-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UF9/F8Mbj9PQM4FI1SqmCUPCjhPsfIzPS32snJ5jniFTRWlOBsVj5wC7FNCq2ZQP IY3xCzwQVFdNxXvI8ClZcg== 0000856465-96-000004.txt : 19960401 0000856465-96-000004.hdr.sgml : 19960401 ACCESSION NUMBER: 0000856465-96-000004 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIANT INDUSTRIES INC CENTRAL INDEX KEY: 0000856465 STANDARD INDUSTRIAL CLASSIFICATION: PETROLEUM REFINING [2911] IRS NUMBER: 860642718 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-10398 FILM NUMBER: 96541567 BUSINESS ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 BUSINESS PHONE: 6025858888 MAIL ADDRESS: STREET 1: 23733 N SCOTTSDALE RD CITY: SCOTTSDALE STATE: AZ ZIP: 85255 10-K405 1 GIANT INDUSTRIES INC. 1995 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1995. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. For the transition period _______ to _______. Commission File Number: 1-10398 GIANT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 86-0642718 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 23733 North Scottsdale Road, Scottsdale, Arizona 85255 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (602) 585-8888 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, $.01 par value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [X] 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 [ ] As of February 29, 1996, 11,250,618 shares of the registrant's Common Stock, $.01 par value, were outstanding and the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $80,083,000 based on New York Stock Exchange closing prices on February 29, 1996. DOCUMENTS INCORPORATED BY REFERENCE Parts of the following documents are incorporated by reference in Part III of this Form 10-K Report: Proxy Statement for Registrant's 1996 Annual Meeting of Stockholders - Items 10, 11, 12, and 13. PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES. GENERAL Giant Industries, Inc., a Delaware corporation ("Giant" or the "Company"), through its wholly-owned subsidiary Giant Industries Arizona, Inc. ("Giant Arizona"), is engaged in the refining and marketing of petroleum products. The Company is the largest refiner and one of the largest marketers of petroleum products in the Four Corners area of the southwestern United States where New Mexico, Arizona, Colorado and Utah adjoin. The Company provides petroleum products through company-operated branded retail facilities, as well as through independent wholesalers and retailers, industrial/commercial accounts and sales and exchanges with major oil companies. The Company also is engaged in the transportation of crude oil and natural gas. The Company was incorporated in 1989 to effect the concurrent merger of Giant Arizona and Hixon Development Company ("Hixon"), now Giant Exploration and Production ("Giant E&P"), into wholly-owned subsidiaries of the Company. Giant Arizona was founded in 1961 and operated as a sole proprietorship until incorporation in the State of Arizona in 1969. Hixon was incorporated in the State of Texas in 1964. Concurrently with the merger of Giant Arizona and Hixon, the Company completed an initial public offering of 2,788,750 shares of the Company's Common Stock. At December 31, 1995, the company had 11,249,129 shares of outstanding Common Stock. Giant E&P is engaged in the exploration for and production of crude oil and natural gas. In early 1996, the Company approved a plan of disposition for these exploration and production operations. The decision was based upon management's review of the prospects for this operation, which indicated that substantial new capital would be necessary to further develop this business and reach an acceptable level of profitability and integration. Following this disposition, the Company will focus its efforts on its core business of refining and marketing. The Company is in the process of searching for a buyer for the assets or the business of Giant E&P and expects to complete a sale in 1996. The Company's long-term strategy is to increase its market share of refined products sold and to capture a significant portion of the anticipated future growth in demand for refined products in the Four Corners market. This strategy is designed to increase control over the distribution of a greater portion of the Company's refined products. Additionally, the Company intends to reduce its dependence on particular customers, obtain higher margins through increased sales at the retail level and develop markets for the sale of refined products in targeted regions. Through selective acquisitions, the Company plans to expand into new markets where the Company's management believes it can duplicate its business strategy. The Company also intends to maintain its market presence in its secondary markets, including the Phoenix metropolitan area, which could provide additional opportunities for selective market expansion. REFINING AND MARKETING REFINING Giant Arizona owns and operates the Ciniza refinery located on 880 acres near Gallup, New Mexico and the Bloomfield refinery, purchased in early October, 1995, located on 285 acres near Farmington, New Mexico. Both of these refineries are located in the Four Corners area. This area serves as the Company's primary market for its refined products and as the primary source of its crude oil and natural gas liquids ("NGLs") supplies. Management believes that the technical capabilities of both refineries, together with the high quality of locally available feedstocks, enable the Company to achieve a refinery conversion yield which is comparable to that achieved by larger refineries located outside of the area. Both refineries are equipped with fluid catalytic cracking, naphtha hydrotreating, reforming, LPG recovery, and diesel hydrotreating and sulfur recovery units to manufacture low sulfur diesel fuel. At the Ciniza refinery an alkylation unit is utilized to manufacture high octane gasoline from cat cracker olefins. At the Bloomfield refinery this is accomplished utilizing a catalytic polymerization unit. The Ciniza refinery is also equipped with isomerization and cogeneration facilities. These processing configurations enable the refineries to yield in excess of 90% high value products, such as gasoline, diesel fuel and jet fuel, from each barrel of crude oil refined and to manufacture a gasoline slate that is 100% unleaded and diesel fuel that is 100% low sulfur diesel. Set forth below is data with respect to refinery operations and the primary refined products produced during the indicated periods.
Year Ended December 31, ------------------------------------- 1995(1) 1994 1993 1992 1991 ---- ---- ---- ---- ---- Feedstock throughput:(2) Crude oil 23,700 19,100 20,300 20,800 19,300 NGLs and oxygenates 5,000 4,500 5,000 4,800 4,300 ------ ------ ------ ------ ------ Total 28,700 23,600 25,300 25,600 23,600 ====== ====== ====== ====== ====== Crude oil throughput (as a % of total) 83% 81% 80% 81% 82% Rated crude oil capacity utilized 88% 92% 98% 101% 94% Refinery margin ($/bbl) $ 5.13 $ 5.60 $ 6.69 $ 4.77 $ 3.88 Products:(1) Gasoline 18,500 15,200 16,300 16,100 15,200 Diesel fuel 7,200 5,200 5,400 5,400 5,200 Jet fuel 900 1,300 1,800 2,000 1,800 Other 2,100 1,900 1,800 2,100 1,400 ------ ------ ------ ------ ------ Total 28,700 23,600 25,300 25,600 23,600 ====== ====== ====== ====== ====== High Value Products: Gasoline 65% 64% 65% 63% 64% Diesel fuel 25% 22% 21% 21% 22% Jet fuel 3% 6% 7% 8% 8% ------ ------ ------ ------ ------ Total 93% 92% 93% 92% 94% ====== ====== ====== ====== ====== (1) The 1995 operating data reflects the operations of the Bloomfield refinery since October 4, 1995. (2) Average barrels per day
The purchase of the Bloomfield refinery in October 1995 increased the Company's total rated crude oil refining capacity owned by 18,000 bpd. Each unit in a refinery requires regular maintenance and repair (referred to as a "turnaround") during which it is not in operation. Turnaround cycles vary for different units and, in general, refinery management plans product inventories and unit maintenance to permit some operations to continue even when certain units are inactive. Maintenance turnarounds involve the refineries' own personnel and some additional contract labor. Turnarounds are effected on a continuous 24-hour basis in order to minimize the unproductive time of the units involved. Giant has historically expensed current maintenance charges and capitalized turnaround costs which are then amortized over the estimated period until the next turnaround. In general, a major turnaround is scheduled every four years. The most recent major turnaround occurred at the Ciniza refinery during March and April 1994. This type of turnaround occurred at the Bloomfield refinery in 1993. Unscheduled maintenance shutdowns also occur, but the Company believes that the record of both refineries with respect to unscheduled maintenance shutdowns is generally good compared with the industry as a whole. RAW MATERIAL SUPPLY The refineries primarily process a mixture of high gravity, low sulfur crude oil, condensate and NGLs and a material known as Lisbon condensate. The locally produced, high quality crude oil known as Four Corners Sweet is the primary feedstock for the refineries. The refineries also supplement their supply of crude oil with Alaskan North Slope ("ANS") crude oil, accessed from the West Coast through the Four Corners and Texas-New Mexico pipeline systems, which together can transport approximately 65,000 barrels per day. The Ciniza refinery also has access to West Texas Intermediate and other lesser known crude oils by rail, should the need arise and should economic conditions allow the use of such alternate crude oils. With the acquisition of the Bloomfield refinery and based on projections of local crude oil availability from the field, current levels of usage of ANS and the Company's inventory levels, the Company believes an adequate crude oil supply will be available, without the use of additional supplemental supply alternatives, to sustain both refineries' operations at planned levels, at least through 1996. The Company believes that local crude oil production currently approximates 95% of aggregate local crude oil demand. The Company continues to evaluate supplemental crude oil supply alternatives for both of its refineries on both a short-term and long-term basis. Among other alternatives, the Company has considered making equipment modifications to increase its ability to use alternative crude oils and may install additional rail facilities to enable the Company to provide incremental crude oil and other intermediate feedstocks to supplement local supply sources in the most cost effective manner. Generally, such supplemental crude oil is of lesser quality than locally available crude oils, and, with the exception of ANS, the Company believes such crude oil generally has a delivered cost greater than that of locally available crude oil. As additional supplemental crude oil becomes necessary, the Company intends to implement one or more of these available alternatives as necessary and as is most advantageous under the then prevailing conditions. The Company currently believes that the most desirable strategy to supplement local crude oil supplies, on a long-term basis, is the delivery of supplemental crude oil from outside of the Four Corners area by pipeline. Implementation of supplemental supply alternatives will result in additional raw material costs, operating costs, capital costs, or a combination thereof in amounts which are not presently ascertainable by the Company but which will vary depending on factors such as the specific alternative implemented, the quantity of supplemental crude oil required, and the date of implementation. Implementation of some supply alternatives requires the consent or cooperation of third parties and other considerations beyond the control of the Company. The Company's equity interest in producing wells, which is a part of discontinued operations, currently accounts for approximately 3% of the refineries' crude oil requirements. Crude oil is acquired from a number of other sources, including major oil companies and large and small independent producers, under arrangements which contain market-responsive pricing provisions. Many of these arrangements are subject to cancellation by either party or have terms that are not in excess of one year. In addition, these arrangements are subject to periodic renegotiation. A portion of the refineries' purchases are structured as exchange agreements. In such exchanges, purchases are made in conjunction with matching sales to the supplier at other domestic locations, as may be negotiated periodically. The effect of such arrangements is to make a portion of the cost of the refineries' supply dependent upon market conditions in other locations, which may differ from those pertaining to the Four Corners area. In addition, the Company participates in various government supply programs available to smaller refiners. In addition to crude oil, the Ciniza refinery currently has the capability of processing approximately 5,200 barrels per day of NGLs, consisting of natural gasoline, normal butane and isobutane. NGLs are used as gasoline blending components and to supply the refinery's isomerization and alkylation units. NGLs increase the percentage of gasoline and the octane levels that the refinery can produce, which typically increase the Company's refining margins. NGLs further enhance refinery margins because the Company has historically been able to purchase NGLs at a lower cost per barrel than crude oil. An adequate supply of NGLs is available for delivery to the Ciniza refinery, primarily through a Company-owned pipeline connecting the Ciniza refinery to natural gas liquids fractionation plants operated by third parties. NGLs can also be transported to the Ciniza refinery by rail or transport truck. The Company currently acquires substantially all of its NGL feedstocks pursuant to two long-term agreements with suppliers under which NGLs are made available to the Company at the fractionation plants. These agreements contain market sensitive pricing arrangements under which prices are adjusted on a monthly basis. OXYGENATES The Company owns an ethanol processing plant in Portales, New Mexico. The ethanol plant, a dry mill facility, has the capacity to produce approximately 14.0 million gallons of ethanol per year, 137,000 tons of protein-enriched cattlefeed and beverage quality carbon dioxide. Ethanol is an oxygenate which can be used as a gasoline blending component. An oxygenate is an oxygen-containing compound that can be used as a motor vehicle fuel supplement. Substitution of oxygenated fuels for non-oxygenated gasoline can reduce motor vehicle carbon monoxide emissions. Accordingly, the use of gasoline containing oxygenates has been government-mandated in certain geographical areas. On October 2, 1995, the Company announced the temporary suspension of operations at the facility due to high grain costs. The plant is expected to be closed until grain prices return to more favorable levels. While operations are suspended the Company will not generate any production related income tax credits. The Company anticipates that it will be able to purchase sufficient quantities of oxygenates from third parties at acceptable prices during the period the plant's operations are suspended. TRANSPORTATION Crude oil supply for the Ciniza and Bloomfield refineries comes primarily from the Four Corners area and is either connected by Company owned pipeline or delivered by Company owned truck transports to pipeline injection points or refinery tankage. The Company owns about 240 miles of pipeline for gathering and delivery of crude oil to the refineries. The pipeline system reaches into the San Juan Basin and connects with common carrier pipelines. The Ciniza refinery receives NGL's through a 13-mile Company owned pipeline connected to a natural gas liquids fractionation plant. Currently, over 40 Company-owned truck transports are involved in the collection of crude oil from producing wells to supply the refineries. MARKETING AND DISTRIBUTION THE FOUR CORNERS MARKET. The Four Corners area, which is the primary market area for the Company's refined products, is the area which is bounded on the north by Grand Junction, Colorado, on the west by central Arizona, on the south by Las Cruces, New Mexico and on the east by central New Mexico. The Company's New Mexico market includes the greater Albuquerque area, the largest market in New Mexico. Substantially all of the Company's refined products are distributed in the Four Corners market. The Company estimates that, during 1995, its gasoline production was distributed 60% in New Mexico, 28% in Arizona, 9% in Colorado and 3% in Utah; and its diesel production was distributed 56% in New Mexico, 29% in Arizona, 11% in Colorado and 4% in Utah. The Company's truck transports support refinery sales in its primary market as well as its secondary markets. These vehicles hauled 52% of the refineries' sales barrels in 1995. REFINED PRODUCT SALES. During 1995, the Company sold approximately 6,600,000 barrels of gasoline and 2,600,000 barrels of diesel fuel from both refineries. The Company's retail outlets sold an equivalent of approximately 34% of these gasoline and 25% of these diesel sales. Gasoline and diesel sales made through product exchanges with large oil companies accounted for approximately 18% of the volume sold by the refineries. The remaining gasoline and diesel sales were made to wholesalers, retailers and industrial/commercial customers. Supplementing sales barrels sourced from both refineries were periodic purchases, for resale, of gasoline and diesel from other sources. Specific economic and/or market conditions are the major factors affecting the timing and volume of these resale transactions. The Company's other refined products, including military jet fuels, are marketed to various third party customers. RETAIL MARKETING. At December 31, 1995, the Company operated 51 self-service retail stations located in New Mexico, Arizona and Colorado, and the Travel Center, located on I-40 near the Ciniza refinery. This was the same number of operating units as in December, 1994. During 1995, four units were sold, four new units were constructed and two units were demolished and rebuilt. The Company's retail outlets sold approximately 122,000,000 gallons of gasoline and diesel fuel in 1995, approximately the same volume as in 1994. Gross merchandise sales in 1995 were approximately $45,700,000, a 7% increase over 1994 sales of $42,700,000. In the first two months of 1996, three additional service stations were sold bringing the number of operating units to 48. The Company is planning to construct five new units and substantially remodel eight units in 1996 depending on a variety of factors, including economic conditions. The Company's service stations are typically modern, high-volume self-service stations. During 1995, the Company continued its program to install credit card readers in dispensers ("CRINDS") in its higher volume units. CRINDS were installed in thirteen units and five units were converted from single product to multiple product dispensers ("MPDs"). Also in 1995, the Company completed a pilot test program of an integrated point of sale system. This system includes, among other things, bar code scanning and integrated credit and dispenser controls. At December 31, 1995, this system had been installed at four units. The Company plans to install this system with MPDs and CRINDS in approximately thirty units during 1996. The Company's service stations are augmented by convenience stores at most locations, which provide items such as general merchandise, alcoholic and nonalcoholic beverages, fast foods, health and beauty aids and automotive products. In 1995, the Retail Division expanded its deli operation to five of its newly constructed and remodeled units. Named, "The Deli at Giant", these stores offer a full scale deli and fast food menu. The Company owns and operates the Travel Center adjacent to the Ciniza refinery on I-40. The Travel Center provides a direct market for a portion of the Ciniza refinery's diesel production and allows diesel fuel to be sold at virtually no incremental transportation cost. In the twelve months ended December 31, 1995, the Company sold approximately 19,800,000 gallons of diesel fuel at the Travel Center (approximately 21% of the Ciniza refinery's total diesel production). The Travel Center facility includes 18 high volume diesel fueling islands, a large truck repair facility, and a 29,000 square foot shopping mall that contains a 265-seat full service restaurant, a large convenience store, a fast food diner, a 24-hour movie theater, a gift shop, a western wear and boot shop, a hair salon and other accommodations such as showers, laundry, security and lighted parking. EMPLOYEES The Company and its subsidiaries employed approximately 1,500 persons on February 29, 1996, including approximately 1,400 full-time and approximately 100 part-time employees. Approximately 1,250 were employed in refining and marketing operations including 100 part-time employees. Of these, 650 (including 90 part-time) were employed in the service station division and 300 (including 10 part-time) were employed at the Travel Center. Giant E&P operations employed approximately 50 persons. The Company currently has no labor union employees. OTHER MATTERS COMPETITIVE CONDITIONS The industry in which the Company is engaged is highly competitive. Many of the Company's competitors are large, integrated oil companies which, because of their more diverse operations, stronger capitalization and better brand name recognition, may be better able than the Company to withstand volatile industry conditions, including shortages or excesses of crude oil or refined products or intense price competition. The principal competitive factors affecting the Company's refining and marketing operations are the quality, quantity and delivered costs of crude oil, NGLs and other refinery feedstocks, refinery processing efficiencies, refined product mix, refined product selling prices and the cost of delivering refined products to markets. Other competitive factors include the ability of competitors to deliver refined products into the Company's primary market area by pipeline. The Company's larger competitors have refineries which are located outside the Four Corners area but which are larger and more efficient than the Company's refineries and, as a result, have lower per barrel of crude oil refinery processing costs. The Company competes with major and larger integrated oil companies and with independent refiners in Southeastern New Mexico, West Texas, the Texas Panhandle, Utah, Colorado and Southern California for selling refined products. Refined products from the Texas and Southeastern New Mexico refineries can be shipped to Albuquerque, New Mexico, primarily through two common carrier pipelines, one originating in El Paso, Texas and the second originating in Amarillo, Texas. The principal competitive factors affecting the Company's retail marketing business are location of service stations, product price, product quality, appearance and cleanliness of service stations and brand identification. REGULATORY, ENVIRONMENTAL AND OTHER MATTERS AFFECTING REFINING AND MARKETING OPERATIONS. The Company's refining and marketing operations are subject to a variety of federal, state and local health and environmental laws and regulations governing the discharge of pollutants into the air and water, product specifications, and the generation, treatment, storage, transportation and disposal of solid and hazardous waste and materials. The Company believes that the refineries are capable of processing currently utilized feedstocks in substantial compliance with existing, currently effective environmental laws and regulations. However, environmental laws and regulations are becoming increasingly stringent, and the Company is aware of regulations which will become effective in the future which may affect the refining and marketing industry. The following currently appear to be the most significant of such laws and regulations as they relate to the Company's operations. Where possible, the Company has attempted to estimate a range of its cost of compliance based upon its current understanding of such laws and regulations. The current estimates of costs provided are preliminary only and actual costs may differ significantly from these estimates. The Company will be subject to additional environmental regulations adopted by the Environmental Protection Agency ("EPA") and state and local environmental agencies to implement the Clean Air Act Amendments of 1990 (the "Amendments"). Among other things, the Amendments require all major sources of hazardous air pollutants, as well as certain other sources of air pollutants, to obtain state operating permits. The permits must contain applicable federal and state emission limitations and standards as well as satisfy other statutory requirements. All sources subject to the permit program must pay an annual permit fee. The Company believes that operating permits will be required at both of its refineries and also believes that it will be able to obtain these permits. Although additional costs will be incurred in connection with these permits, the Company does not believe these costs will be material. The Amendments also require EPA to adopt emission standards for categories of hazardous air pollutant sources. In accordance with this directive, EPA has adopted emission standards that apply to hazardous air pollutants emitted by petroleum refineries. The standards are applicable to emissions from, among other things, process vents, storage vessels, equipment leaks, wastewater operations and gasoline loading racks. The Company believes its compliance cost may be approximately $2,900,000 to $3,400,000, which will be incurred over a period of approximately five years. EPA may adopt regulations that would require enhanced monitoring of air emissions at the refineries and potentially at other Company facilities. Based on the preliminary information currently available, if these regulations are adopted the Company believes that its compliance cost would be in the range of $1,000,000 to $3,000,000. EPA has adopted regulations requiring underground storage tanks that were installed before December 1988 to be in compliance with specified standards by December 1998. In particular, steel tanks, and associated steel piping, must be protected against corrosion and devices must be in place to prevent tank spills and overfills. Underground storage tanks that were installed after December 1988 already are subject to these requirements. The underground storage tanks at all but nine of the Company's service stations satisfy the 1998 standards. The Company anticipates that it will make the necessary modifications at six of these stations in 1997 and at the remaining three stations in 1998, at a cost of approximately $450,000 and $240,000 respectively. The Company does not believe that any gasoline produced at the refineries will be subject to the Clean Air Act Amendments' Reformulated Gasoline regulatory program, unless a state governor requests that Reformulated Gasoline be required in certain areas. The Company already complies with the Amendments' Oxygenated Gasoline requirements, and other state or local oxygenated fuel requirements, in connection with gasoline sold in Bernalillo County, New Mexico, Maricopa County and Pima County, Arizona, Denver County, Colorado and El Paso County, Texas. The Company has not experienced any problems to date obtaining oxygenates to comply with these requirements. The State of Arizona has adopted legislation requiring gasoline sold in Maricopa County to have a Reid Vapor Pressure ("RVP") that does not exceed nine pounds per square inch during the period September 30 through March 31. The legislation also requires gasoline sold in Maricopa County to have a RVP of seven pounds per square inch during the period May 31 through September 30. To date, the Company has chosen not to install equipment necessary to produce gasoline complying with the standards and has pursued other alternatives for supplying the Maricopa County market, such as acquiring petroleum products by trade with other companies. The Company from time to time needs to obtain new environmental permits or modifications to existing permits. Although there can be no guarantee that the Company will be able to obtain all required permits, the Company does not presently anticipate any unusual problems in obtaining the necessary permits and permit modifications, nor does it anticipate any significant problems in connection with the renewal of existing permits prior to their expiration. The Company cannot predict what additional health and environmental legislation or regulations will be enacted or become effective in the future or how existing or future laws or regulations will be administered or interpreted with respect to products or activities to which they have not been previously applied. Compliance with more stringent laws or regulations, as well as more vigorous enforcement policies of 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. NOTICES OF VIOLATIONS. Notices of Violations and similar governmental notices ("NOVs") are issued by governmental authorities and may allege violations of environmental requirements. The Company is in receipt of a NOV, dated February 9, 1993, from the New Mexico Environmental Department ("NMED") alleging that the Company failed to comply with certain notification requirements contained