-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LANY88SK2iBKILhlq05nUw/q1C6j2Pj1LDCFLIJYZy77++yEYQhGPqmAdFqe+XRp rQ+/Y/HtXa3n8FdyEgQ0jg== /in/edgar/work/20000811/0000856465-00-000005/0000856465-00-000005.txt : 20000921 0000856465-00-000005.hdr.sgml : 20000921 ACCESSION NUMBER: 0000856465-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000811 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIANT INDUSTRIES INC CENTRAL INDEX KEY: 0000856465 STANDARD INDUSTRIAL CLASSIFICATION: [2911 ] IRS NUMBER: 860642718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-10398 FILM NUMBER: 695351 BUSINESS ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 BUSINESS PHONE: 6025858888 MAIL ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 10-Q 1 0001.txt SECOND QUARTER 2000 10-Q GIANT INDUSTRIES, INC. 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 June 30, 2000 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 July 31, 2000: 9,145,674 shares. GIANT INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets June 30, 2000 (Unaudited) and December 31, 1999 Condensed Consolidated Statements of Earnings for the Three and Six Months Ended June 30, 2000 and 1999 (Unaudited) Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 (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 4 - Submission of Matters to a Vote of Security Holders Item 6 - Exhibits and Reports on Form 8-K SIGNATUR PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS)
JUNE 30, DECEMBER 31, - ----------------------------------------------------------------------------- 2000 1999 - ----------------------------------------------------------------------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents $ 9,080 $ 32,945 Receivables, net 76,248 74,000 Note receivable 5,000 - Inventories 67,045 58,240 Prepaid expenses and other 6,029 4,097 Deferred income taxes 2,702 2,702 - ----------------------------------------------------------------------------- Total current assets 166,104 171,984 - ----------------------------------------------------------------------------- Property, plant and equipment 494,640 485,181 Less accumulated depreciation and amortization (176,978) (161,983) - ----------------------------------------------------------------------------- 317,662 323,198 - ----------------------------------------------------------------------------- Goodwill, net 21,341 21,819 Other assets 24,064 29,798 - ----------------------------------------------------------------------------- $ 529,171 $ 546,799 ============================================================================= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 307 $ 297 Accounts payable 76,185 76,833 Accrued expenses 37,145 45,458 - ----------------------------------------------------------------------------- Total current liabilities 113,637 122,588 - ----------------------------------------------------------------------------- Long-term debt, net of current portion 258,113 258,272 Deferred income taxes 28,401 28,002 Other liabilities and deferred income 5,538 5,475 Commitments and contingencies (Notes 5 and 6) Common stockholders' equity 123,482 132,462 - ----------------------------------------------------------------------------- $ 529,171 $ 546,799 ============================================================================= See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA)
THREE MONTHS SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, - ----------------------------------------------------------------------------------- 2000 1999 2000 1999 - ----------------------------------------------------------------------------------- Net revenues $266,066 $201,182 $491,200 $350,203 Cost of products sold 210,501 137,339 388,423 237,026 - ----------------------------------------------------------------------------------- Gross margin 55,565 63,843 102,777 113,177 Operating expenses 29,504 29,012 59,029 56,096 Depreciation and amortization 8,370 7,841 16,675 15,179 Selling, general and administrative expenses 6,396 7,388 12,798 15,326 Loss on write-off of assets - 1,950 - 1,950 - ----------------------------------------------------------------------------------- Operating income 11,295 17,652 14,275 24,626 Interest expense, net 5,805 5,513 11,516 11,103 - ----------------------------------------------------------------------------------- Earnings before income taxes 5,490 12,139 2,759 13,523 Provision for income taxes 2,209 4,734 1,110 5,260 - ----------------------------------------------------------------------------------- Net earnings $ 3,281 $ 7,405 $ 1,649 $ 8,263 =================================================================================== Net earnings per common share: Basic $ 0.36 $ 0.68 $ 0.18 $ 0.76 =================================================================================== Assuming dilution $ 0.36 $ 0.68 $ 0.18 $ 0.76 =================================================================================== See accompanying notes to condensed consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, - ---------------------------------------------------------------------------------- 2000 1999 - ---------------------------------------------------------------------------------- Cash flows from operating activities: Net earnings $ 1,649 $ 8,263 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 16,675 15,179 Deferred income taxes 399 2,266 Loss on disposal of assets 12 1,890 Other 408 406 Changes in operating assets and liabilities: Increase in receivables (2,457) (20,629) Increase in inventories (8,805) (7,669) (Increase) decrease in prepaid expenses and other (1,932) 1,331 (Decrease) increase in accounts payable (648) 26,403 (Decrease) increase in accrued expenses (3,041) 10,681 - ---------------------------------------------------------------------------------- Net cash provided by operating activities 2,260 38,121 - ---------------------------------------------------------------------------------- Cash flows from investing activities: Purchases of property, plant and equipment and other assets (13,000) (19,737) Refinery acquisition contingent payment (5,442) (2,039) Proceeds from sale of property, plant and equipment 3,098 324 - ---------------------------------------------------------------------------------- Net cash used by investing activities (15,344) (21,452) - ---------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds of long-term debt 68,000 - Payments of long-term debt (68,152) (24,953) Purchase of treasury stock (10,738) - Proceeds from exercise of stock options 109 84 Deferred financing costs - (50) - ---------------------------------------------------------------------------------- Net cash used by financing activities (10,781) (24,919) - ---------------------------------------------------------------------------------- Net decrease in cash and cash equivalents (23,865) (8,250) Cash and cash equivalents: Beginning of period 32,945 55,697 - ---------------------------------------------------------------------------------- End of period $ 9,080 $ 47,447 ================================================================================== 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.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION: Giant Industries, Inc., a Delaware corporation (together with its subsidiaries, "Giant" or the "Company"), through its wholly-owned subsidiary Giant Industries Arizona, Inc. and its subsidiaries ("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 accounting principles generally accepted in the United States of America 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 six months ended June 30, 2000 are not necessarily indicative of the results that may be expected for the year ending December 31, 2000. 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, 1999. 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." 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. 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) hedge of the exposure to variable cash flows of a forecasted transaction, or (c) 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 SFAS No. 133, 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 1999 financial statements and notes to conform to the statement classifications used in 2000. 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 or Phoenix Fuel. The Refining Group manufactures these refined products or acquires them through exchange arrangements, third party purchases, or from Phoenix Fuel. Phoenix Fuel acquires the petroleum products it supplies primarily from third parties. 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 staff operations, including selling, general and administrative expenses of approximately $4,463,000 and $5,410,000 for the three months ended June 30, 2000 and 1999, respectively, and $8,794,000 and $11,382,000 for the six months ended June 30, 2000 and 1999, 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, where appropriate, for LIFO and lower of cost or market inventory allowances. 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 staff 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. Disclosures regarding the Company's reportable segments with reconciliations to consolidated totals for the three months ended June 30, 2000 and 1999, are presented below.
