accompanying Letter of
Transmittal, to exchange $1,000 principal amount of its 9 1/8% Senior Notes
Due 2006, Series A (the "Exchange Notes"), in a transaction registered under
the Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus
constitutes a part, for each $1,000 principal amount of the outstanding 9 1/8%
Senior Notes due 2006 (the "Old Notes"), of which $70,000,000 aggregate
principal amount is outstanding (the "Exchange Offer"). The Exchange Notes and
the Old Notes are sometimes referred to herein collectively as the "Notes."
The Exchange Notes will be general unsecured obligations of the Company,
ranking parri passu in right of payment with all future senior indebtedness of
the Company and senior to all future subordinated indebtedness of the Company.
The Exchange Notes will be effectively subordinated, however, to (i) all
future secured obligations of the Company to the extent of the assets securing
such obligations and (ii) all current and future obligations of Subsidiaries
(as defined herein) of the Company, including borrowings under the Frontier
Credit Facility (as defined herein) and trade obligations. As of March 31,
1998, $5.7 million was drawn under the Frontier Credit Facility. The Company
does not have any outstanding indebtedness, and has no current arrangements to
incur any indebtedness, that would be subordinated to the Exchange Notes.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn prior to 5:00 p.m., New York City time, on the date
the Exchange Offer expires, which will be Friday, June 19, 1998 unless the
Exchange Offer is extended (the "Expiration Date"). Tenders of Old Notes may
be withdrawn at any time prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange. However, the
Exchange Offer is subject to certain conditions that may be waived by the
Company and to the terms and provisions of the Registration Rights Agreement
(as defined herein). See "The Exchange Offer." Old Notes may be tendered only
in denominations of $1,000 and integral multiples thereof. The Company has
agreed to pay the expenses of the Exchange Offer. There will be no cash
proceeds to the Company from the Exchange Offer. See "Use of Proceeds."
The Exchange Notes will be obligations of the Company entitled to the
benefits of the indenture relating to the Notes (the "Indenture"). The form
and terms of the Exchange Notes are identical in all material respects to the
form and terms of the Old Notes, except that (i) the offering of the Exchange
Notes has been registered under the Securities Act, (ii) the Exchange Notes
will not be subject to transfer restrictions and (iii) the Exchange Notes will
not be entitled to registration or other rights under the Registration Rights
Agreement including the provision in the Registration Rights Agreement for
payment of Liquidated Damages (as defined in the Registration Rights
Agreement) upon failure by the Company to consummate the Exchange Offer or the
occurrence of certain other events. Following the Exchange Offer, any holders
of Old Notes will continue to be subject to the existing restrictions on
transfer thereof and, as a general matter, the Company will not have any
further obligation to such holders to provide for registration under the
Securities Act of transfers of the Old Notes held by them. To the extent that
Old Notes are tendered and accepted in the Exchange Offer, a holder's ability
to sell untendered and tendered but unaccepted Old Notes could be adversely
affected. See "Risk Factors" and "The Exchange Offer--Purpose and Effect of
the Exchange Offer."
(continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES OFFERED HEREBY.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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The date of this Prospectus is May 14, 1998.
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The Old Notes were sold by the Company on February 9, 1998, to Bear, Stearns
& Co., Inc. (the "Initial Purchaser") in transactions not registered under the
Securities Act in reliance upon the exemption provided in Section 4(2) of the
Securities Act (the "Offering"). The Initial Purchaser subsequently resold the
Old Notes to qualified institutional buyers (as defined in Rule 144A under the
Securities Act) ("Qualified Institutional Buyers" or "QIBs") or outside the
United States within the meaning of Regulation S under the Securities Act, the
purchasers of which agreed to comply with certain transfer restrictions and
other restrictions. Accordingly, the Old Notes may not be reoffered, resold or
otherwise transferred in the United States unless such transaction is
registered under the Securities Act or an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange
Notes are being offered hereby in order to satisfy the obligations of the
Company under a registration rights agreement among the Company and the
Initial Purchaser relating to the Old Notes (the "Registration Rights
Agreement").
The Exchange Notes will bear interest at a rate of 9 1/8% per annum, payable
semiannually on February 15 and August 15 of each year, commencing August 15,
1998. Holders of Exchanges Notes of record on August 1, 1998, will receive on
August 15, 1998, an interest payment in an amount equal to (x) the accrued
interest on such Exchange Notes from the date of issuance thereof to August
15, 1998, plus (y) the accrued interest on the previously held Old Notes from
the date of issuance of such Old Notes (February 9, 1998) to the date of
exchange thereof. Interest will not be paid on Old Notes that are accepted for
exchange. The Notes mature on February 15, 2006.
The Old Notes were initially represented by two global Old Notes (the "Old
Global Notes") in registered form, registered in the name of Cede & Co., as a
nominee for The Depository Trust Company ("DTC" or the "Depositary"), as
depositary. The Exchange Notes exchanged for Old Notes represented by the Old
Global Notes will be initially represented by one global Exchange Note (the
"Exchange Global Note") in registered form, registered in the name of the
Depositary. References herein to "Global Notes" shall be references to the Old
Global Notes and the Exchange Global Note.
Based on an interpretation of the Securities Act by the staff of the
Securities and Exchange Commission (the "SEC"), Exchange Notes issued pursuant
to the Exchange Offer in exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder thereof (other than (i) a broker-
dealer who purchased such Old Notes directly from the Company for resale
pursuant to Rule 144A or any other available exemption under the Securities
Act or (ii) a person that is an "affiliate" (within the meaning of Rule 405 of
the Securities Act) of the Company), without compliance with the registration
and prospectus delivery provisions of the Securities Act, provided that the
holder is acquiring the Exchange Notes in its ordinary course of business and
is not participating, and has no arrangement or understanding with any person
to participate, in the distribution of the Exchange Notes. Holders of Old
Notes wishing to accept the Exchange Offer must represent to the Company that
such conditions have been met.
Any broker-dealer who holds Old Notes acquired for its own account as a
result of market making activities or other trading activities, and who
receives Exchange Notes in exchange for Old Notes pursuant to the Exchange
Offer may be a statutory underwriter and must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of the
securities. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of Exchange Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of one year after the effective date
of the Registration Statement with respect to which this Prospectus is a part,
it will make this Prospectus available to any broker-dealer upon request for
use in connection with any such resale. See "Plan of Distribution." Any
broker-dealer who purchased Old Notes from the Company to resell pursuant to
Rule 144A or any other available exemption under the Securities Act, or who
otherwise acquired Old Notes from the Company other than as a result of market
making activities, will not be able to tender its Old Notes in the Exchange
Offer and must comply with the registration and prospectus delivery
requirements of Securities Act in connection with any sale or transfer of Old
Notes unless such sale or transfer is made pursuant to an exemption from such
requirements. See "The Exchange Offer--Purpose and Effect of the Exchange
Offer."
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The Exchange Notes will be a new issue of securities for which there
currently is no market. Although the Initial Purchaser has informed the
Company that it currently intends to make a market in the Exchange Notes, it
is not obligated to do so, and any such market making may be discontinued at
any time without notice. As the Old Notes were issued and the Exchange Notes
are being issued to a limited number of institutions who typically hold
similar securities for investment, the Company does not expect that an active
public market for the Exchange Notes will develop. Accordingly, there can be
no assurance as to the development, liquidity or maintenance of any market for
the Exchange Notes on any securities exchange or for quotation through the
Nasdaq Stock Market. See "Risk Factors."
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE EXCHANGE NOTES IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATIONS THAT
THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
NOTICE TO NEW HAMPSHIRE RESIDENTS
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER THE RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY
SUCH FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A
SECURITY OR A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY
WAY UPON THE MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO,
ANY PERSON, SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE
MADE, TO ANY PROSPECTIVE PURCHASER, CUSTOMER, OR CLIENT ANY REPRESENTATION
INCONSISTENT WITH THE PROVISIONS OF THIS PARAGRAPH.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company incorporates herein by reference the following documents
previously filed by the Company pursuant to the Exchange Act:
(a) Annual Report on Form 10-K for the year ended December 31, 1997.
All other documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed
to be modified or superseded for purposes of this Prospectus to the extent
that a statement contained herein or in any other subsequently filed document
which also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
ANY PERSON RECEIVING A COPY OF THIS PROSPECTUS MAY OBTAIN WITHOUT CHARGE,
UPON WRITTEN OR ORAL REQUEST, A COPY OF ANY OF THE DOCUMENTS INCORPORATED BY
REFERENCE HEREIN, EXCEPT FOR THE EXHIBITS TO SUCH DOCUMENTS (UNLESS SUCH
EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE INTO SUCH DOCUMENTS).
REQUESTS SHOULD BE ADDRESSED TO CORPORATE SECRETARY, FRONTIER OIL CORPORATION,
10000 MEMORIAL DRIVE, SUITE 600, HOUSTON, TEXAS 77024-3411.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the detailed information and consolidated financial statements
and notes thereto appearing elsewhere in this Prospectus. Prospective investors
should carefully consider the matters discussed under the caption "Risk
Factors." Unless the context otherwise requires, all references in this
Prospectus to "Frontier" or the "Company" are to Frontier Oil Corporation
(formerly known as Wainoco Oil Corporation) and its subsidiaries. As used
herein, "Rocky Mountain region" refers to the following five states: Colorado,
Wyoming, Utah, Montana and Idaho. The Financial Data of the Company included
herein have been restated to reflect the disposition of the Company's United
States and Canadian oil and gas operations.
THE COMPANY
GENERAL
Frontier is an independent energy company engaged in crude oil refining and
the wholesale marketing of refined petroleum products, primarily in the Rocky
Mountain region of the United States. The Company operates a complex refinery
(the "Frontier Refinery") in Cheyenne, Wyoming with a permitted crude oil
capacity of 41,000 barrels per day ("bpd"). Since its acquisition of the
Frontier Refinery in 1991, the Company spent approximately $60 million in a
capital improvement program from 1992 through 1993 which, among other things,
(i) increased the Frontier Refinery's capability to process heavy crude oil,
(ii) enabled the Frontier Refinery to meet federally-mandated low sulfur
standards with respect to all of its diesel fuel production and (iii) improved
the Frontier Refinery's general reliability. An important feature of the
Frontier Refinery is its ability to process up to 100% heavy crude oil, which
is less expensive than sweet crude oil. As a result, the Company is well
positioned to benefit from an increase in the differential between the price of
lower cost heavy crude oil and the price of more expensive sweet crude oil
feedstocks (the "light/heavy spread"), which is currently estimated to be $4.55
per barrel ("bbl"). See "Business--Refining Operations--Varieties of Crude
Oil." For the year ended December 31, 1997, the Company achieved consolidated
revenues of $376.4 million and EBITDA (as defined herein) of $30.9 million.
The Company markets refined products primarily in eastern Colorado (including
the Denver metropolitan area) and eastern Wyoming, or the "Eastern Slope area"
of the Rocky Mountain region. The Company also markets refined products in
western Nebraska and, through exchange agreements with other refiners, in the
Dakotas and Utah. Of the 15 crude oil refineries in the Rocky Mountain region,
the Company only considers the four other refineries (two in Denver and two in
Wyoming) located within the Eastern Slope area to be competitors, although
additional competition comes from refineries outside the Eastern Slope area
that supply refined products to the area via pipeline. The Company believes it
has an advantage over (i) its four refinery competitors because only the
Company operates a coking unit, which enables it to produce a higher yield of
gasoline and diesel fuel from heavy crude oil, and (ii) the pipeline
competitors that ship product into the Eastern Slope area because they must
incur a transportation cost, which for Gulf Coast refiners equates to
approximately $1.60 per bbl. Furthermore, while it has in the past generally
marketed unbranded products, in the second half of 1997, the Company entered
into a marketing agreement with CITGO Petroleum Corporation ("CITGO") to market
branded products to independent and other branded retail operators in its
market area. For the year ended December 31, 1997, the Frontier Refinery's
product mix included various grades of gasoline (51%), diesel fuel (30%) and
asphalt and other refined petroleum products (19%).
The Company prefers to process locally produced heavy crude oil. In the year
ended December 31, 1997, the Company obtained approximately 84% of its crude
oil supply, or charge, from Wyoming producers while Canadian heavy crude oil
made up a majority of the Frontier Refinery's remaining feedstocks. During the
same period, heavy crude oil constituted approximately 91% of the Frontier
Refinery's total crude oil charge. The Company believes it is able to obtain
favorable pricing terms for the heavy crude oil it uses as feedstock because
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available supply currently outstrips demand. None of the Company's direct
competitors, and only three other refineries in the entire Rocky Mountain
region, operate coking units necessary to process high volumes of heavy crude
oil. In addition, while Wyoming crude oil production is declining, the
completion of the 785-mile Express Pipeline from Hardisty, Alberta to Casper,
Wyoming in April 1997 immediately doubled available pipeline capacity for
Canadian crude oil to the Wyoming market. The Express Pipeline has benefitted
the Company by (i) holding down prices of Wyoming heavy crude oil and (ii)
providing the Company with the flexibility to significantly increase the
Frontier Refinery's Canadian heavy crude oil charge if favorable supply and
pricing conditions arise. The Company also receives a supply cost advantage on
up to 25,000 bpd from its partial ownership interest in a crude oil pipeline
(the "Centennial Pipeline") that runs from the regional hub at Guernsey,
Wyoming to the Frontier Refinery.
The Company is a holding company that conducts all of its operations
exclusively through subsidiaries. As a holding company, the Company is
dependent on dividends or other distributions of funds from its Subsidiaries to
meet its debt service and other obligations, including the payment of principal
and interest on the Notes.
RECENT DEVELOPMENTS
NAME CHANGE. The Company's Board of Directors and shareholders recently
approved the change in the Company's corporate name to "Frontier Oil
Corporation." The Company believes that the name change was desirable because
the "Wainoco" name was associated with the Company's prior exploration and
production operations. However, with the completion of the sale of its Canadian
oil and gas operations (the "Canadian Disposition") in 1997, the Company's
operations currently consist almost exclusively of crude oil refining and
wholesale marketing of refined petroleum products. The Company chose the name
"Frontier Oil Corporation" because the "Frontier" name has been identified with
the Company's operations since 1991 when it acquired the Frontier Refinery. The
Frontier Refinery has operated in the Rocky Mountain region since 1940 and is
strongly identified with refining and marketing in the region. The Company
believes that its new name will more closely connect the Company with its
operations and take advantage of a well known regional name and logo.
SUMMARY FIRST QUARTER OPERATING RESULTS. On April 28, 1998, the Company
released summary operating results for the quarter ended March 31, 1998. The
Company reported a loss from continuing operations for the period of $839,000,
or $.03 per share, which was $9.2 million better than the loss from continuing
operations in the first quarter of 1997 of $10.0 million. Including an
extraordinary loss on early debt retirement of $3.0 million, the Company had a
net loss for the recent quarter of $3.9 million or $.14 per share. In the first
quarter of 1997, the Company reported a net loss of $8.5 million, or $.31 per
share, which included approximately $1.6 million of income from discontinued
oil and gas operations. Operating income before depreciation of $3.5 million
was up $6.8 million from the $3.3 million loss generated in the first quarter
of 1997.
The Company believes that its significant first quarter improvement versus
last year is primarily due to a widening of the light/heavy crude oil spread,
lower operating expenses and reduced interest expense. The first quarter
refined product spread was $4.74 per bbl compared to $3.16 per bbl in the first
quarter of 1997. Yields of gasoline were the same as last year while yields of
distillates increased 6% from the first quarter of 1997. The light/heavy crude
oil spread increased $1.24 per bbl during the first quarter to $4.72 per bbl
and refining operating expenses dropped $.32 per bbl to $3.41 per bbl. As a
result of the Company's 1997 debt reduction and early 1998 debt refinancing,
net interest expense for the quarter decreased by more than 55% to $2.0 million
in the first quarter.
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SUMMARY OF TERMS OF EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $70,000,000 aggregate
principal amount of Exchange Notes for up to an equal aggregate principal
amount of Old Notes. The Exchange Notes will be obligations of the Company
entitled to the benefits of the Indenture. The form and terms of the Exchange
Notes are identical in all material respects to the form and terms of the Old
Notes, except that (i) the offering of the Exchange Notes has been registered
under the Securities Act, (ii) the Exchange Notes will not be subject to
transfer restrictions and (iii) the Exchange Notes will not be entitled to
registration or other rights under the Registration Rights Agreement including
the provision in the Registration Rights Agreement for payment of Liquidated
Damages upon failure by the Company to consummate the Exchange Offer or the
occurrence of certain other events. See "Description of the Notes." Capitalized
terms followed by the parenthetical "(as defined)" and not defined herein will
have the meanings given them in the Indenture.
Registration Rights The Old Notes were sold by the Company on
Agreement.................. February 9, 1998 to the Initial Purchaser
pursuant to a Purchase Agreement, dated February
4, 1998 (the "Purchase Agreement"). Pursuant to
the Purchase Agreement, the Company and the
Initial Purchaser entered into the Registration
Rights Agreement which, among other things,
grants the holders of the Old Notes certain
exchange and registration rights. The Exchange
Offer is intended to satisfy certain obligations
of the Company under the Registration Rights
Agreement.
The Exchange Offer.......... $1,000 principal amount of Exchange Notes will be
issued in exchange for each $1,000 principal
amount of Old Notes validly tendered and accepted
pursuant to the Exchange Offer. As of the date
hereof, $70,000,000 in aggregate principal amount
of Old Notes are outstanding. Promptly following
the Expiration Date, the Company will issue the
Exchange Notes to holders of Old Notes who
properly tender their Exchange Notes in
accordance with the procedures set forth below
under the caption "The Exchange Offer--Procedures
for Tendering". The terms of the Exchange Notes
are identical in all material respects to the Old
Notes except for certain transfer restrictions
and registration rights relating to the Old
Notes.
No federal or state regulatory requirements must
be complied with or approval obtained in
connection with the Exchange Offer, other than
the registration requirements under the
Securities Act.
Resale...................... Based on existing interpretations of the
Securities Act by the staff of the SEC set forth
in several no-action letters to third parties,
and subject to the immediately following
sentence, the Company believes that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by a holder
thereof (other than (i) a broker-dealer who
purchased such Old Notes directly from the
Company for resale pursuant to Rule 144A or any
other available exemption under the Securities
Act or (ii) a person that is an "affiliate"
(within the meaning of Rule 405 of the Securities
Act) of the Company), without compliance with the
registration and prospectus delivery provisions
of the Securities Act, provided that the holder
is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and
has no arrangement or understanding with
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any person to participate, and does not intend to
participate, in the distribution of the Exchange
Notes. However, any purchaser of Notes who is an
affiliate of the Company or who intends to
participate in the Exchange Offer for the purpose
of distributing the Exchange Notes, or any
broker-dealer who purchased the Old Notes from
the Company to resell pursuant to Rule 144A or
any other available exemption under the
Securities Act, (i) will not be able to rely on
the interpretations by the staff of the SEC set
forth in the above-mentioned no-action letters,
(ii) will not be able to tender its Old Notes in
the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements
of the Securities Act in connection with any sale
or transfer of the Notes unless such sale or
transfer is made pursuant to an exemption from
such requirements. The Company does not intend to
seek its own no-action letter and there is no
assurance that the staff of the SEC would make a
similar determination with respect to the
Exchange Notes as it has in such no-action
letters to third parties. See "The Exchange
Offer--Purpose and Effect of the Exchange Offer"
and "Plan of Distribution." Each broker-dealer
that receives Exchanges Notes for its own account
pursuant to the Exchange Offer must acknowledge
that it will deliver a prospectus in connection
with any resale of such Exchange Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with
resales of Exchange Notes received in exchange
for Old Notes where such Old Notes were acquired
by such broker-dealer as a result of market-
making activities or other trading activities.
The Company has agreed that, for a period of one
year after the Expiration Date, it will make this
Prospectus available to any broker-dealer for use
in connection with any such resale. See "Plan of
Distribution."
Expiration Date............. 5:00 p.m., New York City time, on Friday, June
19, 1998, unless the Exchange Offer is extended,
in which case the term "Expiration Date" means
the latest date and time to which the Exchange
Offer is extended. See "The Exchange Offer--
Expiration Date; Extensions; Amendments."
Accrued Interest on the
Exchange Notes and the Old
Notes......................
The Exchange Notes will bear interest at a rate
of 9 1/8% per annum, payable semiannually on
February 15 and August 15 of each year,
commencing August 15, 1998. Holders of Exchange
Notes of record on August 1, 1998, will receive
on August 15, 1998, an interest payment in an
amount equal to (i) the accrued interest on such
Exchange Notes from the date of issuance thereof
to August 15, 1998, plus (ii) the accrued
interest on the previously held Old Notes from
the date of issuance of such Old Notes (February
9, 1998) to the date of exchange thereof.
Interest will not be paid on Old Notes that are
accepted for exchange. The Notes mature on
February 15, 2006.
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Conditions to the Exchange
Offer...................... The Company may terminate the Exchange Offer if
it determines that its ability to proceed with
the Exchange Offer could be materially impaired
due to the occurrence of certain conditions. The
Company does not expect any of such conditions to
occur, although there can be no assurance that
such conditions will not occur. Holders of Old
Notes will have certain rights under the
Registration Rights Agreement should the Company
fail to consummate the Exchange Offer. See "The
Exchange Offer--Conditions to the Exchange
Offer."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile,
together with the Old Notes to be exchanged and
any other required documentation, to Chase Bank
of Texas, National Association, as Exchange
Agent, at the address set forth herein and
therein or effect a tender of Old Notes pursuant
to the procedures for book-entry transfer as
provided for herein and therein. By executing the
Letter of Transmittal, each holder will represent
to the Company that, among other things, the
Exchange Notes acquired pursuant to the Exchange
Offer are being acquired in the ordinary course
of business of the person receiving such Exchange
Notes, whether or not such person is the holder,
that neither the holder nor any such other person
has any arrangement or understanding with any
person to participate in the distribution of such
Exchange Notes and that neither the holder nor
any such other person is an "affiliate," as
defined in Rule 405 under the Securities Act, of
the Company. See "The Exchange Offer--Procedures
for Tendering."
Following consummation of the Exchange Offer,
holders of Old Notes not tendered as a general
matter will not have any further registration
rights, and the Old Notes will continue to be
subject to certain restrictions on transfer.
Accordingly, the liquidity of the market for the
Old Notes could be adversely affected. See "Risk
Factors--Absence of Public Market for the Notes"
and "--Consequences of Exchange and Failure to
Exchange" and "The Exchange Offer--Consequences
of Failure to Exchange."
Special Procedures for
Beneficial Owners.......... Any beneficial owner whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee
and who wishes to tender in the Exchange Offer
should contact such registered holder promptly
and instruct such registered holder to tender on
his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner
must, prior to completing and executing the
Letter of Transmittal and delivering his Old
Notes, either (a) make appropriate arrangements
to register
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ownership of the Old Notes in such holder's name
or (b) obtain a properly completed bond power
from the registered holder or endorsed
certificates representing the Old Notes to be
tendered. The transfer of record ownership may
take considerable time, and completion of such
transfer prior to the Expiration Date may not be
possible. See "The Exchange Offer--Procedures for
Tendering."
Guaranteed Delivery
Procedures................. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available, or who cannot deliver their Old Notes
(or complete the procedure for book-entry
transfer) and deliver a properly completed Letter
of Transmittal and any other documents required
by the Letter of Transmittal to the Exchange
Agent prior to the Expiration Date may tender
their Old Notes according to the guaranteed
delivery procedures set forth in "The Exchange
Offer--Guaranteed Delivery Procedures."
Withdrawal Rights........... Tenders of Old Notes may be withdrawn at any time
prior to the Expiration Date by furnishing a
written or facsimile transmission notice of
withdrawal to the Exchange Agent containing the
information set forth in "The Exchange Offer--
Withdrawal of Tenders."
Acceptance of Old Notes and
Delivery of Exchange
Notes...................... Subject to certain conditions (as summarized
above in "Conditions to the Exchange Offer" and
described more fully in "The Exchange Offer--
Conditions to the Exchange Offer"), the Company
will accept for exchange any and all Old Notes
that are properly tendered in the Exchange Offer
prior to the Expiration Date. See "The Exchange
Offer--Procedures for Tendering." The Exchange
Notes issued pursuant to the Exchange Offer will
be delivered promptly following the Expiration
Date.
Exchange Agent.............. Chase Bank of Texas, National Association, the
Trustee under the Indenture, is serving as
exchange agent (the "Exchange Agent") in
connection with the Exchange Offer. The mailing
address of the Exchange Agent is Chase Bank of
Texas, National Association, P.O. Box 2320,
Dallas, Texas 75221-2320, Attention: Frank Ivins,
Registered Bond Events. The overnight courier and
hand delivery address for the Exchange Agent is
Chase Bank of Texas, National Association, One
Main Place, 1201 Main Street, 18th Floor, Dallas,
Texas 75202, Attention: Frank Ivins, Registered
Bond Events. For assistance and request for
additional copies of this Prospectus, the Letter
of Transmittal or the Notice of Guaranteed
Delivery, the telephone number for the Exchange
Agent is (713) 216-6686, and the facsimile number
for the Exchange Agent is (713) 216-5476,
Attention: Mauri Cowen.
Effect on Holders of Old
Notes...................... Holders of Old Notes who do not tender their Old
Notes in the Exchange Offer will continue to hold
their Old Notes and will be entitled to all the
rights and limitations applicable thereto under
the
6
<PAGE>
Indenture. All untendered, and tendered but
unaccepted, Old Notes will continue to be subject
to the restrictions on transfer provided for in
the Old Notes and the Indenture. To the extent
that Old Notes are tendered and accepted in the
Exchange Offer, the trading market, if any, for
the Old Notes could be adversely affected. See
"Risk Factors--Consequences of Exchange and
Failure to Exchange."
SEE "THE EXCHANGE OFFER" FOR MORE DETAILED INFORMATION CONCERNING THE TERMS OF
THE EXCHANGE OFFER.
7
<PAGE>
SUMMARY OF TERMS OF EXCHANGE NOTES
SECURITIES OFFERED.......... $70.0 million aggregate principal amount of 9
1/8% Senior Notes due 2006, Series A.
MATURITY DATE............... February 15, 2006.
INTEREST PAYMENT DATES...... Interest on the Exchange Notes will be payable
semi-annually in arrears on February 15 and
August 15 of each year, commencing August 15,
1998.
OPTIONAL REDEMPTION......... The Exchange Notes are redeemable for cash, in
whole or in part, at the option of the Company at
any time on or after February 15, 2002, at the
redemption prices set forth herein plus accrued
and unpaid interest and Liquidated Damages, if
any, thereon, to the redemption date.
Notwithstanding the foregoing, prior to February
15, 2002, the Company may redeem the Exchange
Notes at its option, in whole or in part, at the
Make-Whole Price (as defined herein), plus
accrued and unpaid interest and Liquidated
Damages, if any, thereon, to the redemption date.
In addition, for a period of three years
following the date of this Offering Memorandum,
the Company may redeem up to 35% of the aggregate
principal amount of the Exchange Notes originally
issued at a redemption price of 109 1/8% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon,
to the redemption date, with the net cash
proceeds of one or more Qualified Equity
Offerings, provided at least 65% of the aggregate
principal amount of Exchange Notes originally
issued remains outstanding following each such
redemption. See "Description of the Notes--
Optional Redemption."
RANKING..................... The Exchange Notes will be general unsecured
obligations of the Company and will rank pari
passu in right of payment with all future senior
indebtedness of the Company and senior in right
of payment to all future subordinated
indebtedness of the Company. The Exchange Notes
will be effectively subordinated, however, to (i)
all future secured obligations of the Company to
the extent of the assets securing such
obligations and (ii) all current and future
obligations of the Subsidiaries of the Company,
including borrowings under the Frontier Credit
Facility and trade obligations. As of March 31,
1998, the Company and its Subsidiaries had $5.7
million of outstanding indebtedness effectively
senior to the Notes (excluding an additional
$14.3 million available for cash advances under
the Frontier Credit Facility). The Indenture will
permit the Company and its Subsidiaries to incur
additional indebtedness, including additional
secured indebtedness, subject to certain
conditions. See "Capitalization," "Description of
Indebtedness" and "Description of the Notes--
General."
FUTURE SUBSIDIARY
GUARANTEES.................. Under certain circumstances, the Company's
payment obligations under the Exchange Notes may
be in the future jointly and severally
8
<PAGE>
guaranteed on an unsecured basis by one or more
of the Subsidiaries of the Company. See
"Description of the Notes--Subsidiary Guarantees"
and "--Certain Covenants--Future Subsidiary
Guarantors."
CHANGE OF CONTROL........... Upon the occurrence of a Change of Control, each
holder of the Exchange Notes may require the
Company to repurchase all or any part of the
Exchange Notes at a price equal to 101% of the
principal amount thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon,
to the date of repurchase. See "Risk Factors--
Potential Inability to Fund a Change of Control
Offer" and "Description of the Notes--Repurchase
at the Option of Holders--Change of Control."
CERTAIN COVENANTS........... The Indenture pursuant to which the Exchange
Notes will be issued (the "Indenture") will
contain certain covenants that, among other
things, restrict the ability of the Company and
its Subsidiaries to incur Indebtedness (as
defined herein) to pay dividends or make other
distributions, repurchase Equity Interests (as
defined herein) or subordinated indebtedness,
create certain liens, enter into certain
transactions with affiliates, issue or sell
capital stock of subsidiaries, engage in sale-
and-leaseback transactions, sell assets or enter
into certain mergers or consolidations. See
"Description of the Notes--Certain Covenants."
TRANSFER RESTRICTIONS....... For a description of restrictions on transfer of
the Exchange Notes, see "The Exchange Offer--
Purpose and Effect of the Exchange Offer."
FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE
INVESTORS IN EVALUATING AN INVESTMENT IN THE NOTES, SEE "RISK FACTORS."
9
<PAGE>
SUMMARY HISTORICAL CONSOLIDATED AND PRO FORMA FINANCIAL DATA
The summary historical financial information presented below for each of the
five years in the period ended December 31, 1997 has been derived from the
historical audited consolidated financial statements of the Company, which have
been audited by Arthur Andersen LLP, independent public accountants.
The unaudited summary pro forma data is based on the Company's historical
financial statements, adjusted to give effect to the Offering and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds." The unaudited summary pro forma statement of operations data assumes
the Offering and the application of the proceeds therefrom occurred January 1,
1997. The unaudited summary pro forma balance sheet data assumes the Offering
and the application of the proceeds therefrom occurred as of December 31, 1997.
The unaudited summary pro forma data is not necessarily indicative of the
results that actually would have occurred if the Offering and the application
of the estimated proceeds therefrom had been in effect on the dates indicated
or which may be obtained in the future.
The information presented below should be read in conjunction with the
Consolidated Financial Statements and related notes thereto, the Unaudited Pro
Forma Consolidated Financial Information, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," and other financial
information included elsewhere in this Prospectus. The historical financial
information presented below has been restated for the Company's discontinued
oil and gas operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------
PRO
FORMA
1993 1994 1995(1) 1996(1) 1997(1) 1997
------ ------ ------- ------- ------- ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues....................... $326.1 $313.2 $331.8 $383.4 $376.4 $376.4
Refining operating costs....... 296.2 277.9 317.3 362.5 337.4 337.4
Selling and general expenses... 7.3 7.2 7.2 6.3 8.1 8.1
Depreciation................... 6.9 7.7 8.4 9.0 9.2 9.2
------ ------ ------ ------ ------ ------
Operating income (loss)........ 15.7 20.4 (1.1) 5.6 21.7 21.7
Interest expense, net (2)...... 17.9 18.6 18.2 17.2 13.9 6.6
------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations before income
taxes......................... (2.2) 1.8 (19.3) (11.6) 7.8 15.1
Provision for income taxes..... -- 0.1 -- -- -- --
------ ------ ------ ------ ------ ------
Income (loss) from continuing
operations..................... $ (2.2) $ 1.7 $(19.3) $(11.6) $ 7.8 $ 15.1
====== ====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
EBITDA from continuing
operations(3)................. $ 22.6 $ 28.1 $ 7.3 $ 14.6 $ 30.9 $ 30.9
Capital expenditures from
continuing operations......... 28.7 8.0 5.2 4.8 5.7 5.7
Net cash provided by operating
activities.................... 32.8 32.1 9.9 8.5 12.5
Net cash provided by (used in)
investing activities.......... (39.0) (23.6) 16.4 (12.0) 81.7
Net cash provided by (used in)
financing activities.......... 6.5 (6.4) (26.0) 2.7 (77.7)
Ratio of earnings to fixed
charges(4).................... NM 1.1 NM NM 1.5 2.9
Ratio of EBITDA from continuing
operations to interest
expense(5).................... 1.3 1.5 NM NM 2.2 4.0
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1993 1994 1995(1) 1996(1) 1997(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Raw material input (bpd)
Light crude oil...................... 6,581 6,165 8,098 4,322 3,162
Heavy crude oil...................... 25,909 27,025 27,174 31,677 31,967
Other feed and blend stock........... 2,957 4,105 5,072 5,192 6,154
------- ------- ------- ------- -------
Total.............................. 35,447 37,295 40,344 41,191 41,283
======= ======= ======= ======= =======
Total product sales (bpd)
Gasoline............................. 19,837 19,437 20,767 20,311 20,499
Distillates.......................... 11,819 12,628 13,265 12,561 12,110
Asphalt and other.................... 7,682 6,724 6,781 7,306 7,949
------- ------- ------- ------- -------
Total.............................. 39,338 38,789 40,813 40,178 40,558
======= ======= ======= ======= =======
Operating margin information (dollars
per sales bbl)
Product spread....................... $ 5.51 $ 5.88 $ 4.03 $ 4.48 $ 5.78
Operating expenses, excluding
depreciation........................ 3.55 3.45 3.19 3.15 3.30
Depreciation......................... 0.42 0.53 0.55 0.59 .61
------- ------- ------- ------- -------
Operating margin..................... $ 1.54 $ 1.90 $ 0.29 $ 0.74 $ 1.87
======= ======= ======= ======= =======
Light/heavy crude oil spread
(dollars per bbl)................... $ 4.48 $ 3.61 $ 2.94 $ 2.56 $ 3.54
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
-------------------------
HISTORICAL PRO FORMA
------------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, including cash equivalents.................. $ 21.7 $ 15.4
Total assets...................................... 177.9 172.8
Total debt, including current maturities.......... 70.6 70.0
Shareholders' equity.............................. 55.9 52.9
</TABLE>
- --------
(1) For a discussion of the significant items affecting comparability of
financial information for 1997, 1996 and 1995, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this Offering Memorandum.
(2) No attempt has been made to adjust historical interest expense for
corporate debt obligations which, although used to fund subsidiary
operations, was not allocated among operating subsidiaries and portions of
which have been redeemed from proceeds of the Canadian Disposition. Since
the Canadian Disposition, the Company has redeemed $72.4 million principal
amount of its 12% Senior Notes due 2002 and $7.5 million of its 10 3/4%
Subordinated Debentures due 1998 with such proceeds. The annual interest
expense on the debt redeemed was approximately $9.5 million in the years
1993-1996 and $7.7 million in 1997.
(3) EBITDA from continuing operations represents income from continuing
operations before interest expense, income tax and depreciation and
amortization. The Company has reported EBITDA from continuing operations
because it believes EBITDA is a measure commonly reported and widely used
by investors and other interested parties as an indicator of a company's
operating performance and ability to incur and service debt. The Company
believes EBITDA assists such investors in comparing a company's performance
on a consistent basis without regard to depreciation and amortization,
which can vary significantly depending upon accounting methods
(particularly when acquisitions are involved) or nonoperating factors (such
as historical cost). However, EBITDA is not a calculation based on
generally accepted accounting principles ("GAAP") and should not be
considered an alternative to net income in measuring the Company's
performance or used as an exclusive measure of cash flow because it does
not consider the impact of working capital growth, capital expenditures,
debt principal reductions and other sources and uses of cash which are
disclosed in the Company's Consolidated Statements of Cash Flows. Investors
should carefully consider the specific items included in the Company's
definition of EBITDA and that the Company is only reporting EBITDA
generated from its continuing operations. While EBITDA has been disclosed
herein to permit a more complete comparative analysis of the Company's
operating performance and debt servicing ability relative to other
companies, investors should be cautioned that EBITDA from continuing
operations as reported by the Company may not be comparable in all
instances to EBITDA, and other similar titled measures, as reported by
other companies. The Company believes that the most important trends
illustrated by presenting EBITDA from continuing operations are (i) the
higher level of debt coverage which would have occurred in past periods
given the Company's recently deleveraged financial position and (ii) the
high degree of correlation between the light/heavy spread and the Company's
EBITDA from continuing operations and operating income.
(4) Earnings were inadequate to cover fixed charges for the years ended
December 31, 1993, 1995 and 1996 by $2.9 million, $19.3 million and $11.6
million, respectively.
(5) EBITDA from continuing operations was inadequate to cover interest expense
for the years ended December 31, 1995 and 1996 by $10.9 million and $2.6
million, respectively. Pro forma interest expense assumes that the issuance
of the Notes and the repayment of all existing debt (other than the
Frontier Credit Facility) had occurred at the beginning of 1997.
11
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including, without limitation,
statements that include the words "anticipates," "believes," "could,"
"estimates," "expects," "intends," "may," "plan," "predict," "project,"
"should," and similar expressions, and statements relating to the Company's
strategic plans, capital expenditures, industry trends and prospects and the
Company's financial position. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause actual
results, performance or achievements of the Company to differ materially from
those expressed or implied by such forward-looking statements. Although the
Company believes that its plans, intentions and expectations reflected in such
forward-looking statements are reasonable, it can give no assurance that such
plans, intentions or expectations will be achieved. Important factors that
could cause actual results to differ materially from the Company's
expectations ("Cautionary Statements") are set forth under the captions
"Prospectus Summary," "Risk Factors," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," and elsewhere in this Prospectus. All subsequent written and oral
forward-looking statements attributable to the Company or persons acting on
its behalf are expressly qualified in their entirety by the Cautionary
Statements.
RISK FACTORS
Holders of Old Notes should carefully consider the information set forth
below, as well as other information appearing in this Prospectus, before
tendering any Old Notes for exchange into Exchange Notes. Certain matters set
forth below also apply to the Old Notes and will continue to apply to any Old
Notes remaining outstanding after the Exchange Offer.
RANKING OF THE NOTES; EFFECTIVE SUBORDINATION
The Notes will be general unsecured obligations of the Company ranking pari
passu with all future unsecured senior indebtedness of the Company and senior
to all future subordinated indebtedness of the Company. The Notes will be
effectively subordinated, however, to (i) all future secured obligations of
the Company to the extent of the assets securing such obligations and (ii) all
current and future obligations of the Subsidiaries of the Company (including
borrowings under the Frontier Credit Facility and claims of trade creditors
and tort claimants). In the event of liquidation or insolvency of the Company
or if any secured indebtedness is accelerated, the secured assets of the
Company will be available to pay obligations on the Notes only after such
secured indebtedness has been paid in full. At March 31, 1998, the Company and
its Subsidiaries had approximately $5.7 million of indebtedness outstanding
effectively senior to the Notes (excluding an additional $14.3 million
available for cash advances under the Frontier Credit Facility). See
"Description of the Notes."