in one of the permits applicable to the Ciniza refinery's land treatment facility. As a result, the Company has submitted a proposal for closure of all or a portion of the land treatment facility. Other options are also being discussed with NMED, including modification of the existing permit. NMED has indicated that it probably will not require the Company to undertake any cleanup activities if the land treatment facility is closed, although periodic monitoring and site maintenance could be required. The Company has not disposed of any hazardous waste at the land treatment facility since 1990. The Company has received other NOVs from time to time relating to matters such as regulatory filing requirements. The Company has responded or intends to respond to all such matters. The Company does not believe any such matters to be material. DISCHARGES AND RELEASES. Refining, pipeline, trucking and marketing operations are inherently subject to accidental spills, discharges or other releases of petroleum or hazardous substances which may give rise to liability to governmental entities or private parties under federal, state or local environmental laws, as well as under common law. Accidental discharges of contaminants have occurred from time to time during the normal course of the Company's operations, including discharges associated with the Company's refineries, pipeline and trucking operations. The Company has undertaken, intends to undertake or has completed all investigative or remedial work thus far required by governmental agencies to address potential contamination by the Company. The Company anticipates that it will incur remediation costs from time to time in connection with current and former gasoline service stations operated by the Company. The Company's experience has been that such costs generally do not exceed $100,000 per location, and a portion of such costs may be subject to reimbursement from State underground storage tank funds. The Company has discovered hydrocarbon contamination adjacent to a 55,000 barrel crude oil storage tank that is no longer in use 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 is located may have been a part of a refinery owned by various other parties that ceased operations approximately thirty-five years ago. The Company has completed a site investigation, which indicates that contaminated groundwater may extend approximately 300 feet south of the property boundary. Without admitting liability for the contamination, the Company intends to conduct remediation activities under the oversight of the New Mexico Oil Conservation Division ("OCD"). The Company accrued a $250,000 environmental reserve in relation to this site. Although the Company has invested substantial resources to prevent and minimize future accidental discharges and to remediate contamination resulting from prior discharges, there can be no assurance that accidental discharges will not occur in the future, that future action will not be taken in connection with past discharges, that governmental agencies will not assess penalties against the Company in connection with any past or future contamination, or that third parties will not assert claims against the Company for damages allegedly arising out of any past or future contamination. FARMINGTON PROPERTY/LEE ACRES LANDFILL. In 1973, the Company constructed the Farmington refinery which was operated until 1982. The Company became aware of soil and shallow groundwater contamination at this facility in 1985. The Company hired environmental consulting firms to investigate the contamination and undertake remedial action. The consultants identified several areas of contamination in the soils and shallow groundwater underlying the Farmington property. A consultant to the Company has indicated that contamination attributable to past operations at the Farmington property has migrated off the refinery property, including a hydrocarbon plume that appears to extend no more than 1,800 feet south of the refinery property. Remediation activities are ongoing by the Company under OCD's supervision. The Company had reserved approximately $1,000,000 for possible environmental expenditures relating to its Farmington Property, of which approximately $800,000 still remains. The Farmington property is located adjacent to the Lee Acres Landfill (the "Landfill"), a closed landfill formerly operated by San Juan County which is situated on lands owned by the United States Bureau of Land Management ("BLM"). Industrial and municipal wastes were disposed of in the Landfill by numerous sources. During the period that it was operational, the Company disposed of office trash, maintenance shop trash, used tires and water from the Farmington refinery's evaporation pond at the Landfill. In May 1991, EPA notified the Company that it may be a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") for the release or threatened release of hazardous substances, pollutants or contaminants at the Landfill. 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 Giant's 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 any 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 of 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. Preliminary studies have indicated that the groundwater gradient in the vicinity of the Landfill is in the direction of the Farmington property and that contaminants from the Landfill may be migrating through the groundwater underlying the Farmington property. Sampling data have also indicated the presence of contaminants in the groundwater underlying a residential subdivision known as the Lee Acres Subdivision, which may have migrated downgradient from the Landfill and the Farmington property area. An alternate water supply has been provided to residents of the Lee Acres Subdivision by BLM. The Lee Acres 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. BLM may assert claims against the Company and others for reimbursement of investigative, cleanup and other costs incurred by BLM in connection with the Landfill and surrounding areas. It is also possible that the Company will assert claims against BLM in connection with contamination that may be originating from the Landfill. Private parties and other governmental entities may also assert claims against BLM, the Company and others for property damage, personal injury and other damages allegedly arising out of any contamination originating from the Landfill and the Farmington property. Parties may also request judicial determination of their rights and responsibilities, and the rights and responsibilities of others, in connection with the Landfill and the Farmington property. Currently, however, there is no outstanding litigation against the Company by BLM or any other party. BLOOMFIELD REFINERY. 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 RCRA (the "Order"). The Order required BRC to investigate and propose measures for correcting any releases of hazardous waste or hazardous constituents at or from the Bloomfield refinery. The Company is in the process of gathering and analyzing information in order to establish an environmental reserve. Such reserve, which the Company does not believe will be material, will be recorded as additional purchase price and allocated to the assets acquired. RIGHTS-OF-WAY. Certain irregularities in title may exist with respect to a limited number of the Company's rights-of-way or franchises for its crude oil pipeline gathering system. The Company, however, has continued its use of the entirety of its pipeline gathering system. As of this date, no claim stemming from any right- of-way or franchise matter has been asserted against the Company. The Company does not believe that its use or enjoyment of the pipeline gathering system will be adversely affected by any such right-of-way matters or irregularities in title. TAXES. 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 produces crude oil and natural gas, or purchases crude oil as a first purchaser, from properties located in a geographic area outside the boundaries of the Navajo Indian Reservation in which the Navajo Tribe has asserted the right to impose severance and other taxes. A portion of the Company's pipeline gathering system also is located in this geographic area. The extent of the Tribe's taxing authority in the geographic area is subject to doubt. The Company has received several tax assessments from the Tribe pertaining to the geographic area, including a $1.8 million severance tax assessment issued in November 1991. The Company has invoked its appeal rights with the Tribe's Tax Commission in connection with these matters and intends to oppose the severance tax assessment. It is the Company's understanding that its appeals will be held in abeyance pending further judicial clarification of the Tribe's taxing authority by means of litigation involving other companies. It is possible, however, that the Company's assessments will have to be litigated by the Company before final resolution. The Company also may receive further tax assessments before judicial resolution of the Tribe's taxing authority. The Company intends to continue its production and purchasing activities in the geographic area. DISCONTINUED OPERATIONS EXPLORATION & PRODUCTION GENERAL In early 1996, the Company approved a plan of disposition of its exploration and production operations. The decision was based upon management's review of the prospects for this operation, which indicated that substantial new capital would be necessary to further develop this business and reach an acceptable level of profitability and integration. Following this disposition, the Company will focus its efforts on its core business of refining and marketing. The Company is in the process of searching for a buyer for the assets or the business and expects to complete a sale in 1996. Based on current information, the Company does not expect to incur a loss on the disposal of the operation. The independent oil and gas consulting firms of Malkewicz Hueni Associates, Inc. ("MHA") and LaRoche, Swindell & Associates ("LaRoche") conducted an audit of reserves as of December 31, 1995. MHA reviewed the properties located in the San Juan Basin, Paradox Basin and Anadarko Basin. The properties located in these areas were audited by Intera Information Technologies, Inc. (Intera) in 1994. Intera's key personnel, previously responsible for auditing these properties, joined the firm of MHA during 1995. LaRoche, Swindell, & Associates was commissioned to audit the reserves of the Big Foot field in South Texas acquired in 1995 by the Company. It is the opinion of MHA and LaRoche that the reserves are, in the aggregate, reasonable and have been prepared in accordance with generally accepted petroleum engineering and evaluation principles as set forth in the Standards Pertaining to the Estimating and Auditing of Oil and Gas Reserve Information promulgated by the Society of Petroleum Engineers. At December 31, 1995, the Company's total proved reserves were estimated at 4,959,800 barrels of oil (79% proved developed) and 15,263,800 Mcf of gas (83% proved developed). At December 31, 1995, the Company's net equivalent barrels of proved reserves were estimated at approximately 7,503,800 barrels and at December 31, 1994, approximately 4,191,200 barrels. This represents an increase of 79% from year-end 1994 on an equivalent barrel ("BOE") basis. During 1995, the Company produced 664,500 BOE. Approximately 530% of this production was replaced by reserve additions of 3,519,000 BOE during 1995. Overall, the Company realized a net increase of 3,312,700 BOE as a result of acquisitions, development drilling, improved well performance, and new zone discoveries. The Company also earned a positive interest revision of 6.7% in certain proved developed gas properties pursuant to a 1992 purchase and sale agreement described below. See "San Juan Basin Properties." This revision increased the Company's net reserves by 279,100 Mcf. Approximately 63.8% of the Company's total proved reserves are in the San Juan and Paradox Basins, both of which are in the Four Corners area. 13.2% of the Company's reserves are located on the border of Kansas and Oklahoma near the Anadarko Basin. The Company exchanges crude oil from this area with other producers within the primary market area of its refineries. The remaining 23% of the reserves are in the Big Foot Field, located south of San Antonio, Texas. The Company operates substantially all of its producing oil and gas properties in the San Juan, Paradox and Anadarko Basin areas. During the twelve months ended December 31, 1995, the exploration & production operations sold a daily average of approximately 1,111 net barrels of oil and approximately 3,499 net Mcf of gas from a total of 627 producing wells. Of this total, approximately 236 net barrels of oil and 231 net Mcf of gas were from non-operated properties. The following table provides certain information regarding the Company's principal oil and gas properties and reserves as of December 31, 1995.
Proved Reserves ------------------------------------ Number Number Average Total Proved Proved Developed of Gross of Net Average Net ----------------- ----------------- Producing Producing Working Revenue Oil Gas Oil Gas Wells(1) Wells(2) Interest(3) Interest(4) MBbls MMcf MBbls MMcf --------- --------- ----------- ----------- ------- -------- ------- -------- San Juan Basin 280 200.2 71.5% 60.7% 2,184.6 13,042.2 1,658.4 10,595.5 Anadarko Basin(5) 40 30.3 75.6% 63.7% 717.9 1,643.5 607.6 1,512.5 Paradox Basin 23 12.9 56.2% 46.7% 359.0 408.3 345.9 379.3 South Texas 286 102.9 36.0% 31.3% 1,698.3 169.8 1,307.3 130.7 --- ----- ---- ---- ------- -------- ------- -------- Total or Weighted Averages 629 346.3 55.0% 47.3% 4,959.8 15,263.8 3,919.2 12,618.0 === ===== ==== ==== ======= ======== ======= ========
1) Gross producing wells is the total number of producing wells in which the Company has a working interest. Wells with multiple completions in the same bore hole are counted as one well. The Company had 19 gross (15.6 net) multiple completion wells. Any well in which one of the multiple completions is an oil completion is classified as an oil well. At December 31, 1995, the Company had 498 gross (284 net) producing oil wells and 131 gross (62 net) producing gas wells. The Company also operates 30 injection wells associated with waterflooding and pressure maintenance operations. 2) Net producing wells is the number of gross producing wells multiplied by the percentage working interest owned by the Company in the properties. 3) Average based on the sum of working interest divided by the number of wells. 4) Average based on the sum of net revenue interests divided by the number of gross wells. Some royalty rates decreased in 1993, 1994 & 1995 pursuant to Title 43 of the Code of Federal Regulations Part 3103.4-1, pertaining to stripper oil wells. This results in higher net revenue interests. 5) These properties are subject to reversionary working interest varying from 4% to 6%. The Company does not believe that these reversions will become effective for several years. The following tables summarize the Company's oil and gas revenues, average daily net production volumes sold of oil and gas, weighted average oil and gas sales prices, total proved reserves, production costs (lifting costs) and depreciation, depletion and amortization ("DD&A") rates for the periods indicated.
Year Ended December 31, ---------------------------- 1995 1994 1993 ------ ------ ------ Oil and Gas Revenues (in 000's) San Juan Basin $4,266 $3,851 $4,967 South Texas Area 1,407 Anadarko Basin 2,169 1,851 2,040 Paradox Basin 446 241 369 ------ ------ ------ Total $8,288 $5,943 $7,376 ====== ====== ======
Year Ended December 31, --------------------------------------------------- 1995 1994 1993 --------------- --------------- --------------- Oil Gas Oil Gas Oil Gas ------ ------ ------ ------ ------ ------ Average Daily Net Production Sold (1,4) San Juan Basin 504 2,967 419 2,611 474 3,163 South Texas Area 226 38 Anadarko Basin 312 418 279 361 275 376 Paradox Basin 69 76 39 63 56 72 ----- ----- ----- ----- ----- ----- Total 1,111 3,499 737 3,035 805 3,611 ===== ===== ===== ===== ===== =====
Year Ended December 31, ---------------------------------------------- 1995 1994 1993 -------------- -------------- -------------- Oil Gas Oil Gas Oil Gas (Bbl) (MCF) (Bbl) (MCF) (Bbl) (MCF) ------ ------ ------ ------ ------ ------ Average Sales Price (4) San Juan Basin $16.59 $1.15 $15.36 $1.58 $16.35 $1.85 South Texas Area 16.86 1.66 Anadarko Basin 16.36 1.99 15.28 2.22 16.63 2.70 Paradox Basin 16.51 1.07 15.28 1.01 16.50 1.24 ------ ----- ------ ----- ------ ----- Weighted Average sales price $16.52 $1.24 $15.33 $1.64 $16.46 $1.92 ====== ===== ====== ===== ====== ===== Proved Reserves (in 000's) at Year End (4) 4,960 15,264 2,215 11,860 2,196 12,998 Average Production Costs: (Per Equivalent Barrel)(3) Average Lifting Costs (2) $ 4.60 $ 4.58 $ 5.89 Average Production Taxes 0.89 1.10 1.02 ------ ------ ------ Total $ 5.49 $ 5.68 $ 6.91 ====== ====== ====== Average DD&A Rate (Per Equivalent Barrel)(3) (Units Only)* $ 4.65 $ 5.32 $ 7.50 *Before the writedown of the carrying value of oil and gas properties.
1) Net production sold represents product volumes sold after deduction of all royalty and similar interests held by others. 2) Lifting costs include direct lease operating expenses, workovers, pipeline expenses (net of revenues) and production taxes. Total Lease Operating Expense ("LOE") for 1995 includes the newly acquired, non-operated Big Foot Field. LOE of Giant operated properties was $3.97 per barrel oil equivalent in 1995, a decrease of 13% from the previous year. 3) Equivalent barrels combine oil and gas volumes assuming that six Mcf of gas is equivalent to one barrel of oil. 4) All volumes and prices are stated on a per barrel basis for oil and on a per Mcf basis for gas. SAN JUAN BASIN PROPERTIES In 1992, the Company sold a volume of reserves equal to approximately 50% of its then working interest in certain proved developed natural gas reserves along with a portion of the associated gathering system. The Purchase and Sale Agreement associated with that transaction contains a provision whereby the ownership interest in the subject reserves is adjusted annually at December 31, 1993 through 1996, based on year end reserve reports, so that the buyer receives a cumulative working interest estimated for the life of the reserves equal to the reserve volume purchased. At December 31, 1995 the Company earned a positive interest revision of approximately 279,100 Mcf under this provision of that agreement. As of December 31, 1995, the Company had net proved Coalbed Methane gas reserves of 7,219,100 Mcf (6,730,500 Mcf operated plus 488,600 Mcf non-operated) based on MHA's audit. This represents an increase of 17% from the Company's December 31, 1994 consulting engineer's reserve estimate of 6,162,900 Mcf. The increase is primarily the result of improved well performance, lower operating expenses and a resulting increase in the Company's net revenue interest in certain properties pursuant to the 1992 Purchase and Sale Agreement described above. Prior to December 31, 1992, the Company had drilled or participated in the drilling of 91 coal seam gas wells which qualified for federal tax credits under Section 29 of the Fuel Use Act regarding Alternative Fuels. The Company's interest in the production of the estimated reserves at December 31, 1995, is expected to generate approximately $2.95 million of federal income tax credits on a present value basis which is available to be used to offset income taxes through the year 2002. Through December 31, 1995 , the Company had generated approximately $4.5 million in federal tax credits of which $1.7 million was utilized to offset taxes payable, $1.9 million carried forward to offset future tax obligations and $0.9 million was unable to be used. The Company's ability to utilize such credits generated in the future depends upon the Company's ability to generate taxable earnings. SOUTH TEXAS PROPERTIES Effective January 1, 1995, the Company purchased a non-operated working interest in the Big Foot field, located south of San Antonio, Texas. Additional, small working interests were purchased in the same field effective February 1 and June 1, 1995. A total of 38 wells were drilled and completed in the field in 1995. Two additional wells were drilled and awaiting completion at year end. OIL AND GAS RESERVES The following table sets forth as of December 31, 1995, estimates of the Company's proved reserves, projected future production and estimated future net revenues from production of proved reserves, using selling prices and estimated development and production costs as of December 31, 1995. The discounted present values of estimated future net revenues shown in the table are not intended to represent the fair market value of oil and gas reserves owned by the Company.
Proved Reserves ------------------------------------ Future Net Percent Total Proved Proved Developed Percent Future Percent Revenues of ----------------- ----------------- of Total Net of Future Discounted Discounted Oil Gas Oil Gas Proved Revenues(2) Net @ 10% Future Net MBbls MMcf MBbls MMcf Reserves(1) ($M) Revenues ($M) Revenues ------- -------- ------- -------- ----------- ------------ --------- ---------- ---------- San Juan Basin 2,184.6 13,042.2 1,658.4 10,595.5 58.1% $25,256.6 51.4% $14,884.0 50.3% Anadarko Basin 717.9 1,643.5 607.6 1,512.5 13.2% 10,434.3 21.2% 6,864.1 23.2% Paradox Basin 359.0 408.3 345.9 379.3 5.7% 3,982.2 8.1% 2,720.5 9.2% South Texas 1,698.3 169.8 1,307.3 130.7 23.0% 9,498.4 19.3% 5,111.3 17.3% ------- -------- ------- -------- ------ --------- ------ --------- ------ Totals 4,959.8 15,263.8 3,919.2 12,618.0 100.0% $49,171.5 100.0% $29,579.9 100.0% ======= ======== ======= ======== ====== ========= ====== ========= ======
1) Equivalent gas information is based on a ratio of gas to oil of six Mcf to one Bbl. 2) Production of oil and gas, unit prices, and gross revenues are based on prices which take into account fixed and determinable changes in existing prices as a result of contractual arrangements, operation of law, or regulatory agency action. The Company's reserve report assumes that plugging expenses equal salvage value. There are numerous uncertainties inherent in estimating quantities of proved reserves and in projecting future rates of production and timing of development expenditures, including many factors beyond the control of the producer. The reserve data set forth herein represents only estimates. Reserve engineering is a subjective process of estimating underground accumulations of oil and gas that cannot be measured in an exact way, and the accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. As a result, estimates of different engineers often vary. In addition, results of drilling, testing and production subsequent to the date of an estimate may justify revision of such estimates. Accordingly, reserve estimates are often different from the quantities of oil and gas that are ultimately recovered. Further, the estimated future net revenues from proved reserves and the present value thereof are based upon certain assumptions about prices, timing of development and future production levels and cost, that may not prove correct over time. Predictions about prices and future production levels are subject to great uncertainty, and the meaningfulness of such estimates is highly dependent upon the accuracy of the assumptions upon which they are based. Except to the extent the Company acquires additional properties containing proved reserves or conducts successful exploration and development activities, or both, the proved reserves, and the revenues generated from the production thereof, will decline as reserves are produced. Increases or decreases in prices of oil and gas will also affect revenues and the present value of estimated future net cash flows from the Company's properties. The revenues generated from the Company's future exploration and production activities are therefore highly dependent upon the level of success in acquiring or discovering additional reserves and the costs incurred in doing so. The Company has filed estimates of oil and gas reserve data with the United States Department of Energy ("DOE") in accordance with the DOE's annual survey of domestic oil and gas reserves. The reserves reported to the DOE are required to be on a gross basis and, therefore, are not comparable to reserve data reported herein. EXPLORATORY AND DEVELOPMENTAL ACREAGE The following table provides information regarding the Company's developed and undeveloped acreage held at December 31, 1995:
Developed Acres Undeveloped Acres --------------------- --------------------- Gross Net Gross Net --------- --------- --------- --------- New Mexico 54,726.92 42,049.32 2,416.71 2,416.71 Colorado 11,360.42 2,138.35 320.00 55.00 Oklahoma 2,908.21 2,100.38 232.24 180.63 Kansas 7,979.68 6,035.94 1,264.00 584.00 Utah 10,371.31 6,845.04 7,303.68 6,238.94 Wyoming 1,259.62 1,199.62 Texas 8,307.88 3,264.24 Nevada 28,757.87 17,459.52 --------- --------- --------- --------- Total 95,654.42 62,433.27 41,554.12 28,134.42 ========= ========= ========= =========
In 1995 there was an increase in developed acreage which generally reflects the Company's purchase of producing properties in the San Juan and Paradox Basins and in South Texas. A 1995 decrease in undeveloped acreage reflects the release of tracts in Wyoming and Nevada which the Company had impaired in 1994. The following table sets forth certain information regarding the Company's drilling activities for the periods indicated:
Year Ended December 31, ----------------------------------------- 1995(1) 1994 1993 ----------- ----------- ----------- Gross Net Gross Net Gross Net ----- --- ----- --- ----- --- Productive Wells 47.0 19.7 6.0 3.3 4.0 0.5 Dry Holes 1.0 0.3 1.0 0.6 1.0 1.0
1) A dry hole is an exploratory or development well found to be incapable of producing either oil or gas in sufficient quantities to justify completion as an oil or gas well. The Company drilled 48 gross (20 net) wells in 1995. Of this total, 45 gross (19.4 net) were development wells, and 3 gross (.6 net) were exploratory wells. One (.3 net) of the exploratory wells was a dry hole. The following table sets forth the capital expenditures (in $000's) incurred by the Company for oil and gas property acquisitions, exploration and development during the periods indicated:
Year Ended December 31, ---------------------------- 1995 1994 1993 ------ ------ ------ Property Acquisitions: Unproved (16) 357 327 Proved 5,192 326 87 Exploration 251 123 290 Development 6,095 2,759 3,211 ------ ----- ----- Total 11,522 3,565 3,915 ====== ===== =====
