<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from _______ to _______.
Commission File Number: 1-10398
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 86-0642718
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
23733 North Scottsdale Road, Scottsdale, Arizona 85255
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(480) 585-8888
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [ ]
Number of Common Shares outstanding at October 31, 1999: 10,432,588 shares.
<PAGE>
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 (Unaudited) and December 31, 1998
Condensed Consolidated Statements of Earnings (Loss)
Three and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 6 - Exhibits and Reports on Form 8-K
SIGNATUR
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 30,608 $ 55,697
Receivables, net....................................... 76,847 50,195
Inventories............................................ 63,040 51,349
Prepaid expenses and other............................. 4,524 7,860
Deferred income taxes.................................. 6,625 6,625
--------- ---------
Total current assets................................ 181,644 171,726
--------- ---------
Property, plant and equipment............................ 471,006 439,940
Less accumulated depreciation and amortization......... (155,824) (138,008)
--------- ---------
315,182 301,932
--------- ---------
Goodwill, net............................................ 22,085 22,902
Other assets............................................. 26,149 29,225
--------- ---------
$ 545,060 $ 525,785
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt...................... $ 296 $ 1,200
Accounts payable....................................... 77,362 42,903
Accrued expenses....................................... 37,894 36,519
--------- ---------
Total current liabilities........................... 115,552 80,622
--------- ---------
Long-term debt, net of current portion................... 258,443 282,484
Deferred income taxes.................................... 30,003 26,793
Other liabilities and deferred income.................... 6,487 8,184
Commitments and contingencies (Notes 5 and 6)
Common stockholders' equity.............................. 134,575 127,702
--------- ---------
$ 545,060 $ 525,785
========= =========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(Unaudited)
(In thousands except per share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net revenues........................... $ 214,503 $ 167,461 $ 564,706 $ 470,191
Cost of products sold.................. 160,064 119,139 397,090 337,639
---------- ---------- ---------- ----------
Gross margin........................... 54,439 48,322 167,616 132,552
Operating expenses..................... 28,771 26,424 84,867 75,578
Depreciation and amortization.......... 7,487 7,664 22,666 21,227
Selling, general and administrative
expenses............................. 7,296 6,432 22,622 18,484
Write-off of merger costs.............. 1,053 1,053
Loss on write-off of assets............ 1,950
---------- ---------- ---------- ----------
Operating income....................... 10,885 6,749 35,511 16,210
Interest expense, net.................. 5,205 6,046 16,308 17,454
---------- ---------- ---------- ----------
Earnings (loss) before income taxes.... 5,680 703 19,203 (1,244)
Provision (benefit) for income taxes... 2,215 282 7,475 (742)
---------- ---------- ---------- ----------
Net earnings (loss).................... $ 3,465 $ 421 $ 11,728 $ (502)
========== ========== ========== ==========
Net earnings (loss) per common share:
Basic................................ $ 0.32 $ 0.04 $ 1.09 $ (0.05)
========== ========== ========== ==========
Assuming dilution.................... $ 0.32 $ 0.04 $ 1.08 $ (0.05)
========== ========== ========== ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
Nine Months Ended
September 30,
--------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................................. $ 11,728 $ (502)
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities:
Depreciation and amortization............................... 22,666 21,227
Deferred income taxes....................................... 3,210 (200)
Loss (gain) on disposal of assets........................... 1,718 (320)
Other....................................................... (377) 441
Changes in operating assets and liabilities,
net of the effects of acquisitions:
Increase in receivables................................... (26,369) (2,349)
(Increase) decrease in inventories........................ (11,485) 7,354
Decrease (increase) in prepaid expenses and other......... 3,141 (5)
Increase (decrease) in accounts payable................... 34,459 (10,679)
Increase in accrued expenses.............................. 3,412 24,460
-------- --------
Net cash provided by operating activities......................... 42,103 39,427
-------- --------
Cash flows from investing activities:
Acquisitions, net of cash received.............................. (38,205)
Purchases of property, plant and equipment and other assets..... (31,190) (49,825)
Refinery acquisition contingent payment......................... (7,289) (7,244)
Proceeds from sale of property, plant and equipment............. 1,135 2,571
-------- --------
Net cash used by investing activities............................. (37,344) (92,703)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt.................................... 18,000
Payments of long-term debt...................................... (24,944) (29,309)
Payment of dividends............................................ (2,199)
Purchase of treasury stock...................................... (4,950) (1,179)
Proceeds from exercise of stock options......................... 96
Deferred financing costs........................................ (50) (67)
-------- --------
Net cash used by financing activities............................. (29,848) (14,754)
-------- --------
Net decrease in cash and cash equivalents......................... (25,089) (68,030)
Cash and cash equivalents:
Beginning of period............................................. 55,697 82,592
-------- --------
End of period................................................... $ 30,608 $ 14,562
======== ========
Non-cash Investing and Financing Activities. In the second quarter of 1999 the Company received
87,036 shares of its own common stock valued at approximately $975,000 from two officers of the
Company as payment for the exercise of 108,857 common stock options. These shares were
immediately cancelled.
See accompanying notes to condensed consolidated financial statements.
</TABLE
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION:
Giant Industries, Inc., a Delaware corporation ("Giant" or, together
with its subsidiaries, the "Company"), through its wholly-owned subsidiary
Giant Industries Arizona, Inc. ("Giant Arizona"), is engaged in the refining
and marketing of petroleum products in New Mexico, Arizona, Colorado and
Utah, with a concentration in the Four Corners where these states adjoin. In
addition, Phoenix Fuel Co., Inc. ("Phoenix Fuel"), a wholly-owned subsidiary
of Giant Arizona, operates an industrial/commercial petroleum fuels and
lubricants distribution operation. (See Note 2 for further discussion of
Company operations.)
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include
all of the information and notes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments and reclassifications considered necessary for a fair and
comparable presentation have been included and are of a normal recurring
nature. Operating results for the nine months ended September 30, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. The enclosed financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was originally to be
effective for the Company's financial statements as of January 1, 2000. In
June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of Effective Date of FASB
Statement No. 133." The SFAS No. 137 defers the effective date of SFAS No.
133 by one year in order to give companies more time to study, understand and
implement the provisions of SFAS No. 133 and to complete information system
modifications. The SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. It
requires that entities record all derivatives as either assets or
liabilities, measured at fair value, with any change in fair value recognized
in earnings or in other comprehensive income, depending on the use of the
derivative and whether it qualifies for hedge accounting. If certain
conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the
foreign currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or a foreign-
currency-denominated forecasted transaction.
Under this Statement, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use
for assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. The Company
is in the process of evaluating the effects that this Statement will have on
its financial reporting and disclosures.
Certain reclassifications have been made to the 1998 financial
statements and notes to conform to the statement classifications used in
1999.
<PAGE>
NOTE 2 - COMPANY OPERATIONS
The Company is organized into three operating segments based on
manufacturing and marketing criteria. These segments are the Refining Group,
the Retail Group and Phoenix Fuel. A description of each segment and its
principal products and operations are as follows:
- Refining Group: The Refining Group consists of the Company's two
refineries, its fleet of crude oil and finished product truck transports, its
crude oil pipeline gathering operations and its finished product terminalling
operations. The Company's two refineries manufacture various grades of
gasoline, diesel fuel, jet fuel and other products from crude oil, other
feedstocks and blending components. These products are sold through company-
operated retail facilities, independent wholesalers and retailers,
industrial/commercial accounts and sales and exchanges with major oil
companies. Crude oil, other feedstocks and blending components are purchased
from third party suppliers.
- Retail Group: The Retail Group consists of service station/convenience
stores and one travel center. These operations sell various grades of
gasoline, diesel fuel, general merchandise and food products to the general
public through retail locations. The petroleum fuels sold by the Retail Group
are supplied by the Refining Group, which either manufactures these refined
products or acquires them through exchange arrangements, third party
purchases, or from Phoenix Fuel. General merchandise and food products are
obtained from third party suppliers.
- Phoenix Fuel: Phoenix Fuel is an industrial/commercial petroleum fuels
and lubricants distribution operation, which includes a number of bulk
distribution plants, an unattended fleet fueling ("cardlock") operation and a
fleet of finished product truck transports. The petroleum fuels and
lubricants sold are primarily obtained from third party suppliers and to a
lesser extent from the Refining Group.
Operations that are not included in any of the three segments are
included in the category "Other" and consist primarily of corporate office
operations, including selling, general and administrative expenses of
$6,385,000 and $6,479,000 for the three months ended September 30, 1999 and
1998, respectively, and $20,432,000 and $16,920,000 for the nine months ended
September 30, 1999 and 1998, respectively.
Operating income for each segment consists of net revenues less cost of
products sold, operating expenses, depreciation and amortization and the
segment's selling, general and administrative expenses. The sales between
segments are made at market prices. Cost of products sold reflect current
costs adjusted for LIFO and lower of cost or market inventory adjustments.