HOLDING COMPANY STRUCTURE; DEPENDENCE ON SUBSIDIARIES' OPERATIONS
The Company is a holding company that conducts all of its operations
exclusively through subsidiaries. The Company's only significant assets are
the capital stock of its wholly owned subsidiaries. As a holding company, the
Company is dependent on dividends or other distributions of funds from its
subsidiaries to meet the Company's debt service and other obligations,
including the payment of principal and interest on the Notes. The Indenture,
subject to certain restrictions, permits the Company or its Subsidiaries to
incur additional secured indebtedness, which would in effect be senior to the
Notes. The Indenture also permits such Subsidiaries to pledge assets in order
to secure indebtedness of the Company and to agree with lenders under any
secured indebtedness, including the Frontier Credit Facility, to restrictions
on repurchases of the Notes and on the ability of such Subsidiaries to make
distributions, loans, other payments or asset transfers to the Company. Under
the
12
<PAGE>
terms of the Frontier Credit Facility and related guarantees, the Subsidiaries
of the Company are prohibited from transferring cash in the form of dividends,
loans or advances in certain circumstances, including to the extent any loans
are outstanding to the borrower or upon a default or event of default under
the Frontier Credit Facility. The Frontier Credit Facility includes certain
financial covenant requirements relating to Frontier's working capital, cash
earnings, tangible net worth and fixed charge coverage. Borrowings under the
Frontier Credit Facility also must be reduced to zero for at least five
consecutive business days each calendar quarter, the failure of which
represents an event of default. Accordingly, the existence of borrowings or a
default or event of default under the Frontier Credit Facility could adversely
affect the Company's ability to have sufficient cash to pay its obligations,
including the Notes. See "Description of Indebtedness."
POTENTIAL INABILITY TO SERVICE DEBT
At December 31, 1997, as adjusted to give effect to the Offering and the
application of the estimated net proceeds therefrom, the Company's total debt
was $70.0 million and shareholders' equity was $52.9 million. The degree to
which the Company is leveraged has important consequences to holders of the
Notes, including the following: (i) the Company's ability to obtain additional
financing in the future, whether for working capital, capital expenditures,
acquisitions or other purposes, may be impaired; (ii) a portion of the
Company's cash flow from operations is required to be dedicated to the payment
of interest on its debt, thereby reducing funds available to the Company for
other purposes; (iii) the Company's flexibility in planning for or reacting to
changes in market conditions may be limited; (iv) the Company may be more
vulnerable in the event of a downturn in its business; and (v) to the extent
of any amounts outstanding under the Frontier Credit Facility, the Company
will be vulnerable to increases in interest rates.
The ability of the Company to meet its debt service obligations, including
with respect to the Notes, will depend on the future operating performance and
financial results of the Company, which will be subject in part to factors
beyond the control of the Company. Although the Company believes that its cash
flow will be adequate to meet its interest payments, there can be no assurance
that the Company will continue to generate earnings in the future sufficient
to cover its fixed charges. If the Company is unable to generate earnings in
the future sufficient to cover its fixed charges and is unable to borrow
sufficient funds to cover such charges, it may be required to refinance all or
a portion of its debt or to sell all or a portion of its assets. There can be
no assurance that a refinancing would be possible, nor can there be any
assurance as to the timing of any asset sales or the proceeds that the Company
could realize therefrom. In addition, the Frontier Credit Facility prohibits
the Company from making, or permitting any of its Subsidiaries to make, any
material change in the nature of their respective businesses, which
effectively restricts the Company's ability to sell assets and its use of the
proceeds therefrom.
CONSEQUENCES OF HIGHLY LEVERAGED TRANSACTION
The provisions of the Indenture do not afford the holders of the Notes
protection, including the right to require the Company to repurchase the
Notes, in the event of a highly leveraged transaction that may adversely
affect such holders if such transaction does not constitute a Change of
Control. The indenture does not contain provisions that permit the holders of
the Notes to require that the Company repurchase or redeem the Notes in the
event of a takeover, recapitalization or similar transaction. Accordingly, the
Company could enter into certain transactions, including acquisitions,
refinancing or other recapitalizations, that could effect the Company's
capital structure or the value of the Notes, but that would not constitute a
Change of Control. See "Description of the Notes--Purchase at the Option of
Holders."
VOLATILITY OF CRUDE OIL PRICES AND REFINING MARGINS
The Company's cash flow from operations is primarily dependent upon
producing and selling quantities of refined products at margins sufficient to
cover fixed and variable expenses. In recent years, crude oil costs and prices
of refined products have fluctuated substantially. These costs and prices
depend on numerous factors, including the demand for crude oil, gasoline and
other refined products, which in turn depend on, among other
13
<PAGE>
factors, changes in the economy, the level of foreign and domestic production
of crude oil and refined products, the availability of imports of crude oil
and refined products, the marketing of alternative and competing fuels and the
extent of government regulation.
The Company's crude oil requirements are supplied from sources that include
major oil companies, crude oil marketing companies, large independent
producers and smaller local producers. Crude oil supply contracts are
generally short-term contracts with market-responsive pricing provisions. The
prices received by the Company for its refined products are affected by global
market dynamics as well as local factors such as product pipeline capacity,
local market conditions and the level of operations of other refineries in the
Rocky Mountain region. A large rapid increase in crude oil prices would
adversely affect the Company's operating margins if the increased cost of raw
materials could not be passed along to the Company's customers. The Company
generally does not hedge its refined product prices.
The price at which the Company can sell gasoline and its other refined
products will be strongly influenced by the commodity price of crude oil.
Generally, an increase or decrease in the price of crude oil results in a
corresponding increase or decrease in the price of gasoline and other refined
products. However, the Frontier Refinery maintains inventories of crude oil,
intermediate products and refined products, the value of each of which is
subject to rapid fluctuations in market prices. Inventories are recorded at
the lower of cost on a first in, first out ("FIFO") basis or market. As a
result, a rapid and significant increase or decrease in the market prices for
crude oil or refined products could have a significant short-term impact on
the Company's earnings and cash flow.
LIGHT/HEAVY CRUDE OIL SPREAD
The Company's profitability is linked to the light/heavy spread. The Company
prefers to refine heavy crude oil because it provides a wider refining margin
than does light crude. Accordingly, any tightening of the spread will impact
adversely on the Company's profitability. While the spread has widened since
early 1996, there can be no assurance that this trend will continue. In
addition, a substantial drop in crude oil prices could depress the spread by
making it uneconomical for production companies to produce heavy crude oil,
which sells at a discount to light crude. Because of the historical volatility
of crude oil prices, there can be no assurance that such a situation will not
arise.
OPERATING HAZARDS; SINGLE REFINERY
All of the Company's refining activities currently are conducted at the
Frontier Refinery, which is the Company's principal operating asset. As a
result, the operations of the Company, and its ability to service the Notes,
are subject to significant interruption if the Frontier Refinery were to
experience a major accident or fire, be damaged by severe weather or other
natural disaster, or otherwise be forced to curtail its operations or shut
down. Should the Centennial Pipeline, which runs from the Guernsey Station hub
to the Frontier Refinery, become inoperative, crude oil would have to be
supplied to the Frontier Refinery through an alternative pipeline or from
additional tank trucks, the economic impact of which could be adverse to the
Company. In addition, despite safety procedures put in place by the Company, a
major accident, fire or other event could damage the Frontier Refinery or the
environment or cause personal injuries. Although the Company maintains
business interruption, property and other insurance against these risks in
amounts which it believes to be economically prudent, if the Frontier Refinery
were to experience a major accident or fire or an interruption in supply or
operations, the Company's business could be materially adversely affected. In
addition, the Frontier Refinery consists of many processing units, a number of
which have been in operation for a long time. Although the Company schedules
down time for repair, or "turnaround," for each unit every one to three years,
there can be no assurance that one or more of such units will not require
additional, unscheduled turnarounds for unanticipated maintenance or repairs.
During the first half of 1998, the Company has scheduled a turnaround on two
of the major units of the Frontier Refinery.
14
<PAGE>
RAW MATERIAL SUPPLY
The Company believes an adequate supply of crude oil and other feedstocks
will be available to the Frontier Refinery from local producers, crude oil
sourced through common carrier pipelines and other sources to sustain the
Company's operations for the foreseeable future at substantially the levels
currently being experienced. However, there is no assurance that this
situation will continue. If additional supplemental crude oil becomes
necessary, the Company intends to implement available alternatives that are
most advantageous under then prevailing conditions. Implementation of some
supply alternatives requires the consent or cooperation of third parties and
other considerations beyond the control of the Company. See "Business--
Refining Operations--Crude Oil Supply."
COMPETITION
The refining industry in which the Company is engaged is highly competitive.
Many of the Company's competitors are large, integrated, major or independent
oil companies which, because of their more diverse operations, larger
refineries and stronger capitalization, may be better able than the Company to
withstand volatile industry conditions, including shortages or excesses of
crude oil or refined products or intense price competition at the wholesale
level. Many of these competitors have financial and other resources
substantially greater than those of the Company. In addition, the Company is
aware of several proposals or industry discussions regarding refined products
pipeline projects that if or when undertaken and completed could impact
portions of its marketing areas. The various proposed projects involve both
new pipeline construction and expansions of existing pipelines. Although the
Company believes that it could continue to compete favorably against imported
refined products because of associated transportation costs, the completion of
any of these projects would increase competition by increasing the available
capacity to transport refined products to the Rocky Mountain region. See
"Business--Refining Operations--Competition."
SEASONALITY
Demand for gasoline and asphalt products is higher during the summer months
than during the winter months due to seasonal increases in highway traffic and
road construction work. As a result, the Company's operating results for the
first and fourth calendar quarters are generally lower than those for the
second and third quarters. Diesel demand has historically been more stable
because two major east-west truck routes and two major railroads cross the
Company's principal marketing area. However, reduced road construction and
agricultural work during the winter months does somewhat depress demand for
diesel in the winter months.
ENVIRONMENTAL RISKS
The Company's operations are subject to a variety of federal, state and
local environmental laws and regulations governing the discharge of pollutants
into the air and water, product specifications and the generation, treatment,
storage, transportation and disposal of solid and hazardous waste and
materials. Environmental laws and regulations that affect the Company's
operations, processes and margins have become and are becoming increasingly
stringent. Examples are the Clean Air Act Amendments of 1990 (the "Clean Air
Act Amendments") and the additional environmental regulations adopted by the
United States Environmental Protection Agency ("EPA") and state and local
environmental agencies to implement the Clean Air Act Amendments. Although the
Company believes the Frontier Refinery is able to process currently used
feedstocks at full capacity in substantial compliance with existing
environmental laws and regulations, the Company cannot predict the nature,
scope or effect of legislation or regulatory requirements that could be
imposed or how existing or future laws or regulations will be administered or
interpreted with respect to products or activities to which they have not been
previously applied. Compliance with more stringent laws or regulations, as
well as more vigorous enforcement policies of the regulatory agencies, could
adversely affect the financial position and the results of operations of the
Company and could require substantial expenditures by the Company. See
"Business--Government Regulation--Environmental Matters."
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Also, the Company's operations are inherently subject to accidental spills,
discharges or other releases of petroleum or hazardous substances which may
give rise to liability to governmental entities or private parties under
federal, state or local environmental laws, as well as under common law. The
Company has undertaken all investigative or remedial work to date that has
been requested by governmental agencies to address potential contamination by
the Company. Although the Company has invested substantial resources to
prevent future accidental discharges and to remediate contamination resulting
from prior discharges, there can be no assurance that accidental discharges
will not occur in the future, that future action will not be taken in
connection with past discharges, that governmental agencies will not assess
penalties against the Company in connection with any past or future
contamination, or that third parties will not assert claims against the
Company for damages allegedly arising out of any past or future contamination.
See "Business--Government Regulation--Environmental Matters."
The Company estimates that regulations recently promulgated by the EPA under
the authority of Title III of the Clean Air Act Amendments (the "Title III
Regulations") will require the Company to expend approximately $600,000 by the
regulatory compliance deadline of August 1, 1998 to improve the Frontier
Refinery's control of emissions of hazardous air pollutants. The Company is a
party to an administrative consent order (the "State Order") entered into with
the Wyoming Department of Environmental Quality in 1995 requiring the
investigation of environmental impacts resulting from past activities. The
Company will be responsible for costs related to the site investigations
required by the State Order and any resulting remediation. However, the
ultimate cost of any such environmental remediation projects cannot be
reasonably estimated by the Company at this time. The continuation of the
present investigative process, other more extensive investigations over time
or changes in future regulatory requirements could result in future
liabilities. The Company has been named as a potentially responsible party
("PRP") under CERCLA (as defined herein) at a site in Louisiana associated
with the Company's discontinued oil and gas exploration and production
operations. The Company believes that any future liabilities related to this
site will not have a material adverse effect on the financial condition,
results of operations or business of the Company.
TAX RISKS
The Company and its operations and products are subject to taxes imposed by
federal, state or local governments. These taxes have generally increased over
time. There can be no certainty of the effect that increases in these taxes,
or the imposition of new taxes, could have on the Company, or whether such
taxes could be passed on to customers. See "Business--Government Regulation--
Environmental Matters."
LABOR RELATIONS
The Frontier Refinery currently employs 168 union members represented by the
Oil, Chemical and Atomic Workers Union ("OCAW") and six AFL-CIO affiliated
unions. The Company's current three-year contract with OCAW expires in July
1999, while its current six-year contract with the AFL-CIO affiliated unions
expires in June 2002. On May 8, 1996, approximately 150 union employees of the
Company commenced a strike which settled July 29, 1996. The 1996 strike did
not have a material effect on the Company's operations, and the Company
believes that its current relations with its employees are good. However,
there can be no assurance that the Company's employees will not strike again
at some time in the future or that such a strike would not adversely affect
the Company's operations. See "Business--Employees."
FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO FUTURE SUBSIDIARY GUARANTEES
Although there are currently no Subsidiary Guarantees with respect to the
Notes, the Company's obligations under the Notes may under certain
circumstances be guaranteed on a general unsecured basis in the future.
Various preference or fraudulent conveyance laws have been enacted for the
protection of creditors and may be utilized by a court of competent
jurisdiction to subordinate or avoid any Subsidiary Guarantee issued by a
Guarantor. It is also possible that under certain circumstances a court could
hold that the direct obligations of a
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Guarantor could be superior to the obligations under the Subsidiary Guarantee.
See "Description of the Notes--Subsidiary Guarantees."
To the extent that a court were to find that at the time a Guarantor entered
into a Subsidiary Guarantee either (x) the Subsidiary Guarantee was incurred
by a Guarantor with the intent to hinder, delay or defraud any present or
future creditor or that a Guarantor contemplated insolvency with a design to
favor one or more creditors to the exclusion in whole or in part of others or
(y) the Guarantor did not receive fair consideration or reasonably equivalent
value for issuing the Subsidiary Guarantee and, at the time it issued the
Subsidiary Guarantee, the Guarantor (i) was insolvent or rendered insolvent by
reason of the issuance of the Subsidiary Guarantee, (ii) was engaged or about
to engage in a business or transaction for which the remaining assets of the
Guarantor constituted unreasonably small capital or (iii) intended to incur,
or believed that it would incur, debts beyond its ability to pay such debts as
they matured, the court could avoid or subordinate the Subsidiary Guarantee in
favor of the Guarantor's other creditors. Among other things, a legal
challenge of a Subsidiary Guarantee issued by a Guarantor on fraudulent
conveyance grounds may focus on the benefits, if any, realized by the
Guarantor as a result of the issuance by the Company of the Notes. To the
extent a Subsidiary Guarantee is avoided as a fraudulent conveyance or held
unenforceable for any other reason, the holders of the Notes would cease to
have any claim in respect of such Guarantor and would be creditors solely of
the Company.
POTENTIAL INABILITY TO FUND A CHANGE OF CONTROL OFFER
In the event of a Change of Control (as defined in the Indenture), if the
Company does not exercise its right to purchase the Notes, each Holder will
have the right to require the Company to repurchase all or any portion of its
Notes then outstanding at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest and Liquidated Damages, if
any, thereon, to the date of repurchase. See "Description of the Notes--
Repurchase at the Option of Holders--Change of Control."
Although a Change of Control under the Indenture would not constitute and
event of default under the Frontier Credit Facility, certain events that
constitute a Change of Control under the Indenture could constitute events of
default under future indebtedness incurred by the Company. Such events may
prohibit the Company from repurchasing the Notes, permit the lenders under
such debt instruments to accelerate the debt and, if the debt is not paid, to
enforce security interests on, or commence litigation that could ultimately
result in a sale of, substantially all the assets of the Company. If the
Company is unable to repay all of such indebtedness or is unable to obtain any
necessary consents, then the Company will be unable to offer to repurchase the
Notes and such failure will constitute an Event of Default under the
Indenture. There can be no assurance that the Company will have sufficient
funds available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) as described above. See "Description of
Indebtedness."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Old Notes are currently owned by a relatively small number of beneficial
owners. The Old Notes have not been registered under the Securities Act or any
state securities laws and, unless so registered and to the extent not
exchanged for the Exchange Notes, may not be offered or sold except pursuant
to an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. Any
Old Notes tendered and exchanged in the Exchange Offer will reduce the
aggregate principal amount of Old Notes outstanding. Following the
consummation of the Exchange Offer, holders who did not tender their Old Notes
generally will not have any further registration rights under the Registration
Rights Agreement, and such Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for such
Old Notes could be adversely affected. The Old Notes are currently eligible
for sale pursuant to Rule 144A through The Portal Market of the National
Association of Securities Dealers, Inc. ("Portal"). Because the Company
anticipates that most holders will elect to exchange their Old Notes for
Exchange Notes due to the restrictions on the resale of Old Notes under the
Securities Act, the Company anticipates that the liquidity of the market for
any Old Notes remaining after the consummation of the Exchange Offer may be
substantially limited.
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The Exchange Notes will constitute a new issue of securities for which there
is currently no active trading market. If the Exchange Notes are traded after
their initial issuance, they may trade at a discount from their initial
offering price, depending upon prevailing interest rates, the market for
similar securities and other factors including general economic conditions and
the current financial condition, results of operations and business prospects
of the Company. Although the Exchange Notes will generally be permitted to be
resold or otherwise transferred by non-affiliates of the Company without
compliance with the registration and prospectus delivery requirements of the
Securities Act, the Company does not intend to apply for a listing or
quotation of the Exchange Notes on any securities exchange or stock market.
The Initial Purchaser has informed the Company that it currently intends to
make a market in the Exchange Notes. However, the Initial Purchaser is not
obligated to do so, and any such market-making may be discontinued at any time
without notice. In addition, such market-making activity will be subject to
the limits imposed under the Exchange Act. Accordingly, there can be no
assurance as to the development, liquidity or maintenance of any market for
the Exchange Notes (or in the case of non-tendering holders of Old Notes, the
trading market for the Old Notes following the Exchange Offer). If no trading
market develops or is maintained for the Exchange Notes, holders may
experience difficulty in reselling the Exchange Notes or may be unable to sell
them.
The liquidity of, and trading market for, the Old Notes or the Exchange
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects
for, the Company.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Old Notes who do not exchange their Old Notes for Exchange Notes
pursuant to the Exchange Offer will continue to be subject to the restrictions
on transfer of such Old Notes as set forth in the legend thereon as a
consequence of the issuance of the Old Notes pursuant to exemptions from, or
in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered or sold, unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Company does not
currently anticipate that it will register the Old Notes under the Securities
Act. In addition, upon the consummation of the Exchange Offer, holders of Old
Notes which remain outstanding will not be entitled to any rights to have such
Old Notes registered under the Securities Act or to any similar rights under
the Registration Rights Agreement, subject to certain exceptions. To the
extent that Old Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered, or tendered but unaccepted, Old Notes
could be adversely affected.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on February 9, 1998, to the Initial
Purchaser pursuant to the Purchase Agreement. The Initial Purchaser
subsequently resold all of the Old Notes (i) to Qualified Institutional Buyers
(as defined in Rule 144A) or (ii) outside the United States within the meaning
of Regulation S under the Securities Act, the purchasers of which agreed to
comply with certain transfer restrictions and other conditions. As a condition
to the purchase of the Old Notes by the Initial Purchaser, the Company entered
into the Registration Rights Agreement with the Initial Purchaser, which
requires, among other things, that promptly following the issuance and sale of
the Old Notes, the Company file with the SEC the Registration Statement with
respect to the Exchange Notes, use its best efforts to cause the Registration
Statement to become effective under the Securities Act and, upon the
effectiveness of the Registration Statement, offer to the holders of the Old
Notes the opportunity to exchange their Old Notes for a like principal amount
of Exchange Notes, which will be issued without a restrictive legend and may
be reoffered and resold by the holder without restrictions or limitations
under the Securities Act subject to certain exceptions described below. A copy
of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The term "holder"
with respect to the Exchange Offer means any person in whose name Old Notes
are registered on the Company's books or any other person who has obtained a
properly completed bond power from the registered holder or any person whose
Old Notes are held of record by the Depositary who desires to deliver such Old
Notes by book-entry transfer of the Depositary.
Based on existing interpretations of the Securities Act by the staff of the
SEC set froth in several no-action letters to third parties, and subject to
the immediately following sentence, the Company believes that Exchange Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be offered
for resale, resold and otherwise transferred by a holder thereof (other than
(i) a broker-dealer who purchased such Old Notes directly from the Company for
resale pursuant to Rule 144A or any other available exemption under the
Securities Act or (ii) a person that is an "affiliate" (within the meaning of
Rule 405 of the Securities Act) of the Company), without compliance with the
registration and prospectus delivery provisions of the Securities Act,
provided that the holder is acquiring the Exchange Notes in its ordinary
course of business and is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of the
Exchange Notes. However, any purchaser of Old Notes who is an affiliate of the
Company or who intends to participate in the Exchange Offer for the purpose of
distributing the Exchange Notes, or any broker-dealer who purchased the Old
Notes from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act, (i) will not be able to rely on the
interpretations by the staff of the SEC set forth in such no-action letters,
(ii) will not be able to tender its Old Notes in the Exchange Offer and (iii)
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the Old Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
Accordingly, any holder who tenders in the Exchange Offer with the intention
to participate, or for the purpose of participating, in a distribution of the
Exchange Notes must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with a secondary resale
transaction. See "Plan of Distribution."
As a result of the filing and effectiveness of the Registration Statement of
which this Prospectus is a part, the Company will not be required to pay an
increased interest rate on the Old Notes. Following the consummation of the
Exchange Offer, holders of Old Notes not tendered will not have any further
registration rights except in certain limited circumstances requiring the
filing of a Shelf Registration Statement (as defined in the Registration
Rights Agreement), and the Old Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the liquidity of the market for the Old
Notes could be adversely affected.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept all Old Notes
properly tendered and not withdrawn prior to 5:00 p.m. New York City
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time, on the Expiration Date. After authentication of the Exchange Notes by
the Trustee or an authenticating agent, the Company will issue and deliver
$1,000 principal amount of Exchange Notes in exchange for each $1,000
principal amount of outstanding Old Notes accepted in the Exchange Offer.
Holders may tender some or all of their Old Notes pursuant to the Exchange
Offer in denominations of $1,000 and integral multiples thereof.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange Notes
in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) any Exchange Notes to be received by it were
acquired in the ordinary course of its business and (iii) it has no
arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the Exchange Notes.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Old Notes, where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities,
must acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes. See "Plan of Distribution."
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Old Notes, except that (i) the offering
of the Exchange Notes has been registered under the Securities Act, (ii) the
Exchange Notes will not be subject to transfer restrictions and (iii) the
holders of the Exchange Notes will not be entitled to registration or other
rights under the Registration Rights Agreement including the provision for
payment of Liquidated Damages upon failure by the Company to consummate the
Exchange Offer or to maintain the effectiveness of the Registration Statement
of which this Prospectus is a part. The Exchange Notes will evidence the same
debt as the Old Notes. The Exchange Notes will be issued under and entitled to
the benefits of the Indenture.
As of the date of this Prospectus, $70,000,000 aggregate principal amount of
the Old Notes is outstanding. In connection with the issuance of the Old
Notes, the Company arranged for the Old Notes to be issued and transferable in
book-entry form through the facilities of the Depositary, acting as
depositary. The Exchange Notes will also be issuable and transferable in book-
entry form through the Depositary.
This Prospectus, together with the accompanying Letter of Transmittal, is
initially being sent to all registered holders of the Old Notes as of the
close of business on May 20, 1998. The Company intends to conduct the Exchange
Offer in accordance with the applicable requirements of the Exchange Act, and
the rules and regulations of the SEC thereunder, including Rule 14e-1, to the
extent applicable. The Exchange Offer is not conditioned upon any minimum
aggregate principal amount of Old Notes being tendered, and holders of the Old
Notes do not have any appraisal or dissenters' rights under the Wyoming
Business Corporation Act or under the Indenture in connection with the
Exchange Offer. The Company shall be deemed to have accepted validly tendered
Old Notes when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. See "--Exchange Agent." The Exchange Agent will act as
agent for the tendering holders for the purpose of receiving Exchange Notes
from the Company and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, at the
Company's cost, to the tendering holder thereof as promptly as practicable
after the Expiration Date. See "--Expiration Date; Extensions; Amendments" and
"--Procedures for Tendering."
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes pursuant to the Exchange Offer. The Company will pay all charges and
expenses, other than certain applicable taxes, in connection with the Exchange
Offer. See "--Solicitation of Tenders; Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OLD NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM
TENDERING ALL OR ANY PORTION OF THEIR OLD NOTES PURSUANT TO THE EXCHANGE
OFFER. MOREOVER, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
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RECOMMENDATION. HOLDERS OF OLD NOTES MUST MAKE THEIR OWN DECISION WHETHER TO
TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE AMOUNT OF OLD
NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL
AND CONSULTING WITH THEIR ADVISORS, IF ANY, BASED ON THEIR OWN FINANCIAL
POSITION AND REQUIREMENTS.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on June
19, 1998, unless the Company, in its sole discretion, extends the Exchange
Offer, in which case the term "Expiration Date" shall mean the latest date to
which the Exchange Offer is extended. The Company may extend the Exchange
Offer at any time and from time to time by giving oral or written notice to
the Exchange Agent and by timely public announcement.
The Company expressly reserves the right, in its sole discretion (i) to
delay acceptance of any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Old Notes not previously
accepted, if any of the conditions set forth herein under "--Conditions of the
Exchange Offer" shall have occurred and shall not have been waived by the
Company (if permitted to be waived by the Company), by giving oral or written
notice of such delay, extension or termination to the Exchange Agent and (ii)
to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance, extension, termination or amendment will be followed as promptly
as practicable by oral or written notice thereof by the Company to the
registered holders of the Old Notes. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, the Company
will promptly disclose such amendment in a manner reasonably calculated to
inform the holders of such amendment and the Company will extend the Exchange
Offer to the extent required by law.
Without limiting the manner in which the Company may choose to make public
announcements of any delay in acceptance, extension, termination or amendment
of the Exchange Offer, the Company shall have no obligation to publish, advise
or otherwise communicate any such public announcement, other than by making a
timely release thereof to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest at a rate of 9 1/8% per annum, payable
semiannually on February 15 and August 15 of each year, commencing August 15,
1998. Holders of Exchange Notes of record on August 1, 1998, will receive on
August 15, 1998, an interest payment in an amount equal to (i) the accrued
interest on such Exchange Notes from the date of issuance thereof to August
15, 1998, plus (ii) the accrued interest on the previously held Old Notes from
the date of issuance of such Old Notes (February 9, 1998) to the date of
exchange thereof. Interest will not be paid on Old Notes that are accepted for
exchange. The Notes mature on February 15, 2006.
PROCEDURES FOR TENDERING
Each holder of Old Notes wishing to accept the Exchange Offer must complete,
sign and date the Letter of Transmittal, or a facsimile thereof, in accordance
with the instructions contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such facsimile, together with the Old
Notes to be exchanged and any other required documentation, to Chase Bank of
Texas, National Association, as Exchange Agent, at the address set forth
herein and in the Letter of Transmittal or effect a tender of Old Notes
pursuant to the procedures for book-entry transfer as provided for herein and
therein. By executing the Letter of Transmittal, each holder will represent to
the Company, that, among other things, the Exchange Notes acquired pursuant to
the Exchange Offer are being acquired in the ordinary course of business of
the person receiving such Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other person has any arrangement
or understanding with any person to participate, and does not intend to
participate, in the distribution of such
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Exchange Notes and that neither the holder nor any such other person is an
"affiliate," as defined in Rule 405 under the Securities Act, of the Company.
Any financial institution that is a participant in the Depositary's Book-
entry Transfer Facility system may make book-entry delivery of the Old Notes
by causing the Depositary to transfer such Old Notes into the Exchange Agent's
account in accordance with the Depositary's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer
into the Exchange Agent's account at the Depositary, the Letter of Transmittal
(or facsimile thereof), with any required signature guarantees and any other
required documents, must, in any case, be transmitted to and received by the
Exchange Agent at its address set forth herein under "--Exchange Agent" prior
to 5:00 p.m., New York City time, on the Expiration Date. DELIVERY OF
DOCUMENTS TO THE DEPOSITARY IN ACCORDANCE WITH ITS PROCEDURES DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. See "--Book Entry Transfer."
Only a holder may tender its Old Notes in the Exchange Offer. To tender in
the Exchange Offer, a holder must complete, sign and date the Letter of
Transmittal or a facsimile thereof, have the signatures thereof guaranteed if
required by the Letter of Transmittal, and mail or otherwise deliver such
Letter of Transmittal or such facsimile, together with the Old Notes (unless
such tender is being effected pursuant to the procedure for book-entry
transfer) and any other required documents, to the Exchange Agent for receipt,
prior to 5:00 p.m., New York City time, on the Expiration Date.
The Tender by a holder will constitute an agreement between such holder, the
Company and the Exchange Agent in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. If less than all
of the Old Notes are tendered, a tendering holder should fill in the amount of
Old Notes being tendered in the appropriate box on the Letter of Transmittal.
The entire amount of Old Notes delivered to the Exchange Agent will be deemed
to have been tendered unless otherwise indicated.
THE LETTER OF TRANSMITTAL WILL INCLUDE REPRESENTATIONS TO THE COMPANY THAT,
AMONG OTHER THINGS, (1) THE EXCHANGE NOTES ACQUIRED PURSUANT TO THE EXCHANGE
OFFER ARE BEING ACQUIRED IN THE ORDINARY COURSE OF BUSINESS OF THE PERSON
RECEIVING SUCH EXCHANGE NOTES (WHETHER OR NOT SUCH PERSON IS THE HOLDER), (2)
NEITHER THE HOLDER NOR ANY SUCH OTHER PERSON IS ENGAGED IN, INTENDS TO ENGAGE
IN OR HAS ANY ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE IN
THE DISTRIBUTION OF SUCH EXCHANGE NOTES, (3) NEITHER THE HOLDER NOR ANY SUCH
OTHER PERSON IS AN "AFFILIATE" (AS DEFINED IN RULE 405 UNDER THE SECURITIES
ACT), OF THE COMPANY AND (4) IF THE TENDERING HOLDER IS A BROKER OR DEALER (AS
DEFINED IN THE EXCHANGE ACT) (A) IT ACQUIRED THE OLD NOTES FOR ITS OWN ACCOUNT
AS A A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND (B)
IT HAS NOT ENTERED INTO ANY ARRANGEMENT OR UNDERSTANDING WITH THE COMPANY OR
ANY "AFFILIATE" THEREOF TO DISTRIBUTE THE EXCHANGE NOTES TO BE RECEIVED IN THE
EXCHANGE OFFER. IN THE CASE OF A BROKER-DEALER THAT RECEIVES EXCHANGE NOTES
FOR ITS OWN ACCOUNT IN EXCHANGE FOR OLD NOTES WHICH WERE ACQUIRED BY IT AS A
RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES, THE LETTER OF TRANSMITTAL
WILL ALSO INCLUDE AN ACKNOWLEDGMENT THAT THE BROKER-DEALER WILL DELIVER A COPY
OF THIS PROSPECTUS IN CONNECTION WITH THE RESALE BY IT OF EXCHANGE NOTES
RECEIVED PURSUANT TO THE EXCHANGE OFFER; HOWEVER, BY SO ACKNOWLEDGING AND BY
DELIVERING A PROSPECTUS, SUCH HOLDER WILL NOT BE DEEMED TO ADMIT THAT IT IS AN
"UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT. SEE "PLAN OF
DISTRIBUTION."
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDERS. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ENSURE DELIVERY TO THE EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY ALSO REQUEST THAT THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS,
TRUST COMPANIES OR NOMINEES EFFECT SUCH TENDER FOR HOLDERS, IN EACH CASE AS
SET FORTH HEREIN AND IN THE LETTER OF TRANSMITTAL.
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Any beneficial owner whose Old Notes are registered in the name of his
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact such registered holder promptly and instruct such
registered holder to tender on his behalf. If such beneficial owner wishes to
tender on his own behalf, such beneficial owner must, prior to completing and
executing the Letter of Transmittal and delivering his Old Notes, either make
appropriate arrangements to register ownership of the Old Notes in such
owner's name or obtain a properly completed bond power from the registered
holder. The transfer of record ownership would require that a beneficial owner
contact the broker or other registered holder to request such transfer, who
may in turn have to contact additional parties to effect such transfer.
Accordingly, the transfer of record ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national
securities exchange or of the National Association of Securities Dealers,
Inc., a commercial bank or trust company having an office or correspondent in
the United States or an "eligible guarantor institution" within the meaning of
Rule 17Ad-15 under the Exchange Act (each an "Eligible Institution"), unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered
holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" of the Letter of Transmittal
or (ii) for the account of an Eligible Institution. If the Letter of
Transmittal is signed by a person other than the registered holder listed
therein, such Old Notes must be endorsed or accompanied by appropriate bond
powers which authorize such person to tender the Old Notes on behalf of the
registered holder, in either case signed as the name of the registered holder
or holders appears on the Old Notes. If the Letter of Transmittal or any Old
Notes or bond powers are signed or endorsed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such person should so
indicate when signing, and unless waived by the Company, evidence satisfactory
to the Company of their authority to so act must be submitted with the Letter
of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered or any Old Notes the Company's acceptance
of which would, in the opinion of counsel for the Company, be unlawful. The
Company also reserves the absolute right to waive irregularities or conditions
of tender as to particular Old Notes. The Company's interpretation of the
terms, and conditions of the Exchange Offer (including the instructions in the
Letter of Transmittal) will be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
must be cured within such time as the Company shall determine. Although the
Company intends to notify holders of defects or irregularities with respect to
tenders of Old Notes, neither the Company, the Exchange Agent nor any other
person shall be under any duty to give notification of defects or
irregularities with respect to tenders of Old Notes, nor shall any of them
incur any liability for failure to give such notification. Tenders of Old
Notes will not be deemed to have been made until such irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that the Company
determines are not properly tendered or the tender of which is otherwise
rejected by the Company, and as to which the defects or irregularities have
not been cured or waived by the Company, will be returned by the Exchange
Agent to the tendering holder unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
In addition, the Company reserves the right, to the extent permitted by
applicable law, in its sole discretion (i) to purchase or make offers for any
Old Notes that remain outstanding subsequent to the Expiration Date, or, as
set forth under "--Conditions of the Exchange Offer," terminate the Exchange
Offer and (ii) to purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or
offers may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the
Old Notes at the DTC (the "Book-Entry Transfer Facility") for the purpose of
facilitating the Exchange Offer, and subject to the establishment thereof, any
financial
23
<PAGE>
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. ALTHOUGH DELIVERY OF OLD NOTES MAY BE EFFECTED
THROUGH BOOK-ENTRY TRANSFER INTO THE EXCHANGE AGENT'S ACCOUNT AT THE BOOK-
ENTRY TRANSFER FACILITY, AN APPROPRIATE LETTER OF TRANSMITTAL PROPERLY
COMPLETED AND DULY EXECUTED WITH ANY REQUIRED SIGNATURE GUARANTEE AND ALL
OTHER REQUIRED DOCUMENTS MUST IN EACH CASE BE TRANSMITTED TO AND RECEIVED OR
CONFIRMED BY THE EXCHANGE AGENT AT ITS ADDRESS SET FORTH BELOW ON OR PRIOR TO
THE EXPIRATION DATE, OR, IF THE GUARANTEED DELIVERY PROCEDURES DESCRIBED BELOW
ARE COMPLIED WITH, WITHIN THE TIME PERIOD PROVIDED UNDER SUCH PROCEDURES.
DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY DOES NOT CONSTITUTE
DELIVERY TO THE EXCHANGE AGENT.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, or who cannot complete the procedure for book-entry
transfer on a timely basis, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmittal, mail or hand delivery)
setting forth the name and address of the holder, the certificate number or
numbers of such holder's Old Notes and the principal amount of such Old
Notes tendered, stating that the tender is being made thereby, and
guaranteeing that, within three New York Stock Exchange ("NYSE") trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof), together with the certificate(s) representing the Old Notes to be
tendered in proper form for transfer (or confirmation of a book-entry
transfer into the Exchange Agent's account at the Depositary of Old Notes
delivered electronically) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the
Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), together with the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a book-
entry transfer into the Exchange Agent's account at the Depositary of Old
Notes delivered electronically) and all other documents required by the
Letter of Transmittal are received by the Exchange Agent within three NYSE
trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written or facsimile transmission notice
of withdrawal must be received by the Exchange Agent at its address set forth
herein prior to 5:00 p.m., New York City time, on the Expiration Date. Any
such notice of withdrawal must (i) specify the name of the person having
deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify the
Old Notes to be withdrawn (including the certificate number or numbers and
principal amount of such Old Notes or, in the case of Old Notes transferred by
book-entry transfer, the name and number of the account at the Depositary to
be credited), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantee) or be accompanied by
documents of transfer sufficient to permit the Trustee with respect to the Old
Notes to register the transfer of such Old Notes into the name of the
Depositor
24
<PAGE>
withdrawing the tender and (iv) specify the name in which any such Old Notes
are to be registered, if different from that of the Depositor. All questions
as to the validity, form and eligibility (including time of receipt) of such
withdrawal notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Old Notes so withdrawn will be
deemed not to have been validly tendered for purposes of the Exchange Offer,
and no Exchange Notes will be issued with respect thereto unless the Old Notes
so withdrawn are validly retendered. Any Old Notes that have been tendered but
are not accepted for exchange will be returned to the holder thereof without
cost to such holder as soon as practicable after withdrawal, rejection of
tender or termination of the Exchange Offer. Properly withdrawn Old Notes may
be retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to exchange Exchange Notes for, any Old
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Old Notes if, in the Company's judgment, any of the
following conditions has occurred or exists or has not been satisfied: (i)
that the Exchange Offer, or the making of any exchange by a holder, violates
applicable law or any applicable interpretation of the staff of the SEC, (ii)
that any action or proceeding shall have been instituted or threatened in any
court or by or before any governmental agency or body with respect to the
Exchange Offer, (iii) that there has been adopted or enacted any law, statute,
rule or regulation that can reasonably be expected to impair the ability of
the Company to proceed with the Exchange Offer, (iv) that there has been
declared by United States federal or New York state authorities a banking
moratorium; or (v) that trading on the American Stock Exchange or the New York
Stock Exchange or generally in the United States over-the-counter market has
been suspended by order of the SEC or any other governmental agency, in each
of clauses (i) through (iv) which, in the Company's judgment, would reasonably
be expected to impair the ability of the Company to proceed with the Exchange
Offer.