MARKETING OF CRUDE OIL AND NATURAL GAS Crude oil production in the Four Corners area is primarily delivered directly to the refineries via pipeline or by truck for processing. Crude oil produced outside the Four Corners area is exchanged for barrels in the Four Corners area or sold on the open market. The majority of the Company's natural gas in the San Juan Basin is sold through third-party gas brokers at spot market prices and transported to market by interstate and intrastate pipelines. Contracts with these brokers are generally short term in nature (less than 18 months) and allow for prices to adjust to the marketplace. The Company believes that because of the competitive nature of the industry today, the loss of any one of its natural gas purchasers would not have an adverse effect on its business. OTHER MATTERS COMPETITIVE CONDITIONS The Company's exploration and production operation is subject to intense competition particularly with respect to the acquisition of desirable properties. There is also competition for the acquisition of oil and gas leases suitable for exploration and the hiring of experienced personnel. The Company's competitors in oil and gas exploration, development, production and marketing include major integrated oil and gas companies, numerous independent oil and gas companies, drilling and production purchase programs and individual producers and operators. The ability of the Company to increase its holdings of proved oil and gas reserves in the future is directly dependent upon the Company's ability to select and acquire suitable producing properties and prospects for future drilling in competition with these companies and the availability of capital. Many competitors have financial resources, staffs, facilities and other resources significantly greater than those of the Company. Crude oil prices are affected by a variety of factors that are beyond the control of the Company. The principal factors currently influencing prices, in addition to local factors discussed previously under the caption RAW MATERIAL SUPPLY, include the pricing and production policies of members of the Organization of Petroleum Exporting Countries ("OPEC"), the availability to world markets of production from troubled areas of the world and the worldwide and domestic demand for oil and refined products. Oil pricing will continue to be unpredictable and greatly influenced by governmental and political forces. A small portion of the Company's natural gas continues to be sold on contracts which control the gas price. As a result of the Federal Energy Regulatory Commission's ("FERC") Order No. 636, no gas is now sold to interstate pipeline companies, and these contracts have now been transferred to third party marketing companies which have recently purchased all of the gas the Company is able to deliver under the contracts. The majority of the Company's natural gas is purchased at the wellhead by natural gas marketers and brokers, who then arrange for transportation of the natural gas from the wellhead to a sales point where the gas is sold to an end user or local distribution company. Prices paid by natural gas marketers and brokers fluctuate monthly in response to market factors which are generally controlled by demand for natural gas at the end user level. While deliverability of natural gas has not been curtailed by market factors, the Company cannot accurately predict whether current levels of deliverability of natural gas will continue in the future. The Company cannot control or accurately predict future pricing. REGULATION AND OTHER FACTORS AFFECTING EXPLORATION AND PRODUCTION GENERAL. Oil and gas exploration and production activities are heavily regulated by federal, state and local governmental entities; and expenses and delays often associated with compliance with such regulations may adversely affect the Company's operations. Regulations affect, among other things, the timing and cost of drilling operations, conservation matters, marketing, transportation and production of oil and gas, prices received for such production, taxes and numerous other matters. Many states also restrict allowable rates of production of oil and gas to their respective statewide market demands. In addition, some states have enacted statutes prescribing ceiling prices for gas sold within such states. Regulations affecting the Company's activities are frequently revised and new or amended regulations in the future could significantly impact the Company's oil and gas exploration operations. The transportation and sale of natural gas has historically been subject to regulation by federal and state regulatory authorities pursuant to a number of statutes, including the Natural Gas Act of 1938 (the "NGA") and the Natural Gas Policy Act of 1978 (the "NGPA"). The provisions of the NGA and the NGPA and regulations promulgated thereunder significantly impact the transportation of the Company's produced natural gas through interstate and intrastate pipelines. Although the Company is currently able to arrange for the transportation of its produced gas volumes under generally satisfactory conditions, there can be no assurance that future regulatory developments will not adversely affect the Company. Various federal, state and local laws and regulations which relate to the protection of the environment may affect the Company's operations and costs as a result of their effect on oil and gas exploration, development and production operations. At present, the Company believes it is in substantial compliance with applicable environmental rules and regulations in areas in which it drills and produces crude oil and natural gas. However, the Company is not able to predict the ultimate cost associated with compliance with current environmental regulations or future regulatory changes. The Company is subject to all of the risks normally incident to the exploration for and production of oil and gas, including blowouts, cratering, down hole problems, pollution and fires, each of which could result in damage to or destruction of oil and gas wells, producing formations or production facilities, or damage to persons and other property. As is common in the industry, the Company does not fully insure against all these risks either because insurance is not readily available or because the Company elects not to insure due to prohibitive premium costs. The occurrence of an event not fully covered by insurance could have a material adverse effect on the financial position and results of operations of the Company. In addition, exploratory drilling carries a significant risk that no commercial oil or gas production will be obtained. TITLE MATTERS. Title to the Company's oil and gas properties is subject to royalty, overriding royalty, carried working and other similar interests and contractual arrangements customary in the oil and gas industry (including farmout and development agreements, operating agreements and joint venture arrangements), to liens for current taxes not yet due and to other minor defects and encumbrances. The Company believes that such burdens do not materially detract from the value of such properties or from the Company's interest therein or materially interfere with the operation of the Company's business. As is generally customary in the oil and gas industry in the case of undeveloped properties, an in-house title review is made prior to or at the time of acquisition. More comprehensive title investigations, including in most cases receipt of a title opinion of outside legal counsel, are generally made prior to the consummation of an acquisition of producing property and before commencement of drilling operations. With regard to the Company's coal seam gas reserves, potential legal questions may arise as to whether the right to produce such reserves is granted to the Company by certain of its oil and gas leases or are instead retained by the landowner or whether the Company's right to produce such reserves is subject to or affected by existing or future leases granted to others to develop the associated coal reserves. The bulk of the Company's coal seam gas reserves are held pursuant to substantially identical leases granted by the BLM. A United States Department of Interior Solicitor's opinion issued in 1981 supports the Company's belief that it has the right to produce coal seam gas reserves underlying lands subject to the Company's existing oil and gas leases granted by the BLM and that any subsequent coal leases or oil and gas leases granted by the BLM or other parties will not have a material adverse effect on the Company's right to produce such gas. The Company believes that the commercial impracticability of mining the associated coal reserves and other factors further reduce the risk of a bona fide dispute with anyone other than the BLM regarding ownership of and the right to drill for and produce the Company's coal seam gas. In view of the foregoing and its analysis of relevant leases and current case law, the Company believes that any potential future claims by the BLM or other parties will not have any material adverse effect on its title to such coal gas reserves. ITEM 3. LEGAL PROCEEDINGS. The Company is a party to ordinary routine litigation incidental to its business. There is also hereby incorporated by reference the information under the headings "Regulatory, Environmental, and Other Matters Affecting Refining and Marketing" and "Regulation and Other Factors Affecting Exploration and Production" in Items 1 and 2, the discussions contained in Item 7, and the information regarding contingencies in Note 15 to the Consolidated Financial Statements in Item 8. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. Executive Officers of the Registrant. Executive Officer Name Age Position Since - ---- --- -------- --------- James E. Acridge 55 President and Chief October 1989 Executive Officer A. Wayne Davenport 47 Vice President and May 1994 Chief Financial Officer Fredric L. Holliger 48 Executive Vice President October 1989 and Chief Operating Officer Morgan Gust 48 Vice President and August 1990 General Counsel, Vice President Administration and Secretary Gary L. Nielsen 53 Vice President Finance, October 1989 Treasurer and Assistant Secretary The officers of the Company are elected annually by the Board of Directors and each officer serves until his successor is chosen and qualified or until his earlier resignation or removal. There are no family relationships among the officers of the Company. James E. Acridge has served as Chairman of the Board of Directors, President and Chief Executive Officer of the Company since October 1989. Mr. Acridge also serves as Chairman of the Nominating Committee. Mr. Acridge is Chairman of the Board of Directors, President and Chief Executive Officer of Giant Arizona and Chairman of the Board of Directors of Giant E&P. Mr. Acridge founded Giant Arizona in 1969 and has served continuously as its Chairman of the Board of Directors, President and Chief Executive Officer. A. Wayne Davenport served as Vice President and Corporate Controller commencing May 1994 and, since May 1995, serves as Vice President and Chief Financial Officer. He also serves in such positions for Giant and Giant E&P. Prior to joining the Company in March 1994, Mr. Davenport was an investor in crude oil and natural gas properties and a consultant to the industry. From February 1987 to September 1992, he served in various positions, the last being Executive Vice President and Chief Financial Officer, with Hondo Oil & Gas Company, a company engaged in refining, marketing, exploration and production. Mr. Davenport was an audit partner for the accounting firm of Ernst & Young from May 1982 until February 1987. Fredric L. Holliger has served as a director, Executive Vice President and Chief Operating Officer of the Company since October 1989. Mr. Holliger joined Giant Arizona as Senior Vice President and President of the Giant Arizona refining division in February 1989 and continues to serve as a director, Executive Vice President and Chief Operating Officer of Giant Arizona. Since May 1993, he has also served as a director and President and Chief Executive Officer of Giant E&P. Before joining Giant Arizona, he served for two years as President of Northern Natural Gas Company, a division of Enron Corp., Omaha, Nebraska ("Northern Natural") and prior thereto was employed by Northern Natural for 14 years, serving in a variety of marketing, supply, operations and petroleum engineering capacities. Morgan Gust has served as Secretary and General Counsel of the Company since August 1990 and as Vice President since September 1990. In addition, he has served as Vice President Administration since October 1992. He also serves in such capacities and as a director of Giant Arizona and Giant E&P. Before joining the Company, Mr. Gust was President of Tucson Resources, Inc., an investment and financial services company, where he served first in the capacity of Vice President and General Counsel and later as Executive Vice President. From September 1975 to July 1988, Mr. Gust was a partner in the law firm of Gust, Rosenfeld and Henderson. Gary L. Nielsen has served as Treasurer and Assistant Secretary of the Company since October 1989, Vice President since September 1990 and Vice President Finance since September 1992. He also serves in such capacities for both Giant Arizona and Giant E&P. Mr. Nielsen joined Giant Arizona as its Treasurer in October 1986. Before joining Giant Arizona, he was senior Vice President and Chief Financial Officer of the casino hotel division of Del Webb Corporation from April 1978 to March 1986, and Chief Financial Officer of the Crescent Hotel Group from March 1986 to October 1986. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The principal United States market on which the Company's Common Stock is traded is the New York Stock Exchange. The high and low sales prices for the Common Stock for each full quarterly period as reported on the New York Stock Exchange Composite Tape for the last two fiscal years is as follows: Quarter Ended High Low ------------------ ------ ------ December 31, 1995 12 1/4 9 5/8 September 30, 1995 11 3/8 7 7/8 June 30, 1995 8 7/8 7 1/8 March 31, 1995 8 7/8 6 5/8 December 31, 1994 9 1/4 6 3/4 September 30, 1994 8 7/8 7 1/8 June 30, 1994 9 7/8 7 3/8 March 31, 1994 10 3/4 8 5/8 For 1995, the Company's Board of Directors declared quarterly common stock dividends of $0.05 per share. Any future dividends are subject to the results of the Company's operations, declarations by the Board of Directors and existing debt covenants, as described below. The Company has issued $100,000,000 of 9 3/4% Senior Subordinated Notes ("Notes"). The Notes were issued pursuant to an Indenture dated November 29, 1993 (the "Indenture") among the Company, its Subsidiaries, as guarantors, and NBD Bank, National Association, as trustee. The Indenture contains a number of covenants, which, among other provisions, place restrictions on the payment of dividends. A similar provision is contained in the agreement governing the Company's 10.91% senior unsecured note. At December 31, 1995, retained earnings available for dividends under the terms of the Indenture was approximately $13,137,000. The Indenture includes the payment of dividends in its definition of "Restricted Payments" which are subject to limitations, the most significant of which are summarized as follows: The Company will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, make any Restricted Payment, unless: (a) no Default or Event of Default shall have occurred and be continuing at the time of or immediately after giving effect to such Restricted Payment; (b) at the time of and immediately after giving effect to such Restricted Payment, the Company would be able to incur at least $1.00 of additional Indebtedness pursuant to the first paragraph of the covenant captioned "Limitation on Incurrence of Additional Indebtedness"; and (c) immediately after giving effect to such Restricted Payment, the aggregate amount of all Restricted Payments declared or made after the Issue Date does not exceed the sum of (A) 50% of the Consolidated Net Income of the Company and its Restricted Subsidiaries (or in the event such Consolidated Net Income shall be a deficit, minus 100% of such deficit) during the period (treated as one accounting period) subsequent to September 30, 1993 and ending on the last day of the fiscal quarter immediately preceding the date of such Restricted Payment and (B) $15 million. Consolidated Net Income excludes, among other things, any full cost ceiling limitation writedown. Also see the "Capital Structure" discussion in "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Item 7 hereof. Capitalized items used but not defined above have the meaning assigned to them in the Indenture. There were 315 holders of record of Common Stock on February 29, 1996. ITEM 6. SELECTED FINANCIAL DATA. The following table summarizes recent financial information of the Company. This selected financial data should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations at Item 7 and the Consolidated Financial Statements, related notes thereto, and the Auditors' Report included in Item 8 hereof:
FINANCIAL AND OPERATING HIGHLIGHTS (In Millions, Except Percentages, Per Share and Operating Data) Year Ended December 31, ---------------------------------------------------- 1995 1994 1993 1992 1991 -------- -------- -------- -------- -------- FINANCIAL STATEMENT DATA Continuing Operations: Net Revenues $ 332.9 $ 291.6 $ 313.2 $ 301.7 $ 285.5 Operating Income (Loss) 20.6 20.1 31.4 15.3 (1.5) Net Earnings (Loss) 7.7 7.4 17.5 7.1 (6.3) Earnings (Loss) Per Common Share .68 .61 1.43 .58 (.51) Discontinued Operations Net Earnings (Loss)(1) .2 (2.9) (11.3) (9.5) (.3) Earnings (Loss) Per Common Share .01 (.24) (.92) (.78) (.03) Weighted Average Common Shares Outstanding 11.5 12.1 12.2 12.2 12.2 Dividends Paid Per Common Share .20 .225 Stockholders' Equity 109.7 109.7 105.9 98.6 99.8 Book Value Per Common Share 9.75 9.15 8.69 8.07 8.16 Return on Average Stockholders' Equity 7.2% 4.2% 5.8% Total Assets 324.9 279.4 274.4 233.3 253.9 Working Capital 50.3 86.4 88.0 47.2 61.9 Long-Term Debt as a Percentage of Total Capitalization(2) 56.5% 51.4% 52.5% 46.8% 51.1% Long-Term Debt 142.7 116.1 117.3 86.9 104.3 OPERATIONS DATA - CONTINUING OPERATIONS: REFINING AND MARKETING:(3) Rated Crude Oil Capacity Utilized 88% 92% 98% 101% 94% Refinery Sourced Sales Barrels (Bbls/Day) 27,430 23,054 24,412 24,477 23,787 Average Crude Oil Costs (Per Bbl) $ 18.41 $ 16.97 $ 18.09 $ 20.21 $ 21.76 Refinery Margin ($/Bbl) $ 5.13 $ 5.60 $ 6.69 $ 4.77 $ 3.88 Service Stations: Fuel Gallons Sold (In Thousands) 100,601 100,685 77,684 71,068 67,447 Product Margin ($/Gallon) $ 0.175 $ 0.177 $ 0.177 $ 0.150 $ 0.121 Merchandise Sold (In Thousands) $ 38,091 $ 32,727 $ 22,367 $ 18,159 $ 14,958 Merchandise Margin 30% 29% 28% 27% 28% Number of Outlets at Year End 51 51 51 42 44 Travel Centers:(4) Fuel Gallons Sold (In Thousands) 21,522 30,337 32,148 38,253 33,229 Product Margin ($/Gallon) $ 0.102 $ 0.118 $ 0.128 $ 0.121 $ 0.124 Merchandise Sold (In Thousands) $ 7,640 $ 9,929 $ 10,125 $ 10,041 $ 8,970 Merchandise Margin 47% 45% 45% 47% 47% Number of Outlets at Year End 1 1 2 2 2 Retail Fuel Volumes Sold as a % of Refinery Sourced Sales Barrels 29% 37% 29% 29% 28% OPERATIONS DATA - DISCONTINUED OPERATIONS: EXPLORATION AND PRODUCTION: Crude Oil Production Sold (Net Bbls/Day) 1,111 737 805 918 1,207 Natural Gas Production Sold (Net Mcf/Day) 3,499 3,035 3,611 5,286 4,152 Crude Oil Average Selling Price (Per Bbl) $ 16.52 $ 15.33 $ 16.46 $ 19.00 $ 20.13 Natural Gas Average Selling Price (Per Mcf) $ 1.24 $ 1.64 $ 1.92 $ 1.63 $ 1.34 Lifting Costs ($/BOE) $ 5.49 $ 5.68 $ 6.91 $ 5.58 $ 5.07 Year End Proved Reserves, Net:(5) Crude Oil (Thousand Barrels) 4,960 2,215 2,196 3,285 3,320 Natural Gas (MMcf) 15,264 11,860 12,998 15,943 35,083 Combined (OEB) 7,504 4,191 4,362 5,942 9,167 Percent of Refinery Crude Oil Throughput Represented by: Equity Interests 5% 4% 4% 4% 6% Controlling Interests 6% 6% 6% 7% 10%
(1) The 1994, 1993 and 1992 amounts include a $2.2 million, $9.9 million and $8.6 million net of tax charge, respectively, for the reduction of the carrying value of crude oil and natural gas properties. (2) In certain prior reports, the Company included deferred income taxes as a component of total capitalization. Deferred income taxes are excluded from capitalization calculations in this report. (3) Operations data includes the operations of the Bloomfield refinery from October 4, 1995. (4) The Company's Giant Express travel center was sold November 2, 1994. (5) Based on annual reserve report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS COMPARISON OF THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994 - --------------------------------------------------------------------- The primary factors affecting the results of the Company's 1995 continuing operations as compared to its 1994 continuing operations are the acquisition of the Bloomfield refinery shortly after the beginning of the fourth quarter of 1995, a decline in refinery margins, an increase in refinery sourced sales volumes from the Ciniza refinery and the temporary suspension of operations at the Company's ethanol production plant. In early 1996, the Company approved a plan of disposition of its exploration and production business. The Company's financial statements have been restated to classify these operations as discontinued operations. Based on current information, the Company does not expect to incur a loss on the disposal of these operations. EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES - ------------------------------------------------------- Earnings from continuing operations before income taxes were $11.4 million for the year ended December 31, 1995, an increase of $1.3 million from $10.1 million for the year ended December 31, 1994. The increase is primarily the result of the acquisition of the Bloomfield refinery, a 5% increase in Ciniza refinery finished product sales volumes and a 16% increase in service station merchandise sales. These increases were partially offset by a 10% decrease in Ciniza refinery average margins and a decrease in third party sales volumes from the ethanol plant. REVENUES - -------- Revenues for the year ended December 31, 1995, increased $41.3 million or 14% to $332.9 million from $291.6 million in the comparable 1994 period. Finished product sales of $29.5 million from the Bloomfield refinery accounts for approximately 71% of the increase. In addition, a 5% increase in Ciniza refinery finished product sales volumes, a 4% increase in Ciniza refinery weighted average selling prices and a 16% increase in service station merchandise sales contributed to increased revenues. Offsetting these increases were a decline in third party sales from the ethanol plant and an overall decline in other revenues from retail operations. The increase in Ciniza refinery finished product sales volumes in 1995 was partially the result of a scheduled major maintenance turnaround started in March and completed in April 1994 and an accident at the refinery in July 1994 which reduced production for a period of approximately sixty days. The increase in service station merchandise sales is the result of increased same store sales and the addition of six units. The overall decline in other revenues from retail operations is primarily related to the sale of the Giant Express travel center in November 1994. The volumes of refined products sold through retail outlets decreased approximately 7% from 1994 levels due to a 29% decrease in volumes sold from the travel centers, primarily related to the sale of the Giant Express, and a slight decrease in service station volumes resulting from increased competition and the sale or remodeling of several units, offset in part by the addition of six new units. COST OF PRODUCTS SOLD - --------------------- For the year ended December 31, 1995, cost of products sold increased $38.8 million or 20% to $234.3 million from $195.5 million for the corresponding 1994 period. Cost of products sold of $22.4 million relating to the Bloomfield refinery accounts for approximately 58% of the increase. Also contributing to increased costs was an 8% increase in average crude oil costs and a 5% increase in the volume of finished products sold from the Ciniza refinery, along with a 15% increase in the cost of merchandise sales from the service stations. The increase is partially offset by a decrease in costs relating to the temporary suspension of operations at the ethanol plant, a decrease in merchandise sales from the travel centers and $1.4 million of estimated insurance reimbursements included in 1994 cost of products sold. OPERATING EXPENSES - ------------------ For the year ended December 31, 1995, operating expenses increased approximately $33,000 to $51.9 million from $51.8 million in the corresponding 1994 period. Operating expenses increased approximately 5% due to the acquisition of the Bloomfield refinery and 5% due to payroll and related costs for other continuing operations. Partially offsetting these increases were declines of approximately 4% due to the sale of the Giant Express, 3% due to declines in incurred self insurance costs and adjustments to various self insurance accruals, 2% due to the temporary suspension of operations at the ethanol plant and 1% due to lower purchased fuel costs for the Ciniza refinery. DEPRECIATION AND AMORTIZATION - ----------------------------- For the year ended December 31, 1995, depreciation and amortization increased $1.1 million to $13.3 million from $12.2 million in the corresponding 1994 period. The increase is primarily related to the acquisition of the Bloomfield refinery and the separate purchase of crude oil gathering operations in September 1995. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- For the year ended December 31, 1995, selling, general and administrative expenses increased approximately $848,000 or 7% to $12.8 million from $11.9 million in the corresponding 1994 period. The increase is primarily the result of a reduction in 1994 first quarter expenses from the recording of a $1.0 million insurance settlement relating to environmental costs incurred in prior years and higher payroll costs in the 1995 period. Offsetting these items was a reduction in expenses from no management incentive bonus in the 1995 period and reductions in 1995 expenses for a decrease in the estimated liability for self insured workmen's compensation claims and an adjustment in the estimated allowance for doubtful accounts. INTEREST EXPENSE (INCOME) - ------------------------- For the year ended December 31, 1995, interest expense decreased approximately $299,000 or 3% to $11.5 million from $11.8 million in the same 1994 period. The decrease is primarily related to the reduction of certain fixed rate long-term debt and the capitalization of interest in the 1995 period, offset in part by the addition of certain variable rate long-term debt incurred in part to finance the acquisition of the Bloomfield refinery and for working capital purposes. For the year ended December 31, 1995, interest and investment income increased approximately $506,000 or 29% to $2.2 million from $1.7 million. The increase is primarily due to interest received on the refund of income taxes paid in prior periods and higher interest rates. These increases were partially offset by a decrease due to a decline in the amount of excess funds available for investment. INCOME TAXES - ------------ Income taxes for the years ended December 31, 1995 and 1994 were computed in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, resulting in effective tax rates of approximately 32% and 26%, respectively. The difference in rates is due in part to the amounts of alcohol fuel tax credits generated in 1994 compared to 1995, relating to the temporary suspension of operations at the Company's ethanol plant, as well as coal seam gas tax credits generated in each year, as they relate to varying amounts of annual income. DISCONTINUED OPERATIONS - ----------------------- For the years ended December 31, 1995 and 1994, the Company's exploration and production operations ("Giant E&P") recorded net earnings of $143,000 and a net loss of $2.9 million, respectively. The improvement is primarily due to a writedown in the carrying value of crude oil and natural gas properties in the third quarter of 1994, and in 1995, to increases in crude oil and natural gas production, along with an increase in crude oil selling prices, offset in part by a decline in natural gas selling prices in 1995. Revenues, including intercompany revenues of $5.3 million in 1995 and $4.1 million in 1994, totaled $8.4 million for the year ended December 31, 1995, an increase of $2.4 million or 40% from the $6.0 million reported for the comparable 1994 period. This increase is due to a 51% increase in crude oil production, an 8% increase in average crude oil selling prices and a 15% increase in natural gas production. These increases were offset in part by a 24% decline in average natural gas selling prices. The increase in crude oil production is primarily the result of the acquisition of various crude oil producing reserves during 1995. The increase in natural gas production is due to a favorable 1994 year end adjustment of coal seam gas reserves sold in 1992, determined pursuant to an annual redetermination clause contained in the 1992 purchase and sale agreement, which resulted in the addition of approximately 1,018 million cubic feet of natural gas reserves. For the year ended December 31, 1995, operating costs and expenses increased $1.2 million or 18% to $8.1 million from $6.9 million in the comparable 1994 period primarily due to increases in production. OUTLOOK - ------- With the acquisition of the Bloomfield refinery and additional crude oil gathering operations, along with the anticipated disposition of the Company's exploration and production operations, the Company will focus its efforts on its primary business of refining and marketing of petroleum products. The Company's future results of operations are primarily dependent on producing and selling sufficient quantities of refined products at margins sufficient to cover fixed and variable expenses. COMPARISON OF THE YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993 - --------------------------------------------------------------------- The primary factors affecting the results of the Company's 1994 continuing operations as compared to its 1993 continuing operations are a decline in refining margins, the acquisition of nine retail units, an increase in interest costs, a decline in refinery sourced sales volumes and higher operating expenses and grain costs. EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES - ----------------------------------------------------------- Earnings from continuing operations before income taxes were $10.1 million for the year ended December 31, 1994, a decrease of $17.0 million or 63% from $27.1 million for the year ended December 31, 1993. The decrease is primarily the result of a 16% decline in average refinery margins, a 6% decrease in refinery sourced finished product sales volumes, higher ethanol plant grain costs and higher interest and operating expenses. These factors were partially offset by a 19% increase in finished product sales volumes and a 31% increase in merchandise sales from the Company's retail units. REVENUES - -------- Revenues for the year ended December 31, 1994, decreased $21.6 million or 7% to $291.6 million from $313.2 million in the comparable 1993 period. The decrease is primarily due to an 11% decline in refinery weighted average selling prices, a 6% decrease in refinery sourced finished product sales volumes and a 1% decline in retail selling prices. Offsetting these decreases was a 19% increase in the volume of finished products sold from the retail units along with a 31% increase in merchandise sales. Also included in 1994 revenues is a $0.5 million gain resulting from the settlement of property damage claims relating to an accident at the refinery in July 1994. The decline in refinery sourced finished product sales volumes was primarily due to a scheduled major maintenance turnaround started in March and completed in April and an accident at the refinery in mid-July which damaged the alkylation unit and curtailed production for a period of approximately sixty days. The increase in retail finished product and merchandise sales is the result of increased same store sales and volumes and the acquisition of nine units in the Company's primary market area. Volumes of refined products sold through retail outlets increased approximately 19% from 1993 levels primarily due to a 30% increase in volumes sold from the service stations offset in part by a 6% decrease in travel center volumes, 5% at the Giant Travel Center and 11% at the Giant Express which was sold on November 2, 1994. COST OF PRODUCTS SOLD - --------------------- For the year ended December 31, 1994, cost of products sold decreased $14.3 million or 7% to $195.5 million from $209.8 million for the corresponding 1993 period. A 6% decline in average crude oil costs and a 6% decline in the volume of finished products sold from the refinery accounts for most of the decrease. These decreases were partially offset by an increase in costs relating to increased merchandise sales from the retail units and a $1.8 million increase in average grain costs due to forward grain purchase contracts and higher costs resulting from the effects of the poor grain harvest of 1993. Also included in 1994 cost of products sold is $1.4 million of preliminary estimates of reimbursements for losses under the Company's business interruption insurance policies relating to the refinery accident in July. OPERATING EXPENSES - ------------------ For the year ended December 31, 1994, operating expenses increased $4.9 million or 10% to $51.8 million from $46.9 million in the corresponding 1993 period. The increase is primarily due to operating expenses of nine retail units acquired, an increase in payroll and related costs for other operations and increases in repairs and maintenance and utility costs at the refinery. Partially offsetting these increases was a decrease in refinery purchased fuel costs. DEPRECIATION AND AMORTIZATION - ----------------------------- For the year ended December 31, 1994, depreciation and amortization increased approximately $831,000 to $12.2 million from $11.4 million in the corresponding 1993 period. The increase is primarily related to nine retail units acquired, the completion and start up of a diesel desulfurization unit at the refinery in September 1993 and amortization of costs relating to the major maintenance turnaround completed at the refinery in April 1994. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES - -------------------------------------------- For the year ended December 31, 1994, selling, general and administrative expenses decreased $1.7 million or 13% to $11.9 million from $13.6 million for the year ended December 31, 1993. The decline is primarily due to a decrease in the management incentive bonus accrual and the recording of a $1.0 million insurance settlement in the first quarter of 1994 relating to environmental costs incurred in prior years. Partially offsetting these decreases were increases in payroll and related costs and a reduction in 1993 third quarter expenses by $0.9 million for a decrease in the estimated liability for self insured workmen's compensation claims. INTEREST EXPENSE (INCOME) - ------------------------- For the year ended December 31, 1994, interest expense increased $6.0 million or 105% to $11.8 million from $5.8 million in the same 1993 period. The increase is primarily due to the issuance of $100 million of 9 3/4% senior subordinated notes in November 1993, the proceeds of which were partially used to retire existing debt with lower effective interest rates, but with significantly shorter maturities. In addition, the amortization of proceeds from a terminated interest rate swap were lower in the 1994 period. For the year ended December 31, 1994, interest and investment income increased approximately $247,000 or 17% to $1.7 million from $1.5 million in the comparable 1993 period primarily due to the investment of larger amounts of excess cash, in part from the issuance of the senior subordinated notes, at slightly higher interest rates. INCOME TAXES - ------------ Income taxes for the years ended December 31, 1994 and 1993 were computed in accordance with SFAS No. 109, resulting in effective tax rates of approximately 26% and 35%, respectively. The difference in the two rates is primarily due to the relationship of relatively consistent amounts of alcohol fuel and coal seam gas tax credits in each year to varying amounts of annual income and the effect of the statutory rate increase in 1993 on deferred income taxes resulting from the enactment of the Revenue Reconciliation Act of 1993 which increased the statutory U.S. federal income tax rate to 35% from 34%. DISCONTINUED OPERATIONS - ----------------------- For the years ended December 31, 1994 and 1993, Giant E&P recorded net losses of $2.9 million and $11.3 million, respectively, including the effects of "ceiling test" writedowns. The 1994 net writedown of $2.2 million was primarily due to low crude oil and natural gas prices at September 30, 1994, impairment of certain unproved properties and downward revisions of certain reserves. The 1993 net writedown of $9.9 million was primarily due to downward revisions of oil and gas reserves and low crude oil prices at December 31, 1993. Exclusive of the "ceiling test" writedowns, the 1994 period reflected a smaller loss compared to the same 1993 period primarily due to lower production costs relative to declines in crude oil and natural gas production and selling prices. Revenues from Giant E&P, including intercompany revenues of $4.1 million in 1994 and $4.8 million in 1993, totaled $6.0 million for the year ended December 31, 1994, a decrease of $1.4 million or 20% from the $7.4 million reported for the comparable 1993 period. This decrease is due to an 8% decline in crude oil production, a 7% decline in average crude oil selling prices, a 16% decline in natural gas production and a 15% decline in natural gas selling prices. The decline in natural gas production is due to an unfavorable 1993 year end adjustment of coal seam gas reserves sold in 1992, determined pursuant to an annual redetermination clause contained in the 1992 purchase and sale agreement, which resulted in a decrease of approximately 1,159 million cubic feet in natural gas reserves. Operating costs and expenses of Giant E&P decreased approximately 24% for the year ended December 31, 1994, compared to the same 1993 period. The decline is primarily related to a decrease in production. LIQUIDITY AND CAPITAL RESOURCES CASH FLOW FROM OPERATIONS - ------------------------- Net cash provided by operating activities from continuing operations totaled $24.5 million for the year ended December 31, 1995, compared to $7.8 million for the comparable 1994 period. Operating cash flows increased primarily as a result of differences in the net changes in working capital items. WORKING CAPITAL - --------------- Working capital at December 31,1995 consisted of current assets of $108.9 million and current liabilities of $58.5 million, or a current ratio of 1.86:1. At December 31, 1994, the current ratio was 3.12:1 with current assets of $127.2 million and current liabilities of $40.8 million. Current assets include the net assets of the discontinued operations because the Company anticipates selling this business during 1996. Current assets have decreased since December 31, 1994, primarily due to a decrease in cash and cash equivalents, marketable securities and income tax refunds and other receivables. Marketable securities have declined due to the liquidation of the Company's portfolio through sales and maturities. Other receivables have decreased as a result of insurance reimbursements received and a decline in the amount of investment income receivable. Trade receivables and inventories have increased primarily as the result of the acquisition of the Bloomfield refinery, along with increases in prices. Net assets of discontinued operations have increased as the result of reserve acquisitions. Current liabilities have increased due to an increase in accounts payable and accrued expenses. Accounts payable have increased primarily due to an increase in raw material purchases due to the acquisition of the Bloomfield refinery and crude gathering operations. In addition, 1995 year end crude prices were approximately 10% higher than in 1994. Accrued expenses have increased due to higher excise taxes payable as a result of the Bloomfield refinery acquisition. CAPITAL EXPENDITURES AND RESOURCES - ---------------------------------- Net cash used in investing activities for the purchase of property, plant and equipment and other assets totaled approximately $78.0 million for the year 1995. This amount includes the acquisition of the Bloomfield refinery; the acquisition, construction, rebuilding or substantial remodeling of twelve retail units; the acquisition of a crude oil gathering operation, including long-term supply contracts; upgrades to improve operations and efficiencies at the Ciniza refinery and in transportation operations; along with information system enhancements. On October 4, 1995, the Company through a wholly-owned subsidiary, completed the purchase of the 18,000 barrel per day ("bpd") Bloomfield refinery ("Bloomfield") located in Bloomfield, New Mexico, along with related pipeline and transportation assets. Bloomfield and the related assets were purchased for $55 million, plus approximately $7.5 million for crude oil and refined product inventories associated with the refinery operations. The purchase was funded with $32.5 million of cash on hand and $30.0 million provided under a Credit Agreement. The purchase agreement also provides for potential contingent payments to be made to the seller over approximately the next six years, not to exceed a present value of $25.0 million, should certain criteria be met. At December 31, 1995, the Company had accrued approximately $1.2 million under this arrangement relating to 1995 operations and adjusted the purchase price accordingly. In addition, the Company assumed certain environmental obligations and is in the process of gathering and analyzing information in order to establish an environmental reserve. Such reserve, which the Company does not believe will be material, will be recorded as additional purchase price and allocated to the assets acquired. Included in the purchase was the seller's interest in approximately 25 miles of pipeline connecting the Bloomfield refinery to the Texas-New Mexico and Four Corners common carrier pipeline systems and various automobiles and small trucks. On a pro forma basis, assuming the purchase took place on January 1, 1994, the Company's net revenues would have been $439.7 million and $432.1 million, net earnings from continuing operations would have been $14.8 million and $18.9 million and earnings from continuing operations per common share would have been $1.29 and $1.56 for the years ended December 31, 1995 and 1994, respectively. This unaudited pro forma financial information does not purport to represent the results of operations that actually would have resulted had the purchase occurred on the dates specified, nor should it be taken as indicative of the future results of operations. In the third quarter of 1995, the Company, through a wholly-owned subsidiary, completed the acquisition of a crude oil gathering operation. The assets acquired include land, buildings, equipment and long-term crude oil supply contracts. The amounts allocated to the long-term supply contracts will be amortized to cost of products sold over the life of the contracts which have a duration of three to twelve years. The acquisition should lower raw material and transportation costs by providing long-term crude oil purchase agreements and through consolidation of the crude oil trucking operations with the Company's current operations and those acquired with the Bloomfield refinery. On July 25, 1995, the Company completed the exchange of two of its retail service stations located in Tucson, Arizona for a finished products terminal in Albuquerque, New Mexico previously owned by a major oil Company. The effect of the exchange is to replace two service stations not considered to be strategic to the Company's overall marketing strategies with a finished products terminal which is a part of the Company's strategy to maximize both product volumes and netbacks to the Ciniza and Bloomfield refineries, maximize the Company's customer base and improve access to product pipelines in Albuquerque. In 1995, the Company purchased two retail units, constructed and opened four others and substantially remodeled six more. In addition, the Company received proceeds of approximately $2.6 million from the sale of three operating service stations, certain non-strategic real estate and other assets. A gain of approximately $237,000 resulted from these sales. On October 2, 1995, the Company announced the temporary suspension of operations at its ethanol processing plant due to high grain costs. The plant is expected to be closed until grain prices return to more favorable levels. The Company does not anticipate any problems in acquiring oxygenates while the plant operations are suspended. Included in the Company's financial results are ethanol plant third party revenues of $7.0 million and operating losses of $782,000 for the year ended December 31, 1995, and third party revenues of $12.7 million and operating losses of $1.4 million for the year ended December 31, 1994. The Company has budgeted approximately $48.2 million for capital expenditures in 1996. Approximately $7.8 million is budgeted for non-discretionary projects that are required by law or regulation or to maintain the physical integrity of existing assets in 1996. These projects include, among others, operational and environmental projects at the refineries, retail operations and crude gathering operations, along with a contingency payment to the seller of the Bloomfield refinery under the Bloomfield refinery acquisition agreement. The remaining budget of $40.4 million is for discretionary projects to sustain or enhance the current level of operations, increase earnings on existing or new business and to expand operations. The primary projects in this category include the acquisition, construction, rebuilding and remodeling of retail units, multiple pump dispensers and card readers for retail operations, upgrades to the refineries and information system enhancements. The amount of these budgeted discretionary projects that are actually undertaken in 1996 will depend on, among other things, identifying acceptable acquisitions, general business conditions and results of operations. All of the budgeted capital projects undertaken are expected to be funded from working capital. Working capital, including that necessary for capital expenditures and debt service, will be funded through cash generated from operating activities, the sale of the exploration and production assets, 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. Although the Company is not currently aware of any pending circumstances which would change these capital budget expectations, changes in the tax laws, the imposition of any changes in federal and state clean air and clean fuel requirements and other changes in environmental laws and regulations may also increase future capital expenditure levels. Future capital expenditures are also subject to business conditions affecting the industry. In addition, 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. Much of the capital currently planned to be spent by the Company for environmental compliance is integrally related to operations or to operationally required projects. The Company does not specifically identify capital expenditures related to such projects on the basis of whether they are for environmental as opposed to economic purposes. However, with respect to capital expenditures budgeted primarily to satisfy environmental regulations, it is estimated that approximately $0.5 million, $0.6 million and $5.0 million was spent in 1995, 1994 and 1993, respectively, and $1.3 million is expected to be spent in 1996. With respect to the Company's operating expenses for environmental compliance, while records are not kept specifically identifying or allocating such expenditures, management believes that the Company incurs significant operating expense for such purposes. DISCONTINUED OPERATIONS - ----------------------- In early 1996, the Company approved a plan of disposition of the exploration and production segment. The decision was based upon management's review of the prospects for this operation, which indicated that substantial new capital would be necessary to further develop this business and reach an acceptable level of profitability and integration. With the acquisition of the Bloomfield refinery and crude oil gathering operations, the Company will focus its efforts on its core business of refining and marketing. The Company is in the process of searching for a buyer for the assets or the business and expects to complete a sale in 1996. Based on current information, the Company does not expect to incur a loss on the disposal of the segment. Net assets, including deferred tax liabilities of $4.2 million in 1995 and $2.4 million in 1994, of this operation were $26.7 million and $20.4 million at December 31, 1995 and 1994, respectively. Net earnings (loss) and net earnings (loss) per share were $143,000 and $0.01, $(2.9) million and $(0.24), and $(11.3) million and $(0.92) for the years ended December 31, 1995, 1994 and 1993, respectively. CAPITAL STRUCTURE - ----------------- At December 31, 1995 and 1994, the Company's long-term debt was 56.5% and 51.4% of total capital, respectively. The increase is primarily due to an increase in long-term debt associated with the Bloomfield acquisition. 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. The principal balance is due in October 1998 and has a floating interest rate that is tied to various short-term indices. At December 31, 1995, this rate was approximately 7%. On November 6, 1995, $10.0 million of this revolving term facility was prepaid from cash on hand. 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. This facility has a floating interest rate that is tied to various short-term indices. At December 31, 1995, this rate was approximately 8 1/2%. As of December 31, 1995, direct borrowings under this arrangement were $11.0 million and there were $16.9 million of irrevocable letters of credit outstanding, primarily to secure purchases of raw materials. Borrowings under this facility are generally higher at month end due to payments for raw materials and various taxes. The Company is required to pay a quarterly commitment fee based on the unused amount of each facility. The Credit Agreement contains certain covenants and restrictions which require the Company to, among other things, maintain a minimum consolidated net worth; minimum fixed charge coverage ratio; minimum funded debt to total capitalization percentage; and places limits on investments, prepayment of senior subordinated debt, guarantees, liens and restricted payments. The Credit Agreement is guaranteed by substantially all of the Company's wholly-owned subsidiaries. The Company's Board of Directors has authorized the repurchase of a total of 1.5 million shares of the Company's common stock or approximately 12% of all shares issued as of the inception of the repurchase program. 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. In 1995, the Company repurchased 737,200 shares of its common stock for approximately $6.3 million. From the inception of the repurchase program, the Company has repurchased 939,500 shares at a weighted average cost of approximately $8.52 per share, including commissions, or approximately $8.0 million. These shares are treated as treasury shares. Any repurchased shares are available for a variety of corporate purposes. The number of shares actually repurchased will be dependent upon market conditions and there is no guarantee as to the exact number of shares to be repurchased by the Company. The Company may suspend or discontinue the program at any time without notice. On December 14, 1995, the Company's Board of Directors declared a common stock dividend of $0.05 per share payable to stockholders of record on January 24, 1996. This dividend was paid on February 6, 1996. For the year 1995, the Board of Directors declared common stock dividends of $0.20 per share. 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. It is expected that 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 EPA notified the Company that it may be a potentially responsible party for the release, or threatened release, of hazardous substances, pollutants or contaminants at the Lee Acres Landfill, 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 an environmental liability accrual of approximately $1.1 million relating 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 accrual is recorded in the current and long-term sections of the Company's consolidated balance sheet. In addition, the Company assumed certain environmental obligations related to the acquisition of the Bloomfield refinery and is in the process of gathering and analyzing information in order to establish an environmental reserve. Such reserve, which the Company does not believe will be material, will be recorded as additional purchase price and allocated to the assets acquired. 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, and such assessments are or will be the subject of litigation or administrative appeals. In March 1995, the Financial Accounting Standards Board issued 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." The Company has not completed the process of evaluating the impact that will result from adopting this Statement. However, management does not believe the adoption will have a significant impact on the Company's financial position or results of operations. SFAS No. 121 is required to be adopted in the first quarter of 1996. With the acquisition of the Bloomfield refinery and based on projections of local crude oil availability from the field, current levels of usage of Alaska North Slope crude oil ("ANS") and the Company's inventory levels, the Company believes an adequate crude oil supply will be available, without the use of additional supplemental supply alternatives, to sustain both refineries' operations at planned levels, at least through 1996. The Company believes that local crude oil production currently approximates 95% of aggregate local crude oil demand. The Company is currently able to supplement local crude oil supplies with ANS and other alternate grades of crude oil through its gathering systems' interconnection with the Four Corners and Texas-New Mexico common carrier pipeline systems and by truck or rail. Generally, such crude oil is of lesser quality than locally available crude oils, and, with the exception of ANS, the Company believes such crude oil generally has a delivered cost greater than that of locally available crude oil. The Company continues to evaluate supplemental crude oil supply alternatives for both of its refineries on both a short-term and long-term basis. Among other alternatives, the Company has considered making equipment modifications to increase its ability to use alternative crude oils and may install additional rail facilities to enable the Company to provide incremental crude oil and other intermediate feedstocks to supplement local supply sources in the most cost effective manner. As additional supplemental crude oil becomes necessary, the Company intends to implement one or more of these available alternatives as necessary and as is most advantageous under the then prevailing conditions. The Company currently believes that the most desirable strategy to supplement local crude oil supplies, on a long-term basis, is the delivery of supplemental crude oil from outside of the Four Corners area by pipeline. Implementation of supplemental supply alternatives will result in additional raw material costs, operating costs, capital costs, or a combination thereof in amounts which are not presently ascertainable by the Company but which will vary depending on factors such as the specific alternative implemented, the quantity of supplemental crude oil required, and the date of implementation. Implementation of some supply alternatives requires the consent or cooperation of third parties and other considerations beyond the control of the Company. "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 ability of the Company to sustain and leverage the competitive advantages generated by the acquisition of the Bloomfield refinery; the results of the disposal of the Company's exploration and production operations; 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. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 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, 1995 and 1994, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Giant Industries, Inc. and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Phoenix, Arizona March 4, 1996
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, --------------------- 1995 1994 --------- --------- (In thousands) ASSETS Current assets: Cash and cash equivalents $ 9,549 $ 12,860 Marketable securities 35,631 Receivables: Trade, less allowance for doubtful accounts of $424,000 and $546,000 22,264 14,818 Income tax refunds 380 2,144 Other 1,381 4,303 --------- --------- 24,025 21,265 --------- --------- Inventories 42,581 32,270 Prepaid expenses and other 3,880 2,317 Net assets of discontinued operations 26,689 20,396 Deferred income taxes 2,145 2,490 --------- --------- Total current assets 108,869 127,229 --------- --------- Property, plant and equipment 292,919 223,821 Less accumulated depreciation and amortization (94,357) (85,863) --------- --------- 198,562 137,958 --------- --------- Other assets 17,431 14,258 --------- --------- $ 324,862 $ 279,445 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 4,063 $ 4,107 Accounts payable 34,162 19,066 Accrued expenses 20,316 17,640 --------- --------- Total current liabilities 58,541 40,813 --------- --------- Long-term debt, net of current portion 142,676 116,090 Deferred income taxes 12,864 11,322 Other liabilities 1,049 1,530 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, 12,188,629 and 12,187,629 shares issued 122 122 Additional paid-in capital 72,389 72,373 Retained earnings 45,373 40,373 Unearned employee benefits related to ESOP (514) Unearned compensation related to restricted stock (151) (614) Unrealized loss on securities available-for-sale, net (398) --------- --------- 117,733 111,342 Less common stock in treasury-at cost, 939,500 and 202,300 shares (8,001) (1,652) --------- --------- 109,732 109,690 --------- --------- $ 324,862 $ 279,445 ========= =========
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, ----------------------------------------------- 1995 1994 1993 ----------- ----------- ----------- (In thousands except shares and per share data) Net revenues $ 332,888 $ 291,623 $ 313,187 Cost of products sold 234,271 195,489 209,769 ----------- ----------- ----------- Gross margin 98,617 96,134 103,418 Operating expenses 51,856 51,823 46,945 Depreciation and amortization 13,345 12,246 11,415 Selling, general and administrative expenses 12,778 11,930 13,642 ----------- ----------- ----------- Operating income 20,638 20,135 31,416 Interest expense (11,506) (11,805) (5,765) Interest and investment income 2,239 1,733 1,486 ----------- ----------- ----------- Earnings from continuing operations before income taxes 11,371 10,063 27,137 Provision for income taxes 3,638 2,608 9,597 ----------- ----------- ----------- Earnings from continuing operations 7,733 7,455 17,540 Discontinued operations: Earnings (loss) from exploration and production operations (net of income taxes (benefit) of $154 in 1995, $(1,351) in 1994, and $(5,825) in 1993) 143 (2,934) (11,275) ----------- ----------- ----------- Earnings before extraordinary item 7,876 4,521 6,265 Extraordinary loss on early extinguishment of debt, net of income tax benefit of $252 (384) ----------- ----------- ----------- Net earnings $ 7,876 $ 4,521 $ 5,881 =========== =========== =========== Earnings (loss) per common share: Continuing operations $ 0.68 $ 0.61 $ 1.43 Discontinued operations 0.01 (0.24) (0.92) ----------- ----------- ----------- Earnings before extraordinary item 0.69 0.37 0.51 Extraordinary loss (0.03) ----------- ----------- ----------- Net earnings $ 0.69 $ 0.37 $ 0.48 =========== =========== =========== Weighted average number of shares outstanding 11,478,779 12,127,481 12,225,177 =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
