<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.
COMMISSION FILE NUMBER: 1-11392
CLARK REFINING & MARKETING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1491230
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
8182 MARYLAND AVENUE 63105-3721
ST. LOUIS, MISSOURI (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (314) 854-9696
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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
--- ---
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 amendment to this
Form 10-K. [X]
Number of shares of registrant's common stock, $.01 par value, outstanding
as of March 17, 1995: 100 all of which are owned by Clark USA, Inc.
<PAGE>
CLARK REFINING & MARKETING, INC.
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TABLE OF CONTENTS
PAGE
----
PART I
Items 1 and 2. Business; Properties................................. 1
Item 3. Legal Proceedings.................................... 20
Item 4. Submission of Matters to a Vote of Security Holders.. 21
PART II
Item 5. Market for the Registrant's Common Stock and Related
Shareholder Matters................................ 21
Item 6. Selected Financial Data.............................. 22
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 24
Item 8. Financial Statements and Supplementary Data.......... 34
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 34
PART III
Item 10. Directors and Executive Officers of the Registrant... 34
Item 11. Executive Compensation............................... 36
Item 12. Security Ownership of Certain Beneficial Owners
and Management..................................... 40
Item 13. Certain Relationships and Related Transactions....... 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
of Form 8-K........................................ 41
Glossary of Terms.................................................... 43
Signatures........................................................... 62
Certain industry terms are defined in the Glossary of Terms
<PAGE>
PART I
ITEM 1 AND 2. BUSINESS; PROPERTIES
Clark Refining & Marketing, Inc. (the "Company" or "Clark"), headquartered in
St. Louis, Missouri, is a leading independent refiner and marketer of petroleum
products in the central United States. Its principal activities consist of
crude oil refining, wholesale marketing of refined petroleum products and retail
marketing of gasoline and convenience products through its company-operated
retail network. These operations have been conducted under the Clark name for
over 60 years.
All of the outstanding common stock of Clark is owned by Clark USA, Inc.
("Clark USA"). In November 1988, Clark USA was formed by The Horsham Corporation
("Horsham") and AOC Limited Partnership ("AOC L.P.") to hold all of the
capital stock of Clark Refining & Marketing, Inc. ("Clark") and certain other
assets. Pursuant to a stockholder agreement (the "Stockholder Agreement")
among AOC L.P., Horsham, Clark USA and Clark, Horsham purchased 60% of the
equity capital of Clark USA and AOC L.P. purchased the remaining 40% interest.
On December 30, 1992, Horsham and Clark USA entered into a Stock Purchase and
Redemption Agreement (the "Stock Purchase Agreement") with AOC L.P. to
purchase all of the shares and options to purchase shares of Clark USA owned by
AOC L.P. (the "Minority Interest"), resulting in Horsham owning 100% of the
outstanding equity of Clark USA at that time. On February 27, 1995, Clark USA
sold $135 million of additional equity to a subsidiary of Horsham. The Horsham
subsidiary immediately resold $120 million of the equity to Tiger Management
Corporation, an institutional money manager, for an interest of between 35.6%
and 40.0% (based on 1995 earnings) of Clark USA. As a result, the Company
received an equity contribution of $150 million from Clark USA and used such
proceeds along with existing cash to acquire (the "Acquisition") from Chevron
U.S.A., Inc. ("Chevron") its Port Arthur, Texas refinery and related assets
("the Port Arthur Refinery") for approximately $70 million, plus approximately
$138 million for inventory and spare parts. Clark is also obligated under
certain circumstances to pay to Chevron contingent payments (the "Chevron
Contingent Payments") based on refining industry margin indicators and the
volume of crude oil processed at the Port Arthur Refinery over a five-year
period. Based on the prevailing average refining industry margin indicators
during 1993 and 1994, Clark would not have been obligated to make any Chevron
Contingent Payments had the Chevron Contingent Payments obligations been in
place during such periods. The maximum total amount of the Chevron Contingent
Payments is $125 million. The Acquisition positions the Company as one of the
four largest independent refiners in the United States.