If the Company determines that it may terminate the Exchange Offer for any
of the reasons set forth above, the Company may (i) refuse to accept any Old
Notes and return any Old Notes that have been tendered to the holders thereof,
(ii) extend the Exchange Offer and retain all Old Notes tendered prior to the
Expiration Date of the Exchange Offer, subject to the rights of such holders
of tendered Old Notes to withdraw their tendered Old Notes or (iii) waive such
termination event with respect to the Exchange Offer and accept all properly
tendered Old Notes that have not been withdrawn. If such waiver constitutes a
material change in the Exchange Offer, the Company will disclose such change
by means of a supplement to this Prospectus that will be distributed to each
registered holder, and the Company will extend the Exchange Offer for a period
of five to ten business days, depending upon the significance of the waiver
and the manner of disclosure to the registered holders, if the Exchange Offer
would otherwise expire during such period.
25
<PAGE>
EXCHANGE AGENT
Chase of Bank of Texas, National Association, the Trustee under the
Indenture, has been appointed as Exchange Agent for the Exchange Offer. In
such capacity, the Exchange Agent has no fiduciary duties and will be acting
solely on the basis of directions of the Company. Requests for assistance and
requests for additional copies of this Prospectus or of the Letter of
Transmittal should be directed to the Exchange Agent addressed as follows:
Chase Bank of Texas, National Association
By Hand or Overnight By Facsimile By Mail:
Courier: Transmission
(for Eligible
Institutions Only):
Chase Bank of Texas,
Chase Bank of Texas, National Association
National Association (214) 762-5932 P.O. Box 2320
One Main Place To Confirm by Telephone Dallas, Texas 75221-
1201 Main Street, 18th Call: 2320
Floor (214) 672-5678 Attention: Frank Ivins
Dallas, Texas 75202 Registered Bond
Attention: Frank Ivins For Information or to Events
Request Additional
Copies Call:
Registered Bond Events
(713) 216-6686
Attention: Marui Cowen
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
SOLICITATION OF TENDERS; FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation pursuant to the Exchange
Offer is being made by mail. Additional solicitations may be made by officers
and regular employees of the Company and its affiliates in person, by
telegraph, telephone or telecopier.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or other
persons soliciting acceptances of the Exchange Offer. The Company will,
however, pay the Exchange Agent reasonable and customary fees for its
services, reimburse the Exchange Agent for its reasonable out-of-pocket costs
and expenses in connection therewith and indemnify the Exchange Agent for all
losses and claims incurred by it as a result of the Exchange Offer. The
Company may also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of this Prospectus, the Letter of Transmittal and related
documents to the beneficial owners of the Old Notes and in handling or
forwarding tenders for exchange.
The expenses to be incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees and printing costs, will be paid by the Company.
The Company will pay all transfer taxes, if any, applicable to the exchange
of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing Exchange Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered holder of the Old
Notes tendered, or if tendered Old Notes are registered in the name of any
person other than the person signing the Letter of Transmittal, or if a
transfer tax is imposed for any reason other than the exchange of Old Notes
pursuant to the Exchange Offer, then the amount of any such transfer taxes
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed by the Company directly to
such tendering holder.
26
<PAGE>
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the Old
Notes, as reflected in the Company's accounting records on the date of the
exchange. Accordingly, no gain or loss for accounting purposes will be
recognized by the Company as a result of the consummation of the Exchange
Offer. The expenses of the Exchange Offer will be amortized by the Company
over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
Participation in the Exchange Offer is voluntary. Holders of the Old Notes
are urged to consult their financial and tax advisors in making their own
decisions as to what action to take.
As a result of the making of, and upon acceptance for exchange of all
validly tendered Old Notes pursuant to the terms of, this Exchange Offer, the
Company will have fulfilled a covenant contained in the Registration Rights
Agreement. Holders of the Old Notes who do not tender their Old Notes in the
Exchange Offer will continue to hold such Old Notes and will be entitled to
all the rights, and subject to the limitations applicable thereto, under the
Indenture and the Registration Rights Agreement, except for any such rights
under the Registration Rights Agreement that by their terms terminate or cease
to have further effect as a result of the making of this Exchange Offer. See
"Description of the Notes." All untendered Old Notes will continue to be
subject to the restrictions on transfer set forth in the Indenture. The Old
Notes may not be offered, resold, pledged or otherwise transferred, prior to
the date that is two years after the later of February 9, 1998 and the last
date on which the Company or any "affiliate" (within the meaning of Rule 144
of the Securities Act) of the Company was the owner of such Old Note except
(i) to the Company, (ii) pursuant to a registration statement which has been
declared effective under the Securities Act, (iii) to Qualified Institutional
Buyers in reliance upon the exemption from the registration requirements of
the Securities Act provided by Rule 144A, (iv) in a transaction occurring
outside the United States to a foreign person, which transaction meets the
requirements of Rule 904 under the Securities Act, (v) in transactions
complying with the provisions of Regulation S under the Securities Act, (vi)
after one year, in transactions complying with the volume limitation
provisions under section (e) of Rule 144 or (vii) in accordance with another
exemption from the registration requirements under the Securities Act (and
based upon an opinion of counsel if the Company so requests), and, in each
case, in accordance with any applicable securities laws of any State of the
United States or any other applicable jurisdiction. To the extent that Old
Notes are tendered and accepted in the Exchange Offer, the liquidity of the
trading market for untendered Old Notes could be adversely affected.
The Company may in the future seek to acquire untendered Old Notes in the
open market or through privately negotiated transactions, through subsequent
exchange offers or otherwise. The Company intends to make any such
acquisitions of Old Notes in accordance with the applicable requirements of
the Exchange Act and the rules and regulations of the SEC thereunder,
including Rule 14e-1, to the extent applicable. The Company has no present
plan to acquire any Old Notes that are not tendered in the Exchange Offer or
to file a registration statement to permit resales of any Old Notes that are
not tendered in the Exchange Offer.
27
<PAGE>
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange Old
Notes in like principal amount. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Old Notes,
except that (i) the offering of the Exchange Notes has been registered under
the Securities Act, (ii) the Exchange Notes will not be subject to transfer
restrictions and (iii) the holders of the Exchange Notes will not be entitled
to registration or other rights under the Registration Rights Agreement
including the payment of Liquidated Damages upon failure by the Company to
consummate the Exchange Offer or the occurrence of certain other events. The
Old Notes surrendered in exchange for Exchange Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the Exchange Notes
will not result in a change in the indebtedness of the Company.
CAPITALIZATION
The following table sets forth the historical unaudited consolidated
capitalization of the Company as of December 31, 1997, and the as adjusted
consolidated capitalization which gives effect to the Offering and the
application of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997
------------------------
ACTUAL AS ADJUSTED(1)(2)
------ -----------------
(IN MILLIONS)
<S> <C> <C>
Cash, including cash equivalents...................... $ 21.7 $ 15.4
====== ======
Total debt, including current maturities:
Frontier Credit Facility(3)......................... $ -- $ --
9 1/8% Senior Notes due 2006........................ -- 70.0
12% Senior Notes due 2002(4)........................ 24.6 --
7 3/4% Convertible Subordinated Debentures due
2014(4)............................................ 46.0 --
------ ------
Total debt........................................ 70.6 70.0
------ ------
Total shareholders' equity............................ 55.9 52.9
------ ------
Total capitalization.................................. $126.5 $122.9
====== ======
</TABLE>
- --------
(1) Assumes net proceeds of $67.3 million from the Offering, the redemption of
the remaining $24.6 million principal amount of the Company's 12% Senior
Notes due 2002 at a price of 103.43% and the redemption of all of the
$46.0 million of the Convertible Debentures at a price of 101.55%. See
Note (a) in the Notes to Unaudited Pro Forma Consolidated Financial
Statements.
(2) On March 12, 1998, all but $713,000 of the 7 3/4% Convertible Subordinated
Debentures were redeemed. Holders of $713,000 of the 7 3/4% Convertible
Subordinated Debentures elected to convert into 83,542 shares of the
Company's Common Stock.
(3) The maximum amount available under the Frontier Credit Facility is $50.0
million, of which maximum cash borrowings are currently $20.0 million. Any
unutilized capacity after cash borrowings is available for letters of
credit. See "Description of Indebtedness."
(4) On February 10, 1998 the Company called for redemption of the outstanding
principal amounts with a call date of March 12, 1998.
28
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The selected historical financial information presented below for each of
the five years in the period ended December 31, 1997 has been derived from the
historical audited consolidated financial statements of the Company, which
have been audited by Arthur Andersen LLP, independent public accountants. The
information presented below should be read in conjunction with the
Consolidated Financial Statements and related notes thereto, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," and
other financial information included elsewhere in this Prospectus. The
historical financial information presented below has been restated for the
Company's discontinued oil and gas operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1993 1994 1995(1) 1996(1) 1997(1)
------ ------ ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Revenues............................. $326.1 $313.2 $331.8 $383.4 $376.4
Refining operating costs............. 296.2 277.9 317.3 362.5 337.4
Selling and general expenses......... 7.3 7.2 7.2 6.3 8.1
Depreciation......................... 6.9 7.7 8.4 9.0 9.2
------ ------ ------ ------ ------
Operating income (loss).............. 15.7 20.4 (1.1) 5.6 21.7
Interest expense, net(2)............. 17.9 18.6 18.2 17.2 13.9
------ ------ ------ ------ ------
Income (loss) from continuing
operations before income taxes...... (2.2) 1.8 (19.3) (11.6) 7.8
Provision for income taxes........... -- 0.1 -- -- --
------ ------ ------ ------ ------
Income (loss) from continuing
operations.......................... (2.2) 1.7 (19.3) (11.6) 7.8
Income (loss) from discontinued
operations(3)....................... 4.7 (14.3) 0.2 4.8 15.2
------ ------ ------ ------ ------
Income (loss) before extraordinary
items............................... 2.5 (12.6) (19.1) (6.8) 23.0
Extraordinary loss on retirement of
debt................................ -- -- -- -- 3.9
------ ------ ------ ------ ------
Net income (loss).................... $ 2.5 $(12.6) $(19.1) $ (6.8) $ 19.1
====== ====== ====== ====== ======
BASIC AND DILUTED EARNINGS (LOSS) PER
AVERAGE SHARE OF COMMON STOCK:
Continuing operations................ $ (.09) $ .06 $ (.71) $ (.43) $ .28
Discontinued operations.............. .19 (.52) .01 .18 .55
Extraordinary loss................... -- -- -- -- (.14)
------ ------ ------ ------ ------
Net income (loss).................... $ .10 $ (.46) $ (.70) $ (.25) $ .69
====== ====== ====== ====== ======
OTHER FINANCIAL DATA:
EBITDA from continuing operations(4). $ 22.6 $ 28.1 $ 7.3 $ 14.6 $ 30.9
Capital expenditures from continuing
operations.......................... 28.7 8.0 5.2 5.0 5.7
Net cash provided by operating
activities.......................... 32.8 32.1 9.9 8.5 12.5
Net cash provided by (used in)
investing activities................ (39.0) (23.6) 16.4 (12.0) 81.7
Net cash provided by (used in)
financing activities................ 6.5 (6.4) (26.0) 2.7 (77.7)
Ratio of earnings to fixed
charges(5).......................... NM 1.1 NM NM 1.5
BALANCE SHEET DATA(6):
Cash, including cash equivalents..... $ 3.8 $ 5.8 $ 6.0 $ 5.2 $ 21.7
Total assets......................... 296.8 277.5 238.4 239.9 177.9
Total debt, including current
maturities.......................... 176.9 170.8 145.4 148.4 70.6
Shareholders' equity................. 66.0 49.4 32.5 25.3 55.9
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1993 1994 1995(1) 1996(1) 1997(1)
------- ------- ------- ------- -------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Raw material input (bpd)
Light crude oil................ 6,581 6,165 8,098 4,322 3,162
Heavy crude oil................ 25,909 27,025 27,174 31,677 31,967
Other feed and blend stocks.... 2,957 4,105 5,072 5,192 6,154
------- ------- ------- ------- -------
Total........................ 35,447 37,295 40,344 41,191 41,283
======= ======= ======= ======= =======
Heavy crude oil percentage of
crude oil charges............... 80% 81% 77% 88% 91%
Manufactured product yields
(bpd)
Gasoline....................... 15,129 16,106 17,263 16,825 17,060
Distillates.................... 11,777 13,094 13,744 13,712 12,856
Asphalt and other.............. 7,128 6,575 7,951 9,215 10,200
------- ------- ------- ------- -------
Total........................ 34,034 35,775 38,958 39,752 40,116
======= ======= ======= ======= =======
Total product sales (bpd)
Gasoline....................... 19,837 19,437 20,767 20,311 20,499
Distillates.................... 11,819 12,628 13,265 12,561 12,110
Asphalt and other.............. 7,682 6,724 6,781 7,306 7,949
------- ------- ------- ------- -------
Total........................ 39,338 38,789 40,813 40,178 40,558
======= ======= ======= ======= =======
Operating margin information
(Dollars per sales bbl)
Average sales price............ $ 22.60 $ 22.06 $ 22.14 $ 25.98 $ 25.27
Material costs................. 17.09 16.18 18.11 21.50 19.49
------- ------- ------- ------- -------
Product spread............... 5.51 5.88 4.03 4.48 5.78
Operating expenses excluding
depreciation.................. 3.55 3.45 3.19 3.15 3.30
Depreciation................... 0.42 0.53 0.55 0.59 0.61
------- ------- ------- ------- -------
Operating margin............. $ 1.54 $ 1.90 $ 0.29 $ 0.74 $ 1.87
======= ======= ======= ======= =======
Light/heavy crude oil spread
(dollars per bbl)............... $ 4.48 $ 3.61 $ 2.94 $ 2.56 $ 3.54
</TABLE>
- --------
(1) For a discussion of the significant items affecting comparability of
financial information for 1997, 1996 and 1995, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Offering Memorandum.
(2) No attempt has been made to adjust historical interest expense for
corporate debt obligations which, although used to fund subsidiary
operations, was not allocated among operating subsidiaries and portions of
which have been redeemed from proceeds of the Canadian Disposition. Since
the Canadian Disposition, the Company has redeemed $72.4 million principal
amount of its 12% Senior Notes due 2002 and $7.5 million of its 10 3/4%
Subordinated Debentures due 1998 with such proceeds. The annual interest
expense on the debt redeemed was approximately $9.5 million in the years
1993-1996 and $7.7 million in 1997.
(3) Discontinued operations reflected in the above periods represent the
Company's oil and gas operating segment, comprising the Canadian and
United States oil and gas properties. On June 16, 1997, the Company
completed the Canadian Disposition. The Company completed the U.S.
Disposition during 1995.
(4) EBITDA from continuing operations represents income from continuing
operations before interest expense, income tax and depreciation and
amortization. The Company has reported EBITDA from continuing operations
because it believes EBITDA is a measure commonly reported and widely used
by investors and other interested parties as an indicator of a company's
operating performance and ability to incur and service debt. The Company
believes EBITDA assists such investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which can vary significantly depending upon accounting
methods (particularly when acquisitions are involved) or nonoperating
factors (such as historical cost). However, EBITDA is not a calculation
based on GAAP and should not be considered an alternative to net income in
measuring the Company's performance or used as an exclusive measure of
cash flow because it does not consider the impact of working capital
growth, capital expenditures, debt principal reductions and other sources
and uses of cash which are disclosed in the Company's Consolidated
Statements of Cash Flows. Investors should carefully consider the specific
items included in the Company's definition of EBITDA and that the Company
is only reporting EBITDA generated from its continuing operations. While
EBITDA has been disclosed herein to permit a more complete comparative
analysis of the Company's operating performance and debt servicing ability
relative to other companies, investors should be cautioned that EBITDA
from continuing operations as reported by the Company may not be
comparable in all instances to EBITDA, and other similar titled measures,
as reported by other companies. The Company believes that the most
important trends illustrated by presenting EBITDA from continuing
operations are (i) the higher level of debt coverage which would have
occurred in past periods given the Company's recently deleveraged
financial position and (ii) the high degree of correlation between the
light/heavy spread and the Company's EBITDA from continuing operations and
operating income.
(5) Earnings were inadequate to cover fixed charges for the years ended
December 31, 1993, 1995 and 1996 by $2.9 million, $19.3 million and $11.6
million, respectively.
(6) Balance sheet data has not been restated to reflect the disposition of the
Company's oil and gas operations.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
In 1997 the Company decided to focus entirely on its refining business and
to divest its remaining exploration and production operations. The Company had
previously completed the sale of its domestic oil and gas properties (the
"U.S. Disposition") in 1995, and in June 1997, it closed the Canadian
Disposition. After such dispositions, the Company's primary continuing
operation is the Frontier Refinery. Accordingly, the Company's operating
results for its oil and gas operations segment, comprising the oil and gas
properties divested in the U.S. Disposition and the Canadian Disposition, are
presented as discontinued operations in the consolidated financial statements.
The Company experiences stronger demand for its refined products,
particularly gasoline and asphalt, during the summer months due to seasonal
increases in highway traffic and road construction work. As a result, the
Company's operating results for the first and fourth calendar quarters are
generally lower than those for the second and third quarters. Demand for
diesel is more stable, but reduced road construction and agricultural work
during the winter months does have an impact on demand for diesel. Consistent
with the seasonality of its business, the Company invests in working capital
during the first half of the year and recovers working capital investment in
the second half of the year.
RESULTS OF OPERATIONS
1997 Compared with 1996. The Company had net income for the year ended
December 31, 1997 of $19.1 million or $0.69 per share, compared to a loss of
$6.9 million or ($0.25) per share for 1996. The 1997 results include a $23.3
million gain resulting from the Canadian Disposition which closed on June 16,
1997, a $9.9 million reduction to income in recognition of the cumulative
translation adjustment and a $3.9 million extraordinary loss on early
retirement of debt.
Operating income increased by $16.1 million in the year ended December 31,
1997 as compared to 1996 due to an increase in the refined product spread
(revenues less material costs) of $19.5 million and an increase in other
income of $1.1 million, offset by an increase in refining operating expenses
of $2.6 million and selling and general costs of $1.8 million.
Refined product revenues and refining operating costs are impacted by
changes in the price of crude oil. The price of crude oil was lower in 1997
than in 1996. The refined product spread for 1997 was $5.78 per bbl compared
to $4.48 per bbl for 1996. The refined product spread increased due to better
light product margins, primarily gasoline, and an improved light/heavy spread
which more than offset inventory losses in the first quarter of 1997 of
approximately $4.0 million from a decline in crude oil prices of more than
$6.00 per bbl. Inventories are recorded at the lower of cost on a FIFO basis
or market. Refined product revenues decreased $8.0 million, or 2%, in 1997 as
compared to 1996. The decrease in refined product revenues resulted primarily
from $1.67 per bbl decrease in average diesel sales prices offset by a $0.05
per bbl increase in average gasoline sales prices. Refined product sales
volumes were nearly the same for the 1997 and 1996 periods.
Other income, which consists primarily of processing fees, increased $1.1
million to $2.3 million for the year ended December 31, 1997 as compared to
1996 mostly due to gains on foreign currency swaps of $522,000 related to the
Canadian sales proceeds and higher processing fees.
Refining operating costs decreased $25.0 million, or 7%, in the year ended
December 31, 1997 from 1996 due to a $27.6 million decrease in material costs
partially offset by an increase in refining operating expenses of $2.6
million. Material costs per bbl decreased 9%, or $2.01 per bbl in 1997 due to
lower oil prices, lower crude oil charges, increased use of heavy crude oil
and an increase in the light/heavy spread. The crude oil charge rate, (or the
volume of crude oil processed by the crude unit), declined by 870 bpd in 1997
due to turnaround work conducted on the crude unit in the fourth quarter of
1997. During 1997, Frontier increased its use of heavy crude oil by 1% and the
heavy crude oil utilization rate expressed as a percent of total crude oil
increased to 91% in
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1997 from 88% in 1996. In addition, the light/heavy spread increased 38% to
average $3.54 per bbl for the year ended December 31, 1997 because the Company
contracted for approximately 30,000 bpd of Wyoming and Canadian heavy crude
oil for much of 1997 at a light/heavy spread substantially better than it
obtained for the same period in 1996. For 1998, the Company has contracted for
an average of 29,000 bpd of Wyoming and Canadian heavy crudes at a light/heavy
spread ranging from $4.80 to $5.25 per bbl. Refining operating expenses
increased by $0.15 per bbl to $3.30 due to higher maintenance and turnaround
costs and leased equipment costs offset by decreased natural gas and utility
costs. Prior year operating expenses were reduced by a $1.3 million settlement
of repair costs related to a 1995 pipeline gas explosion. Although efforts to
reduce refining operating expenses will continue, maintenance problems may
arise in the future, resulting in downtime of certain processing units and
reduced yields which may increase operating expenses and negatively impact
profitability. A major turnaround is scheduled in the spring of 1998 on the
fluid catalytic cracking unit and alkylation and related units. These units
are scheduled to be down for 28 days, which will decrease average yields
during that time. Other turnaround work is scheduled for several Refinery
units during 1998, but this work should not materially impact yields.
Selling and general expenses increased $1.8 million, or 28%, for the year
ended December 31, 1997 reflecting increases in salaries and benefits.
Included in 1996 is $0.2 million of salary and salary-related expenses of
certain employees who were not retained after March 31, 1996, in connection
with the U.S. Disposition in late 1995 and a corporate reorganization to
reduce the number of corporate employees and to transfer some job functions to
other locations in early 1996.
Depreciation increased $152,000 or 2% for the year ended December 31, 1997
as compared to 1996. Such increase was attributable to ongoing capital
investment in the Frontier Refinery.
Net interest expense decreased by $3.3 million, or 19%, in the year ended
December 31, 1997 as compared to 1996. Such decrease was attributable to
interest income of $2.0 million earned primarily on the sale proceeds of the
Canadian Disposition and reduced interest expense of $1.3 million due to early
retirement of debt. On October 1, 1997, the Company retired $7.5 million of
its 10 3/4% Subordinated Debentures, and by the end of 1997, $72.4 million
principal amount of its 12% Senior Notes was retired. Average debt decreased
from $154 million for the year ended December 31, 1996 to $138 million in
1997.
Income from discontinued oil and gas operations includes the Company's
Canadian oil and gas operations through May 5, 1997. Income from discontinued
operations was $1.7 million for the year ended December 31, 1997 as compared
to $4.8 million for 1996.
1996 Compared with 1995. Operating income increased $6.7 million in 1996
compared to 1995. Such increase was attributable to improved refined product
spread of $5.9 million, reduced operating costs of $1.2 million and reduced
selling and general costs of $0.9 million, offset by a decrease in other
income of $0.8 million and an increased depreciation expense of $0.5 million.
The 1995 increase in other income was related to a settlement of a contract
dispute as processing fees were constant.
Refined products revenues and refining operating costs are impacted by
changes in the price of crude oil. Generally, the price of crude oil remained
strong throughout 1996 compared to a lower average price in 1995. The refined
product spread increased 11%, to $4.48 per bbl, in 1996. Lower national
distillate inventory levels in 1996 contributed to the improved diesel
margins; however, a continued decline in the light/heavy spread in 1996
compared to 1995 increased material costs. The adverse impact of higher crude
oil prices significantly reduced margins for by-products, such as asphalt, in
1996 compared to 1995 levels. In 1996, refined product revenues increased 16%
from 1995 due to a $3.84 per bbl increase in average sales price, offset by a
2% decrease in sales volumes.
Refining operating costs increased $45.2 million, or 14%, in 1996 compared
to 1995 due to a 17% increase in material costs associated with the strong
worldwide crude oil market, offset by a reduction in the refining operating
expenses of $1.2 million. During 1996, the Company increased its use of heavy
crude oil by 17% which favorably impacted material costs. The heavy crude oil
utilization rate expressed as a percent of total crude
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oil increased to 88% in 1996 from 77% in 1995. The favorable impact of the
increased use of heavy crude oil in 1996 was offset somewhat by the continued
decline in the light/heavy spread during 1996. In 1996, the light/heavy spread
declined 13% from 1995 to average $2.56 per bbl as a result of increased
competition for Wyoming heavy crude oil and other sources of heavy crude oil
in the Company's market area. However, in the fourth quarter of 1996, the
Frontier Refinery experienced an increase in the light/heavy spread when it
contracted for delivery in 1997 of approximately 25,000 bpd of Wyoming heavy
crude oil at a light/heavy spread of $3.25 to $3.75 per bbl. The $1.2 million
decrease in refinery operating expenses in 1996 was primarily attributable to
recovery in the first quarter of 1996 of approximately $1.3 million of repair
costs related to a pipeline gas explosion in 1995. The repair costs
approximating $1.3 million in 1995, and related recovery in 1996, were both
included in refinery operating expense. During 1996, refinery operating
expenses were reduced in various categories including insurance and turnaround
expense; however, these savings were offset by cost increases associated with
higher natural gas prices and general maintenance costs. The strike by
approximately 150 union employees which commenced May 8, 1996 and settled July
29, 1996 did not adversely impact operating costs or throughput. The increase
in depreciation expense reflected in 1996 of $500,000, or 6%, from 1995 was
primarily attributable to ongoing capital investment in the Frontier Refinery.
Selling and general expenses decreased $0.9 million, or 12%, to $6.3 million
in 1996 compared to 1995 due to a reduction in corporate staff after the U.S.
Disposition. Additionally, 1996 included approximately $0.2 million in
expenses for corporate staff who were retained until March 31, 1996.
Net interest expense decreased $1.0 million, or 5%, in 1996 compared to 1995
as a result of lower average debt balance outstanding throughout 1996 with
proceeds from the U.S. Disposition applied to reduce debt primarily in
December 1995.
Discontinued oil and gas operations includes both Canadian and United States
oil and gas operations. Income from discontinued operations was $4.8 million
in 1996 compared to $211,000 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
On June 16, 1997, the Company completed the Canadian Disposition. Net
proceeds after purchase price adjustments, transaction expenses and severance
costs were approximately $91.3 million (C$126.7 million). With proceeds from
the sale, the Company redeemed $49.2 million of its 12% Senior Notes,
including redemption premium, during the third quarter of 1997, and on October
1, 1997, redeemed the remaining $7.5 million outstanding of 10 3/4%
Subordinated Debentures at par. In addition, on December 30, 1997, the Company
redeemed $25.6 million of its 12% Senior Notes, including redemption premium.
In total, $79.9 million principal amount of debt was retired with sales
proceeds. As of December 31, 1997, the Company had a debt to capitalization
ratio of 56% compared to the highly leveraged percentage of 85% as of year-end
1996.
On February 9, 1998, the Company issued $70 million of Old Notes. On
February 10, 1998, the Company called for redemption the remaining $24.6
million of its Senior Notes and $46 million of its Convertible Subordinated
Debentures outstanding at December 31, 1997 (together, the "Redemptions"). The
Company used the net proceeds from the issuance of the Old Notes and available
cash to fund the Redemptions. On March 12, 1998, all but $731,000 of the 7
3/4% Convertible Subordinated Debentures were redeemed. Holders of $731,000 of
the 7 3/4% Convertible Subordinated Debentures elected to convert into 83,542
shares of the Company's Common Stock.
At December 31, 1997, the Company had $21.7 million available in cash, $20
million available under the Frontier Credit Facility and $250,000 of 12%
Senior Notes held by the Company. The Company had working capital of $20.9
million at December 31, 1997, including the portion of the sales proceeds from
the Canadian Disposition remaining after debt retirement.
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Net cash provided by operating activities was $12.5 million, $8.5 million
and $9.9 million for 1997, 1996 and 1995, respectively. Working capital
changes required $9.9 million and $2.6 million of cash flows for 1997 and
1996, respectively. The major use of cash for working capital changes in 1997
was to reduce accounts payable for crude oil payments and accrued liabilities
for interest payments. Trade receivables declined due to the Canadian
Disposition. Consistent with the seasonality of its business, the Company
invests in working capital during the first half of the year and recovers
working capital investment in the second half of the year.
The scheduled turnaround of the fluid cracking unit and alkylation and
related units in the second quarter of 1998 will negatively impact refinery
yields during the 28 day turnaround period. To mitigate the impact on
operating results, the Company has built inventories of gasoline and diesel in
preparation for the turnaround. Third party purchases of gasoline and diesel
may also be necessary to maintain sales to the Frontier Refinery's customers.
The Company expects to finance the build up in inventories and pay for the
approximately $7 million of turnaround maintenance expenses through cash flows
from operations and borrowings under the Frontier Credit Facility.
Investing activities in 1997 included capital expenditures of $9.0 million,
a decrease of $4.4 million from 1996, primarily due to a $5.4 million decrease
in oil and gas operations investment. Investing activities include proceeds
from the Canadian Disposition of $91.3 million for the year ended December 31,
1997. Capital expenditures were $13.4 for the year ended December 31, 1996
compared to $17.2 million in 1995. Refinery capital expenditures of $13
million are planned in 1998. It is anticipated that cash generated from
operating activities will be sufficient to meet its 1998 investing
requirements.
The Company's 12% Senior Notes currently restrict it from the payment of
dividends. Additionally, under certain conditions, the Frontier Credit
Facility restricts the transfer of cash in the form of dividends, loans or
advances up to the Company. The Company does not believe these restrictions
limit its current operating plans.
OTHER MATTERS
Impact of Changing Prices/Hedging. The Company's revenues and cash flows, as
well as estimates of future cash flows are very sensitive to changes in energy
prices. Major shifts in the cost of crude oil and the price of refined
products can result in large changes in operating margin from refining
operations. Energy prices also determine the carrying value of the Frontier
Refinery's inventory.
The Company, at times, engages in futures transactions with respect to crude
oil in its refining operations for the purpose of hedging its position. To
date, the use of future transactions has been limited to protect against price
declines for excess inventory volumes. Futures contracts and options may also,
in the future, be used to fix margins in its refining and marketing
operations. In addition, the Company, at times, engages in futures
transactions for the purchase of natural gas at fixed prices. Natural gas is
consumed by the Frontier Refinery for energy purposes.
Year 2000. Many of the computer systems used by the Company today were
designed and developed using two digits, rather than four, to specify the
year. As a result, such systems will recognize the year 2000 as "00". This
could cause many computer applications to fail completely or to create
erroneous results unless corrective measures are taken. The Company utilizes
software and related computer technology essential to its operations that may
be affected by the Year 2000 issue. A review of the Company's primary computer
accounting system indicated only minor modifications will be required to make
it Year 2000 compliant. Reviews are being done to determine what actions will
be necessary to make its remaining computer systems Year 2000 compliant. The
Company expects to complete its remaining reviews and prepare cost estimates
by mid-1998.
Net Operating Loss Tax Carryforwards. Realization of deferred tax assets is
dependent on the Company's ability to generate taxable income within the life
of the net operating loss tax carryforwards ("NOLs"). As a result of the
Company's history of operating losses, a valuation allowance has been provided
for deferred tax assets that are not offset by scheduled future reversals of
deferred tax liabilities.
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During 1997, the Company completed an assessment of certain of its tax
strategies adopted in prior years to maximize the benefit for U.S. tax
reporting purposes of its Canadian operations. Accordingly, the Company has
elected to reflect the amounts and positions taken for U.S. federal income tax
purposes. Therefore, the aggregate (and corresponding yearly components)
regular NOLs disclosed previously in the Company's 1996 annual report on Form
10-K for financial reporting purposes have been increased by $89.7 million in
total, of which a portion was used to offset estimated taxable income
generated during the period January 1, 1997 through December 31, 1997.
At December 31, 1997, the Company had regular NOLs of $145.6 million
available to reduce future taxable income. The regular NOLs will expire as
follows: $32.2 million in 2002, $7.7 million in 2003, $11.3 million in 2004,
$29.5 million in 2005, $17.2 million in 2006, $13.7 million in 2007, $11.3
million in 2008, $2.2 million in 2009, $16.1 million in 2010 and $4.4 million
in 2011.
Also at December 31, 1997, the Company had alternative minimum tax net
operating loss carryforwards ("AMT NOLs") for United States reporting of $98.4
million to reduce future taxable income. The AMT NOLs will expire as follows:
$2.8 million in 2002, $5.4 million in 2003, $9.0 million in 2004, $27.0
million in 2005, $13.1 million in 2006, $11.6 million in 2007, $8.6 million in
2008, $1.4 million in 2009, $16.8 million in 2010 and $2.7 million in 2011.
The Company has tax depletion carryforwards of $8.7 million which are
indefinitely available to reduce future United States income taxes payable.
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BUSINESS
GENERAL
Frontier is an independent energy company engaged in crude oil refining and
the wholesale marketing of refined petroleum products, primarily in the Rocky
Mountain region of the United States. The Company operates the Frontier
Refinery in Cheyenne, Wyoming with a maximum average monthly crude oil
refining capacity of 41,000 bpd, as permitted by the Wyoming Department of
Environmental Quality. Since its acquisition of the Frontier Refinery in 1991,
the Company spent approximately $60 million in a capital improvement program
from 1992 through 1993 which, among other things, (i) increased the Frontier
Refinery's capability to process heavy crude oil, (ii) enabled the Frontier
Refinery to meet federally-mandated low sulfur standards with respect to all
of its diesel fuel production and (iii) improved the Frontier Refinery's
general reliability. An important feature of the Frontier Refinery is its
ability to process up to 100% heavy crude oil, which is less expensive than
sweet crude oil. As a result, the Company is well positioned to benefit from
an increase in the light/heavy spread, which is currently estimated to be
$4.55 per bbl. See "--Refining Operations--Varieties of Crude Oil." For the
year ended December 31, 1997, the Company achieved consolidated revenues of
$376.4 million and EBITDA (as defined herein) of $30.9 million.
The Company markets refined products in the Eastern Slope area of the Rocky
Mountain region. The Company also markets refined products in western Nebraska
and, through exchange agreements with other refiners, in the Dakotas and Utah.
Of the 15 crude oil refineries in the Rocky Mountain region, the Company only
considers the four other refineries (two in Denver and two in Wyoming) located
within the Eastern Slope area to be refinery competitors, although additional
competition comes from refineries outside the Eastern Slope area that supply
refined products to the area via pipeline. The Company believes it has an
advantage over (i) its four refinery competitors because only the Company
operates a coking unit, which enables it to produce a higher yield of gasoline
and diesel fuel from heavy crude oil, and (ii) the pipeline competitors that
ship product into the Eastern Slope area because they must incur a
transportation cost, which for Gulf Coast refiners equates to approximately
$1.60 per bbl. Furthermore, while it has in the past generally marketed
unbranded products, in the second half of 1997, the Company entered into a
marketing agreement with CITGO to market branded products to independent and
other branded retail operators in its market area. For the year ended December
31 1997, the Frontier Refinery's product mix included various grades of
gasoline (51%), diesel fuel (30%) and asphalt and other refined petroleum
products (19%).
The Company prefers to process locally produced heavy crude oil. In the year
ended December 31, 1997, the Company obtained approximately 84% of its crude
oil supply, or charge, from Wyoming producers while Canadian heavy crude oil
made up a majority of the Frontier Refinery's remaining feedstocks. During the
same period, heavy crude oil constituted approximately 91% of the Frontier
Refinery's total crude oil charge. The Company believes it is able to obtain
favorable pricing terms for the heavy crude oil it uses as feedstock because
available supply currently outstrips demand. None of the Company's direct
competitors, and only three other refineries in the entire Rocky Mountain
region, operate coking units necessary to process high volumes of heavy crude
oil. In addition, while Wyoming crude oil production is declining, the
completion of the 785-mile Express Pipeline from Hardisty, Alberta to Casper,
Wyoming in April 1997 immediately doubled available pipeline capacity for
Canadian crude oil to the Wyoming market. The Express Pipeline is an
independent common carrier pipeline indirectly owned by two Canadian energy
companies, TransCanada Pipelines Limited and Alberta Energy Company Ltd. This
new pipeline has benefitted the Company by (i) holding down prices of Wyoming
heavy crude oil and (ii) providing the Company with the flexibility to
significantly increase the Frontier Refinery's Canadian heavy crude oil charge
if favorable supply and pricing conditions arise. The Company also receives a
supply cost advantage on up to 25,000 bpd from its partial ownership interest
in the Centennial Pipeline that runs from the regional hub at Guernsey,
Wyoming to the Frontier Refinery.
BUSINESS STRATEGY AND STRENGTHS
The Company's business strategy includes the following major objectives: (i)
focus solely on refining operations, (ii) capitalize on improvements in the
light/heavy spread, (iii) concentrate marketing efforts in the Rocky Mountain
region, which has experienced high demand growth, and (iv) selectively pursue
acquisitions of
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refining and related transportation assets as attractive opportunities arise.
The Company believes it is well-positioned to execute its strategy as a result
of the following factors:
Refinery with Ability to Process 100% Heavy Crude Oil. The Company is able
to exploit the light/heavy spread because the Frontier Refinery's coking unit
provides significant upgrading capability. A capital improvements program at
the Frontier Refinery expanded the capacity of its coking unit from 8,200 bpd
to 10,000 bpd giving it the capability to process 100% heavy crude oil. At the
same time, the Company retains the flexibility to process sweet crude oil
should heavy crude oil become less economically advantageous to process. In
the two-year period ended December 31, 1997, the Frontier Refinery's average
crude oil charge was 89% heavy crude oil, and in 1997, the Frontier Refinery
processed approximately 11.7 million barrels ("mmbbls") of heavy crude oil.
Accordingly, a widening in the Company's light/heavy spread has a direct
impact on the Company's profitability. The Company has recently benefitted
from an increase in its light/heavy spread; for the year ended December 31,
1997 the Company's light/heavy spread improved to $3.54 per bbl from $2.54 per
bbl for the same period in 1996. In the quarter ended December 31, 1997, the
Company's light/heavy spread was $3.82 per bbl.