GIANT INDUSTRIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Unearned Unearned compen- Unrealized Common stock employee sation loss on Total ----------------- Additional benefits related to securities Treasury stock stock- Shares Par paid-in Retained related to restricted available- ---------------- holders' issued value capital earnings ESOP stock for-sale Shares Cost equity ---------- ----- ---------- -------- ---------- ---------- ---------- ------- ------- -------- (In thousands except number of shares) Balances, January 1, 1993 12,223,768 $122 $72,764 $29,971 $(2,247) $(2,008) $ 98,602 Stock options exercised 3,700 37 37 Benefits allocated to employees by ESOP 900 900 Compensation related to restricted stock awards 494 494 Restricted stock award shares forfeited (34,698) (384) 384 Net earnings 5,881 5,881 ---------- ---- ------- ------- ------- ------- ----- ------- ------- -------- Balances, December 31, 1993 12,192,770 122 72,417 35,852 (1,347) (1,130) 105,914 Purchase of treasury stock 202,300 $(1,652) (1,652) Stock options exercised 500 3 3 Benefits allocated to employees by ESOP 833 833 Compensation related to restricted stock awards 469 469 Restricted stock award shares forfeited (5,641) (47) 47 Unrealized loss on securities available- for-sale $(398) (398) Net earnings 4,521 4,521 ---------- ---- ------- ------- ------- ------- ----- ------- ------- -------- Balances, December 31, 1994 12,187,629 122 72,373 40,373 (514) (614) (398) 202,300 (1,652) 109,690 Purchase of treasury stock 737,200 (6,349) (6,349) Stock options exercised 1,000 8 8 Benefits allocated to employees by ESOP 514 514 Compensation related to restricted stock awards 8 463 471 Dividends declared (2,876) (2,876) Change in unrealized loss on securities available- for-sale 398 398 Net earnings 7,876 7,876 ---------- ---- ------- ------- ------- ------- ----- ------- ------- -------- Balances, December 31, 1995 12,188,629 $122 $72,389 $45,373 $ $ (151) $ 939,500 $(8,001) $109,732 ========== ==== ======= ======= ======= ======= ===== ======= ======= ========
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, ------------------------------------ 1995 1994 1993 --------- -------- -------- (In thousands) Cash flows from operating activities: Net earnings $ 7,876 $ 4,521 $ 5,881 Adjustments to reconcile net earnings to net cash provided by continuing operating activities: (Earnings) loss from discontinued operations (143) 2,934 11,275 Depreciation and amortization 13,345 12,246 11,415 Deferred income taxes 1,632 (1,058) (258) Restricted stock award compensation 471 469 494 Extraordinary loss on extinguishment of debt 384 Gain on involuntary conversion of refinery assets (533) Proceeds from settlement of interest rate swap agreement 1,514 (Decrease) increase in other liabilities (328) 1,019 (1,190) Other 57 341 9 Changes in operating assets and liabilities: Increase in receivables (2,513) (7,200) (1,880) (Increase) decrease in inventories (10,311) (8,929) 1,458 (Increase) decrease in prepaid expenses and other (1,563) 1,120 (1,753) Increase (decrease) in accounts payable 15,096 5,037 (1,965) Increase (decrease) in accrued expenses 904 (2,121) 9,513 --------- -------- -------- Net cash provided by continuing operating activities 24,523 7,846 34,897 --------- -------- -------- Cash flows from investing activities: Purchases of property, plant and equipment and other assets (77,978) (17,165) (9,187) Proceeds from sale of property, plant and equipment and other assets 2,588 5,611 410 Insurance proceeds from involuntary conversion of refinery assets 438 Purchase of ESOP loan from bank (1,347) Payments received on ESOP loan 514 833 Purchases of marketable securities (101,562) (57,109) Proceeds from sales and maturities of marketable securities 35,991 100,849 20,963 Net change in assets of discontinued operations (6,150) 639 (312) --------- -------- -------- Net cash used by investing activities (45,035) (10,357) (46,582) --------- -------- -------- Cash flows from financing activities: Proceeds of long-term debt 41,000 100,000 Payments of long-term debt (14,458) (3,025) (73,885) Purchase of treasury stock (6,349) (1,652) Deferred financing costs (698) (100) (2,199) Payment of dividends (2,302) Proceeds from exercise of stock options 8 3 37 --------- -------- -------- Net cash provided (used) by financing activities 17,201 (4,774) 23,953 --------- -------- -------- Net (decrease) increase in cash and cash equivalents (3,311) (7,285) 12,268 Cash and cash equivalents: Beginning of year 12,860 20,145 7,877 --------- -------- -------- End of year $ 9,549 $ 12,860 $ 20,145 ========= ======== ========
Noncash Investing and Financing Activities. For the year ended December 31, 1995, two retail units with a net book value of $1,613,000 were exchanged for a finished products terminal and $1,198,000 was incurred as a contingent payment related to the acquisition of the Bloomfield refinery. For the year ended December 31, 1994, a portion of the acquisition price of nine retail units was seller financed for $2,917,000. 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. ("Giant" or the "Company") was organized to combine the refining and marketing business of Giant Industries Arizona, Inc. ("Giant Arizona") with the exploration and production business of Hixon Development Company ("Hixon") through a merger in December 1989 in which Giant Arizona and Hixon became wholly-owned subsidiaries of the Company. In conjunction with the merger, the Company completed its initial public offering. In 1990, Hixon was renamed Giant Exploration & Production Company ("Giant E&P"). In early 1996, the Company approved a plan of disposition of the exploration and production business, Giant E&P. As a result, the Company's financial statements have been retroactively restated to present the exploration and production business as a discontinued operation. (See Note 3 for further discussion.) DESCRIPTION OF BUSINESS The Company operates primarily as an independent refiner and marketer of petroleum products. 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. In October 1995, the Company acquired the Bloomfield refinery, with a crude oil throughput capacity of 18,000 bpd and a total capacity including natural gas liquids of 18,600 bpd, located in Bloomfield, New Mexico. (See Note 2 for further discussion.) 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 is the largest refiner and one of the largest marketers of petroleum products in the Four Corners area of the southwestern United States where New Mexico, Arizona, Colorado and Utah adjoin. The Company also owns an ethanol production plant which supplies ethanol for blending by the Company as well as for sale to third party customers. Due to high grain costs, this facility has temporarily suspended operations and will be reopened when grain prices become more favorable. As an adjunct to its retail outlets, the Company sells merchandise through stores. The Company is in the process of selling its exploration and production business which engages in the exploration for and the acquisition, development and production of crude oil, condensate and natural gas primarily in New Mexico, Kansas, Oklahoma and South Texas. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Giant and all its subsidiaries. All significant intercompany accounts and transactions have been eliminated. USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS The preparation of financial statements in conformity with generally accepted accounting principles necessarily 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 these 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. FUTURES CONTRACTS The Company periodically enters into futures contracts to hedge its exposure to price fluctuations on crude oil and refined products. Gains and losses on hedge contracts are deferred and reported as a component of the related transaction. For the purposes of the Statement of Cash Flows, hedging transactions are considered to be operating activities. INTEREST RATE SWAPS In the past, interest rate management techniques such as swaps and caps were entered into in order to effectively manage and reduce net interest expense. Net settlements on swap transactions are reported as an adjustment to net interest expense. MARKETABLE SECURITIES All marketable securities were sold or matured in 1995. In 1994, all marketable securities were classified as available-for-sale and consisted of taxable corporate bonds, non-taxable municipal bonds and variable rate preferred stocks and were stated at fair value. Fair value was estimated based on quoted market prices. Marketable securities were managed as part of the Company's short-term cash management program. CONCENTRATION OF CREDIT RISK Credit risk with respect to customer receivables is concentrated in a small geographic area in which the Company operates and relates 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. INVENTORIES Inventories are stated at the lower of cost or market. Costs for crude oil and refined products produced by the refineries are determined by the last-in, first-out ("LIFO") method. Costs for exchange and terminal refined products and shop supplies are determined by the first-in, first-out ("FIFO") method. Costs for merchandise inventories are determined by the retail inventory method. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost and, except for oil and gas properties, 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: Oil and gas properties Units of production 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 The full cost method of accounting is followed for oil and gas properties. Under this method of accounting, the cost of unsuccessful as well as successful exploration and development activities are capitalized as oil and gas properties. The sum of net capitalized costs and estimated future development and dismantlement costs is amortized over the production of proved reserves using the units of production method. Depreciation, depletion and amortization per equivalent barrel of production sold for the years ended December 31, 1995, 1994 and 1993 was $4.65, $5.32, and $7.50, respectively, excluding the effect of the Company's writedown of oil and gas properties. Excluded from amounts subject to amortization are costs associated with unevaluated properties of $1,004,000 and $1,551,000 at December 31, 1995 and 1994, respectively, until proved reserves associated with the properties have been determined or impairment occurs. Net capitalized costs exceeding the estimated present value of future cash inflows from proved oil and gas reserves reduced by estimated future operating expenses and development expenditures are charged to current operations. Gain or loss on the sale or other disposition of oil and gas properties is not recognized unless significant oil and gas reserves are involved. 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. 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. TREASURY STOCK The Company's Board of Directors has authorized the repurchase of up to 1,500,000 shares of the Company's common stock or approximately 12% of all shares issued as of the inception of the repurchase program. 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 1995, the Company had repurchased 939,500 shares at a cost of approximately $8,001,000. These shares are being treated as treasury shares. 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. Generally, the timing of these accruals coincides with the completion of a feasibility study. INCOME TAXES The provision (benefit) for income taxes is based on earnings (loss) reported in the financial statements. Deferred income taxes are provided on temporary differences between the basis of assets and liabilities for financial reporting purposes and income tax purposes. EARNINGS (LOSS) PER COMMON SHARE Earnings (loss) per common share is computed on the weighted average number of shares of common stock outstanding during each period. The exercise of outstanding stock options would not result in a material dilution of earnings per share. NEW ACCOUNTING PRONOUNCEMENTS In March 1995, the Financial Accounting Standards Board issued 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." The Company has not completed the process of evaluating the impact that will result from adopting this Statement. However, management does not believe the adoption will have a significant impact on the Company's financial position or results of operations. SFAS No. 121 is required to be adopted in the first quarter of 1996. In October 1995, the Financial Accounting Standards Board issued SFAS No. 123 "Accounting for Stock Based Compensation." The Company has determined that it will not change to the fair value method and will continue to use Accounting Principles Board Opinion No. 25 for measurement and recognition of employee stock based compensation. SFAS No. 123 will require additional disclosures in the 1996 financial statements. RECLASSIFICATIONS Certain reclassifications have been made to the 1994 and 1993 financial statements to conform to the statement classifications used in 1995 relating to the classification of the exploration and production business as discontinued operations. NOTE 2--ACQUISITION: 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 purchase price was $55,000,000 plus approximately $7,500,000 for crude oil and refined products inventories associated with the refinery operations. The purchase agreement also provides for potential contingent payments to be made to BRC over approximately the next six years, not to exceed a present value of $25,000,000, should certain criteria be met. At December 31, 1995, the Company had accrued approximately $1,198,000 under this arrangement relating to 1995 operations. In addition, the Company assumed certain environmental obligations and is in the process of gathering and analyzing information in order to establish an environmental reserve. Such reserve, which the Company does not believe will be material, will be recorded as additional purchase price and allocated to the assets acquired. The following unaudited pro forma combined condensed financial information for the twelve months ended December 31, 1995 and 1994 include the results of operations of the Company, including the operations of the Bloomfield refinery for the fourth quarter of 1995, and BRC for nine months of 1995 and twelve months of 1994, 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 each 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 dates specified, nor should it be taken as indicative of the future results of operations. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994 (IN THOUSANDS EXCEPT PER SHARE DATA)
1995 1994 ----------- ----------- Net revenues $ 439,719 $ 432,089 Cost of products sold 313,353 294,964 ----------- ----------- Gross margin 126,366 137,125 ----------- ----------- Operating expenses 61,504 64,755 Depreciation and amortization 15,408 14,996 Selling, general and administrative expenses 14,339 14,495 ----------- ----------- Operating income 35,115 42,879 Interest expense, net and other 12,229 14,021 ----------- ----------- Earnings from continuing operations before income taxes 22,886 28,858 Provision for income taxes 8,118 9,955 ----------- ----------- Earnings from continuing operations 14,768 18,903 Discontinued operations: Earnings (loss) from exploration and production operations (net of income taxes (benefit) of $154 in 1995 and $(1,351) in 1994) 143 (2,934) ----------- ----------- Net earnings $ 14,911 $ 15,969 =========== =========== Earnings (loss) per common share: Continuing operations $ 1.29 $ 1.56 Discontinued operations 0.01 (0.24) ----------- ----------- Net earnings $ 1.30 $ 1.32 =========== ===========
NOTE 3--DISCONTINUED OPERATIONS: In early 1996, the Company approved a plan of disposition of the exploration and production segment. The decision was based upon management's review of the prospects for this operation, which indicated that substantial new capital would be necessary to further develop this business and reach an acceptable level of profitability and integration. With the acquisition of the Bloomfield refinery and crude oil gathering operations, the Company will focus its efforts on its core business of refining and marketing. The Company is in the process of searching for a buyer for the assets or the business and expects to complete a sale in 1996. Based on current information, the Company does not expect to incur a loss on the disposal of the segment. The summarized balance sheet of the exploration and production segment at December 31 was as follows:
1995 1994 ------- ------- (In thousands) Assets: Current assets $ 1,489 $ 1,143 Oil and gas properties, plant and equipment, net 33,140 24,958 Other assets 373 417 ------- ------- Total assets 35,002 26,518 ------- ------- Liabilities: Current liabilities 1,996 1,592 Deferred taxes and other liabilities 6,317 4,530 ------- ------- Total liabilities 8,313 6,122 ------- ------- Net assets of discontinued operations $26,689 $20,396 ======= =======
The following is a summary of the operating results of the exploration and production segment for the three years ended December 31:
1995 1994 1993 ------- ------- -------- (In thousands) Net revenues $ 8,363 $ 5,959 $ 7,409 Operating costs and expenses 8,066 6,849 8,998 Reduction of carrying value of crude oil and natural gas properties 3,395 15,511 ------- ------- -------- 297 (4,285) (17,100) Provision (benefit) for income taxes(1) 154 (1,351) (5,825) ------- ------- -------- Net earnings (loss) from discontinued operations $ 143 $(2,934) $(11,275) ======= ======= ========
(1) Coal seam gas tax credits generated from these operations of $700,000, $635,000 and $752,000 in 1995, 1994 and 1993, respectively, which could not be used on a separate return basis, have been allocated to continuing operations based on the Company's tax sharing arrangement. NOTE 4--MARKETABLE SECURITIES: On January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires the classification of securities at acquisition into one of three categories: held-to-maturity, available-for-sale, or trading--with different reporting requirements for each classification. At December 31, 1995, the Company had no marketable securities. At December 31, 1994, all of the Company's marketable securities were classified as available-for-sale and had a fair value of $35,631,000. A valuation allowance of $654,000 was recorded in 1994 to reduce the carrying value of the portfolio to estimated fair value and the after-tax adjustment necessary to mark the securities to market reduced stockholders' equity by $398,000. This adjustment had no effect on the 1994 results of operations. A summary of the Company's securities at December 31, 1994 was as follows:
December 31, 1994 --------------------------------------------- Gross Gross Amortized Unrealized Unrealized Estimated Cost Gains Losses Fair Value --------- ---------- ---------- ---------- (In thousands) Obligations of states and political subdivisions $34,270 $2 $(236) $34,036 Corporate debt securities 55 55 Equity securities 1,960 (420) 1,540 ------- -- ----- ------- $36,285 $2 $(656) $35,631 ======= == ===== =======
An analysis of the caption "Unrealized loss on securities available- for-sale, net" in the Consolidated Balance Sheet is as follows:
1995 1994 ---- ---- (In thousands)* Unrealized loss on securities available- for-sale, January 1 $(398) $ Net change in unrealized loss, due principally to the liquidation of the investment portfolio in 1995 and higher interest rates in 1994 398 (398) ----- ----- Unrealized loss on securities available- for-sale, December 31, $ 0 $(398) ===== ===== *These amounts have been tax effected.
Included in the Company's investment portfolio at December 31, 1994, was $2,000,000 of Orange County, California Tax and Revenue Anticipation Notes due July 28, 1995 (the "Orange County Notes"). Orange County filed for bankruptcy on December 6, 1994. The Company wrote this investment down by $200,000 in 1994 to reflect an estimated other than temporary impairment. In 1995, the Company was paid in full for these Orange County Notes. In recording gains and losses on the sale of marketable securities, cost is determined using specific identification. In 1995, the Company realized gross losses of approximately $310,000 offset in part by the $200,000 gain realized on the full payment of the Orange County Notes. Gains and losses were nominal for all other years presented. NOTE 5--INVENTORIES: Inventories consist of the following:
December 31, ------------------- 1995 1994 ------- ------- (In thousands) First-in, first-out ("FIFO") method: Crude oil $15,465 $13,611 Refined products 17,605 11,054 Refinery and shop supplies 6,871 5,705 Retail method: Merchandise 2,721 2,428 ------- ------- Subtotal 42,662 32,798 Allowance for last-in, first-out ("LIFO") method (81) (528) ------- ------- Total $42,581 $32,270 ======= =======
The Company uses the LIFO method of inventory valuation. The portion of inventories valued on a LIFO basis totaled $29,710,000 and $21,717,000 at December 31, 1995 and 1994, respectively. The following data will facilitate comparison with operating results of companies using the FIFO method. If inventories had been determined using the FIFO method at December 31, 1995, 1994 and 1993, net earnings and earnings per share for the years ended December 31, 1995, 1994 and 1993 would have been higher (lower) by $(268,000) and $(0.02), $357,000 and $0.03 and $237,000 and $0.02, respectively. NOTE 6--PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment, at cost, consist of the following:
December 31, -------------------- 1995 1994 -------- -------- (In thousands) Land and improvements $ 21,582 $ 20,888 Buildings and improvements 56,165 50,997 Machinery and equipment 178,301 120,666 Pipelines 8,875 8,426 Furniture and fixtures 15,195 13,837 Vehicles 6,552 4,613 Construction in progress 6,249 4,394 -------- -------- Subtotal 292,919 223,821 Accumulated depreciation and amortization (94,357) (85,863) -------- -------- Total $198,562 $137,958 ======== ========
NOTE 7--ACCRUED EXPENSES: Accrued expenses are comprised of the following:
December 31, ------------------- 1995 1994 ------- ------- (In thousands) Excise taxes $ 8,608 $ 5,952 Payroll and related costs 3,975 3,373 Interest 1,390 1,285 Other 6,343 7,030 ------- ------- Total $20,316 $17,640 ======= =======
NOTE 8--LONG-TERM DEBT: Long-term debt consists of the following:
December 31, --------------------- 1995 1994 -------- -------- (In thousands) 9 3/4% senior subordinated notes, due 2003, interest payable semi-annually $100,000 $100,000 Unsecured credit agreement, due 1998, floating interest rate, interest payable quarterly 31,000 10.91% senior unsecured note, due 1995 to 1999, interest payable quarterly 8,750 11,250 Notes payable to others, collateralized by real estate, 9% to 11%, due 1995 to 2010, interest payable monthly or annually 3,645 4,594 8% secured promissory note, due 1995 to 1997, interest payable quarterly 1,945 2,917 Other 1,399 1,436 -------- -------- Subtotal 146,739 120,197 Less current portion (4,063) (4,107) -------- -------- Total $142,676 $116,090 ======== ========
The Indenture supporting the 9 3/4% senior subordinated notes ("Notes") contains certain covenants that, among other things, restrict the ability of the Company and its subsidiaries to create liens, incur or guarantee debt, pay dividends, sell certain assets or subsidiary stock, engage in certain mergers, engage in certain transactions with affiliates or alter the Company's current line of business. At December 31, 1995, the Company was in compliance with these covenants. In addition, the Company is, subject to certain conditions, 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 will 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, 1995, retained earnings available for dividends under the terms of the Indenture was approximately $13,137,000. In October 1995, the Company entered into a Credit Agreement with a group of banks under which $30,000,000 was borrowed pursuant to a three-year unsecured revolving term facility to provide financing for the purchase of the Bloomfield refinery. The principal balance is due in October 1998 and has a floating interest rate that is tied to various short-term indices. At December 31, 1995, this rate was approximately 7%. On November 6, 1995, $10,000,000 of this revolving term facility was prepaid from cash on hand. 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) $40,000,000, or (ii) the amount determined under a borrowing base calculation tied to eligible accounts receivable and inventories as defined in the Credit Agreement. At December 31, 1995, the lesser amount was $40,000,000. This facility has a floating interest rate that is tied to various short-term indices. At December 31, 1995, this rate was approximately 8 1/2%. At December 31, 1995, direct borrowings under this arrangement were $11,000,000 and there were $16,948,000 of irrevocable letters of credit outstanding. The Company is required to pay a quarterly commitment fee based on the unused amount of each facility. The Credit Agreement contains certain covenants and restrictions which require the Company to, among other things, maintain a minimum consolidated net worth; minimum fixed charge coverage ratio; minimum funded debt to total capitalization percentage; and places limits on investments, prepayment of senior subordinated debt, guarantees, liens and restricted payments. At December 31, 1995, the Company was in compliance with these covenants. The Credit Agreement is guaranteed by substantially all of the Company's wholly-owned subsidiaries. The 10.91% senior unsecured note is due to an insurance company and the related agreement includes certain covenants, determined on a FIFO inventory basis, that require the Company to maintain a minimum net worth and working capital; places certain restrictions on, while not precluding, the purchase or redemption of the Company's capital stock, payment of dividends and payments of subordinated debt and interest; limits the dollar amount of new operating leases; and specifies certain conditions for new long-term debt obligations. At December 31, 1995, the Company was in compliance with these covenants. The remaining balance is payable in seven semi-annual installments of $1,250,000 through 1999. In 1995, 1994 and 1993, the Company's interest expense was reduced by approximately $242,000, $288,000 and $1,304,000, respectively, as a result of amortizing the proceeds received from a terminated interest rate swap agreement. At December 31, 1995, there were approximately $364,000 of deferred swap proceeds to be amortized over the remaining term of the 10.91% note. Aggregate annual maturities of long-term debt as of December 31, 1995 are: 1996 - $4,063,000; 1997 - $4,128,000; 1998 - $34,047,000; 1999 - $3,346,000; 2000 - $49,000; and all years thereafter - $101,106,000. NOTE 9--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" and SFAS No. 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Company using available market information and valuation methodologies described below. However, considerable judgment is required 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, ------------------------------------------ 1995 1994 -------------------- -------------------- Carrying Estimated Carrying Estimated Amount Fair Value Amount Fair Value -------- ---------- -------- ---------- (In thousands) Balance Sheet--Financial Instruments: Assets: Marketable securities $ 35,631 $ 35,631 Liabilities: Fixed rate long-term debt $115,637 $103,582 $120,068 $106,854
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. MARKETABLE SECURITIES The fair value of marketable securities was determined based on quoted market prices from various brokers. (See Note 4 for further discussion.) FIXED RATE LONG-TERM DEBT The fair value of fixed rate long-term debt was estimated by discounting future cash flows using rates estimated to be currently available for debt of similar terms and remaining maturities. HEDGING ACTIVITIES The Company purchases crude oil futures contracts and options to reduce price volatility and to fix margins in its refining and marketing operations. In addition, the Company uses forward grain purchase contracts and options to reduce price volatility on and to secure grain supplies for its ethanol production operations. These contracts permit settlement by delivery of commodities and, therefore, are not financial instruments, as defined by SFAS No. 105. The Company uses these contracts in its hedging activities. At December 31, 1995, the Company's hedging activities had futures contracts maturing in 1996 covering 85,000 barrels of crude oil and options had been purchased on 240,000 barrels of crude oil. At December 31, 1994, the Company's hedging activities had futures contracts maturing in 1995 covering 168,000 barrels of crude oil and grain purchase contracts for approximately 190,000,000 pounds of grain, equating to approximately 90% of grain demand through September 1995. In addition, options had been purchased on approximately 58,000,000 pounds of the contracted grain commitment. The crude oil futures contracts qualify as hedges and any gains or losses resulting from market changes will be offset by losses or gains on the Company's hedging contracts. The crude oil options provide the Company downside protection on a portion of crude oil barrels in inventory in excess of current operating needs. The grain purchase contracts were forward purchase contracts and had the effect of fixing the Company's grain cost. The grain options purchased would have allowed the Company to participate in the market if grain prices dropped significantly. These options expired unexercised in 1995. Gains and losses on hedging contracts are deferred and reported as a component of the related transaction. Net deferred gains for the Company's petroleum hedging activities were approximately $116,000 and $17,000 at December 31, 1995 and 1994, respectively. The Company is exposed to loss in the event of nonperformance by the other parties to these contracts. However, the Company does not anticipate nonperformance by the counterparties. NOTE 10--INCOME TAXES: The provision for income taxes is comprised of the following:
Year Ended December 31, ------------------------------- 1995 1994 1993 ------- ------- ------- (In thousands) Current: Federal $ 1,140 $ 3,283 $ 8,264 State 866 385 1,582 Deferred: Federal 1,438 (1,189) 5 State 194 129 (254) ------- ------- ------- $ 3,638 $ 2,608 $ 9,597 ======= ======= =======
