FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period _______ to _______. For Quarter Ended September 30, 1996 Commission File Number: 1-10398 GIANT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 86-0642718 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23733 North Scottsdale Road, Scottsdale, Arizona 85255 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (602) 585-8888 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Number of Common Shares outstanding at October 31, 1996: 11,158,668 shares. GIANT INDUSTRIES, INC. AND SUBSIDIARIES INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements Condensed Consolidated Balance Sheets September 30, 1996 (Unaudited) and December 31, 1995 Condensed Consolidated Statements of Earnings (Unaudited) Three and Nine Months Ended September 30, 1996 and 1995 Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1996 and 1995 Notes to Condensed Consolidated Financial Statements (Unaudited) Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations PART II - OTHER INFORMATION Item 1 - Legal Proceedings Item 5 - Other Item 6 - Exhibits and Reports on Form 8-K SIGNATURE PART I FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) September 30, 1996 December 31, 1995 ------------------ ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 25,098 $ 9,549 Accounts receivable, net 29,970 24,025 Inventories 35,515 42,581 Prepaid expenses and other 1,615 3,880 Net assets of discontinued operations 26,689 Deferred income taxes 2,070 2,145 --------- --------- Total current assets 94,268 108,869 --------- --------- Property, plant and equipment 310,080 292,919 Less accumulated depreciation and amortization (104,818) (94,357) --------- --------- 205,262 198,562 --------- --------- Other assets 24,076 17,431 --------- --------- $ 323,606 $ 324,862 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 4,044 $ 4,063 Accounts payable 36,845 34,162 Accrued expenses 31,353 20,316 --------- --------- Total current liabilities 72,242 58,541 --------- --------- Long-term debt, net of current portion 106,837 142,676 Deferred income taxes 15,880 12,864 Other liabilities 5,045 1,049 Common stockholders' equity 123,602 109,732 --------- --------- $ 323,606 $ 324,862 ========= ========= See accompanying notes to condensed consolidated financial statements. GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (In thousands except shares and per share data) Three Months Ended Nine Months Ended September 30, September 30, ------------------------- ------------------------- 1996 1995 1996 1995 ----------- ----------- ----------- ----------- Net revenues $ 136,032 $ 78,400 $ 375,775 $ 228,552 Cost of products sold 100,567 53,719 267,245 159,573 ----------- ----------- ----------- ----------- Gross margin 35,465 24,681 108,530 68,979 Operating expenses 16,141 13,120 47,418 37,490 Depreciation and amortization 4,508 2,986 12,889 9,349 Selling, general and administrative expenses 3,423 3,333 12,465 9,540 ----------- ----------- ----------- ----------- Operating income 11,393 5,242 35,758 12,600 Interest expense, net 2,658 2,307 9,035 6,480 ----------- ----------- ----------- ----------- Earnings from continuing operations before income taxes 8,735 2,935 26,723 6,120 Provision for income taxes 3,452 967 10,422 1,947 ----------- ----------- ----------- ----------- Earnings from continuing operations 5,283 1,968 16,301 4,173 Discontinued operations, net (20) 10 (13) 104 ----------- ----------- ----------- ----------- Net earnings $ 5,263 $ 1,978 $ 16,288 $ 4,277 =========== =========== =========== =========== Earnings per common share: Continuing operations $ 0.47 $ 0.17 $ 1.45 $ 0.36 Discontinued operations 0.01 ----------- ----------- ----------- ----------- Net earnings $ 0.47 $ 0.17 $ 1.45 $ 0.37 =========== =========== =========== =========== Weighted average number of shares outstanding 11,231,602 11,321,229 11,247,710 11,547,500 =========== =========== =========== =========== See accompanying notes to condensed consolidated financial statements. GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September 30, -------------------- 1996 1995 -------- -------- Cash flows from continuing operating activities: Net earnings $ 16,288 $ 4,277 Adjustments to reconcile net earnings to net cash provided by continuing operating activities: Loss (earnings) from discontinued operations 13 (104) Depreciation and amortization 12,889 9,349 Deferred income taxes 2,386 (262) Restricted stock award compensation 114 347 Other 455 41 Changes in operating assets and liabilities: (Increase) decrease in receivables (4,291) 4,109 Decrease (increase) in inventories 7,066 (1,357) Decrease in prepaid expenses and other 2,265 1,186 Increase in accounts payable 2,699 1,818 Increase (decrease) in accrued expenses 7,351 (1,010) -------- -------- Net cash provided by continuing operating activities 47,235 18,394 -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment and other assets (20,906) (17,067) Proceeds from sale of property, plant and equipment 4,425 1,262 Payments received on ESOP loan 514 Proceeds from sales and maturities of marketable securities 35,981 Proceeds from sale of discontinued operations 23,814 Net cash used for discontinued operations (597) (5,668) -------- -------- Net cash provided by investing activities 6,736 15,022 -------- -------- Cash flows from financing activities: Payments of long-term debt (35,858) (4,325) Purchase of treasury stock (1,047) (5,620) Payment of dividends (1,719) (1,738) Proceeds from exercise of stock options 202 -------- -------- Net cash used by financing activities (38,422) (11,683) -------- -------- Net increase in cash and cash equivalents 15,549 21,733 Cash and cash equivalents: Beginning of period 9,549 12,860 -------- -------- End of period $ 25,098 $ 34,593 ======== ======== Noncash Investing and Financing Activities. In the second quarter of 1996, the Company accrued $2,250,000 for estimated preacquisition environmental liabilities assumed in the purchase of the Bloomfield Refinery in the fourth quarter of 1995. This amount has been added to property, plant and equipment as an adjustment to the purchase price of the Bloomfield Refinery. In the third quarter of 1995, two retail units with a net book value of $1,613,000 were exchanged for a finished product terminal. See accompanying notes to condensed consolidated financial statements. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. Operating results for the nine months ended September 30, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. The enclosed financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. Certain reclassifications have been made to the September 30, 1995 financial statements to conform to the statement classifications used in the 1996 period relating to the classification of the Company's exploration and production business as discontinued operations. NOTE 2 - PRO FORMA FINANCIAL INFORMATION: On October 4, 1995, the Company completed the purchase of the Bloomfield Refinery along with related pipeline and transportation assets from Gary-Williams Energy Co. and its wholly-owned subsidiary, Bloomfield Refining Company ("BRC"). The following Statements of Earnings compare the consolidated results of Giant Industries, Inc. ("Giant"), including the results of the Bloomfield Refinery, for the nine months ended September 30, 1996 with the pro forma combined condensed statement of earnings of the Company and BRC ("Pro Forma") for the nine months ended September 30, 1995. The pro forma statement includes the results of operations of the Company and BRC, along with adjustments which give effect to events that are directly attributable to the transaction and which are expected to have a continuing impact. The information assumes the transaction was consummated as of the beginning of the period presented. The unaudited pro forma combined condensed financial information does not purport to represent the results of operations that actually would have resulted had the purchase occurred on the date specified, nor should it be taken as indicative of the future results of operations. STATEMENTS OF EARNINGS NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 (In thousands except shares and per share data) (Unaudited) Giant Pro Forma 1996 1995 ---------- ---------- Net revenues $ 375,775 $ 335,383 Cost of products sold 267,245 238,655 ---------- ---------- Gross margin 108,530 96,728 Operating expenses 47,418 47,138 Depreciation and amortization 12,889 11,412 Selling, general and administrative expenses 12,465 11,100 ---------- ---------- Operating income 35,758 27,078 Interest expense, net 9,035 9,442 ---------- ---------- Earnings from continuing operations before income taxes 26,723 17,636 Provision for income taxes 10,422 6,426 ---------- ---------- Earnings from continuing operations $ 16,301 $ 11,210 ========== ========== Earnings per common share for continuing operations $ 1.45 $ 0.97 ========== ========== Weighted average number of shares outstanding 11,247,710 11,547,500 ========== ========== NOTE 3 - DISCONTINUED OPERATIONS On August 30, 1996, the Company completed the sale of substantially all of its exploration and production assets for $25,500,000. Certain assets of the exploration and production business with a net asset value of approximately $6,500,000 were retained by the Company, primarily a working interest in certain natural gas properties that qualify for the coal seam gas tax credits under Section 29 of the Internal Revenue Code, an office building and some equipment. Certain of the retained assets are subject to a production payment classified as other liabilities in the Company's consolidated balance sheet. The retained assets have been reclassified primarily as other assets