For the Three Months Ended June 30, 2000 (In thousands) ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated -------- -------- -------- ------- ----------- ------------ Customer net revenues............... $ 76,648 $113,938 $ 75,409 $ 71 $ - $266,066 Intersegment net revenues........... 55,789 - 18,790 - (74,579) - -------- -------- -------- ------- -------- -------- Total net revenues.................. $132,437 $113,938 $ 94,199 $ 71 $(74,579) $266,066 -------- -------- -------- ------- -------- -------- Operating income.................... $ 14,116 $ 2,244 $ 634 $(5,699) $ - $ 11,295 Interest expense.................... (6,143) Interest income.................... 338 -------- Earnings before income taxes........ $ 5,490 -------- Depreciation and amortization....... $ 4,291 $ 2,882 $ 641 $ 556 $ - $ 8,370 Capital expenditures................ $ 1,180 $ 1,240 $ 246 $ 13 $ - $ 2,679
For the Three Months Ended June 30, 1999 (In thousands) ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated -------- -------- -------- ------- ----------- ------------ Customer net revenues............... $ 53,372 $ 85,971 $ 61,776 $ 63 $ - $201,182 Intersegment net revenues........... 46,422 - 2,378 - (48,800) - -------- -------- -------- ------- -------- -------- Total net revenues.................. $ 99,794 $ 85,971 $ 64,154 $ 63 $(48,800) $201,182 -------- -------- -------- ------- -------- -------- Operating income.................... $ 19,694 $ 3,249 $ 3,147 $(6,488) $ (1,950) $ 17,652 Interest expense.................... (6,117) Interest income.................... 604 -------- Earnings before income taxes........ $ 12,139 -------- Depreciation and amortization....... $ 3,872 $ 2,251 $ 564 $ 1,154 $ - $ 7,841 Capital expenditures................ $ 3,086 $ 4,878 $ 224 $ 2,019 $ - $ 10,207
Disclosures regarding the Company's reportable segments with reconciliations to consolidated totals for the six months ended June 30, 2000 and 1999, are presented below.
As of and for the Six Months Ended June 30, 2000 (In thousands) ---------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated -------- -------- ------- ------- ----------- ------------ Customer net revenues............... $116,745 $210,488 $163,798 $ 169 $ - $491,200 Intersegment net revenues........... 126,211 - 31,788 - (157,999) - -------- -------- -------- -------- --------- -------- Total net revenues.................. $242,956 $210,488 $195,586 $ 169 $(157,999) $491,200 -------- -------- -------- -------- --------- -------- Operating income.................... $ 20,743 $ 1,086 $ 2,668 $(10,222) $ - $ 14,275 Interest expense.................... (12,255) Interest income..................... 739 -------- Earnings before income taxes........ $ 2,759 -------- Depreciation and amortization....... $ 8,519 $ 5,636 $ 1,254 $ 1,266 $ - $ 16,675 Total assets........................ $253,677 $156,414 $ 77,114 $ 41,966 $ - $529,171 Capital expenditures................ $ 3,120 $ 8,631 $ 922 $ 22 $ 12,695
For the Six Months Ended June 30, 1999 (In thousands) --------------------------------------------------------------- Refining Retail Phoenix Reconciling Group Group Fuel Other Items Consolidated -------- -------- ------- ------- ----------- ------------ Customer net revenues............... $ 86,426 $154,222 $109,450 $ 105 $ - $350,203 Intersegment net revenues........... 77,786 - 3,546 - (81,332) - -------- -------- -------- -------- --------- -------- Total net revenues.................. $164,212 $154,222 $112,996 $ 105 $ (81,332) $350,203 -------- -------- -------- -------- --------- -------- Operating income.................... $ 30,025 $ 4,590 $ 5,278 $(13,317) $ (1,950) $ 24,626 Interest expense.................... (12,168) Interest income..................... 1,065 -------- Earnings before income taxes........ $ 13,523 -------- Depreciation and amortization....... $ 7,712 $ 4,356 $ 1,119 $ 1,992 $ - $ 15,179 Capital expenditures................ $ 5,307 $ 11,534 $ 566 $ 2,330 $ - $ 19,737
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:
Three Months Ended June 30, ------------------------------------------------------------------- 2000 1999 -------------------------------- -------------------------------- Per Per Earnings Shares Share Earnings Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Earnings per common share - basic Net earnings............. $3,281,000 9,150,574 $0.36 $7,405,000 10,848,784 $0.68 Effect of dilutive stock options.......... - 13,726 - - 59,842 - ---------- --------- ----- ---------- ---------- ----- Earnings per common share - assuming dilution Net earnings............. $3,281,000 9,164,300 $0.36 $7,405,000 10,908,626 $0.68 ========== ========= ===== ========== ========== =====
Six Months Ended June 30, ------------------------------------------------------------------- 2000 1999 -------------------------------- -------------------------------- Per Per Earnings Shares Share Earnings Shares Share (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ----------- ------------- ------ ----------- ------------- ------ Earnings per common share - basic Net earnings............. $1,649,000 9,398,344 $0.18 $8,263,000 10,843,803 $0.76 Effect of dilutive stock options.......... - 13,740 - - 34,180 - ---------- --------- ----- ---------- ---------- ----- Earnings per common share - assuming dilution Net earnings............. $1,649,000 9,412,084 $0.18 $8,263,000 10,877,983 $0.76 ========== ========= ===== ========== ========== =====
On December 21, 1999, the Company filed a Schedule 13E-4 Issuer Tender Offer Statement with the Securities and Exchange Commission. The offer expired on February 4, 2000, and the Company acquired 1,169,414 shares of its common stock, which were properly tendered under the offer, on February 8, 2000. The repurchased shares are being treated as treasury shares. At June 30, 2000, there were 9,150,574 shares of the Company's common stock outstanding. There were no transactions subsequent to June 30, 2000, that if the transactions had occurred before June 30, 2000, would materially change the number of common shares or potential common shares outstanding as of June 30, 2000. NOTE 4 - INVENTORIES:
JUNE 30, DECEMBER 31, - ---------------------------------------------------------------------------- (IN THOUSANDS) 2000 1999 - ---------------------------------------------------------------------------- First-in, first-out ("FIFO") method: Crude oil $18,467 $11,550 Refined products 33,337 26,632 Refinery and shop supplies 10,723 10,502 Merchandise 4,345 4,897 Retail method: Merchandise 9,075 8,809 - ---------------------------------------------------------------------------- Subtotal 75,947 62,390 Allowance for last-in, first-out ("LIFO") method (8,902) (4,150) - ---------------------------------------------------------------------------- Total $67,045 $58,240 ============================================================================