Favorable Crude Oil Supply Conditions. While Wyoming crude oil production is
declining, expanding Canadian heavy crude oil production combined with local
pipeline access to such production has produced crude oil supply conditions
favorable to the Frontier Refinery. Canadian heavy crude oil production
increased 24% from 1990 through 1995 without a corresponding increase in
Canadian refining capacity. With the opening of the Express Pipeline in April
1997, the Frontier Refinery now has more direct pipeline access to Canadian
production in substantial volumes. The current capacity of the Express
Pipeline is 172,000 bpd. The Express Pipeline has reduced transportation costs
incurred by the Company by approximately $0.75 per bbl, and the Company
believes that the Express Pipeline has reduced transportation time from
approximately 30 days to 15 days. The expansion of the available supply of
heavy crude oil from the Express Pipeline has also put downward pressure on
the price of locally produced heavy crude oil. In addition, while the Company
favors heavy crude oil, the Express Pipeline provides the Frontier Refinery
with access to a greater variety of crude oil types. The Company has entered
into a 15-year commitment with the Express Pipeline for the delivery of
approximately 13,800 bpd, subject to an assignment of a portion of the
capacity in early years for additional capacity in later years. See "--
Pipeline Operations--The Express Pipeline."
Attractive Market Region. The Company believes that the Rocky Mountain
region, particularly the Eastern Slope area, offers a favorable refining
market in which to operate, featuring strong demand for refined products and
abundant supply of crude oil feedstocks. Gasoline consumption in Colorado,
where the Company markets 71.0% of its gasoline sales volumes, has increased
at a rate of 5.4% per year from 1992 through 1996, compared to the national
average of 1.9%. Similarly, diesel consumption in Wyoming is strong, where the
Company markets 54.0% of its diesel sales volumes, because Wyoming state motor
fuel taxes are approximately 13c per gallon lower than the neighboring states
of Nebraska and Utah. East-west traffic therefore prefers to refuel in
Wyoming, frequently near the Frontier Refinery. As regional refining capacity
is insufficient to meet the high demand for refined petroleum products in the
Eastern Slope area, three pipelines also transport refined product into the
area from outside the Rocky Mountain region. As a local refiner, however, the
Company believes that it has a competitive advantage over these imports due to
their associated transportation costs.
As a result of these favorable supply-demand dynamics, the crack spreads in
the Rocky Mountain region have been consistently higher than those experienced
by refiners in the Gulf Coast or Mid-Continent areas. On average, for the
years 1992 through 1997, the crack spreads for unleaded gasoline and diesel
fuel were $3.13 per bbl and $3.37 per bbl higher, respectively, in the Rocky
Mountain region as compared to the Gulf Coast region. With respect to heavy
crude oil, the Company's refining margins include not only the crack spread
(which is calculated with respect to sweet crude oil), but also the associated
light/heavy spread.
Marketing Alliance with CITGO. In the second half of 1997, the Company
entered into a seven-year marketing agreement with CITGO, its largest
customer, to become a branded representative for CITGO. The Company believes
the CITGO agreement offers potential to increase its market share in the
Eastern Slope area because CITGO currently has only a small share of the
Eastern Slope market. The agreement allows the
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Company to produce gasoline and diesel to CITGO's specifications, sign up
independent and other branded retail operators as CITGO branded locations and
sell its own refined products to these operators. The agreement also allows
the Company to offer additional benefits to its customers such as access to
CITGO's proprietary credit card and pay-at-the-pump systems. Moreover, the
Company believes that its affiliation with the nationally-recognized CITGO
brand will allow it to continue to effectively compete in its market area as
more independent regional retailers seek relationships with suppliers of
branded products.
Improved Financial Condition. During 1997, the Company made the strategic
decision to focus on its refining operations and to divest its remaining
exploration and production operations. On June 16, 1997, the Company completed
the Canadian Disposition, which generated net proceeds to the Company of $91.3
million and a net gain to the Company of $23.3 million. The Company previously
completed the U.S. Disposition in late 1995. The Company used proceeds of the
Canadian Disposition to repay $79.9 million principal amount of its
outstanding indebtedness. The Company will use the proceeds of the Offering
together with existing working capital to repay all of its remaining
outstanding indebtedness ($70.6 million as of December 31, 1997). In addition,
the Company has the ability to reduce tax liability with respect to future
income through the use of NOLs. At December 31, 1997, the Company had NOLs of
$145.6 million, which will be used by the Company to reduce future taxable
income. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Net Operating Loss Carryforwards." The Canadian
Disposition, the Offering and the subsequent retirement of outstanding debt
will allow the Company to improve its capital structure and to reduce ongoing
debt service requirements. As a result, the Company will possess an improved
financial position and believes it is well-positioned to execute its operating
strategy.
REFINING OPERATIONS
Industry Overview. The refining industry is highly competitive, as refined
products are chiefly treated as commodities. Refining margins vary according
to product demand and crude oil supply costs. During the 1980s and early
1990s, there were refinery closures in the United States due to flat product
demand and high capital requirements, and in 1990, the Clean Air Act
Amendments required refineries to install facilities to modify the qualities
of gasoline and diesel. In addition, in the early 1990s many refineries also
increased their gasoline and diesel production capacity. The increase in
production capacity, coupled with modest demand growth, led to low refining
margins. During 1996 and 1997 gasoline and diesel demand increased to the
point that refinery utilization rates have become very high, and refinery
margins have substantially increased.
Varieties of Crude Oil. Traditionally, crude oil has been classified as (i)
sweet (if sulfur content is low) or sour (if sulfur content is high) and (ii)
light (if gravity is high) or heavy (if gravity is low). For the most part,
heavy crude oil tends to be sour and light crude oil tends to be sweet.
However, it is current industry practice to use the term "sweet" in referring
to sweet or light crude oil and to use the term "heavy" in referring to heavy
or sour crude oil. When refined, sweet crude oil produces a higher yield of
higher margin refined products such as gasoline and diesel, and as a result,
is more expensive than heavy crude oil. In contrast, heavy crude oil produces
more low margin by-products and heavy residual oils. The discount at which
heavy crude oil sells compared to the sales price of sweet crude oil is known
in the industry as the light/heavy spread. A coking unit, such as the one used
by the Frontier Refinery, can process certain by-products and heavy residual
oils to produce additional volumes of gasoline and diesel, thus increasing a
refinery's aggregate yield of higher margin refined products from the same
initial volume of crude oil.
Light/Heavy Spread. The light/heavy spread generally declined from 1992
through the end of 1995. The narrowing of the light/heavy spread resulted in
large part from capacity upgrades and capital improvement programs undertaken
by refiners in response to economic demand and the requirements of the Clean
Air Act Amendments and other environmental regulations. As a part of such
improvement programs many refiners also added upgrading capacity to process
heavy crude oil. The additional upgrading capacity among refiners dramatically
increased the demand for heavy crude oil causing the light/heavy spread to
narrow over such period. By 1996, however, the additional upgrading capacity
was absorbed, and the spread began to improve. Subsequent
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Canadian heavy crude oil development coupled with the opening of the Express
Pipeline have increased the supply of heavy crude oil in Wyoming and further
widened the Company's light/heavy spread. The following chart presents the
Company's average quarterly light/heavy spread for the period from January 1,
1992 through December 31, 1997:
[LIGHT/HEAVY CRUDE OIL SPREAD CHART APPEARS HERE]
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Products. The Frontier Refinery is a complex heavy crude coking refinery.
Refineries are frequently classified according to their complexity. Complex
refineries have the conversion capability, or upgrading capacity, to produce
high yields of high margin refined products despite processing significant
volumes of heavy crude oil. In contrast, in order to produce high yields of
gasoline and diesel, simple refineries must process primarily sweet crude oil.
Some simple refineries may be capable of processing heavy crude oil, but they
will produce large volumes of by-products and heavy residual oils. The
Frontier Refinery has one of the highest conversion capabilities to produce
transportation fuels relative to other refineries in the Rocky Mountain
region. Because gasoline and diesel sales generally achieve higher margins
than are available on other refined products, the Company expects that they
will continue to make up the bulk of its production. The following is a
description of the Company's products:
Gasoline. Gasoline accounted for 51% of the Company's total refined
product sales volumes for the year ended December 31, 1997. The Frontier
Refinery produces gasoline in various grades, or octane levels. In the year
ended December 31, 1997, the Company sold 71% of its gasoline sales volumes
in the Colorado market which has experienced above-average demand growth
over the past five years. The Company's gasoline sales are always stronger
in the summer months due to heavier automobile traffic in the region.
Diesel. Diesel accounted for 30% of the Company's total refined product
sales volumes for the year ended December 31, 1997. The Frontier Refinery
benefits from a strong local market for diesel fuel. Cheyenne is located
along Interstate 80, which is the principal east-west thoroughfare for
trucks because of its low-grade crossing over the Continental Divide. The
heavy truck traffic coupled with a motor fuel tax in the State of Wyoming
that is 15c per gallon less than the neighboring states of Utah and
Nebraska produces consistently strong demand for diesel fuel in the
Cheyenne area. In addition, two major railroads pass through Cheyenne
creating additional demand for diesel fuel. As a result, the Company is
able to sell a significant portion of its diesel product at the Frontier
Refinery, eliminating any transportation costs. The Company believes that
all of its diesel product meets the low sulfur requirements imposed by the
Clean Air Act Amendments of 1990.
Asphalt and Other Refined Products. Asphalt and other refined products
accounted for 19% of the Company's total refined product sales volumes for
the year ended December 31, 1997. The Company believes that the Frontier
Refinery produces especially high-quality asphalt due to the high
percentage of heavy crude oil feedstocks used. The Company believes that it
has benefitted from the population growth and accompanying construction in
the Denver metropolitan area as a substantial portion of its asphalt sales
go to Colorado. Asphalt sales are much stronger in the summer months due to
reduced construction work in the Rocky Mountain region during the winter.
The Company sells other refined products, including petroleum coke, which
is primarily burned as a fuel component in industrial power plants.
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The following table sets forth the Frontier Refinery's charges and yield
achieved since 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Raw material input (bpd)
Light crude oil...................... 6,581 6,165 8,098 4,322 3,162
Heavy crude oil...................... 25,909 27,025 27,174 31,677 31,967
Other feed and blend stocks.......... 2,957 4,105 5,072 5,192 6,154
------ ------ ------ ------ ------
Total.............................. 35,447 37,295 40,344 41,191 41,283
====== ====== ====== ====== ======
Heavy crude oil percentage of crude oil
charges............................... 80% 81% 77% 88% 91%
Manufactured product yields (bpd)
Gasoline............................. 15,129 16,106 17,263 16,825 17,060
Diesel............................... 11,777 13,094 13,744 13,712 12,856
Asphalt and other.................... 7,128 6,575 7,951 9,215 10,200
------ ------ ------ ------ ------
Total.............................. 34,034 35,775 38,958 39,752 40,116
====== ====== ====== ====== ======
Total product sales (bpd)
Gasoline............................. 19,837 19,437 20,767 20,311 20,499
Diesel............................... 11,819 12,628 13,265 12,561 12,110
Asphalt and other.................... 7,682 6,724 6,781 7,306 7,949
------ ------ ------ ------ ------
Total.............................. 39,338 38,789 40,813 40,178 40,558
====== ====== ====== ====== ======
</TABLE>
Marketing and Distribution. The Company's primary market for its refined
products is the Eastern Slope area of the Rocky Mountain region, which
includes Colorado and Wyoming. For the year ended December 31, 1997,
approximately 71% and 14%, respectively, of the Frontier Refinery's gasoline
sales volumes were sold in Colorado and Wyoming. For the same period, 25% and
54%, respectively, of the Frontier Refinery's diesel sales volumes were sold
in Colorado and Wyoming. In 1996, the Company had an 11% and 12% share,
respectively, of the gasoline market in Colorado and Wyoming. In the same
year, the Company had a 16% and 36% share, respectively, of the diesel market
in Colorado and Wyoming, respectively. The gasoline and diesel produced by the
Frontier Refinery is primarily shipped via pipeline to terminals for
distribution by truck or rail. In the year ended December 31, 1997,
approximately 10% of gasoline sales volumes and approximately 52% of diesel
sales volumes were sold at the Frontier Refinery. Pipeline shipments are
handled mainly by the Kaneb pipeline, serving Denver and Colorado Springs,
Colorado, and the Continental pipeline, serving Sidney and North Platte,
Nebraska.
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<PAGE>
The Company sells refined products to a broad base of independent retailers,
jobbers and major oil companies. Refined products are basically commodities
whose prices are determined by local market conditions at distribution centers
known as "terminal racks." The customer at such a terminal rack typically
supplies his own truck transportation. Prices at the terminal rack are posted
daily by sellers. In 1997, approximately 66% of Frontier's sales were made to
its 25 largest customers. Occasionally, marketing volumes exceed the Frontier
Refinery's production capabilities. In such instances, the Company purchase
product in the spot market as needed. In addition to Denver and Cheyenne, its
largest markets, the Company also markets its products at third party
terminals in Colorado Springs, Colorado; Casper, Wyoming; Evanston, Wyoming;
Salt Lake City, Utah; Sidney, Nebraska; Rapid City, South Dakota and Mandan,
North Dakota.
[MAP OF MAJOR PRODUCT PIPELINE APPEARS HERE]
42
<PAGE>
CITGO Marketing Agreement. In the second half of 1997, the Company entered
into a seven-year marketing agreement with CITGO to become a CITGO branded
representative. The agreement allows the Company to produce gasoline and
diesel to CITGO's specification, sign up independent and other branded retail
operators as CITGO branded locations and sell its own refined products to
these operators. The agreement also allows the Company to offer additional
benefits to its customers such as access to CITGO's proprietary credit card
and pay-at-the-pump systems. The Company believes the CITGO agreement offers
potential to grow its market share in the Eastern Slope area because CITGO,
which has the largest number of branded retail outlets in the United States,
currently has only a small share of the Eastern Slope market. Moreover, the
Company believes that its affiliation with the nationally-recognized CITGO
brand will allow it to continue to effectively compete in its market area as
more independent regional retailers seek relationships with suppliers of
branded products.
Exchange Agreements. The Company has entered into agreements with other
refiners pursuant to which it supplies these exchange partners with refined
product at specified locations in exchange for receiving refined product from
the partners at other locations. A current aggregate monthly volume of 100,000
bbls of gasoline and 90,000 bbls of diesel is subject to such exchange
agreements. The exchange agreements are designed to reduce the Company's
exposure in any given market area.
Competition. The Company's most competitive market is the Denver
metropolitan area. Four principal refineries serve the Denver market: Sinclair
Oil Company ("Sinclair"), which has a 54,000 bpd refinery near Rawlins,
Wyoming and a 22,000 bpd refinery in Casper, Wyoming; Ultramar Diamond
Shamrock Corporation ("UDS"), which has a 28,000 bpd refinery in Denver, and
Conoco Inc. ("Conoco"), which has a 57,500 bpd refinery in Denver. Denver is
also supplied by five product pipelines, including three from outside the
region that enable refined products from other regions to be sold in the
Denver market. The Company is aware of several proposals or industry
discussions involving the expansion of existing pipelines or the construction
of new pipelines to serve the Denver market. However, the Company believes
that any additional product shipped as a result of such expansions would be
burdened by the same transportation costs that add to the current expense of
shipping refined product to Denver via pipelines from outside the region.
The UDS and Conoco refineries located in Denver incur lower product
transportation costs in servicing the Denver market than the Company. However,
the Company has lower crude oil transportation costs due to (i) its proximity
to the Guernsey, Wyoming hub, the major crude oil pipeline hub in the Rocky
Mountain region and (ii) its ownership interest in the Centennial Pipeline.
Moreover, unlike Sinclair, UDS and Conoco, the Company sells its products
exclusively wholesale. The Company believes that this commitment to the
wholesale market gives it a customer relations advantage over its principal
competitors in the Eastern Slope area, all of which also have retail outlets,
because the Company is not in direct competition with independent retailers of
gasoline and diesel. The other markets served by the Company are less
competitive than the Denver market.
Crude Oil Supply. In the year ended December 31, 1997, the Company obtained
approximately 84% of its refinery charge from Wyoming, 4% from Montana and 12%
from Canada. During the same period, heavy crude oil constituted approximately
91% of the Frontier Refinery's total crude oil charge. Cheyenne is 80 miles
southwest of Guernsey, Wyoming, the main hub and crude oil trading center for
the Rocky Mountain region. The Company transports approximately 60% of the
crude oil purchased at Guernsey to the Frontier Refinery through the
Centennial Pipeline. Additional crude oil volumes are transported on an
alternative pipeline. Ample quantities of heavy crude oil, both locally
produced Wyoming General Sour and imported Canadian heavy crude oil are
available at Guernsey. The Company's ability to process up to 100% heavy crude
oil feedstocks gives it a distinct advantage over the four other Eastern Slope
refineries, none of which has the necessary upgrading capability to process
high volumes of heavy crude oil. Upgrading capability is the ability to
produce a higher yield of higher margin refined products, such as gasoline and
diesel, than would otherwise be possible using heavy crude oil feedstock. Only
three of the other 15 refineries in the entire Rocky Mountain region have the
coking units necessary to process substantial volumes of heavy crude oil. The
Company has 26% of the heavy residual oil upgrading capacity in the entire
Rocky Mountain region. A refinery's upgrading capacity is measured in terms of
the capacity, in terms of volume, of its coking unit(s) and other processing
units with upgrading capability.
43
<PAGE>
The supply of crude oil in the Rocky Mountain region exceeds refining
capacity. Canadian crude oil production increased 17% from 1990 through 1995
without a corresponding increase in Canadian refining capacity. The Company
believes that heavy crude oil refining capacity will continue to be constrained
in the Rocky Mountain region because of stringent environmental permitting
requirements and the high cost of requisite plant modifications. As a result,
the Company believes it will continue to have access to an ample supply of
regional and Canadian heavy crude oil at attractive prices.
The Company purchases crude oil from a number of suppliers, including major
oil companies, marketing companies and large and small independent producers,
under arrangements which contain market-responsive pricing provisions. Many of
these arrangements are subject to cancellation by either party or have terms
that are not in excess of one year and are subject to periodic renegotiation.
The Company also enters into forward contracts to lock in crude oil supply at
an attractive light/heavy spread. Generally, these forward contracts secure
delivery for no more than 12 months in advance. Currently, the Company has
committed to purchase an average of 29,000 bpd of crude oil in 1998 through
forward contracts at light/heavy spreads ranging from $4.80 per bbl to $5.25
per bbl.
[MAP OF ROCKY MOUNTAIN REFINERIES AND MAJOR CRUDE OIL PIPELINES APPEARS HERE]
44
<PAGE>
Refinery Units. The following is a flow chart of the refining process and a
summary description of the Frontier Refinery's processing units and their
respective functions.
[FLOW CHART APPEARS HERE]
Atmospheric Crude Distillation Unit ("Crude Unit"). The hydrocarbon
compounds which make up crude oil will separate, or "fractionate," when
subjected to high temperatures. The Crude Unit, installed in 1979, can charge
41,000 bpd of crude oil and fractionate it into several products which are
then typically fed into other units of the Frontier Refinery. A small amount
of product from the Crude Unit can be blended directly into gasoline. Another
product, called heavy naphtha, has some characteristics of gasoline, except
that its octane is too low and is therefore fed into other processing units in
order to increase its octane. The next product is diesel material, which is
treated in another processing unit to lower the sulfur content. Atmospheric
gas oil is next produced from the Crude Unit and fed to another process unit
which makes diesel and gasoline from the gas oil. The final product from the
Crude Unit is atmospheric tower bottoms, which is charged directly to the
Vacuum Crude Distillation Unit.
Vacuum Crude Distillation Unit. The Vacuum Unit, installed in 1979, is fully
integrated with the Crude Unit and allows further separation of the crude oil
into intermediate products. The capacity of the Vacuum Unit is 27,000 bpd. The
first product from this unit is vacuum gas oil, which is combined with the
atmospheric gas oil, to be charged to the FCCU (as defined herein). The
remaining heavy residual oil is either produced as asphalt or charged to the
coker.
Delayed Coking Unit. Delayed coking is a thermal cracking process in which
the heavy residual oil from the Crude Unit is heated to high temperatures and
separates into hydrocarbon vapors and a solid residue coke product. The vapors
produced by the coking process are condensed and fractionated into lighter,
more valuable intermediate products which are then charged to other Frontier
Refinery units. The coker produces streams which
45
<PAGE>
are ultimately converted into finished gasoline and finished diesel products
by these other Frontier Refinery units. The solid residue coke product is
primarily sold as a fuel for heavy industrial boilers. The coker was installed
in 1979 and upgraded and expanded in 1992. In 1992 and 1993, the Company spent
$6.8 million to expand the capacity of the coker from 8,200 bpd to 10,000 bpd.
Catalytic Reforming Unit. The Catalytic Reformer, constructed in 1972, has a
demonstrated capacity of 7,500 bpd. This unit upgrades the octane of the
naphtha produced in the Crude Unit and the coker. It is capable of producing
product with an octane of 98 Research Octane Number ("RON"). The product of
the Catalytic Reformer is reformate, a high gasoline blending octane stock.
Naphtha Hydrotreater. The Naphtha Hydrotreater desulfurizes all naphtha
produced in the refinery, taking feedstocks from both the coker and the Crude
Unit. The Naphtha Hydrotreater provides low sulfur (1 part per million)
feedstocks for the Catalytic Reformer. Constructed in 1972, the unit has a
capacity of up to 8,000 bpd.
Fluid Catalytic Cracking Unit ("FCCU"). Catalytic cracking greatly enhances
the efficiency of a refinery by converting the heavier gas oil streams from
the Crude Unit and the coker primarily into gasoline, diesel, and other
intermediate products which are converted to gasoline in the Alkylation Unit.
The FCCU, originally constructed in 1943, has a permitted and rated capacity
of 12,000 bpd.
Alkylation Unit. The Alkylation Unit chemically combines isobutane with
propylene and butylene from the FCCU into high octane gasoline. The unit has
demonstrated capacity in excess of 4,000 bpd of alkylate. Propane, a by-
product, is sold or used as refinery fuel, depending on economics. The normal
butane produced is processed in the Butane Isomerization Unit, with any excess
used in gasoline blending. The Alkylation Unit was installed in 1972.
Butane Isomerization Unit. This unit uses an isomerization catalyst to
process normal butane produced in the refinery, along with normal butane
contained in purchased field grade butane, converting a portion of the butane
to isobutane. Isobutane is a necessary feedstock for the Alkylation Unit. This
unit has a capacity of 1,400 bpd and was constructed in 1972 at the same time
the Alkylation Unit was constructed.
Diesel Desulfurization Unit ("Diesel Hydrotreater"). The Diesel Hydrotreater
was expanded and modernized in 1993, as part of the Frontier Refinery's major
capital project to make low-sulfur diesel, which was required by the Clean Air
Act Amendments. This unit makes a finished diesel product with less than 0.05%
sulfur, as required by the Clean Air Act Amendments. It has a demonstrated
capacity of 17,000 bpd and is permitted for 21,000 bpd. The Diesel
Hydrotreater was installed in 1951 and upgraded and expanded in 1993.
Sulfur Recovery Units. The Frontier Refinery has two parallel trains of
Sulfur Recovery Units. These units do not produce fuel product but treat the
product to remove sulfur in order to maintain compliance with environmental
regulations. The older unit was constructed in 1984 and has a capacity of 30
long tons/day. The newer unit was installed in 1993 and has a capacity of 75
long tons/day. The treated streams from these units then combine and are
charged to the final cleanup process unit (Scott Unit) which limits the total
sulfur recovery capacity to 90 long tons/day.
Hydrogen Unit. The Hydrogen Unit converts purchased natural gas into
hydrogen, which is a necessary feedstock to the two hydrotreating units
(Naphtha and Diesel Hydrotreaters). The Hydrogen Unit was built in 1993 and
has a capacity of 5.5 million standard cubic feet per day of hydrogen
production.
Central Control Room with Advanced Computer Controls. Beginning in 1993, the
Frontier Refinery started a conversion program to the latest state-of-the-art
computer control systems for refinery process units. The Crude Unit was the
first process unit placed on the Honeywell TDC-3000 system (the "TDC-3000
system"), which utilizes advanced computer controls to optimize the unit's
operation. Other process units were placed on the TDC-3000 system in 1994
through 1996. In 1996, all control systems were brought into a new centralized
control room. The coker is the only remaining unit not on the centralized
control system. This final unit has been contracted for TDC-3000
implementation in 1998.
46
<PAGE>
Residual Oil Processing Agreement. The Company has an agreement with Conoco
which expires in 2002 whereby it uses a portion of the coking unit's capacity
to process heavy residual oils received from Conoco's Denver refinery. In
return, the Company ships coker gasoil produced by the coker (in volumes of
equivalent value to the heavy residual oils received) back to the Conoco
refinery. The Company also receives a processing fee and a pro rata
reimbursement of operating expenses from Conoco. As the Frontier Refinery does
not currently have the capacity to process the excess volumes of coker gasoil
shipped to the Conoco refinery, the agreement allows the Company to avoid
processing "bottlenecks" that would otherwise occur at the Frontier Refinery.
Express Pipeline. The 785-mile Express Pipeline, which opened in April 1997,
runs from Hardisty, Alberta to Casper, Wyoming with a capacity of 172,000 bpd.
The new pipeline immediately doubled available capacity of Canadian crude oil
to the Frontier Refinery. While the Company did have prior limited access to
Canadian crude oil, the Express Pipeline has cut transportation costs by $0.75
per bbl, and the Company believes that the Express Pipeline has accelerated
transportation time from 30 days to 15 days. The Express Pipeline has
benefitted the Company by (i) holding down prices of Wyoming heavy crude oil
and (ii) providing the Company with the flexibility to significantly increase
the Frontier Refinery's Canadian heavy crude oil charge if favorable supply
and pricing conditions arise. In addition, while the Company favors heavy
crude oil, the Express Pipeline provides the Frontier Refinery with greater
access to a wide variety of crude oil types. The Company also believes the
Express Pipeline will facilitate its ability to form alliances with Canadian
heavy crude oil producers. The Company has entered into a 15-year commitment
with the Express Pipeline for the delivery of approximately 13,800 bpd,
subject to an assignment of a portion of the capacity in early years for
additional capacity in the middle period of the commitment. The Company
assigned away such capacity because it currently has an adequate local crude
oil supply. The effect of the assignment is that the crude charge received by
the Frontier Refinery from the Express Pipeline will increase from 5,000 bpd
in 1997 to 22,600 bpd in 2005 and then decline back to 13,800 bpd from 2006
through 2012.
Refining Margins. The Company's income and cash flow depend principally on
the margin between the cost to obtain and refine crude oil and the price
received for refined products. With respect to gasoline and diesel production,
the margin includes the crack spread plus the additional light/heavy spread to
the extent heavy crude oil is refined. However, the Company's aggregate margin
is reduced by (i) the "cost" of by-products, or the lower margin received for
volumes of refined products other than gasoline and diesel, (ii) costs
associated with crude oil and intermediate product inventories, (iii) the cost
of spot market purchases to supplement its own production and (iv) operating
expenses.
Crude Oil and Refined Product Prices. The price at which the Company can
sell gasoline and its other refined products will be strongly influenced by
the commodity price of crude oil. Generally, an increase or decrease in the
price of crude oil results in a corresponding increase or decrease in the
price of gasoline and other refined products. However, the Frontier Refinery
maintains inventories of crude oil, intermediate products and refined
products, the value of each of which is subject to rapid fluctuations in
market prices. As a result, a rapid and significant movement in the market
prices for crude oil or refined products could have an adverse short-term
impact on earning and cash flow. Inventories are recorded at the lower of cost
on a FIFO basis or market. Crude oil prices, in general, are affected by a
number of factors including domestic and international demand, domestic and
foreign energy legislation, production guidelines established by the
Organization of Petroleum Exporting Countries, relative supplies of other
fuels, such as natural gas, and changing international economic and political
conditions.
Refinery Maintenance. Each of the Frontier Refinery's operating units
requires regular maintenance and repair shutdowns (referred to as
"turnarounds") during which it is not in operation. Turnaround cycles vary for
different units but are generally required every one to three years. In
general, turnarounds at the Frontier Refinery are managed so that some units
continue to operate while others are down for scheduled maintenance.
Maintenance turnarounds are implemented using Company personnel as well as
some additional contract labor. Turnaround work typically proceeds on a
continuous 24-hour basis to minimize unit downtime. The Company accrues for
its turnaround costs. The Company normally schedules its maintenance
turnaround work during the spring or fall of each year. During the second
quarter of 1998, the Company has scheduled turnarounds on its
47
<PAGE>
FCCU and Alkylation Unit. The Company plans to build up product inventories to
minimize the impact of such planned turnarounds.
Safety and Lost Time Accidents. The Company is subject to the requirements
of the federal Occupational Safety and Health Act ("OSHA") and comparable
state occupational safety statutes. The Company believes that it has operated
in substantial compliance with OSHA requirements, including general industry
standards, recordkeeping and reporting, hazard communication, and process
safety management. The nature of the Company's business may result from time
to time in industrial accidents. The reportable incident rate for the Frontier
Refinery for 1995 and 1996 (the most recent two years with complete data
reported) has been below the average incident rates published by the National
Petroleum Refiners Association for the U.S. refining sector and the Rocky
Mountain region. It is possible that changes in safety and health regulations
or a finding of non-compliance with current regulations could result in
additional capital expenditures or operating expenses.
GOVERNMENT REGULATION
Environmental Matters. The Company's refining and marketing operations are
subject to a variety of federal, state and local health and environmental laws
and regulations governing product specifications, the discharge of pollutants
into the air and water, and the generation, treatment, storage, transportation
and disposal of solid and hazardous waste and materials. Permits are required
for the operation of the Frontier Refinery, and these permits are subject to
revocation, modification and renewal. Governmental authorities have the power
to enforce compliance with these regulations and permits, and violators are
subject to injunctions, civil fines and even criminal penalties. The Company
believes the Frontier Refinery is in substantial compliance with existing
environmental laws, regulations and permits.
Among these requirements are the Title III Regulations. The Company
estimates that the Title III Regulations will require the Company to expend
approximately $600,000 by the regulatory compliance deadline of August 1, 1998
to improve the Frontier Refinery's control of emissions of hazardous air
pollutants. Subsequent rulemaking authorized by Title III or other titles of
the Clean Air Act Amendments or similar laws may necessitate additional
expenditures in future years. Because other refineries will be required to
make similar expenditures, the Company does not expect such expenditures to
materially adversely impact its competitive position.
Nevertheless, rules and regulations implementing federal, state and local
laws relating to health and the environment will continue to affect operations
of the Company, and the Company cannot predict what additional health and
environmental legislation or regulations will be enacted or become effective
in the future or how existing or future laws or regulations will be
administered or interpreted with respect to products or activities to which
they have not been applied previously. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of regulatory
agencies, could have a materially adverse effect on the financial position and
the results of operations of the Company as well as the refining industry in
general, and may result in substantial expenditures for the installation and
operation of pollution control or other environmental systems and equipment.
The Company is party to an agreement with the State of Wyoming requiring the
investigation and possible eventual remediation of certain areas of the
Frontier Refinery's property which may have been impacted by past operational
activities. Prior to this agreement, the Company addressed tasks required
under a consent decree ("Consent Decree") entered by the Wyoming State
District Court on November 28, 1984 and involving the State of Wyoming, the
Wyoming Department of Environmental Quality, and the predecessor owners of the
Frontier Refinery. This action primarily addressed the threat of groundwater
and surface water contamination at the Frontier Refinery. As a result of these
investigative efforts, substantial capital expenditures and remediation of
conditions found to exist have already taken place or are in progress.
Additionally, the EPA issued an administrative order on consent ("Federal
Order") with respect to the Frontier Refinery on September 24, 1990 pursuant
to the RCRA. The Federal Order requires the technical investigation of the
Frontier Refinery to determine if certain areas have been adversely impacted
by past operational activities. Based upon the results of
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<PAGE>
the investigation, additional remedial action could be required by a
subsequent administrative order or permit. Both the state Consent Decree and
the Federal Order are now vacated.
On March 21, 1995, the Company and the Wyoming Department of Environmental
Quality entered into an administrative consent order ("State Order") that
generally parallels the Federal Order and replaces the Consent Decree.
Accordingly, the Consent Decree was dismissed in an Order entered March 21,
1995. The State Order eliminates certain of the Consent Decree requirements,
unifies state and federal regulatory expectations regarding site investigation
and remediation and, consequently, helps to streamline certain of the
Company's current environmental obligations. The EPA withdrew the Federal
Order on March 19, 1997 in recognition of the State Order and Wyoming's
assumption of RCRA corrective action authority. The ultimate cost of any
environmental remediation projects that may be identified by the site
investigation required by the State Order cannot be reasonably estimated at
this time. However, the continuation of the present investigative process,
other more extensive investigations over time or changes in regulatory
requirements could result in future liabilities.
The Company has a 34.72% undivided ownership interest in the Centennial
Pipeline. Conoco Pipe Line Company is the sole operator of the Centennial
Pipeline as well as the holder of the remaining ownership interest. The
Centennial Pipeline runs approximately 88 miles from Guernsey to Cheyenne,
Wyoming. The Frontier Refinery receives up to 25,000 bpd of crude oil
feedstock through the Centennial Pipeline. Under the terms of the operating
agreement for the Centennial Pipeline, the costs and expenses incurred to
operate and maintain the Centennial Pipeline are allocated to the Company on
the basis of either its throughput or ownership interest. The Centennial
Pipeline is subject to numerous federal, state and local laws and regulations
relating to the protection of health, safety and the environment. The Company
believes the Centennial Pipeline is operated in accordance with all applicable
laws and regulations. The Company is not aware of any material pending legal
proceedings to which the Centennial Pipeline is a party.
In 1997, the Company completed divesting itself of its former oil and gas
properties and assets. While the transactions that conveyed these properties
and assets to new owners were intended to transfer any attendant environmental
liabilities to the new owners, there can be no assurances that the Company
will never be subject to liability for any former activity respecting the
divested oil and gas properties. The Company has been named as a PRP under
CERCLA (as defined herein) at the Gulf Coast Vacuum Services Superfund Site
located in Vermilion Parish, Louisiana, one of the divested properties. The
Company has entered into a consent decree resolving its liabilities as a PRP
at this Superfund site. The Company believes that any future liabilities
related to this site will not have a material adverse effect on the financial
condition of the Company. The Company also believes that any liability
relating to its historical practices respecting the oil and gas properties
will not have a material adverse effect on the financial condition, results of
operations or business of the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original conduct, on certain classes of persons
who are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances. Under
CERCLA, such persons may be subject to joint and several liability for the
costs of cleaning up the hazardous substances that have been released into the
environment, for damages to natural resources, and for the costs of certain
health studies. It is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly
caused by hazardous substances or other pollutants released into the
environment. Analogous state laws impose similar responsibilities and
liabilities on responsible parties. In the course of its historical
operations, as well as in its current ordinary operations, the Company has
generated waste, some of which falls within the statutory definition of a
"hazardous substance" and some of which may have been disposed of at sites
that may require cleanup under Superfund.
As is the case with all companies engaged in similar industries, the Company
faces potential exposure from future claims and lawsuits involving
environmental matters. These matters include soil and water contamination,
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<PAGE>
air pollution, and personal injuries or property damage allegedly caused by
substances manufactured, handled, used, released or disposed of by the
Company.
EMPLOYEES
At December 31, 1997, the Company employed 291 full-time employees in the
refining operations, 42 at the Houston and Denver offices and 249 at the
Frontier Refinery. The Frontier Refinery employees include 81 administrative
and technical personnel and 168 union members. The union members are
represented by seven bargaining units, the largest being the Oil, Chemical and
Atomic Workers International Union ("OCAW"). The Company's current three-year
contract with OCAW expires in July 1999 while its current six-year contract
with the AFL-CIO affiliated union expires in June 2002. On May 8, 1996,
approximately 150 union employees of the Company commenced a strike which was
settled on July 29, 1996. The 1996 strike did not have a material effect on
the Company's operations, and the Company believes that its current relations
with its employees are good. However, there can be no assurance that the
Company's employees will not strike again at some time in the future or that
such a strike would not adversely effect the Company's operations.
PROPERTIES
The Company owns the 125-acre site of the Frontier Refinery in Cheyenne and
rents office space in Englewood, Colorado and Houston, Texas.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings. The
Company is a party to ordinary routine litigation incidental to its business.
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MANAGEMENT
DIRECTORS AND SENIOR OFFICERS
The following table sets forth names, ages and titles of the directors and
senior officers of the Company. Their respective backgrounds are described
following the table.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James R. Gibbs.......... 53 President, Chief Executive Officer and Director
Julie H. Edwards........ 39 Senior Vice President--Finance and Chief Financial Officer
S. Clark Johnson........ 52 Senior Vice President--Refining Operations
J. Currie Bechtol....... 56 Vice President--General Counsel
Gerald B. Faudel........ 48 Vice President--Safety and Environmental Affairs
Jon D. Galvin........... 44 Vice President--Controller
Douglas Y. Bech......... 52 Director
Paul B. Loyd, Jr........ 51 Director
James S. Palmer......... 69 Director
Derek A. Price.......... 65 Director
Carl W. Schafer......... 62 Director
</TABLE>
James R. Gibbs joined the Company in February 1982 and has been President
since January 1987. He assumed the additional position of Chief Executive
Officer on April 1, 1992. Mr. Gibbs has been a director of the Company since
1985. Mr. Gibbs is a member of the Board of Directors of Smith International,
Inc., an oil field service company; an advisory director of Frost National
Bank, N.A.; and a director of Veritas DGC Inc., a seismic service company.
Julie H. Edwards joined the Company in March 1991 and has been Senior Vice
President--Finance and Chief Financial Officer since 1994. From 1985 to
February 1991, she was employed by Smith Barney, Harris Upham & Co. Inc. in
the Corporate Finance Department. Prior to 1985, she was employed as a
geologist of two oil companies, Amerada Hess Corporation and American
Ultramar, Ltd. Ms. Edwards is a member of the Board of Directors of Evans
Systems, Inc., a fuel distribution, convenience store and diversified company.
S. Clark Johnson is Senior Vice President--Refining Operations and serves as
President of the refining subsidiaries of the Company. He has over 25 years of
experience in refining and marketing. Prior to joining the Company in 1992,
Mr. Johnson was Senior Vice President--Marketing, Supply & Terminals at Kerr-
McGee Refining Corporation for approximately two years. In 1989, Mr. Johnson
served as President of Coast Mart, Inc., a retail subsidiary of Coastal
Corporation. Prior to 1989, Mr. Johnson was with Tenneco Oil Company for 20
years where he held numerous positions, including Vice President--Retail
Marketing from 1987 to 1988. Mr. Johnson is a member of the Board of Directors
of Pride Refining, Inc., the general partner of Pride Companies, L.P., a
products pipeline and crude oil gathering company.
J. Currie Bechtol is Vice-President--General Counsel of the Company. He was
appointed to this position in January 1998. Prior to joining the Company, Mr.
