SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report
(Date of earliest event reported)
July 15, 2002
GIANT INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or jurisdiction of incorporation)
1-10398 86-0642718
(Commission File Number) (IRS Employer Identification No.)
23733 North Scottsdale Road
Scottsdale, Arizona 85255
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(602) 585-8888
ITEM 5. OTHER EVENTS
Giant Industries, Inc., in connection with a registration statement
filed July 15, 2002 on Form S-4, is amending its audited financial statements
and related items (see below) as originally reported in its 2001 Annual
Report on Form 10-K for the year ended December 31, 2001 to reflect the
following:
- Transitional pro forma disclosures under Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," adopted
January 1, 2002.
- Information regarding the subsidiary guarantors of Giant Industries,
Inc.'s $200,000,000 of senior subordinated notes.
Item 8 of Part III and Item 14(a)(1) of Part IV as reported in Giant
Industries, Inc.'s 2001 Annual Report on Form 10-K, for the fiscal year ended
December 31, 2001, are amended and restated herein in their entirety within
this Current Report on Form 8-K. The financial statements of Giant
Industries, Inc. are included as Appendix A of this Current Report on Form
8-K. See Index to Consolidated Financial Statements.
ITEM 7. EXHIBITS
Exhibit Number Description of Document
- -------------- ------------------------------------------------------
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GIANT INDUSTRIES, INC.
/s/ GARY R. DALKE
------------------------------------------
Gary R. Dalke, Vice President, Controller,
Chief Accounting Officer and Assistant Secretary
(Principal Accounting Officer)
Date: July 15, 2002
APPENDIX A
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report
Consolidated Balance Sheets - December 31, 2001 and 2000
Consolidated Statements of Earnings - Years ended December 31, 2001, 2000 and
1999
Consolidated Statements of Stockholders' Equity - Years ended December 31,
2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000
and 1999
Notes to Consolidated Financial Statements
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Giant Industries, Inc.
Scottsdale, Arizona
We have audited the accompanying consolidated balance sheets of Giant
Industries, Inc. and subsidiaries as of December 31, 2001 and 2000, and the
related consolidated statements of earnings, stockholders' equity and cash
flows for each of the three years in the period ended December 31, 2001.
These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Giant Industries, Inc.
and subsidiaries as of December 31, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Deloitte & Touche LLP
Phoenix, Arizona
March 29, 2002 (except for Note 19, as to which the date is July 12, 2002)
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
- ----------------------------------------------------------------------------------------
(In thousands, except share and per share data) 2001 2000
- ----------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 26,326 $ 26,618
Receivables:
Trade, less allowance for doubtful
accounts of $540 and $356 37,181 69,215
Income tax refunds 1,497 741
Other 4,852 5,591
- ----------------------------------------------------------------------------------------
43,530 75,547
- ----------------------------------------------------------------------------------------
Inventories 58,729 56,607
Prepaid expenses and other 3,661 3,659
Deferred income taxes 3,735 2,753
- ----------------------------------------------------------------------------------------
Total current assets 135,981 165,184
- ----------------------------------------------------------------------------------------
Property, plant and equipment 525,345 508,384
Less accumulated depreciation and amortization (201,823) (192,234)
- ----------------------------------------------------------------------------------------
323,522 316,150
- ----------------------------------------------------------------------------------------
Goodwill, less accumulated amortization of $5,361 and $4,292 19,815 20,806
Note and interest receivable from a related party, less
allowance for doubtful account of $5,409 and $0 (Note 6) - 5,810
Other assets 27,856 20,615
- ----------------------------------------------------------------------------------------
$ 507,174 $ 528,565
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 45 $ 213
Accounts payable 42,255 66,461
Accrued expenses 36,537 44,016
- ----------------------------------------------------------------------------------------
Total current liabilities 78,837 110,690
- ----------------------------------------------------------------------------------------
Long-term debt, net of current portion 256,749 258,009
Deferred income taxes 32,772 27,621
Other liabilities and deferred income 2,406 4,542
Commitments and contingencies (Notes 3, 6,
10, 11, 13, 14, 15, 16 and 18)
Stockholders' equity:
Preferred stock, par value $.01 per share,
10,000,000 shares authorized, none issued
Common stock, par value $.01 per share,
50,000,000 shares authorized, 12,305,859
and 12,282,688 shares issued 123 122
Additional paid-in capital 73,589 73,099
Retained earnings 99,152 87,262
- ----------------------------------------------------------------------------------------
172,864 160,483
Less common stock in treasury - at cost,
3,751,980 and 3,334,680 shares (36,454) (32,780)
- ----------------------------------------------------------------------------------------
Total stockholders' equity 136,410 127,703
- ----------------------------------------------------------------------------------------
$ 507,174 $ 528,565
========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31,
- ------------------------------------------------------------------------------------------
(In thousands, except per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------
Net revenues $ 968,679 $ 1,074,362 $ 782,683
Cost of products sold 738,514 859,001 568,005
- ------------------------------------------------------------------------------------------
Gross margin 230,165 215,361 214,678
Operating expenses 114,260 122,650 115,599
Depreciation and amortization 33,875 33,579 31,129
Selling, general and administrative expenses 27,864 25,373 28,166
Loss on the disposal/write-down of assets 6,212 - 2,387
Allowance for related party note and interest
receivable 5,409 - -
- ------------------------------------------------------------------------------------------
Operating income 42,545 33,759 37,397
Interest expense (24,098) (24,411) (23,417)
Interest and investment income 1,661 1,989 2,476
- ------------------------------------------------------------------------------------------
Earnings before income taxes 20,108 11,337 16,456
Provision for income taxes 7,727 4,048 5,678
- ------------------------------------------------------------------------------------------
Net earnings $ 12,381 $ 7,289 $ 10,778
==========================================================================================
Earnings per common share:
Basic $ 1.40 $ 0.79 $ 1.01
==========================================================================================
Assuming dilution $ 1.39 $ 0.79 $ 1.01
==========================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock
---------------- Additional Treasury Stock Total
Shares Par paid-in Retained -------------------- stockholders'
issued value capital earnings Shares Cost equity
- ----------------------------------------------------------------------------------------------------------
(In thousands, except number of shares)
Balances, January 1, 1999 12,232,367 $122 $72,699 $69,391 1,393,600 $(14,510) $127,702
Purchase of treasury stock - - - - 569,100 (6,113) (6,113)
Stock options exercised 120,857 1 1,069 - - - 1,070
Shares cancelled on net
exercise of stock options (87,036) (1) (778) (196) - - (975)
Net earnings - - - 10,778 - - 10,778
- ----------------------------------------------------------------------------------------------------------
Balances, December 31, 1999 12,266,188 122 72,990 79,973 1,962,700 (20,623) 132,462
Purchase of treasury stock - - - - 1,371,980 (12,157) (12,157)
Stock options exercised 16,500 - 109 - - - 109
Net earnings - - - 7,289 - - 7,289
- ----------------------------------------------------------------------------------------------------------
Balances, December 31, 2000 12,282,688 122 73,099 87,262 3,334,680 (32,780) 127,703
Purchase of treasury stock - - - - 417,300 (3,674) (3,674)
Stock options exercised 126,601 2 1,105 - - - 1,107
Shares cancelled on net
exercise of stock options (103,430) (1) (615) (491) - - (1,107)
Net earnings - - - 12,381 - - 12,381
- ----------------------------------------------------------------------------------------------------------
Balances, December 31, 2001 12,305,859 $123 $73,589 $99,152 3,751,980 $(36,454) $136,410
==========================================================================================================
The accompanying notes are an integral part of these consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
- --------------------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings $ 12,381 $ 7,289 $ 10,778
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 33,875 33,579 31,129
Deferred income taxes 4,169 (432) 5,132
Deferred lease expense 296 791 837
Allowance for related party note and interest
receivable 5,409 - -
Loss on the disposal/write-down of assets 6,212 - 2,181
Interest received on related party note receivable 938 - 380
Interest accrued on related party note receivable (537) (539) (528)
Other 1,344 (806) (782)
Changes in operating assets and liabilities:
Decrease (increase) in receivables 32,177 (571) (23,330)
(Increase) decrease in inventories (4,645) 1,640 (6,685)
(Increase) decrease in prepaid expenses and other (133) 479 1,209
(Decrease) increase in accounts payable (24,206) (10,372) 33,930
(Decrease) increase in accrued expenses (2,024) (1,566) 5,548
- --------------------------------------------------------------------------------------------
Net cash provided by operating activities 65,256 29,492 59,799
- --------------------------------------------------------------------------------------------
Cash flows from investing activities:
Purchases of property, plant and equipment (57,056) (22,455) (46,361)
Purchases of other assets (5,602) - -
Refinery acquisition contingent payment (5,139) (5,442) (7,289)
Proceeds from sale of property, plant and
equipment and other assets 7,889 4,473 2,288
- --------------------------------------------------------------------------------------------
Net cash used by investing activities (59,908) (23,424) (51,362)
- --------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds of long-term debt - 68,000 -
Payments of long-term debt (1,429) (68,347) (25,115)
Purchase of treasury stock (3,674) (12,157) (6,113)
Deferred financing costs (537) - (56)
Proceeds from exercise of stock options - 109 95
- --------------------------------------------------------------------------------------------
Net cash used by financing activities (5,640) (12,395) (31,189)
- --------------------------------------------------------------------------------------------
Net decrease in cash and cash equivalents (292) (6,327) (22,752)
Cash and cash equivalents:
Beginning of year 26,618 32,945 55,697
- --------------------------------------------------------------------------------------------
End of year $ 26,326 $ 26,618 $ 32,945
============================================================================================
Income taxes paid $ 4,675 $ 4,060 $ 2,099
============================================================================================
Interest paid $ 24,135 $ 24,458 $ 24,176
============================================================================================
Significant Noncash Investing and Financing Activities. During 2001, the Company received
103,430 shares of its own common stock valued at approximately $1,107,000 from James E. Acridge,
the Company's former Chairman of the Board and Chief Executive Officer (the "CCEO"), as payment
for the exercise by the CCEO of 126,601 common stock options. These shares were immediately
cancelled. In addition, the Company repurchased, for cash, 59 service station/convenience stores
from FFCA Capital Holding Corporation ("FFCA") for approximately $38,052,000 plus closing costs.