Clark's assets other than the Port Arthur Refinery were acquired on November
22, 1988 out of bankruptcy proceedings. The assets acquired consisted of (i)
substantially all of the assets of Apex Oil Company, Inc., a Wisconsin
corporation (formerly OC Oil & Refining Corporation and prior thereto Clark Oil
& Refining Corporation, a Wisconsin corporation ("Old Clark")) and its
subsidiaries and (ii) certain other assets and liabilities of the
Novelly/Goldstein Partnership (formerly Apex Oil Company), a Missouri general
partnership ("Apex"), the indirect owner of Old Clark and an affiliate of AOC
L.P.
Horsham, the indirect controlling owner of Clark, is a Canadian management and
holding company which also owns controlling interests in Barrick Gold
Corporation, one of the worlds largest gold producers; Trizec Corporation Ltd.,
a major North American real estate company; and Horsham Properties GmbH, a
German-based property company.
Clark operates its business on a decentralized basis through two divisions, a
refining and a marketing division. The refining division consists of two
Illinois refineries and the Port Arthur, Texas refinery, 16 product distribution
terminals, an LPG storage terminal, a crude oil terminal and pipeline interests.
The marketing division currently consists of approximately 840 retail locations
selling gasoline and convenience products in twelve Midwestern states as well as
a wholesale marketing group selling gasoline, diesel and jet fuel and other
petroleum products currently on an unbranded basis. In addition, a corporate
service division provides centralized administrative, business, financial and
human resource support systems for the refining and marketing divisions.
1
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REFINING
Overview
The refining division consists of two refineries in Illinois and the Port
Arthur, Texas refinery with a combined crude oil throughput capacity of
approximately 330,000 barrels per day, 14 product terminals located throughout
Clark's Midwest market area, a crude oil terminal, two product distribution
terminals and an LPG terminal associated with the Port Arthur refinery, crude
and product pipeline interests, and integrated supply, distribution, planning
and support operations/services.
Midwest Refineries
Clark's Illinois refineries, Blue Island (near Chicago) and Hartford (near St.
Louis), are supplied by crude oil pipelines and are also located on inland
waterways with barge access. The refineries not only have access to multiple
sources of foreign and domestic crude oil supply, but also benefit from crude
oil input flexibility. The Company believes that the location of these
refineries provides a competitive advantage since the Midwest has historically
benefitted from relatively high refining margins and less volatility than
comparable operations located in other regions of the United States. In the
past, demand for refined products has exceeded supply in the region. This
excess demand has historically been satisfied by imports from other regions,
providing the Companys Midwest refineries with a transportation cost advantage.
The Hartford refinery is capable of processing a variety of grades of crude
oil, including heavy sour crude at a rated capacity of 60,000 barrels per day.
The Hartford refinery has the capability to process approximately 45,000 barrels
per day of heavy sour crude oil. Heavy sour crude oil has historically been
available at substantially lower cost compared to light sweet crude oil such as
WTI. The Blue Island refinery also can process various grades of crude oil,
including light sour crude oil at a rated capacity of 70,000 barrels per day.
The two refineries are connected by product pipelines, increasing flexibility
relative to stand-alone operations. Clark's product terminals allow efficient
distribution of refinery production through pipeline systems.
Blue Island Refinery
The Blue Island refinery is located in Blue Island, Illinois, approximately 17
miles south of Chicago. The refinery is situated on a 170 acre site, bounded by
the town of Blue Island and the Calumet-Sag Canal. The facility was initially
constructed in 1945 and, through a series of improvements and expansions, has
reached a crude oil capacity of 70,000 barrels per day, although the actual
throughput rates have been sustained at levels in excess of rated capacity. The
Blue Island refinery has a Nelson Complexity Rating of 8.7 versus an average
rating of 9.3 for all Petroleum Administration for Defense District (''PADD'')
II refineries. The Nelson Complexity Rating is an industry measure of a
refinery's ability to produce high value-added products. Blue Island has among
the highest capabilities to produce gasoline relative to the other refineries in
its market area and through productivity initiatives has achieved the
flexibility to produce low sulfur diesel fuel when the market warrants. During
most of the year, gasoline is the most profitable refinery product.