The portion of inventories valued on a LIFO basis totaled $40,538,000 and $32,435,000 at June 30, 2000 and December 31, 1999, 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 June 30, 2000 and 1999, net earnings and diluted earnings per share for the three months ended June 30, 2000 and 1999 would have been higher by $459,000 and $0.05 and $1,653,000 and $0.15, respectively, and net earnings and diluted earnings per share for the six months ended June 30, 2000 and 1999 would have been higher by $2,912,000 and $0.31 and lower by $430,000 and $0.04, respectively. For interim reporting purposes, inventory increments expected to be liquidated by year end are valued at the most recent acquisition costs and inventory liquidations that are expected to be reinstated by year end are ignored for LIFO inventory valuation calculations. The LIFO effects of inventory increments not expected to be liquidated by year end, and the LIFO effects of inventory liquidations not expected to be reinstated by year end, are recorded in the period such increments and liquidations occur. 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. In addition, 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. At June 30, 2000, the Company was in compliance with the restrictive covenants relating to these 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. Separate financial statements of the Company's subsidiaries are not 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 June 30, 2000, the availability of funds under the Credit Agreement was $65,000,000. There were no direct borrowings outstanding under this facility at June 30 or July 31, 2000, and there were approximately $2,387,000 of irrevocable letters of credit outstanding on each date. At December 31, 1999, there were no direct borrowings outstanding under this facility. The interest rate applicable to the Credit Agreement is tied to various short-term indices. At June 30, 2000, this rate was approximately 8% 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 restrictive covenants 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 June 30, 2000, the Company was in compliance with the Credit Agreement's restrictive covenants. The Credit Agreement is guaranteed by certain of the Company's direct and indirect wholly-owned subsidiaries. The Company also had approximately $7,917,000 of capital lease obligations outstanding at June 30, 2000, which require annual lease payments of approximately $895,000, all of which are recorded as interest expense. The Company intends to purchase the assets associated with these lease obligations pursuant to options to purchase during the remaining lease period of approximately seven years for approximately $7,917,000, of which $2,000,000 has been paid in advance and is recorded in "Other Assets" in the Company's Condensed Consolidated Balance Sheet. 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 June 30, 2000, which may result from those matters for which the Company has recorded accruals is not ascertainable, the Company believes that any amounts exceeding the recorded accruals should not materially affect the Company's financial condition. It is possible, however, 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 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 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 United 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"). 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"), which 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 at the South Valley Superfund Site, 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 state law 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. Since its original filing, the state court complaint has been removed to federal court. The Company, along with certain other defendants, has filed motions to dismiss the state and federal claims. Although neither complaint calculates the amount of damages being sought by the state, a preliminary assessment report on alleged damages to natural resources, dated December 1998, issued 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 1973, the Company constructed the Farmington refinery, which was operated until 1982. The Company became aware of soil and shallow groundwater contamination at this facility in 1985. The Company hired environmental consulting firms to investigate the contamination and undertake remedial action. The consultants identified several areas of contamination in the soils and shallow groundwater underlying the Farmington property. A consultant to the Company has indicated that contamination attributable to past operations at the Farmington property has migrated off the refinery property, including a hydrocarbon plume that appears to extend no more than 1,800 feet south of the refinery property. Remediation activities are ongoing by the Company under the supervision of the New Mexico Oil Conservation Division ("OCD"), although no cleanup order has been received. The Company had reserved approximately $1,000,000 for possible environmental expenditures relating to its Farmington property, of which approximately $570,000 still remains. The Farmington property is located adjacent to the Lee Acres Landfill (the "Landfill"), a closed landfill formerly operated by San Juan County, which is situated on lands owned by the United States Bureau of Land Management (the "BLM"). Industrial and municipal wastes were disposed of in the Landfill by numerous sources. During the period that it was operational, the Company disposed of office trash, maintenance shop trash, used tires and water from the Farmington refinery's evaporation pond at the Landfill. The Landfill was added to the National Priorities List as a CERCLA Superfund site in 1990. In connection with this listing, the Environmental Protection Agency ("EPA") defined the site as the Landfill and the Landfill's associated groundwater plume. EPA excluded any releases from the Farmington refinery itself from the definition of the site. In May 1991, EPA notified the Company that it may be a potentially responsible party under CERCLA for the release or threatened release of hazardous substances, pollutants or contaminants at the Landfill. BLM made a proposed plan of action for the Landfill available to the public in 1996. Remediation alternatives examined by BLM in connection with the development of its proposed plan ranged in projected cost from no cost to approximately $14,500,000. BLM proposed the adoption of a remedial action alternative that it believed would cost approximately $3,900,000 to implement. BLM's $3,900,000 cost estimate 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. BLM has received public comment on its proposed plan. The final remedy for the site, however, has not yet been selected. It is anticipated that the final remedy will be selected in 2000. 