These service station/convenience stores had been sold to FFCA in a sale-leaseback transaction
completed in December 1998. Certain deferrals on the Balance Sheet relating to the sale-leaseback
transaction reduced the cost basis of the assets recorded in "Property, Plant and Equipment" by
approximately $1,736,000. These deferrals included a deferred gain on the original sale to FFCA
and deferred lease allocations included in "Other Liabilities and Deferred Income," and deferred
costs associated with the original sale included in "Other Assets." During 2000, approximately
$5,200,000 was incurred as a contingent payment related to the 1995 acquisition of the Bloomfield
Refinery. This amount was adjusted downward in 2001 to $5,139,000, the amount that was actually
paid. During 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. In addition, approximately
$10,692,000 was incurred as a contingent payment related to the 1995 acquisition of the
Bloomfield Refinery, of which $5,250,000 was paid in 1999 and $5,442,000 in 2000.
The accompanying notes are an integral part of these consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
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, and Colorado, with a concentration in the Four Corners area 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.
DESCRIPTION OF BUSINESS
The Company operates primarily as an independent refiner and marketer of
petroleum products. The Company's principal business is the refining of crude
oil into petroleum products which are sold through branded retail outlets as
well as through distributors, industrial/commercial accounts and major oil
companies. The Company has two operating refineries in New Mexico. The Ciniza
Refinery, with a crude oil throughput capacity of 20,800 barrels per day
("bpd") and a total capacity including natural gas liquids of 26,000 bpd, is
located near Gallup, New Mexico. The Bloomfield Refinery, with a crude oil
throughput capacity of 16,000 bpd and a total capacity including natural gas
liquids of 16,600 bpd, is located in Bloomfield, New Mexico.
At December 31, 2001, the Company had 150 retail service
station/convenience stores and a travel center. These operations sell various
grades of gasoline, diesel fuel, general merchandise and food products to the
general public.
In addition, through Phoenix Fuel, the largest independent petroleum
products distributor in the state of Arizona, the Company distributes
gasoline, diesel fuel and various lubricants to industrial and commercial
accounts.
(See Note 2 for a further discussion of business segments, Note 3 for
recent acquisitions and dispositions, and Note 18 for the pending acquisition
of the Yorktown Refinery.)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Giant and
all of its subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of the Company's consolidated financial statements, in
conformity with accounting principles generally accepted in the United States
of America, requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NET REVENUES
Revenues are recognized from sales when product ownership is transferred
to the customer. Excise and other similar taxes are excluded from net
revenues.
STATEMENTS OF CASH FLOWS
All highly liquid instruments with an original maturity of three months
or less are considered to be cash equivalents.
DERIVATIVES
The Company has in the past entered into futures or option contracts to
hedge its exposure to price fluctuations on crude oil and refined products.
For purposes of the Statement of Cash Flows, hedging transactions are
considered to be operating activities.
The Company from time to time speculates in the purchasing and selling
of crude oil and finished products and may enter into futures, options and
wet barrel contracts to speculate on price fluctuations in these commodities.
These activities are transacted in accordance with policies established by
the Company, which set limits on quantities, requires various levels of
approval and requires certain review and reporting procedures. Gains and
losses on all speculative transactions are reflected in earnings in the
period that they occur.
The Company had no open commodity futures or options contracts at
December 31, 2001.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities," as amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment to SFAS
No. 133." SFAS No. 133, as amended, 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. There was no effect
on the Company's financial position, results of operations or cash flows as a
result of adopting SFAS No. 133.
CONCENTRATION OF CREDIT RISK
Credit risk with respect to customer receivables is concentrated in the
geographic area in which the Company operates and relates primarily to
customers in the oil and gas industry. To minimize this risk, the Company
performs ongoing credit evaluations of its customers' financial position and
requires collateral, such as letters of credit, in certain circumstances. The
Company maintained its cash and cash equivalents in federally insured banking
institutions or other financial service providers.
INVENTORIES
Inventories are stated at the lower of cost or market. Costs for crude
oil and refined products produced by the refineries, and the lubricants and
other merchandise of Phoenix Fuel, are determined by the last-in, first-out
("LIFO") method. Costs for retail, exchange and terminal refined products and
shop supplies are determined by the first-in, first-out ("FIFO") method.
Costs for merchandise inventories at retail locations are determined by the
retail inventory method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and are depreciated on
the straight-line method over their respective estimated useful lives.
The estimated useful lives for the various categories of property, plant
and equipment are:
Buildings and improvements 7-30 years
Machinery and equipment 7-24 years
Pipelines 30 years
Furniture and fixtures 2-15 years
Vehicles 3- 7 years
Routine maintenance, repairs and replacement costs are charged against
earnings as incurred. Turnaround costs, which consist of complete shutdown
and inspection of significant units of the refineries at intervals of two or
more years for necessary repairs and replacements, are deferred and amortized
over the period until the next expected shutdown, which generally ranges from
24 to 48 months depending on the type of shutdown and the unit involved.
Expenditures which materially increase values, expand capacities or extend
useful lives are capitalized. Interest expense is capitalized as part of the
cost of constructing major facilities and equipment.
The American Institute of Certified Public Accountants has issued a
"Statement of Position" exposure draft on cost capitalization that is
expected to require companies to expense the non-capital portion of major
maintenance costs as incurred. The statement is expected to require that any
existing unamortized deferred non-capital major maintenance costs be expensed
immediately. The exposure draft indicates that this change will be required
to be adopted for fiscal years beginning after June 15, 2002, and that the
effect of expensing existing unamortized deferred non-capital major
maintenance costs will be reported as a cumulative effect of an accounting
change in the consolidated statement of operations. At December 31, 2001, the
Company had $12,769,000 of turnaround costs, classified as machinery and
equipment, included in property, plant and equipment. Company management has
not determined the amount, if any, of these costs that could be capitalized
under the provisions of the exposure draft.
GOODWILL
Goodwill, which results from business acquisitions, represents the
excess of the purchase price over the fair value of the net assets acquired
and is carried at cost less accumulated amortization. Goodwill is amortized
on the straight-line method over the period of expected benefit ranging from
15 to 30 years.
Effective in 2002, the Company is required to adopt SFAS No. 142,
"Goodwill and Other Intangible Assets." This Statement requires, among other
things, that goodwill not be amortized, but be tested for impairment. The
provisions of the Statement apply to fiscal years beginning after December
15, 2001. Impairment losses for goodwill and indefinite-lived intangible
assets that arise due to the initial application of this Statement (resulting
from a transitional impairment test) must be reported as resulting from a
change in accounting principle. At December 31, 2001, the Company had
goodwill of $19,815,000, of which $14,722,000 related to the acquisition of
Phoenix Fuel and $4,891,000 related to various retail acquisitions. The
Company has not determined, but is in the process of evaluating, the impact
that this new standard will have on its financial position and results of
operations. See Note 19 for pro forma information excluding such goodwill
amortization.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of", issued by the Financial Accounting Standards
Board ("FASB"), the Company reviews the carrying values of its long-lived
assets and identifiable intangibles for possible impairment whenever events
or changes in circumstances indicate that the carrying amount of assets to be
held and used may not be recoverable. For assets to be disposed of, the
Company reports long-lived assets and certain identifiable intangibles at the
lower of carrying amount or fair value less cost to sell. (See Note 4)
Effective in 2002, the Company is required to adopt SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." This
Statement defines an impairment as "the condition that exists when the
carrying amount of a long-lived asset (asset group) is not recoverable and
exceeds its fair value." It develops a single accounting model for the
disposal of long-lived assets, whether previously held or newly acquired.
This Statement applies to recognized long-lived assets of an entity to be
held and used or to be disposed of, and applies to the entire group when a
long-lived asset is a part of the group. A group is defined as the lowest
level of operations with identifiable cash flows that are largely independent
of the cash flows of other assets and liabilities. The Statement identifies
the circumstances that apply when testing for recoverability, as well as
other potential adjustments or revisions relating to recoverability. Specific
guidance is provided for recognition and measurement and reporting and
disclosure for long-lived assets held and used, disposed of other than by
sale, and disposed of by sale. The Company has not determined, but is in the
process of evaluating, the impact that this new standard will have on its
financial position and results of operations.
TREASURY STOCK
The Company's Board of Directors has authorized the repurchase of up to
2,900,000 shares of the Company's common stock. These 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. Through the end of 2001, the Company had repurchased 2,582,566
shares under this program at a cost of approximately $25,716,000. These
shares are being treated as treasury shares. In addition, the Company
purchased 1,169,414 shares of its common stock, as treasury shares, for $9.00
per share, net to the sellers, through a Schedule 13E-4 Issuer Tender Offer
completed on February 8, 2000.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute to
current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and the
costs can be reasonably estimated. Environmental liabilities are not
discounted to their present value and are recorded without consideration of
potential recoveries from third parties. Subsequent adjustments to estimates,
which may be significant, may be made as more information becomes available
or as circumstances change (See Note 16).
INCOME TAXES
The provision for income taxes is based on earnings (loss) reported in
the financial statements. Deferred income taxes are provided to reflect
temporary differences between the basis of assets and liabilities for
financial reporting purposes and income tax purposes, as well as the effects
of tax credits.