Income taxes paid in 1995, 1994 and 1993 were $0, $5,379,000 and $6,672,000, 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, ------------------------------- 1995 1994 1993 ------- ------- ------- (In thousands) Income taxes at the statutory U.S. federal income tax rate $ 3,980 $ 3,522 $ 9,498 Increase (decrease) in taxes resulting from: State taxes, net 563 505 1,333 Statutory rate change related to deferred income taxes 461 General business credits, net (679) (910) (888) Federal tax credits from nonconventional fuel (700) (635) (752) Other, net 474 126 (55) ------- ------- ------- $ 3,638 $ 2,608 $ 9,597 ======= ======= =======
Deferred income taxes are provided to reflect temporary differences in the basis of net assets for income tax and financial reporting purposes. The tax effected temporary differences and credit carryforwards which comprise deferred taxes are as follows:
December 31, 1995 December 31, 1994 ------------------------------ ------------------------------- Assets Liabilities Total Assets Liabilities Total ------- ----------- -------- ------- ------------ -------- (In thousands) (In thousands) Nondeductible accruals for uncollectible receivables $ 168 $ 168 $ 217 $ 217 Insurance accruals 597 597 716 716 Insurance settlements 106 106 597 597 Other nondeductible accruals 130 130 382 382 Other reserves 616 616 Inventory costs capitalized for income tax purposes 137 137 323 323 Nondeductible writedown of marketable securities 255 255 Other 391 391 ------- -------- -------- ------- -------- -------- Total current 2,145 2,145 2,490 2,490 ------- -------- -------- ------- -------- -------- Other nondeductible accruals 349 349 528 528 Other reserves 638 638 Restricted stock awards $ (28) (28) $ (179) (179) Operating lease (1,003) (1,003) (1,061) (1,061) Accelerated depreciation (19,953) (19,953) (19,163) (19,163) Other 42 (979) (937) 128 (8) 120 Tax credit carryforwards 8,708 8,708 7,795 7,795 ------- -------- -------- ------- -------- -------- Total noncurrent 9,099 (21,963) (12,864) 9,089 (20,411) (11,322) ------- -------- -------- ------- -------- -------- Total $11,244 $(21,963) $(10,719) $11,579 $(20,411) $ (8,832) ======= ======== ======== ======= ======== ========
At December 31, 1995, the Company had a minimum tax credit carryforward of approximately $5,438,000 available to offset future income taxes payable to the extent regular income taxes payable exceeds alternative minimum taxes payable. Minimum tax credits can be carried forward indefinitely. At December 31, 1995, the Company also had approximately $3,270,000 of general business credits available to offset future regular taxes payable. Pursuant to Federal income tax law, these carryover credits must be used before any minimum tax credit carry- forward can be used. Of the total general business credit available, $885,000 will expire in 2008, $1,341,000 will expire in 2009, and $1,044,000 will expire in 2010. NOTE 11--EMPLOYEE STOCK OWNERSHIP PLAN: The Company and its subsidiaries have an Employee Stock Ownership Plan ("ESOP") which is a noncontributory defined contribution plan established primarily to acquire shares of the Company's common stock for the benefit of all eligible employees. The ESOP's assets included 1,435,965 and 1,534,878 shares of the Company's common stock at December 31, 1995 and 1994, respectively. At December 31, 1995, all shares had been allocated to the participants. At December 31, 1994, 1,460,322 shares had been allocated to the participants and 74,556 shares remained unallocated. Shares are allocated to participants when principal payments are made on the loan discussed below. Allocations to participant accounts are made on a formula based on the ratio that each participant's compensation, during the Plan year, bears to the compensation of all such participants. The Company treats all ESOP shares as outstanding for earnings per share purposes. The ESOP originally borrowed $6,500,000 from a bank and purchased shares of the Company's common stock from existing shareholders. The loan was purchased by the Company from the bank in 1993. In 1995, the $514,000 balance remaining on the loan obligation was paid by the ESOP. The loan obligation had an interest rate equal to 80% of the prime rate. The loan obligation was considered unearned employee benefit expense and, as such, recorded as a reduction of the Company's stockholders' equity. Both the loan obligation and the unearned benefit expense were reduced by the amount of any loan repayments made by the ESOP. Contributions to the ESOP are made at the discretion of the Board of Directors. The Company made contributions of $900,000, $900,000 and $889,000 to the ESOP for 1995, 1994 and 1993, respectively. NOTE 12--STOCK INCENTIVE PLAN: The Company established the 1989 Stock Incentive Plan under which 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. The Plan is administered by the Compensation Committee of the Board of Directors. The following summarizes stock option transactions under this plan:
Number of Option Options outstanding at Shares Prices - ---------------------- --------- ------ January 1, 1993 252,142 $5.25 to 10.63 Granted 113,500 7.75 Forfeited (57,085) 8.96 to 10.63 Exercised (3,700) 5.25 to 10.63 ------- December 31, 1993 304,857 5.25 to 10.63 Granted 10,000 9.25 to 10.38 Forfeited (2,000) 5.25 Exercised (500) 5.25 ------- December 31, 1994 312,357 5.25 to 10.63 Forfeited (5,000) 7.75 Exercised (1,000) 7.75 ------- December 31, 1995 306,357 $5.25 to 10.63 ======= Options exercisable at December 31: 1995 222,973 $5.25 to 10.63 1994 154,481 5.25 to 10.63 1993 85,503 5.25 to 10.63
In 1990, an additional 29,500 shares of restricted stock were granted under this plan of which 8,572 were forfeited in 1993 and 1,286 in 1994. At December 31, 1995, there were 168,801 shares available for future grants. Prior to adoption of the 1989 Stock Incentive Plan, the Company granted shares to employees under Restricted Stock Plans as follows: Shares --------- 1989 124,097* 1988 214,447** *Net of 21,045 shares forfeited. **Net of 33,746 shares forfeited. All of the options or restricted stock grants are subject to forfeiture with vesting ranging from 14% to 33% annually beginning one year after the date of grant for restricted stock and exercise dates of stock options. Compensation expense related to restricted stock grants is charged to earnings over the appropriate vesting period. All options were granted at fair market value at the date of grant and expire on the tenth anniversary of the grant date. NOTE 13--401(k) PLAN: In 1993, the Company adopted a 401(k) retirement plan for its employees. This plan complements the Company's Employee Stock Ownership Plan by allowing the employees to invest on a pre-tax basis in non-Giant stock investments thus diversifying their retirement portfolios. For the years ended December 31, 1995, 1994 and 1993, the Company had expensed $188,000, $189,000 and $109,000, respectively, for matching contributions under this plan. NOTE 14--INTEREST, OPERATING LEASES AND RENT EXPENSE: Interest paid and capitalized for 1995 was $11,833,000 and $190,000, for 1994 was $11,644,000 and $0, and for 1993 was $4,711,000 and $249,000, respectively. 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, 1995 as follows:
Land, building, machinery and equipment leases (In thousands) ------------------------- 1996 $ 516 1997 501 1998 470 1999 464 2000 415 Later years 58 ------ Total minimum payments required $2,424 ======
Total rent expense was $1,982,000, $1,890,000 and $1,584,000 for 1995, 1994 and 1993, respectively. NOTE 15--COMMITMENTS AND 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 December 31, 1995 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. In 1994, the Company established an environmental liability accrual for approximately $1,400,000 relating to ongoing environmental projects, including the remediation of a hydrocarbon plume at the Company's Farmington refinery. In late 1994, the Company accrued an additional $250,000 relating to hydrocarbon contamination on 5.5 acres the Company owns in Bloomfield, New Mexico. At December 31, 1995, the balance of the accrual was approximately $1,100,000, 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. It is the Company's understanding that these appeals will be held in abeyance pending further judicial clarification of the Tribe's taxing authority by means of litigation involving other companies. It is possible, however, that the Company's assessments will have to be litigated by the Company before final resolution. The Company may receive further tax assessments before judicial resolution of the Tribe's taxing authority. NOTE 16--QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
Year Ended December 31, 1995 -------------------------------------- Quarter -------------------------------------- First Second Third Fourth(1) ------- ------- ------- -------- (In thousands except per share data) Continuing Operations: Net revenues $69,562 $80,590 $78,400 $104,336 Cost of products sold 49,357 56,497 53,719 74,698 ------- ------- ------- -------- Gross margin 20,205 24,093 24,681 29,638 ------- ------- ------- -------- Operating expenses 12,115 12,255 13,120 14,366 Depreciation and amortization 3,056 3,307 2,986 3,996 Selling, general and administrative expenses 2,842 3,365 3,333 3,238 Net earnings 112 2,093 1,968 3,560 Net earnings per common share $ 0.01 $ 0.18 $ 0.17 $ 0.32 Discontinued Operations: Net earnings $ 35 $ 59 $ 10 $ 39 Net earnings per common share $ 0.01 (1) Fourth quarter 1995 includes the results of operations of the Bloomfield refinery which was acquired on October 4, 1995.
Year Ended December 31, 1994 -------------------------------------- Quarter -------------------------------------- First Second Third Fourth ------- ------- ------- -------- (In thousands except per share data) Continuing Operations: Net revenues $63,202 $73,831 $76,760 $ 77,830 Cost of products sold 41,195 47,554 53,940 52,800 ------- ------- ------- -------- Gross margin 22,007 26,277 22,820 25,030 ------- ------- ------- -------- Operating expenses 12,124 12,537 13,759 13,403 Depreciation and amortization 3,028 3,103 3,047 3,068 Selling, general and administrative expenses 2,209 3,545 3,124 3,052 Net earnings 1,667 3,112 287 2,389 Net earnings per common share $ 0.14 $ 0.25 $ 0.02 $ 0.20 Discontinued Operations: Net earnings (loss) $ (255) $ (155) $(2,540) $ 16 Net loss per common share $ (0.02) $ (0.01) $ (0.21)
NOTE 17--SUPPLEMENTARY FINANCIAL INFORMATION FOR OIL AND GAS PRODUCING ACTIVITIES (UNAUDITED): The following is historical information relating to the Company's oil and gas business which has been recorded as a discontinued operation. Excluded from amounts subject to amortization as of December 31, 1995 and 1994 are $1,004,000 and $1,551,000, respectively, of costs associated with unevaluated properties. COSTS EXCLUDED FROM AMORTIZATION
Year Costs Incurred Excluded ----------------------------- Costs at Prior December 31, Years 1993 1994 1995 1995 ----- ---- ---- ---- ------------ (In thousands) Property acquisition $336 $327 $357 $(16) $1,004 ==== ==== ==== ===== ======
CAPITALIZED COSTS The Company's net investment in oil and gas properties was as follows:
December 31, ------------------- 1995 1994 ------- ------- (In thousands) Capitalized costs: Proved properties $90,256 $78,388 Unproved properties 1,004 1,551 ------- ------- 91,260 79,939 Less accumulated depreciation, depletion and amortization 59,910 56,919 ------- ------- Net capitalized costs $31,350 $23,020 ======= =======
During 1994, the Company recognized a non-cash writedown of its oil and gas properties of $3,395,000 for the excess of net capitalized costs over the estimated present value of net future cash inflows. This writedown was recorded as an increase to accumulated depreciation, depletion and amortization. COSTS INCURRED Costs incurred (exclusive of general support facilities) in oil and gas exploration activities (all in the United States) were as follows:
Year Ended December 31, ------------------------------- 1995 1994 1993 ------- ------ ------ (In thousands) Property acquisition costs: Proved properties $ 5,192 $ 326 $ 87 Unproved properties (16) 357 327 ------- ------ ------ Subtotal 5,176 683 414 Development costs 6,095 2,759 3,211 Exploration costs 251 123 290 ------- ------ ------ Total $11,522 $3,565 $3,915 ======= ====== ======
ESTIMATED QUANTITIES (ALL IN THE UNITED STATES) OF PROVED OIL AND GAS RESERVES Proved reserves are estimated quantities of crude oil, natural gas and natural gas liquids which geological and engineering data demonstrate with reasonable certainty to be recoverable in future years from known reservoirs under existing economic and operating conditions. Proved developed reserves are those which are expected to be recovered through existing wells with existing equipment and operating methods. The Company's reserves are located primarily in the southwestern United States. The following schedules set forth the Company's net proved and proved developed oil and gas reserves, as determined by independent consultants, along with a summary of the changes in the quantities of net proved reserves:
Oil Gas (Thousands (Millions of barrels) of cubic feet) ------------ -------------- Proved Reserves: At January 1, 1993 3,285 15,943 Revisions of previous estimates (1,036) (2,748) Extension, discoveries and other additions 234 1,284 Production (287) (1,481) ------ ------ At December 31, 1993 2,196 12,998 ------ ------ Revisions of previous estimates 151 (187) Extension, discoveries and other additions 135 404 Production (267) (1,355) ------ ------ At December 31, 1994 2,215 11,860 ------ ------ Revisions of previous estimates (44) 3,018 Extension, discoveries and other additions 1,254 1,315 Purchase of minerals in place 1,936 658 Production (401) (1,587) ------ ------ At December 31, 1995 4,960 15,264 ====== ======
Downward revisions in prior years were due to unsuccessful drilling efforts, reduced well economic productivity and limitations in drilling for the replacement of reserves. Current year upward revisions are due to recompletions, workovers and improved well performance. In 1992, the Company sold a volume of reserves equal to approximately 50% of its then working interest in certain proved developed natural gas reserves along with a portion of the associated gathering system. The purchase and sale agreement associated with that transaction contains a provision whereby the ownership interest in the subject reserves is adjusted annually at December 31, 1993 through 1996, based on year end reserve reports, so that the buyer receives a cumulative working interest estimated for the life of the reserves equal to the reserve volume purchased. In 1995 and 1994, there were positive gas revisions of 279 and 1,018 million cubic feet, respectively. In 1993, there was a negative gas revision of approximately 1,159 million cubic feet.
Oil Gas (Thousands (Millions of barrels) of cubic feet) ------------ -------------- Proved developed reserves included in above: At December 31, 1993 1,855 8,225 At December 31, 1994 1,884 9,269 At December 31, 1995 3,919 12,618
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL AND GAS RESERVES The Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves ("Standardized Measure") is a disclosure requirement under SFAS No. 69. The Standardized Measure does not purport to present the fair market value of a company's proved oil and gas reserves. This would require consideration of expected future economic and operating conditions, which are not taken into account in calculating the Standardized Measure. Under the Standardized Measure, future cash inflows were estimated by applying year end prices, adjusted for fixed and determinable escalations, to the estimated future production of year end proved reserves. Prices tend to be volatile and have increased slightly for natural gas and decreased somewhat for crude oil since year end. Future cash inflows were reduced by estimated future production and development costs to determine pre-tax cash inflows. Future income taxes were computed by applying the statutory tax rate to the excess of pre-tax cash inflows over the Company's tax basis in the associated proved oil and gas properties. Tax credits, including the federal coal seam gas credit, and permanent differences were also considered in the future income tax calculation. Future net cash inflows after income taxes were discounted using a 10% annual discount rate to arrive at the Standardized Measure. Set forth below is the Standardized Measure relating to proved oil and gas reserves:
Year Ended December 31, -------------------------------- 1995 1994 1993 -------- -------- -------- (In thousands) Future cash inflows $108,301 $ 54,061 $ 56,958 Future production and development costs (59,130) (24,515) (23,722) -------- -------- -------- Future net cash flows before income taxes 49,171 29,546 33,236 10% annual discount for estimated timing of cash flows (19,591) (10,588) (12,589) -------- -------- -------- Discounted future net cash flows before income taxes 29,580 18,958 20,647 Income taxes (discounted) (3,412) (915) -------- -------- -------- Standardized measure of discounted future net cash flows $ 26,168 $ 18,958 $ 19,732 ======== ======== ========
Changes in the Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves for 1995, 1994 and 1993:
Year Ended December 31, ------------------------------ 1995 1994 1993 -------- -------- -------- (In thousands) Sales of oil and gas produced, net of production costs $(5,459) $(3,416) $ (4,496) Net changes in prices and production costs relating to future production (2,889) (4,368) (10,758) Extensions, discoveries and improved recovery 6,691 970 2,331 Development costs incurred during the period 6,095 2,759 3,211 Changes in estimated future development costs (5,196) 133 (2,459) Revisions in previous quantity estimates 2,063 644 (10,031) Net changes due to purchases of minerals in place 9,188 Accretion of discount 1,896 1,973 3,194 Net changes in income taxes (3,412) 915 4,797 Other (1,767) (384) 2,006 ------- ------- -------- Net increase (decrease) 7,210 (774) (12,205) Beginning of year 18,958 19,732 31,937 ------- ------- -------- End of year $26,168 $18,958 $ 19,732 ======= ======= ========
Results of operations for exploration and production activities (all in the United States):
Year Ended December 31, ------------------------------- 1995 1994 1993 -------- -------- -------- (In thousands) Revenues $ 8,363 $ 5,959 $ 7,409 Production costs and other expenses (4,791) (4,055) (4,776) Reduction of carrying value of crude oil and natural gas properties (3,395) (15,511) Depreciation, depletion and amortization (3,275) (2,794) (4,222) ------- ------- -------- 297 (4,285) (17,100) Income tax (expense) benefit (154) 1,351 5,825 ------- ------- -------- Results of operations for producing activities (excluding corporate overhead and interest expense) $ 143 $(2,934) $(11,275) ======= ======= ========
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. PART III Certain information required by Part III is omitted from this Report by virtue of the fact that the Registrant will file with the Securities and Exchange Commission a definitive proxy statement relating to the Company's Annual Meeting of Stockholders to be held May 16, 1996 pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this Report, and certain information to be included therein is incorporated herein by reference. The Company expects to disseminate the Proxy Statement to stockholders on or about March 29, 1996. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning the Company's directors required by this Item is incorporated by reference to the information contained in the Proxy Statement under the caption "Election of Directors." The information concerning the Company's executive officers required by this Item is incorporated by reference to the section in Part I, Item 4 hereof entitled "Executive Officers of the Registrant." The information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference to the information contained in the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 11. EXECUTIVE COMPENSATION The information required by this Item is incorporated by reference to the information contained in the Proxy Statement under the captions "Election of Directors," "Executive Compensation," "Compensation Committee Report on Executive Compensation" and "Compensation Committee Interlocks and Insider Participation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item is incorporated by reference to the information contained in the Proxy Statement under the captions "Election of Directors" and "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item is incorporated by reference to the information contained in the Proxy Statement under the captions "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a)(1) The following financial statements are included in Item 8: (i) Independent Auditors' Report (ii) Consolidated Balance Sheets - December 31, 1995 and 1994 (iii) Consolidated Statements of Earnings - Years ended December 31, 1995, 1994 and 1993 (iv) Consolidated Statements of Stockholders' Equity - Years ended December 31, 1995, 1994 and 1993 (v) Consolidated Statements of Cash Flows - Years ended December 31, 1995, 1994 and 1993 (vi) Notes to Consolidated Financial Statements (2) Financial Statement Schedule. The following financial statement schedule of Giant Industries, Inc. for the years ended December 31, 1995, 1994 and 1993 is filed as part of this Report and should be read in conjunction with the Consolidated Financial Statements of Giant Industries, Inc. Independent Auditors' Report on Schedule . . . . . S-1 Schedule II - Valuation and Qualifying Accounts . . S-2 Schedules not listed above have been omitted because they are not applicable or are not required or because the information required to be set forth therein is included in the Consolidated Financial Statements or Notes thereto. (3) Exhibits. The Exhibits listed on the accompanying Index to Exhibits immediately following the financial statement schedule are filed as part of, or incorporated by reference into, this Report. Contracts with management and any compensatory plans or arrangements relating to management are as follows: Exhibit No. Description - ------- ----------- 10.1 1989 Stock Incentive Plan of the Registrant. Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-10398. 10.3 ESOP Substitute Excess Deferred Compensation Benefit Plan. Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File No. 1-10398. 10.6 Amended 1988 Restricted Stock Plan of Registrant. Incorporated by reference to Exhibit 10.3 to Form S-1. 10.7 1989 Stock Option Plan of Registrant. Incorporated by reference to Exhibit 10.4 to Form S-1. 10.30 Employment Agreement, dated as of November 16, 1989, between James E. Acridge and the Company. Incorporated by reference to Exhibit 10.52 to Amendment No. 2. 10.31 Employment Agreement, dated as of November 16, 1989, between Fredric L. Holliger and the Company. Incorporated by reference to Exhibit 10.53 to Amendment No. 2. 10.32 Employment Agreement, dated as of August 1, 1990 between Morgan Gust and the Company. Incorporated by reference to Exhibit 10.64 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.35 Giant Industries, Inc. and Affiliated Companies 401(k) Plan. Incorporated by reference to Exhibit 10.46 to Amendment No. 2 to the Form S-3 Registration Statement under the Securities Act of 1933 as filed November 12, 1993, File No. 33-69252. _________________________________ Form S-1--Refers to the Form S-1 Registration Statement under the Securities Act of 1933 as filed October 16, 1989, File No. 33-31584. Amendment No. 2--Refers to the Amendment No. 2 to Form S-1 Registration Statement under the Securities Act of 1933 as filed November 20, 1989, File No. 33-31584. (b) Reports on Form 8-K. Report on Form 8-K dated October 18, 1995, with respect to the Company's acquisition of the Bloomfield refinery, including for Bloomfield Refining Company unaudited financial statements as of June 30, 1995 and audited financial statements for the three years ended December 31, 1994, and for the Company an unaudited pro forma combined condensed balance sheet as of June 30, 1995, and unaudited pro forma combined condensed statements of earnings for the six months ended June 30, 1995 and for the year ended December 31, 1994. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. GIANT INDUSTRIES, INC. By: / s / James E. Acridge ------------------------------ James E. Acridge Chairman of the Board, President and Chief Executive Officer March 28, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ James E. Acridge - --------------------------------------- James E. Acridge, Chairman of the Board, President, Chief Executive Officer and Director March 28, 1996 /s/ A. Wayne Davenport - --------------------------------------- A. Wayne Davenport Vice President and Chief Financial Officer (Principal Financial Officer and Prinicipal Accounting Officer) March 28, 1996 /s/ Fredric L. Holliger - --------------------------------------- Fredric L. Holliger, Executive Vice President, Chief Operating Officer and Director. March 28, 1996 /s/ F. Michael Geddes - --------------------------------------- F. Michael Geddes, Director March 28, 1996 /s/ George C. Hixon - --------------------------------------- George C. Hixon, Director March 28, 1996 /s/ Harry S. Howard, Jr. - --------------------------------------- Harry S. Howard, Jr., Director March 28, 1996 /s/ Richard T. Kalen, Jr. - --------------------------------------- Richard T. Kalen, Jr., Director March 28, 1996 INDEPENDENT AUDITORS' REPORT Board of Directors and Stockholders Giant Industries, Inc. Scottsdale, Arizona We have audited the consolidated financial statements of Giant Industries, Inc. and subsidiaries (the "Company") as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and have issued our report thereon dated March 4, 1996; such report is included elsewhere in this Form 10-K. Our audits also included the financial statement schedule of the Company listed in Item 14. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. DELOITTE & TOUCHE LLP Phoenix, Arizona March 4, 1996 S-1 SCHEDULE II GIANT INDUSTRIES, INC. AND SUBSIDIARIES Valuation and Qualifying Accounts Three years ended December 31, 1995 (In thousands)