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. Based on current information, the Company does not believe that it needs to record a liability in relation to BLM's proposed plan. BLM may assert claims against the Company and others for reimbursement of investigative, cleanup and other costs incurred by BLM in connection with the Landfill and surrounding areas. It is also possible that the Company will assert claims against BLM in connection with contamination that may be originating from the Landfill. Private parties and other governmental entities may also assert claims against BLM, the Company and others for property damage, personal injury and other damages allegedly arising out of any contamination originating from the Landfill and the Farmington property. Parties may also request judicial determination of their rights and responsibilities, and the rights and responsibilities of others, in connection with the Landfill and the Farmington property. Currently, however, there is no outstanding litigation against the Company by BLM or any other party. In connection with the acquisition of the Company's Bloomfield refinery, the Company assumed certain environmental obligations including Bloomfield Refining Company's ("BRC") obligations under an Administrative Order issued by EPA in 1992 pursuant to the Resources Conservation and Recovery Act (the "Order"). The Order required BRC to investigate and propose measures for correcting any releases of hazardous waste or hazardous constituents at or from the Bloomfield refinery. The Company established an environmental reserve of $2,250,000 in connection with this matter, of which approximately $1,500,000 still remains. The Company has discovered hydrocarbon contamination adjacent to a 55,000 barrel crude oil storage tank (the "Tank") that was located in Bloomfield, New Mexico. The Company believes that all or a portion of the Tank and the 5.5 acres owned by the Company on which the Tank was located may have been a part of a refinery, owned by various other parties, that, to the Company's knowledge, ceased operations in the early 1960s. The Company submitted a work plan to define the extent of petroleum contamination in the soil and groundwater, which was approved by OCD subject to certain conditions. One of the conditions required the Company to submit a comprehensive report on all site investigations to OCD by January 14, 2000. The Company filed the required report on January 13, 2000, which included proposed remedial activities at the site. Based upon the report, it appears possible that contaminated groundwater is contained within the property boundaries and does not extend offsite. It is anticipated that OCD will not require remediation of offsite soil based upon the low contaminant levels found there. On May 19, 2000, OCD approved the Company's report with certain conditions. The Company must complete remedial activities and submit a report to OCD by August 31, 2000. The Company previously estimated cleanup costs at $250,000 and an environmental reserve in that amount was created, of which $232,000 remains. The Company currently anticipates that the cost of remediation will be closer to $100,000. The Company is in receipt of a Notice of Violation, dated February 9, 1993, from the New Mexico Environment Department ("NMED") alleging that the Company failed to comply with certain notification requirements contained in one of the permits applicable to the Ciniza refinery's land treatment facility. As a result, the Company and NMED are negotiating a plan for closure of the land treatment facility. It is anticipated that the costs associated with implementing the type of closure plan under discussion would be approximately $400,000. An estimated $100,000 of this amount would be spent in 2000, with the remainder spent over a period of approximately 30 years. The Company has received a Notice of Violation and Settlement Offer ("NOV"), dated July 18, 2000, from NMED. The NOV alleges that the Company has violated a number of air quality regulations, as well as a condition of an air quality permit, at the Company's Bloomfield refinery. The NOV represents that NMED is willing to settle this matter for $145,854. The Company intends to contest the NOV. The Company has an environmental liability accrual of approximately $2,300,000. 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 the Company owns in Bloomfield, New Mexico. The remainder, in the approximate amount of $1,500,000, relates to certain environmental obligations assumed in the acquisition of the Bloomfield refinery. The environmental accrual is recorded in the current and long-term sections of the Company's Consolidated Balance Sheets. 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 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 precisely estimate the amount of any obligation for such taxes at this time because the Navajo Tribe's legal 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 certain 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 intends to continue purchasing activities in the area of disputed jurisdiction. The Company is subject to various federal and state programs relating to the composition of motor fuels. The State of Arizona passed legislation in April 2000 that requires refiners and suppliers of gasoline to phase out the use of the gasoline additive methyl tertiary butyl ether ("MTBE") in Arizona by July 2003, if feasible. The Company uses MTBE as an octane booster in its fuels. A reasonable estimate of the financial impact, if any, of the phase out of MTBE on the Company cannot be made at this time because, among other reasons, the market price of alternative octane boosters may be more or less than the price of MTBE at the time of the phase out and, depending upon the alternative selected, modifications to the manner in which the Company's refineries are operated may or may not be necessary. In December 1999, EPA issued a rule which requires refiners to reduce the sulfur content of gasoline to 30 parts per million ("ppm") by 2006 unless they qualify for an extension of this deadline. The Company may be eligible for an extension of up to one year under a provision pertaining to gasoline produced or sold in certain designated geographic areas, including three states in which the Company markets its gasoline. It is anticipated that the Company will incur costs in the approximate amount of $3,500,000 to purchase the equipment necessary to produce gasoline with a 30 ppm sulfur