EARNINGS PER COMMON SHARE
Earnings per share are calculated in accordance with SFAS No. 128,
"Earnings Per Share." Basic earnings per common share are computed by
dividing consolidated net earnings by the weighted average number of shares
of common stock outstanding during each period. Earnings per common share
assuming dilution is computed by dividing consolidated net earnings by the
sum of the weighted average number of shares of common stock outstanding plus
additional shares representing the exercise of outstanding common stock
options using the treasury stock method, unless such calculation is
antidilutive. (See Note 5.)
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Company adopted SFAS No. 141, "Business Combinations."
This Statement requires, among other things, that the purchase method of
accounting be used to account for all business combinations. The provisions
of the Statement apply to all business combinations initiated after June 30,
2001, and to all business combinations accounted for using the purchase
method for which the date of acquisition is July 1, 2001, or later. The
Company has always used the purchase method of accounting for acquisitions
and business combinations and does not anticipate that the application of
SFAS No. 141 will have a material affect on the way the Company records
acquisitions or business combinations. However, the Company does anticipate
that more intangible assets will be recorded as a result of SFAS No. 141.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." This Statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-
lived assets and the associated asset retirement costs. It applies to legal
obligations associated with the retirement of long-lived assets that result
from the acquisition, construction, development and/or the normal operation
of a long-lived asset, except for certain obligations of lessees. As used in
this Statement, a legal obligation is an obligation that a party is required
to settle as a result of an existing or enacted law, statute, ordinance, or
written or oral contract or by legal construction of a contract under the
doctrine of promissory estoppel.
SFAS No. 143 requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred if
a reasonable estimate of fair value can be made. The associated asset
retirement costs are capitalized as part of the carrying amount of the long-
lived asset. Disclosure requirements include descriptions of asset retirement
obligations and reconciliations of changes in the components of those
obligations. This Statement is effective for financial statements issued for
fiscal years beginning after June 15, 2002. The Company has not determined,
but is evaluating the effect SFAS No. 143 will have relative to its refining
and marketing assets.
OTHER COMPREHENSIVE INCOME
For the years ended December 31, 2001, December 31, 2000, and December
31, 1999, respectively, the only component of other comprehensive income is
net income as reported on the Company's Consolidated Statements of Earnings.
RECLASSIFICATIONS
Certain reclassifications have been made to prior years' consolidated
financial statements to conform to the statement classifications used in the
current year. These reclassifications had no effect on reported earnings or
stockholders' equity.
NOTE 2 - BUSINESS SEGMENTS:
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
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 terminaling
operations. The Company's two refineries manufacture various grades of
gasoline, diesel fuel, and other products from crude oil, other feedstocks
and blending components. In addition, finished products are acquired through
exchange agreements, from third party suppliers, and from Phoenix Fuel. 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 Refining Group or Phoenix Fuel supplies
the petroleum fuels sold by the Retail Group. 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." These operations consist primarily of
corporate staff operations, including selling, general, and administrative
expenses.
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 reflects current
costs adjusted, where appropriate, 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 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 are presented below.
As of and for the Year Ended December 31, 2001 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
----------------------------------------------------------------
Customer net revenues:
Finished products $257,636 $228,533 $284,430 $ - $ - $ 770,599
Merchandise and
lubricants - 144,531 24,555 - - 169,086
Other 9,373 17,315 2,062 244 - 28,994
----------------------------------------------------------------
Total 267,009 390,379 311,047 244 - 968,679
----------------------------------------------------------------
Intersegment net revenues:
Finished products 166,546 - 80,125 - (246,671) -
Other 16,671 - - - (16,671) -
----------------------------------------------------------------
Total 183,217 - 80,125 - (263,342) -
----------------------------------------------------------------
Total net revenues $450,226 $390,379 $391,172 $ 244 $(263,342) $ 968,679
================================================================
Operating income (loss) $ 66,148 $ 5,214 $ 4,731 $(21,927) $ (11,621) $ 42,545
Interest expense (24,098)
Interest income 1,661
----------
Earnings before income taxes $ 20,108
==========
Depreciation and amortization $ 16,463 $ 12,709 $ 2,696 $ 2,007 $ - $ 33,875
Capital expenditures $ 13,310 $ 41,337 $ 985 $ 1,424 $ - $ 57,056
Total assets $228,403 $165,176 $ 65,539 $ 48,056 $ - $ 507,174
As of and for the Year Ended December 31, 2000 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
----------------------------------------------------------------
Customer net revenues:
Finished products $280,525 $267,201 $334,122 $ - $ - $ 881,848
Merchandise and
lubricants - 138,543 26,662 - - 165,205
Other 9,159 15,595 2,188 367 - 27,309
----------------------------------------------------------------
Total 289,684 421,339 362,972 367 - 1,074,362
----------------------------------------------------------------
Intersegment net revenues:
Finished products 212,957 - 80,252 - (293,209) -
Other 15,531 - - - (15,531) -
----------------------------------------------------------------
Total 228,488 - 80,252 - (308,740) -
----------------------------------------------------------------
Total net revenues $518,172 $421,339 $443,224 $ 367 $(308,740) $1,074,362
================================================================
Operating income (loss) $ 45,790 $ 31 $ 7,275 $(19,337) $ - $ 33,759
Interest expense (24,411)
Interest income 1,989
----------
Earnings before income taxes $ 11,337
==========
Depreciation and amortization $ 17,138 $ 11,528 $ 2,554 $ 2,359 $ - $ 33,579
Capital expenditures $ 6,850 $ 13,470 $ 1,413 $ 722 $ - $ 22,455
Total assets $244,947 $148,992 $ 82,084 $ 52,542 $ - $ 528,565
As of and for the Year Ended December 31, 1999 (In thousands)
----------------------------------------------------------------
Refining Retail Phoenix Reconciling
Group Group Fuel Other Items Consolidated
----------------------------------------------------------------
Customer net revenues:
Finished products $180,277 $206,485 $225,199 $ - $ - $ 611,961
Merchandise and
lubricants - 118,895 24,150 - - 143,045
Other 10,263 13,185 3,552 677 - 27,677
----------------------------------------------------------------
Total 190,540 338,565 252,901 677 - 782,683
----------------------------------------------------------------
Intersegment net revenues:
Finished products 180,933 - 19,784 - (200,717) -
Other 16,827 - - - (16,827) -
----------------------------------------------------------------
Total 197,760 - 19,784 - (217,544) -
----------------------------------------------------------------
Total net revenues $388,300 $338,565 $272,685 $ 677 $(217,544) $ 782,683
================================================================
Operating income (loss) $ 51,323 $ 3,790 $ 8,549 $(23,878) $ (2,387) $ 37,397
Interest expense (23,417)
Interest income 2,476
----------
Earnings before income taxes $ 16,456
==========
Depreciation and amortization $ 15,615 $ 9,270 $ 2,273 $ 3,971 $ - $ 31,129
Capital expenditures $ 8,419 $ 33,235 $ 1,984 $ 2,723 $ - $ 46,361
Total assets $252,356 $146,110 $ 79,731 $ 68,602 $ - $ 546,799
NOTE 3 - ACQUISITIONS AND DISPOSITIONS:
In December 1998, the Company and FFCA Capital Holding Corporation
("FFCA") completed a sale-leaseback transaction. Under the terms of the Sale
and Lease Agreement (the "Agreement"), FFCA purchased 83 service
station/convenience stores from the Company for approximately $51,763,000.
The Company in turn leased the 83 service station/convenience stores back
from FFCA under an operating lease arrangement with an initial term of 15
years and three separate options to continue the lease for successive periods
of five years. In the second half of 1999, the Company reacquired 24 of the
service station/convenience stores for approximately $13,711,000, which was
the original selling price of these properties. In the second quarter of
2001, FFCA approached the Company to determine whether the Company had any
interest in acquiring the remaining 59 service station/convenience stores.
Subsequently, in July 2001, the Company repurchased, for cash, the 59 service
station/convenience stores for approximately $38,052,000, which was the
original selling price of these properties, plus closing costs. Certain
deferrals on the Balance Sheet relating to the sale-leaseback transaction
reduced the cost basis of the assets recorded in "Property, Plant and
Equipment" by approximately $1,736,000. These deferrals included a deferred
gain on the original sale to FFCA and deferred lease allocations included in
"Other Liabilities and Deferred Income," and deferred costs associated with
the original sale included in "Other Assets." Lease expense related to these
assets totaled $2,610,000 for 2001, $4,556,000 for 2000, and $4,556,000 for
1999. Depreciation expense related to these same assets totaled $2,937,000 in
2001, $1,499,000 in 2000, and $627,000 in 1999. For 2002, depreciation
expense is estimated to be approximately $4,137,000 based on depreciation
expense recorded in January 2002. This amount could change depending on the
sale of any of these assets. The original total base rent payments under the
FFCA sale-leaseback transaction, included scheduled increases of six percent
on the second anniversary of the Agreement and every second anniversary
thereafter, on a compounded basis during the initial lease term and any
extension thereof. At December 31, 2000, the Company had recorded a deferred
credit of approximately $1,628,000 to reflect the excess of rent expense over
cash payments made. This deferred credit is included in "Other Liabilities
and Deferred Income" in the Company's Consolidated Balance Sheet at December
31, 2000. The Company had recorded a gain of approximately $5,650,000 on the
original transaction, which was deferred and was being amortized over the
initial lease period of 15 years. This deferred gain was reduced to $990,000
at December 31, 2000, as the result of the 1999 repurchase and annual
amortization. The deferred gain is reflected in "Other Liabilities and
Deferred Income" in the Company's Consolidated Balance Sheet at December 31,
2000. The amounts recorded for deferred credits and deferred gain were used
to reduce the cost basis of the 59 units repurchased in 2001, as described
above.