Charged Balance at (credited) Balance beginning to costs at end of period and expenses Deduction(b) of period ---------- ------------ --------- --------- Year ended December 31, 1995: Allowance for doubtful accounts $546 $(82)(a) $ (40) $424 ==== ==== ===== ==== Year ended December 31, 1994: Allowance for doubtful accounts $429 $167 $ (50) $546 ==== ==== ===== ==== Year ended December 31, 1993: Allowance for doubtful accounts $415 $133 $(119) $429 ==== ==== ===== ==== (a)Includes an adjustment of $162,000 credited to costs and expenses to revise the Company's estimated Allowance for Doubtful Accounts. (b)Deductions are specific trade accounts determined to be uncollectible. S-2 /TABLE GIANT INDUSTRIES, INC. ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1995 INDEX TO EXHIBITS Definitions: Form S-1--Refers to the Form S-1 Registration Statement under the Securities Act of 1933 as filed October 16, 1989, File No. 33-31584. Amendment No. 1--Refers to the Amendment No. 1 to Form S-1 Registration Statement under the Securities Act of 1933 as filed October 27, 1989, File No. 33-31584. Amendment No. 2--Refers to the Amendment No. 2 to Form S-1 Registration Statement under the Securities Act of 1933 as filed November 20, 1989, File No. 33-31584. Amendment No. 3--Refers to the Amendment No. 3 to Form S-1 Registration Statement under the Securities Act of 1933 as filed December 12, 1989, File No. 33-31584. Form S-3--Refers to the Form S-3 Registration Statement under the Securities Act of 1933 as filed September 22, 1993, File No. 33-69252. Exhibit No. Description - ----------- ----------- 2.1* Purchase and Sale Agreement, dated August 8, 1995, among Bloomfield Refining Company and Gary-Williams Energy Corporation, as Sellers, and Giant Industries Arizona, Inc., as Buyer. Incorporated by reference to Exhibit 2.1 to the Company's Report on Form 8-K for the period October 4, 1995, File No. 1-10398. 2.2 First Amendment, dated September 29, 1995, to Purchase and Sale Agreement, dated August 8, 1995, among Bloomfield Refining Company and Gary-Williams Energy Corporation, as Sellers, and Giant Industries Arizona, Inc. as Buyer. Incorporated by reference to Exhibit 2.2 to the Company's Report on Form 8-K for the period October 4, 1995, File No. 1-10398. 2.3 Second Amendment, dated October 2, 1995, to Purchase and Sale Agreement, dated August 8, 1995, among Bloomfield Refining Company and Gary-Williams Energy Corporation, as Sellers, and Giant Industries Arizona, Inc. as Buyer. Incorporated by reference to Exhibit 2.3 to the Company's Report on Form 8-K for the period October 4, 1995, File No. 1-10398. 3.1 Restated Certificate of Incorporation of the Giant Industries, Inc., a Delaware corporation (the "Company"). Incorporated by reference to Exhibit 3.1 to Amendment No. 3. 3.2 Bylaws of the Company, as amended. Incorporated by reference to Exhibit 3.2 to Amendment No. 3. 3.3 Articles of Incorporation of Giant Exploration & Production Company, a Texas corporation ("Giant Exploration"), formerly Hixon Acquisition Corp. Incorporated by reference to Exhibit 2.1, Annex III to Form S-1. 3.4 Bylaws of Giant Exploration. Incorporated by reference to Exhibit 2.1, Annex IV to Form S-1. 3.5 Articles of Incorporation of Giant Industries Arizona, Inc., an Arizona corporation ("Giant Arizona") formerly Giant Acquisition Corp. Incorporated by reference to Exhibit 2.1, Annex V to Form S-1. 3.6 Bylaws of Giant Arizona. Incorporated by reference to Exhibit 2.1, Annex VI to Form S-1. 3.7 Articles of Incorporation of Ciniza Production Company. Incorporated by reference to Exhibit 3.7 to Form S-3. 3.8 Bylaws of Ciniza Production Company. Incorporated by reference to Exhibit 3.8 to Form S-3. 3.9 Articles of Incorporation of Giant Stop-N-Go of New Mexico, Inc. Incorporated by reference to Exhibit 3.9 to Form S-3. 3.10 Bylaws of Giant Stop-N-Go of New Mexico, Inc. Incorporated by reference to Exhibit 3.10 to Form S-3. 3.11 Articles of Incorporation of Giant Four Corners, Inc. Incorporated by reference to Exhibit 3.11 to Form S-3. 3.12 Bylaws of Giant Four Corners, Inc. Incorporated by reference to Exhibit 3.12 to Form S-3. 3.13 Articles of Incorporation of Giant Mid-Continent, Inc. Incorporated by reference to Exhibit 3.13 to the Company's Report on Form 10-K for fiscal year ended December 31, 1994, File No. 1-10398. 3.14 Bylaws of Giant Mid-Continent, Inc. Incorporated by reference to Exhibit 3.14 to the Company's Report on Form 10-K for fiscal year ended December 31, 1994, File No. 1-10398. 3.15** Articles of Incorporation of San Juan Refining Company. 3.16** Bylaws of San Juan Refining Company. 4.1 Amended and Restated Note Agreement, dated as of September 30, 1993, among the Prudential Insurance Company of America ("Prudential"), Pruco Life Insurance Company ("Pruco"), the Company and Giant Arizona, relating to $20,000,000 of 10.91% Senior Notes due March 31, 1999. Incorporated by reference to Exhibit 4.13 to Amendment No. 2 to the Form S-3 Registration Statement under the Securities Act of 1933 as filed November 12, 1993, File No. 33-69252. 4.2 Letter Amendment No. 1, dated December 31, 1994, to Amended and Restated Note Agreement, dated September 30, 1993, among Prudential, Pruco, the Company and Giant Arizona. Incorporated by reference to Exhibit 4.2 to the Company's Report on Form 10-K for fiscal year ended December 31, 1994, File No. 1-10398. 4.3 Letter Amendment No. 2, dated May 9, 1995, to Amended and Restated Note Agreement, dated September 30, 1993, among Prudential, Pruco, the Company and Giant Arizona. Incorporated by reference to Exhibit 4 to the Company's Report on Form 10-Q for the quarter ended September 30, 1995, File No. 1-10398. 4.4 Indenture, dated as of November 29, 1993 among the Company, as Issuer, the Subsidiary Guarantors, as guarantors, and NBD Bank, National Association, as Trustee, relating to $100,000,000 of 9 3/4% Senior Subordinated Notes due 2003. Incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated November 29, 1993, File No. 1-10398. 4.5 Credit Agreement, dated October 4, 1995, among Giant Industries, Inc., as Borrower, Giant Industries Arizona, Inc., Ciniza Production Company, San Juan Refining Company, Giant Exploration & Production Company and Giant Four Corners, Inc., as Guarantors and Bank of America National Trust and Savings Association, as Agent, Bank of America Illinois, as a Bank and as Letter of Credit Issuing Bank and the Other Financial Institutions Parties hereto. Incorporated by reference to Exhibit 4.1 to the Company's Report on Form 8-K for the period October 4, 1995, File No. 1-10398. 10.1 1989 Stock Incentive Plan of the Company. Incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1989, File No. 1-10398. 10.2 Employee Stock Ownership Plan and Trust Agreement of the Company, as amended. Incorporated by reference to Exhibit 10.1 of the Company's Report on Form 10-Q for the quarter ended September 30, 1994, File No. 1-10398. 10.3 ESOP Substitute Excess Deferred Compensation Benefit Plan. Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File 1-10398. 10.4 Loan Agreement, dated December 20, 1991, between NBD Bank, National Association and Continental Bank, N.A. as trustee under the Employee Stock Ownership Plan and Trust Agreement of the Company. Incorporated by reference to Exhibit 10.7 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1991, File No. 1-10398. 10.5 Term Note for $2,896,831.80, dated December 20, 1991, between NBD Bank, National Association and the Employee Stock Ownership Plan and Trust Agreement of the Company. Incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for fiscal year ended December 31, 1991, File No. 1-10398. 10.6 Amended 1988 Restricted Stock Plan of the Company. Incorporated by reference to Exhibit 10.3 Form S-1. 10.7 1989 Stock Option Plan of the Company. Incorporated by reference to Exhibit 10.4 to Form S-1. 10.8 Form of Assignment of Oil & Gas and Mineral Leases between Mtrust Corp., N.A., Alexander P. Hixon and George C. Hixon, Trustees of the Elizabeth F. Hixon Trust, and Hixon Development Company. Incorporated by reference to Exhibit 10.12 to Form S-1. 10.9 Form of Assignment of Overriding Royalty Interest between Mtrust Corp., N.A., Alexander P. Hixon and George C. Hixon, Trustees of the Elizabeth F. Hixon Trust, and Hixon Development Company. Incorporated by reference to Exhibit 10.13 to Form S-1. 10.10 Purchase Agreement, dated November 29, 1990, between Giant Arizona and Prime Pinnacle Peak Properties Limited Partnership. Incorporated by reference to Exhibit 10.16 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.11 Escrow Instructions, dated January 7, 1991, between Prime Pinnacle Peak Properties Limited Partnership and Giant Arizona. Incorporated by reference to Exhibit 10.17 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.12 Agreement for Leasing of Service Station Site, dated March 1, 1991, between Giant Arizona and Prime Pinnacle Peak Properties Limited Partnership. Incorporated by reference to Exhibit 10.18 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.13 First Amendment to Agreement for Leasing of Service Station Site, dated March 1, 1991, between Giant Arizona and Prime Pinnacle Peak Properties Limited Partnership. Incorporated by reference to Exhibit 10.18 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992, File 1-10398. 10.14 Purchase and Sale Agreement, dated as of May 7, 1991, between New Bank of New England N.A., Den Norske Bank, Kansallis--Osake--Pankki--and Portales Energy Company, Inc. and the Company. Incorporated by reference to Exhibit 10.4 to the Company's Report on Form 10-Q for the quarter ended June 30, 1991, File No. 1-10398. 10.15 Aircraft Lease Purchase Agreement, dated as of June 21, 1991, between Metlife Capital Corporation and the Company. Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1991, File No. 1-10398. 10.16 Promissory Note for $600,000, dated December 1, 1988, from JEA to Metlife Capital Corporation ("Metlife"). Incorporated by reference to Exhibit 10.38 to Form S-1. 10.17 Promissory Note for $825,000, dated December 20, 1988, from JEA to Metlife. Incorporated by reference to Exhibit 10.39 to Form S-1. 10.18 Promissory Note for $750,000, dated December 28, 1987, from JEA to Metlife. Incorporated by reference to Exhibit 10.40 to Form S-1. 10.19 Promissory Note for $825,000, dated June 28, 1988, from JEA to Metlife. Incorporated by reference to Exhibit 10.41 to Form S-1. 10.20 Promissory Note for $900,000, dated August 31, 1988, from JEA to Metlife. Incorporated by reference to Exhibit 10.42 to Form S-1. 10.21 Promissory Note for $1,125,000, dated April 21, 1989, from JEA to Metlife. Incorporated by reference to Exhibit 10.43 to Form S-1. 10.22 Promissory Note for $1,087,500, dated December 30, 1988, from JEA to Metlife. Incorporated by reference to Exhibit 10.44 to Form S-1. 10.23 Promissory Note for $1,082,900, dated December 30, 1988, from JEA to Metlife. Incorporated by reference to Exhibit 10.45 to Form S-1. 10.24* Sales Agreement, dated June 6, 1989, between Giant Arizona and Mobil Oil Corporation. Incorporated by reference to Exhibit 10.47 to Amendment No. 2. 10.25* Amendment, dated April 20, 1990, to Sales Agreement, dated June 6, 1989, between Giant Arizona and Mobil Oil Corporation. Incorporated by reference to Exhibit 10.51 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.26* Sales Agreement, dated February 10, 1989, between Giant Arizona and Conoco Inc. Incorporated by reference to Exhibit 10.48 to Amendment No. 2. 10.27* Crude Oil and Condensate Sales and Purchase Agreement, dated August 1, 1994, between Meridian Oil Trading Inc. (Seller) and Giant Refining Company, a division of Giant Industries Arizona, Inc. (Buyer). Incorporated by reference to Exhibit 10.27 to the Company's Report on Form 10-K for fiscal year ended December 31, 1994, File No. 1-10398. 10.28* Natural Gas Liquids Sales and Purchase Agreement, dated October 27, 1994, between Meridian Oil Hydrocarbons Inc. and Giant Refining Company, a division of Giant Industries Arizona, Inc. Incorporated by reference to Exhibit 10.28 to the Company's Report on Form 10-K for fiscal year ended December 31, 1994, File No. 1-10398. 10.29* Natural Gasoline Purchase and Sale Agreement, dated September 1, 1990, between Sunterra Gas Processing Company and Giant Arizona. Incorporated by reference to Exhibit 10.57 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.30 Employment Agreement, dated as of November 16, 1989, between James E. Acridge and the Company. Incorporated by reference to Exhibit 10.52 to Amendment No. 2. 10.31 Employment Agreement, dated as of November 16, 1989, between Fredric L. Holliger and the Company. Incorporated by reference to Exhibit 10.53 to Amendment No. 2. 10.32 Employment Agreement, dated as of August 1, 1990 between Morgan Gust and the Company. Incorporated by reference to Exhibit 10.64 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.33 Consulting Agreement, dated January 1, 1990, between the Company and Kalen and Associates. Incorporated by reference to Exhibit 10.66 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 10.34 Consulting Agreement, dated March 12, 1992, between the Company and Geddes and Company. Incorporated by reference to Exhibit 10.1 to the Company's Report on Form 10-Q for the quarter ended June 30, 1992, File No. 1-10398. 10.35 Giant Industries, Inc. and Affiliated Companies 401(k) Plan. Incorporated by reference to Exhibit 10.46 to Amendment No. 2 to the Form S-3 Registration Statement under the Securities Act of 1933 as filed November 12, 1993, File No. 33-69252. 11.1** Statement regarding computation of earnings per share. 18.1 Letter regarding change in accounting principles. Incorporated by reference to Exhibit 18.1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1990, File No. 1-10398. 21.1** Subsidiaries of the Company. 23.1** Consent of Malkewicz Hueni Associates, Inc. 23.2** Consent of LaRoche, Swindell & Associates. 23.3** Consent of Deloitte & Touche LLP to incorporate reports in previously filed Registration Statement. 27 ** Financial Data Schedule. 99.1** Information required by Rule 15d-21 under the Securities Act of 1934 for the year ended December 31, 1995 for the Giant Industries, Inc. and Affiliated Companies Employee Stock Ownership Plan. *Certain information contained in these documents has been afforded confidential treatment. **Filed herewith. EX-3.15 2 EXHIBIT 3.15 ARTICLES OF INCORPORATION OF SAN JUAN REFINING COMPANY The undersigned, acting as incorporator of a corporation under the New Mexico Business Corporation Act, adopts the following Articles of Incorporation for the corporation: ARTICLE I NAME The name of the corporation is SAN JUAN REFINING COMPANY. ARTICLE II PURPOSE The purposes for which the corporation is organized are: to own and operate properties and businesses engaged in buying, refining, selling, marketing, distributing and transporting petroleum products and other goods and services and to transact any lawful business for which corporations may be incorporated under the New Mexico Business Corporation Act. ARTICLE III DURATION The period of the duration of the corporation shall be perpetual, unless dissolved according to law. ARTICLE IV STOCK The aggregate number of authorized shares which the corporation shall have authority to issue is 500,000 shares of common, no par value per share. ARTICLE V REGISTERED OFFICE AND AGENT Its initial registered office address is 325 Paseo de Peralta, Santa Fe, New Mexico 87501, and its initial registered agent at that address is Montgomery & Andrews, Professional Association. ARTICLE VI INITIAL BOARD OF DIRECTORS The business of the Corporation shall be managed by a Board of Directors consisting of not fewer than one (1) person, the exact number to be determined from time to time by the Board of Directors. The Directors shall have the power to adopt, amend and rescind the ByLaws of the Corporation which shall govern the regulation of the internal affairs of the Corporation. The names and street addresses of the members of the initial Board of Directors of the Corporation, who shall hold office until the initial meeting of the shareholders, and thereafter until their successors are elected and qualified are as follows: NAME ADDRESS James E. Acridge 4939 E. Horseshoe Road Chairman of the Board Paradise Valley, AZ 85253 Morgan M. Gust 4636 N. Dromedary Phoenix, AZ 85377 Fredric L. Holliger 10422 E. Windrose Drive Scottsdale, AZ 85259 ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS The corporation shall indemnify its directors and officers to the fullest extent permitted by New Mexico law. ARTICLE VIII LIMITATION OF LIABILITY OF DIRECTORS In accordance with N.M.S.A. 1978, S.S. 53-12-2 (E) (Cum. Supp. 1993), a director shall not be personally liable to the corporation or its shareholders for monetary damages for breach of fiduciary duty as a director unless: 1. The director has breached or failed to perform the duties of the director's office in compliance with subsection (B) of Section 53-11-35 N.M.S.A. 1978; 2. The breach or failure to perform constitutes: a. negligence, willful misconduct or recklessness in the case of a director who has either an ownership interest in the corporation or receives in his capacity as a director or as an employee of the corporation compensation of more than Two Thousand Dollars ($2,000.00) from the corporation in any calendar year; or b. willful misconduct or recklessness in the case of a director who does not have an ownership interest in the corporation and does not receive in his capacity as director or as an employee of the corporation compensation of more than Two Thousand Dollars ($2,000.00) from the corporation in any calendar year. The foregoing provision shall only eliminate the liability of a director for action taken as a director or any failure to take action as a director at meetings of the board of directors or of a committee of the board of directors, or by virtue of action of the directors without a meeting pursuant to Section 53-11-43 N.M.S.A. 1978, on or after the date when such provision in the Articles of Incorporation becomes effective. ARTICLE IX INCORPORATION The name and address of the incorporator is as follows: NAME ADDRESS Gary Kilpatric 325 Paseo de Peralta Santa Fe, New Mexico 87501 DATED: 9/15/1995 /s/ GARY KILPATRIC ------------------------------ Gary Kilpatric 325 Paseo de Peralta Santa Fe, New Mexico 87501 AFFIDAVIT OF ACCEPTANCE OF APPOINTMENT BY DESIGNATED INITIAL REGISTERED AGENT TO: THE STATE CORPORATION COMMISSION STATE OF NEW MEXICO STATE OF NEW MEXICO ) ) ss. COUNTY OF SANTA FE ) On this 15th day of September, 1995, before me, a Notary Public in and for the State and County aforesaid, personally appeared Gary Kilpatric, Vice-President/Treasurer of Montgomery & Andrews, Professional Association, who is known to be the person and who, being by me duly sworn, acknowledged to me that he does hereby acknowledge that corporation's acceptance of the appointment as the initial Registered Agent of the corporation which is named in the foregoing Articles of Incorporation, and which is applying for a Certificate of Incorporation. MONTGOMERY & ANDREWS Professional Association By /s/ GARY KILPATRIC ------------------------------- Gary Kilpatric Its Vice-President/Treasurer Acknowledged, subscribed and sworn before me on the day, month and year first set forth above. --------------------------------- Notary Public My commission expires: 11/22/95 - --------------------- EX-3.16 3 EXHIBIT 3.16 BYLAWS OF SAN JUAN REFINING COMPANY I. SHAREHOLDERS A. MEETINGS: The Annual Meeting of Shareholders will be held in the month of May at the time and place fixed by the Board. Special Meetings of Shareholders may be called by the President, the Board, or the holders of one-tenth of the shares entitled to vote at the meeting, and will be held at the time and place fixed by the person calling the Special Meeting. If the place of meeting is not fixed, the meeting will be held at the registered office of the Corporation. B. NOTICE: Written Notice stating the time, place, and, if a Special Meeting, the purpose, will be delivered not less than ten nor more than fifty days before the meeting date either personally or by mail at the direction of the President, the Secretary, or the persons calling the meeting, to each Shareholder of record entitled to vote at the meeting. If mailed, a Notice is deemed delivered when deposited postage prepaid in the United States mail addressed to the Shareholder at the address shown by the Corporation transfer books. C. QUORUM - VOTING: A majority of the shares entitled to vote represented in person or by proxy will constitute a quorum at a meeting of Shareholders. A quorum once attained continues until adjournment despite voluntary withdrawal of enough shares to leave less than a quorum. If a quorum is present, the affirmative vote of the majority of the shares represented at the meeting and entitled to vote on the subject matter will be the act of the Shareholders unless the vote of a greater number or class voting is required by the Business Corporation Act. II. DIRECTORS A. NUMBER, TENURE, QUALIFICATION, ELECTION: The Board will consist of not less than three (3) nor more than five (5) Directors who will be elected annually by the Shareholders at their Annual Meeting to serve until their successors have been elected and qualified. A Director need not be a Shareholder or a New Mexico resident. A Director may be removed with or without cause by the Shareholders, or may resign. Vacancies may be filled by a majority of the remaining Directors though less than a quorum. Newly created directorships may be filled by the Directors for a term of office continuing only until the next election of Directors by the Shareholders. B. MEETINGS: An Annual Meeting of the Board will be held without notice immediately following the Shareholders' Annual Meeting. Special Meetings of the Board may be called by any Director or Officer, and will be held at the time and place fixed by the person calling the Special Meeting. Written Notice stating the time, place and purpose of the Special Meeting will be delivered either personally, by mail, or by telegram at the direction of the person calling the meeting, to each Director at least 24 hours before the Special Meeting time. If mailed or telegraphed, a Notice is deemed delivered when deposited, postage or charges prepaid, with the transmitting agency, addressed to the Director. C. QUORUM - ACTION: A majority of the number of Directors then in office will constitute a quorum at Board Meetings. A quorum once attained continues until adjournment despite voluntary withdrawal of enough Directors to leave less than a quorum. The act of a majority of Directors present at a meeting at which a quorum is present will be the act of the Board. The Directors will manage the business and affairs of the Corporation, and may act only as a Board with each Director having one vote. D. COMMITTEES: The Board of Directors, by resolution adopted by a majority of the full Board, may designate from among its members one or more committees each of which shall have and may exercise all the authority of the Board to the extent provided by law. III. OFFICERS A. NUMBER, TENURE, QUALIFICATION AND ELECTION: The officers of the Corporation will be a President/Chief Executive Officer; Executive Vice President/Chief Operating Officer; Vice President/Chief Financial Officer; Vice President and General Counsel, Vice President Administration and Secretary; and, Vice President Finance, Treasurer and Assistant Secretary, and such other officers as the Board may decide, who will be elected annually by the Board at its Annual Meeting to serve until their successors are elected and qualified. Officers need not be Shareholders, or Directors, or New Mexico residents. An officer may be removed with or without cause by the Board, or may resign. Vacancies and newly created offices will be filled by the Board. One person may hold more than one office, but no person may be both President and Secretary. Officers will perform the duties, and will have the power and authority, assigned by the Board, incident to the office, and provided in these Bylaws. B. PRESIDENT AND EXECUTIVE VICE PRESIDENT: The President, or the Executive Vice President during the absence, disability, or failure to act of the President, will be the chief executive officer of the Corporation, will preside at all Corporation meetings, and when authorized will execute and deliver documents in the name of the Corporation. C. SECRETARY AND ASSISTANTS: The Secretary, or any Assistant Secretary during the absence, disability, or failure to act, of the Secretary, will keep and have custody of, the record of Shareholders, the stock transfer books, and the minutes of the proceedings of the Shareholders and Directors, will give all Notices required, and when authorized will execute, attest, seal and deliver documents of the Corporation. D. TREASURER AND ASSISTANTS: The Treasurer, or any Assistant Treasurer during the absence, disability, or failure to act, of the Treasurer, will be custodian of the property of, and will be responsible for keeping, correct and complete books and records for account for, the Corporation. IV. ACTION WITHOUT A MEETING Any action required or permitted to be taken at a meeting of Shareholders or Directors may be taken without a meeting if a consent in writing setting forth the action so taken is signed by all of the Shareholders entitled to vote with respect to the subject matter thereof, or by all the Directors, as the case may be. V. WAIVER OF NOTICE Whenever any notice is required to be given to any Shareholder or Director, a waiver thereof in writing signed by the person entitled to the notice is equivalent to the giving of the notice. The attendance of a Shareholder in person or by proxy, or of a Director, at a meeting constitutes a waiver of notice of the meeting except when attendance is for the sole purpose of objecting because the meeting is not lawfully called or convened. VI. SEAL The Board may adopt a corporate seal which the Corporation may use by impressing or affixing it or a facsimile thereof, but the failure to have or affix a corporate seal does not affect the validity of any instrument or any action taken in reliance thereon or in pursuance thereof. VII. SHARE CERTIFICATES AND TRANSFER The Board will adopt a form of certificate to represent the shares of the Corporation. Each Shareholder is entitled to a certificate, signed by the President or Executive Vice President, and the Secretary or an Assistant Secretary, and representing the number of full and fractional fully paid shares owned by the Shareholder. Share transfer and issuance will be done by the Secretary, or the designee thereof, in the manner provided by the Business Corporation Act and Uniform Commercial Code of New Mexico. The name and address of the Shareholder to whom the certificate is issued, the number and class of shares represented, and the date of original issue or from whom transferred shall be entered on the record of Shareholders of the Corporation. The person or entity in whose name shares stand on the record of Shareholders of the Corporation will be the Shareholder and will be deemed by the Corporation to be the owner of the shares for all purposes whether or not the Corporation has other knowledge. Shares will be transferred only on the stock transfer books of the Corporation. VIII. MONETARY MATTERS A. FUNDS AND BORROWING: The depository for corporate funds, the persons entitled to draw against these funds, the persons entitled to borrow on behalf of the Corporation, and the manner of accomplishing these matters will be determined by the Board. B. COMPENSATION: The compensation for Directors and Officers will be established by the Board. Compensation of employees will be established by the President subject to review by the Board. C. FISCAL YEAR: The fiscal year of the Corporation will end December 31 or such other date as may be established by the Board. IX. INTERESTED PARTIES No transaction of the Corporation will be affected because a Shareholder, Director, Officer or Employee of the Corporation is interested in the transaction. Such interested parties will be counted for quorum purposes, and may vote, when the Corporation considers the transaction. Such interested parties will not be liable to the Corporation for the party's profits, or the Corporation's losses, from the transaction. X. INDEMNIFICATION The Corporation will indemnify and defend each of its Officers, Directors and employees, to the full extent permitted by law, against all claims and actions against any such person by reason of the fact that the person is or was an Officer, Director or employee of the Corporation. XI. AMENDMENTS These Bylaws may be altered, amended, or repealed by the Board unless the power to do so is reserved to the Shareholders by the Articles of Incorporation. SECRETARY'S CERTIFICATE I certify the foregoing to be the true copy of the Bylaws duly adopted by the Corporation on September 15, 1995. /s/ MORGAN GUST --------------------------------- Secretary EX-11.1 4 EXHIBIT 11.1 GIANT INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE DATA
Year Ended December 31, ------------------------------------------ 1995 1994 1993 ----------- ----------- ------------ Earnings from continuing operations $ 7,733,000 $ 7,455,000 $ 17,540,000 Earnings (loss) from discontinued operations 143,000 (2,934,000) (11,275,000) ----------- ----------- ------------ Earnings before extraordinary item 7,876,000 4,521,000 6,265,000 Extraordinary loss, net (384,000) ----------- ----------- ------------ Net earnings $ 7,876,000 $ 4,521,000 $ 5,881,000 =========== =========== ============ Weighted average number of shares outstanding during the period 11,478,779 12,127,481 12,225,177 =========== =========== ============ Earnings (loss) per common share: Continuing operations $ 0.68 $ 0.61 $ 1.43 Discontinued operations 0.01 (0.24) (0.92) ----------- ----------- ------------ Earnings before extraordinary item 0.69 0.37 0.51 Extraordinary loss, net (0.03) ----------- ----------- ------------ Net earnings $ 0.69 $ 0.37 $ 0.48 =========== =========== ============ Additional Primary Computation - ------------------------------ Earnings from continuing operations $ 7,733,000 $ 7,455,000 $ 17,540,000 Earnings (loss) from discontinued operations 143,000 (2,934,000) (11,275,000) ----------- ----------- ------------ Earnings before extraordinary item 7,876,000 4,521,000 6,265,000 Extraordinary loss, net (384,000) ----------- ----------- ------------ Net earnings $ 7,876,000 $ 4,521,000 $ 5,881,000 =========== =========== ============ Additional adjustment to weighted average number of shares outstanding: Weighted average number of shares outstanding above 11,478,779 12,127,481 12,225,177 Add - dilutive effect of outstanding options(a) 40,541 31,821 60,097 ----------- ----------- ------------ Weighted average number of shares outstanding as adjusted 11,519,320 12,159,302 12,285,274 =========== =========== ============ Earnings (loss) per common share:(b) Continuing operations $ 0.67 $ 0.61 $ 1.43 Discontinued operations 0.01 (0.24) (0.92) ----------- ----------- ------------ Earnings before extraordinary item 0.68 0.37 0.51 Extraordinary loss, net (0.03) ----------- ----------- ------------ Net earnings $ 0.68 $ 0.37 $ 0.48 =========== =========== ============
GIANT INDUSTRIES, INC. AND SUBSIDIARIES COMPUTATION OF PER SHARE DATA
Year Ended December 31, ----------------------------------------- 1995 1994 1993 ----------- ----------- ----------- Fully Diluted Computation - ------------------------- Earnings from continuing operations $ 7,733,000 $ 7,455,000 $ 17,540,000 Earnings (loss) from discontinued operations 143,000 (2,934,000) (11,275,000) ----------- ----------- ------------ Earnings before extraordinary item 7,876,000 4,521,000 6,265,000 Extraordinary loss, net (384,000) ----------- ----------- ------------ Net earnings $ 7,876,000 $ 4,521,000 $ 5,881,000 =========== =========== ============ Additional adjustment to weighted average number of shares outstanding: Weighted average number of shares outstanding above 11,478,779 12,127,481 12,225,177 Add - dilutive effect of outstanding options(a) 103,084 33,456 84,629 ----------- ----------- ------------ Weighted average number of shares outstanding as adjusted 11,581,863 12,160,937 12,309,806 =========== =========== ============ Earnings (loss) per common share:(b) Continuing operations $ 0.67 $ 0.61 $ 1.43 Discontinued operations 0.01 (0.24) (0.92) ----------- ----------- ------------ Earnings before extraordinary item 0.68 0.37 0.51 Extraordinary loss, net (0.03) ----------- ----------- ------------ Net earnings $ 0.68 $ 0.37 $ 0.48 =========== =========== ============ (a) As determined by the application of the treasury stock method. (b) This calculation is submitted in accordance with Regulation S-K item 601(b)(11) although not required by footnote 2 to paragraph 14 of APB Opinion No. 15 because it results in dilution of less than 3%.