The total assets of each segment consist primarily of net property,
plant and equipment, inventories, accounts receivable and other assets
directly associated with the segment's operations. Included in the total
assets of the corporate office operations are a majority of the Company's
cash and cash equivalents, various accounts receivable, net property, plant
and equipment and other long-term assets.
<PAGE>
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals for the three months ended
September 30, 1999 and 1998, are presented below.
</TABLE>
<TABLE>
<CAPTION>
As of and for the Three Months Ended September 30, 1999 (In thousands)
------------------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- -------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $ 57,280 $ 91,739 $ 65,385 $ 99 $214,503
Intersegment net revenues........... 55,056 10,352 $(65,408)
-------- -------- -------- ------- -------- --------
Total net revenues.................. $112,336 $ 91,739 $ 75,737 $ 99 $(65,408) $214,503
-------- -------- -------- ------- -------- --------
Operating income.................... $ 14,107 $ 1,310 $ 1,754 $(6,286) $ 10,885
Interest expense.................... (5,944)
Interest income.................... 739
--------
Earnings before income taxes........ $ 5,680
--------
Depreciation and amortization....... $ 3,950 $ 2,175 $ 570 $ 792 $ 7,487
Capital expenditures................ $ 1,035 $ 9,353 $ 775 $ 290 $ 11,453
</TABLE>
<TABLE>
<CAPTION>
As of and for the Three Months Ended September 30, 1998 (In thousands)
------------------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $ 47,875 $ 78,791 $ 40,567 $ 228 $167,461
Intersegment net revenues........... 37,577 506 2,453 $(40,536)
-------- -------- -------- ------- -------- --------
Total net revenues.................. $ 85,452 $ 79,297 $ 43,020 $ 228 $(40,536) $167,461
-------- -------- -------- ------- -------- --------
Operating income.................... $ 8,441 $ 3,959 $ 600 $(6,251) $ 6,749
Interest expense.................... (6,227)
Interest income.................... 181
--------
Earnings before income taxes........ $ 703
--------
Depreciation and amortization....... $ 3,731 $ 2,599 $ 491 $ 843 $ 7,664
Capital expenditures................ $ 7,139 $ 3,733 $ 591 $ 251 $ 11,714
</TABLE>
<PAGE>
Disclosures regarding the Company's reportable segments with
reconciliations to consolidated totals for the nine months ended
September 30, 1999 and 1998, are presented below.
<TABLE>
<CAPTION>
As of and for the Nine Months Ended September 30, 1999 (In thousands)
-----------------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $143,706 $245,961 $174,835 $ 204 $564,706
Intersegment net revenues........... 132,842 13,898 $(146,740)
-------- -------- -------- -------- --------- --------
Total net revenues.................. $276,548 $245,961 $188,733 $ 204 $(146,740) $564,706
-------- -------- -------- -------- --------- --------
Operating income.................... $ 44,757 $ 5,900 $ 7,032 $(20,228) $ (1,950) $ 35,511
Interest expense.................... (18,112)
Interest income..................... 1,804
--------
Earnings before income taxes........ $ 19,203
--------
Depreciation and amortization....... $ 11,662 $ 6,531 $ 1,689 $ 2,784 $ 22,666
Total assets........................ $260,141 $138,868 $ 72,633 $ 73,418 $545,060
Capital expenditures................ $ 6,342 $ 20,887 $ 1,341 $ 2,620 $ 31,190
</TABLE>
<TABLE>
<CAPTION>
As of and for the Nine Months Ended September 30, 1998 (In thousands)
-----------------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
-------- -------- ------- ------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Customer net revenues............... $143,493 $199,384 $127,092 $ 222 $470,191
Intersegment net revenues........... 97,097 1,876 6,631 $(105,604)
-------- -------- -------- -------- --------- --------
Total net revenues.................. $240,590 $201,260 $133,723 $ 222 $(105,604) $470,191
-------- -------- -------- -------- --------- --------
Operating income.................... $ 20,317 $ 9,143 $ 3,448 $(16,698) $ 16,210
Interest expense.................... (18,959)
Interest income..................... 1,505
--------
Earnings before income taxes........ $ (1,244)
--------
Depreciation and amortization....... $ 10,477 $ 6,790 $ 1,452 $ 2,508 $ 21,227
Capital expenditures................ $ 35,519 $ 11,756 $ 1,671 $ 915 $ 49,861
</TABLE
<PAGE>
NOTE 3 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for net earnings (loss):
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common
share - basic
Net earnings............. $3,465,000 10,667,009 $0.32 $421,000 10,972,428 $0.04
Effect of dilutive
stock options.......... 70,840 111,733
---------- ---------- ----- -------- ---------- -----
Earnings per common
share - assuming dilution
Net earnings............. $3,465,000 10,737,849 $0.32 $421,000 11,084,161 $0.04
========== ========== ===== ======== ========== =====
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------------------------------------
1999 1998
-------------------------------- --------------------------------
Per Per
Earnings Shares Share Loss Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------- ------------- ------ ----------- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Earnings (loss) per common
share - basic
Net earnings (loss)...... $11,728,000 10,784,444 $1.09 $(502,000) 10,986,244 $(0.05)
Effect of dilutive
stock options.......... 46,400 *
----------- ---------- ----- --------- ---------- ------
Earnings (loss) per common
share - assuming dilution
Net earnings (loss)...... $11,728,000 10,830,844 $1.08 $(502,000) 10,986,244 $(0.05)
=========== ========== ===== ========= ========== ======
</TABLE>
*Additional shares would be antidilutive due to the net loss.
There were no transactions subsequent to September 30, 1999, that if the
transactions had occurred before September 30, 1999, would materially change
the number of common shares or potential common shares outstanding as of
September 30, 1999.
<PAGE>
NOTE 4 - INVENTORIES:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(In thousands)
<S> <C> <C>
Inventories consist of the following:
First-in, first-out ("FIFO") method:
Crude oil............................ $11,271 $ 8,419
Refined products..................... 28,968 17,956
Refinery and shop supplies........... 10,201 9,648
Merchandise.......................... 4,573 4,568
Retail method:
Merchandise.......................... 8,179 7,460
------- -------
63,192 48,051
Adjustment for last-in,
first-out("LIFO") method............. (152) 14,758
Allowance for lower of cost
or market............................ (11,460)
------- -------
$63,040 $51,349
======= =======
</TABLE>
The portion of inventories valued on a LIFO basis totaled $37,872,000
and $30,423,000 at September 30, 1999 and December 31, 1998, respectively.
The following data will facilitate comparison with the operating results of
companies using the FIFO method of inventory valuation.
If inventories had been determined using the FIFO method at September
30, 1999 and 1998, net earnings and diluted earnings per share for the three
months ended September 30, 1999 and 1998 would have been higher by $2,500,000
and $0.23, and $428,000 and $0.04, respectively, and the net earnings and
diluted earnings per share for the nine months ended September 30, 1999 and
the net loss and diluted loss per share for the nine months ended September
30, 1998 would have been higher by $2,070,000 and $0.19, and $1,406,000 and
$0.13 respectively.
<PAGE>
NOTE 5 - LONG-TERM DEBT:
The Company has issued $150,000,000 of 9% senior subordinated notes due
2007 (the "9% Notes") and $100,000,000 of 9 3/4% senior subordinated notes
due 2003 (the "9 3/4% Notes", and collectively with the 9% Notes, the
"Notes"). The Indentures supporting the Notes contain restrictive covenants
that, among other things, restrict the ability of the Company and its
subsidiaries to create liens, to incur or guarantee debt, to pay dividends,
to repurchase shares of the Company's common stock, to sell certain assets or
subsidiary stock, to engage in certain mergers, to engage in certain
transactions with affiliates or to alter the Company's current line of
business. At September 30, 1999, the Company was in compliance with the
covenants relating to these Notes.
The Company had been precluded from making restricted payments from the
third quarter of 1998 until June 30, 1999, because it did not satisfy a
financial ratio test contained in one of the covenants relating to the 9 3/4%
Notes. This included the payment of dividends and the repurchase of shares of
the Company's common stock. The terms of the Indenture also had restricted
the amount of money the Company could otherwise borrow during this period.
The Company is no longer subject to these restrictions, as the Company
currently satisfies the requirements of the covenant's financial ratio test.
Subject to certain conditions, the Company is obligated to offer to
purchase a portion of the Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase, with the net cash proceeds of certain sales or other dispositions
of assets. Upon a change of control, the Company would be required to offer
to purchase all of the Notes at 101% of the principal amount thereof, plus
accrued interest, if any, to the date of purchase.
In December 1998, the Company and FFCA Capital Holding Corporation
("FFCA") completed a sale-leaseback transaction in which the Company sold
eighty-three service station/convenience stores to FFCA and leased them back.
Net proceeds to the Company, after expenses, were approximately $50,100,000.
In the third quarter of 1999, the Company repurchased nine of the service
station/convenience stores for approximately $7,100,000.