In October 1995, the Company completed the purchase of the Bloomfield
Refinery along with related pipeline and transportation assets for
$55,000,000 from Gary-Williams Energy Co. and its wholly-owned subsidiary,
Bloomfield Refining Company ("BRC"). The purchase agreement provided for
potential contingent payments to be made to BRC over approximately six years
from the acquisition date of approximately $35,000,000, not to exceed a net
present value of $25,000,000 as of October 1995, should certain criteria be
met. These contingent payments were considered to be additional purchase
price and were allocated to the assets acquired in the same proportions as
the original purchase price was allocated, not to exceed the estimated
current replacement cost, and amortized over the estimated remaining life of
the assets. For 2000, the Company accrued $5,200,000 in accordance with the
purchase agreement relating to 2000 operations. This amount was adjusted
downward in 2001 to $5,139,000, which amount was paid. This payment
represented the final amount due under the purchase agreement. For 1999, the
Company paid approximately $5,250,000 and had accrued an additional
$5,442,000 at December 31, 1999, relating to 1999 operations. In addition,
the Company accrued $2,250,000 in 1996 relating to certain environmental
obligations assumed in the purchase, which amount was also considered to be
additional purchase price.
Refer to Note 18 for a discussion of the pending acquisition of the
Yorktown Refinery.
NOTE 4 - LOSS ON THE DISPOSAL/WRITE-DOWN OF ASSETS:
For the year ended December 31, 2001, the Company recorded a pre-tax
loss on the disposal/write-down of assets of $6,212,000. This amount included
losses of $609,000 on the sale of assets in the ordinary course of business,
primarily related to the sale of 11 service station/convenience stores;
losses of $2,719,000 on the write-down of assets due to impairment, resulting
from the application of Statement of Financial Accounting Standard ("SFAS")
No. 121 due to a strategy to sell certain service station/convenience stores,
some of which were closed; losses of $592,000 relating to the value of
leasehold improvements included in leased service station/convenience stores
returned to the lessors; and losses of $2,292,000 primarily related to the
retirement or replacement of certain refinery property, plant, and equipment.
As a result of the Company's ongoing retail asset evaluation initiated
in 2001, the Company identified 60 non-strategic or underperforming units for
possible divestiture. Eight of these units were subsequently removed from the
list due to improved performance. Of the remaining units, 11 were sold, six
were closed and reclassified as assets held for sale, one leased unit was
returned to the lessor, and four are in escrow and are expected to close in
the second quarter of 2002. The remaining 30 stores continue to be operated
by the Company, but are being marketed for potential sale in accordance with
the Company's strategy, and may be divested if acceptable offers are received
and negotiated during 2002.
In addition, 12 other units were closed in 2001. Seven of these units
were classified as assets held for sale, three leased units were returned to
the lessors, and the Company is attempting to sublease two others.
In 2001, the Company also recorded a reserve totaling $5,409,000 related
to a note and accrued interest receivable from a related party. For a further
discussion of this matter refer to Note 6.
NOTE 5 - EARNINGS PER SHARE:
The following is a reconciliation of the numerators and denominators of
the basic and diluted per share computations for earnings as required by SFAS
No. 128:
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
Per Per Per
Earnings Shares Share Earnings Shares Share Earnings Shares Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share
- basic:
Earnings $12,381,000 8,871,006 $1.40 $7,289,000 9,214,470 $0.79 $10,778,000 10,678,773 $1.01
Effect of dilutive
stock options 14,128 8,950 40,084
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings per common share
- assuming dilution:
Earnings $12,381,000 8,885,134 $1.39 $7,289,000 9,223,420 $0.79 $10,778,000 10,718,857 $1.01
===================================================================================================================================
In October 2001, the Company's Board of Directors (the "Board") directed
the Company to purchase 400,000 shares of its common stock under its stock
repurchase program from the CCEO for $3,520,000 or $8.80 per share. This was
the closing price of the Company's common stock on the New York Stock
Exchange on the date that the conditions to purchase set by the Board were
satisfied, including the receipt of necessary bank waivers and consents.
At December 31, 2001 and 2000, there were 8,553,879 and 8,948,008
shares, respectively, of the Company's common stock outstanding.
There were no transactions subsequent to December 31, 2001, that if the
transactions had occurred before December 31, 2001, would materially change
the number of common shares or potential common shares outstanding as of
December 31, 2001.
NOTE 6 - RELATED PARTY TRANSACTIONS:
The Company loaned $4,000,000 to James E. Acridge, its former Chairman
and Chief Executive Officer (the "CCEO") on September 17, 1998 (the "Loan").
The Loan was originally evidenced by an unsecured promissory note bearing
interest at the prime rate published by the Wall Street Journal on September
17, 1998 (the "Prime Rate") plus 2%. Principal and accrued interest were due
and payable in one lump sum on February 28, 1999. On December 23, 1998, the
Company and the CCEO entered into a revised loan agreement. The amount of the
Loan was increased to $5,000,000, the Loan's interest rate was increased to
the Prime Rate plus 3%, and the Loan's maturity date was extended to February
28, 2001. An initial interest payment was made on February 28, 1999 for
interest due through December 31, 1998. Subsequent interest was due and
payable semi-annually on June 30 and December 31 of each year.
The Loan was modified again on March 10, 2000. The terms of the Loan
were revised so that all principal and interest, including interest that
otherwise would have been payable on December 31, 1999, became due and
payable on February 28, 2001. As security for the modified loan, the Company
received a pledge by an entity owned by the CCEO (the "LLC") of a 49% equity
interest in an entity that owns certain real property in north Scottsdale,
Arizona (the "Real Property"). The loan was further modified on February 28,
2001 to extend the Loan's maturity date to March 28, 2001. This modification
reflected the fact that the Company's purchase of a parcel of land from a
trust of which the CCEO was the beneficiary had not closed. A portion of the
proceeds of this sale was used to pay the interest that became due and
payable under the Loan on February 28, 2001. On March 21, 2001, the Company's
Board of Directors (the "Board") approved an additional two-year extension of
the Loan's maturity date, making all principal and interest due and payable
on March 28, 2003. This extension was conditioned upon, among other things,
the CCEO's payment of all interest due and payable on March 28, 2001, which
was paid. In return for the extension of the Loan, the CCEO provided
additional security for the Loan by pledging all of his equity interest in
the LLC.
The Company is aware of prior liens on the Real Property and on certain
of the collateral pledged to the Company (the "Prior Liens") that relate to
loans entered into by the LLC (the "LLC Loans"). The Company also understands
that the CCEO has personally guaranteed the LLC Loans. On July 18, 2001, the
Board was advised that the LLC was not able to make the monthly payment due
and owing to its lenders (the "Lenders") in the month of July. The Board was
asked to make such payment, in the amount of $240,833, on behalf of the CCEO
for the benefit of the LLC. The Board authorized the Company to make the July
payment in order to avoid a default under the LLC Loans. The Company also has
been advised that the LLC did not make, when due, the monthly payment due and
owing to the Lenders in December 2001 (the "December Payment"). The Company
understands that a letter agreement was entered into with the Lenders, in
which the Lenders agreed to forbear from exercising certain rights and
remedies available to them in connection with the December payment if certain
terms and conditions were satisfied (the "Forbearance Letter"). The Company
further understands that, in connection with the Forbearance Letter, the CCEO
pledged 29,622 shares of the Company's common stock owned by him to the
Lenders as additional collateral.
The LLC's failure to make the December Payment when due constitutes a
default under the terms of the Loan. The Company has been advised that the
CCEO also is in default under a provision of the Loan that addresses the
CCEO's failure to discharge when due all sums owed under any loan secured by
a stock pledge.
In view of recent events, including the CCEO's defaults under the terms
of the Loan and the failure of a limited liability company controlled by the
CCEO to pay rent in connection with space subleased to the limited liability
company by the Company, the Company has evaluated the collectability of the
Loan. The limited liability company's sublease and certain associated
litigation is further discussed in Note 16. The Company has reviewed
financial information requested from the CCEO, including a personal financial
statement and 2000 tax returns for the CCEO and certain of his material
affiliated entities. It has also obtained an appraisal of the Real Property
and conducted a search of public records for third party claims evidenced by
filed litigation and liens.
The Company believes that the Yorktown Refinery acquisition will
constrain the Company's ability to obtain waivers or other approvals in
connection with restrictive covenants contained in the Company's $65,000,000
secured Credit Agreement that may be applicable to certain courses of action
potentially available to the Company in connection with the collateral for
the Loan. Restrictive covenants in the Indenture supporting the Company's
senior subordinated notes due 2003 and in the Indenture supporting the
Company's senior subordinated notes due 2007 also could constrain the
Company's ability to take certain actions. It is possible that the Company
will not be able to recover all or any of the amounts due and owing from the
CCEO as a result of such restrictive covenants. Accordingly, in view of the
Company's evaluation of the Loan's collectability, under generally accepted
accounting principles, it is appropriate to record a financial reserve in the
full amount of the Loan, including interest accrued through December 31,
2001, and such a reserve totaling $5,409,000 has been recorded as of December
31, 2001. The Company is aware that the CCEO is pursuing a number of
potential transactions that may provide him with funds to satisfy his
obligations under the Loan. In the event that certain of these transactions
occur, the Company will reevaluate its reserve.