Bechtol was a partner in the law firm Hutcheson & Grundy, L.L.P., a position
he had held since 1984.
Gerald B. Faudel is Vice President--Safety and Environmental Affairs and has
held that position with the Company since November 1993. He holds a similar
position with the refining subsidiaries. From October 1991 through November
1993, Mr. Faudel was Director of Safety, Environmental and External Affairs of
the refining subsidiaries of the Company. Mr. Faudel was employed by Frontier
Oil Corporation from October 1989 through October 1991 as Director of Safety,
Environmental and External Affairs. Prior to October 1989, Mr. Faudel was
employed with Tosco Corporation's Avon Refinery as Manager of Hazardous Waste
and Wastewater Program.
Jon D. Galvin is Vice President--Controller of the Company. He was appointed
to this position in September 1997. Mr. Galvin has been the Chief Financial
Officer of the Company's refining subsidiaries since February 1992.
Previously, he had spent 15 years with Arthur Andersen, ultimately as Audit
Principal.
51
<PAGE>
Douglas Y. Bech has been Chairman of Club Regina Resorts, Inc. since August
1997. From October 1994 to October 1997, Mr. Bech was a partner in the law
firm of Akin, Gump, Strauss, Hauer & Feld, L.L.P. of Houston, Texas. Since
August 1994, he has also been a managing director of Raintree Capital Company,
L.L.C., a merchant banking firm. From May 1993 to July 1994, Mr. Bech was a
partner of Gardere & Wynne, L.L.P. of Houston, Texas. From 1977 until May
1993, Mr. Bech was a partner of Andrews & Kurth L.L.P. Mr. Bech is a member of
the Board of Directors of Pride Refining, Inc., the general partner of Pride
Companies, L.P., a products pipeline and crude gathering company; and JetFax,
Inc., a multifunctional peripheral office equipment company. He has been a
director of the Company since 1993.
Paul B. Loyd, Jr. has been Chairman and director of R&B Falcon Corporation
since December 1997. Mr. Loyd was Chairman and Chief Executive Officer of
Reading & Bates Corporation, an offshore contract drilling company, from June
1991 until December 1997 and was a director of Reading & Bates from April 1991
until December 1997. Mr. Loyd was Chief Executive Officer and a director of
Chiles-Alexander International, Inc. from 1987 to 1989, President and a
director of Griffin-Alexander Drilling Company from 1984 to 1987, and prior to
that, a director and Chief Financial Officer of Houston Offshore
International, all of which are companies in the offshore drilling industry.
Mr. Loyd is a member of the Board of Directors of Carrizo Oil & Gas, Inc. He
has been a director of the Company since 1994.
James S. Palmer is Chairman of the law firm of Burnet, Duckworth & Palmer of
Calgary, Alberta, Canada, where he has been a partner since 1956. Burnet,
Duckworth & Palmer has been retained by the Company as its counsel regarding
certain Canadian legal matters. Mr. Palmer is Chairman of the Board of Telus
Corporation, a telecommunications company. Mr. Palmer is also a member of the
Board of Directors of Bank of Canada; Chancellor Energy Resources Inc.; Crown
Life Insurance Company; Fleet Aerospace Corporation; Remington Resources Ltd.,
an oil and gas company; Sceptre Resources Limited, an oil and gas company;
Tombill Mines Limited, a diversified Canadian public holding company; and
Westcoast Energy Inc., a pipeline and transmission company. Mr. Palmer has
been a director of the Company since 1975.
Derek A. Price is a trustee of The J.W. McConnell Family Foundation, a
charitable foundation. Prior to April 1991, Mr. Price was Chairman of the
Board of Directors and Chief Executive Officer of Starlaw Holdings Limited, a
private investment company with holdings principally in the areas of financial
services, real estate and manufacturing. Mr. Price has been a director of the
Company since 1987.
Carl W. Schafer has been the President of the Atlantic Foundation, a
charitable foundation which mainly supports oceanographic research, since
1990. From 1987 until 1990, Mr. Schafer was a principal of the investment
management firm of Rockefeller & Co., Inc. Mr. Schafer presently serves on the
Board of Directors of Roadway Express, Inc., a transportation company; the
PaineWebber and Guardian Groups of Mutual Funds, registered investment
companies; Electronic Clearing House, Inc., an electronic financial
transactions processing company; Evans Systems, Inc., a fuel distribution,
convenience store and diversified company; and Nutraceutix Inc., a
biotechnology company. Mr. Schafer has been a director of the Company since
1984.
52
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth, as of March 20, 1998, the beneficial
ownership of the Company's Common Stock, with respect to each person known by
the Company to be the beneficial owner of more than five percent of the
Company's outstanding voting securities, excluding Common Stock held by the
Company;
<TABLE>
<CAPTION>
AMOUNT AND NATURE PERCENTAGE OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNERSHIP(1) OF COMMON STOCK(2)
---------------- -------------------------- --------------------
<S> <C> <C>
Ingalls & Snyder LLC........... 5,818,498(3) 20.6%
61 Broadway
New York, New York 10006
Kornitzer Capital Management,
Inc. ......................... 3,065,800(4) 10.9
P.O. Box 918
Shawnee Mission, Kansas 66201
Great Plains Trust Company..... 1,552,500(4) 5.5
4705 Mission Road
Westwood, Kansas 66205
The Guardian Life Insurance
Company of America(5)......... 2,693,700(5) 9.6
201 Park Avenue South
New York, New York 10003
</TABLE>
- --------
(1) On March 12, 1998, all but $731,000 of $46 million aggregate principal
amount outstanding of the Company's 7 3/4% Convertible Debentures due 2014
(the "Convertible Debentures") were redeemed. The holders of $731,000 of
the Convertible Debentures elected to convert such debentures into 83,542
shares of the Company's Common Stock. For the purposes of this table, the
Company has assumed that any Convertible Debentures held by the principal
stockholders listed above were redeemed and not converted.
(2) Represents percentage of 28,187,091 outstanding shares of Common Stock as
of March 20, 1998.
(3) Ingalls & Snyder LLC ("Ingalls & Snyder") filed with the Commission a
Schedule 13G, dated September 6, 1995, and amendments thereto, dated
December 8, 1995, January 17 and June 10, 1996, January 29 and July 28,
1997 and February 9, 1998. Based on the most recent amendment, Ingalls &
Snyder had sole voting power with respect to 381,000 of the above shares
and sole dispositive power with respect to all 5,818,498 shares of Common
Stock (excluding 571 shares of Common Stock Ingalls & Snyder would be
deemed to have beneficially owned through its holdings, at the time of
the filing of such amendment, of $5,000 principal amount of Convertible
Debentures, assuming conversion at such time.
(4) Kornitzer Capital Management, Inc. ("KCM") filed with the Commission a
Schedule 13G, dated March 29, 1996, and amendments thereto, dated
February 10, 1997 and February 17, 1998 (filed jointly with Great Plains
Trust Company ("Great Plains")). Based on the most recent amendment, (i)
KCM had shared voting power and shared dispositive power with respect to
5,809,121 shares Common Stock (excluding 2,743,321 shares of Common Stock
KCM would be deemed to have beneficially owned through its holdings, at
the time of the filing of such amendment, of $24,004,000 principal amount
of Convertible Debentures, assuming conversion at such time, and (ii)
Great Plains had shared voting power and shared dispositive power with
respect to 2,056,000 shares of Common Stock (excluding 503,500 shares of
Common Stock Great Plains would be deemed to have beneficially owned
through its holdings, at the time of the filing of such amendment, of
$4,406,000 principal amount of Convertible Debentures, assuming
conversion at such time.
(5) The Guardian Life Insurance Company of America ("Guardian Life") and
certain related entities disclosed below jointly filed with the
Commission a Schedule 13G, dated February 14, 1996, and an amendment
thereto, dated February 11, 1998. Based on such amendment, (i) Guardian
Life had sole voting and dispositive power with respect to 1,097,400
shares of Common Stock shared voting and dispositive power with respect
to 419,400 shares of Common Stock, (ii) The Guardian Investor Services
Corporation
53
<PAGE>
("GISC"), a wholly owned subsidiary of Guardian Life, had sole voting and
dispositive power with respect to no shares of Common Stock and shared
voting and dispositive power with respect to 1,176,000 shares of Common
Stock, (iii) The Guardian Park Avenue Fund, a mutual fund sponsored by
Guardian Life and managed by GISC, had sole voting and dispositive power
with respect to no shares of Common Stock and shared voting and dispositive
power with respect to 495,300 shares of Common Stock, (iv) The Guardian
Stock Fund, Inc., a mutual fund sponsored by Guardian Life and managed by
GISC, had sole voting and dispositive power with respect to no shares of
Common Stock and shared voting and dispositive power with respect to
451,300 shares of Common Stock, (v) The Guardian Park Avenue Small Cap
Fund, a mutual fund sponsored by Guardian Life and managed by GISC, had
sole voting and dispositive power with respect to no shares of Common Stock
and shared voting and dispositive power with respect to 135,000 shares of
Common Stock, (vi) The Guardian Small Cap Stock fund, a mutual fund
sponsored by Guardian Life and managed by GISC, had sole voting and
dispositive with respect to no shares of Common Stock and shared voting and
dispositive power with respect to 95,000 shares of Common Stock, (vii) The
Guardian Employees' Incentive Savings Plan, an employee benefit plan
offered to the employees of Guardian Life, had sole voting and dispositive
power with respect to no shares of Common Stock and shared voting and
dispositive power with respect to 314,000 shares of Common Stock and (viii)
The Guardian Life Insurance Company of American Master Pension Trust, a
pension fund for the employees of Guardian Life, had sole voting and
dispositive power with respect to no shares of common stock and shared
voting and dispositive power with respect to 105,700 shares of Common
Stock. Based on such amendment, Guardian Life and such related entities
beneficially owned, in the aggregate without duplication, 2,693,700 shares
of Common Stock.
54
<PAGE>
DESCRIPTION OF INDEBTEDNESS
As of December 31, 1997, on a pro forma basis after giving effect to the
Offering and the application of the net proceeds therefrom, the Company and
its subsidiaries would have had no outstanding indebtedness (excluding
availability under the Frontier Credit Facility) other than the Notes.
Frontier Oil and Refining Company, an indirect, wholly owned subsidiary of the
Company ("FORC"), is a party to a working capital facility (the "Frontier
Credit Facility") with a group of three banks, for which Union Bank of
California, N.A. ("Union Bank") is agent. The Frontier Credit Facility
provides working capital for operations, generally by issuing standby letters
of credit in support of purchases of crude oil and petroleum products and by
making short term working capital loans. Letters of credit and advances under
the Frontier Credit Facility are secured by certain accounts receivable,
inventory, intercompany notes and the common stock of the borrower. The
obligations of FORC under the Frontier Credit Facility are guaranteed by its
direct parent, Frontier Oil Corporation, which is also an indirect, wholly
owned subsidiary of the Company.
One or more of the following events may constitute an event of default under
the Frontier Credit Facility: (i) the failure by FORC to pay its obligations
as they become due, (ii) a representation or warranty of FORC thereunder
proves incorrect in any material respect, (iii) nonperformance thereunder of
covenants and the failure by FORC to remedy such nonperformance upon receiving
notice thereof, (iv) the failure of FORC or any of its affiliates (including
the Company) to pay its debts generally and the written admission thereof, (v)
the commencement of enforcement proceedings against FORC or any of its
affiliates (including the Company) upon nonpayment of certain judgments or
orders for payment, (vi) the occurrence of a material adverse change in the
business of FORC and certain of its affiliates (not including the Company) and
(vii) the cessation of the lien in favor of the collateral securing such
facility.
The amount of available capacity under the Frontier Credit Facility is
determined by a bi-weekly borrowing base calculation to a maximum capacity of
$50.0 million, of which cash advances are currently limited to $20.0 million.
Advances under the Frontier Credit Facility bear interest, at the borrower's
option, at Union Bank's prime rate plus .50% or reserve-adjusted LIBOR for
certain interest periods plus 1.75%. The Frontier Credit Facility provides for
a quarterly commitment fee of .375 of 1%. Standby letters of credit issued
bear a fee of 1.25% annually, plus standard issuance and renewal fees. The
Frontier Credit Facility includes certain financial covenant requirements
relating to Frontier's working capital (at least 1.08 to 1.0 at the end of
each quarter), cash earnings (EBITDA of at least $10.0 million on a rolling
four quarter basis), tangible net worth (as defined therein) and fixed charge
coverage (rolling four quarter EBITDA minus $4.0 million must be equal to at
least 2.5 times fixed charges). At March 31, 1997, FORC would have violated
the above-referenced covenant relating to working capital, but obtained bank
waivers.
Under the terms of the Frontier Credit Facility and related guarantees, the
Subsidiaries of the Company are prohibited from transferring cash in the form
of dividends, loans or advances in certain circumstances, including to the
extent any loans are outstanding to the borrower or upon a default or event of
default under the Frontier Credit Facility. Borrowings under the Frontier
Credit Facility also must be reduced to zero for at least five consecutive
business days each calendar quarter, the failure of which represents an event
of default. Accordingly, the existence of borrowings or a default or event of
default under the Frontier Credit Facility could adversely effect the
Company's ability to have sufficient cash to pay its obligations, including
the Notes.
55
<PAGE>
DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes will be issued, and the Old Notes were issued, pursuant
to the Indenture (the "Indenture") between the Company and Chase Bank of
Texas, National Association, as trustee (the "Trustee"). The terms of the
Notes include those stated in the Indenture and those made part of the
Indenture by reference to the Trust Indenture Act of 1939, as amended (the
"Trust Indenture Act"). The Exchange Notes will be subject to all such terms,
and prospective investors are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified
in its entirety by reference to the Indenture. Copies of the Indenture and the
Registration Rights Agreement are available as set forth under "--Additional
Information." The definitions of certain terms used in the following summary
are set forth below under "--Certain Definitions." As used in this
"Description of the Notes," the "Company" means Frontier Oil Corporation, but
not any of its Subsidiaries.
The Exchange Notes will be issued solely in exchange for an equal principal
amount of Old Notes pursuant to the Exchange Offer. The form and terms of the
Exchange Notes will be identical in all material respects to the form and
terms of the Old Notes except that the offering of the Exchange Notes has been
registered under the Securities Act, and the Exchange Notes will therefore not
be subject to transfer restrictions, registration rights and certain
provisions relating to the payment of Liquidated Damages under certain
circumstances. The Notes are subject to the terms stated in the Indenture, a
copy of which has been filed as an exhibit to the Registration Statement, and
holders of the Notes are referred thereto for a statement of those terms.
The Old Notes and the Exchange Notes will constitute a single series of debt
securities under the Indenture. If the Exchange Offer is consummated, holders
of Old Notes who do not exchange their Old Notes for Exchange Notes will vote
together with holders of the Exchange Notes for all relevant purposes under
the Indenture. In that regard, the Indenture requires that certain actions by
the holders thereunder (including following an Event of Default) must be
taken, and certain rights must be exercised, by specified minimum percentages
of the aggregate principal amount of the outstanding securities issued under
the Indenture. In determining whether holders of the requisite percentage in
principal amount have given any notice, consent or waiver or taken any other
action permitted under the Indenture, any Old Notes that remain outstanding
after the Exchange Offer will be aggregated with the Exchange Notes, and the
holders of such Old Notes and the Exchange Notes will vote together as a
single series for all such purposes. Accordingly, all references herein to
specified percentages in aggregate principal amount of the outstanding Notes
shall be deemed to mean, at any time after the Exchange Offer is consummated,
such percentages in aggregate principal amount of the Old Notes and the
Exchange Notes then outstanding.
The Notes are general unsecured obligations of the Company, ranking pari
passu in right of payment with all future senior indebtedness of the Company
and senior in right of payment to all future subordinated indebtedness of the
Company. The Notes will be effectively subordinated, however, to all future
secured obligations of the Company to the extent of the assets securing such
obligations. In addition, because of the holding company structure of the
Company, the Notes will be effectively subordinated to all current and future
obligations of the Subsidiaries of the Company, including without limitation,
claims of trade creditors, tort claimants, secured creditors, taxing
authorities and creditors holding guarantees. After giving effect to the sale
of the Old Notes and the application of the net proceeds from the offering, at
March 31, 1998, the Company would have had no Indebtedness (other than the
Notes), and the Company's Subsidiaries would have had $5.7 million of
outstanding Indebtedness under the Frontier Credit Facility (excluding an
additional $14.3 million available for cash advances under the Frontier Credit
Facility). The Indenture permits the Company and its Subsidiaries to incur
additional Indebtedness, including secured Indebtedness, under certain
circumstances. See "Risk Factors--Ranking of the Notes; Effective
Subordination," "--Ability to Service Debt," "Capitalization" and "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock."
56
<PAGE>
Any Old Notes that remain outstanding after the completion of the Exchange
Offer, together with the Exchange Notes issued in connection with the Exchange
Offer, will be treated as a single class of securities under the Indenture.
As of the date of the Indenture, all of the Company's principal operating
Subsidiaries will be Restricted Subsidiaries. Under certain circumstances, the
Company will be able to designate current or future Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
The Notes are limited in aggregate principal amount to $75.0 million, $70
million of which were issued in the Offering. Up to $5 million of additional
Notes may be issued from time to time in the future, subject to the
limitations set forth under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Disqualified Stock." The Notes will mature on
February 15, 2006. Interest on the Notes will accrue at the rate of 9 1/8% per
annum and will be payable semi-annually in arrears on February 15 and August
15 of each year, commencing, on August 15, 1998, to holders of record on the
immediately preceding February 1 and August 1. Interest on the Notes will
accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal of and premium, interest and Liquidated Damages, if any, on the
Notes will be payable at the office or agency of the Company maintained for
such purpose in the City of New York, New York or, at the option of the
Company, payment of interest and Liquidated Damages, if any, may be made by
check mailed to holders of the Notes at their respective addresses set forth
in the register of holders; subject to the right of any holders of Notes in
the principal amount of $1.0 million or more to request payment by wire
transfer. Until otherwise designated by the Company, the Company's office or
agency will be the office of the Trustee maintained for such purpose in the
City of New York, New York. The Notes will be issued in denominations of
$1,000 and integral multiples thereof.
SUBSIDIARY GUARANTEES
Under the circumstances described below under "--Certain Covenants--Future
Subsidiary Guarantors," the Company's payment obligations under the Notes may
in the future be jointly and severally guaranteed (the "Subsidiary
Guarantees") by one or more of the Company's Subsidiaries (the "Guarantors").
The obligations of each Guarantor under its Subsidiary Guarantee will be a
general unsecured obligation of such Guarantor, ranking pari passu in right of
payment with all other current or future senior borrowings of such Guarantor
and senior in right of payment to any subordinated indebtedness, if any,
incurred by such Guarantor in the future. The Subsidiary Guarantees will be
effectively subordinated, however, to all current and future secured
obligations of the Guarantors, including borrowings under the Frontier Credit
Facility. See "Offering Memorandum Summary--The Offering--Ranking."
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee
will be limited to such maximum amount as will, after giving effect to all
other contingent and fixed liabilities of such Subsidiary Guarantor and after
giving effect to any collections from or payments made by or on behalf of any
other Guarantor in respect of the obligations of such other Subsidiary
Guarantor under its Subsidiary Guarantee or pursuant to its contribution
obligations under the Indenture, result in the obligations of such Subsidiary
Guarantor under its Subsidiary Guarantee not constituting a fraudulent
conveyance or fraudulent transfer under federal, state or foreign law. Each
Subsidiary Guarantor that makes a payment or distribution under a Subsidiary
Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in a pro rata amount based on the Adjusted Net Assets of each
Subsidiary Guarantor.
The Indenture will provide that, subject to the provisions of the following
paragraph, no Guarantor may consolidate with or merge with or into (whether or
not such Guarantor is the surviving Person) another Person (other than the
Company or another Guarantor), whether or not affiliated with such Guarantor,
unless (i) the
57
<PAGE>
Person formed by or surviving any such consolidation or merger (if other than
such Guarantor) shall execute a Guarantee and deliver an opinion of counsel in
accordance with the terms of the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default exists; (iii) such
Guarantor, or any Person formed by or surviving any such consolidation or
merger, would have Consolidated Net Worth (immediately after giving effect to
such transaction), equal to or greater than the Consolidated Net Worth of such
Guarantor immediately preceding the transaction; and (iv) the Company would be
permitted by virtue of the Company's pro forma Consolidated Interest Coverage
Ratio, immediately after giving effect to such transaction, to incur at least
$1.00 of additional Indebtedness pursuant to the Consolidated Interest
Coverage Ratio test set forth in the covenant described below the caption "--
Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified
Stock."
The Indenture provides that, in the event of a sale or other disposition
(including by way of merger, consolidation or otherwise) of all of the assets
or Capital Stock of any Guarantor, that such Guarantor will be released and
relieved of any obligations under its Subsidiary Guarantee; provided, however,
that the Net Proceeds of such sale or other disposition are applied in
accordance with the applicable provisions of the Indenture. See "--Repurchase
at the Option of Holders--Asset Sales"; and provided, further, that upon such
release the obligations of such Guarantor in respect of any and all other
guarantees of Indebtedness of the Company or a Guarantor are similarly
released. In addition, the Indenture provides that, in the event the Board of
Directors designates a Guarantor to be an Unrestricted Subsidiary, then such
Guarantor will be released and relieved of any obligations under its
Subsidiary Guarantee, provided that such designation is conducted in
accordance with the applicable provisions of the Indenture.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to February 15,
2002. Thereafter, the Notes will be subject to redemption at any time at the
option of the Company, in whole or in part, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the applicable
redemption date, if redeemed during the twelve-month period beginning on
February 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002............................................. 104.563%
2003............................................. 103.042
2004............................................. 101.521
2005 and thereafter.............................. 100.000
</TABLE>
Notwithstanding the foregoing, the Company may at any time prior to February
15, 2002, at its option, redeem the Notes, in whole or in part, at the Make-
Whole Price, plus accrued and unpaid interest and Liquidated Damages, if any,
thereon to the redemption date. In addition, for a period of three years
following the date of this Offering Memorandum, the Company may redeem up to
35% of the aggregate principal amount of Notes originally issued at the
redemption price of 109 1/8% of the principal amount thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the redemption
date, with the net cash proceeds of one or more Qualified Equity Offerings,
provided that (a) at least 65% in aggregate principal amount of Notes
originally issued remains outstanding immediately after the occurrence of each
such redemption and (b) each such redemption occurs within 60 days of the date
of the closing of each such Qualified Equity Offering.
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee on a pro rata basis, by lot
or by such method as the Trustee shall deem fair and appropriate; provided,
however, that no Notes of $1,000 or less shall be redeemed in part. Notices of
redemption shall be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each holder of Notes to be redeemed at
its registered address. Notices of redemption may not be conditional. If any
Note is to
58
<PAGE>
be redeemed in part only, the notice of redemption that relates to such Note
shall state the portion of the principal amount thereof to be redeemed. A new
Note in principal amount equal to the unredeemed portion thereof will be
issued in the name of the holder thereof upon cancellation of the original
Note. Notes called for redemption become due on the date fixed for redemption.
On and after the redemption date, interest ceases to accrue on Notes or
portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "--Repurchase at the Option of Holders", the
Company is not required to make mandatory redemption or sinking fund payments
with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
The Indenture provides that, upon the occurrence of a Change of Control, the
Company will be required to make an offer (a "Change of Control Offer") to
repurchase all or any part (equal to $1,000 or an integral multiple thereof)
of each holder's Notes at an offer price in cash equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest and
Liquidated Damages, if any, thereon to the date of repurchase (the "Change of
Control Payment"). Within 30 days following a Change of Control, the Company
will mail a notice to each holder of Notes and the Trustee describing the
transaction that constitutes the Change of Control and offering to repurchase
Notes on the date specified in such notice, which date shall be no earlier
than 30 days and no later than 60 days from the date such notice is mailed
(the "Change of Control Payment Date"), pursuant to the procedures required by
the Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of Notes as a result of a Change
of Control.
On or before the Change of Control Payment Date, the Company will, to the
extent lawful, (a) accept for payment all Notes or portions thereof properly
tendered pursuant to the Change of Control Offer, (b) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all Notes
or portions thereof so tendered and (c) deliver or cause to be delivered to
the Trustee the Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each holder
of Notes so tendered the Change of Control Payment for such Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by
book entry) to each holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided, however, that
each such new Note will be in a principal amount of $1,000 or an integral
multiple thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
Except as described above with respect to a Change of Control, the Indenture
does not contain provisions that permit the holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction. In addition, the Company could enter
into certain transactions, including acquisitions, refinancing or other
recapitalizations, that could affect the Company's capital structure or the
value of the Notes, but that would not constitute a Change of Control. The
occurrence of a Change of Control may result in a default under the Credit
Facility and give the lenders thereunder the right to require the Company to
repay all outstanding obligations thereunder. The Company's ability to
repurchase Notes following a Change of Control may also be limited by the
Company's then existing financial resources.
The Company will not be required to make a Change of Control Offer following
a Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
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A "Change of Control" will be deemed to have occurred upon the occurrence of
any of the following: (a) the sale, lease, transfer, conveyance or other
disposition (other than by merger or consolidation), in one or a series of
related transactions, of all or substantially all of the assets of the Company
and its Subsidiaries, taken as a whole, (b) the adoption of a plan relating to
the liquidation or dissolution of the Company, (c) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that any "person" (as such term is used in Section 13(d)
(3) of the Exchange Act) becomes the "beneficial owner" (as such term is
defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act), directly or
indirectly through one or more intermediaries, of more than 50% of the voting
power of the outstanding voting stock of the Company or (d) the first day on
which more than a majority of the members of the Board of Directors are not
Continuing Directors (as such term is defined below); provided, however, that
a transaction in which the Company becomes a Subsidiary of another Person
(other than a Person that is an individual) shall not constitute a Change of
Control if (i) the shareholders of the Company immediately prior to such
transaction "beneficially own" (as such term is defined in Rule 13d-3 and Rule
13d-5 under the Exchange Act), directly or indirectly through one or more
intermediaries, at least a majority of the voting power of the outstanding
voting stock of the Company immediately following the consummation of such
transaction and (ii) immediately following the consummation of such
transaction, no "person" (as such term is defined above), other than such
other Person (but including the holders of the Equity Interests of such other
Person), "beneficially owns" (as such term is defined above), directly or
indirectly through one or more intermediaries, more than 50% of the voting
power of the outstanding voting stock of the Company. "Continuing Directors"
means, as of any date of determination, any member of the Board of Directors,
who (a) was a member of the Board of Directors on the Issue Date or (b) was
nominated for election to the Board of Directors with the approval of, or
whose election to the Board of Directors was ratified by, at least a majority
of the Continuing Directors who were members of the Board of Directors at the
time of such nomination or election.
Asset Sales
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, consummate an Asset Sale unless (a) the
Company or such Restricted Subsidiary, as the case may be, receives
consideration at the time of such Asset Sale at least equal to the fair market
value (as determined in accordance with the definition of such term) of the
assets or Equity Interests issued or sold or otherwise disposed of and (b) at
least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash or Cash Equivalents; provided,
however, that the amount of (i) any liabilities (as shown on the Company's or
such Restricted Subsidiary's most recent balance sheet) of the Company or such
Restricted Subsidiary (other than contingent liabilities and liabilities that
are by their terms subordinated to the Notes or any guarantee thereof) that
are assumed by the transferee of any such assets pursuant to a customary
novation agreement that releases the Company or such Restricted Subsidiary
from further liability and (ii) any securities, notes or other obligations
received by the Company or such Restricted Subsidiary from such transferee
that are immediately converted by the Company or such Restricted Subsidiary
into cash (to the extent of the cash received) shall be deemed to be cash for
purposes of this provision.
Within 365 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or any such Restricted Subsidiary may apply such Net Proceeds to
(a) permanently repay the principal of any secured Indebtedness (to the extent
of the fair value of the assets securing such Indebtedness, as determined by
the Board of Directors) or (b) to acquire (including by way of a purchase of
assets or stock, merger, consolidation or otherwise) assets used in the
Principal Business. Any Net Proceeds that are applied to the acquisition of
assets in the Principal Business pursuant to any binding agreement shall be
deemed to have been applied for such purpose within such 365-day period so
long as they are so applied within two years after the date of receipt of such
Net Proceeds. Pending the final application of any such Net Proceeds, the
Company or any such Restricted Subsidiary may temporarily reduce outstanding
revolving credit borrowings or otherwise invest such Net Proceeds in any
manner that is not prohibited by the Indenture. Any Net Proceeds from Asset
Sales that are not applied or invested as provided in the first sentence of
this paragraph will be deemed to constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds exceeds $10.0 million, the
Company will be required to make an offer to all holders of Notes (an "Asset
Sale Offer") to purchase the maximum principal amount of
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Notes that may be purchased out of the Excess Proceeds at an offer price in
cash in an amount equal to 100% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the date of
purchase, in accordance with the procedures set forth in the Indenture;
provided, however, that, if the Company is required to apply such Excess
Proceeds to repurchase, or to offer to repurchase, any Pari Passu
Indebtedness, the Company shall only be required to offer to repurchase the
maximum principal amount of Notes that may be purchased out of the amount of
such Excess Proceeds multiplied by a fraction, the numerator of which is the
aggregate principal amount of Notes outstanding and the denominator of which
is the aggregate principal amount of Notes outstanding plus the aggregate
principal amount of Pari Passu Indebtedness outstanding. To the extent that
the aggregate principal amount of Notes tendered pursuant to an Asset Sale
Offer is less than the amount that the Company is required to repurchase, the
Company may use any remaining Excess Proceeds for general corporate purposes.
If the aggregate principal amount of Notes surrendered by holders thereof
exceeds the amount that the Company is required to repurchase, the Trustee
shall select the Notes to be purchased on a pro rata basis. Upon completion of
such offer to purchase, the amount of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides the Company will not, and will not permit any of its
Restricted Subsidiaries to, directly or indirectly, (a) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests (including, without
limitation, any such payment in connection with any merger or consolidation
involving the Company) or to the direct or indirect holders of the Company's
Equity Interests in their capacity as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company); (b) purchase, redeem or otherwise acquire or retire for value
(including without limitation, in connection with any merger or consolidation
involving the Company) any Equity Interests of the Company (other than any
such Equity Interests owned by the Company or any Restricted Subsidiary of the
Company); (c) make any payment on or with respect to, or purchase, redeem,
defease or otherwise acquire or retire for value, any Indebtedness that is
subordinated to the Notes, except a payment of interest or principal at Stated
Maturity (or within one year thereof); or (d) make any Restricted Investment
(all such payments and other actions set forth in clauses (a) through (d)
above being collectively referred to as "Restricted Payments"), unless, at the
time of and after giving effect to such Restricted Payment:
(i) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof;
(ii) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the
Consolidated Interest Coverage Ratio test set forth in the first paragraph
of the covenant described under the caption "--Incurrence of Indebtedness
and Issuance of Disqualified Stock"; and
(iii) such Restricted Payment, together with the aggregate amount of all
other Restricted Payments made by the Company and its Restricted
Subsidiaries after the Issue Date (excluding Restricted Payments permitted
by clauses (b), (c), (d) and (f), but including, without duplication,
Restricted Payments permitted by clauses (a) and (e), of the next
succeeding paragraph), is less than the sum of (A) 50% of the Consolidated
Net Income of the Company for the period (taken as one accounting period)
from January 1, 1998 to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (or, if such Consolidated Net Income for such
period is a deficit, less 100% of such deficit), plus (B) 100% of the
aggregate net cash proceeds received by the Company from the issue or sale
since the Issue Date of Equity Interests of the Company (other than
Disqualified Stock) or of Disqualified Stock or debt securities of the
Company that have been converted into such Equity Interests (other than any
such Equity Interests, Disqualified Stock or convertible debt securities
sold to a Restricted Subsidiary of the Company and other than Disqualified
Stock or convertible debt securities that have been converted into
Disqualified Stock), plus (C) the aggregate principal amount
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of any Convertible Debentures converted into Equity Interests since the
Issue Date, plus (D) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the cash return of capital with respect to such Restricted
Investment (less the cost of disposition, if any) plus (E) in the event
that any Unrestricted Subsidiary is redesignated as a Restricted
Subsidiary, the lesser of (1) an amount equal to the fair market value of
the Company's Investments in such Restricted Subsidiary and (2) the amount
of Restricted Investments previously made by the Company and its Restricted
Subsidiaries in such Unrestricted Subsidiary, plus (F) $10.0 million.
The foregoing provisions will not prohibit (a) the payment of any dividend
within 60 days after the date of declaration thereof if at said date of
declaration such payment would have complied with the provisions of the
Indenture; (b) the redemption, repurchase, retirement, defeasance or other
acquisition of any subordinated Indebtedness or Equity Interests of the
Company in exchange for, or out of the net cash proceeds of the substantially
concurrent sale (other than to a Subsidiary of the Company) of, other Equity
Interests of the Company (other than any Disqualified Stock), provided that
the amount of any such net cash proceeds that are utilized for any such
redemption, repurchase, retirement, defeasance or other acquisition shall be
excluded from clause (iii) (B) of the preceding paragraph; (c) the defeasance,
redemption, repurchase, retirement or other acquisition of subordinated
Indebtedness with the net cash proceeds from an incurrence of, or in exchange
for, Permitted Refinancing Indebtedness; (d) the payment of any dividend or
distribution by a Restricted Subsidiary of the Company to the holders of its
common Equity Interests on a pro rata basis; (e) so long as no Default or
Event of Default shall have occurred and be continuing, the repurchase,
redemption or other acquisition or retirement for value of any Equity
Interests of the Company held by any employee of the Company's or any of its
Restricted Subsidiaries, provided that the aggregate price paid for all such
repurchased, redeemed, acquired or retired Equity Interests shall not exceed
$1.0 million in any calendar year; and (f) the acquisition of Equity Interests
by the Company in connection with the exercise of stock options or stock
appreciation rights by way of cashless exercise or in connection with the
satisfaction of withholding tax obligations.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default. For
purposes of making such determination, all outstanding Investments by the
Company and its Restricted Subsidiaries (except to the extent repaid in cash)
in the Subsidiary so designated will be deemed to be Restricted Payments at
the time of such designation. All such outstanding Investments will be deemed
to constitute Investments in an amount equal to the greater of (a) the net
book value of such Investments at the time of such designation and (b) the
fair market value of such Investments at the time of such designation. Such
designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or
securities proposed to be transferred or issued by the Company or such
Restricted Subsidiary, as the case may be, pursuant to the Restricted Payment.
The fair market value of any non-cash Restricted Payment shall be determined
in the manner contemplated by the definition of the term "fair market value."
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur" or an
"incurrence") any Indebtedness other than Permitted Indebtedness and that the
Company will not issue any Disqualified Stock and will not permit any of its
Restricted Subsidiaries to issue any shares of Disqualified Stock; provided,
however, that the Company or any Guarantor may incur Indebtedness, and the
Company may issue Disqualified Stock, if the Consolidated Interest Coverage
Ratio for the Company's most recently ended four full fiscal quarters for
which internal financial statements are available immediately preceding the
date on which such additional Indebtedness is incurred or such Disqualified
Stock is issued would have been at least 2.0 to 1, determined on a pro forma
basis (including a pro forma application of the net proceeds therefrom), as if
the additional Indebtedness or Disqualified Stock had been issued or incurred
at the beginning of such four-quarter period.
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Liens
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create, incur, assume
or suffer to exist any Lien on any asset now owned or hereafter acquired, or
any income or profits therefrom or assign or convey any right to receive
income therefrom, except Permitted Liens, to secure (a) any Indebtedness of
the Company or such Restricted Subsidiary (if it is not also a Guarantor),
unless prior to, or contemporaneously therewith, the Notes are equally and
ratably secured, or (b) any Indebtedness of any Guarantor unless prior to, or
contemporaneously therewith, the Subsidiary Guarantees are equally and ratably
secured; provided, however, that if such Indebtedness is expressly
subordinated to the Notes or the Subsidiary Guarantees, the Lien securing such
Indebtedness will be subordinated and junior to the Lien securing the Notes or
the Subsidiary Guarantees, as the case may be, with the same relative priority
as such Indebtedness has with respect to the Notes or the Subsidiary
Guarantees.
Sale-and-Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, enter into any sale-and-leaseback transaction;
provided, however, that the Company or any Restricted Subsidiary, as
applicable, may enter into a sale-and-leaseback transaction if (i) the Company
or such Restricted Subsidiary could have (a) incurred Indebtedness in an
amount equal to the Attributable Indebtedness relating to such sale-and-
leaseback transaction pursuant to the Consolidated Interest Coverage Ratio
test set forth in the first paragraph of the covenant described above under
the caption "--Incurrence of Indebtedness and Issuance of Disqualified Stock"
and (b) incurred a Lien to secure such Indebtedness pursuant to the covenant
described under the caption "--Liens," (ii) the gross cash proceeds of such
sale-and-leaseback transaction are at least equal to the fair market value (as
determined in accordance with the definition of such term, the results of
which determination shall be set forth in an Officers' Certificate delivered
to the Trustee) of the property that is the subject of such sale-and-leaseback
transaction and (iii) the transfer of assets in such sale-and-leaseback
transaction is permitted by, and the Company applies the proceeds of such
transaction in compliance with, the covenant described above under the caption
"--Repurchase at the Option of Holders--Asset Sales."
Issuances and Sales of Capital Stock of Wholly Owned Restricted Subsidiaries
The Indenture provides that the Company (i) will not, and will not permit
any Wholly Owned Restricted Subsidiary of the Company to, transfer, convey,
sell, or otherwise dispose of any Capital Stock of any Wholly Owned Restricted
Subsidiary of the Company to any Person (other than the Company or a Wholly
Owned Restricted Subsidiary of the Company), unless (a) such transfer,
conveyance, sale, or other disposition is of all the Capital Stock of such
Wholly Owned Restricted Subsidiary and (b) the Net Proceeds from such
transfer, conveyance, sale, or other disposition are applied in accordance
with the covenant described above under the caption "--Repurchase at the
Option of Holders--Asset Sales," and (ii) will not permit any Wholly Owned
Restricted Subsidiary of the Company to issue any of its Equity Interests to
any Person other than to the Company or a Wholly Owned Restricted Subsidiary
of the Company; except, in the case of both clauses (i) and (ii) above, with
respect to dispositions or issuances by a Wholly Owned Restricted Subsidiary
of the Company as contemplated in clauses (a) and (b) of the definition of
"Wholly Owned Restricted Subsidiary."