In accordance with the Indentures supporting the Notes, the Company is
required to use the net proceeds from the FFCA sale-leaseback transaction
described above, less $10,000,000, to either make a permanent reduction in
senior indebtedness (as defined in the respective Indentures), or make an
investment in capital assets used in the Company's principal business (as
defined in the respective Indentures). To the extent that a sufficient
portion of the net proceeds are not utilized for these purposes before
certain time periods expire, the Company would be required to offer to
repurchase the senior subordinated notes as stipulated in the Indentures.
Prior to the expiration dates, the Company used a sufficient portion of the
net proceeds from the FFCA transaction to invest in capital assets and to
reduce senior indebtedness and is not required to offer to repurchase the
senior subordinated notes.
Repayment of the Notes is jointly and severally guaranteed on an
unconditional basis by the Company's direct and indirect wholly-owned
subsidiaries, subject to a limitation designed to ensure that such guarantees
do not constitute a fraudulent conveyance. Except as otherwise allowed in the
Indenture pursuant to which the Notes were issued, there are no restrictions
on the ability of such subsidiaries to transfer funds to the Company in the
form of cash dividends, loans or advances. General provisions of applicable
state law, however, may limit the ability of any subsidiary to pay dividends
or make distributions to the Company in certain circumstances.
No separate financial statements of the subsidiaries are included herein
because the aggregate assets, liabilities, earnings, and equity of the
subsidiaries are substantially equivalent to the assets, liabilities,
earnings, and equity of the Company on a consolidated basis; the subsidiaries
are jointly and severally liable for the repayment of the Notes; and the
separate financial statements and other disclosures concerning the
subsidiaries are not deemed material to investors.
<PAGE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES:
Various legal actions, claims, assessments and other contingencies
arising in the normal course of the Company's business, including those
matters described below, are pending against the Company and certain of its
subsidiaries. Certain of these matters involve or may involve significant
claims for compensatory, punitive or other damages. These matters are subject
to many uncertainties, and it is possible that some of these matters could be
ultimately decided, resolved or settled adversely. The Company has recorded
accruals for losses related to those matters that it considers to be probable
and that can be reasonably estimated. Although the ultimate amount of
liability at September 30, 1999, which may result from these matters is not
ascertainable, the Company believes that any amounts exceeding the Company's
recorded accruals should not materially affect the Company's financial
condition. It is possible that the ultimate resolution of these matters could
result in a material adverse effect on the Company's results of operations
for a particular reporting period.
Federal, state and local laws and regulations relating to health and the
environment affect nearly all of the operations of the Company. As is the
case with all companies engaged in similar industries, the Company faces
significant exposure from actual or potential claims and lawsuits involving
environmental matters. These matters include soil and water contamination,
air pollution and personal injuries or property damage allegedly caused by
substances manufactured, handled, used, released or disposed of by the
Company. Future expenditures related to health and environmental matters
cannot be reasonably quantified in many circumstances for various reasons,
including the speculative nature of remediation and clean-up cost estimates
and methods, imprecise and conflicting data regarding the hazardous nature of
various types of substances, the number of other potentially responsible
parties involved, various defenses which may be available to the Company and
changing environmental laws and interpretations of environmental laws.
On October 1, 1999, the State of New Mexico filed a lawsuit in the
United States District Court for the District of New Mexico, and a separate
lawsuit in the Second Judicial District Court, County of Bernalillo, State of
New Mexico, against numerous entities, including General Electric Company,
ACF Industries, Inc., Chevron Corporation, Texaco Refining and Marketing,
Inc., Phillips Petroleum Company, Ultramar Diamond Shamrock Corporation, the
United States Department of Energy, the Untied States Department of Defense,
the United States Air Force and the Company. The lawsuits relate to alleged
releases of pollutants at the South Valley Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") Superfund site in
Albuquerque, New Mexico. The South Valley Superfund site includes
contamination that allegedly originated from a number of facilities,
including a GE Aircraft Engines/U.S. Air Force facility and a petroleum
products terminal (the "Albuquerque Terminal") that was acquired by the
Company in 1995 from Texaco Refining and Marketing Inc. ("Texaco"). The
lawsuits allege that the defendants released or threatened to release
hazardous substances into the environment, causing injury to surface water,
groundwater and soil which are natural resources of the state. In the federal
court lawsuit, the state seeks monetary damages under CERCLA for all past,
present and future damages to these natural resources, plus interest, costs
and attorneys' fees. The state court complaint contains claims for trespass,
public nuisance, interference with natural resources held in trust by the
state, negligence, strict liability, unjust enrichment and punitive damages.
The state seeks various monetary damages in connection with these claims,
including natural resources damages, loss of use of property and natural
resources, loss of tax revenues, lost profits, punitive damages and
attorneys' fees and costs. Although neither complaint calculates the amount
of damages being sought by the state, a preliminary assessment of alleged
damages to natural resources conducted by the New Mexico Office of the
Natural Resources Trustee estimated these damages at $260,000,000. Liability
for natural resource damages under CERCLA is joint and several, such that a
responsible party may be liable for all natural resource damages at a site
even though it was responsible for only a small part of such damages.
Texaco agreed to defend, indemnify, reimburse and hold the Company
harmless from and against all claims and damages arising from, or caused by,
pre-closing contamination at the Albuquerque Terminal. Texaco has
acknowledged this obligation, subject to any evidence that alleged releases
resulted from the Company's operations. The Company believes that any damages
associated with the South Valley Superfund site relate to releases that
predate the Company's acquisition of the Albuquerque Terminal and,
accordingly, does not believe that it needs to record a liability in
connection with the two lawsuits.
In May 1991, the Environmental Protection Agency ("EPA") notified the
Company that it may be a potentially responsible party for the release, or
threatened release, of hazardous substances, pollutants or contaminants at
the Lee Acres Landfill (the "Landfill") CERCLA Superfund site. The Landfill
is adjacent to the Company's inactive Farmington refinery. This refinery was
operated until 1982. Although a final plan of action for the Superfund site
has not yet been adopted by the Bureau of Land Management (the "BLM"), the
owner of the Landfill, BLM developed a proposed plan of action in 1996, which
it projected would cost approximately $3,900,000 to implement. This cost
projection is based on certain assumptions which may or may not prove to be
correct and is contingent on confirmation that the remedial actions, once
implemented, are adequately addressing Landfill contamination. For example,
if assumptions regarding groundwater mobility and contamination levels are
incorrect, BLM is proposing to take additional remedial actions with an
estimated cost of approximately $1,800,000.
In 1989, a consultant to the Company estimated, based on various
assumptions, that the Company's share of potential liability could be
approximately $1,200,000. This figure was based upon estimated Landfill
remediation costs significantly higher than those being proposed by BLM. The
figure was also based on the consultant's evaluation of such factors as
available clean-up technology, BLM's involvement at the site and the number
of other entities that may have had involvement at the site, but did not
include an analysis of all of the Company's potential legal defenses and
arguments, including possible setoff rights.
Potentially responsible party liability is joint and several, such that
a responsible party may be liable for all of the clean-up costs at a site
even though the party was responsible for only a small part of such costs.
Although it is possible that the Company may ultimately incur liability for
clean-up costs associated with the Landfill, a reasonable estimate of the
amount of this liability, if any, cannot be made at this time because, among
other reasons, the final site remedy has not been selected, a number of
entities had involvement at the site, allocation of responsibility among
potentially responsible parties has not yet been made, and potentially-
applicable factual and legal issues have not been resolved. Accordingly, the
Company has not accrued a liability in relation to BLM's proposed plan.
In June, 1999, the New Mexico Oil Conservation Division ("OCD") approved
the closure of lead remediation activities at a 5.5 acre site that the
Company owns in Bloomfield, New Mexico. This approval was conditioned upon
the Company's submission of a work plan to define the extent of petroleum
contamination in the soil and groundwater which was discovered at the site in
1995. The Company has submitted the requested work plan and is awaiting OCD
approval.
The Company has an environmental liability accrual of approximately
$2,400,000. Approximately $800,000 relates to ongoing environmental projects,
including the remediation of a hydrocarbon plume that appears to extend no
more than 1,800 feet south of the inactive Farmington refinery and
hydrocarbon contamination on and adjacent to the 5.5 acres that the Company
owns in Bloomfield, New Mexico. The remaining $1,600,000 relates to an
originally estimated liability of approximately $2,300,000, recorded in the
second quarter of 1996, for certain environmental obligations assumed in the
acquisition of the Bloomfield refinery. That amount was recorded as an
adjustment to the purchase price and allocated to the assets acquired. The
environmental accrual is recorded in the current and long-term sections of
the Company's Consolidated Balance Sheets.