On January 25, 2001, the Board accepted an offer from the CCEO, on
behalf of a trust of which the CCEO is the beneficiary, to sell a parcel of
land (the "Jomax Property") to the Company for the lesser of $5,000,000 or
the Jomax Property's appraised value. In March 2001, the Jomax Property was
sold to the Company for $5,000,000. The trust had an option, exercisable for
a period of two years, to repurchase the property at the greater of the
amount paid by the Company to purchase the property or the property's
appraised value. The trust also had a right of first refusal, exercisable for
a period of two years, to repurchase the property on the same terms as
contained in a bona fide offer from a bona fide purchaser. On September 20,
2001, the Board directed the Company to purchase the trust's option and right
of first refusal (collectively, the "Rights") for $600,000, and the Rights
were subsequently sold to the Company for this price. At the time of the
sale, the Company was negotiating with a potential purchaser for the sale of
the Jomax Property for a price in excess of the Company's purchase price. The
potential purchaser was requiring the Company to represent in the purchase
and sale agreement that there were no effective options to purchase, or
rights of first refusal, affecting the property. The Company's purchase of
the Rights would have enabled the Company to make this representation and
would have avoided any other complications associated with the Rights that
potentially could have affected the sale. The potential purchaser
subsequently advised the Company that it was discontinuing negotiations
regarding the possible sale because general market and economic conditions,
coupled with the financial uncertainties arising out of the events that
occurred on September 11, 2001, had severely depressed the real estate
market. Although the potential purchaser re-approached the Company during the
first quarter of 2002 about purchasing the property, the Company is exploring
other alternatives.
In the third quarter of 2001, the Board directed the transfer to the
CCEO of a life insurance policy on his life with a cash surrender value of
$251,078. This policy and life insurance policies for another executive had
been issued prior to the Company's going public in 1989. In connection with
its determination that the policy should be transferred to the CCEO, the
Board considered historical information and other relevant matters relating
to the policy, including the fact that several life insurance policies on the
other executive's life had previously been transferred to that executive. The
cash value of the life insurance policy was considered compensation to the
CCEO for tax purposes in 2001. The $251,078 cash surrender value recorded on
the Company's books was expensed by the Company in the third quarter and is
included in selling, general and administrative expenses ("SG&A").
In the third quarter of 2001, the CCEO submitted statements to the
Company for reimbursement of certain expenditures made by the CCEO on behalf
of the Company in the current year and prior years for which the CCEO had not
previously been reimbursed. In August 2001, the Company reimbursed the CCEO
$204,293 in connection with such statements. This amount was considered
compensation to the CCEO for tax purposes in 2001. The $204,293 was expensed
by the Company in the third quarter and is included in SG&A.
As described above, the payment of $240,833 made on behalf of the CCEO
was expensed by the Company in the third quarter of 2001. This amount was
considered compensation to the CCEO for tax purposes in 2001 and is included
in SG&A.
During 2001, the Board directed the Company to repurchase 400,000 shares
of its common stock from the CCEO for $3,520,000 or $8.80 per share. This was
the closing price of the Company's common stock on the New York Stock
Exchange on the date that the conditions to purchase set by the Board were
satisfied, including the receipt of necessary bank waivers and consents. The
Board directed the Company to purchase these shares under the stock
repurchase program. The repurchased shares are treated as treasury shares. In
addition, the Board authorized the purchase of artwork from the CCEO for
display in the corporate headquarters. The artwork was purchased at its
appraised value of $162,550. A substantial portion of the artwork had been
displayed in the Company's corporate office for up to ten years without any
financial consideration being provided to the CCEO for its use. The proceeds
of the artwork transaction were used by the CCEO to pay balances due on
certain amounts owed to Giant Arizona by the CCEO and by entities controlled
by the CCEO.
During 2000, the Company repurchased 129,466 shares of its common stock
under its stock repurchase program from the CCEO for $896,887 or $7.00 per
share for 99,466 shares and $6.6875 per share for 30,000 shares. The per
share price paid for the shares was the low price reported for the Company's
common stock on the New York Stock Exchange on the dates the purchases were
made. All of the repurchased shares are treated as treasury shares. In
addition, the Company's Board of Directors authorized the purchase of artwork
from the CCEO for display at the Company's headquarters building. The artwork
was purchased at its appraised value of approximately $450,000. A substantial
portion of the artwork had been displayed in the Company's corporate office
for up to ten years without any financial consideration being provided to the
CCEO for its use.
During 1999, the Company repurchased 440,000 shares of its common stock
under its stock repurchase program from the CCEO 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. The repurchased shares are treated as treasury
shares.
All of the material foregoing transactions were reviewed and approved by
the Board or committees of the Board.
NOTE 7 - INVENTORIES:
Inventories consist of the following:
DECEMBER 31,
- ------------------------------------------------------------------------------
(In thousands) 2001 2000
- ------------------------------------------------------------------------------
First-in, first-out ("FIFO") method:
Crude oil $ 12,835 $ 17,420
Refined products 21,982 24,679
Refinery and shop supplies 8,111 10,829
Merchandise 3,928 3,882
Retail method:
Merchandise 9,179 8,737
- ------------------------------------------------------------------------------
Subtotal 56,035 65,547
Adjustment for last-in, first-out ("LIFO") method 5,996 (8,940)
Allowance for lower of cost or market (3,302) -
- ------------------------------------------------------------------------------
Total $ 58,729 $ 56,607
==============================================================================
The portion of inventories valued on a LIFO basis totaled $30,872,000
and $28,319,000 at December 31, 2001 and 2000, respectively. The data in the
following paragraph 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 December 31,
2001, 2000 and 1999, net earnings and diluted earnings per share for the
years ended December 31, 2001, 2000 and 1999 would have been (lower) higher
by $(6,981,000) and $(0.79), $2,935,000 and $0.32, and $4,408,000 and $0.41,
respectively.
In 2001, cost of products sold were increased by approximately
$3,302,000 as a result of a reduction in the carrying value of inventories
related to a decline in crude oil and refined product prices.
For the year 2001, certain lower cost refinery LIFO inventory layers
were liquidated resulting in an increase in 2001 earnings of approximately
$139,000 or $0.02 per share.
For the year 2000, certain lower cost Phoenix Fuel LIFO inventory layers
were liquidated resulting in an increase in 2000 earnings of approximately
$1,042,000 or $0.11 per share.
For the year 1999, certain higher cost refinery LIFO inventory layers
were liquidated resulting in a reduction of 1999 earnings of approximately
$1,531,000 or $0.14 per share.
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment, at cost, consist of the following:
DECEMBER 31,
- -----------------------------------------------------------------------------
(In thousands) 2001 2000
- -----------------------------------------------------------------------------
Land and improvements $ 38,139 $ 31,681
Buildings and improvements 136,478 123,941
Machinery and equipment 291,614 291,250
Pipelines 11,560 10,761
Furniture and fixtures 29,544 25,822
Vehicles 7,874 8,503
Construction in progress 10,136 16,426
- -----------------------------------------------------------------------------
Subtotal 525,345 508,384
Accumulated depreciation and amortization (201,823) (192,234)
- -----------------------------------------------------------------------------
Total $ 323,522 $ 316,150
=============================================================================
NOTE 9 - ACCRUED EXPENSES:
Accrued expenses are comprised of the following:
DECEMBER 31,
- -----------------------------------------------------------------------------
(In thousands) 2001 2000
- -----------------------------------------------------------------------------
Excise taxes $ 12,200 $ 13,787
Bloomfield Refinery acquisition contingent payment - 5,200
Payroll and related costs 6,941 7,320
Bonus, profit sharing and retirement plans 6,566 3,162
Interest 5,681 5,719
Other 5,149 8,828
- -----------------------------------------------------------------------------
Total $ 36,537 $ 44,016
=============================================================================
NOTE 10 - LONG-TERM DEBT:
Long-term debt consists of the following:
DECEMBER 31,
- -----------------------------------------------------------------------------
(In thousands) 2001 2000
- -----------------------------------------------------------------------------
9% senior subordinated notes, due 2007, interest
payable semi-annually $150,000 $150,000
9 3/4% senior subordinated notes, due 2003,
interest payable semi-annually 100,000 100,000
Capital lease obligations, 11.3%, due through
2007, interest payable monthly 6,703 7,917
Other 91 305
- -----------------------------------------------------------------------------
Subtotal 256,794 258,222
Less current portion (45) (213)
- -----------------------------------------------------------------------------
Total $256,749 $258,009
=============================================================================
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.
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 repayment of the Notes; and
the separate financial statements and other disclosures concerning the
subsidiaries are not deemed material to investors.
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 December 31, 2001, retained
earnings available for dividends under the most restrictive terms of the
Indentures were approximately $7,128,000.
On December 23, 1998, the Company entered into a $65,000,000 secured
Credit Agreement (the "Credit Agreement") that was to expire December 23,
2001, with a group of banks including Bank of America, N.A. as lead bank and
administrative agent. On December 19, 2001, this Credit Agreement was
extended until November 14, 2003, under substantially the same terms and
conditions. 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. The
Credit Agreement also allows the Company to borrow 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 December 31, 2001, the availability
of funds under the Credit Agreement was $57,215,000. The borrowing base is
less than $65,000,000 primarily due to lower selling prices and sales volumes
that affected eligible accounts receivable, and reduced inventory valuations
that affected eligible inventories. There were no direct borrowings
outstanding under this facility at December 31, 2001, and there were
approximately $4,258,000 of irrevocable letters of credit outstanding,
primarily to insurance companies and regulatory agencies.
The interest rate applicable to the Credit Agreement is tied to various
short-term indices. At December 31, 2001, this rate was approximately 4% 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. The Credit Agreement is guaranteed by certain of the Company's
direct and indirect wholly-owned subsidiaries.
In connection with the acquisition of the Yorktown Refinery, the Company
expects to replace the Credit Agreement with a new and larger credit
facility.