content at its refineries. The federal Clean Air Act requires the sale of reformulated gasoline ("RFG") in certain designated areas of the country. Motor fuels produced by the Company's refineries are not sold in any such areas. Arizona, however, has adopted a cleaner burning gasoline ("CBG") program. The Company does not presently manufacture gasolines that satisfy Arizona CBG specifications. The specifications are currently applicable to gasolines sold or used in Maricopa County and a portion of Yavapai County, and are expected to become effective in Pinal County by 2001. The Company operates approximately 25 service stations in these areas, and also conducts wholesale marketing operations there. The Company currently does not intend to make the changes necessary to produce CBG because the capital costs associated with manufacturing large quantities of such gasolines would be significant in amounts not determined by the Company. The Company has the ability to purchase or exchange for these gasolines to supply its operations in the CBG areas, including Pinal County. It is possible that additional legislation or regulations affecting motor fuel specifications may be adopted that would impact geographic areas in which the Company markets its products. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS EARNINGS BEFORE INCOME TAXES - ---------------------------- For the three months ended June 30, 2000, earnings before income taxes were $5,490,000, a decrease of $6,649,000 from earnings before income taxes of $12,139,000 for the three months ended June 30, 1999. For the six months ended June 30, 2000, earnings before income taxes were $2,759,000, a decrease of $10,764,000 from earnings before income taxes of $13,523,000 for the six months ended June 30, 1999. In each period, the decrease was primarily due to a decline in Phoenix Fuel finished product margins, a 48% decline for the quarter and a 30% decline for the six months; an 8% decrease in refinery sourced finished product sales volumes, due in part to competitive conditions and, in the first quarter of 2000, to customers using inventory they had stored at the end of 1999 in anticipation of potential Y2K problems; a decline in refinery margins, a 9% decline for the quarter and a 7% decline for the six months; an increase in operating expenses, including depreciation and amortization; and a decline in retail fuel margins, a 12% decline for the quarter and an 18% decline for the six months. Retail and refining margins were each affected by finished product and crude oil costs which increased faster than related retail and wholesale selling prices. The decrease in earnings was offset in part by increased retail merchandise sales, a 21% increase for the quarter and a 17% increase for the six months, along with a 2% increase in merchandise margins in each period; and lower selling, general and administrative expenses ("SG&A"). In addition, 1999 earnings were reduced as the result of 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 June 30, 2000, increased approximately $64,884,000 or 32% to $266,066,000 from $201,182,000 in the comparable 1999 period. Revenues for the six months ended June 30, 2000, increased approximately $140,997,000 or 40% to $491,200,000 from $350,203,000 in the comparable 1999 period. The increase in each period is due to, among other things, increases in refinery weighted average selling prices, a 46% increase for the quarter and a 64% increase for the six months; increases in Phoenix Fuel weighted average selling prices, a 40% increase for the quarter and a 53% increase for the six months, along with increases in wholesale fuel volumes sold to third party customers, a 4% increase for the quarter and a 3% increase for the six months; and a 21% and 17% increase in retail merchandise sales for the quarter and six months, respectively. This increase was partially offset by an 8% decline in refinery sourced finished product sales volumes in each period. The volumes of refined products sold through the Company's retail units increased approximately 3% and 5% from 1999 levels for the quarter and six months, respectively, primarily due to Company constructed and remodeled service station/convenience stores that were opened in 1999 and 2000. The volume of finished product sold from service station/convenience stores that were in operation for a full year in each period increased approximately 4% for the quarter and 3% for the six months, while volumes sold from the Company's travel center declined approximately 17% for the quarter and 9% for the six months. COST OF PRODUCTS SOLD - --------------------- For the three months ended June 30, 2000, cost of products sold increased $73,162,000 or 53% to $210,501,000 from $137,339,000 in the corresponding 1999 period. For the six months ended June 30, 2000, cost of products sold increased $151,397,000 or 64% to $388,423,000 from $237,026,000 in the corresponding 1999 period. The increase is due in part to a 75% increase in average crude oil costs for the quarter and a 99% increase for the six months; increases in the cost of finished product purchased by Phoenix Fuel, a 49% increase for the quarter and a 62% increase for the six months, along with a 4% increase in wholesale fuel volumes sold to third party customers for the quarter and a 3% increase for the six months; and a 21% and 17% increase in retail merchandise sales for the quarter and six months, respectively. This increase was partially offset by an 8% decline in refinery sourced finished product sales volumes in each period. 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. There were no similar liquidations in the same 2000 period. OPERATING EXPENSES - ------------------ For the three months ended June 30, 2000, operating expenses increased approximately $492,000 or 2% to $29,504,000 from $29,012,000 for the three months ended June 30, 1999. For the six months ended June 30, 2000, operating expenses increased approximately $2,933,000 or 5% to $59,029,000 from $56,096,000 for the six months ended June 30, 1999. The increase in each period is due to, among other things, increased retail operating costs related to new service station/convenience stores opened in 1999 and 2000, including wages and related costs, and increased retail credit card processing fees due to an increase in the number of transactions, as well as the average dollar amount of each transaction. In addition, for the six months there were higher costs and increased volumes of purchased fuel for the refineries; increased expense related to various refinery maintenance projects undertaken in 2000; and higher expenditures at the refineries for catalyst, chemicals and additives. These increases were offset in part in each period