and will be utilized in the Company's continuing operations. Future coal seam gas tax credits, when earned, will be used to offset income taxes payable. The Company incurred a net loss on the final disposal of approximately $13,000. NOTE 4 - INVENTORIES: September 30, 1996 December 31, 1995 ------------------ ----------------- (In thousands) Inventories consist of the following: First-in, first-out ("FIFO") method: Crude oil $12,923 $15,465 Refined products 16,416 17,605 Refinery and shop supplies 7,557 6,871 Retail method: Merchandise 2,521 2,721 ------- ------- 39,417 42,662 Allowance for last-in, first-out ("LIFO") method (3,902) (81) ------- ------- $35,515 $42,581 ======= ======= /TABLE NOTE 5 - LONG-TERM DEBT: In November 1993, the Company issued $100,000,000 of 9 3/4% senior subordinated notes ("Notes"). Repayment of the Notes is jointly and severally guaranteed on an unconditional basis by the Company's direct and indirect wholly-owned subsidiaries, subject to a limitation designed to ensure that such guarantees do not constitute a fraudulent conveyance. Except as otherwise allowed in the Indenture pursuant to which the Notes were issued, there are no restrictions on the ability of such subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. General provisions of applicable state law, however, may limit the ability of any subsidiary to pay dividends or make distributions to the Company in certain circumstances. Separate financial statements of the subsidiaries are not included herein because the subsidiaries are jointly and severally liable; 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; and the separate financial statements and other disclosures concerning the subsidiaries are not deemed material to investors. NOTE 6 - CONTINGENCIES: The Company and certain subsidiaries are defendants to various legal actions. Certain of these pending legal actions involve or may involve compensatory, punitive or other damages. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings or claims referred to above could be decided adversely. Although the amount of liability at September 30, 1996 with respect to these matters is not ascertainable, the Company believes that any resulting liability should not materially affect the Company's financial condition or results of operations. 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 due to the speculative nature of remediation and clean-up cost estimates and methods, the 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. The United States Environmental Protection Agency notified the Company in May 1991 that it may be a potentially responsible party for the release or threatened release of hazardous substances, pollutants, or contaminants at the Lee Acres Landfill, which is owned by the United States Bureau of Land Management and which is adjacent to the Company's Farmington Refinery which was operated until 1982. 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 it was responsible for only a small part of such costs. At the present time, the Company is unable to determine the extent of potential liability, if any, in this matter and has made no provision therefore in its financial statements. The Company has established an environmental liability accrual of approximately $3,400,000 of which approximately $1,100,000 relates to ongoing environmental projects, including the remediation of a hydrocarbon plume at the Company's Farmington Refinery and hydrocarbon contamination on 5.5 acres the Company owns in Bloomfield, New Mexico. The remaining amount of approximately $2,300,000 is an estimate, recorded in the second quarter of 1996, of certain environmental obligations assumed in the acquisition of the Bloomfield Refinery. This amount has been recorded as an adjustment to the purchase price and allocated to the assets acquired. The environmental accrual is recorded in the current and long-term sections of the Company's consolidated balance sheet. The Company has received several tax notifications and assessments from the Navajo Tribe relating to crude oil and natural gas removed from properties located outside the boundaries of the Navajo Indian Reservation in an area of disputed jurisdiction, including a $1,800,000 severance tax assessment issued to Giant Arizona in November 1991. The Company has invoked its appeal rights with the Tribe's Tax Commission in connection with this assessment and intends to oppose the assessment. The Company may receive further tax assessments before the resolution of this matter. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. RESULTS OF OPERATIONS EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES - ------------------------------------------------------- Earnings from continuing operations before income taxes were $8.7 million for the three months ended September 30, 1996, an increase of approximately $5.8 million from $2.9 million for the three months ended September 30, 1995. For the nine months ended September 30, 1996, earnings from continuing operations before income taxes were $26.7 million, an increase of $20.6 million from the $6.1 million reported in the same 1995 period. The increase in both periods is primarily the result of the acquisition of the Bloomfield Refinery and increases in Ciniza Refinery average margins of 3% and 30% for the three and nine month periods, respectively. These increases were partially offset by increases in operating and administrative costs. REVENUES - -------- Revenues for the three months ended September 30, 1996, increased $57.6 million or 74% to $136.0 million from $78.4 million in the comparable 1995 period. Finished product sales of $45.4 million from the Bloomfield Refinery accounts for approximately 79% of the increase. In addition, a 19% increase in Ciniza Refinery weighted average selling prices and a 9% increase in service station merchandise sales contributed to increased revenues. Offsetting these increases was a decline in third party sales from the Company's ethanol plant due to a temporary suspension of operations in October 1995. The increase in service station merchandise sales is the result of increased same store volumes and a net increase in sales from thirteen new or remodeled units over eleven units that have been disposed of in the last twelve months. The volumes of refined products sold through retail outlets increased approximately 1% from 1995 third quarter levels due to a 5% increase in service station volumes, offset in part by a 20% decline in volumes sold from the travel center. Service station volumes have increased due in part to the addition of twelve new units and one remodeled unit, offset by a loss in volume from the sale of eleven units and a slight decline in same store volumes resulting from increased competition. Revenues for the nine months ended September 30, 1996, increased $147.2 million or 64% to $375.8 million from $228.6 million in the comparable 1995 period. Finished product sales of $120.0 million from the Bloomfield Refinery accounts for approximately 82% of the increase. In addition, a 15% increase in Ciniza Refinery weighted average selling prices and a 12% increase in service station merchandise sales contributed to increased revenues. Offsetting these increases was a decline in third party sales from the Company's ethanol plant. The increase in service station merchandise sales is the result of increased same store volumes and a net increase in sales from thirteen new or remodeled units over eleven units that have been disposed of. The volumes of refined products sold through retail outlets decreased approximately 3% from 1995 nine month levels due to a 15% decrease in volumes sold from the travel center and an 1% decline in service station volumes resulting from increased competition, the sale of eleven units and a slight decline in same store volumes, offset in part by the addition of twelve new units and one remodeled unit. COST OF PRODUCTS SOLD - --------------------- For the three months ended September 30, 1996, cost of products sold increased $46.8 million or 87% to $100.5 million from $53.7 million for the corresponding 1995 period. Cost of products sold of $36.1 million relating to the Bloomfield Refinery accounts for approximately 77% of the increase. Also contributing to increased costs was a 21% increase in average crude oil costs and a 10% increase in the cost of merchandise sales from the service stations. These increases were partially offset by a decrease in costs relating to the temporary suspension of operations of the Company's ethanol plant. For the nine months ended September 30, 1996, cost of products sold increased $107.7 million or 67% to $267.3 million from $159.6 million for the corresponding 1995 period. Cost of products sold of $91.7 million relating to the Bloomfield Refinery accounts for approximately 85% of the increase. Also contributing to increased costs was a 14% increase in average crude oil costs and a 14% increase in the cost of merchandise sales from the service stations. These increases were partially offset by a decrease in costs relating to the temporary suspension of operations of the Company's ethanol plant and the liquidation of certain lower cost LIFO inventory layers which resulted in a reduction in cost of products sold of approximately $2.8 million compared to a similar reduction of approximately $300,000 in 1995. OPERATING EXPENSES - ------------------ For the three months ended September 30, 1996, operating expenses increased $3.0 million or 23% to $16.1 million from $13.1 million in the three months ended September 30, 1995. For the nine months ended September 30, 1996, operating expenses increased $9.9 million or 26% to $47.4 million from $37.5 million in the nine months ended