In 1997, as part of the acquisition of certain service
station/convenience stores, the Company leased 64 service station/convenience
stores for a period of 10 years with options to purchase the assets during
the ten-year period for approximately $22,904,000. These leases were
accounted for as capital leases. At December 31, 2001, six stores remained to
be purchased and continue to be leased under the original terms. One of these
stores is a grocery store and does not sell gasoline. The Company intends to
purchase the six stores pursuant to options to purchase during the remaining
lease period for approximately $6,700,000, of which $2,000,000 has been paid
in advance and is recorded in "Other Assets" in the Company's Consolidated
Balance Sheet. The remaining lease obligations of approximately $6,700,000
are being accounted for as capital leases and require annual lease payments
of approximately $753,000, all of which are recorded as interest expense.
Assets associated with these lease obligations of approximately $7,601,000
are included in property, plant and equipment. Accumulated depreciation as of
December 31, 2001 of approximately $3,079,000 is related to these assets.
Assets of $580,000, primarily liquor licenses, are included in other assets.
Aggregate annual maturities of long-term debt as of December 31, 2001
are: 2002 - $45,000; 2003 - $100,029,000; 2004 - $17,000; 2005 - $0; 2006 -
$0; and all years thereafter - $156,703,000.
NOTE 11 - FINANCIAL INSTRUMENTS AND HEDGING ACTIVITY:
The following disclosure of the estimated fair value of financial
instruments is made in accordance with the requirements of SFAS No. 107,
"Disclosures about Fair Value of Financial Instruments," as amended by SFAS
No. 133. The Company, using available market information and valuation
methodologies described below, determined the estimated fair value amounts.
Considerable judgment is required, however, in interpreting market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein may not be indicative of the amounts that the Company could realize in
a current market exchange. The use of different market assumptions or
valuation methodologies may have a material effect on the estimated fair
value amounts.
The carrying amounts and estimated fair values of the Company's
financial instruments are as follows:
DECEMBER 31,
- ---------------------------------------------------------------------------
(In thousands) 2001 2000
- ---------------------------------------------------------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- ---------------------------------------------------------------------------
Balance Sheet - Financial
Instruments:
Fixed rate long-term debt $250,091 $244,633 $250,305 $229,256
The fair value of fixed rate long-term debt was determined using quoted
market prices, where applicable, or estimated by discounting future cash
flows using rates estimated to be currently available for debt of similar
terms and remaining maturities.
The carrying values of cash and cash equivalents, receivables, accounts
payable and accrued expenses approximate fair values due to the short-term
maturities of these instruments. Variable rate long-term debt instruments are
estimated to approximate fair values as rates are tied to short-term indices.
The Company also has a $5,000,000 long-term note receivable with a
related party. This note was fully reserved for at December 31, 2001.
HEDGING ACTIVITIES
From time to time, the Company enters into futures and options contracts
to reduce price volatility, to fix margins in its refining and marketing
operations and to protect against price declines for inventory volumes.
At December 31, 2001 and 2000, the Company had no hedging transactions
in place.
Gains and losses from market changes on contracts not qualifying for
hedge accounting are recognized immediately in operations. For 2001, 2000 and
1999 the Company incurred losses of $10,000, $471,000 and $306,000,
respectively, related to these activities.
NOTE 12 - INCOME TAXES:
The provision (benefit) for income taxes is comprised of the following:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------
Current: Federal $2,978 $4,292 $ 532
State 579 188 14
Deferred: Federal 4,184 (628) 3,412
State (14) 196 1,720
- ------------------------------------------------------------------------------
$7,727 $4,048 $5,678
==============================================================================
Income taxes paid in 2001, 2000 and 1999 were $4,675,000, $4,060,000,
and $2,099,000, respectively.
A reconciliation of the difference between the provision for income
taxes and income taxes at the statutory U.S. federal income tax rate is as
follows:
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------
(In thousands) 2001 2000 1999
- ------------------------------------------------------------------------------
Income taxes at the statutory
U.S. federal income tax rate of 35% $7,038 $3,968 $5,760
Increase (decrease) in taxes resulting from:
State taxes, net 470 301 795
Resolution of tax matters - - (320)
Nonconventional fuel credits, net - (249) -
General business credits, net - - (205)
Other, net 219 28 (352)
- ------------------------------------------------------------------------------
$7,727 $4,048 $5,678
==============================================================================
Deferred income taxes are provided to reflect temporary differences in
the basis of net assets for income tax and financial reporting purposes, as
well as available tax credit carryforwards. The tax effected temporary
differences and credit carryforwards which comprise deferred taxes are as
follows:
DECEMBER 31, 2001 DECEMBER 31, 2000
- -----------------------------------------------------------------------------------------
(In thousands) ASSETS LIABILITIES TOTAL ASSETS LIABILITIES TOTAL
- -----------------------------------------------------------------------------------------
Nondeductible accruals for
uncollectible receivables $ 156 $ - $ 156 $ 70 $ - $ 70
Insurance accruals 672 - 672 627 - 627
Insurance settlements (94) - (94) 902 - 902
Contribution carryover 897 - 897 - - -
Other reserves 1,009 - 1,009 1,246 - 1,246
Inventory costs capitalized
for income tax purposes (211) - (211) (92) - (92)
Nondeductible accrual for
lower of cost or market
adjustment to inventory 1,306 - 1,306 - - -
- -----------------------------------------------------------------------------------------
Total current 3,735 - 3,735 2,753 - 2,753
- -----------------------------------------------------------------------------------------
Other nondeductible accruals 1,101 (98) 1,003 980 (195) 785
Accelerated plant costs - (1,660) (1,660) - (135) (135)
Deferred lease payments - - - 645 - 645
Accelerated depreciation - (41,575) (41,575) - (42,734) (42,734)
Other 1,978 (877) 1,101 - (665) (665)
Tax credit carryforwards 8,359 - 8,359 14,483 - 14,483
- -----------------------------------------------------------------------------------------
Total noncurrent 11,438 (44,210) (32,772) 16,108 (43,729) (27,621)
- -----------------------------------------------------------------------------------------
Total $15,173 $(44,210) $(29,037) $18,861 $(43,729) $(24,868)
=========================================================================================
At December 31, 2001, the Company had an alternative minimum tax credit
carryforward of approximately $8,282,000 available to offset future income
taxes payable to the extent regular income taxes payable exceeds alternative
minimum taxes payable. Alternative minimum tax credits can be carried forward
indefinitely.
In 2001, the Company utilized $3,777,000 of general business credits.
There are no remaining general business credits to offset regular taxes
payable at December 31, 2001.
NOTE 13 - EMPLOYEE STOCK OWNERSHIP AND 401(K) PLANS:
The Company has a 401(k) retirement plan ("401(k)") for its employees
who meet plan eligibility requirements. Until it was merged into the 401(k)
effective December 31, 2000, the Company also had an Employee Stock Ownership
Plan ("ESOP"), which was a noncontributory defined contribution plan
established primarily to acquire shares of the Company's common stock. The
ESOP's assets were transferred into the 401(k) on April 24, 2001. The merger
was done to reduce costs and simplify reporting and accounting obligations.
On December 31, 2000, the ESOP's assets included 1,187,897 shares of the
Company's common stock. All of these shares were allocated to the
participants' accounts effective as of December 31, 2000. In addition to
investments in the Company's common stock, the ESOP held investments in a
balanced mutual fund. Contributions to the ESOP were made at the discretion
of the Company's Board of Directors. The Company made contributions of
$825,000 and $3,000,000 to the ESOP for 2000 and 1999, respectively.
The Company matches the employee's contributions to the 401(k) at a rate
of 50% up to a maximum of 6% of the employee's annual compensation, subject
to a per participant maximum contribution amount. For the years ended
December 31, 2001, 2000, and 1999, the Company expensed $1,454,000,
$1,415,000, and $1,388,000, respectively, for matching contributions under
this plan. The Company's matching contribution can be invested in available
options at the discretion of the participant. Additional contributions to the
401(k) are made at the discretion of the Company's Board of Directors. For
the year ending December 31, 2001, the Company made a discretionary
contribution of $900,000 to the 401(k). This amount is similar to the
discretionary contributions made in past years to the ESOP. This amount will
be used to purchase the Company's common stock, which will be allocated to
employees' accounts according to the same formula used for discretionary
contributions to the ESOP. At December 31, 2001, the assets of the 401(k)
included 995,568 shares of the Company's common stock.
NOTE 14 - STOCK INCENTIVE PLANS:
Under the 1998 Stock Incentive Plan (the "1998 Plan"), shares of the
Company's common stock are authorized to be issued to deserving employees in
connection with awards of options, appreciation rights, restricted shares,
performance shares or performance units, all as defined in the 1998 Plan.
Appreciation rights, performance shares and performance units may be settled
in cash, common shares of the Company or any combination thereof.
The total number of shares available for grant under the 1998 Plan is 2%
of the total number of common shares outstanding as of the first day of each
calendar year, which amount was 178,960 shares for 2001, and was 206,070
shares for 2000, subject to a 400,000 share annual limitation on the number
of common shares available for the grant of options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal
Revenue Code. Common shares available for grant in any particular calendar
year that are not, in fact, granted in such year cannot be added to the
common shares available for grant in any subsequent calendar year. For 2002,
the number of shares available for grant is 171,077.
On May 17, 2001, 177,500 nonqualified stock options were granted to 13
employees under the 1998 Plan. The exercise price for all of the options was
$9.95, which was the closing price for the Company's Common Stock on the New
York Stock Exchange on the date of grant. One-third of each grant vested on
the date of grant, one-third on May 17, 2002, and the remaining one-third on
May 17, 2003. All of the options expire on May 16, 2011.
No grants were made in 2000.
The 1998 Plan provides that all grants are subject to restrictions,
conditions and terms more specifically described in the 1998 Plan, including,
but not limited to, the exercise price for stock options and appreciation
rights and time vesting requirements for all awards. In general, the 1998
Plan provides that grants of stock options and appreciation rights must
expire no more than 10 years from the date of grant. In addition, all grants
under the 1998 Plan are subject to forfeiture under certain circumstances,
and all unvested awards may vest immediately under various circumstances
defined in the 1998 Plan.