by a reduction in accruals for incentive bonuses and lower lease expense due to the repurchase of 24 service station/convenience stores sold as part of a sale-leaseback transaction between the Company and FFCA Capital Holding Corporation ("FFCA") completed in December 1998. In addition, the first six months of 2000 reflected reduced retail advertising costs because of a change in advertising strategies as well as reduced expenditures for other promotional programs. DEPRECIATION AND AMORTIZATION - ----------------------------- For the three months ended June 30, 2000, depreciation and amortization increased approximately $529,000 or 7% to $8,370,000 from $7,841,000 in the same 1999 period. For the six months ended June 30, 2000, depreciation and amortization increased approximately $1,496,000 or 10% to $16,675,000 from $15,179,000 in the same 1999 period. The increase in each period is primarily related to construction, remodeling and upgrades in retail and refining operations during 1999 and 2000; the amortization of 1999 refinery turnaround costs; and the repurchase of 24 service station/convenience stores sold as part of a sale-leaseback transaction between the Company and FFCA in December 1998. In addition, depreciation and amortization for 1999 included the amortization of certain natural gas properties and the adjustment of the value of certain real estate assets held for sale. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- For the three months ended June 30, 2000, SG&A decreased approximately $992,000 or 13% to $6,396,000 from $7,388,000 in the corresponding 1999 period. For the six months ended June 30, 2000, SG&A decreased approximately $2,528,000 or 16% to $12,798,000 from $15,326,000 in the corresponding 1999 period. The decrease is primarily due to higher expenses for the estimated costs of incentive bonuses and accruals for other employee benefits made in 1999 as compared to 2000, a larger than normal contribution to the Company's Employee Stock Ownership Plan ("ESOP") in 1999, and higher 1999 workers' compensation expense. The decrease was offset in part by higher group insurance costs in each 2000 period due to higher claims experience; and for the six months, severance pay costs incurred in 2000 relating to a reorganization and staff reduction program. In addition, insurance reimbursements were received in the first quarter of 1999 relating to prior workers' compensation claims that had been paid by the Company. INTEREST EXPENSE, NET - --------------------- For the three months ended June 30, 2000, net interest expense (interest expense less interest income) increased approximately $292,000 or 5% to $5,805,000 from $5,513,000 in the comparable 1999 period. For the six months ended June 30, 2000, net interest expense increased approximately $413,000 or 4% to $11,516,000 from $11,103,000 in the comparable 1999 period. The increase in each period is primarily due to additional interest expense related to borrowings from the Company's revolving credit facility and a decline in interest and investment income from the investment of funds in short-term instruments. INCOME TAXES - ------------ The effective tax rate for the three and six month periods ended June 30, 2000, was approximately 40% and was approximately 39% for each comparable 1999 period. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATIONS - ------------------------- Operating cash flows decreased for the six months ended June 30, 2000 compared to the six months ended June 30, 1999, primarily as a result of a decrease in cash flows related to changes in operating assets and liabilities in each period and a decrease in net earnings. Net cash provided by operating activities totaled $2,260,000 for the six months ended June 30, 2000, compared to net cash provided by operating activities of $38,121,000 in the comparable 1999 period. WORKING CAPITAL - --------------- Working capital at June 30, 2000 consisted of current assets of $166,104,000 and current liabilities of $113,637,000, or a current ratio of 1.46:1. At December 31, 1999, the current ratio was 1.40:1 with current assets of $171,984,000 and current liabilities of $122,588,000. Current assets have decreased since December 31, 1999, due to a decrease in cash and cash equivalents, offset in part by an increase in accounts and note receivable, inventories, and prepaid expenses and other. Accounts receivable have increased primarily due to an increase in finished product selling prices and certain miscellaneous receivables, offset in part by a reduction in product trading activity. Note receivable increased due to the reclassification of a note receivable from the Company's Chairman and Chief Executive Officer from "Other Assets" to current "Note Receivable". Inventories have increased due to an increase in both crude oil and refined product volumes and prices. Prepaid expenses and other have increased primarily as a result of refundable deposits placed in escrow for the acquisition of certain retail assets. Current liabilities have decreased due to an decrease in accounts payable and accrued expenses. Accounts payable have decreased primarily as a result of a decrease in certain trade payables, offset in part by an increase in the cost of certain raw materials and finished products. Accrued expenses have decreased primarily as a result of the payment of an accrued contingent payment related to the 1995 acquisition of the Company's Bloomfield refinery, the payment of 1999 accrued bonuses and 401(k) Company matching contributions, and the payment of certain accrued interest balances. CAPITAL EXPENDITURES AND RESOURCES - ---------------------------------- Net cash used in investing activities for the purchase of property, plant and equipment totaled approximately $12,695,000 for the six months ended June 30, 2000. Expenditures included amounts for, among other things, the assignment of certain leases/subleases to the Company associated with 9 service station/convenience stores located on the Navajo and Zuni Indian Reservations; certain pipeline right-of-way payments; operational and environmental projects for the refineries; construction, remodeling and upgrade of retail operations; and construction costs related to the remodeling of a cardlock location. The Company received proceeds of approximately $3,098,000 from the sale of property, plant and equipment in the first six months of 2000, primarily from the sale of eight service station/convenience stores. The Company has entered into a non-binding letter of intent to acquire an interest in Western Refining Company ("Western"), or an affiliated entity, under terms yet to be finalized. Western, a Dallas, Texas based company, recently entered into an agreement to acquire the refining assets