2
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The feedstocks and production of the Blue Island refinery for the years ended
December 31, 1994, 1993 and 1992 were as follows:
BLUE ISLAND REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 1993 (a) 1992
-----------------------------------------------
BBLS % BBLS % BBLS %
-----------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
FEEDSTOCKS
-----------------------
Light Sweet Crude Oil 20,780 71.3% 22,016 85.9% 25,811 93.3%
Light Sour Crude Oil 7,120 24.5 1,404 5.5 -- --
Unfinished 157 0.5 873 3.4 760 2.8
Blendstocks 1,076 3.7 1,338 5.2 1,084 3.9
------ ----- ------ ----- ------ -----
Total 29,133 100.0 25,631 100.0 27,655 100.0
====== ===== ====== ===== ====== =====
PRODUCTION
Gasoline
Unleaded 12,571 43.7 9,701 38.3 13,423 48.6
Premium Unleaded 5,558 19.3 5,232 20.6 4,795 17.4
------ ----- ------ ----- ------ -----
18,129 63.0 14,933 58.9 18,218 66.0
------ ----- ------ -----
Other Products
-----------------------
Diesel Fuel 6,376 22.2 5,329 21.0 3,863 14.0
Others 4,293 14.8 5,091 20.1 5,522 20.0
------ ----- ------ ----- ------ -----
10,669 37.0 10,420 41.1 9,385 34.0
------ ----- ------ ----- ------ -----
Total 28,798 100.0 25,353 100.0 27,603 100.0
----------------------- ====== ===== ====== ===== ====== =====
Output/Day 78.9 69.5 75.4
</TABLE>
(a) The 1993 refinery production yield reflects maintenance turnaround downtime
of approximately two months on selected units. During a turnaround,
refinery production is reduced significantly.
Hartford Refinery
The Hartford refinery is located in Hartford, Illinois, approximately 17 miles
northeast of St. Louis. The refinery is situated on a 400 acre site. The
facility was initially constructed in 1941 and, through a series of improvements
and expansions, has reached a crude oil refining capacity of approximately
60,000 barrels per day. The Hartford refinery includes a coker unit and
consequently has a Nelson Complexity Rating of 9.6 versus an average of 9.3 for
all PADD II refineries. The Hartford refinery has the ability to process lower
cost, heavy sour crude oil into higher value products such as gasoline and
diesel fuel. This upgrading capability allows the refinery to produce a high
percentage of premium products and permits Clark to benefit from higher margins
when heavy sour crude oil is at a significant discount to other crude oil.
3
<PAGE>
The feedstocks and production of the Hartford refinery for the years ended
December 31, 1994, 1993 and 1992 were as follows:
HARTFORD REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1994 (a) 1993 1992
--------------- ------------- -------------
BBLS % BBLS % BBLS %
--------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
FEEDSTOCKS
Light Sweet Crude Oil 6,037 26.2% 4,817 19.6% 5,312 21.2%
Light Sour Crude Oil 7,696 33.4 3,814 15.5 4,161 16.6
Heavy Sour Crude Oil 8,800 38.2 13,119 53.4 11,115 44.3
Unfinished -- -- 704 2.9 1,781 7.1
Blendstocks 506 2.2 2,103 8.6 2,705 10.8
------ ----- ------ ----- ------ -----
Total 23,039 100.0 24,557 100.0 25,074 100.0
====== ===== ====== ===== ====== =====
PRODUCTION
Gasoline
Unleaded 9,777 43.6 10,394 43.6 11,487 46.9
Premium Unleaded 1,732 7.7 1,892 8.0 1,855 7.6
------ ----- ------ ----- ------ -----
11,509 51.3 12,286 51.6 13,342 54.5
------ ----- ------ ----- ------ -----
Other Products
Diesel Fuel 7,801 34.8 7,979 33.5 7,281 29.7
Others 3,106 13.9 3,557 14.9 3,878 15.8
------ ----- ------ ----- ------ -----
10,907 48.7 11,536 48.4 11,159 45.5
------ ----- ------ ----- ------ -----
Total 22,416 100.0 23,822 100.0 24,501 100.0
====== ===== ====== ===== ====== =====
Output/Day 61.4 65.3 66.9
</TABLE>
(a) The 1994 results reflect maintenance turnaround downtime of approximately
one month on selected units.