On December 31, 1999, 100,000 nonqualified stock options were granted
under the 1998 Plan, 50,000 stock options at an exercise price of $12.00 per
share and 50,000 stock options at $18.50 per share. The stock options were
granted to two employees who had been granted an equal number of Phantom
Stock units under the Giant Industries, Inc. 1998 Phantom Stock Plan (the
"Phantom Stock Plan"), which was terminated by the Company in 1999. Each
Phantom Stock unit was equivalent to one share of the Company's common stock.
The stock options were granted under the original terms of the Phantom Stock
Plan grant as to exercise price, vesting and expiration date. The exercise
prices exceeded the fair market value at the date of grant, 60,000 options
became vested on the grant date, and the remaining options vest in varying
amounts, and at various times, through December 31, 2001. All of the options
expire on February 1, 2008. No other awards were outstanding under the
Phantom Stock Plan at the time of its termination.
Under the Company's 1989 Stock Incentive Plan (the "1989 Plan"), 500,000
shares of the Company's common stock were authorized to be issued to
deserving employees in the form of options and/or restricted stock. At
December 31, 2001, no shares were available for future grants under the 1989
Plan because, by its terms, no new awards may be made after December 11,
1999.
All of the options or restricted stock granted under the 1989 Plan are
fully vested. At December 31, 2001, 121,450 shares granted under the 1989
Plan remained to be exercised.
The following summarizes stock option transactions under the 1989 and
1998 Plans:
OPTIONS OUTSTANDING AT SHARES WEIGHTED AVERAGE EXERCISE PRICE
- -----------------------------------------------------------------------------
January 1, 1999 431,408 $ 8.80
Granted 100,000 15.25
Exercised (120,857) 8.86
--------
December 31, 1999 410,551 10.36
Exercised (16,500) 6.61
Forfeited (15,000) 14.88
Expired (5,000) 10.50
--------
December 31, 2000 374,051 10.34
Granted 177,500 9.95
Exercised (126,601) 8.74
Expired (26,000) 10.63
--------
December 31, 2001 398,950 $10.65
========
Options exercisable at December 31:
2001 280,613 $10.95
2000 298,251 10.07
1999 252,285 9.80
The following summarizes information about stock options outstanding
under the 1989 and 1998 Plans at December 31, 2001:
Options Outstanding Options Exercisable
- ---------------------------------------------- --------------------------
Weighted
Average Weighted
Range of Number Remaining Number Average
Exercise Prices Outstanding Contractual Life Exercisable Exercise Price
- ---------------------------------------------- --------------------------
$ 5.25 17,900 0.3 Years 17,900 $ 5.25
7.75 47,750 1.3 Years 47,750 7.75
12.00 to 18.50 100,000 6.1 Years 100,000 15.25
8.88 55,800 7.1 Years 55,800 8.88
9.95 177,500 9.4 Years 59,163 9.95
------- -------
398,950 6.9 Years 280,613 $10.95
======= =======
In October 1995, the FASB issued SFAS No. 123 "Accounting for Stock
Based Compensation." The Company has determined that it will not change to
the fair value method prescribed in the Statement and will continue to use
Accounting Principles Board Opinion No. 25 for measurement and recognition of
employee stock based compensation.
The Company has adopted the disclosure-only provisions of SFAS No. 123.
If the Company had elected to recognize compensation costs based on the fair
value at the date of grant for awards granted in 2001, 1999 and 1998,
consistent with the provisions of SFAS No. 123, the Company's net earnings
and earnings per share for the years ended December 31, 2001, 2000 and 1999
would have decreased by approximately $634,000 and $0.07 per share, $289,000
and $0.03 per share, and $497,000 and $0.05 per share, respectively.
The pro forma effects of applying SFAS No. 123 in this disclosure are
not necessarily indicative of future amounts.
The estimated weighted average fair values of options granted during
2001, 1999 and 1998 were $5.96, $9.14 and $5.40 per share, respectively, and
were estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions:
2001 1999 1998
---- ---- ----
Expected life in years 8 8 7
Risk-free interest rate 5.4% 6.5% 6%
Volatility 47% 45% 38%
Dividend Yield - - 1.2%
NOTE 15 - INTEREST, OPERATING LEASES AND RENT EXPENSE:
Interest paid and capitalized for 2001 was $24,135,000 and $0, for 2000
was $24,458,000 and $62,000, and for 1999 was $24,176,000 and $183,000,
respectively.
As discussed in Note 3, on December 31, 1998, the Company and FFCA
completed a sale-leaseback transaction. Under the terms of the Agreement,
FFCA purchased 83 service station/convenience stores from the Company and the
Company in turn leased the 83 service station/convenience stores back from
FFCA under an operating lease arrangement with an initial term of 15 years
and three separate options to continue the lease for successive periods of
five years. The Company reacquired 24 of the service station/convenience
stores in the second half of 1999 and the remaining 59 in the third quarter
of 2001.
The Company is committed to annual minimum rentals under noncancelable
operating leases that have initial or remaining lease terms in excess of one
year as of December 31, 2001 as follows:
Land, building,
machinery and
equipment leases
- -------------------------------------------------------------------
(In thousands)
2002 $ 4,606,000
2003 3,414,000
2004 2,577,000
2005 1,711,000
2006 1,096,000
2007 - 2024 6,004,000
- -------------------------------------------------------------------
Total minimum payments required $19,408,000
===================================================================
Total rent expense was $8,459,000, $11,017,000, and $12,134,000 for
2001, 2000, and 1999, respectively.
NOTE 16 - 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 December 31, 2001, that may result from those matters for which
the Company has recorded accruals 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, 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 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.
In June 2001, NMED issued four compliance orders ("Orders") to the
Company in connection with alleged violations of air regulations at the
Company's Ciniza and Bloomfield refineries. The Orders allege violations
discovered during NMED inspections in 1999 and 2000. The civil penalties
proposed in connection with the Orders originally totaled approximately
$550,000. The Company settled the alleged violations for $135,000 during the
first quarter of 2002.
In 1973, the Company constructed the Farmington Refinery that 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's
environmental reserve for this matter is approximately $570,000.
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. While the Landfill was operational, the
Company used it to dispose of office trash, maintenance shop trash, used
tires and water from the Farmington refinery's evaporation pond.
The Landfill was added to the National Priorities List as a CERCLA
Superfund site in 1990. In connection with this listing, 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 believes would cost approximately $3,900,000 to
implement. BLM's $3,900,000 cost estimate is based on certain assumptions
that 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. Although the Company was
given reason to believe that a final remedy would be selected in 2000, that
selection did not occur. The Company has been advised that the site remedy
may be announced in 2002. 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 also was 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 also may 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 also may 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 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 Resource 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. EPA has delegated its oversight authority over
the Order to NMED's Hazardous Waste Bureau ("HWB"). In 2000, OCD approved the
groundwater discharge permit for the refinery, which included an abatement
plan that addressed the Company's environmental obligations under the Order.
The abatement plan reflects new information relating to the site as well as
remediation methods that were not originally contemplated in connection with
the Order. Discussions between OCD, HWB and the Company have resulted in
proposed revisions to the abatement plan. Adoption of the abatement plan as
the appropriate corrective action remedy under the Order would significantly
reduce the Company's corrective action costs. The Company estimates that
remediation expenses associated with the abatement plan will be in the range
of approximately $50,000 to $150,000, and will be incurred over a period of
approximately 30 years. If the Company's request is not granted, the Company
estimates that remaining remediation expenses could range as high as
$1,000,000, which is reflected in the Company's environmental reserve for
this matter, and could be as low as $600,000. If, as expected, the abatement
plan is approved as submitted, the Company anticipates that the reserve will
be reduced.
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. Based upon a
January 13, 2000 report filed with OCD, it appears possible that contaminated
groundwater is contained within the property boundaries and does not extend
offsite. The Company anticipates that OCD will not require remediation of
offsite soil based upon the low contaminant levels found there. In the course
of conducting cleanup activities approved by OCD, it was discovered that the
extent of contamination was greater than anticipated. The Company received
approval to conduct a pilot bioventing project to address remaining
contamination at the site, which was completed on June 26, 2001, at a cost of
approximately $15,000. Based on the results of the pilot project, the Company
submitted a remediation plan to OCD that proposes the use of bioventing to
address remaining contamination. The Company anticipates that it would incur
approximately $150,000 in remediation expenses in connection with this plan
over a period of one to two years, and the Company has created an
environmental reserve in this amount. If the Company's plan is not approved,
the Company cannot reasonably estimate remaining remediation costs because,
among other reasons, it does not know what remediation technology would be
approved by OCD for use at the site.
As of December 31, 2001, the Company had an environmental liability
accrual of approximately $2,500,000. Approximately $1,600,000 of this accrual
is for the following previously discussed projects: (i) the remediation of
the hydrocarbon plume that appears to extend no more than 1,800 feet south of
the Company's inactive Farmington refinery; (ii) environmental obligations
assumed in connection with the acquisition of the Bloomfield Refinery; and
(iii) hydrocarbon contamination on and adjacent to the 5.5 acres that the
Company owns in Bloomfield, New Mexico. The remaining amount of the accrual
relates to the closure of certain solid waste management units at the Ciniza
Refinery, which is being conducted in accordance with the refinery's Resource
Conservation and Recovery Act permit; closure of the Ciniza Refinery land
treatment facility including post-closure expenses; and amounts for smaller
remediation projects. The accrual balance reflects a reduction in amounts
accrued for environmental obligations assumed in connection with the
acquisition of the Bloomfield Refinery and increases in reserves for other
environmental projects. The environmental accrual is recorded in the current
and long-term sections of the Company's Consolidated Balance Sheets.