The Company is subject to audit on an ongoing basis of the various
taxes that it pays to federal, state, local and tribal governments. These
audits may result in assessments or refunds along with interest and
penalties. In some cases the jurisdictional basis of the taxing authority is
in dispute and is the subject of litigation or administrative appeals. The
Company has received several tax notifications and assessments from the
Navajo Tribe relating to Company operations outside the boundaries of the
Navajo Indian Reservation in an area of disputed jurisdiction, including a
$1,800,000 severance tax assessment (including interest and penalties through
the date of the assessment) issued in November 1991, and a $3,400,000
severance tax assessment (including interest and penalties through the date
of the assessment) issued in May 1999, both of which relate to crude oil
removed from properties located within this area. The Company has invoked its
appeal rights with the Tribe's Tax Commission in connection with the
severance tax assessments and intends to oppose the assessments. Although it
is probable that the Company will incur liability in connection with tax
notifications and assessments from the Navajo Tribe relating to the area of
disputed jurisdiction, it is not possible to reasonably estimate the amount
of any obligation for such taxes at this time because the Navajo Tribe's
authority to impose taxes throughout this area has not been legally
established and all potentially-applicable factual issues have not been
resolved. The Company has accrued a liability for assessments that it has
received from the Navajo Tribe for substantially less than the amount of the
assessments. It is possible that the Company's assessments will have to be
litigated by the Company before final resolution. In addition, the Company
may receive further tax assessments. The Company may potentially be able to
request reimbursement from third party oil lease interest owners in
connection with any severance tax amounts ultimately paid by the Company that
relate to purchases from the interest owners.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
EARNINGS (LOSS) BEFORE INCOME TAXES
- -----------------------------------
For the three months ended September 30, 1999, earnings before income
taxes were $5,680,000, an increase of $4,977,000 from earnings before income
taxes of $703,000 for the three months ended September 30, 1998. This
increase was primarily due to (i) a 48% increase in refinery margins, (ii)
the recording of a reimbursement for lost earnings under the Company's
business interruption insurance policy, and (iii) increased operating income
from Phoenix Fuel. In addition, 1998 earnings reflected the write-off of
costs incurred in connection with the terminated merger with Holly
Corporation. The increase in earnings was offset in part by a 12% decline in
refinery sourced finished product sales volumes, a 20% decline in retail fuel
margins, and an increase in operating expenses. The decline in refinery
sourced finished product fuel volumes was due in part to increased refinery
production in the third quarter of 1998 following a major refinery turnaround
in the 1998 second quarter.
For the nine months ended September 30, 1999, earnings before income
taxes were $19,203,000, an increase of $20,447,000 from a loss before income
taxes of $1,244,000 for the nine months ended September 30, 1998. This
increase was primarily due to (i) a 46% increase in refinery margins, (ii)
increased operating income from Phoenix Fuel, and (iii) increased merchandise
sales from service station/convenience stores that were in operation for the
full nine months in each period. In addition, 1998 earnings reflected the
write-off of costs incurred in connection with the terminated merger with
Holly Corporation. The increase in earnings was offset in part by increased
operating and administrative expenses, and the write-off of $1,950,000 in net
book value of assets that were either demolished for new construction or
replaced with new systems.
REVENUES
- --------
Revenues for the three months ended September 30, 1999, increased
approximately $47,042,000 or 28% to $214,503,000 from $167,461,000 in the
comparable 1998 period. The increase is due to, among other things, a 50%
increase in refinery weighted average selling prices; a 14% increase in
wholesale fuel volumes sold by Phoenix Fuel, along with a 39% increase in
weighted average selling prices; and a 6% increase in merchandise sales from
service station/convenience stores that were in operation for the full three
months in each period. This increase was offset in part by a 12% decline in
refinery sourced finished product sales volumes.
The volumes of refined products sold through the Company's retail units
during this period was relatively flat compared with 1998 levels. The volume
of finished product sold from the Company's travel center increased 11%, due
in large part to improved marketing programs. Finished product sales volumes
from service station/convenience stores that were in operation for the full
three months in each period declined approximately 8%. This decrease was
partially offset by finished product sales from service station/convenience
stores that were constructed, remodeled or acquired within the last fifteen
months.
Revenues for the nine months ended September 30, 1999, increased
approximately $94,515,000 or 20% to $564,706,000 from $470,191,000 in the
comparable 1998 period. The increase is due to, among other things, a 17%
increase in refinery weighted average selling prices; an 11% increase in
wholesale fuel volumes sold by Phoenix Fuel, along with an 15% increase in
weighted average selling prices; the acquisition of thirty-two service
station/convenience stores, and the lease of one other, from Kaibab
Industries, Inc. in June and July 1998 (the "Kaibab Acquisition"); and an 11%
increase in merchandise sales from service station/convenience stores that
were in operation for the full nine months in each period. This increase was
partially offset by a 1% decline in refinery sourced finished product sales
volumes.
The volumes of refined products sold through the Company's retail units
during this period increased approximately 20% from 1998 levels primarily due
to the Kaibab Acquisition. The volume of finished product sold from the
Company's travel center increased 15%, due in large part to improved
marketing programs. Finished product sales volumes from service
station/convenience stores that were in operation for the full nine months in
each period declined approximately 7%. This decrease was partially offset by
finished product sales from service station/convenience stores constructed,
remodeled or acquired within the last twenty-one months.
COST OF PRODUCTS SOLD
- ---------------------
For the three months ended September 30, 1999, cost of products sold
increased $40,925,000 or 34% to $160,064,000 from $119,139,000 in the
corresponding 1998 period. The increase is due in part to a 46% increase in
average crude oil costs; a 14% increase in wholesale fuel volumes sold by
Phoenix Fuel, along with a 46% increase in the cost of finished product
purchased; and a 6% increase in merchandise sales from service
station/convenience stores that were in operation for the full three months
in each period. This increase was offset in part by a 12% decline in refinery
sourced finished product sales volumes.
For the nine months ended September 30, 1999, cost of products sold
increased $59,451,000 or 18% to $397,090,000 from $337,639,000 in the
corresponding 1998 period. The increase is due in part to an 11% increase in
wholesale fuel volumes sold by Phoenix Fuel, along with a 17% increase in the
cost of finished product purchased; an 8% increase in average crude oil
costs; an 11% increase in merchandise sales from service station/convenience
stores that were in operation for the full nine months in each period; and
the Kaibab Acquisition. This increase was partially offset by a 1% decline in
refinery sourced finished product sales volumes.
In the second quarter of 1999 certain higher cost crude oil LIFO
inventory layers were liquidated which resulted in an increase in the cost of
products sold of approximately $1,600,000. These inventory layers are not
expected to be restored by year end. There were no similar liquidations in
1998.
OPERATING EXPENSES
- ------------------
For the three months ended September 30, 1999, operating expenses
increased approximately $2,347,000 or 9% to $28,771,000 from $26,424,000 for
the three months ended September 30, 1998. Thirty-five percent of the
increase is due to the Kaibab acquisition. The remaining increase is
primarily due to increased lease expense related to the sale-leaseback
transaction between the Company and FFCA that was completed in December 1998;
and payroll and related costs, including accruals for 1999 retail operating
and management bonuses. These increases were offset in part by lower retail
advertising and promotion costs.
For the nine months ended September 30, 1999, operating expenses
increased approximately $9,289,000 or 12% to $84,867,000 from $75,578,000 for
the nine months ended September 30, 1998. Fifty-five percent of the increase
is due to the Kaibab acquisition. The remaining increase is primarily due to
increased lease expense related to the sale-leaseback transaction between the
Company and FFCA that was completed in December 1998; expenses for the
estimated costs of 1999 company-wide bonuses; and increased administrative
and support costs related to retail expansion that has occurred over the last
two years. These increases were offset in part by a reduction in refinery
maintenance and purchased fuel expenses and lower retail advertising and
insurance costs.
DEPRECIATION AND AMORTIZATION
- -----------------------------
For the three months ended September 30, 1999, depreciation and
amortization decreased approximately $177,000 or 2% to $7,487,000 from
$7,664,000 in the same 1998 period. The decrease is primarily due to a
reduction in depreciation expense related to the sale-leaseback transaction
between the Company and FFCA, offset in part by increases related to the
amortization of 1998 and 1999 refinery turnaround costs and to construction,
remodeling and upgrades in retail and refining operations during 1998 and
1999.
For the nine months ended September 30, 1999, depreciation and
amortization increased approximately $1,439,000 or 7% to $22,666,000 from
$21,227,000 in the same 1998 period. The increase is primarily related to
construction, remodeling and upgrades in retail and refining operations
during 1998 and 1999, the amortization of 1998 and 1999 refinery turnaround
costs and the reduction in the value of real estate held for sale. These
increases were partially offset by a reduction in depreciation expense
related to the sale-leaseback transaction between the Company and FFCA.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
- --------------------------------------------
For the three months ended September 30, 1999, selling, general and
administrative expenses ("SG&A") increased approximately $864,000 or 13% to
$7,296,000 from $6,432,000 in the corresponding 1998 period. The increase is
primarily related to an accrual for a retroactive merit pay increase,
increased group health insurance costs, and the expensing of a proportionate
share of a predetermined 1999 contribution to the Company's Employee Stock
Ownership Plan. In addition, 1998 SG&A expenses were reduced for adjustments
to certain 1998 accruals for estimated liabilities for self insured workmen's
compensation, and property and casualty, claims to bring them in line with
expected year-end levels. The increase was offset in part by a reduction in
outside consulting costs in the 1999 third quarter as compared to the 1998
third quarter.