The Port Arthur Refinery and Acquisition
The Acquisition more than doubled Clark's refining capacity and provides Clark
with a sour crude oil refinery with a technical complexity rating (10.18) in the
top third of all U.S. Gulf Coast refineries. The refinery has the ability to
process 100% sour crude oil, including up to 20% heavy sour crude oil, and has
coking capabilities. The configuration of the Port Arthur Refinery complements
Clark's existing refineries with its ability to produce jet fuel, 100% low
sulfur diesel fuel, 55% summer reformulated gasoline ("RFG") and 75% winter RFG.
The refinery's Texas Gulf Coast location provides access to numerous cost
effective domestic and international crude oil sources, and its products can be
sold in the mid-continent and eastern U.S. as well as export markets. Clark
believes that the Port Arthur Refinery has the potential for significant
productivity gains with minimal capital investment, and that it will offer an
opportunity for improved results of operations and cash flow.
The Port Arthur Refinery was operated by Gulf Oil Corporation (''Gulf'') prior
to Chevron's acquisition of Gulf in 1984. Although the original refinery on
this site began operating in 1904, the refinery has been the subject of
substantial capital expenditures. Gulf invested approximately $400 million in a
major conversion to sour crude in 1980-1982 and Chevron invested approximately
$450 million from 1989 through 1994. Converted by Chevron from a dual train to
a single train operation in 1992 in order to achieve a substantial reduction in
operating costs, the refinery's rated crude oil design capacity was reduced from
what had previously been over 400,000 barrels per day to approximately 178,500
barrels per day. In October 1994, Clark received an air operational permit from
the Texas Natural Resources Conservation Commission (the ''TNRCC'') which
provides that the refinery crude oil charge rate can be increased to 250,000
barrels per day. Clark intends to operate the refinery at approximately 200,000
barrels per day, subject to market conditions.
The Port Arthur Refinery consists of approximately 4,000 acres, of which less
than 100 acres are occupied by active operating units. These units include a
crude unit, catalytic reformer, fluid catalytic cracking unit, hydrotreaters,
4
<PAGE>
cogeneration units, sulfur recovery units, gas recovery units, an HF alkylation
unit and delayed cokers. The average age of the operating units at the refinery
is 17 years, which Clark believes is significantly below the industry average.
Terminals and Pipelines
Refined products are distributed primarily through Clark's terminals, company-
owned and common carrier product pipelines and by leased barges over the
Mississippi, Illinois and Ohio rivers. Clark owns and operates 14 product
terminals in its Midwest market area, most of which have product blending
capabilities. Most of Clark's terminals are capable of handling and blending
ethanol, one of two viable renewable oxygenates required for RFG. Clark is an
experienced ethanol user, having used ethanol since the early 1980s. In
addition to cost efficiencies in supplying its retail network, the terminal
distribution system allows efficient distribution of refinery production.
Clark enters into refined product exchange agreements with unaffiliated
companies to broaden its geographical distribution capabilities, and products
are also received through numerous exchange terminals and distribution points
throughout the Midwest.
Clark's Midwest terminals and respective capacities, as of December 31, 1994,
were as follows:
<TABLE>
<CAPTION>
TERMINAL CAPACITY
-------- ---------
<S> <C>
(M BBLS)
Blue Island, IL....... 86.6
Brecksville, OH....... 252.4
Clermont, IN.......... 272.0
Columbus, OH.......... 132.2
Taylor, MI............ 287.9
Granville, WI......... 323.6
Green Bay, WI......... 269.0
Hammond, IN........... 816.9
Hartford, IL.......... 567.0
Marshall, MI.......... 248.3
Peoria, IL............ 163.2
Rockford, IL.......... 143.2
St. Louis, MO......... 471.3
Toledo, OH............ 195.4
----------
Total capacity 4,229.0
==========
</TABLE>
Clark acquired a crude oil terminal, two products terminals and an LPG
terminal with associated pipelines as a part of the Port Arthur Acquisition.