of Refining Holding Company L.P. in El Paso, Texas and is in negotiations with Chevron to purchase its El Paso refining assets. The Company is in the initial phase of due diligence and is continuing discussions with Western regarding the interest to be acquired. The Company continues to investigate other strategic acquisitions as well as capital improvements to its existing facilities. The Company is also evaluating the possible sale or exchange of non-strategic or under performing assets. The Company anticipates that working capital, including that necessary for capital expenditures and debt service, will be funded through existing cash balances, cash generated from operating activities, and, if necessary, future borrowings. Future liquidity, both short and long-term, will continue to be primarily dependent on producing or purchasing, and selling, sufficient quantities of refined products at margins sufficient to cover fixed and variable expenses. CAPITAL STRUCTURE - ----------------- At June 30, 2000 and December 31, 1999, the Company's long-term debt was 67.6% and 66.1% of total capital, respectively, and the Company's net debt (long-term debt less cash and cash equivalents) to total capitalization percentages were 66.9% and 63.0%, 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. In addition, 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. At June 30, 2000, the Company was in compliance with the restrictive covenants relating to these Notes. 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 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 June 30, 2000, the availability of funds under the Credit Agreement was $65,000,000. There were no direct borrowings outstanding under this facility at June 30 or July 31, 2000, and there were approximately $2,387,000 of irrevocable letters of credit outstanding on each date. The interest rate applicable to the Credit Agreement is tied to various short-term indices. At June 30, 2000, this rate was approximately 8% 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 restrictive covenants 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 June 30, 2000, the Company was in compliance with the Credit Agreement's restrictive covenants. The Credit Agreement is guaranteed by certain 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 first six months of 2000, the Company did not repurchase any shares under this program. From the inception of the stock repurchase program through June 30, 2000, the Company had repurchased 1,962,700 shares for approximately $20,623,000, resulting in a weighted average cost of $10.51 per share. The repurchased shares are treated as treasury shares. On August 7, 2000, the Company's Board of Directors approved the acquisition of up to 100,000 shares of the Company's common stock, pursuant to the Company's stock repurchase program, from its Chairman and Chief Executive Officer at a price of $7.00 per share, which was the closing price of the Company's common stock on that date. Approximately 79,500 shares had been purchased as of August 10, 2000. Shares repurchased under the Company's program 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. As previously disclosed in the Company's Annual Report on Form 10-K, the Company filed a Schedule 13E-4 Issuer Tender Offer Statement with the Securities and Exchange Commission on December 21, 1999, to acquire up to 1,333,333 shares of its common stock at a price of $9.00 per share, net to the seller in cash. The offer expired on February 4, 2000, at which time 1,169,414 shares had been properly tendered to the Company. The Company purchased all of these shares at the stated price, at a cost of approximately $10,525,000, plus expenses of approximately $213,000 on February 8, 2000. These repurchased shares are treated as treasury shares. The Company's Board of Directors did not declare a cash dividend on common stock for the first or second quarters 2000. 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. It is anticipated that the Board of Directors will periodically review the Company's policy regarding the payment 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. The potential loss from a hypothetical 10% adverse change in commodity prices on open commodity futures and options contracts held by the Company at June 30, 2000, was approximately $172,000. 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 June 30, 2000, 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. As previously discussed in the Company's Annual Report on Form 10-K for the Company's fiscal year ended December 31, 1999 and in the Company's Quarterly Report on Form 10-Q for the first quarter of 2000, the Company has discovered hydrocarbon contamination adjacent to a 55,000 barrel crude oil storage tank (the "Tank") that was located in Bloomfield, New Mexico. The Company believes that all or a portion of the Tank and the 5.5 acres owned by the Company on which the Tank was located may have been a part of a refinery, owned by various other parties, that, to the Company's knowledge, ceased operations in the early 1960s. The Company submitted a work plan to define the extent of petroleum contamination in the soil and groundwater, which was approved by OCD subject to certain conditions. One of the conditions required the Company to submit a comprehensive report on all site investigations to OCD by January 14, 2000. The Company filed the required report on January 13, 2000. Based upon the report, it appears possible that contaminated groundwater is contained within the property boundaries and does not extend offsite. It is anticipated that OCD will not require remediation of offsite soil based upon the low contaminant levels found there. Subsequent to the filing of the Company's Form 10-Q for the first quarter of 2000, OCD approved the Company's report, which included proposed remedial activities at the site, with certain conditions. The Company must complete remedial activities and submit a report to OCD by August 31, 2000. The Company previously estimated cleanup costs at $250,000 and an environmental reserve in that amount was created, of which $232,000 remains. The Company currently anticipates that the cost of remediation will be closer to $100,000. The Company has received a Notice of Violation and Settlement Offer ("NOV"), dated July 18, 2000, from NMED. The NOV alleges that the Company has violated a number of air quality regulations, as well as a condition of an air quality permit, at the Company's Bloomfield refinery. The NOV represents that NMED is willing to settle this matter for $145,854. The Company intends to contest the NOV. The State of Arizona passed legislation in April 2000 that requires refiners and suppliers of gasoline to phase out the