EX-21.1 5 EXHIBIT 21.1 SUBSIDIARIES OF GIANT INDUSTRIES, INC. (a Delaware corporation) Jurisdiction of Names Under Which Subsidiary Incorporation Company Does Business - ---------- --------------- --------------------- Giant Industries Arizona, Inc. Arizona Giant Refining Company Ciniza Pipe Line Company - Ciniza Production Company* New Mexico - Giant Stop-N-Go of New Mexico, Inc.* New Mexico - San Juan Refining Company* New Mexico - Giant Four Corners, Inc.* Arizona - Giant Mid-Continent, Inc.* Arizona Giant Exploration & Production Company Texas _______________ *A wholly-owned subsidiary of Giant Industries Arizona, Inc. EX-23.1 6 EXHIBIT 23.1 Malkewicz Hueni Associates, Inc. (LOGO) March 22, 1996 Mr. Dave Ahl Manager SEC Reporting Giant Industries, Inc. 23733 North Scottsdale Road Scottsdale, Arizona 85255 Gentlemen: The firm of Malkewicz Hueni Associates, Inc. was returned to conduct a year-end audit, effective December 31, 1995, of reserves for oil and gas interests held by Giant Industries Inc. ("Giant") through its wholly-owned subsidiaries, Giant Exploration & Production Company, Ciniza Production Company and Giant Mid-Continent, Inc. This letter authorizes Giant to use Malkewicz Hueni Associates, Inc.'s report, dated February 23, 1996 regarding the December 31, 1995 reserve audit, in preparing its Form 10-K Annual Report to be filed with the United States Securities and Exchange Commission. Malkewicz Hueni Associates Inc. has no interest in Giant or any of its affiliated companies or subsidiaries and is not entitled to receive any such interest as payment for such reports. Malkewicz Hueni Associates Inc. is not employed by Giant on a contingent basis. Very truly yours, MALKEWICZ HUENI ASSOCIATES, INC. /s/ M. DAVID CLOUATRE - -------------------------------- M. DAVID CLOUATRE REGISTERED PETROLEUM ENGINEER 14142 Denver West Parkway, Suite 190 Golden, Colorado 80401 U.S.A. (303) 277-0270 Fax: (303) 277-0267 EX-23.2 7 EXHIBIT 23.2 LaRoche, Swindell & Associates Petroleum Consultants Suite 305 4625 Greenville Avenue Dallas, Texas 75206 (214) 363-3337 March 21, 1996 Mr. Dave Ahl Manager SEC Reporting Giant Industries, Inc. 23733 North Scottsdale Road Scottsdale, Arizona 85255 Gentlemen: The firm of LaRoche, Swindell & Associates was retained to conduct a year-end audit, effective December 31, 1995, of reserves for oil and gas interests held by Giant Industries Inc. ("Giant") through its wholly-owned subsidiaries, Giant Exploration & Production Company, Ciniza Production Company and Giant Mid Continent, Inc. This letter authorizes Giant to use LaRoche, Swindell & Associates' report, dated September 27, 1995 regarding the December 31, 1995 reserve audit, in its Form 10-K Annual Report to be filed with the United States Securities and Exchange Commission. LaRoche, Swindell & Associates has no interest in Giant or any of its affiliated companies or subsidiaries and is not entitled to receive any such interest as payment for such reports. LaRoche, Swindell & Associates is not employed by Giant on a contingent basis. Very truly yours, LaRoche, Swindell & Associates /s/ GARY S. SWINDELL -------------------------------- Gary S. Swindell EX-23.3 8 EXHIBIT 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statement No. 33-35357 of Giant Industries, Inc. on Form S-8 of our reports dated March 4, 1996 appearing in the Annual Report on Form 10-K of Giant Industries, Inc. for the year ended December 31, 1995. DELOITTE & TOUCHE LLP Phoenix, Arizona March 27, 1996 EX-27 9 ART. 5 FDS FOR YEAR ENDED DECEMBER 31, 1995
5 1000 YEAR DEC-31-1995 DEC-31-1995 9,549 0 22,688 424 42,581 108,869 292,919 94,357 324,862 58,541 142,676 122 0 0 109,610 324,862 332,888 332,888 234,271 299,472 0 0 11,506 11,371 3,638 7,733 143 0 0 7,876 0.69 0
EX-99.1 10 EXHIBIT 99.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _____________ FORM 11-K ANNUAL REPORT _____________ PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Fiscal year Ended December 31, 1995 GIANT INDUSTRIES, INC. AND AFFILIATED COMPANIES EMPLOYEE STOCK OWNERSHIP PLAN GIANT INDUSTRIES, INC. ______________________ The principal executive offices of Giant Industries, Inc. are located at 23733 North Scottsdale Road, Scottsdale, Arizona 85255. FINANCIAL STATEMENTS AND EXHIBITS - --------------------------------- (a) Financial Statements and Supplemental Schedule Page Number ----------- Independent Auditors' Report F-1 Statements of net assets available F-2 for benefits - December 31, 1995 and 1994 Statements of changes in net assets F-3 available for benefits - Years ended December 31, 1995, 1994 and 1993 Notes to financial statements F-4 to F-7 Supplemental Schedule: Schedule of assets held for investment purposes F-8 (b) Exhibits - none 2 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Committee has duly caused this annual report to be signed by the undersigned thereunto duly authorized. EMPLOYEE STOCK OWNERSHIP PLAN OF GIANT INDUSTRIES, INC. AND AFFILIATED COMPANIES Date: 3-27-96 Signature: /s/ Gary L. Nielsen _______________________________ Gary L. Nielsen, Vice President Finance-Treasurer Date: 3-27-96 Signature: /s/ Morgan Gust _______________________________ Morgan Gust, Vice President-General Counsel Date: 3-27-96 Signature: /s/ Debra A. McKinney _______________________________ Debra A. McKinney, Director of Personnel 3 INDEPENDENT AUDITORS' REPORT Administrative Committee Employee Stock Ownership Plan of Giant Industries, Inc. and Affiliated Companies Scottsdale, Arizona We have audited the accompanying statements of net assets available for benefits of the Employee Stock Ownership Plan of Giant Industries, Inc. and Affiliated Companies as of December 31, 1995 and 1994, and the related statements of changes in net assets available for benefits for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the Plan's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets available for benefits of the Employee Stock Ownership Plan of Giant Industries, Inc. and Affiliated Companies as of December 31, 1995 and 1994, and the changes in net assets available for benefits for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplemental schedule for the year ended December 31, 1995 on page F-8 is presented for the purpose of additional analysis and is not a required part of the basic financial statements, but is supplementary information required by the Department of Labor's Rules and Regulations for Reporting and Disclosure under the Employee Retirement Income Security Act of 1974. This schedule is the responsibility of the Plan's management. Such schedule has been subjected to the auditing procedures applied in our audit of the basic 1995 financial statements and, in our opinion, is fairly stated in all material respects when considered in relation to the basic financial statements taken as a whole. DELOITTE & TOUCHE LLP Phoenix, Arizona March 15, 1996 F-1 EMPLOYEE STOCK OWNERSHIP PLAN OF GIANT INDUSTRIES, INC. AND AFFILIATED COMPANIES STATEMENTS OF NET ASSETS AVAILABLE FOR BENEFITS DECEMBER 31, 1995 AND 1994
1995 1994 ----------- ----------- ASSETS - ------ Investments at fair value (Notes 3, 4 and 5): Mutual funds $ 1,732,010 $ 1,066,062 Limited partnership 22,200 22,200 Common stock of Giant Industries, Inc. 17,590,571 11,511,590 Loans to participants 40,808 50,614 ----------- ----------- Total investments at fair value 19,385,589 12,650,466 Interest and dividends receivable 2,329 1,832 Other receivables 3,582 3,116 Cash and cash equivalents 260,260 45,625 ----------- ----------- Total assets 19,651,760 12,701,039 ----------- ----------- LIABILITIES - ----------- Other liabilities 9,288 10,259 Note payable (Notes 4 and 6) 513,679 ----------- ----------- Total liabilities 9,288 523,938 ----------- ----------- NET ASSETS AVAILABLE FOR BENEFITS $19,642,472 $12,177,101 =========== ===========
See notes to financial statements. F-2 EMPLOYEE STOCK OWNERSHIP PLAN OF GIANT INDUSTRIES, INC. AND AFFILIATED COMPANIES STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR BENEFITS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993 ----------- ----------- ----------- Additions: Net appreciation in fair value of investments (Note 3) $ 7,230,900 $ - $ 8,166,489 Interest and dividend income 319,843 30,035 52,490 Employer contribution 900,000 900,000 889,441 ----------- ----------- ----------- Total additions 8,450,743 930,035 9,108,420 ----------- ----------- ----------- Deductions: Net depreciation in fair value of investments (Note 3) 4,249,045 Distributions to participants 957,969 654,130 828,258 Interest expense 27,249 66,766 96,167 Other 154 250 ----------- ----------- ----------- Total deductions 985,372 4,970,191 924,425 ----------- ----------- ----------- Net increase (decrease) 7,465,371 (4,040,156) 8,183,995 Net Assets Available for Benefits: Beginning of Year 12,177,101 16,217,257 8,033,262 ----------- ----------- ----------- End of Year $19,642,472 $12,177,101 $16,217,257 =========== =========== ===========
See notes to financial statements. F-3 EMPLOYEE STOCK OWNERSHIP PLAN OF GIANT INDUSTRIES, INC. AND AFFILIATED COMPANIES NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 1. DESCRIPTION OF THE PLAN: GENERAL - On June 30,1987, Giant Industries, Inc. (the "Company") converted through an amendment, its Joint Profit Sharing Plan to an Employee Stock Ownership Plan. The Employee Stock Ownership Plan of Giant Industries, Inc. and Affiliated Companies (the "Plan") is a non- contributory defined contribution plan which covers all eligible employees. The purpose of the Plan is to enable participants to share in the ownership of the Company. The Summary Plan Description describes the Plan, including contribution allocations, termination, vesting and benefit provisions. The Plan is subject to the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). CONTRIBUTIONS - The Plan provides for a contribution from the Company from its current or accumulated net income as may be determined annually at the discretion of its Board of Directors. PARTICIPATION AND VESTING - Each employee hired on or after July 1, 1993 shall become a participant on his or her participation date, which is defined as the January 1 or July 1 coincident with or next following the date on which the employee shall have completed one year of service. The participation date of any employee hired prior to July 1, 1993 shall be determined in accordance with the terms of the Plan prior to the seventh amendment. Participants' interests in their accounts vest over a seven year period. In the event the Plan is terminated by the Company, all participants would immediately become 100% vested in their accrued benefits as of the date of Plan termination. ALLOCATIONS - Each participant's account is credited with an allocation of the Company's contribution, investment income and forfeitures of terminated participants' non-vested accounts. Allocations to participant accounts are made on a formula based on the ratio that each participant's compensation, as defined, during the Plan year, bears to the compensation of all such participants. PLAN ADMINISTRATION - The Company administers the Plan through an administrative committee comprised of three employees who are appointed by the Company's Board of Directors. Most expenses pertaining to the administration of the Plan are being paid by the Company, at the Company's option. Bank of America is the Plan's trustee and custodian and Boyce & Associates is the Plan's recordkeeper. AMENDMENTS - The Plan was amended six times prior to 1993. F-4 A seventh amendment was executed on August 4, 1993, to be effective as of January 1, 1993. This amendment changed Plan eligibility provisions for employees hired on or after July 1, 1993, eliminated the availability of life insurance within the Plan, amended dividend allocation procedures and amended participant loan provisions. In addition, changes were made to maintain the Plan in compliance with current regulations. An eighth amendment was executed on October 5, 1994 to be effective as of July 1, 1987. This amendment was adopted in order to comply with the Tax Reform Act of 1986 and any subsequent amendments to the Internal Revenue Code, including but not limited to the Unemployment Compensation Amendments of 1992 and the Omnibus Budget Reconciliation Act of 1993, and any related Internal Revenue Service regulations and pronouncements. TERMINATION - Although it has not expressed any intent to do so, the Company has the right under the Plan to discontinue its contributions at any time and to terminate the Plan subject to the provisions of ERISA. 2. SIGNIFICANT ACCOUNTING POLICIES: The accounting records of the Plan are maintained on the accrual basis. Investments included in the Statement of Net Assets Available for Benefits are stated at fair value. The fair value of marketable securities and mutual funds is determined based on quoted market prices as of the Plan's year end. The fair value of the limited partnership is management's best estimate based on an independent appraisal provided by Bank of America. Giant Industries, Inc.'s common stock value is determined based on the quoted market price as reported by the New York Stock Exchange as of the Plan's year end. The net change in the fair value of investments is recorded in the Statements of Changes in Net Assets Available for Benefits as net appreciation (depreciation) in fair value of investments. Interest and dividend income is recorded on the accrual basis. Benefits are recorded when paid. F-5 3. Investments: The following tables present the fair value of investments at December 31, 1995 and 1994, with mutual funds and common stock of the Company representing investments greater than 5% of the Plan's net assets at December 31, 1995 and 1994.
December 31, 1995 December 31, 1994 ----------------------- ------------------------ Number of Number of shares or shares or principal Fair principal Fair amount Value amount Value --------- ----------- ------------ ----------- Mutual Funds: ML Lee Acquisition 25 $ 15,796 25 $ 17,725 Bank of America: Equity Fund 118,168 384,281 91,071 218,516 Fixed Income Fund 243,507 565,498 138,043 279,055 Core Equity Growth Fund 7,312 197,287 8,753 169,415 Short Term Government Fund 87,020 187,785 87,277 162,449 Convertible Securities Fund 60,482 190,352 43,188 108,045 Aggressive Equity Fund 32,700 191,011 25,410 110,857 ----------- ----------- Total mutual funds 1,732,010 1,066,062 Limited Partnership: Recorp. Mtg. Investors II 1.5 22,200 1.5 22,200 Giant Industries, Inc. common stock 1,435,965 17,590,571 1,534,878 11,511,590 Loans to participants 40,808 50,614 ----------- ----------- $19,385,589 $12,650,466 =========== ===========
Net appreciation (depreciation) in fair value of the Plan's investments (including investments bought, sold and held during the period) for the years ended December 31 consists for the following:
1995 1994 1993 ---------- ---------- ---------- Limited partnership $ $ 22,199 $ Preferred stocks (589) 2,150 Common stocks (6,530) 40,228 Mutual funds 272,245 20,584 (4,300) Giant Industries, Inc., common stock 6,958,655 (4,284,709) 8,127,789 Corporate bonds 622 ---------- ----------- ---------- Net appreciation (depreciation) $7,230,900 $(4,249,045) $8,166,489 ========== =========== ==========
F-6 4. INVESTMENTS IN COMMON STOCK OF GIANT INDUSTRIES, INC.: The Company stock owned by the Plan is made up of allocated and unallocated shares. The allocated shares are those which are held in the accounts of the participants of the Plan. The unallocated shares are those which are held by the Plan Trustee. These shares are allocated to participants when principal payments are made on the note payable. During 1995, 1994, and 1993, the Plan allocated 74,556, 120,937, and 130,616 shares, respectively, of the unallocated shares of the Company stock to the participants as a result of principal payments on the note payable. During 1995, 1994, and 1993, the Company contributed $900,000, $900,000, and $889,441, respectively, of which $27,249, $66,766, and $96,167, respectively, was used to make interest payments on the note, and $513,679, $833,234, and $793,274, respectively, was used to reduce the principal balance on the note. The following is a summary of the allocated and unallocated shares of the Company stock owned by the Plan at December 31 (all shares are rounded to whole shares):
1995 1994 1993 ---------------------- ---------------------- ---------------------- Shares Fair Value Shares Fair Value Shares Fair Value --------- ----------- --------- ----------- --------- ----------- Allocated Shares 1,435,965 $17,590,571 1,460,322 $10,952,418 1,403,711 $14,388,038 Unallocated Shares 74,556 559,172 195,493 2,003,803 --------- ----------- --------- ----------- --------- ----------- Total Shares 1,435,965 $17,590,571 1,534,878 $11,511,590 1,599,204 $16,391,841 ========= =========== ========= =========== ========= ===========
5. RELATED PARTY TRANSACTIONS: The total balance of loans to participants at December 31, 1995 and 1994 includes $35,912 and $50,134, respectively, of balances due from executive officers of the Company. 6. NOTE PAYABLE: During 1993, the Company purchased the Plan's existing note payable to the bank. The note was paid in full in September 1995. 7. FEDERAL INCOME TAX STATUS: The Plan obtained its latest determination letter dated September 16, 1994 in which the Internal Revenue Service stated that the Plan, as then designed, was in compliance with the applicable requirements of the Internal Revenue Code. F-7 EMPLOYEE STOCK OWNERSHIP PLAN OF GIANT INDUSTRIES, INC. AND AFFILIATED COMPANIES SUPPLEMENTAL SCHEDULE AT DECEMBER 31, 1995 ITEM 27a - ASSETS HELD FOR INVESTMENT PURPOSES
COLUMN B COLUMN C COLUMN D COLUMN E - ---------------------------- -------------------------------------------- ---------- ----------- DESCRIPTION OF INVESTMENT INCLUDING IDENTITY OF ISSUE, BORROWER, COLLATERAL, RATE OF INTEREST, MATURITY CURRENT LESSOR, OR SIMILAR PARTY DATE, PAR OR MATURITY VALUE COST VALUE - ---------------------------- -------------------------------------------- ---------- ----------- ML Lee Acquisition Mutual Fund - 25 Shares $ 25,000 $ 15,796 Bank of America Equity Fund - 118,168 shares 298,154 384,281 Bank of America Fixed Income Fund - 243,507 shares 514,568 565,498 Bank of America Core Equity Growth Fund - 7,312 shares 148,978 197,287 Bank of America Short-Term Government Fund - 87,020 shares 167,227 187,785 Bank of America Convertible Securities Fund - 60,482 shares 163,086 190,352 Bank of America Aggressive Equity Fund - 32,700 shares 152,647 191,011 Recorp. Mtg. Investors II Limited Partnership - 1.5 units 60,000 22,200 Giant Industries, Inc. Common stock - 1,435,965 shares 6,931,849 17,590,571 Loans to Participants Loans at 12%, collateralized by vested accounts, due 1996 through 2002 40,808 40,808 ---------- ----------- Total assets held for investment purposes $8,502,317 $19,385,589 ========== =========== F-8
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