The Port Arthur Refinery's terminals and respective capacities following the
Acquisition were as follows:
<TABLE>
<CAPTION>
TERMINAL CAPACITY
-------- ---------
<S> <C>
(M BBLS)
Beaumont, TX (crude oil and
refined products)................ 3,220.0
Fannett, TX (LPG)................. 2,500.0
Port Arthur Products Station
(approximately 33% interest)..... 1,831.5
---------
Total capacity 7,551.5
=========
</TABLE>
5
<PAGE>
Clark's pipeline interests following the Acquisition were as follows:
<TABLE>
<CAPTION>
PIPELINE TYPE INTEREST ROUTE
-------- ---- -------- -----
<S> <C> <C> <C>
Southcap Crude 36.0% St. James, LA to Patoka, IL
Chicap Crude 22.7 Patoka, IL to Mokena, IL
Clark Port Arthur Crude and Products 100.0 Port Arthur and Beaumont, TX
Wolverine Products 9.5 Chicago, IL to Toledo, OH
West Shore Products 11.1 Chicago, IL to Green Bay, WI
</TABLE>
These pipelines operate as common carriers pursuant to published pipeline
tariffs, which also apply to use by Clark. Clark also owns a dedicated pipeline
from the Blue Island refinery to a Company-owned terminal in Hammond, Indiana
and from the Port Arthur refinery to an LPG terminal in Fannett, Texas.
Supply
Clark's integrated Midwest refining and marketing assets are strategically
located in close proximity to a variety of supply and distribution channels. As
a result, Clark has the flexibility to acquire the most economic domestic or
foreign crude oil and the ability to distribute its products to its own retail
system and to most domestic wholesale markets. The Port Arthur refinery's Texas
Gulf Coast location provides access to numerous cost-effective domestic and
international crude oil sources, and its products can be sold in the mid-
continent and eastern United States as well as export markets. Clark has
agreements to sell to Chevron, at market prices, 40,000 barrels per day of
gasoline and 6,500 barrels per day of low-sulfur diesel and jet fuel for one
year from the date of the Acquisition. Remaining production will be used to
supply Clark's current wholesale and retail needs with the balance initially
sold in the spot markets, while Clark further develops its wholesale and retail
networks.
Clark's Illinois refineries are located on major inland water transportation
routes and are connected to various regional, national and Canadian common
carrier pipelines. Clark has a minority interest in several of these pipelines.
The Blue Island refinery can receive Canadian crude oil through the Lakehead
Pipeline from Canada, foreign and domestic crude oil through the Capline
Pipeline system originating in the Louisiana Gulf Coast region, and domestic
crude oil originating in West Texas, Oklahoma and the Rocky Mountains through
the Arco Pipeline system. The Hartford refinery has access to foreign and
domestic crude oil supplies through the Capline/Capwood Pipeline systems and
access to West Texas, Oklahoma and Rocky Mountain crude oil through the Platte
Pipeline system. Both refineries are situated on major water transportation
routes which provide flexibility to receive crude oil or intermediate feedstocks
by barge when economical.
Clark has two sour crude oil supply contracts. One is with P.M.I. Comercio
Internacional, S.A. de C.V. (''PMI''), an affiliate of Petroleos Mexicanos, S.A.
de C.V. This contract is cancelable upon three months' notice by either party,
but it is intended to remain in place for the foreseeable future. The volume is
currently 15,000 barrels per day of Maya and 30,000 of Olmeca crude oil, with
price determination based on a market-related formula applicable to all PMI U.S.
customers. The other sour crude oil supply contract is for 15,000 barrels per
day of light sour crude oil with Lagoven, a subsidiary of PDVSA with price
determination based on a market-related formula. This contract is also
cancelable upon three months' notice by either party, but it is intended to
remain in place for the foreseeable future. Other term crude oil supply
agreements primarily relate to Canadian crude oil delivered to Blue Island.
Approximately 25,000 barrels per day are currently under contract with three
Canadian suppliers, cancelable with two months' notice by either party.