September 30, 1995. Operating expenses in both comparative periods increased approximately 24% due to the acquisition of the Bloomfield Refinery and 4% due to increases in payroll and related costs for other operations. Partially offsetting these increases was a decrease of 7% due to the temporary suspension of operations of the ethanol plant. DEPRECIATION AND AMORTIZATION - ----------------------------- For the three months ended September 30, 1996, depreciation and amortization increased approximately $1.5 million or 51% to $4.5 million from $3.0 million in the comparable 1995 period. For the nine months ended September 30, 1996, depreciation and amortization increased approximately $3.5 million or 38% to $12.9 million from $9.4 million in the same 1995 period. The increases are primarily the result of the acquisition of the Bloomfield Refinery, along with the addition of service station and transportation assets. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- For the three months ended September 30, 1996, selling, general and administrative expenses increased approximately $90,000 or 3% to $3.4 million from $3.3 million in the corresponding 1995 period. The increase is primarily the result of expense accruals for incentive bonus plans, along with increases in payroll and related costs, offset in part by expense reductions for decreases in estimated liabilities for self insured workman's compensation and property and casualty claims. For the nine months ended September 30, 1996, selling, general and administrative expenses increased approximately $2.9 million or 31% to $12.4 million from $9.5 million in the corresponding 1995 period. The increase is primarily the result of expense accruals for incentive bonus plans, increases in payroll and related costs and expense accruals for estimated severance tax assessments and environmental expenditures. These increases were partially offset by expense reductions for decreases in estimated liabilities for self insured workman's compensation and property and casualty claims. INTEREST EXPENSE, NET - --------------------- For the three months ended September 30, 1996, net interest expense (interest expense less interest income) increased $351,000 or 15% to $2.7 million from $2.3 million in the same 1995 period. For the nine months ended September 30, 1996, net interest expense increased $2.5 million or 39% to $9.0 million from $6.5 million in the same 1995 period. The increase in both periods is primarily due to a decline in investment income because of a decrease in excess funds available for investment and an increase in interest expense from the addition of certain variable rate long-term debt, both related to the acquisition of the Bloomfield Refinery in October 1995. INCOME TAXES - ------------ Income taxes for the three and nine months ended September 30, 1996 and 1995 were computed in accordance with Statement of Financial Accounting Standards No. 109, resulting in effective tax rates of approximately 39% for the 1996 periods and 32% for the 1995 periods. The difference in the two rates is primarily due to estimated alcohol fuel tax credits in 1995, resulting from the operation of the Company's ethanol plant which temporarily suspended operations in October 1995, as well as estimated coal seam gas tax credits in 1995, as they relate to varying amounts of estimated annual income. DISCONTINUED OPERATIONS - ----------------------- On August 30, 1996, the Company completed the sale of substantially all of its exploration and production assets for $25,500,000. Certain assets of the exploration and production business with a net asset value of approximately $6,500,000 were retained by the Company, primarily a working interest in certain natural gas properties that qualify for the coal seam gas tax credits under Section 29 of the Internal Revenue Code, an office building and some equipment. Certain of the retained assets are subject to a production payment classified as other liabilities in the Company's consolidated balance sheet. The retained assets have been reclassified primarily as other assets and will be utilized in the Company's continuing operations. Future coal seam gas tax credits, when earned, will be used to offset income taxes payable. The three and nine month periods ended September 30, 1996 and 1995 reflect nominal net earnings or losses. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATIONS - ------------------------- Net cash provided by operating activities of continuing operations totaled $47.2 million for the nine months ended September 30, 1996, compared to $18.4 million for the comparable 1995 period. Operating cash flows increased primarily as the result of improved cash flows from operations (net earnings + depreciation and amortization + deferred taxes) and the differences in the net changes in working capital items in each period. WORKING CAPITAL - --------------- Working capital at September 30, 1996, consisted of current assets of $94.3 million and current liabilities of $72.2 million, or a current ratio of 1.30:1. At December 31, 1995, the current ratio was 1.86:1 with current assets of $108.9 million and current liabilities of $58.5 million. The Company's current ratio has declined primarily as the result of using cash generated from operations and the sale of the Company's exploration and production assets for the payment of long-term debt and capital expenditures. Current assets have decreased since December 31, 1995, primarily due to decreases in the net assets of discontinued operations, inventories and prepaid insurance and deposits, offset in part by increases in cash and cash equivalents and accounts receivable. The net assets of discontinued operations have decreased because of the sale or reclassification of the net assets of the Company's exploration and production operations. Inventories have decreased primarily as the result of a 31% decline in pipeline and onsite crude oil inventory volumes, offset in part by an increase in crude oil acquisition costs and the liquidation of certain lower cost LIFO inventory layers. Deposits have decreased because of the refund of funds placed in escrow in connection with the proposed acquisition of the Wingate fractionation plant which was ultimately not completed. Cash and cash equivalents have increased in part from increased operating cash flows and the sale of the Company's exploration and production operations. Accounts receivable have increased due to increases in trade receivables, resulting from higher sales volumes and prices, and excise tax refunds due on product transfers to the Company's Albuquerque Terminal. Current liabilities have increased due to an increase in accounts payable and accrued expenses. Accounts payable have increased primarily due to an increase in the volume and cost of raw materials. Accrued expenses have increased primarily due to an increase in accrued income taxes, accrued interest and accrued incentive plan costs. CAPITAL EXPENDITURES AND RESOURCES - ---------------------------------- Net cash used in investing activities for the purchase of property, plant and equipment and other assets totaled approximately $20.9 million for the first nine months of 1996, including the acquisition of seven retail units; the construction and remodeling of various other retail units; the acquisition of finished product and crude truck transports; and upgrades and turnaround expenditures to improve operations and efficiencies at the refineries. Capital expenditures for the fourth quarter are estimated to be approximately $10.0 million. In the first nine months of 1996, the Company received proceeds of approximately $4.1 million from the sale of six operating service stations. A gain of approximately $238,000 resulted from these sales. On August 30, 1996, the Company completed the sale of substantially all of its exploration and production assets for $25,500,000. Certain assets of the exploration and production business with a net asset value of approximately $6,500,000 were retained by the Company, primarily a working interest in certain natural gas properties that qualify for the coal seam gas tax credits under Section 29 of the Internal Revenue Code, an office building and some equipment. Certain of the retained assets are subject to a production payment classified as other liabilities in the Company's consolidated balance sheet. The retained assets have been reclassified primarily as other assets and will be utilized in the Company's continuing operations. Future coal seam gas tax credits, when earned, will be used to offset income taxes payable. The Company continues to investigate other strategic acquisitions as well as capital improvements to its existing facilities. The Company is also actively pursuing the possible sale or exchange of non-strategic or underperforming assets. Working capital, including that necessary for capital expenditures and debt service, will be funded through cash generated from operating activities, existing cash balances and, if necessary, future borrowings. Future liquidity, both short and long-term, will continue to be primarily dependent on producing and selling sufficient quantities of refined products at margins sufficient to cover fixed and variable expenses. CAPITAL STRUCTURE - ----------------- At September 30, 1996, and December 31, 1995, the Company's long-term debt was 46.4% and 56.5% of total capital, respectively. The decrease is primarily due to the repayment of long-term debt and an increase in stockholders' equity due to net earnings. Subsequent to September 30, 1996, the Company repaid an additional $6.3 million of long-term debt bringing the Company's long-term debt to total capitalization percentage to 44.9%. At September 30, 