use of the gasoline additive methyl tertiary butyl ether ("MTBE") in Arizona by July 2003, if feasible. The Company uses MTBE as an octane booster in its fuels. A reasonable estimate of the financial impact, if any, of the phase out of MTBE on the Company cannot be made at this time because, among other reasons, the market price of alternative octane boosters may be more or less than the price of MTBE at the time of the phase out and, depending upon the alternative selected, modifications to the manner in which the Company's refineries are operated may or may not be necessary. The Company's current receipts and projections of Four Corners crude oil production indicate that the Company's crude oil demand may 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. The Four Corners basin is a mature production area and, accordingly, is subject to a natural decline in production over time. In the past, this natural decline has been offset by new drilling, 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. Through the first half of 2000, the Company has noticed some increase in certain Four Corners production and has indications that producers are considering projects that, if undertaken, could result in increased production by the end of 2000 or early 2001. The Company estimates that for the year 2000 its refinery production runs will approximate 1999 levels based on current receipts and projections of Four Corners crude oil production. If additional crude oil or other refinery feedstocks become available, the Company may increase its production runs depending on demand for finished products and refining margins attainable. 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 continues to evaluate supplemental feedstock alternatives for its refineries on both a short-term and long-term basis. These alternatives include, among other possibilities, the encouraging of new exploration and production opportunities on tribal reservation lands. In addition, the Company may evaluate a project to increase its production of gasoline from abundantly available natural gas liquids. 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. Another potential project would take product on to Salt Lake City, Utah. 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 potentially 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. Separately, at the end of 1999, an existing natural gas liquids pipeline had been converted to a refined products pipeline and began delivering finished product from Southeastern New Mexico to the Albuquerque and Four Corners areas. The Company has experienced increased competition for sales volumes in these areas as a result of the completion of this project. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This report contains forward-looking statements that involve known and unknown risks and uncertainties. Forward-looking statements are identified by words or phrases such as "believes," "expects," "anticipates," "estimates," "could," "plans," "intends," variations of such words and phrases and other similar expressions. While these forward-looking statements are made in good faith, and reflect the Company's current judgment regarding such matters, actual results could vary materially from the forward-looking statements. Important factors that could cause actual results to differ from forward-looking statements include, but are 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 against the Company by the State of New Mexico and the Company's ultimate liability related thereto; the availability of indemnification from third parties in connection with various legal proceedings; the Company's ability to recover tax payments from third parties; the Company's ability to resolve alleged legal violations without the assessment of additional fines or penalties; the expansion of the Company's refining, retail and Phoenix Fuel operations through acquisition and construction; the risk that the Company will not acquire an interest in Western Refining Company or an affiliated entity; the risk that Western Refining Company will not complete the acquisition of the refining assets in El Paso, Texas of Refinery Holding Company L.P. and/or Chevron; 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 impact of the mandated use of gasolines satisfying governmentally mandated specifications on the Company's operations; the ability of the Company to duplicate the level of 1999 refinery production runs in 2000; the ability of the Company to reduce operating expenses and non-essential capital expenditures; and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. All subsequent written and oral forward-looking statements attributable to the Company, or persons acting on behalf of the Company, are expressly qualified in their entirety by the foregoing. Forward-looking statements made by the Company represent its judgement on the dates such statements are made. The Company assumes no obligation to update any forward-looking statements to reflect new or changed events or circumstances. 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. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to ordinary routine litigation incidental to its business. There is also 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 1 hereof, under the heading "Liquidity and Capital Resources - Other." ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of stockholders was held on May 11, 2000. Proxies for the meeting were solicited under Regulation 14A. There were no matters submitted to a vote of security holders other than the election of one director and approval of auditors as specified in the Company's Proxy Statement. There was no solicitation in opposition to management's nominee to the Board of Directors. Fredric L. Holliger was elected as a director of the Company. The vote was as follows: SHARES SHARES VOTED "FOR" VOTED "WITHHOLDING" ----------- ------------------- 8,196,343 126,865 Deloitte & Touche LLP were ratified as independent auditors for the Company for the year ending December 31, 2000. The vote was as follows: SHARES SHARES SHARES VOTED "FOR" VOTED "AGAINST" VOTED "ABSTAINING" ----------- --------------- ------------------ 8,257,276 37,705 28,227 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 June 30, 2000. 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 June 30, 2000 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: August 11, 2000 EX-27 2 0002.txt ART.5 FDS FOR GIANT INDUSTRIES, INC., 2ND QTR. 2000 10-Q
5 1,000 6-MOS DEC-31-2000 JUN-30-2000 9,080 0 0 0 67,045 166,104 494,640 176,978 529,171 113,637 258,113 0 0 0 0 529,171 491,200 491,200 388,423 464,127 0 0 0 2,759 1,110 1,649 0 0 0 1,649 0.18 0.18
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