In addition to gasoline, Clark's refineries produce other types of refined
products. No. 2 diesel fuel is used mainly as a fuel for diesel burning
engines. No. 2 diesel fuel production is moved via pipeline or barge to Clark's
16 product terminals and is sold over Clark's terminal truck racks or through
refinery pipeline or barge movement. The Port Arthur Refinery produces jet fuel
which is generally sold through pipelines. Other production includes residual
oils (slurry oil and vacuum tower bottoms) which are used mainly for heavy
industrial fuel (e.g., power generation) and in the manufacturing of roofing
flux or for asphalt used in highway paving.
Clark supplies gasoline and diesel fuel to its retail system first, then
distributes products to its wholesale operations based on the highest average
market returns before product is sold into the spot market.
6
<PAGE>
Planning and Economics
Clark employs sophisticated linear programming models to optimize refinery
operations. These models enable Clark to predict the yield structure of given
crude oils and feedstocks, facilitating optimal feedstock combinations and
production of the most advantageous refined product mix for a given set of
market conditions. In this manner, Clark is able to take advantage of lower
cost crude oils and adjust the output mix in response to changing market prices
at any given time.
Inventory Management
Clark employs several strategies to minimize the impact on profitability due
to the volatility in feedstock costs and refined product prices. These
strategies generally involve the purchase and sale of exchange-traded, energy-
related futures and options with a duration of six months or less. In addition,
Clark, to a lesser extent, uses energy swap agreements similar to those traded
on the exchanges, such as crack spreads and crude oil options, to better match
the price movements in Clarks markets as opposed to the delivery point of the
exchange-traded contract. These strategies are designed to minimize, on a
short-term basis, Clarks exposure to the risk of fluctuations in crude oil
prices and refined product margins. The number of barrels of crude oil and
refined products covered by such contracts varies from time to time. Such
purchases and sales are closely managed, balanced daily and subject to
internally established risk standards and covenants contained in Clarks credit
agreement. The results of these existing hedging activities affect refining
costs of sales and inventory costs.
With the Acquisition, Clark will have an opportunity to limit its exposure to
price fluctuations on crude oil and finished product production through the use
of U.S. Gulf Coast based energy derivatives, such as forward futures and option
contracts relating to Gulf Coast crack spreads. Currently, a market exists for
Gulf Coast refinery crack spreads based on published spot market product prices
and exchange-traded crude oil. Since Clark will initially be selling the
majority of the Port Arthur Refinery's production into the Gulf Coast spot
market, Clark believes that forward future and option contracts related to crack
spreads may be used effectively to hedge refining margins. Consequently, Clark
is considering the feasibility and implementation of such a program,
particularly in the initial phase of Clark's operation of the Port Arthur
Refinery. While Clarks hedging program, if implemented, would be intended to
provide an acceptable profit margin on a portion of the Port Arthur Refinery
production, the use of such a program could limit Clarks ability to participate
in an improvement in Gulf Coast crack spreads.
Clark manages its total inventory position in a manner consistent with a
hedging policy which states that a normal operating inventory level (base load)
will not be hedged, while material increases or decreases from this level will
be offset by appropriate hedging strategies to protect against an adverse impact
due to unfavorable price moves. With the acquisition of the Port Arthur
Refinery and its associated inventory, this base load level approximately
doubled. Clarks retail network also reduces risk by providing market sales
which represented approximately 74% of the Illinois refineries' gasoline
production for the year ended December 31, 1994 and would represent
approximately 37% including the Port Arthur refinery. In addition, the retail
network benefits from a reliable and cost-effective source of supply.
Capital Investment
Clark continually strives to increase its refineries' efficiency and
competitive position to meet changing market and regulatory demands. Clark
believes that its current strategic capital expenditure plan to comply with
mandatory environmental and other regulatory requirements should continue to
position Clark to compete effectively. The business strategy evaluates the
costs and benefits of complying with environmental regulations, especially those
capital projects which are primarily discretionary. Clark evaluates these
primarily discretionary environmental compliance expenditures with the goal of
incurring such expenditures only when satisfactory returns are expected. Clark
plans to optimize capital investments by linking capital spending to cash flow
generated within each of its operations.