1996, the Company's net debt (long-term debt less cash and cash equivalents) to total capitalization percentage was 39.8%. The Company's capital structure includes $100 million of 10 year 9 3/4% senior subordinated notes ("Notes"). Repayment of the Notes is jointly and severally guaranteed on an unconditional basis by the Company's direct and indirect wholly-owned subsidiaries, subject to a limitation designed to ensure that such guarantees do not constitute a fraudulent conveyance. Except as otherwise allowed in the Indenture pursuant to which the Notes were issued, there are no restrictions on the ability of such subsidiaries to transfer funds to the Company in the form of cash dividends, loans or advances. General provisions of applicable state law, however, may limit the ability of any subsidiary to pay dividends or make distributions to the Company in certain circumstances. In October 1995, the Company entered into a Credit Agreement with a group of banks under which $30.0 million was borrowed pursuant to a three-year unsecured revolving term facility to provide financing for the purchase of the Bloomfield Refinery. This revolving term facility has been prepaid from cash on hand and proceeds from the sale of the Company's exploration and production operations. The $30.0 million that was repaid is currently available under this facility for the acquisition of property, plant and equipment. In addition, the Credit Agreement contains a three-year unsecured working capital facility to provide working capital and letters of credit in the ordinary course of business. The availability under this working capital facility is the lesser of (i) $40.0 million, or (ii) the amount determined under a borrowing base calculation tied to eligible accounts receivable and inventories as defined in the Credit Agreement. At September 30, 1996, the lesser amount was $40.0 million. There were no direct borrowings under this arrangement at September 30, 1996, and there were $16.0 million of irrevocable letters of credit outstanding, primarily to secure purchases of raw materials. The Company's Board of Directors has authorized the repurchase of up to 1,500,000 shares of the Company's common stock. In 1996, through the end of October, the Company repurchased 123,200 shares of its common stock at a weighted average price of $14.98 including commissions. From the inception of the stock repurchase plan, the Company has repurchased 1,062,700 shares at a weighted average cost of $9.27. On August 14, 1996, the Company's Board of Directors declared a cash dividend on common stock of $0.05 per share payable to stockholders of record on October 24, 1996. This dividend was paid on November 6, 1996. Future dividends, if any, are subject to the results of the Company's operations, existing debt covenants and declaration by the Company's Board of Directors. OTHER - ----- 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 due to the speculative nature of remediation and cleanup cost estimates and methods, imprecise and conflicting data regarding the hazardous nature of various types of substances, the number of other potentially responsible parties involved, various defenses which may be available to the Company and changing environmental laws and interpretations of environmental laws. Rules and regulations implementing federal, state and local laws relating to health and the environment will continue to affect the operations of the Company. The Company cannot predict what health or environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or enforced with respect to products or activities of the Company. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of the regulatory agencies, could have an adverse effect on the financial position and the results of operations of the Company and could require substantial expenditures by the Company for the installation and operation of pollution control systems and equipment not currently possessed by the Company. In May 1991, the Environmental Protection Agency notified the Company that it may be a potentially responsible party for the release, or threatened release, of hazardous substances, pollutants or contaminants at the Lee Acres Landfill, which is adjacent to the Company's Farmington Refinery which was operated until 1982. At the present time, the Company is unable to determine the extent of its potential liability, if any, in the matter. In 1989, a consultant to the Company estimated, based on various assumptions, that the Company's share of potential liability could be approximately $1.2 million. This figure was based upon 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. The consultant, however, did not conduct an analysis 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. Actual liability, if any, may differ significantly from the consultant's estimate. In addition, the Company is remediating