Dividend and Other Payment Restrictions Affecting Subsidiaries
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) (i) pay dividends or make any
other distributions to the Company or any of its Restricted Subsidiaries on
its Capital Stock or with respect to any other interest or participation in,
or measured by, its profits, or (ii) pay any Indebtedness owed to the Company
or any of its Restricted Subsidiaries, (b) make loans or advances to the
Company or any of its Restricted Subsidiaries or (c) transfer any of its
properties or assets to the Company or any of its Restricted Subsidiaries,
except for such encumbrances or restrictions existing under or by reason of
(1) the Credit Facility (including with respect to Indebtedness incurred
thereunder after the Issue Date) or Existing Indebtedness, each as in effect
on the Issue
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Date, (2) the Indenture, the Notes and Subsidiary Guarantees, if any, (3)
applicable law, (4) any instrument governing Indebtedness or Capital Stock of
a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition),
which encumbrance or restriction is not applicable to any Person or the
properties or assets of any Person, other than the Person, or the property or
assets of the Person, so acquired, provided that, in the case of Indebtedness,
such Indebtedness was permitted by the terms of the Indenture to be incurred,
(5) by reason of customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices, (6)
purchase money obligations for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (c) above
on the property so acquired, (7) customary provisions in bona fide contracts
for the sale of property or assets or (8) Permitted Refinancing Indebtedness
with respect to any Indebtedness referred to in clauses (1) and (2) above,
provided that the restrictions contained in the agreements governing such
Permitted Refinancing Indebtedness are not materially more restrictive, taken
as a whole, than those contained in the agreements governing the Indebtedness
being refinanced.
Future Subsidiary Guarantors
The Company shall cause each Restricted Subsidiary that (i) incurs
Indebtedness (other than Permitted Indebtedness and Purchase Money
Indebtedness) following the Issue Date or (ii) has Indebtedness (other than
Permitted Indebtedness and Purchase Money Indebtedness) or Disqualified Stock
outstanding on the date on which such Restricted Subsidiary becomes a
Restricted Subsidiary, to execute and deliver to the Trustee a Subsidiary
Guarantee at the time such Restricted Subsidiary incurs such Indebtedness or
becomes a Restricted Subsidiary.
Merger, Consolidation, or Sale of Assets
The Indenture provides that the Company may not consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell,
assign, transfer, lease, convey or otherwise dispose of all or substantially
all of its properties or assets in one or more related transactions, to
another Person unless (a) the Company is the surviving corporation or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia, (b) the Person formed by or surviving any such consolidation or
merger (if other than the Company) or the Person to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made assumes all the obligations of the Company under the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee, (c) immediately after such transaction no Default
or Event of Default exists and (d) except in the case of a merger of the
Company with or into a Wholly Owned Restricted Subsidiary of the Company, the
Company or the Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made (A) will have
Consolidated Net Worth immediately after the transaction equal to or greater
than the Consolidated Net Worth of the Company immediately preceding the
transaction and (B) will, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of
the applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Consolidated Interest Coverage Ratio
test set forth in the covenant described above under the caption "--Incurrence
of Indebtedness and Issuance of Disqualified Stock."
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any of
its Restricted Subsidiaries to, make any payment to, or sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or guarantee with, or for
the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the
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Company or such Restricted Subsidiary with an unrelated Person or, if there is
no such comparable transaction, on terms that are fair and reasonable to the
Company or such Restricted Subsidiary, and (b) the Company delivers to the
Trustee (i) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $5.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(a) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and (ii) with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $10.0 million, an opinion as to
the fairness to the Company or the relevant Subsidiary of such Affiliate
Transaction from a financial point of view issued by an accounting, appraisal
or investment banking firm that is, in the judgment of the Board of Directors,
qualified to render such opinion and is independent with respect to the
Company; provided, however, that the following shall be deemed not to be
Affiliate Transactions: (A) any employment agreement or other employee
compensation plan or arrangement entered into by the Company or any of its
Restricted Subsidiaries in the ordinary course of business of the Company or
such Restricted Subsidiary; (B) transactions between or among the Company and
its Restricted Subsidiaries; (C) Permitted Investments and Restricted Payments
that are permitted by the provisions of the Indenture; (D) loans or advances
to officers, directors and employees of the Company or any Restricted
Subsidiary made in the ordinary course of business of the Company and its
Restricted Subsidiaries in an aggregate amount not to exceed $500,000
outstanding at any one time; (E) indemnities of officers, directors and
employees of the Company or any Restricted Subsidiary permitted by bylaw or
statutory provisions; and (F) the payment of reasonable and customary regular
fees to directors of the Company or any of its Restricted Subsidiaries.
Line of Business
For so long as any Notes are outstanding, the Company shall not, and shall
not permit any of its Restricted Subsidiaries to, engage in any business or
activity other than the Principal Business.
Reports
Whether or not the Company is required to do so by the rules and regulations
of the Commission, the Company will file with the Commission (unless the
Commission will not accept such a filing) and, within 15 days of filing, or
attempting to file, the same with the Commission, furnish to the holders of
the Notes (a) all quarterly and annual financial and other information with
respect to the Company and its Subsidiaries that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by the Company's
certified independent accountants, and (b) all current reports that would be
required to be filed with the Commission on Form 8-K if the Company were
required to file such reports. In addition, the Company and any Guarantors
will furnish to the holders of the Notes, prospective purchasers of the Notes
and securities analysts, upon their request, the information, if any, required
to be delivered pursuant to Rule 144A(d) (4) under the Securities Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (a) default for 30 days in the payment when due of interest or
Liquidated Damages on the Notes; (b) default in payment when due of the
principal of or premium, if any, on the Notes; (c) failure by the Company to
comply with the provisions described under the caption "--Repurchase at the
Option of Holders" or "--Certain Covenants--Merger, Consolidation, or Sale of
Assets"; (d) failure by the Company for 60 days after notice to comply with
any of its other agreements in the Indenture or the Notes; (e) default under
any mortgage, indenture or instrument under which there may be issued or by
which there may be secured or evidenced any Indebtedness for money borrowed by
the Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries), whether such
Indebtedness or guarantee now exists or is created after the Issue Date, which
default (i) is caused by a failure to pay principal of or premium or interest
on such Indebtedness
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prior to the expiration of any grace period provided in such Indebtedness (a
"Payment Default") or (ii) results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the principal amount of any
such Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a Payment Default or the maturity of
which has been so accelerated, aggregates $5.0 million or more and provided,
further, that if any such default is cured or waived or any such acceleration
rescinded, or such Indebtedness is repaid, within a period of 10 days from the
continuation of such default beyond the applicable grace period or the
occurrence of such acceleration, as the case may be, such Event of Default and
any consequential acceleration of the Notes shall be automatically rescinded,
so long as such rescission does not conflict with any judgment or decree; (f)
failure by the Company or any of its Restricted Subsidiaries to pay final
judgments aggregating in excess of $5.0 million (net of applicable insurance
coverage which is acknowledged in writing by the insurer), which judgments are
not paid, discharged or stayed for a period of 60 days; (g) failure by any
Guarantor to perform any covenant set forth in its Subsidiary Guarantee, or
the repudiation by any Guarantor of its obligations under its Subsidiary
Guarantee or the unenforceability of any Subsidiary Guarantee against a
Guarantor for any reason and (h) certain events of bankruptcy or insolvency
with respect to the Company or any Guarantor.
If any Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company or any Guarantor, all
outstanding Notes will become due and payable without further action or
notice. The holders of a majority in principal amount of the then outstanding
Notes by written notice to the Trustee may on behalf of all of the holders
rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal, interest, premium or Liquidated Damages that
have become due solely because of the acceleration) have been cured or waived.
Holders of the Notes may not enforce the Indenture or the Notes except as
provided in the Indenture. Subject to certain limitations, holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal or
interest) if it determines that withholding notice is in their interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Notes pursuant to the
optional redemption provisions of the Indenture, an equivalent premium shall
also become and be immediately due and payable to the extent permitted by law
upon the acceleration of the Notes.
The holders of a majority in principal amount of the Notes then outstanding
by notice to the Trustee may on behalf of the holders of all of the Notes
waive any existing Default or Event of Default and its consequences under the
Indenture except a continuing Default or Event of Default in the payment of
the principal of or interest or Liquidated Damages on the Notes.
The Company will be required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company will be required,
upon becoming aware of any Default or Event of Default, to deliver to the
Trustee a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company
or any Guarantor, as such, shall have any liability for any obligations of the
Company or any Guarantor under the Notes, the Subsidiary Guarantees or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder of Notes by accepting a Note waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the Notes. Such waiver may not be effective to
waive liabilities under the federal securities laws and it is the view of the
Commission that such a waiver is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of the
obligations of itself and any Guarantors discharged with respect to the
outstanding Notes ("Legal Defeasance") except for (a) the rights of holders of
outstanding Notes to receive payments in respect of the principal of and
premium, interest and Liquidated Damages on such Notes when such payments are
due from the trust referred to below, (b) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payment and money for security payments held in trust,
(c) the rights, powers, trusts, duties and immunities of the Trustee, and the
Company's obligations in connection therewith and (d) the Legal Defeasance
provisions of the Indenture. In addition, the Company may, at its option and
at any time, elect to have the obligations of the Company released with
respect to certain covenants that are described in the Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or Event of Default with respect to the Notes. In the
event Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described
under "Events of Default and Remedies" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of and premium, interest and Liquidated
Damages, if any, on the outstanding Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date, (ii) in the case of Legal Defeasance, the Company shall have delivered
to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (A) the Company has received from,
or there has been published by, the Internal Revenue Service a ruling or (B)
since the Issue Date, there has been a change in the applicable federal income
tax law, in either case to the effect that, and based thereon such opinion of
counsel shall confirm that, the holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case
if such Legal Defeasance had not occurred, (iii) in the case of Covenant
Defeasance, the Company shall have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that the holders of the outstanding Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred, (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit), (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Restricted Subsidiaries is a party or by which the Company or any of
its Restricted Subsidiaries is bound, (vi) the Company must have delivered to
the Trustee an opinion of counsel to the effect that the trust funds will not
be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally, (vii)
the Company must deliver to the Trustee an Officers' Certificate stating that
the deposit was not made by the Company with the intent of preferring the
holders of Notes over the other creditors of the Company with the intent of
defeating, hindering, delaying or defrauding creditors of the Company or
others and (viii) the Company must deliver to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
TRANSFER AND EXCHANGE
A holder of Notes may transfer or exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a holder to pay any taxes and fees required by law or
permitted by the Indenture.
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The Company will not be required to transfer or exchange any Note selected for
redemption. Also, the Company will not be required to transfer or exchange any
Note for a period of 15 days before a selection of Notes to be redeemed.
The registered holder of a Note will be treated as the owner of it for all
purposes, and all references to "holders" in this "Description of the Notes"
are to registered holders unless otherwise indicated.
AMENDMENT AND WAIVER
Except as provided below, the Indenture or the Notes may be amended with the
consent of the holders of at least a majority in principal amount of the Notes
then outstanding (including, without limitation, consents obtained in
connection with a purchase of, or tender offer or exchange offer for, Notes),
and any existing default or compliance with any provision of the Indenture or
the Notes may be waived with the consent of the holders of a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for Notes).
Without the consent of each holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (a) reduce the
principal amount of Notes whose holders must consent to an amendment or
waiver, (b) reduce the principal of or change the fixed maturity of any Note
or alter the provisions with respect to the redemption of the Notes (other
than provisions relating to the covenants described above under the caption
"--Repurchase at the Option of Holders"), (c) reduce the rate of or change the
time for payment of interest on any Note, (d) waive a Default or Event of
Default in the payment of principal of or premium, interest or Liquidated
Damages on the Notes (except a rescission of acceleration of the Notes by the
holders of at least a majority in principal amount of the Notes and a waiver
of the payment default that resulted from such acceleration), (e) make any
Note payable in money other than that stated in the Notes, (f) make any change
in the provisions of the Indenture relating to waivers of past defaults or the
rights of holders of Notes to receive payments of principal of or premium,
interest or Liquidated Damages on the Notes (except as permitted in clause (g)
hereof), (g) waive a redemption payment with respect to any Note (other than a
payment required by one of the covenants described above under the caption "--
Repurchase at the Option of Holders"), (h) alter the ranking of the Notes
relative to other Indebtedness of the Company or (i) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any holder of Notes,
the Company, any Guarantor and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to holders
of Notes in the case of a merger or consolidation, to make any change that
would provide any additional rights or benefits to the holders of Notes or
that does not adversely affect the legal rights under the Indenture of any
such holder, to secure the Notes pursuant to the requirements of the "Liens"
covenant, to add any additional Guarantor or to release any Guarantor from its
Subsidiary Guarantee, in each case as provided in the Indenture, or to comply
with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
Neither the Company nor any of its Subsidiaries shall, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any holder of any Notes for or as an inducement
to any consent, waiver or amendment of any terms or provisions of the
Indenture or the Notes, unless such consideration is offered to be paid or
agreed to be paid to all holders of the Notes which so consent, waive or agree
to amend in the time frame set forth in solicitation documents relating to
such consent, waiver or agreement.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage
in other transactions; however, if it acquires any conflicting interest it
must eliminate such conflict within 90 days, apply to the Commission for
permission to continue or resign.
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The holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the
Indenture at the request of any holder of Notes, unless such holder shall have
offered to the Trustee security and indemnity satisfactory to it against any
loss, liability or expense.
GOVERNING LAW
The Indenture and the Notes provide that they are, and the Subsidiary
Guarantees, upon delivery, will provide that they will be, governed by the
laws of the State of New York.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
Registration Rights Agreement without charge by writing to Frontier Oil
Corporation, 10000 Memorial Drive, Suite 600, Houston, Texas 77024-3411,
Attention: Secretary.
FORM, DENOMINATION AND REGISTRATION
Global Notes; Book Entry Form
The Old Notes were offered and sold (a) to Qualified Institutional Buyers in
reliance on the exemption from the registration requirements of the Securities
Act provided by Rule 144A ("Rule 144A Notes") and (b) outside the United
States in reliance on Regulation S under the Securities Act ("Regulation S
Notes"). Except as set forth below, Notes will be issued in registered, global
form without interest coupons in minimum denominations of $1,000 and integral
multiples of $1,000 in excess thereof.
Rule 144A Notes are represented by one Note in registered, global form
without interest coupons (the "Rule 144A Global Note"). The Rule 144A Global
Note was deposited upon issuance with the Trustee as custodian for DTC, in New
York, New York, and registered in the name of DTC or its nominee, in each case
for credit to an account of a direct or indirect participant in DTC as
described below.
Regulation S Notes initially are represented by one temporary Note in
registered, global form without interest coupons (the "Regulation S Temporary
Global Note"). The Regulation S Temporary Global Note was deposited on behalf
of the subscribers thereof with a custodian for DTC. The Regulation S
Temporary Global Note was registered in the name of a nominee of DTC for
credit to the subscribers' respective accounts at the Euroclear and Cedel
Bank. Beneficial interests in the Regulation S Temporary Global Note may be
held only through Euroclear or Cedel Bank.
After the occurrence of (i) the expiration of a 40-day restricted period, as
defined under Regulation S (the "Restricted Period"), or (ii) the exchange of
a beneficial interest in the Regulation S Global Notes for a beneficial
interest in a global note representing Exchange Notes upon consummation of the
Exchange Offer and upon delivery of certification that the beneficial owners
thereof are not U.S. persons (as defined in Rule 902(o) under the Securities
Act) or that such beneficial owners purchased such Notes in a transaction that
did not require registration under the Securities Act and are in the process
of obtaining a beneficial interest in the Rule 144A Global Note in exchange
for their beneficial interest in the Regulation S Temporary Global Note, a
beneficial interest in the Regulation S Temporary Global Note may be exchanged
for an interest in one or more permanent Notes in registered, global form
without interest coupons (collectively, the "Regulation S Permanent Global
Notes" and, together with the Regulation S Temporary Global Notes, the
"Regulation S Global Note") (the Regulation S Global Note and the 144A Global
Note collectively, the "Global Notes") which is expected to be deposited with
the Trustee as custodian for, and registered in the name of, a nominee of DTC.
Investors may
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hold beneficial interests in the Regulation S Permanent Global Note through
organizations other than Euroclear and Cedel Bank that are Participants in
DTC's system. Euroclear and Cedel Bank will hold interests in the Regulation S
Global Note on behalf of their Participants through customers' securities
accounts in their respective names on the books of their respective
depositaries, which are Morgan Guaranty Trust Company of New York, Brussels
office, as operator of Euroclear, and Citibank, N.A., as operator of Cedel
Bank. In turn, each of Euroclear and Cedel Bank will hold such interests in
the Regulation S Global Note in customers' securities accounts in its name on
the books of DTC.
The Notes that are issued as described below under the caption "--
Certificated Notes" will be issued in the form of registered definitive
certificates (the "Certificated Notes"). Such Certificated Securities may,
unless the Global Notes have previously been exchanged for Certificated Notes,
be exchanged for an interest in a Global Note representing the principal
amount of Notes being transferred.
DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations (collectively, the "Participants" or
"DTC's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic book-
entry changes in accounts of its Participants. DTC's Participants include
securities brokers and dealers (including the Initial Purchaser), banks and
trust companies, clearing corporations and certain other organizations. Access
to DTC's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants" or
"DTC's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who
are not Participants may beneficially own securities held by or on behalf of
DTC only through DTC's Participants or DTC's Indirect Participants.
The Company expects that, pursuant to procedures established by DTC, (i)
upon deposit of the Global Notes, DTC will credit the accounts of Participants
designated by the Initial Purchaser with portions of the principal amount of
the Global Notes and (ii) ownership of the Notes evidenced by the Global Notes
will be shown on, and the transfer of ownership thereof will be effected only
through, records maintained by DTC (with respect to the interests of DTC's
Participants), DTC's Participants and DTC's Indirect Participants. Prospective
purchasers are advised that the laws of some states require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer Notes evidenced by the Global Notes will
be limited to such extent.
Beneficial interests in one Global Note may be transferred to a person who
takes delivery in the form of a beneficial interest in another Global Note
only upon receipt by the Trustee of a written certification (in the form
provided in the Indenture) to the effect that such transfer is being made in
accordance with the Indenture and with the Securities Act and any applicable
securities laws of any state of the United States or any other jurisdiction.
Any beneficial interest in one of the Global Notes that is transferred to a
person who takes delivery in the form of a beneficial interest in another
Global Note will, upon transfer, cease to be a beneficial interest in such
Global Note and become a beneficial interest in the other Global Note and
accordingly, will thereafter be subject to all transfer restrictions, if any,
and other procedures applicable to beneficial interests in such other Global
Note for as long as it remains such a beneficial interest.
So long as the Global Note holder is the registered owner of any Notes, the
Global Note holder will be considered the sole holder under the Indenture of
any Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced
by the Global Notes will not be considered the owners or holders thereof under
the Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the Trustee thereunder. Neither the
Company nor the Trustee will have any responsibility or liability for any
aspect of the records of DTC or for maintaining, supervising or reviewing any
records of DTC relating to the Notes.
Payments in respect of the principal of and premium, interest and Liquidated
Damages, if any, on any Notes registered in the name of the Global Note holder
on the applicable record date will be payable by the Trustee to or at the
direction of the Global Note holder in its capacity as the registered holder
under the Indenture. Under the terms of the Indenture, the Company and the
Trustee may treat the persons in whose names Notes, including
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the Global Notes, are registered as the owners thereof for the purpose of
receiving such payments. Consequently, neither the Company nor the Trustee has
or will have any responsibility or liability for the payment of such amounts
to beneficial owners of Notes. The Company believes, however, that it is
currently the policy of DTC to immediately credit the accounts of the relevant
Participants with such payments, in amounts proportionate to their respective
holdings of beneficial interests in the relevant security as shown on the
records of DTC. Payments by DTC's Participants and DTC's Indirect Participants
to the beneficial owners of Notes will be governed by standing instructions
and customary practice and will be the responsibility of DTC's Participants or
DTC's Indirect Participants.
Additional Information Concerning Euroclear and Cedel Bank
Euroclear and Cedel Bank hold securities for participating organizations and
facilitate the clearance and settlement of securities transactions between
their respective participants through electronic book-entry changes in
accounts of such participants. Euroclear and Cedel Bank provide to their
participants, among other things, services for safekeeping, administration,
clearance and settlement of internationally traded securities and securities
lending and borrowing. Euroclear and Cedel Bank interface with domestic
securities markets. Euroclear and Cedel Bank participants are financial
institutions such as underwriters, securities brokers and dealers, banks,
trust companies and certain other organizations. Indirect access to Euroclear
and Cedel Bank is also available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodian relationship with a
Euroclear or Cedel Bank participant, either directly or indirectly.
When beneficial interests are to be transferred from the account of a
Participant (other than Morgan Guaranty Trust Company of New York and
Citibank, N.A., as depositaries for Euroclear and Cedel Bank, respectively) to
the account of a Euroclear participant or a Cedel Bank participant, the
purchaser must send instructions to Euroclear or Cedel Bank through a
participant at least one business day prior to settlement. Euroclear or Cedel
Bank, as the case may be, will instruct Morgan Guaranty Trust Company of New
York or Citibank, N.A. to receive the beneficial interests against payment.
Payment will include interest attributable to the beneficial interest from and
including the last payment date to and excluding the settlement date, on the
basis of a calendar year consisting of twelve 30-day calendar months. For
transactions settling on the 31st day of the month, payment will include
interest accrued to and excluding the first day of the following month.
Payment will then be made by Morgan Guaranty Trust Company of New York or
Citibank, N.A., as the case may be, to the Participant's account against
delivery of the beneficial interests. After settlement has been completed, the
beneficial interests will be credited to the respective clearing systems and
by the clearing system, in accordance with its usual procedures, to the
Euroclear participants' or Cedel Bank participants' account. Credit for the
beneficial interests will appear on the next business day (European time) and
the cash debit will be back-valued to, and interest attributable to the
beneficial interests will accrue from, the value date (which would be the
preceding business day when settlement occurs in New York). If settlement is
not completed on the intended value date (i.e., if the trade fails), the
Euroclear or Cedel Bank cash debit will instead be valued as of the actual
settlement date.
Euroclear participants and Cedel Bank participants will need to make
available to the respective clearing systems the funds necessary to process
same-day funds settlement. The most direct means of doing so is to preposition
funds for settlement, either from cash on hand or existing lines of credit, as
they would for any settlement occurring within Euroclear or Cedel Bank. Under
this approach, such participants may take on credit exposure to Euroclear or
Cedel Bank until the beneficial interests are credited to their accounts one
day later. Finally, day traders that use Euroclear or Cedel Bank and that
purchase beneficial interests from Participants for credit to Euroclear
participants or Cedel Bank participants should note that these trades would
automatically fall on the sale side unless affirmative action were taken to
avoid these potential problems.
Due to time zone differences in their favor, Euroclear participants and
Cedel Bank participants may employ their customary procedures for transactions
in which beneficial interests are to be transferred by the respective clearing
system, through Morgan Guaranty Trust Company of New York or Citibank, N.A.,
to another Participant. The seller must send instructions to Euroclear or
Cedel Bank through a participant at least one
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business day prior to settlement. In these cases, Euroclear or Cedel Bank will
instruct Morgan Guaranty Trust Company of New York or Citibank, N.A., as the
case may be, to credit the beneficial interests to the Participant's account
against payment. Payment will include interest attributable to the beneficial
interest from and including the last payment date to and excluding the
settlement date on the basis of a calendar year consisting of twelve 30-day
calendar months. For transactions settling on the 31st day of the month,
payment will include interest accrued to and excluding the first day of the
following month. The payment will then be reflected in the account of the
Euroclear participant or Cedel Bank participant the following business day,
and receipt of the cash proceeds in the Euroclear or Cedel Bank participant's
account will be back-valued to the value date (which would be the preceding
business day, when settlement occurs in New York). If the Euroclear
participant or Cedel Bank participant has a line of credit with its
representative clearing system and elects to draw on such line of credit in
anticipation of receipt of the sale proceeds in its account, the back-
valuation may substantially reduce or offset any overdraft charges incurred
over that one-day period. If settlement is not completed on the intended value
date (i.e., if the trade fails), receipt of the cash proceeds in the Euroclear
or Cedel Bank participant's account would instead be valued as of the actual
settlement date.
Certificated Notes
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Notes. Upon any such issuance,
the Trustee is required to register such Certificated Notes in the name of,
and cause the same to be delivered to, such person or persons (or the nominee
of any thereof). In addition, if (i) the Company notifies the Trustee in
writing that DTC is no longer willing or able to act as a depositary and the
Company is unable to locate a qualified successor within 90 days or (ii) the
Company, at its option, notifies the Trustee in writing that it elects to
cause the issuance of Notes in the form of Certificated Notes under the
Indenture, then, upon surrender by the Global Note holder of the Global Notes,
Notes in such form will be issued to each person that the Global Note holder
and DTC identify as being the beneficial owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note holder or DTC in identifying the beneficial owners of Notes and
the Company and the Trustee may conclusively rely on, and will be protected in
relying on, instructions from the Global Note holder or DTC for all purposes.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Adjusted Net Assets" of a Guarantor at any date shall mean the amount by
which the fair value of the properties and assets of such Guarantor exceeds
the total amount of liabilities, including, without limitation, contingent
liabilities (after giving effect to all other fixed and contingent liabilities
incurred or assumed on such date), but excluding liabilities under its
Subsidiary Guarantee, of such Guarantor at such date.
"Affiliate" of any specified Person means an "affiliate" of such Person, as
such term is defined for purposes of Rule 144 under the Securities Act.
"Asset Sale" means (a) the sale, lease, conveyance or other disposition (a
"disposition") of any assets or rights (including, without limitation, by way
of a sale and leaseback), excluding dispositions in the ordinary course of
business (provided that the disposition of all or substantially all of the
assets of the Company and its Subsidiaries taken as a whole will be governed
by the provisions of the Indenture described above under the caption "--
Repurchase at the Option of Holders--Change of Control" and the provisions
described above under the caption "--Certain Covenants--Merger, Consolidation,
or Sale of Assets" and not by the provisions of the Asset Sales covenant), (b)
the issue or sale by the Company or any of its Restricted Subsidiaries of
Equity Interests of any of the Company's Subsidiaries, and (c) any Event of
Loss, whether, in the case of clause (a), (b)
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or (c), in a single transaction or a series of related transactions, provided
that such transaction or series of transactions (i) has a fair market value in
excess of $1.0 million or (ii) results in the payment of net proceeds in
excess of $1.0 million. Notwithstanding the foregoing, the following
transactions will be deemed not to be Asset Sales: (A) a disposition of
obsolete or excess equipment or other assets; (B) a disposition of assets by
the Company to a Wholly Owned Restricted Subsidiary or by a Wholly Owned
Restricted Subsidiary to the Company or to another Wholly Owned Restricted
Subsidiary; (C) a disposition of Equity Interests by a Wholly Owned Restricted
Subsidiary to the Company or to another Wholly Owned Restricted Subsidiary;
(D) a Permitted Investment or Restricted Payment that is permitted by the
Indenture; (E) any lease of any equipment or other assets entered into in the
ordinary course of business and with respect to which the Company or any
Restricted Subsidiary thereof is the lessor, except any such lease that
provides for the acquisition of such assets by the lessee during or at the end
of the term thereof for an amount that is less than the fair market value
thereof at the time the right to acquire such assets occurs; (F) any sale of
inventory or hydrocarbons or other products (including crude oil and refined
products), in each case in the ordinary course of business of the Company's
operations; and (G) any trade or exchange by the Company or any Restricted
Subsidiary of any inventory or hydrocarbons or other products (including crude
oil and refined products) for similar products held by another Person;
provided that the fair market value of the properties traded or exchanged by
the Company or such Restricted Subsidiary is reasonably equivalent to the fair
market value of the properties to be received by the Company or such
Restricted Subsidiary.
"Attributable Indebtedness" in respect of a sale-and-leaseback transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP)
of the obligation of the lessee for net rental payments during the remaining
term of the lease included in such sale-and-lease-back transaction (including
any period for which such lease has been extended or may, at the option of the
lessor, be extended). As used in the preceding sentence, the "net rental
payments" under any lease for any such period shall mean the sum of rental and
other payments required to be paid with respect to such period by the lessee
thereunder, excluding any amounts required to be paid by such lessee on
account of maintenance and repairs, insurance, taxes, assessments, water rates
or similar charges. In the case of any lease that is terminable by the lessee
upon payment of penalty, such net rental payment shall also include the amount
of such penalty, but no rent shall be considered as required to be paid under
such lease subsequent to the first date upon which it may be so terminated.
"Board of Directors" means the board of directors of the Company or any
committee thereof duly authorized to act on behalf of such board.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (a) in the case of a corporation, corporate stock, (b)
in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (c) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(d) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of,
the issuing Person.
"Cash Equivalents" means (a) United States dollars or up to $2.0 million of
Canadian dollars, (b) securities issued or directly and fully guaranteed or
insured by the United States government or any agency or instrumentality
thereof having maturities of not more than six months from the date of
acquisition, (c) certificates of deposit and Eurodollar time deposits with
maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any commercial bank organized under the laws of
any country that is a member of the Organization for Economic Cooperation and
Development having capital and surplus in excess of $500 million, (d)
repurchase obligations with a term of not more than seven days for underlying
securities of the types described in clauses (b) and (c) above entered into
with any financial institution meeting the qualifications specified in clause
(c)
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above, (e) commercial paper having the highest rating obtainable from Moody's
Investors Service, Inc. or Standard & Poor's Rating Service and in each case
maturing within 180 days after the date of acquisition, (f) deposits available
for withdrawal on demand with any commercial bank not meeting the
qualifications specified in clause (c) above, provided all such deposits do
not exceed $2.0 million in the aggregate at any one time, and (g) money market
mutual funds substantially all of the assets of which are of the type
described in the foregoing clauses (a) through (e).
"Common Stock" means the Common Stock of the Company, no par value.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus, to the extent
deducted or excluded in calculating Consolidated Net Income for such period,
(a) an amount equal to any extraordinary loss plus any net loss realized in
connection with an Asset Sale, (b) provision for taxes based on income or
profits of such Person and its Restricted Subsidiaries, (c) Consolidated
Interest Expense of such Person and its Restricted Subsidiaries, and (d)
depreciation and amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) of such Person and its Restricted Subsidiaries, in each
case, on a consolidated basis and determined in accordance with GAAP.
"Consolidated Interest Coverage Ratio" means with respect to any Person for
any period, the ratio of the Consolidated Cash Flow of such Person for such
period to the Consolidated Interest Expense of such Person for such period;
provided, however, that the Consolidated Interest Coverage Ratio shall be
calculated giving pro forma effect to each of the following transactions as if
each such transaction had occurred at the beginning of the applicable four-
quarter reference period: (a) any incurrence, assumption, guarantee or
redemption by the Company or any of its Restricted Subsidiaries of any
Indebtedness (other than revolving credit borrowings) subsequent to the
commencement of the period for which the Consolidated Interest Coverage Ratio
is being calculated but prior to the date on which the event for which the
calculation of the Consolidated Interest Coverage Ratio is made (the
"Calculation Date"); (b) any acquisition that has been made by the Company or
any of its Restricted Subsidiaries, or approved and expected to be consummated
within 30 days of the Calculation Date, including, in each case, through a
merger or consolidation, and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference
period and on or prior to the Calculation Date (in which case Consolidated
Cash Flow for such reference period shall be calculated without giving effect
to clause (c) of the proviso set forth in the definition of Consolidated Net
Income); and (c) any other transaction that may be given pro forma effect in
accordance with Article 11 of Regulation S-X as in effect from time to time;
provided further, however, that (i) the Consolidated Cash Flow attributable to
discontinued operations, as determined in accordance with GAAP, and operations
or businesses disposed of prior to the Calculation Date, shall be excluded and
(ii) the Consolidated Interest Expense attributable to discontinued
operations, as determined in accordance with GAAP, and operations or
businesses disposed of prior to the Calculation Date, shall be excluded, but
only to the extent that the obligations giving rise to such Consolidated
Interest Expense will not be obligations of the referent Person or any of its
Restricted Subsidiaries following the Calculation Date.
"Consolidated Interest Expense" means, with respect to any Person for any
period, the sum, without duplication, of (a) the consolidated interest expense
of such Person and its Restricted Subsidiaries for such period, whether paid
or accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations but excluding
amortization of debt issuance costs) and (b) the consolidated interest expense
of such Person and its Restricted Subsidiaries that was capitalized during
such period, in each case determined on a consolidated basis in accordance
with GAAP.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP,
provided that (a) the Net Income (but not loss) of any Person that is not a
Restricted
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Subsidiary or that is accounted for by the equity method of accounting shall
be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Restricted Subsidiary thereof, (b)
the Net Income of any Restricted Subsidiary shall be excluded to the extent
that the declaration or payment of dividends or similar distributions by that
Restricted Subsidiary of that Net Income is not at the date of determination
permitted without any prior governmental approval (that has not been obtained)
or, directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Subsidiary or its shareholders, (c) the Net
Income of any Person acquired in a pooling of interests transaction for any
period prior to the date of such acquisition shall be excluded and (d) the
cumulative effect of a change in accounting principles shall be excluded.
"Consolidated Net Tangible Assets" means, with respect to any Person as of
any date, the sum of the amounts that would appear on a consolidated balance
sheet of such Person and its consolidated Restricted Subsidiaries as the total
assets of such Person and its consolidated Restricted Subsidiaries, determined
on a consolidated basis in accordance with GAAP and after deducting therefrom,
(a) to the extent otherwise included, unamortized debt discount and expenses
and other unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, licenses, organization or development expenses
and other intangible items and (b) the aggregate amount of liabilities of the
Company and its Restricted Subsidiaries which may be properly classified as
current liabilities (including tax accrued as estimated), determined on a
consolidated basis in accordance with GAAP.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (a) the consolidated equity of the common shareholders of such
Person and its consolidated Restricted Subsidiaries as of such date plus (b)
the respective amounts reported on such Person's balance sheet as of such date
with respect to any series of preferred stock (other than Disqualified Stock)
that by its terms is not entitled to the payment of dividends unless such
dividends may be declared and paid only out of net earnings in respect of the
year of such declaration and payment, but only to the extent of any cash
received by such Person upon issuance of such preferred stock, less (i) all
write-ups (other than write-ups resulting from foreign currency translations
and write-ups of tangible assets of a going concern business made within 12
months after the acquisition of such business) subsequent to the Issue Date in
the book value of any asset owned by such Person or a consolidated Restricted
Subsidiary of such Person, (ii) all investments as of such date in
unconsolidated Subsidiaries and in Persons that are not Restricted
Subsidiaries and (iii) all unamortized debt discount and expense and
unamortized deferred charges as of such date, in each case determined in
accordance with GAAP.
"Credit Facility" means that certain Amended and Restated Revolving Credit
and Letter of Credit Agreement, dated June 30, 1997, among Frontier Oil and
Refining Company, certain banks and Union Bank of California, N.A., including
any related notes, guarantees, collateral documents, instruments and
agreements executed in connection therewith, in each case as amended,
restated, modified, supplemented, extended, renewed, replaced, refinanced or
restructured from time to time, whether by the same or any other agent or
agents, lender or group of lenders, whether represented by one or more
agreements and whether one or more Subsidiaries are borrowers or guarantors
thereunder or parties thereto.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures (excluding any
maturity as a result of an optional redemption by the issuer thereof) or is
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or
redeemable at the option of the holder thereof, in whole or in part, on or
prior to the date that is 91 days after the date on which the Notes mature or
are redeemed or retired in full; provided, however, that any Capital Stock
that would constitute Disqualified Stock solely because the holders thereof
(or of any security into which it is convertible or for which it is
exchangeable) have the right to require the issuer to repurchase such Capital
Stock (or such security into which it is convertible or for which it is
exchangeable) upon the occurrence of any of the events constituting an Asset
Sale or a Change of Control shall
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not constitute Disqualified Stock if such Capital Stock (and all such
securities into which it is convertible or for which it is exchangeable)
provides that the issuer thereof will not repurchase or redeem any such
Capital Stock (or any such security into which it is convertible or for which
it is exchangeable) pursuant to such provisions prior to compliance by the
Company with the provisions of the Indenture described under the caption
"Repurchase at the Option of Holders--Change of Control" or "Repurchase at the
Option of Holders--Asset Sales," as the case may be.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Event of Loss" means, with respect to any property or asset of the Company
or any Restricted Subsidiary, (a) any damage to such property or asset that
results in an insurance settlement with respect thereto on the basis of a
total loss or a constructive or compromised total loss or (b) the
confiscation, condemnation or requisition of title to such property or asset
by any government or instrumentality or agency thereof. An Event of Loss shall
be deemed to occur as of the date of the insurance settlement, confiscation,
condemnation or requisition of title, as applicable.
"Existing Indebtedness" means Indebtedness of the Company and its Restricted
Subsidiaries (other than Indebtedness under the Credit Facility) in existence
on the Issue Date, until such amounts are repaid.
The term "fair market value" means, with respect to any asset or Investment,
the fair market value of such asset or Investment at the time of the event
requiring such determination, as determined in good faith by the Board of
Directors of the Company or, with respect to any asset or Investment in excess
of $10.0 million (other than cash or Cash Equivalents), as determined by a
reputable appraisal firm that is, in the judgment of such Board of Directors,
qualified to perform the task for which such firm has been engaged and
independent with respect to the Company.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect from time to time.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (a) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements, but only to the extent that
the notional amounts of such agreements do not exceed 105% of the aggregate
principal amount of such Indebtedness to which such agreement relates, (b)
other agreements or arrangements designed to protect such Person against
fluctuations in interest rates, (c) any hedging agreement or other
arrangement, in each case that is designed to provide protection against
fluctuations in the price of crude oil and gasoline and other refined products
(in the ordinary course of business and not for speculative purposes) and (d)
any foreign currency futures contract, option or similar agreement or
arrangement designed to protect such Person against fluctuations in foreign
currency rates, in each case to the extent such obligations are incurred in
the ordinary course of business of such Person.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP. The amount of any
Indebtedness outstanding as of any date shall be (a) the accreted value
thereof, in the case of any Indebtedness that does not require current
payments of interest, and (b) the principal amount thereof, in the case of any
other Indebtedness.
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"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees by the referent Person of, and Liens on
any assets of the referent Person securing, Indebtedness or other obligations
of other Persons), advances or capital contributions (excluding commission,
travel and similar advances to officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items
that are or would be classified as investments on a balance sheet prepared in
accordance with GAAP; provided, however, that the following shall not
constitute Investments: (i) extensions of trade credit or other advances to
customers on commercially reasonable terms in accordance with normal trade
practices or otherwise in the ordinary course of business, (ii) Hedging
Obligations and (iii) endorsements of negotiable instruments and documents in
the ordinary course of business. If the Company or any Restricted Subsidiary
of the Company sells or otherwise disposes of any Equity Interests of any
direct or indirect Restricted Subsidiary of the Company such that, after
giving effect to any such sale or disposition, such Person is no longer a
Restricted Subsidiary of the Company, the Company shall be deemed to have made
an Investment on the date of any such sale or disposition equal to the fair
market value of the Equity Interests of such Restricted Subsidiary not sold or
disposed of in an amount determined as provided in the final paragraph of the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"Issue Date" means the date on which the Notes are originally issued under
the Indenture.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the
nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement
under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction
other than a precautionary financing statement respecting a lease not intended
as a security agreement).