Clean Air Act/Reformulated Fuels
7
<PAGE>
Under the Clean Air Act, the U.S. Environmental Protection Agency (''EPA'')
promulgated regulations mandating maximum sulfur content for diesel fuel offered
for sale for on-road consumption, which became effective in October 1993.
Additional EPA regulations include guidelines for RFG which became effective in
1995 for nine regions in the U.S., including Chicago and Milwaukee, the only two
currently affected metropolitan areas in Clark's existing markets. Clark, and
virtually all other domestic refineries producing gasoline, were required to
make significant capital expenditures to comply with these new requirements.
Clark has preliminary plans to complete a number of environmental and other
regulatory capital expenditure programs over the period 1995 to 1998.
Environmental and regulatory expenditures consist of two major categories:
mandatory projects to comply with regulations pertaining to ground, water and
air contamination and occupational, safety and health issues, and discretionary
projects which primarily involve the reformulation of refined fuel for sale into
certain defined markets. Clark estimates that total mandatory refining
expenditures for environmental and regulatory compliance from 1995 through 1998
will be approximately $200 million in the aggregate. Costs to comply with
future regulations can not be estimated.
Company expenditures required to comply with reformulated fuels regulations
are primarily discretionary, subject to market conditions and economic
justification. The reformulated fuels programs impose restrictions on
properties of fuels to be refined and marketed, including those pertaining to
gasoline volatility, oxygenated content, detergent addition and sulfur content.
The regulations regarding these fuel properties vary in markets in which Clark
operates, based on attainment of air quality standards and the time of the year.
Modifications were implemented in 1994 to produce 50% RFG at the Blue Island
refinery at a cost of approximately $8 million.
In prior years, Clark invested $23 million in a project initiated to produce
low sulfur diesel fuel at the Hartford refinery which was delayed in 1992 based
on internal and third party analyses that indicated an oversupply of low sulfur
diesel fuel capacity in Clark's marketplace. These analyses projected
relatively narrow price differentials between low and high sulfur diesel
products. This projection has thus far been borne out after the initial
transition to the low sulfur regulations. High sulfur diesel fuel is utilized
by the railroad, marine and farm industries. If price differentials widen
sufficiently to justify investment, Clark could install the necessary equipment
over a 14 to 16 month period at an estimated additional cost of $40 million.
Clark believes there may be potential for improved future economic returns
related to the production of low sulfur diesel fuel, but is deferring further
construction on this project. Clark believes that it would not recover its
entire investment in this project should the project not be completed.
Market Environment
While current industry refining margins are depressed, Clark believes that it
is well positioned to benefit from anticipated long-term improvements in
refining industry profitability. These improvements are expected to result from
increased demand for refined products at a time when domestic refinery
utilization is nearing its maximum crude oil processing limits and industry
capital expenditures are expected to decrease. Industry studies indicate that
since 1983 a tighter balance in supply and demand for refined light petroleum
products has developed in the United States. Capacity utilization for the
industry equaled 92% in 1994 (compared to 71.7% in 1983). Clark believes that
the maximum sustainable refining industry capacity utilization is approximately
93% due to the requirements for regular maintenance.
Industry studies attribute the prospect for improving refining industry
profitability to, among other things: (i) the high utilization rates of U.S.
refineries; (ii) continued economic-related growth in the demand for gasoline in
the United States; (iii) the decreasing level of planned capital expenditures
for additional refining capacity capable of producing higher-value light
petroleum products, such as gasoline and diesel fuel; and (iv) the objective of
those refiners that have invested significant capital in environmental-related
projects to obtain returns on these investments through higher product prices.
Based on its experience and several industry studies, Clark believes that the
U.S. refining industry may evidence gradual margin improvement through the end
of the decade.
Clark believes that significant additional domestic grass roots construction
is unlikely because of high capital costs and stringent environmental
regulations. The last grass roots refinery in the United States was built in
the mid 1970s. The only significant increase in refining crude oil processing
capacity that Clark anticipates in the next few years is the planned restart of
up to 200,000 barrels per day of capacity at the Good Hope refinery in Louisiana
by year-end 1995.