a hydrocarbon plume that appears to extend no more than 1,800 feet south of its inactive Farmington Refinery. The Company has established an environmental liability accrual of approximately $3.4 million. Approximately $1.1 million relates to ongoing environmental projects, including the remediation of the hydrocarbon plume described above and hydrocarbon contamination on and adjacent to 5.5 acres the Company owns in Bloomfield, New Mexico. The remaining amount of approximately $2.3 million is an estimate, recorded in the second quarter of 1996, of certain environmental obligations assumed in the acquisition of the Bloomfield Refinery. This amount has been recorded as an adjustment to the purchase price and allocated to the assets acquired. The environmental accrual is recorded in the current and long-term sections of the Company's consolidated balance sheet. The Company is subject to audit on an ongoing basis of the various taxes that it pays to federal, state, local and tribal agencies. These audits may result in additional assessments or refunds along with interest and penalties. In some cases the jurisdictional basis of the taxing authority is in dispute and is the subject of litigation or administrative appeals. In one such case, the Company has received several tax assessments from the Navajo Nation, including a $1.8 million severance tax assessment issued to Giant Industries Arizona, Inc., a wholly-owned subsidiary of the Company, in November 1991 relating to crude oil removed from properties located outside the boundaries of the Navajo Indian Reservation in an area of disputed jurisdiction. It is the Company's position that it is in substantial compliance with laws applicable to the disputed area. The Company continues to evaluate supplemental crude oil supply alternatives for both of its refineries on both a short-term and long-term basis. Based on projections of local crude oil availability from the field, current levels of usage of Alaska North Slope crude oil and the Company's inventory levels, the Company believes an adequate crude oil supply will be available, without the use of significant additional supplemental supply alternatives, to sustain both refineries' operations at planned levels, at least through 1997. There have been various announcements and discussions within the industry regarding the possible building or expansion of product pipelines, some of which could impact portions of the Company's marketing areas, either directly or indirectly. If certain of these proposals are implemented, they could result in increased competition in portions of the Company's markets for refined products. "Safe Harbor" Statement under the Private Securities Litigation Reform Act of 1995: This report contains forward-looking statements that involve risks and uncertainties, including but not limited to economic, competitive and governmental factors affecting the Company's operations, markets, products, services and prices; the adequacy of raw material supplies; the ability of the Company to successfully abate various tax assessments and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission. PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There are no material pending legal proceedings required to be reported pursuant to Item 103 of Regulation S-K. The Company is a party to ordinary routine litigation incidental to its business. In addition, there is hereby incorporated by reference the information regarding contingencies in Note 6 to the Unaudited Condensed Consolidated Financial Statements set forth in Item 1, Part I hereof and the discussion of certain contingencies contained herein under the heading "Liquidity and Capital Resources - Other." ITEM 5. OTHER At a meeting of the Board of Directors held on August 14, 1996, Anthony J. Bernitsky was elected to the Company's Board of Directors. Mr. Bernitsky has over 40 years of experience in the oil industry and is founder, co-owner and President of Sandia Oil Company, a wholesale and retail gasoline business. Prior to founding Sandia Oil Company, Mr. Bernitsky was President of Malco, a petroleum marketing company, and prior to that held various petroleum marketing positions with Malco and Conoco. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits: 10 - Amendment No. 1, dated August 14, 1996, to 1989 Stock Incentive Plan. 11 - Computation of Per Share Data. 27 - Financial Data Schedule. (b) Reports on Form 8-K - There were no reports on Form 8-K filed for the three months ended September 30, 1996. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q for the quarter ended September 30, 1996 to be signed on its behalf by the undersigned thereunto duly authorized. GIANT INDUSTRIES, INC. /s/ A. WAYNE DAVENPORT -------------------------------------------- A. Wayne Davenport Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) Date: November 12, 1996