"Make-Whole Amount" with respect to a Note means an amount equal to the
excess, if any, of (i) the present value of the remaining interest, premium
and principal payments due on such Note as if such Note were redeemed on
February 15, 2002, computed using a discount rate equal to the Treasury Rate
plus 50 basis points, over (ii) the outstanding principal amount of such Note.
"Treasury Rate" is defined as the yield to maturity at the time of the
computation of United States Treasury securities with a constant maturity (as
compiled by and published in the most recent Federal Reserve Statistical
Release H.15(519), which has become publicly available at least two business
days prior to the date of the redemption notice or, if such Statistical
Release is no longer published, any publicly available source of similar
market date) most nearly equal to the then remaining maturity of the Notes
assuming redemption of the Notes on February 15, 2002; provided, however, that
if the Make-Whole Average Life of such Note is not equal to the constant
maturity of the United States Treasury security for which a weekly average
yield is given, the Treasury Rate shall be obtained by linear interpolation
(calculated to the nearest one-twelfth of a year) from the weekly average
yields of United States Treasury securities for which such yields are given,
except that if the Make-Whole Average Life of such Notes is less than one
year, the weekly average yield on actually traded United States Treasury
securities adjusted to a constant maturity of one year shall be used. "Make-
Whole Average Life" means the number of years (calculated to the nearest one-
twelfth) between the date of redemption and February 15, 2002.
"Make-Whole Price" with respect to a Note means the greater of (i) the sum
of the outstanding principal amount and Make-Whole Amount of such Note, and
(ii) the redemption price of such Note on February 15, 2002, determined
pursuant to the Indenture (104.563% of the principal amount).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (a) any gain (but
not loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (i) any Asset Sale (including, without
limitation, dispositions pursuant to sale-and-leaseback transactions) or (ii)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (b) any extraordinary
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or nonrecurring gain (but not loss), together with any related provision for
taxes on such extraordinary or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of
any non-cash consideration received in any Asset Sale), net of (without
duplication) (a) the direct costs relating to such Asset Sale (including,
without limitation, legal, accounting and investment banking fees, sales
commissions, recording fees, title transfer fees, title insurance premiums,
appraiser fees and costs incurred in connection with preparing such asset for
sale) and any relocation expenses incurred as a result thereof, (b) taxes paid
or estimated to be payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), (c)
amounts required to be applied to the repayment of Indebtedness (other than
under the Credit Facility) secured by a Lien on the asset or assets that were
the subject of such Asset Sale and (d) any reserve established in accordance
with GAAP or any amount placed in escrow, in either case for adjustment in
respect of the sale price of such asset or assets, until such time as such
reserve is reversed or such escrow arrangement is terminated, in which case
Net Proceeds shall include only the amount of the reserve so reversed or the
amount returned to the Company or its Restricted Subsidiaries from such escrow
arrangement, as the case may be.
"Non-Recourse Debt" means Indebtedness (a) as to which neither the Company
nor any of its Restricted Subsidiaries (i) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness) or is otherwise directly or indirectly liable (as a guarantor or
otherwise) or (ii) constitutes the lender, (b) no default with respect to
which (including any rights the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) the holders of other Indebtedness of the Company or any of its
Restricted Subsidiaries to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity and (c) as to which the lenders have been notified in writing that
they will not have any recourse to the stock or assets of the Company or any
of its Restricted Subsidiaries, except to the extent of any Indebtedness
incurred by the Company or any of its Restricted Subsidiaries in accordance
with clause (a) (i) above.
"Pari Passu Indebtedness" means, with respect to any Net Proceeds from Asset
Sales, Indebtedness of the Company and its Restricted Subsidiaries the terms
of which require the Company or such Restricted Subsidiary to apply such Net
Proceeds to offer to repurchase such Indebtedness.
"Permitted Indebtedness" means:
(a) the incurrence by the Company or a Restricted Subsidiary of
Indebtedness under any Working Capital Facility in an aggregate principal
amount at any one time outstanding not to exceed the greater of (a) $50.0
million and (b) an amount equal to the sum of 85% of the book value of
accounts receivable (less allowance for doubtful accounts) and 60% of the
inventory (less applicable reserves) of the Company and its Restricted
Subsidiaries, calculated on a consolidated basis and in accordance with
GAAP, plus any fees, premiums, expenses (including costs of collection),
indemnities and similar amounts payable in connection with such
Indebtedness, and less any amounts repaid permanently in accordance with
the covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales";
(b) the incurrence by the Company and its Restricted Subsidiaries of
Existing Indebtedness;
(c) the incurrence by the Company and its Restricted Subsidiaries of
Hedging Obligations;
(d) the incurrence by the Company of Indebtedness represented by the
Offered Notes and Exchange Notes;
(e) the incurrence of intercompany Indebtedness between or among the
Company and any of its Restricted Subsidiaries, provided that (i) if the
Company or any Guarantor is the obligor on such Indebtedness, such
Indebtedness is expressly subordinate to the payment in full of all
obligations with respect to the Notes and (ii) (A) any subsequent issuance
or transfer of Equity Interests that results in any
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such Indebtedness being held by a Person other than the Company or a
Restricted Subsidiary of the Company, or (B) any sale or other transfer of
any such Indebtedness to a Person that is neither the Company nor a
Restricted Subsidiary of the Company, shall be deemed to constitute an
incurrence of such Indebtedness by the Company or such Restricted
Subsidiary, as the case may be;
(f) Indebtedness in respect of bid, performance or surety bonds issued
for the account of the Company or any Restricted Subsidiary thereof in the
ordinary course of business, including guarantees or obligations of the
Company or any Restricted Subsidiary thereof with respect to letters of
credit supporting such bid, performance or surety obligations (in each case
other than for an obligation for money borrowed);
(g) the incurrence by the Company or any of its Restricted Subsidiaries
of Permitted Refinancing Debt in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund
Indebtedness that was permitted by the Indenture to be incurred (other than
pursuant to clause (a) or (e) of this definition);
(h) incurrence by any Subsidiary of the Company of a Subsidiary
Guarantee;
(i) incurrence of Non-Recourse Debt; or
(j) incurrence by the Company or any Restricted Subsidiary of any
additional Indebtedness not to exceed $5.0 million at any time outstanding.
In the event that the incurrence of any Indebtedness would be permitted
under the covenant "Incurrence of Indebtedness and Issuance of Disqualified
Stock" or one or more of the provisions of this definition, the Company may
designate (in the form of an Officers' Certificate delivered to the Trustee)
the particular provision of the Indenture pursuant to which it is incurring
such Indebtedness.
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company, (b) any Investment in Cash Equivalents,
(c) any Investment by the Company or any Restricted Subsidiary of the Company
in a Person if as a result of such Investment (i) such Person becomes a
Restricted Subsidiary of the Company or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company, (d) any Investment made as a result of
the receipt of non-cash consideration from (i) an Asset Sale that was made
pursuant to and in compliance with the covenant described above under the
caption "--Repurchase at the Option of Holders--Asset Sales" or (ii) a
disposition of assets that does not constitute an Asset Sale, (e) acquisition
of assets solely in exchange for the issuance of Equity Interests (other than
Disqualified Stock) of the Company, and (f) Investments in a Person engaged in
the Principal Business, provided that the aggregate amount of such Investments
pursuant to this clause (f) in Persons that are not Restricted Subsidiaries of
the Company shall not exceed $20.0 million at any one time.
"Permitted Liens" means (a) Liens securing Indebtedness incurred pursuant to
clause (a) of the definition of "Permitted Indebtedness," (b) Liens in favor
of the Company or any of its Restricted Subsidiaries, (c) Liens on property of
a Person existing at the time such Person is merged into or consolidated with
the Company or any Restricted Subsidiary of the Company, provided that such
Liens were in existence prior to its contemplation of such merger or
consolidation and do not extend to any property other than those of the Person
merged into or consolidated with the Company or any of its Restricted
Subsidiaries, (d) Liens on property existing at the time of acquisition
thereof by the Company or any Restricted Subsidiary of the Company, provided
that such Liens were in existence prior to its contemplation of such
acquisition and do not extend to any other property, (e) Liens to secure the
performance of statutory obligations, surety or appeal bonds, bid or
performance bonds, insurance obligations or other obligations of a like nature
incurred in the ordinary course of business, (f) Liens securing Hedging
Obligations, (g) Liens existing on the Issue Date, (h) Liens securing Non-
Recourse Debt, (i) any interest or title of a lessor under a Capital Lease
Obligation or an operating lease, (j) Liens arising by reason of deposits
necessary to obtain standby letters of credit in the ordinary course of
business, (including deposits necessary to obtain standby letters of credit),
(k) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other types
of social security and related benefits, (l) easements, rights of way
restrictions and other similar charges or encumbrances not interfering in
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any material respect with the business of the Company or any Restricted
Subsidiary, (m) any other Liens imposed by operation of law which do not
materially affect the Company's or any Guarantor's ability to perform its
obligations under the Notes or any Subsidiary Guarantee, (n) any attachment or
judgment Lien, unless the judgment it secures shall not, within 60 days after
the entry thereof, have been discharged or execution thereof stayed pending
appeal, or shall not have been discharged within 60 days after the expiration
of any such stay, (o) Liens to secure Purchase Money Indebtedness, which Liens
shall not extend to any other property or assets of the Company or a
Restricted Subsidiary (other than any associated accounts, contracts and
insurance proceeds), (p) Liens securing Permitted Refinancing Indebtedness
with respect to any Indebtedness referred to in clause (o) above, and (q)
Liens incurred in the ordinary course of business of the Company or any
Restricted Subsidiary of the Company with respect to obligations that do not
exceed $5.0 million at any one time outstanding and that (i) are not incurred
in connection with the borrowing of money or the obtaining of advances or
credit (other than trade credit in the ordinary course of business) and (ii)
do not in the aggregate materially detract from the value of the property or
materially impair the use thereof in the operation of business by the Company
or such Restricted Subsidiary.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted
Subsidiaries; provided, however, that (a) the principal amount (or accreted
value, if applicable) of such Permitted Refinancing Indebtedness does not
exceed the principal amount of (or accreted value, if applicable), plus
premium, if any, and accrued interest on, the Indebtedness so extended,
refinanced, renewed, replaced, defeased or refunded (plus the amount of
reasonable expenses incurred in connection therewith), (b) such Permitted
Refinancing Indebtedness has a final maturity date no earlier than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded, (c) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Notes, such Permitted
Refinancing Indebtedness is subordinated in right of payment to the Notes on
terms at least as favorable, taken as a whole, to the holders of Notes as
those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded and (d) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
that is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; provided, however, that a Restricted
Subsidiary that is also a Guarantor may guarantee Permitted Refinancing
Indebtedness incurred by the Company, whether or not such Restricted
Subsidiary was an obligor or guarantor of the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; provided further,
however, that if such Permitted Refinancing Indebtedness is subordinated to
the Notes, such guarantee shall be subordinated to such Restricted
Subsidiary's Subsidiary Guarantee to at least the same extent.
"Principal Business" means (i) the business of the exploration for, and
development, acquisition, production, processing, marketing, refining, storage
and transportation of, hydrocarbons, (ii) any related energy and natural
resource business, (iii) any business currently engaged in by the Company or
its Subsidiaries, (iv) convenience stores, retail service stations, truck
stops and other public accommodations in connection therewith and (iv) any
activity or business that is a reasonable extension, development or expansion
of any of the foregoing.
"Purchase Money Indebtedness" means Indebtedness incurred for the purpose of
(i) financing all or any part of the purchase price of any real or personal
property or assets incurred prior to, at the time of, or within 120 days
after, the acquisition of such property or assets or (ii) financing all or any
part of the cost of construction of any such property or assets, provided that
the amount of any such financing shall not exceed the amount expended in the
acquisition of, or the construction of, such property or assets.
"Qualified Equity Offering" means (a) any sale of Equity Interests (other
than Disqualified Stock) of the Company pursuant to an underwritten offering
registered under the Securities Act or (b) any sale of Equity Interests (other
than Disqualified Stock) of the Company so long as, at the time of
consummation of such sale, the Company has a class of common equity securities
registered pursuant to Section 12(b) or Section 12(g) under the Exchange Act.
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"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of such Person that
is not an Unrestricted Subsidiary.
"Stated Maturity" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations
to repay, redeem or repurchase any such interest or principal prior to the
date originally scheduled for the payment thereof.
"Subsidiary" means, with respect to any Person, (a) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (b) any partnership (i) the sole general
partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (ii) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution, but only to the extent that such Subsidiary at the time of such
designation (a) has no Indebtedness other than Non-Recourse Debt, (b) is not
party to any agreement, contract, arrangement or understanding with the
Company or any Restricted Subsidiary of the Company unless such agreement,
contract, arrangement or understanding does not violate the terms of the
Indenture described under the caption "--Certain Covenants--Transactions with
Affiliates," and (c) is a Person with respect to which neither the Company nor
any of its Restricted Subsidiaries has any direct or indirect obligation (i)
to subscribe for additional Equity Interests or (ii) to maintain or preserve
such Person's financial condition or to cause such Person to achieve any
specified levels of operating results, in each case, except to the extent
otherwise permitted by the Indenture. Any such designation by the Board of
Directors shall be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and
an Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant described above under
the caption "--Certain Covenants--Restricted Payments." If, at any time, any
Unrestricted Subsidiary would fail to meet the foregoing requirements as an
Unrestricted Subsidiary, it shall thereafter cease to be an Unrestricted
Subsidiary for purposes of the Indenture and any Indebtedness of such
Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of the
Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant described under the caption "--
Incurrence of Indebtedness and Issuance of Disqualified Stock," the Company
shall be in default of such covenant). The Board of Directors of the Company
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary, provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only
be permitted if (A) such Indebtedness is permitted under the covenant
described under the caption "--Incurrence of Indebtedness and Issuance of
Disqualified Stock," calculated on a pro forma basis as if such designation
had occurred at the beginning of the four-quarter reference period, and (B) no
Default or Event of Default would be in existence following such designation.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person to the extent (a) all of the outstanding Capital
Stock or other ownership interests of which (other than directors'
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qualifying shares) shall at the time be owned directly or indirectly by such
Person or (b) such Restricted Subsidiary is organized in a foreign
jurisdiction and is required by the applicable laws and regulations of such
foreign jurisdiction to be partially owned by the government of such foreign
jurisdiction or individual or corporate citizens of such foreign jurisdiction
in order for such Restricted Subsidiary to transact business in such foreign
jurisdiction, provided that such Person, directly or indirectly, owns the
remaining Capital Stock or ownership interests in such Restricted Subsidiary
and, by contract or otherwise, controls the management and business of such
Restricted Subsidiary and derives the economic benefits of ownership of such
Restricted Subsidiary to substantially the same extent as if such Restricted
Subsidiary were a wholly owned Restricted Subsidiary.
"Working Capital Facility" includes the Credit Facility and any other
working capital facilities entered into by the Company or any of its
Restricted Subsidiaries, including any related notes, guarantees, collateral
documents, instruments and agreements executed in connection therewith, in
each case as amended, restated, modified, supplemented, extended, renewed,
replaced, refinanced or restructured from time to time, whether by the same or
any other agent or agents, lender or group of lenders, whether represented by
one or more agreements and whether one or more Subsidiaries are borrowers, or
guarantors thereunder or parties thereto.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of certain United States federal
income tax consequences resulting from the acquisition, ownership and
disposition of Notes by an initial beneficial owner of Notes. The tax
treatment of the holders of the Notes may vary depending upon their particular
situations. The legal conclusions expressed in this summary are based upon
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), applicable Treasury regulations, judicial authority and
administrative rulings, all as in effect as of the date of this Offering
Memorandum, and all of which are subject to change, either prospectively or
retroactively. These authorities are subject to various interpretations and it
is therefore possible that the tax treatment of the Notes may differ from the
treatment described below. Legislative, judicial or administrative changes or
interpretations may be forthcoming that could alter or modify the statements
and conclusions set forth herein. Any such changes or interpretations may or
may not be retroactive and could affect the tax consequences to holders.
This discussion deals only with persons who will hold the Notes as capital
assets. In addition, certain other holders (including insurance companies, tax
exempt organizations, financial institutions and broker-dealers) may be
subject to special rules not discussed below. For purposes of this discussion,
a "United States person" means a citizen or resident of the United States, a
corporation, partnership or other entity created or organized in the United
States or under the laws of the United States or of any political subdivision
thereof, an estate whose income is includible in gross income for United
States federal income tax purposes regardless of its source or a trust, if a
U.S. court is able to exercise primary supervision over the administration of
the trust and one or more United States persons have the authority to control
all substantial decisions of the trust. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISORS REGARDING THE UNITED STATES FEDERAL TAX
CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING OF NOTES, AS WELL AS ANY TAX
CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF ANY FOREIGN, STATE, LOCAL OR
OTHER TAXING JURISDICTION.
INTEREST
Interest on the Notes generally will be includable in the income of a United
States person as ordinary income at the time such interest is received or
accrued, in accordance with such United States person's method of accounting
for United States federal income tax purposes. The Company expects that the
Notes will not be issued with original issue discount within the meaning of
the Code.
EFFECT OF OPTIONAL REDEMPTION
The Company, at its option, may redeem part or all of the Notes at the times
and for the amounts described in "Description of the Notes--Optional
Redemption" herein. The Treasury regulations provide that for purposes of
calculating the yield to maturity of a debt instrument, an issuer will be
treated as exercising any option if its exercise would lower the yield of the
debt instrument. However, in this case a redemption of the Notes at the
optional redemption prices would increase the effective yield of such Notes as
calculated from the date of issuance.
THE EXCHANGE OFFER
Pursuant to the Treasury regulations, the exchange of Notes for Exchange
Notes pursuant to the Exchange Offer should not constitute a significant
modification of the terms of the Notes, and, accordingly, such exchange should
be treated as a "non-event" for federal income tax purposes. Therefore, such
exchange should have no federal income tax consequences to United States
persons. The holding period of an Exchange Note will include the holding
period of the Note for which it was exchanged; the basis of an Exchange Note
will be the same as the basis of the Note for which it was exchanged; and each
United States person holding the Notes would continue to be required to
include interest on the Notes in its gross income in accordance with its
method of accounting for United States federal income tax purposes.
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SALES, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange, redemption or other disposition of a Note, other
than the exchange of a Note for an Exchange Note (see "--The Exchange Offer"
above), a holder of a Note generally will recognize gain or loss in an amount
equal to the difference between the amount of cash and the fair market value
of any property received on the sale, exchange, redemption or other
disposition of the Note (other than in respect of accrued and unpaid interest
on the Note, which such amounts are treated as ordinary interest income) and
such holder's adjusted tax basis in the Note. Such gain or loss will be
capital gain or loss, and will generally be long-term capital gain taxable at
a rate of 20% if the Note is held for more than 18 months, mid-term capital
gain taxable at a rate of 28% if the Note is held for 18 months or less but
more than 12 months, and short-term capital gain taxable at ordinary income
tax rates if the Note is held for 12 months or less. Subsequent to December
31, 2000, the capital gain rate would be reduced to 18% if a Note has been
held for more than five years. The deductibility of capital losses is subject
to limitations.
BACKUP WITHHOLDING AND INFORMATION REPORTING
In general, information reporting requirements will apply to interest
payments on the Notes made to United States persons, other than certain exempt
recipients (such as corporations), and to proceeds realized by such United
States persons on dispositions of Notes. A 31% backup withholding tax will
apply to such amounts only if the United States person: (i) fails to furnish
its social security or other taxpayer identification number ("TIN") within a
reasonable time after request therefor, (ii) furnishes an incorrect TIN, (iii)
fails to report properly interest or dividend income, or (iv) fails, under
certain circumstances, to provide a certified statement, signed under penalty
of perjury, that the TIN provided is its correct number and that it is not
subject to backup withholding. Any amount withheld under the backup
withholding rules may be refunded or credited against the United States
persons' United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO NON-UNITED
STATES HOLDERS
For purposes of this discussion, a "Non-United States Holder" is an initial
beneficial owner of a Note that for United States federal income tax purposes
is not a United States person.
INTEREST
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States
Holder: (i) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company; (ii) is not a
controlled foreign corporation with respect to which the Company is a "related
person" within the meaning of the Code; (iii) is not a bank whose receipt of
interest on a Note is described in section 881(c)(3)(A) of the Code; and (iv)
certifies, under penalties of perjury, that such holder is not a United States
person and provides such holder's name and address.
SALE, EXCHANGE OR RETIREMENT OF NOTES
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, exchange, retirement
(including redemption) or other disposition of a Note unless: (i) the gain is
effectively connected with the conduct of a trade or business within the
United States by the Non-United States Holder; or (ii) in the case of a Non-
United States Holder who is a nonresident alien individual and holds the Note
as a capital asset, such holder is present in the United States for 183 or
more days in the taxable year and certain other requirements are met.
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FEDERAL ESTATE TAXES
If interest on the Notes is exempt from withholding of United States federal
income tax under the rules described above, the Notes will not be included in
the estate of a deceased Non-United States Holder for United States federal
estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will, where required, report to the holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments.
In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payments with respect to which
either the requisite certification, as described above, has been received or
an exemption has otherwise been established; provided that neither the Company
nor its payment agent has actual knowledge that the holder is a United States
person or that the conditions of any other exemption are not in fact
satisfied. Under temporary Treasury regulations, these information reporting
and backup withholding requirements will apply, however, to the gross proceeds
paid to a Non-United States Holder on the disposition of the Notes by or
through a United States office of a United States or foreign broker, unless
the holder certifies to the broker under penalties of perjury as to its name,
address and status as a foreign person or the holder otherwise establishes an
exemption. Information reporting requirements, but not backup withholding,
will also apply to a payment of the proceeds of a disposition of the Notes by
or through a foreign office of a United States broker or foreign brokers with
certain types of relationships to the United States unless such broker has
documentary evidence in its file that the holder of the Notes is not a United
States person, and such broker has no actual knowledge to the contrary, or the
holder establishes an exception. Neither information reporting nor backup
withholding generally will apply to a payment of the proceeds of a disposition
of the Notes by or through a foreign office of a foreign broker not subject to
the preceding sentence.
United States Treasury regulations, which generally are effective for
payments made after December 31, 1998, subject to certain transition rules,
alter the foregoing rules in certain respects. Among other things, such
regulations provide presumptions under which a Non-United States Holder is
subject to information reporting and backup withholding at the rate of 31%
unless the Company receives certification from the holder of non-U.S. status.
Depending on the circumstances, this certification will need to be provided
(i) directly by the Non-United States Holder, (ii) in the case of a Non-United
States Holder that is treated as a partnership or other fiscally transparent
entity, by the partners, shareholders or other beneficiaries of such entity,
or (iii) certain qualified financial institutions or other qualified entities
on behalf of the Non-United States Holder.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the Internal Revenue Service.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
FOR NON-UNITED STATES HOLDERS
The following is a general discussion of certain United States federal
income and estate tax consequences of the acquisition, ownership and
disposition of Notes by an initial beneficial owner of Notes that, for United
States federal income tax purposes, is not a "United States person" (a "Non-
United States Holder"). This discussion is based upon the United States
federal tax law now in effect, which is subject to change, possibly
retroactively. For purposes of this discussion, a "United States person" means
a citizen or resident of the United States, a corporation, partnership or
other entity created or organized in the United States or under the laws of
the United States or of any political subdivision thereof, an estate whose
income is includible in gross income for United States federal income tax
purposes regardless of its source or a trust, (A) for taxable years beginning
after December 31, 1996 (or ending after August 20, 1996, if the trustee has
made an applicable election) if a U.S. court is able to exercise primary
supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust or (B)
for taxable years not described in clause (A), if the income of the trust is
includible in gross income for United States federal income tax purposes
regardless of its source. The tax treatment of the Holders of the Notes may
vary depending upon their particular situations. U.S. persons acquiring the
Notes are subject to different rules than those discussed below. In addition,
certain other holders (including insurance companies, tax exempt
organizations, financial institutions and broker-dealers) may be subject to
special rules not discussed below.
INTEREST
Interest paid by the Company to a Non-United States Holder will not be
subject to United States federal income or withholding tax if such interest is
not effectively connected with the conduct of a trade or business within the
United States by such Non-United States Holder and such Non-United States
Holder: (i) does not actually or constructively own 10% or more of the total
combined voting power of all classes of stock of the Company; (ii) is not a
controlled foreign corporation with respect to which the Company is a "related
person" within the meaning of the Code; and (iii) certifies, under penalties
of perjury, that such holder is not a United States person and provides such
holder's name and address.
GAIN ON DISPOSITION
A Non-United States Holder will generally not be subject to United States
federal income tax on gain recognized on a sale, redemption or other
disposition of a Note unless: (i) the gain is effectively connected with the
conduct of a trade or business within the United States by the Non-United
States Holder; or (ii) in the case of a Non-United States Holder who is a
nonresident alien individual and holds the Note as a capital asset, such
holder is present in the United States for 183 or more days in the taxable
year and certain other requirements are met.
FEDERAL ESTATE TAXES
If interest on the Notes is exempt from withholding of United States federal
income tax under the rules described above, the Notes will not be included in
the estate of a deceased Non-United States Holder for United States federal
estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will, where required, report to the Holders of Notes and the
Internal Revenue Service the amount of any interest paid on the Notes in each
calendar year and the amounts of tax withheld, if any, with respect to such
payments.
In the case of payments of interest to Non-United States Holders, temporary
Treasury regulations provide that the 31% backup withholding tax and certain
information reporting will not apply to such payments with
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respect to which either the requisite certification, as described above, has
been received or an exemption has otherwise been established; provided that
neither the Company nor its payment agent has actual knowledge that the Holder
is a United States person or that the conditions of any other exemption are
not in fact satisfied. Under temporary Treasury regulations, these information
reporting and backup withholding requirements will apply, however, to the
gross proceeds paid to a Non-United States Holder on the disposition of the
Notes by or through a United States office of a United States or foreign
broker, unless the Holder certifies to the broker under penalties of perjury
as to its name, address and status as a foreign person or the Holder otherwise
establishes an exemption. Information reporting requirements, but not backup
withholding, will also apply to a payment of the proceeds of a disposition of
the Notes by or through a foreign office of a United States broker or foreign
brokers with certain types of relationships to the United States unless such
broker has documentary evidence in its file that the Holder of the Notes is
not a United States person, and such broker has no actual knowledge to the
contrary, or the Holder establishes an exception. Neither information
reporting nor backup withholding generally will apply to a payment of the
proceeds of a disposition of the Notes by or through a foreign office of a
foreign broker not subject to the preceding sentence.
Recently, the Treasury Department has issued proposed regulations regarding
the withholding and information reporting rules discussed above. In general,
the proposed regulations do not alter the substantive withholding and
information reporting requirements but unify current certification procedures
and forms and clarify reliance standards. If finalized in their current form,
the proposed regulations would generally be effective for payments made after
December 31, 1998, subject to certain transition rules.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules may be refunded or credited against the Non-United
States Holder's United States federal income tax liability, provided that the
required information is furnished to the IRS.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES FOR
UNITED STATES AND NON-UNITED STATES HOLDERS IS FOR GENERAL INFORMATION ONLY
AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE OLD NOTES AND EACH
PROSPECTIVE HOLDER AND, SUBSEQUENT TO THE EXCHANGE OFFER, EACH HOLDER, OF
EXCHANGE NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR WITH RESPECT TO
THE TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND
DISPOSITION OF THE EXCHANGE NOTES INCLUDING THE APPLICABILITY AND EFFECT OF
FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Old
Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that it will
make this Prospectus, as amended or supplemented, available to any broker-
dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transaction,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or at negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commission or concessions received by
any such person may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter", within the meaning of the
Securities Act.
The Company has agreed that, for a period of one year following the
effective date of the Registration Statement with respect to which this
Prospectus is a part, it will promptly send additional copies of this
Prospectus and any amendment or supplement to this Prospectus to any broker-
dealer that requests such documents in the Letter of Transmittal. The Company
has agreed to pay all expenses incident to the Exchange Offer, other than
commissions or concessions of any broker-dealer, and will indemnify the
holders of the Notes (including any broker-dealers) against certain
liabilities including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the Notes offered hereby will be passed on for the Company
by Andrews & Kurth L.L.P., Houston, Texas.
EXPERTS
The consolidated financial statements of the Company as of December 31, 1997
and 1996 and for each of the three years in the period ended December 31,
1997, included in this Registration Statement, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority
of said firm as experts in giving said reports.
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AVAILABLE INFORMATION
Each purchaser of the Notes from the Initial Purchaser will be furnished
with a copy of this Offering Memorandum and any related amendments or
supplements. Each person receiving this Offering Memorandum acknowledges that
(i) such person has been afforded an opportunity to request from the Company
and to review, and has received, all additional information considered by it
to be necessary to verify the accuracy and completeness of the information
herein, (ii) such person has not relied on the Initial Purchaser or any person
affiliated with the Initial Purchaser in connection with its investigation of
the accuracy of such information or its investment decision, and (iii) except
as provided pursuant to (i) above, no person has been authorized to give any
information or to make any representation concerning the Notes offered hereby
other than those contained herein and, if given or made, such other
information or representation should not be relied upon as having been
authorized by the Company or the Initial Purchaser. While any Notes remain
outstanding, the Company will make available, upon request, to any holder and
any prospective purchaser thereof the information required by Rule 144A(d)(4)
under the Securities Act during any period in which the Company is not subject
to Section 13 or 15(d) of the Exchange Act. Any such request should be
directed to Frontier Oil Corporation, 10000 Memorial Drive, Suite 600,
Houston, Texas 77024-3411.
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files periodic reports, proxy statements and other
information with the Commission. Reports, proxy statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C. 20549 and at the regional offices of the Commission
located at 7 World Trade Center, 13th Floor, New York, New York 10048 and
Suite 1400, Northwestern Atrium Center, 14th Floor, 500 West Madison Street,
Chicago, Illinois 60661. Copies of such material may also be obtained at
prescribed rates by writing to the Commission, Public Reference Section, 450
Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and such
information may also be inspected at the offices of the New York Stock
Exchange, 20 Broad Street, New York, New York 10005. The Commission maintains
a Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the
Commission. Such reports, proxy and information statements and other
information may be found on the Commission's Web site address,
http://www.sec.gov.
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INDEX TO FINANCIAL INFORMATION
<TABLE>
<S> <C>
Unaudited Pro Forma Consolidated Financial Information
Introduction to Unaudited Pro Forma Consolidated Financial Information... F-2
Unaudited Pro Forma Consolidated Balance Sheet........................... F-3
Unaudited Pro Forma Consolidated Statements of Operations................ F-4
Notes to Unaudited Pro Forma Consolidated Financial Statements........... F-5
Consolidated Financial Statements
Report of Independent Public Accountants................................. F-6
Consolidated Statements of Operations.................................... F-7
Consolidated Balance Sheets.............................................. F-8
Consolidated Statements of Cash Flows.................................... F-9
Consolidated Statements of Shareholders' Equity.......................... F-10
Notes to Consolidated Financial Statements............................... F-11
Selected Quarterly Financial Data (Unaudited).............................. F-22
</TABLE>
F-1
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UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial information (the
"Pro Forma Financial Statements") of Frontier Oil Corporation (formerly known
as Wainoco Oil Corporation) (the "Company") is based on the Company's
historical financial statements, adjusted to give effect to the issuance of
the 9 1/8% Senior Notes due 2006 in the Offering and the redemption of all
existing debt obligations consisting of the 12% Senior Notes due 2002, 10 3/4%
Subordinated Debentures due 1998 and the 7 3/4% Convertible Subordinated
Debentures due 2014. The Pro Forma Financial Statements are not necessarily
indicative of the results that actually would have occurred if the debt
issuance and debt redemptions had been in effect on the dates indicated or
which may be obtained in the future. The Pro Forma Financial Statements should
be read in conjunction with the historical financial statements of the Company
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations" included elsewhere in this Registration Statement. The Pro
Forma Balance Sheet as of December 31, 1997 assumes the debt issuance and debt
redemptions occurred as of December 31, 1997. The Pro Forma Statement of
Operations for the year ended December 31, 1997 assume the debt issuance and
debt redemptions occurred January 1, 1997.
F-2
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
ASSETS FRONTIER ADJUSTMENTS(F) FRONTIER
------ ---------- -------------- ---------
<S> <C> <C> <C>
Current Assets:
Cash, including cash equivalents........ $ 21,735 $ (6,358)(a) $ 15,377
Receivables............................. 17,204 -- 17,204
Inventory and other current assets...... 29,057 -- 29,057
-------- -------- --------
Total Current Assets.................. 67,996 (6,358) 61,638
-------- -------- --------
Property and Equipment, at cost:
Refinery and pipeline................... 149,201 -- 149,201
Furniture, fixtures and other equipment. 3,044 -- 3,044
-------- -------- --------
152,245 -- 152,245
Less--Accumulated depreciation.......... 45,586 -- 45,586
-------- -------- --------
106,659 -- 106,659
-------- -------- --------
Other Assets.............................. 3,260 1,202 (b) 4,462
-------- -------- --------
$177,915 $ (5,156) $172,759
======== ======== ========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Current Liabilities:
Payables................................ $ 33,527 $ -- $ 33,527
Accrued interest........................ 1,530 (1,530)(c) --
Other accrued liabilities............... 12,011 -- 12,011
Current maturities of long-term debt.... -- -- (c) --
-------- -------- --------
Total current liabilities............. 47,068 (1,530) 45,538
-------- -------- --------
Long-Term Debt, net of current maturities:
Frontier Credit Facility................ -- -- --
9 1/8% Senior Notes due 2006............ -- 70,000 (c) 70,000
12% Senior Notes due 2002............... 24,572 (24,572)(c) --
7 3/4% Convertible Subordinated
Debentures............................. 46,000 (46,000)(c) --
-------- -------- --------
70,572 (572) 70,000
-------- -------- --------
Other Liabilities......................... 4,341 -- 4,341
Shareholders' Equity:
Preferred stock......................... -- -- --
Common stock............................ 57,251 -- 57,251
Paid-in capital......................... 84,785 -- 84,785
Retained earnings (deficit)............. (85,866) (3,054)(d) (88,920)
Treasury stock.......................... (236) -- (236)
-------- -------- --------
Total Shareholders' Equity............ 55,934 (3,054) 52,880
-------- -------- --------
$177,915 $ (5,156) $172,759
======== ======== ========
</TABLE>
See accompanying notes to Pro Forma Financial Statements.
F-3
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
FRONTIER ADJUSTMENTS(F) FRONTIER
---------- -------------- ---------
<S> <C> <C> <C>
Revenues:
Refined products......................... $374,091 $ $374,091
Other.................................... 2,327 2,327
-------- --------
376,418 376,418
Costs and Expenses:
Refining operating costs................. 337,495 337,495
Selling and general expenses............. 8,050 8,050
Depreciation............................. 9,170 9,170
-------- --------
354,715 354,715
Operating Income........................... 21,703 21,703
Interest Expense, net...................... 13,891 (7,301)(e) 6,590
-------- ------- --------
Income From Continuing Operations.......... 7,812 7,301 15,113
Provision for Income Taxes................. -- -- --
-------- ------- --------
Income From Continuing Operations.......... $ 7,812 $ 7,301 $ 15,113
======== ======= ========
Income per Share From Continuing
Operations................................ $ .28 $ 0.55
======== ========
Average number of common shares
outstanding............................... 27,457 27,457
======== ========
</TABLE>
See accompanying notes to Pro Forma Financial Statements.
F-4
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(a) Reflects the redemption of all existing debt obligations and the related
accrued interest with the proceeds from the issuance of the Notes and
available cash. Following is a summary of the cash, including cash
equivalents, pro forma adjustments (in thousands):
<TABLE>
<S> <C>
Proceeds from issuance of the Notes, net of issuance costs......... $ 67,300
Redemptions:
12% Senior Notes at a redemption premium of 103.43%.............. (25,415)
7 3/4% Convertible Subordinated Debentures at a redemption
premium of 101.55%.............................................. (46,713)
Accrued interest on redeemed debt obligations.................... (1,530)
--------
Total redemptions.............................................. (73,658)
--------
Adjustment to cash, including cash equivalents............... $ (6,358)
========
</TABLE>
(b) The adjustment to other assets of $1.2 million consists of approximately
$2.7 million related to the costs to issue the Notes, offset by the write-
off of approximately $1.5 million representing unamortized debt issuance
costs associated with the debt to be redeemed.
(c) Reflects the redemption of all of the Company's existing debt, including
accrued interest and the issuance of the Notes.
(d) Reflects a nonrecurring charge of approximately $1.6 million related to
the redemption premium to be paid on the redemption of 12% Senior Notes
and 7 3/4% Convertible Subordinated Debentures and the write-off of
approximately $1.5 million of unamortized debt issuance costs associated
with the debt to be redeemed.
(e) Reflects (i) the reduction of interest expense as a result of the
redemption of existing outstanding indebtedness with proceeds from the
Offering and the sale of the Canadian oil and gas properties and (ii) the
elimination of interest income on available cash used for the redemption
of outstanding indebtedness. "Interest expense, net" adjustments include
the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
Interest expense on redeemed debt*.......................... $14,644
Interest expense on the Senior Notes (assumed 9 1/8% annual
rate)*..................................................... (6,726)
Elimination of interest income.............................. (617)
-------
Adjustment to Interest Expense, net....................... $ 7,301
=======
</TABLE>
--------
* includes amortization of debt issuance costs
(f) The Pro Forma Financial Statements have been prepared assuming 100% of the
7 3/4% Convertible Subordinated Debentures are redeemed. On March 12,
1998, all but $731,000 of the 7 3/4% Convertible Subordinated Debentures
were redeemed. Holders of $731,000 of the 7 3/4% Convertible Subordinated
Debentures elected to convert into 83,542 shares of the Company's common
stock.