For the nine months ended September 30, 1999, SG&A increased
approximately $4,138,000 or 22% to $22,622,000 from $18,484,000 in the
corresponding 1998 period. The increase is primarily due to expensing a
proportionate share of a predetermined 1999 contribution to the Company's
Employee Stock Ownership Plan, expenses for the estimated costs of 1999
bonuses, an accrual for a retroactive merit pay increase, and increased 1999
workmen's compensation and group health insurance costs. The increase was
offset in part by insurance reimbursements received relating to prior
worker's compensation claims that had been paid by the Company and a
reduction in outside consulting costs.
INTEREST EXPENSE, NET
- ---------------------
For the three months ended September 30, 1999, net interest expense
(interest expense less interest income) decreased approximately $841,000 or
14% to $5,205,000 from $6,046,000 in the corresponding 1998 period.
For the nine months ended September 30, 1999, net interest expense
decreased approximately $1,146,000 or 7% to $16,308,000 from $17,454,000 in
the corresponding 1998 period.
In each period there was a reduction in interest expense primarily
related to the purchase of service station/convenience stores that were
subject to capital lease obligations, along with a reduction in other long-
term debt. In addition, there was an increase in each period in interest
income relating to a long-term note receivable from the Company's Chairman
and Chief Executive Officer. For the three months ended September 30, 1999,
there was an increase in interest and investment income over the same period
in 1998 due to the investment of excess cash, generated from operating cash
flows, in short-term instruments. Interest and investment income for the
three months ended September 30, 1998, was low due to the use of funds, which
had been invested in short-term instruments, for various acquisitions and the
purchase of service station/convenience stores that were subject to capital
lease obligations. For the nine months ended September 30, 1999, there was a
decrease in interest and investment income over the same period in 1998 due
to the use of funds as described above. The effects of fluctuations in
interest rates applicable to invested funds were nominal.
INCOME TAXES
- ------------
The effective tax rate for the three and nine month periods ended
September 30, 1999, was approximately 39%. The effective tax rate for the
three months ended September 30, 1998 was approximately 40% and the effective
benefit rate for the nine months ended September 30, 1998 was approximately
60%. The difference in the rates is primarily due to deferred tax
adjustments.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW FROM OPERATIONS
- -------------------------
Operating cash flows increased for the first nine months of 1999
compared to the first nine months of 1998, primarily as a result of an
increase in net earnings and deferred income taxes, offset in part by a
decrease in cash flows related to the changes in operating assets and
liabilities in each period. Net cash provided by operating activities totaled
$42,103,000 for the nine months ended September 30, 1999, compared to net
cash provided by operating activities of $39,427,000 in the comparable 1998
period.
WORKING CAPITAL
- ---------------
Working capital at September 30, 1999 consisted of current assets of
$181,644,000 and current liabilities of $115,552,000, or a current ratio of
1.57:1. At December 31, 1998, the current ratio was 2.13:1 with current
assets of $171,726,000 and current liabilities of $80,622,000.
Current assets have increased since December 31, 1998, primarily due to
an increase in accounts receivable and inventories. These increases were
offset in part by decreases in cash and cash equivalents and prepaid
expenses. Accounts receivable have increased primarily due to an increase in
finished product selling prices, along with increased Phoenix Fuel sales
volumes and increased product trading activity. Inventories have increased
due to an increase in crude oil and refined product prices and Phoenix Fuel
refined product volumes. These increases were offset in part by declines in
pipeline and refinery onsite crude oil volumes, along with declines in
refinery onsite and terminal refined product volumes. Prepaid expenses have
decreased primarily as a result of a reduction in margin deposits related to
hedging transactions and a reduction in prepaid insurance costs, offset in
part by the prepayment of a 1999 contribution to the Company's Employee Stock
Ownership Plan.
Current liabilities have increased due to an increase in accounts
payable and accrued expenses. Accounts payable have increased primarily as a
result of an increase in the cost of raw materials for the refineries,
increased product trading activity and an increase in the volume and cost of
finished product purchased by Phoenix Fuel. Accrued expenses have increased
primarily as a result of increased accruals for payroll and related costs,
estimated costs of 1999 bonuses, 1999 401(k)Company matching contributions,
retroactive merit pay increases and income taxes payable. These increases
were offset in part by the payment of a contingency related to the
acquisition of the Bloomfield refinery and payment of 1998 accrued 401(k)
Company matching contributions.
CAPITAL EXPENDITURES AND RESOURCES
- ----------------------------------
Net cash used in investing activities for the purchase of property,
plant and equipment totaled approximately $31,190,000 for the first nine
months of 1999. Expenditures included amounts for, among other things, the
reacquisition of nine service station/convenience stores that had been sold
to FFCA in December 1998 as part of a sale-leaseback transaction;
construction costs related to the building of five new service
station/convenience stores, four of which have opened, and the rebuilding of
two others, which are also in operation; costs for remodeling, re-branding,
re-imaging and upgrading various retail units; construction costs related to
the Company's finished products terminal near Flagstaff, Arizona, which
opened in May 1999; the purchase of the Company's aircraft, which previously
had been leased under a long-term arrangement; and expenditures for the
Ciniza refinery second quarter turnaround.
In addition, in the third quarter, the Company made an estimated
contingent payment of $5,250,000 related to the acquisition of the Bloomfield
refinery. This estimated payment would have been due in 2000 in accordance
with the Bloomfield refinery acquisition agreement, but was made at this time
in order to meet a use of proceeds requirement under the Indentures
supporting the Company's 9% and 9 3/4% Senior Subordinated Notes relating to
the sale-leaseback transaction completed in December 1998 between the Company
and FFCA.
The Ciniza refinery began a minor maintenance turnaround on April 5,
1999 that was completed on April 13, 1999. During this turnaround, the
reformer, naphtha hydrotreater, distillate hydrotreater and isomerization
units were shut down. During the shutdown, the reformer catalyst was
regenerated and a reformer heater modification was completed. The other units
were shut down due to a lack of hydrogen supply from the reformer and some
minor maintenance was performed while they were shut down.
The Company has received proceeds of approximately $1,135,000 from the
sale of property, plant and equipment primarily for the sale of two service
station/convenience stores.
The Company held a sealed bid sale of approximately twenty-two service
station/convenience stores, as well as certain other properties held for
resale, which no longer fit into the Company's long-term strategic plans. The
deadline for receiving bids was August 24, 1999. The Company received bids
for all but three of the twenty-two service station/convenience stores and
also received bids for some of the other properties. The Company is in the
process of evaluating the bids and negotiating any necessary supplemental
agreements. To date the Company has closed on two of the properties. The
Company expects to close on all acceptable bids by the end of the year or
early next year. It is anticipated that the proceeds from the sale will be
used for general corporate purposes subject to certain debt restrictions.
CAPITAL STRUCTURE
- -----------------
At September 30, 1999 and December 31, 1998, the Company's long-term
debt was 65.8% and 68.9% of total capital, respectively, and the Company's
net debt (long-term debt less cash and cash equivalents) to total
capitalization percentages were 62.9% and 64.0%, respectively.
The Company's capital structure includes $150,000,000 of 9% senior
subordinated notes due 2007 (the "9% Notes") and $100,000,000 of 9 3/4%
senior subordinated notes due 2003 (the "9 3/4% Notes", and collectively with
the 9% Notes, the "Notes"). The Indentures supporting the Notes contain
restrictive covenants that, among other things, restrict the ability of the
Company and its subsidiaries to create liens, to incur or guarantee debt, to
pay dividends, to repurchase shares of the Company's common stock, to sell
certain assets or subsidiary stock, to engage in certain mergers, to engage
in certain transactions with affiliates or to alter the Company's current
line of business. At September 30, 1999, the Company was in compliance with
the covenants relating to these Notes.
The Company had been precluded from making restricted payments from the
third quarter of 1998 until June 30, 1999, because it did not satisfy a
financial ratio test contained in one of the covenants relating to the 9 3/4%
Notes. This included the payment of dividends and the repurchase of shares of
the Company's common stock. The terms of the Indenture also had restricted
the amount of money the Company could otherwise borrow during this period.
The Company is no longer subject to these restrictions, as the Company
currently satisfies the requirements of the covenant's financial ratio test.
Subject to certain conditions, the Company is obligated to offer to
purchase a portion of the Notes at a price equal to 100% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase, with the net cash proceeds of certain sales or other dispositions
of assets. Upon a change of control, the Company would be required to offer
to purchase all of the Notes at 101% of the principal amount thereof, plus
accrued interest, if any, to the date of purchase.