On June 11, 2001, the Company filed claims against the United States
Defense Energy Support Center ("DESC") in connection with jet fuel that the
Company sold to DESC from 1983 through 1994. The Company asserted that the
DESC underpaid for the jet fuel in the approximate amount of $17,000,000. The
Company believes that its claims are supported by recent federal court
decisions, including decisions from the United States Claims Court, dealing
with contract provisions similar to those contained in the contracts that are
the subject of the Company's claims. On March 12, 2002, the DESC denied the
Company's claims. The Company has 12 months to bring an action in the United
States Court of Federal Claims relating to the denied claims. The DESC has
indicated that it will counterclaim if the Company pursues its claims and
will assert, based on its interpretation of the contract provisions, that the
Company may owe additional amounts of approximately $4,900,000. The Company
is evaluating its options. Due to the preliminary nature of this matter,
there can be no assurance that the Company would ultimately prevail should it
decide to pursue its claims nor is it possible to predict when any payment
would be received if the Company were successful. Accordingly, the Company
has not recorded a receivable for this claim.
Giant Arizona leases approximately 8,176 square feet of space from a
limited liability company in which the CCEO owns a 51% interest. Pursuant to
a sublease between Giant Arizona and a separate limited liability company
controlled by the CCEO, Giant Arizona subleases the space to such entity for
use as an inn. The owner of the 49% interest in the lessor has notified Giant
Arizona that the sublessee is delinquent on the payment of the rent due, and
on or about December 28, 2001, such owner filed a derivative lawsuit for and
on behalf of the lessor against Giant Arizona to collect all amounts owing
under the lease. The suit is for the recovery of rents past due and owing in
excess of $156,990 from August 1, 2000 through date of the complaint.
Pursuant to a letter dated January 16, 2002, Giant Arizona made a formal
demand on the sublessee for the sublessee to pay all of the past due amounts.
In addition, Giant Arizona has filed a motion to dismiss the lawsuit for
failure to comply with the express provisions of the Arizona derivative
action statute or, alternatively, to compel binding arbitration pursuant to
the terms of the lease.
NOTE 17 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Year Ended December 31, 2001
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data) Quarter
- --------------------------------------------------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------------------------
Net revenues $251,212 $281,158 $241,228 $195,081
Cost of products sold 200,502 209,917 181,834 146,261
- --------------------------------------------------------------------------------------------------
Gross margin 50,710 71,241 59,394 48,820
- --------------------------------------------------------------------------------------------------
Operating expenses 28,848 28,736 27,957 28,719
Depreciation and amortization 8,113 8,139 8,608 9,015
Selling, general and administrative expenses 6,583 8,755 7,659 4,867
Loss on the disposal/write-down of assets 139 343 1,301 4,429
Allowance for related party note and
interest receivable - - - 5,409
Net earnings (loss) 950 11,953 5,135 (5,657)
Net earnings (loss) per common share - basic $ 0.11 $ 1.33 $ 0.57 $ (0.66)
Net earnings (loss) per common share - assuming dilution $ 0.11 $ 1.33 $ 0.57 $ (0.66)
Year Ended December 31, 2000
- --------------------------------------------------------------------------------------------------
(In thousands, except per share data) Quarter
- --------------------------------------------------------------------------------------------------
First Second Third Fourth
- --------------------------------------------------------------------------------------------------
Net revenues $225,134 $266,066 $301,213 $281,949
Cost of products sold 178,017 210,630 240,873 229,481
- --------------------------------------------------------------------------------------------------
Gross margin 47,117 55,436 60,340 52,468
- --------------------------------------------------------------------------------------------------
Operating expenses 29,430 29,375 30,429 33,416
Depreciation and amortization 8,305 8,370 8,650 8,254
Selling, general and administrative expenses 6,402 6,396 7,202 5,373
Net earnings (loss) (1,632) 3,281 5,015 625
Net earnings (loss) per common share - basic $ (0.17) $ 0.36 $ 0.55 $ 0.07
Net earnings (loss) per common share - assuming dilution $ (0.17) $ 0.36 $ 0.55 $ 0.07
In the fourth quarter of 2001, the Company recorded a loss on the
disposal/write-down of certain refining and retail assets due to obsolescence
and replacement, recorded the write-down of various service
station/convenience stores due to impairment, and recorded an allowance for a
related party note and interest receivable.
NOTE 18 - SUBSEQUENT EVENT:
On February 8, 2002, the Company entered into an agreement with BP
Corporation North America Inc. and BP Products North America Inc.
(collectively "BP") to purchase a refinery in Yorktown, Virginia (the
"Yorktown Refinery"). The refinery is located in Yorktown, Virginia, on the
York River. It has a crude oil processing capacity of 61,900 barrels per day.
Gasoline comprises approximately 50% of the refinery's current product slate,
which also encompasses a wide range of other products including diesel fuel,
heating oil and coke. The refinery is the only refinery in Virginia and, due
to its coastal location, is able to purchase crude oil produced around the
world and to deliver refined petroleum products to New York Harbor as well as
to the area around the refinery.
The Yorktown Refinery will be acquired for $127,500,000, plus the value
of inventory at closing, which the Company currently projects will have a
value of approximately $42,000,000. The agreement also provides for
conditional potential monthly payments, in an amount not to exceed a combined
total of $25,000,000, if certain refining margin spreads over a specified
index are reached. The payments begin in the year 2003 and conclude at the
end of 2005. The Company made a deposit of $10,000,000 to BP when the
refinery purchase agreement was executed, which is only refundable under
limited circumstances. In addition to the purchase price, the Company
anticipates that it will incur direct costs in connection with the refinery
acquisition of approximately $800,000, excluding financing costs.
The Company will assume certain liabilities and obligations, including
certain environmental obligations, in connection with its purchase of the
Yorktown Refinery, but will be provided with specified levels of
indemnification for certain matters.
The Company expects the refinery purchase to close during the second
quarter of 2002. The closing is contingent on satisfaction of all contract
conditions, including the nonexercise of a right of first refusal held by an
adjacent property owner and the expiration or termination of the required
waiting period under the Hart-Scott-Rodino Antitrust Improvement Act ("HSR")
and any extension of this waiting period by the federal government. The
purchase agreement can be terminated by the Company or BP if the closing does
not occur on or prior to May 31, 2002, although Buyer may not terminate the
agreement until September 30, 2002 if the only condition to closing that has
not occurred is termination or expiration of the HSR waiting period. By
letter dated February 2002, the Federal Trade Commission notified the Company
that the HSR waiting period had been terminated.
The Company intends to finance the acquisition of the refinery with a
combination of committed financing and cash on hand. The debt financing is
anticipated to consist of borrowing under: (i) the Company's Credit
Agreement, which will be amended and restated to, among other things,
increase the Company's maximum available borrowing under the facility and
extend the facility's term by an additional year; (ii) a capital lease
facility; (iii) a mortgage financing facility; and (iv) potentially
additional public debt. The Company anticipates that financing costs
associated with the Yorktown Refinery acquisition, including the possible
refinancing of the Company's 9 3/4% Notes, will be approximately $13,500,000
to $15,000,000.
NOTE 19 - GOODWILL AMORTIZATION:
In accordance with SFAS No. 142, the Company discontinued the
amortization of goodwill effective January 1, 2002. A reconciliation of net
earnings and related per share amounts reported in the Consolidated
Statements of Earnings to the pro forma amounts adjusted for the exclusion of
goodwill amortization, net of the related tax effect, is presented below. For
purposes of the calculation, goodwill amortization was tax effected using the
Company's estimated incremental combined federal and state tax rate of
approximately 40%. The pro forma results reflecting the exclusion of goodwill
amortization have been prepared only to demonstrate the impact of goodwill
amortization, net of tax effect, on net earnings and related per share
amounts and are for comparative purposes only.
Year Ended December 31,
- -----------------------------------------------------------------------------
(In thousands, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------
Reported net earnings $12,381 $ 7,289 $10,778
Add: Goodwill amortization, net of tax effect 641 641 650
- -----------------------------------------------------------------------------
Adjusted net earnings $13,022 $ 7,930 $11,428
=============================================================================
Earnings per common share:
Basic:
Reported net earnings $ 1.40 $ 0.79 $ 1.01
Add: Goodwill amortization, net of
tax effect 0.07 0.07 0.06
- -----------------------------------------------------------------------------
Adjusted net earnings $ 1.47 $ 0.86 $ 1.07
=============================================================================
Diluted:
Reported net earnings $ 1.39 $ 0.79 $ 1.01
Add: Goodwill amortization, net of
tax effect 0.07 0.07 0.06
- -----------------------------------------------------------------------------
Adjusted net earnings $ 1.46 $ 0.86 $ 1.07
=============================================================================
NOTE 20 - SUBSIDIARY GUARANTORS (UNAUDITED):
In connection with the Company's acquisition of the Yorktown refinery
(see Note 18), the Company completed a private placement for $200,000,000 of
senior subordinated notes. The Company will offer to exchange such notes for
a new issue of substantially identical debt securities registered under the
Securities Act of 1933.
The notes will be fully and unconditionally guaranteed, jointly and
severally, on a senior subordinated basis, by each of our existing and future
domestic restricted subsidiaries, subject to a limitation designed to ensure
that such guarantees do not constitute a fraudulent conveyance. Except as
otherwise provided 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.
Separate financial information for such subsidiaries and the parent
company are not provided as the parent company has no independent assets or
operations, the guarantees are full and unconditional and joint and several,
any of the subsidiaries of the Company other than the subsidiary guarantors
are minor and the separate financial statements and other disclosures
concerning the subsidiaries are not deemed material to investors.