F-5
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders of Frontier Oil Corporation:
We have audited the accompanying consolidated balance sheets of Frontier Oil
Corporation (formerly known as Wainoco Oil Corporation) (a Wyoming
corporation) and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Frontier Oil Corporation
and subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 29, 1998
F-6
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Refined products............................... $374,091 $382,098 $329,784
Other.......................................... 2,327 1,275 2,048
-------- -------- --------
376,418 383,373 331,832
-------- -------- --------
Costs and Expenses:
Refining operating costs....................... 337,495 362,485 317,311
Selling and general expenses................... 8,050 6,285 7,156
Depreciation................................... 9,170 9,018 8,471
-------- -------- --------
354,715 377,788 332,938
-------- -------- --------
Operating Income (loss).......................... 21,703 5,585 (1,106)
Interest expense, net............................ 13,891 17,229 18,230
-------- -------- --------
Income (loss) from continuing operations before
income taxes.................................... 7,812 (11,644) (19,336)
Provision for Income Taxes....................... -- -- --
-------- -------- --------
Income (loss) from continuing operations......... 7,812 (11,644) (19,336)
Discontinued operations:
Income from oil and gas operations, net of
taxes......................................... 1,721 4,752 211
Gain on disposal of Canadian oil and gas
properties, net of taxes...................... 23,301 -- --
Recognition of cumulative translation
adjustment.................................... (9,862) -- --
-------- -------- --------
Income (loss) before extraordinary item.......... 22,972 (6,892) (19,125)
Extraordinary loss on retirement of debt, net of
taxes........................................... 3,917 -- --
-------- -------- --------
Net income (loss)................................ $ 19,055 $ (6,892) $(19,125)
======== ======== ========
Basic and diluted earnings (loss) per share of
common stock:
Continuing operations.......................... $ .28 $ (.43) $ (.71)
Discontinued operations........................ .55 .18 .01
Extraordinary loss............................. (.14) -- --
-------- -------- --------
Net Income (Loss)................................ $ .69 $ (.25) $ (.70)
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
ASSETS 1997 1996
------ -------- --------
<S> <C> <C>
Current assets:
Cash, including cash equivalents of $19,981 and $609 at
December 31, 1997 and 1996, respectively................ $ 21,735 $ 5,183
Trade receivables, less allowance for doubtful accounts
of $500 in 1997 and 1996................................ 16,674 19,422
Other receivables........................................ 530 1,357
Inventory of crude oil, products and other............... 27,666 29,617
Other current assets..................................... 1,391 730
-------- --------
Total current assets................................... 67,996 56,309
-------- --------
Property, plant and equipment, at cost:
Refinery and pipeline.................................... 149,201 143,172
Furniture, fixtures and other equipment.................. 3,044 3,646
Oil and gas properties, on a full-cost basis............. -- 170,879
-------- --------
152,245 317,697
Less--accumulated depreciation, depletion and
amortization............................................ 45,586 139,091
-------- --------
106,659 178,606
Other assets............................................... 3,260 4,950
-------- --------
Total assets........................................... $177,915 $239,865
======== ========
<CAPTION>
LIAIBLITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Accounts payable......................................... $ 33,527 $ 43,789
Accrued turnaround cost.................................. 6,771 3,490
Accrued liabilities and other............................ 5,240 5,033
Accrued interest......................................... 1,530 5,249
Current maturities of long-term debt..................... -- 2,500
-------- --------
Total current liabilities.............................. 47,068 60,061
-------- --------
Long-Term Debt, net of current maturities.................. 70,572 145,928
Deferred Credits and Other................................. 2,801 6,189
Deferred Income Taxes...................................... 1,540 2,418
Commitments and Contingencies..............................
Shareholders' Equity:
Preferred stock, $100 par value, 500,000 shares
authorized, no shares issued............................ -- --
Common stock, no par, 50,000,000 shares authorized,
28,111,289 shares and 27,313,502 shares issued in 1997
and 1996, respectively.................................. 57,251 57,172
Paid-in capital.......................................... 84,785 81,767
Retained earnings (deficit).............................. (85,866) (104,921)
Cumulative translation adjustment........................ -- (8,501)
Treasury stock, 52,500 shares and 55,000 shares at
December 31, 1997 and 1996, respectively................ (236) (248)
-------- --------
Total shareholders' equity............................. 55,934 25,269
-------- --------
Total liabilities and shareholders' equity............. $177,915 $239,865
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-8
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1997 1996 1995
-------- -------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)............................... $ 19,055 $ (6,892) $ (19,125)
Gain on disposal of Canadian oil and gas
properties..................................... (23,301) -- --
Recognition of cumulative translation
adjustment..................................... 9,862 -- --
Extraordinary loss on retirement of debt........ 3,917 -- --
Depreciation, depletion and amortization........ 13,018 17,141 21,411
Other........................................... (202) 795 734
Changes in components of working capital from
operations
(Increase) decrease in receivables............ 905 765 (1,283)
(Increase) decrease in inventory.............. 1,856 (9,881) 3,884
(Increase) decrease in other current assets... (642) (35) 175
Increase (decrease) in accounts payable....... (8,617) 7,659 4,161
Increase (decrease) in accrued liabilities.... (3,353) (1,087) (79)
-------- -------- ---------
Net cash provided by operating activities... 12,498 8,465 9,878
INVESTING ACTIVITIES
Additions to property, plant and equipment:
Continuing operations......................... (5,675) (4,760) (5,217)
Discontinued operations....................... (3,298) (8,654) (11,960)
Sales of oil and gas and other properties....... 91,307 990 34,145
Other........................................... (590) 429 (606)
-------- -------- ---------
Net cash provided by (used in) investing
activities................................. 81,744 (11,995) 16,362
FINANCING ACTIVITIES
Borrowings:
Senior notes.................................. 2,000 3,000 --
Payments of debt:
Bank debt, net................................ -- -- (15,000)
Senior notes, including redemption premium.... (74,932) -- (8,000)
Subordinated debentures....................... (7,500) -- (2,500)
Issuance of common stock........................ 3,109 -- --
Other........................................... (357) (345) (488)
-------- -------- ---------
Net cash provided by (used in) financing
activities................................. (77,680) 2,655 (25,988)
Effect of exchange rate changes on cash......... (10) 13 (38)
-------- -------- ---------
Increase (decrease) in cash and cash
equivalents.................................... 16,552 (862) 214
Cash and cash equivalents, beginning of period.. 5,183 6,045 5,831
-------- -------- ---------
Cash and cash equivalents, end of period........ $ 21,735 $ 5,183 $ 6,045
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-9
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS EXCEPT SHARES)
<TABLE>
<CAPTION>
COMMON STOCK OTHER
------------------ -----------------------------
NUMBER OF RETAINED CUMULATIVE
SHARES PAID-IN EARNINGS TRANSLATION TREASURY
ISSUED AMOUNT CAPITAL (DEFICIT) ADJUSTMENT STOCK TOTAL
---------- ------- ------- --------- ----------- -------- --------
(IN THOUSANDS EXCEPT SHARES)
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1994: 27,310,842 $57,172 $81,758 $ (78,904) $(10,307) $(270) $ 49,449
Shares issued under:
Stock option plan..... 2,660 -- 9 -- -- -- 9
Directors' stock plan. -- -- -- -- -- 11 11
Translation adjustment.. -- -- -- -- 2,120 -- 2,120
Net loss................ -- -- -- (19,125) -- -- (19,125)
---------- ------- ------- --------- -------- ----- --------
DECEMBER 31, 1995: 27,313,502 57,172 81,767 (98,029) (8,187) (259) 32,464
Shares issued under:
Directors' stock plan. -- -- -- -- -- 11 11
Translation adjustment.. -- -- -- -- (314) -- (314)
Net loss................ -- -- -- (6,892) -- -- (6,892)
---------- ------- ------- --------- -------- ----- --------
DECEMBER 31, 1996: 27,313,502 57,172 81,767 (104,921) (8,501) (248) 25,269
Shares issued under:
Stock option plan..... 797,787 79 3,018 -- -- -- 3,097
Directors' stock plan. -- -- -- -- -- 12 12
Translation adjustment.. -- -- -- -- (1,361) -- (1,361)
Net income.............. -- -- -- 19,055 -- -- 19,055
Disposition of Canadian
assets................. -- -- -- -- 9,862 -- 9,862
---------- ------- ------- --------- -------- ----- --------
DECEMBER 31, 1997: 28,111,289 $57,251 $84,785 $ (85,866) $ -- $(236) $ 55,934
========== ======= ======= ========= ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF OPERATIONS
The financial statements include the accounts of Frontier Oil Corporation
(formerly known as Wainoco Oil Corporation), a Wyoming corporation, and its
wholly-owned subsidiaries, including Frontier Holdings Inc. (the "Refinery"),
collectively referred to as Frontier or the Company. At the Annual Meeting
held on April 27, 1998, the shareholders of the Company approved the change in
the Company's corporate name from "Wainoco Oil Corporation" to "Frontier Oil
Corporation." The Company is engaged in the crude oil refining and wholesale
marketing of refined petroleum products business (the "refining operations").
The Company conducts its refining operations in the Rocky Mountain region of
the United States. The Company's Cheyenne, Wyoming Refinery purchases the
crude oil to be refined and markets the refined petroleum products produced,
including various grades of gasoline, diesel fuel, asphalt and petroleum coke.
Prior to the third quarter of 1997, the Company also explored for and
produced oil and gas in Canada and prior to the first quarter of 1996 in the
United States (together, the "oil and gas operations"). On June 16, 1997, the
Company completed the sale of all its Canadian oil and gas properties. During
the third quarter of 1994, the Company announced that it intended to cease all
exploration activities in the United States and during 1995 completed the sale
of its United States oil and gas assets. Operating results for the Company's
oil and gas operations segment are presented as discontinued operations in the
accompanying statements of operations and all previously reported results are
restated to this presentation.
2. SIGNIFICANT ACCOUNTING POLICIES
Property, Plant and Equipment
Property, plant and equipment are depreciated based on the straight-line
method over their estimated useful lives. The estimated useful lives are:
<TABLE>
<S> <C>
Refinery plant and equipment............................... 5 to 20 years
Pipeline and pumps......................................... 10 to 20 years
Furniture, fixtures and other.............................. 3 to 10 years
</TABLE>
Maintenance and repairs are expensed as incurred except for major scheduled
repairs and maintenance ("turnaround") of the Refinery operating units. The
costs for turnarounds are ratably accrued over the period from the prior
turnaround to the next scheduled turnaround. Major improvements are
capitalized, and the assets replaced are retired.
New Accounting Statements
The Company adopted the Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standard ("SFAS") No. 128, "Earnings Per
Share" in 1997 which establishes new standards for computing and presenting
earnings per share. SFAS No. 128 requires the presentation of basic and
diluted earnings per share for each period presented. Earnings (loss) per
share has been restated for periods presented to give effect for the adoption
of SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
which establishes standards for reporting and displaying comprehensive income
and its components in the financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. The adoption of this statement
requires incremental financial statement disclosures and thus will have no
effect on the Company's financial position or results of operations.
Inventories
Inventories of crude oil, other unfinished oils and all finished products
are recorded at the lower of cost on a first-in, first-out (FIFO) basis or
market. Refined product exchange transactions are considered asset exchanges
with deliveries offset against receipts. The net exchange balance is included
in inventory. Inventories of materials and supplies are recorded at the lower
of average cost or market.
F-11
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SCHEDULE OF COMPONENTS OF INVENTORY
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
<S> <C> <C>
Crude oil.............................................. $ 3,904 $ 2,863
Unfinished products.................................... 6,338 7,024
Finished products...................................... 9,929 12,816
Chemicals.............................................. 1,534 851
Repairs and maintenance supplies and other............. 5,961 6,063
------- -------
$27,666 $29,617
======= =======
</TABLE>
Environmental Expenditures
Environmental expenditures are expensed or capitalized based upon their
future economic benefit. Costs which improve a property's pre-existing
condition and costs which prevent future environmental contamination are
capitalized. Costs related to environmental damage resulting from operating
activities subsequent to acquisition are expensed. Liabilities for these
expenditures are recorded when it is probable that obligations have been
incurred and the amounts can be reasonably estimated.
Hedging
The Company, at times, engages in futures transactions in its refining
operations for the purpose of hedging its inventory position and natural gas
prices. Gains and losses on futures contracts designated as hedges are
recognized in refining operating costs when the associated hedge transaction
is consummated. The Company does not enter into derivative contracts for
speculative purposes.
Interest
Interest is reported net of interest capitalized and interest income.
Interest income of $2.0 million, $109,000 and $140,000 was recorded in the
years ended December 31, 1997, 1996 and 1995, respectively. During 1996, the
Company capitalized interest of $24,000. The Company capitalizes interest on
debt incurred to fund the construction or acquisition of a significant asset.
Additionally, to manage its interest cost and exposure to interest rate
movements, the Company, at times, enters into interest rate swaps. Such
agreements effectively change the Company's interest rate exposure. At
December 31, 1997, the Company was not subject to any such agreements.
Stock Based Compensation
Compensation cost is measured using the intrinsic value method. Under this
method, compensation cost is the excess, if any, of the quoted market value of
the Company's common stock at the grant date over the amount the employee must
pay to acquire the stock. No compensation cost was recognized for the years
ended December 31, 1997, 1996 and 1995.
Currency Translation
The Canadian dollar financial statements of the Canadian oil and gas
operations have been translated to United States dollars. Gains and losses on
currency transactions are included in the consolidated statements of
F-12
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operations currently, and translation adjustments are included in the
consolidated statements of shareholders' equity. See Note 3 for information
relating to the recognition of the cumulative translation adjustment in 1997.
Intercompany Transactions
Significant intercompany transactions are eliminated in consolidation.
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
disclosures 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 could differ from those estimates.
Cash Flow Reporting
Highly liquid investments with a maturity, when purchased, of three months
or less are considered to be cash equivalents. Cash payments for interest
during 1997, 1996 and 1995 were $18.4 million, $16.3 million and $18.8
million, respectively. Cash payments for income taxes during 1997, 1996 and
1995 were $930,000, $187,000 and $133,000, respectively.
3. SALE OF OIL AND GAS OPERATIONS
On June 16, 1997, the Company completed the sale of all its Canadian oil and
gas properties. The transaction was initiated by the Company through a
negotiated bid process in order to maximize shareholder value. The oil and gas
assets were located in British Columbia and Alberta and included approximately
94 billion cubic feet of natural gas, 1.7 million barrels of oil, condensate
and natural gas liquids, 121,500 net undeveloped leasehold acres and a
significant amount of seismic data. Additionally, value was received for
certain Canadian income tax pools of the Company.
The contract purchase price of C$133.6 million was adjusted from the January
1, 1997 effective date of the sale to June 16, 1997. Net proceeds after these
adjustments, transaction expenses and severance costs were approximately
C$126.7 million (US$91.3 million) as of June 16, 1997. A net gain of $23.3
million was realized on the transaction. No Canadian taxes are estimated to be
payable due to available oil and gas deductions and net operating loss
carryforwards. For U.S. federal income taxes, available net operating loss
carryforwards will be utilized to offset the gain; however, alternative
minimum taxes of approximately $800,000 are estimated and have been paid.
The cumulative translation adjustment as of May 5, 1997 (the measurement
date of the sale) of $9.9 million was realized against income as a result of
the sale. In prior periods, the Company had recognized the currency
translation impact of its Canadian operations as a direct reduction to
shareholders' equity. Consequently, the recognition of the cumulative
translation adjustment in the accompanying statements of operations has no
effect on shareholders' equity.
A net loss of $54,000 from Canadian operations from the measurement date
until June 16, 1997 was included in the gain calculation. As of December 31,
1997, the assets and liabilities of the Canadian operations retained by the
Company were not material.
In the fourth quarter of 1995, the Company culminated the restructuring of
exploration activities in the United States and sold its last domestic oil and
gas assets.
F-13
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following schedule presents certain discontinued oil and gas operating
income (loss) information and capital expenditures for the three years ended
December 31, 1997, 1996 and 1995 and identifiable assets as of December 31,
1997, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1997 1996 1995
(IN THOUSANDS) ------ ------- -------
<S> <C> <C> <C>
OIL AND GAS SALES
Canada................................................ $7,280 $19,592 $21,096
United States......................................... -- 987 9,696
DEPRECIATION, DEPLETION AND AMORTIZATION
Canada................................................ 3,002 8,123 9,641
United States......................................... -- -- 3,299
OPERATING INCOME (LOSS)
Canada................................................ 1,954 4,129 2,737
United States......................................... -- 987 (623)
CAPITAL EXPENDITURES
Canada................................................ 2,815 7,917 10,865
United States......................................... -- -- 277
IDENTIFIABLE ASSETS
Canada................................................ -- 74,001 75,229
United States......................................... -- -- --
</TABLE>
4. LONG-TERM DEBT
SCHEDULE OF LONG-TERM DEBT
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1996
------- --------
<S> <C> <C>
Refining credit facility................................ $ -- $ --
12% Senior Notes........................................ 24,572 95,000
7 3/4% Convertible Subordinated Debentures.............. 46,000 46,000
10 3/4% Subordinated Debentures......................... -- 7,428
------- --------
70,572 148,428
Less current maturities................................. -- 2,500
------- --------
$70,572 $145,928
======= ========
</TABLE>
Refining Credit Facility
The refining operations has a working capital credit facility with a group
of three banks which expires on April 2, 1999. The facility is a collateral-
based facility with total capacity of up to $50 million, of which maximum cash
borrowings are $20 million. Any unutilized capacity after cash borrowings is
available for letters-of-credit. No debt was outstanding on this facility at
December 31, 1997 and 1996. Standby letters of credit outstanding were $4.5
million and $19.5 million at December 31, 1997 and 1996, respectively.
The facility provides working capital financing for operations, generally
the financing of crude and product supply. It is generally secured by the
Refinery's current assets. The agreement provides for a quarterly
F-14
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
commitment fee of .375 of 1% per annum. Interest rates are based, at the
Company's option, on the agent bank's prime rate plus 1/2% or the reserve-
adjusted LIBOR plus 1 3/4%. Standby letters-of-credit issued bear a fee of 1
1/4% annually, plus standard issuance and renewal fees. The facility agreement
includes certain financial covenant requirements relating to the Refinery's
working capital, cash earnings, tangible net worth and fixed charge coverage.
Senior Notes
The $24.6 million of unsecured 12% Senior Notes ("Senior Notes") are due
2002. The notes are redeemable, at the option of the Company, at a premium of
103.43% after July 31, 1997, declining to 100% in 1999. Interest is payable
semiannually. See Note 9 for information related to the December 31, 1997 debt
balance and activity subsequent thereto.
Convertible Subordinated Debentures
The $46 million of 7 3/4% Convertible Subordinated Debentures ("Convertible
Subordinated Debentures") are due in 2014. The debentures are convertible into
the Company's common stock at $8.75 per share. Interest is payable
semiannually. The debentures are redeemable at a premium of 101.55% declining
to 100% in 1999. Sinking fund payments of 5% of the principal amount commence
in 2000, and are calculated to retire 70% of the principal amount prior to
maturity. See Note 9 for information related to the December 31, 1997 debt
balance and activity subsequent thereto.
Early Retirement of Debt
On July 21, 1997, the Company initiated a tender offer for $91.4 million of
its Senior Notes at a price of par as required by the Senior Notes Indenture
after a material sale of assets. The par tender offer expired on August 20,
1997 with approximately $2.2 million being acquired by the Company. On August
21, 1997, the Company called $48.0 million principal amount of its Senior
Notes (including approximately $2.5 million held by the Company) at a price of
103.43% and redeemed them on September 23, 1997. The Company called all $7.5
million principal amount of 10 3/4% Subordinated Debentures and redeemed them
on October 1, 1997. In addition, on November 25, 1997 the Company called $25.0
million principal amount of its Senior Notes (including approximately $.3
million held by the Company) at a price of 103.43% and redeemed them on
December 30, 1997. The debt redemptions were funded with proceeds from the
sale of the Canadian oil and gas operations as disclosed in Note 3. Based on
the redemptions, the Company has recognized an extraordinary loss, net of
taxes, of approximately $3.9 million due to the redemption premium of 103.43%
on the Senior Notes and reduction in debt issuance costs.
Restrictions on Loans, Transfer of Funds and Payment of Dividends
The Refinery credit facility restricts the Refinery as to the distribution
of capital assets and the transfer of cash in the form of dividends, loans or
advances when there are any outstanding borrowings under the facility or when
a default exists or would occur.
Five-year Maturities
The estimated five-year maturities of long-term debt are none in 1998 and
1999, $2.3 million in 2000 and 2001, and $26.9 million in 2002.
F-15
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES
The following is the provision (benefit) for income taxes for the three years
ended December 31, 1997, 1996 and 1995.
PROVISION (BENEFIT) FOR INCOME TAXES
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current................................................... $194 $ -- $ --
Deferred.................................................. (194) -- --
---- ---- ----
$ -- $ -- $ --
==== ==== ====
</TABLE>
The following is a reconciliation of the provision (benefit) for income taxes
computed at the statutory United States income tax rates on pretax income
(loss) and the provision (benefit) for income taxes as reported for the three
years ended December 31, 1997, 1996 and 1995.
RECONCILIATION OF TAX PROVISION
(IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
------ ------- -------
<S> <C> <C> <C>
Provision (benefit) based on statutory rates... $2,656 $(4,242) $(6,563)
Increase (decrease) resulting from:
Net operating loss carryforward.............. (2,656) 4,242 6,563
------ ------- -------
Provision as reported........................ $ -- $ -- $ --
====== ======= =======
</TABLE>
F-16
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following are the significant components, by type of temporary
differences or carryforwards, of deferred tax liabilities and tax assets,
computed at the federal statutory rate as of December 31, 1997 and 1996.
COMPONENTS OF DEFERRED TAXES
<TABLE>
<CAPTION>
DECEMBER 31,
---------------
1997 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
DEFERRED TAX LIABILITIES
Property, plant and equipment due to differences in
depreciation............................................ $14,189 $14,874
Installment sale......................................... 5,435 5,435
Other.................................................... 918 1,415
------- -------
DEFERRED TAX LIABILITIES................................. 20,542 21,724
------- -------
DEFERRED TAX ASSETS
Tax loss carryforwards................................... 50,960 34,944
Depletion carryforwards.................................. 3,045 3,045
Tax credit carryforwards................................. -- 1,209
Other.................................................... 3,069 3,151
------- -------
57,074 42,349
------- -------
LESS--VALUATION ALLOWANCE................................ 38,072 23,043
------- -------
NET DEFERRED TAX ASSETS.................................. 19,002 19,306
------- -------
NET DEFERRED TAX LIABILITIES............................. $ 1,540 $ 2,418
======= =======
</TABLE>
Realization of deferred tax assets is dependent on the Company's ability to
generate taxable income within the life of the tax loss carryforwards. As a
result of the Company's history of operating losses, a valuation allowance has
been provided for deferred tax assets that are not offset by scheduled future
reversals of deferred tax liabilities.
At December 31, 1997, the Company had regular net operating loss ("NOL")
carryforwards for United States tax reporting purposes of $145.6 million
available to reduce future federal taxable income. The regular NOL
carryforwards will expire as follows: $32.2 million in 2002, $7.7 million in
2003, $11.3 million in 2004, $29.5 million in 2005, $17.2 million in 2006,
$13.7 million in 2007, $11.3 million in 2008, $2.2 million in 2009, $16.1
million in 2010 and $4.4 million in 2011.
Also at December 31, 1997, the Company had alternative minimum tax net
operating loss ("AMT NOL") carryforwards for United States tax reporting of
$98.4 million to reduce future taxable income. The AMT NOL carryforwards will
expire as follows: $2.8 million in 2002, $5.4 million in 2003, $9.0 million in
2004, $27.0 million in 2005, $13.1 million in 2006, $11.6 million in 2007,
$8.6 million in 2008, $1.4 million in 2009, $16.8 million in 2010 and $2.7
million in 2011.
The Company has tax depletion carryforwards of $8.7 million which are
indefinitely available to reduce future United States income taxes payable.
As of December 31, 1996, the Company had net operating loss carryforwards
for Canadian tax reporting purposes of $2.1 million which expire in 2003. The
Company also had oil and gas deductions of $116.7 million and earned depletion
of $8.6 million which are available indefinitely to reduce future taxable
income. In June 1997, these tax benefits were acquired by the purchaser of the
Canadian oil and gas properties.
F-17
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMON STOCK
Earnings per Share
The following is a reconciliation of the numerators and denominators used in
the calculation of basic and diluted earnings per share ("EPS") for income
(loss) from continuing operations for the years ended December 31, 1997, 1996
and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------- -------------------------------- --------------------------------
PER PER PER
INCOME SHARES SHARE INCOME SHARES SHARE INCOME SHARES SHARE
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------ ----------- ------------- ------ ----------- ------------- ------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BASIC EPS
Income (loss)
from continuing
operations...... $7,812 27,457 $ .28 $ (11,644) 27,257 $ (.43) $ (19,336) 27,256 $ (.71)
===== ====== ======
Dilutive
securities Stock
options......... -- 494 -- -- -- -- -- -- --
------ ------ --------- ------ --------- ------
Dilutive EPS
Income (loss)
from continuing
operations...... $7,812 27,951 $ .28 $ (11,644) 27,257 $ (.43) $ (19,336) 27,256 $ (.71)
====== ====== ===== ========= ====== ====== ========= ====== ======
</TABLE>
Certain of the Company's stock options that could potentially dilute basic
EPS in the future were not included in the computation of diluted EPS because
to do so would have been antidilutive for the periods presented.
Non-employee Directors Stock Grant Plan
During 1995, the Company established a stock grant plan for non-employee
directors. The purpose of the plan is to provide a portion of non-employee
directors compensation in Company stock. The plan will be beneficial to the
Company and its stockholders by allowing non-employee directors to have a
personal financial stake in the Company through an ownership interest in the
Company's common stock. The plan may grant an aggregate of 60,000 shares of
the Company's common stock initially held in treasury. The Company made grants
to directors under this plan of 2,500 shares in 1997, 1996 and 1995.
Stock Option Plans
The Company has three stock option plans which authorize the granting of
restricted stock and options to purchase shares. The plans through December
31, 1997 have reserved for issuance a total of 4,282,700 shares of common
stock of which 2,364,675 shares were granted and exercised, 1,656,340 shares
were granted and were outstanding and 261,685 shares were available to be
granted. Options under the plans are granted at not less than fair market
value on the date of grant. No entries are made in the accounts until the
options are exercised, at which time the proceeds are credited to common stock
and paid-in capital. Generally, the options vest over their five-year terms.
F-18
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the status of the Company's plans as of December 31, 1997, 1996
and 1995, and changes during the years ended on those dates is presented
below.
<TABLE>
<CAPTION>
1997 1996 1995
-------------------- -------------------- --------------------
WEIGHTED- WEIGHTED- WEIGHTED-
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year................ 2,331,904 $3.81 2,332,842 $4.32 1,858,447 $4.84
Granted................. 742,800 4.74 981,229 3.31 760,500 4.34
Exercised............... (797,787) 3.89 -- -- (2,660) 3.50
Reissued................ -- -- (669,229) 4.30 (129,400) 7.39
Expired................. (620,577) 3.48 (312,938) 4.53 (154,045) 5.55
--------- --------- ---------
Outstanding at end of
year................... 1,656,340 4.31 2,331,904 3.81 2,332,842 4.32
========= ========= =========
Exercisable at end of
year................... 940,850 4.14 1,526,561 4.04 1,707,312 4.41
========= ========= =========
Available for grant at
end of year............ 261,685 68,208 119,720
========= ========= =========
Weighted-average fair
value of options
granted during the
year................... 1.51 .65 1.04
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------- ---------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE AVERAGE
OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 LIFE PRICE AT 12/31/97 PRICE
- ------------------------ ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$2.88 to $7.82.......... 1,656,340 3.23 $4.31 940,850 $4.14
</TABLE>
Had compensation costs been determined based on the fair value at the grant
dates for awards made in 1997, 1996 and 1995, the Company's net income (loss)
and income (loss) per share would have been the pro forma amounts indicated
below for the years ended December 31, 1997, 1996 and 1995.
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
(IN THOUSANDS, EXCEPT
PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Net income (loss):
As reported....................................... $19,055 $(6,892) $(19,125)
Pro forma......................................... 18,578 (7,263) (19,316)
Basic and diluted income (loss) per share:
As reported....................................... $ .69 $ (.25) $ (.70)
Pro forma......................................... .67 (.27) (.71)
</TABLE>
The fair value of grants was estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted-average assumptions
used: risk-free interest rates of 5.91%, 5.33% and 6.54%, expected
volatilities of 41.07%, 32.95% and 38.11%, expected lives of 2.32, 1.59 and
1.93 years and no dividend yield in 1997, 1996 and 1995, respectively.
F-19
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Lease and Other Commitments
The Company has noncapitalized building, equipment and vehicle lease
agreements which expire from 1998 through 2005 having minimum annual payments
as of December 31, 1997 of $2.5 million for 1998, $3.9 million for 1999,
$489,000 for 2000, $396,000 for 2001, $202,000 for 2002, $42,000 each for 2003
and 2004 and $25,000 in 2005. Operating lease rental expense was $2.6 million,
$1.7 million and $1.7 million for the three years ended December 31, 1997,
1996 and 1995, respectively.
The Company has contracted for pipeline capacity of approximately 13,800 bpd
on the Express Pipeline from Hardisty, Alberta to Guernsey, Wyoming commencing
in 1997 for a period of 15 years. The Company's commitment for pipeline
capacity is approximately $5.8 million per year. The agreement allows the
Company to assign a portion of its capacity in early years for additional
capacity in later years. The Company owns a 25,000 bpd interest in a crude oil
pipeline from Guernsey, Wyoming to the refinery. The Company's share of
operating costs for the crude oil pipeline are recorded as refining operating
costs. The Company also has commitments to purchase crude oil from various
suppliers on a one month to one year basis at daily market posted prices to
meet its Refinery throughput requirements.
Concentration of Credit Risk
The Company has concentrations of credit risk with respect to sales within
the same or related industry and within limited geographic areas. The Refining
operation sells its products exclusively at wholesale, principally to
independent retailers and major oil companies located primarily in the Denver,
western Nebraska and eastern Wyoming regions, with 13% of its customers
accounting for approximately 66% of total refined product sales in 1997. The
Company extends credit to its customers based on ongoing credit evaluations.
An allowance for doubtful accounts is provided based on the current evaluation
of each customer's credit risk, past experience and other factors. During
1997, the Company made sales to CITGO Petroleum Products of approximately $72
million, which accounted for 19% of consolidated revenues.
Contribution Plans
The Company sponsors separate defined contribution plans for employees
covered by a collective bargaining agreement and employees not covered by such
an agreement. All employees may participate by contributing a portion of their
annual earnings to the plans. The Company makes basic and/or matching
contributions on behalf of participating employees. The cost of the plans for
the three years ended December 31, 1997, 1996 and 1995 was $1.3 million, $1.2
million and $1.4 million, respectively.
Environmental
The Company accrues for environmental costs as indicated in Note 1. Numerous
local, state and federal laws, rules and regulations relating to the
environment are applicable to the Company's operations. As a result, the
Company falls under the jurisdiction of numerous state and federal agencies
and is exposed to the possibility of judicial or administrative actions for
remediation and/or penalties brought by those agencies. The Refinery is party
to one consent decree requiring the investigation and, in certain instances,
mitigation of environmental impacts resulting from past operational
activities. The Company has been and will be responsible for costs related to
compliance with or remediations resulting from environmental regulations.
There are currently no identified environmental remediation projects of which
the costs can be reasonably estimated. However, the continuation of the
present investigative process, other more extensive investigations over time
or changes in regulatory requirements could result in future liabilities.
F-20
<PAGE>
FRONTIER OIL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Litigation
The Company is involved in various lawsuits which are incidental to its
business. In management's opinion, the adverse determination of such lawsuits
would not have a material adverse effect on the Company's financial position
or results of operations.
Collective Bargaining Agreement Expiration
The Company's refining unit hourly employees are represented by seven
bargaining units, the largest being the Oil, Chemical and Atomic Workers
International Union ("OCAW"). Six AFL-CIO affiliated unions represent the
craft workers. In July 1996, the Company concluded new bargaining agreements,
with the three-year OCAW agreement to expire in July 1999, while the six-year
AFL-CIO contract expires in June 2002. The union employees represent
approximately 58% of the Company's work force at December 31, 1997.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Company's Senior Notes, Convertible Subordinated
Debentures and 10-3/4% Subordinated Debentures was estimated based on
quotations obtained from broker-dealers who make markets in these and similar
securities. The bank credit facilities are based on floating interest rates
and, as such, the carrying amount is a reasonable estimate of fair value. At
December 31, 1997 and 1996, the carrying amounts of long-term debt instruments
(including current maturities) were $70.6 million and $148.4 million,
respectively, and the estimated fair values were $72.0 million and $145.0
million.
As of December 31, 1997, the Company had entered into futures contracts to
hedge a portion of its natural gas consumption requirements. The futures
contracts are placed with a major financial institution the Company believes
is a minimum credit risk. The futures contracts mature each month through
April 1998. The fair value of the Company's open natural gas futures contract
at December 31, 1997 was $(281,000).
9. SUBSEQUENT EVENTS
Debt Refinancing
February 9, 1998, the Company issued $70 million of 9-1/8% Senior Notes due
2006. On February 10, 1998, the Company called for redemption the remaining
$24.6 million of its Senior Notes and $46 million of its Convertible
Subordinated Debentures outstanding at December 31, 1997 (together, the
"Redemptions"). The Redemptions were completed on March 12, 1998. Holders of
$731,000 of 7 3/4% Convertible Subordinated Debentures elected to convert into
83,542 shares of the Company's common stock. The Company used the net proceeds
from the issuance of the 9 1/8% Senior Notes and available cash to fund the
Redemptions.
F-21
<PAGE>
SELECTED QUARTERLY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
1997 1996
-------------------------------- ------------------------------------
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST
------- -------- ------- ------- -------- -------- -------- -------
(UNAUDITED, DOLLARS IN THOUSANDS EXCEPT PER SHARE)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $82,410 $108,108 $96,330 $89,570 $100,448 $107,039 $100,320 $75,566
Operating income (loss). 3,489 14,743 9,045 (5,574) (513) 3,178 5,921 (3,001)
Income (loss) from
continuing operations.. 1,505 11,806 4,534 (10,033) (4,716) (1,262) 1,545 (7,211)
Income from discontinued
operations, net of
taxes (1).............. -- -- 13,606 1,554 2,497 294 192 1,769
Income (loss) before
extraordinary item..... 1,505 11,806 18,140 (8,479) (2,219) (968) 1,737 (5,442)
Extraordinary loss, net
of taxes............... 1,295 2,622 -- -- -- -- -- --
Net income (loss)....... 210 9,184 18,140 (8,479) (2,219) (968) 1,737 (5,442)
Basic and diluted
earnings (loss) per
share:
Continuing operations.. 0.05 0.42 0.17 (0.37) (0.17) (0.05) 0.06 (0.26)
Net income (loss)...... 0.01 0.33 0.66 (0.31) (0.08) (0.04) 0.06 (0.20)
EBITDA from continuing
operations (2)......... 5,826 17,037 11,311 (3,301) 1,740 5,467 8,186 (790)
Net cash provided by
(used in) operating
activities............. 5,698 11,620 9,245 (14,065) 14,420 1,358 1,140 (8,453)
</TABLE>
- --------
(1) Discontinued operations reflected in the above periods represent the
Company's oil and gas operating segment, comprising the Canadian and
United States oil and gas properties. On June 16, 1997, the Company
completed the Canadian Disposition. The Company completed the U.S.
Disposition during 1995.
(2) EBITDA from continuing operations represents income from continuing
operations before interest expense, income tax and depreciation and
amortization. The Company has reported EBITDA from continuing operations
because it believes EBITDA is a measure commonly reported and widely used
by investors and other interested parties as an indicator of a company's
operating performance and ability to incur and service debt. The Company
believes EBITDA assists such investors in comparing a company's
performance on a consistent basis without regard to depreciation and
amortization, which can vary significantly depending upon accounting
methods (particularly when acquisitions are involved) or nonoperating
factors (such as historical cost). However, EBITDA is not a calculation
based on generally accepted accounting principles ("GAAP") and should not
be considered an alternative to net income in measuring the Company's
performance or used as an exclusive measure of cash flow because it does
not consider the impact of working capital growth, capital expenditures,
debt principal reductions and other sources and uses of cash which are
disclosed in the Company's Consolidated Statements of Cash Flows.
Investors should carefully consider the specific items included in the
Company's definition of EBITDA and that the Company is only reporting
EBITDA generated from its continuing operations. While EBITDA has been
disclosed herein to permit a more complete comparative analysis of the
Company's operating performance and debt servicing ability relative to
other companies, investors should be cautioned that EBITDA from continuing
operations as reported by the Company may not be comparable in all
instances to EBITDA, and other similar titled measure, as reported by
other companies. The Company believes that the most important trends
illustrated by presenting EBITDA from continuing operations are (i) the
higher level of debt coverage which would have occurred in past periods
given the Company's recently deleveraged financial position and (ii) the
high degree of correlation between the light/heavy spread and the
Company's EBITDA from continuing operations and operating income.
F-22
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
ALL TENDERED OLD NOTES, EXECUTED LETTERS OF TRANSMITTAL AND OTHER RELATED
DOCUMENTS SHOULD BE DIRECTED TO THE EXCHANGE AGENT. QUESTIONS AND REQUESTS FOR
ASSISTANCE AND REQUESTS FOR ADDITIONAL COPIES OF THE PROSPECTUS, THE LETTER OF
TRANSMITTAL AND OTHER RELATED DOCUMENTS SHOULD BE ADDRESSED TO THE EXCHANGE
AGENT AS FOLLOWS:
By Mail:
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
P.O. Box 2320
Dallas, Texas
75221-2320
Attention: Frank Ivins
Registered Bond Events
By Overnight Courier or Hand Delivery:
CHASE BANK OF TEXAS, NATIONAL ASSOCIATION
One Main Place
1201 Main Street, 18th Floor
Dallas, Texas 75202
Attention: Frank Ivins
Registered Bond Events
By Facsimile Transmission:
(for Eligible Institutions only)
(214) 672-5932
Attention: Frank Ivins
Confirm by Telephone:
(214) 672-5678
(Originals of all documents submitted by facsimile should be sent promptly by
hand, overnight delivery, or registered or certified mail.)
------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS.
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE INITIAL PURCHASER OR ANY OF ITS
AFFILIATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION TO BUY, THE NOTES IN ANY JURISDICTION WHERE SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION
THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS
OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$70,000,000
EXCHANGE OFFER
FRONTIER OIL
CORPORATION
(FORMERLY KNOWN AS WAINOCO OIL CORPORATION)
9 1/8% SENIOR NOTES
DUE 2006, SERIES A
-----------------
PROSPECTUS
-----------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary......................................................... 1
Disclosure Regarding Forward-Looking Statements............................ 12
Risk Factors............................................................... 12
The Exchange Offer......................................................... 19
Use of Proceeds............................................................ 28
Capitalization............................................................. 28
Selected Historical Financial Data......................................... 29
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 31
Business................................................................... 36
Management................................................................. 51
Principal Shareholders..................................................... 53
Description of Indebtedness................................................ 55
Description of the Notes................................................... 56
Certain United States Federal Income Tax Considerations.................... 83
Certain United States Federal Income Tax Consideration for Non-United
States Holders............................................................ 86
Plan of Distribution....................................................... 88
Legal Matters.............................................................. 88
Experts.................................................................... 88
Available Information...................................................... 89
Index to Financial Statements.............................................. F-1
</TABLE>
May 14, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