In December 1998, the Company and FFCA completed a sale-leaseback
transaction in which the Company sold eighty-three service
station/convenience stores to FFCA and leased them back. Net proceeds to the
Company, after expenses, were approximately $50,100,000. In the third quarter
of 1999, the Company repurchased nine of the service station/convenience
stores for approximately $7,100,000.
In accordance with the Indentures supporting the Notes, the Company is
required to use the net proceeds from the FFCA sale-leaseback transaction
described above, less $10,000,000, to either make a permanent reduction in
senior indebtedness (as defined in the respective Indentures), or make an
investment in capital assets used in the Company's principal business (as
defined in the respective Indentures). To the extent that a sufficient
portion of the net proceeds are not utilized for these purposes before
certain time periods expire, the Company would be required to offer to
repurchase the senior subordinated notes as stipulated in the Indentures.
Prior to the expiration dates, the Company used a sufficient portion of the
net proceeds from the FFCA transaction to invest in capital assets and to
reduce senior indebtedness and is not required to offer to repurchase the
senior subordinated notes.
Repayment of the Notes is jointly and severally guaranteed on an
unconditional basis by the Company's direct and indirect wholly-owned
subsidiaries, subject to a limitation designed to ensure that such guarantees
do not constitute a fraudulent conveyance. Except as otherwise allowed in the
Indentures pursuant to which the Notes were issued, there are no restrictions
on the ability of such subsidiaries to transfer funds to the Company in the
form of cash dividends, loans or advances. General provisions of applicable
state law, however, may limit the ability of any subsidiary to pay dividends
or make distributions to the Company in certain circumstances.
No separate financial statements of the subsidiaries are included herein
because the aggregate assets, liabilities, earnings, and equity of the
subsidiaries are substantially equivalent to the assets, liabilities,
earnings, and equity of the Company on a consolidated basis; the subsidiaries
are jointly and severally liable for the repayment of the Notes; and the
separate financial statements and other disclosures concerning the
subsidiaries are not deemed material to investors.
The Company has a $65,000,000 secured Credit Agreement (the "Credit
Agreement") due December 23, 2001, with a group of banks. This Credit
Agreement, a revolving loan agreement, is primarily a working capital and
letter of credit facility and is secured by eligible accounts receivable and
inventories as defined in the Credit Agreement. In addition, the Company is
able to borrow up to $9,000,000 to exercise its purchase rights in connection
with certain service station/convenience stores that are currently subject to
capital lease obligations, and up to $10,000,000 for other acquisitions as
defined in the Credit Agreement. The availability of funds under this
facility is the lesser of (i) $65,000,000, or (ii) the amount determined
under a borrowing base calculation tied to the eligible accounts receivable
and inventories. At September 30, 1999, the availability of funds under the
Credit Agreement was $65,000,000. There were no direct borrowings outstanding
under this facility at September 30, 1999, and there were approximately
$8,887,000 of irrevocable letters of credit outstanding, primarily to secure
purchases of raw materials.
The interest rate applicable to the Credit Agreement is tied to various
short-term indices. At September 30, 1999, this rate was approximately 7.5%
per annum. The Company is required to pay a quarterly commitment fee ranging
from 0.325% to 0.500% per annum of the unused amount of the facility. The
exact rate depends on meeting certain conditions in the Credit Agreement.
The Credit Agreement contains certain covenants and restrictions which
require the Company to, among other things, maintain a minimum consolidated
net worth, a minimum interest coverage ratio and a maximum capitalization
ratio. It also places limits on investments, dispositions of assets,
prepayments of senior subordinated debt, guarantees, liens and restricted
payments. At September 30, 1999, the Company was in compliance with the
Credit Agreement's covenants and was not aware of any noncompliance with the
other terms of the Credit Agreement. The Credit Agreement is guaranteed by
all of the Company's direct and indirect wholly-owned subsidiaries.
The Company's Board of Directors has authorized the repurchase of
2,500,000 shares of the Company's common stock. Purchases may be made from
time to time as conditions permit. Shares may be repurchased through
privately-negotiated transactions, block share purchases and open market
transactions. During the quarter ended September 30, 1999, the Company
repurchased 440,000 shares of its common stock from its Chairman and Chief
Executive Officer for $4,950,000 or $11.25 per share. The per share price
paid for the shares was at a discount to the then current fair market value.
From the inception of the stock repurchase program, the Company has
repurchased 1,833,600 shares for approximately $19,460,000, resulting in a
weighted average cost of $10.61 per share.
Repurchased shares are available for a number of corporate purposes. The
number of shares actually repurchased will be dependent upon market
conditions and existing debt covenants, and there is no guarantee as to the
exact number of shares to be repurchased by the Company. The Company may
discontinue the program at any time without notice. The Company is no longer
restricted from acquiring shares of its common stock under this program as
noted above.
The Company's Board of Directors did not declare a cash dividend on
common stock for the first three quarters of 1999. The payment of dividends
is subject to the results of the Company's operations, existing debt
covenants and declaration by the Company's Board of Directors. As noted
above, the Company is no longer restricted from declaring and paying
dividends. The Company's Board of Directors has decided not to reinstate
dividend payments at the present time. It is anticipated, however, that the
Board of Directors will periodically review the Company's dividend policy for
the possible reinstatement of dividends.
OTHER
- -----
The Company is exposed to various market risks, including changes in
certain commodity prices and interest rates. To manage the volatility
relating to these normal business exposures, the Company periodically uses
commodity futures and options contracts to reduce price volatility, to fix
margins in its refining and marketing operations and to protect against price
declines associated with its crude oil and finished products inventories.
During the three months ended March 31, 1999, the Company entered into
several related transactions for the purchase and sale of various put and
call option contracts expiring in August 1999, the purpose of which was to
protect 700,000 barrels of crude oil inventories from the risk associated
with declines in crude oil prices. During the three months ended June 30,
1999, the Company also entered into several related transactions for the
purchase and sale of various put and call option contracts expiring in
November 1999, the purpose of which was to protect 400,000 barrels of crude
oil inventories from the risk associated with declines in crude oil prices.
For the three months ended September 30, 1999, the Company recorded a
loss of approximately $208,000 related to the option contracts associated
with the 700,000 barrels of crude oil inventories as a result of crude oil
price increases, and for the nine months ended September 30, 1999, a loss of
$2,627,000 was recorded. These losses were offset by reductions in lower of
cost or market inventory reserves. There were no open option contracts at
September 30, 1999, related to the 700,000 barrels of crude oil inventories.
For the three and nine months ended September 30, 1999, the Company
recorded a loss of approximately $1,541,000 related to the option contracts
associated with the 400,000 barrels of crude oil inventories as a result of
crude oil price increases. This loss was offset by reductions in lower of
cost or market inventory reserves. There were no open option contracts at
September 30, 1999, related to the 400,000 barrels of crude oil inventories.
The potential loss from a hypothetical 10% adverse change in commodity
prices on open commodity futures and options contracts held by the Company at
September 30, 1999, would not materially affect the Company's consolidated
financial condition and results of operations.
Additionally, the Company's $65,000,000 Credit Agreement is floating-
rate debt tied to various short-term indices. As a result, the Company's
annual interest costs associated with this debt will fluctuate. At September
30, 1999, there were no direct borrowings outstanding under this Credit
Agreement.
Federal, state and local laws and regulations relating to health and the
environment affect nearly all of the operations of the Company. As is the
case with other companies engaged in similar industries, the Company faces
significant exposure from actual or potential claims and lawsuits involving
environmental matters. These matters include soil and water contamination,
air pollution and personal injuries or property damage allegedly caused by
substances manufactured, handled, used, released or disposed of by the
Company. Future expenditures related to health and environmental matters
cannot be reasonably quantified in many circumstances for various reasons,
including the speculative nature of remediation and cleanup cost estimates
and methods, imprecise and conflicting data regarding the hazardous nature of
various types of substances, the number of other potentially responsible
parties involved, various defenses which may be available to the Company and
changing environmental laws and interpretations of environmental laws.
Rules and regulations implementing federal, state and local laws
relating to health and the environment will continue to affect the operations
of the Company. The Company cannot predict what health or 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
enforced with respect to products or activities of the Company. Compliance
with more stringent laws or regulations, as well as more vigorous enforcement
policies of the regulatory agencies, could have an adverse effect on the
financial position and the results of operations of the Company and could
require substantial expenditures by the Company for the installation and
operation of refinery equipment, pollution control systems and other
equipment not currently possessed by the Company.
On October 1, 1999, the State of New Mexico filed a lawsuit in the
United States District Court for the District of New Mexico, and a separate
lawsuit in the Second Judicial District Court, County of Bernalillo, State of
New Mexico, against numerous entities, including General Electric Company,
ACF Industries, Inc., Chevron Corporation, Texaco Refining and Marketing,
Inc., Phillips Petroleum Company, Ultramar Diamond Shamrock Corporation, the
United States Department of Energy, the Untied States Department of Defense,
the United States Air Force and the Company. The lawsuits relate to alleged
releases of pollutants at the South Valley Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") Superfund site in
Albuquerque, New Mexico. The South Valley Superfund site includes
contamination that allegedly originated from a number of facilities,
including a GE Aircraft Engines/U.S. Air Force facility and a petroleum
products terminal (the "Albuquerque Terminal") that was acquired by the
Company in 1995 from Texaco Refining and Marketing Inc. ("Texaco"). The
lawsuits allege that the defendants released or threatened to release
hazardous substances into the environment, causing injury to surface water,
groundwater and soil which are natural resources of the state. In the federal
court lawsuit, the state seeks monetary damages under CERCLA for all past,
present and future damages to these natural resources, plus interest, costs
and attorneys' fees. The state court complaint contains claims for trespass,
public nuisance, interference with natural resources held in trust by the
state, negligence, strict liability, unjust enrichment and punitive damages.
The state seeks various monetary damages in connection with these claims,
including natural resources damages, loss of use of property and natural
resources, loss of tax revenues, lost profits, punitive damages and
attorneys' fees and costs. Although neither complaint calculates the amount
of damages being sought by the state, a preliminary assessment of alleged
damages to natural resources conducted by the New Mexico Office of the
Natural Resources Trustee estimated these damages at $260,000,000. Liability
for natural resource damages under CERCLA is joint and several, such that a
responsible party may be liable for all natural resource damages at a site
even though it was responsible for only a small part of such damages.
Texaco agreed to defend, indemnify, reimburse and hold the Company
harmless from and against all claims and damages arising from, or caused by,
pre-closing contamination at the Albuquerque Terminal. Texaco has
acknowledged this obligation, subject to any evidence that alleged releases
resulted from the Company's operations. The Company believes that any damages
associated with the South Valley Superfund site relate to releases that
predate the Company's acquisition of the Albuquerque Terminal and,
accordingly, does not believe that it needs to record a liability in
connection with the two lawsuits.
In June, 1999, the New Mexico Oil Conservation Division ("OCD") approved
the closure of lead remediation activities at a 5.5 acre site that the
Company owns in Bloomfield, New Mexico. This approval was conditioned upon
the Company's submission of a work plan to define the extent of petroleum
contamination in the soil and groundwater which was discovered at the site in
1995. The Company has submitted the requested work plan and is awaiting OCD
approval.
The Company has an environmental liability accrual of approximately
$2,400,000. Approximately $800,000 relates to ongoing environmental projects,
including the remediation of a hydrocarbon plume that appears to extend no
more than 1,800 feet south of the inactive Farmington refinery and
hydrocarbon contamination on and adjacent to the 5.5 acres that the Company
owns in Bloomfield, New Mexico. The remaining $1,600,000 relates to an
originally estimated liability of approximately $2,300,000, recorded in the
second quarter of 1996, for certain environmental obligations assumed in the
acquisition of the Bloomfield refinery. That amount was recorded as an
adjustment to the purchase price and allocated to the assets acquired. This
environmental accrual is recorded in the current and long-term sections of
the Company's Consolidated Balance Sheets.
The Company is subject to audit on an ongoing basis of the various taxes
that it pays to federal, state, local and tribal governments. These audits
may result in assessments or refunds along with interest and penalties. In
some cases the jurisdictional basis of the taxing authority is in dispute and
is the subject of litigation or administrative appeals. The Company has
received several tax notifications and assessments from the Navajo Tribe
relating to Company operations outside the boundaries of the Navajo Indian
Reservation in an area of disputed jurisdiction, including a $1,800,000
severance tax assessment (including interest and penalties through the date
of the assessment) issued in November 1991, and a $3,400,000 severance tax
assessment (including interest and penalties through the date of the
assessment) issued in May 1999, both of which relate to crude oil removed
from properties located within this area. The Company has invoked its appeal
rights with the Tribe's Tax Commission in connection with the severance tax
assessments and intends to oppose the assessments. Although it is probable
that the Company will incur liability in connection with tax notifications
and assessments from the Navajo Tribe relating to the area of disputed
jurisdiction, it is not possible to reasonably estimate the amount of any
obligation for such taxes at this time because the Navajo Tribe's authority
to impose taxes throughout this area has not been legally established and all
potentially-applicable factual issues have not been resolved. The Company has
accrued a liability for assessments that it has received from the Navajo
Tribe for substantially less than the amount of the assessments. It is
possible that the Company's assessments will have to be litigated by the
Company before final resolution. In addition, the Company may receive further
tax assessments. The Company may potentially be able to request reimbursement
from third party oil lease interest owners in connection with any severance
tax amounts ultimately paid by the Company that relate to purchases from the
interest owners.
The Company's current receipts and projections of Four Corners crude oil
production indicate that the Company's crude oil demand will periodically
exceed the supply of crude oil that is available from local sources. The
Company has, and may from time to time, decrease production runs at its
refineries from levels it would otherwise schedule as a result of shortfalls
in Four Corners crude oil production. It is anticipated that a temporary
shortfall, as currently projected, will not have a material effect on the
Company's financial position or results of operations.
The Four Corners basin is a mature production area and, accordingly, is
subject to a natural decline in production over time. In the past several
years this natural decline has been offset by field workovers and secondary
recovery projects which resulted in additional production from existing
reserves. Many of these projects were cut back, however, when crude oil
prices declined dramatically in 1998. Based upon history and discussions with
local producers, the Company anticipates that additional projects will again
be undertaken and that production will increase from the field as a result of
the recovery in crude oil prices which began in the second quarter of 1999.
The Company supplements the Four Corners crude oil used at its
refineries with other feedstocks. These feedstocks currently include locally
produced natural gas liquids and other feedstocks produced outside of the
Four Corners area. The Company has initiated a project to increase its
production of gasoline from abundantly available natural gas liquids, and is
evaluating the scope and timing of the project. The Company continues to
evaluate supplemental feedstock alternatives for its refineries on both a
short-term and long-term basis. Whether or not supplemental feedstocks are
used at the Company's refineries depends on a number of factors. These
factors include, but are not limited to, the availability of supplemental
feedstocks, the cost involved, the quantities required, the quality of the
feedstocks, the demand for finished products, and the selling prices of
finished products.
There is no assurance that current or projected levels of Four Corners
crude oil supply for the Company's refineries will be maintained. Any
significant long-term interruption or decline in Four Corners crude oil
supply, due to prices or other factors, or any significant long-term
interruption of crude oil transportation systems, would have an adverse
effect on the Company's operations.
The Company is aware of a number of actions, proposals or industry
discussions regarding product pipeline projects that could impact portions of
its marketing areas. One of these projects is the potential conversion and
extension of the existing Texas-New Mexico crude oil pipeline to transport
refined products from West Texas to New Mexico, including Albuquerque and
potentially Bloomfield, and to Salt Lake City, Utah. Separately, an existing
natural gas liquids pipeline is in the process of being converted to a
refined products pipeline that will be capable of delivering finished product
from Southeastern New Mexico to the Albuquerque and Four Corners areas. This
conversion is reportedly scheduled for completion in 1999. In addition,
various actions have been undertaken to increase the supply of refined
products to El Paso, Texas, which is connected by pipeline to the Albuquerque
area to the north and the Phoenix and Tucson, Arizona markets to the west.
The completion of some or all of these projects would result in increased
competition by increasing the amount of refined products available in these
markets, as well as improving competitor access to these areas, and may
result in new opportunities for the Company as the Company is a net purchaser
of refined products in some of these areas.
In 1997, the Company outlined a program for Year 2000 ("Y2K")
compliance. The Y2K issue is the result of certain computer systems using a
two-digit format rather than four digits to define the applicable year. Such
computer systems may be unable to properly interpret dates beyond the year
1999, which could lead to system failure or miscalculations causing
disruptions of operations. The Company has identified three major areas
determined to be critical for successful Y2K compliance: (1) financial and
information system applications, (2) manufacturing and process applications,
including embedded chips, and (3) business relationships.
The Company had hired an outside consultant to act as its Year 2000
project manager. This consultant directed the Company's efforts in
identifying and resolving Y2K issues pursuant to a five-phase program for
Year 2000 compliance. The Y2K project is now at the stage where it is
internally managed. The five phases are as follows:
(1) AWARENESS PHASE. This phase included the development of a Project
Management Plan to make the Company aware of the Y2K problem, identify
potential Y2K issues in all areas of the Company and develop a plan of action
to resolve these issues. This phase was completed in July 1998.
(2) ASSESSMENT PHASE. Completed in October 1998, this phase included
generating a complete inventory of all software, hardware, processing
equipment and embedded chips throughout the entire organization and
identifying those items that were Y2K compliant and those that were not.
(3) RENOVATION (REMEDY) PHASE. In this phase, strategies were developed
for each item inventoried during the assessment phase to determine whether
remedial action was required and, if so, whether the item should be
eliminated, replaced, or updated. This phase also included the determination
of priorities and scheduling, including contingency plans for all critical
items. This phase was substantially completed in February 1999 except for
Phoenix Fuel and the Company's retail operations, which were completed in
June 1999.
(4) VALIDATION (TESTING) PHASE. In this phase, a test plan is developed
and implemented to validate the remedies selected in the previous phase.
Although originally scheduled for completion by March 1999, the Company
completed testing in September 1999.
(5) IMPLEMENTATION PHASE. This phase involves the use of the Y2K
compliant inventory, and the development and implementation of additional
plans to avoid Y2K problems. Although originally scheduled for completion by
March 1999, the Company completed this phase in September 1999.
At the present time, approximately 1,500 items have been inventoried
consisting of software, hardware, processing equipment and embedded chips.
All inventoried items are now believed to be substantially Y2K compliant.
Utilizing both internal staff and outside consultants, the remediation
and replacement program for the Company's core financial and information
systems was substantially completed in April 1999. To date, 100% of the
targeted core financial and information systems and other related
applications have been renovated and tested. The Company started running the
Y2K compliant financial systems in September 1999.
In the manufacturing and process area, the remediation and replacement
phase is complete, as well as the testing and implementation phases.
In the business relationship area, the Company continues to correspond
with its business partners in order to identify and resolve Y2K issues that
may have an impact on operations. The Company has sent compliance
questionnaires to over 1,400 business partners, 250 of which have been
determined to be critical. The critical business partners identified by the
Company include, among others, certain utilities, pipeline companies,
terminals, crude oil and other raw material suppliers, key customers,
financial institutions, insurance companies and employee benefit plan
administrators. The Company has received responses from approximately 88% of
those business partners identified as being critical and will continue to
follow up with those who have not responded. To date the Company has not
identified any significant problems relating to the responses it has received
and analyzed.
Remediation of the Y2K items identified by the Company is being
accomplished using both internal and external manpower. The Company estimates
that the total cost of the Y2K project will be between $700,000 and $800,000.
Through September 30, 1999, the Company had expended approximately $631,000.
The Company expects to fund its Y2K expenditures from operating cash flows
and short-term borrowings if necessary. The total cost associated with
required modifications to become Year 2000 compliant is not expected to be
significant to the Company's financial position or results of operations.
Contingency plans are in the process of being finalized for all of the
Company's critical business processes in order to minimize any disruptions in
these operations, allowing the Company to continue to function on January 1,
2000 and beyond. These plans are being developed to mitigate both internal
risks as well as potential risks in the chain of the Company's suppliers and
customers. The Company believes that the contingency planning process will be
an ongoing one which will require modifications as the Company obtains
additional information and as contingency plans are completed and reviewed.
Contingency plans are in various stages of completion and include such items
as increasing certain of the Company's inventories, placing certain
processing equipment in manual override mode if needed, establishing Y2K
emergency response teams, and developing other emergency procedures in the
event problems do arise.
The Company continues to assess its most reasonably likely worst case
Y2K scenario. It is the Company's belief that the greatest potential risk
from the Y2K issue could be the inability of principal suppliers to be Y2K
ready. This could result in delays in product deliveries from such suppliers
and disruption of the distribution channel for, among other things, refinery
feedstocks and finished products, including product pipelines, transportation
vendors and the Company's own petroleum product distribution centers. Another
significant potential risk is the general failure of systems and necessary
infrastructure such as electricity supply. Contingency plans will be
developed to address these scenarios.
The Company believes that completed modifications and replacements of
its internal systems and equipment will allow it to be Y2K compliant.
However, due to the widespread nature of potential Y2K issues, there can be
no assurance that all of the Company's Y2K issues will be identified and
resolved in a timely manner, or that contingency plans will mitigate the
effects of any non-compliance. In addition, there can be no assurance that
third parties upon which the Company relies will be Y2K compliant in a timely
manner or that the third parties' contingency plans will mitigate the effects
of any non-compliance. Any significant long-term disruptions to the Company's
business caused by non-compliance could have a material adverse effect on the
Company's financial position and results of operations.
"Safe Harbor" Statement under the Private Securities Litigation Reform
Act of 1995: This report contains forward-looking statements that involve
risks and uncertainties, including but not limited to economic, competitive
and governmental factors affecting the Company's operations, markets,
products, services and prices; risks associated with non-compliance with
certain debt covenants or the satisfaction of financial ratios contained in
such covenants; the adequacy of the Company's environmental and tax reserves;
the ultimate outcome of the two lawsuits filed by the State of New Mexico and
the Company's ultimate liability related thereto; the availability of
indemnification from third parties; the Company's ability to recover tax
payments from third parties; the expansion of the Company's refining, retail
and Phoenix Fuel operations through acquisition and construction; the
successful sale of retail and other assets through a sealed bid sale; the
reinstatement of cash dividends on common stock; the adequacy and cost of raw
material supplies; the potential effects of various pipeline projects as they
relate to the Company's market area and future profitability; the estimated
cost and ability of the Company or third parties on which it relies to become
Y2K compliant; the impact of the mandated use of gasolines satisfying
governmentally mandated specifications on the Company's operations; and other
risks detailed from time to time in the Company's filings with the Securities
and Exchange Commission.
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
The information required by this item is incorporated by reference to
the section entitled "Other" in the Company's Management's Discussion and
Analysis of Financial Condition and Results of Operations in Part I, Item 2.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 1, 1999, the State of New Mexico filed a lawsuit in the
United States District Court for the District of New Mexico, and a separate
lawsuit in the Second Judicial District Court, County of Bernalillo, State of
New Mexico, against numerous entities, including General Electric Company,
ACF Industries, Inc., Chevron Corporation, Texaco Refining and Marketing,
Inc., Phillips Petroleum Company, Ultramar Diamond Shamrock Corporation, the
United States Department of Energy, the Untied States Department of Defense,
the United States Air Force and the Company. The lawsuits relate to alleged
releases of pollutants at the South Valley Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA") Superfund site in
Albuquerque, New Mexico. The South Valley Superfund site includes
contamination that allegedly originated from a number of facilities,
including a GE Aircraft Engines/U.S. Air Force facility and a petroleum
products terminal (the "Albuquerque Terminal") that was acquired by the
Company in 1995 from Texaco Refining and Marketing Inc. ("Texaco"). The
lawsuits allege that the defendants released or threatened to release
hazardous substances into the environment, causing injury to surface water,
groundwater and soil which are natural resources of the state. In the federal
court lawsuit, the state seeks monetary damages under CERCLA for all past,
present and future damages to these natural resources, plus interest, costs
and attorneys' fees. The state court complaint contains claims for trespass,
public nuisance, interference with natural resources held in trust by the
state, negligence, strict liability, unjust enrichment and punitive damages.
The state seeks various monetary damages in connection with these claims,
including natural resources damages, loss of use of property and natural
resources, loss of tax revenues, lost profits, punitive damages and
attorneys' fees and costs. The Company does not believe that it needs to
record a liability in connection with the two lawsuits. For a further
discussion of these lawsuits see Note 6 to the Unaudited Condensed
Consolidated Financial Statements set forth in Item 1, Part I hereof, and the
discussion of certain contingencies contained in Item 2, Part I hereof, under
the heading "Liquidity and Capital Resources - Other."
There are no other material pending legal proceedings required to be
reported pursuant to Item 103 of Regulation S-K. The Company is a party to
ordinary routine litigation incidental to its business. In addition, there is
hereby incorporated by reference the information regarding contingencies in
Note 6 to the Unaudited Condensed Consolidated Financial Statements set forth
in Item 1, Part I hereof and the discussion of certain contingencies
contained in Item 2, Part I hereof, under the heading "Liquidity and Capital
Resources - Other."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit:
27 - Financial Data Schedule.
(b) Reports on Form 8-K. There were no reports filed on Form 8-K for the
quarter ended September 30, 1999.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report on Form 10-Q for the quarter ended
September 30, 1999 to be signed on its behalf by the undersigned thereunto
duly authorized.
GIANT INDUSTRIES, INC.
/s/ GARY R. DALKE
------------------------------------------
Gary R. Dalke, Vice President,
Controller, Accounting Officer
and Assistant Secretary
Date: November 12, 1999
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<PAGE>
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<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<CASH> 30,608
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 63,040
<CURRENT-ASSETS> 181,644
<PP&E> 471,006
<DEPRECIATION> 155,824
<TOTAL-ASSETS> 545,060
<CURRENT-LIABILITIES> 115,552
<BONDS> 258,443
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 545,060
<SALES> 564,706
<TOTAL-REVENUES> 564,706
<CGS> 397,090
<TOTAL-COSTS> 504,623
<OTHER-EXPENSES> 0
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<INCOME-PRETAX> 19,203
<INCOME-TAX> 7,475
<INCOME-CONTINUING> 11,728
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