8
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During the last three years, several United States refiners have announced
plans to sell or close refineries as a result of the high capital expenditures
required to produce RFG and to comply with the Clean Air Act and other
environmental regulations. While much of this capacity has been closed,
industry sources estimate that an incremental 200,000 barrels per day of
capacity could be closed by 2000. These reductions in capacity along with
decreased fuel efficiency of RFG will partially offset the addition of
oxygenates (ethanol, MTBE and ETBE) which will be added to the gasoline pool to
meet the RFG specifications that went into effect in non-attainment areas on
January 1, 1995.
United States gasoline demand has increased by an average of 1% to 2% over the
last decade. Industry studies anticipate this demand to continue to track
economic growth as measured by statistics such as gross domestic product. In
addition, the demand for gasoline in Europe and Asia is expected to increase as
these areas emerge from recession, reducing the incentive for foreign refiners
to export gasoline to the U.S. The more restrictive RFG specifications and
conventional gasoline regulations may also reduce the ability of foreign
refiners to supply imported product.
Refining industry capital expenditure budgets in the United States in the past
five years have been high relative to historic levels and have primarily focused
on compliance with current and proposed environmental regulations, such as those
mandated by the Clean Air Act which provide, among other things, that (i) as of
November 1992, 39 cities which had failed to attain mandated carbon monoxide air
quality standards were required to use oxygenated gasoline for four to twelve
months of each year depending upon each area's historical noncompliance period,
and (ii) beginning in 1995, the nine cities which have the worst ozone quality,
including the Chicago and Milwaukee metropolitan areas which are two key Clark
markets, were required to use RFG throughout the year in order to decrease the
emission of hydrocarbons and toxic pollutants. Another 87 areas which have
failed to attain ozone air quality standards may elect to use RFG throughout the
year.
Industry studies also indicate that 1994 capital expenditures for the domestic
refining industry were expected to be significantly lower than the peak
expenditures made during 1992 to comply with then recently adopted environmental
regulations. These studies also indicate that capital expenditures to increase
capacity are expected to continue to decline through 1997. Although some
refineries increased light production capabilities in conjunction with recent
environmental project capital spending, the current reduction in capital
spending and increased environmental regulations should limit the addition of
incremental light petroleum product production capacity at refineries in the
United States. Much of this decline in capital spending has occurred in the
regions which include Clark's Illinois refineries and the Port Arthur Refinery.
The differential in the cost of light crude oil versus heavy crude oil has
narrowed in recent years due to construction of additional coking capacity as
well as an increased percentage of light crude oil availability in the
marketplace. Industry studies anticipate this differential to widen in the
future due to the reduction in capital spending for new residual oil conversion
capacity. Additionally, the differential is anticipated to widen with increased
demand for light products that result in utilization of existing conversion
capacity requiring incremental crude oil throughput to be lighter, thus
increasing its demand and the relative cost. Since the Hartford and Port Arthur
refineries have coking capability which enables the processing of heavy crude
oil when this differential becomes attractive, the Company believes this
development could have a favorable impact on the Companys future cash flow and
earnings.
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Strategy
The refining division has developed a strategy consistent with the Company's
overall business strategy that focuses on improving productivity, changing
culture, optimizing capital investments and growth. This strategy is described
in more detail with respect to productivity and culture as follows:
Productivity. The refining division operates in a commodity-based market
environment in which market prices for crude oil and refined products are
largely beyond its control. Accordingly, the refining division focuses on
improving productivity by increasing production, enhancing yields and minimizing
operating costs.
Over the past two years, the refining division has identified and implemented,
and is continuing to implement, numerous productivity improvement initiatives.
Clark anticipates that additional productivity improvements will be identified
and implemented in future periods. To date, the refining division has been
implementing productivity projects with payouts estimated by Clark to be less
than 18 months. Examples of some of the productivity improvements at the Blue
Island and Hartford refineries follow:
Blue Island
FCC unit charge. A review by independent consultants and Company personnel of
the FCC unit resulted in the development of an operating plan to optimize the
operation of the unit and increase its effective throughput limits while
maintaining carefully determined operational, environmental and safety
guidelines. As a result of implementing this plan, the capacity of the FCC
unit was increased from approximately 25,000 barrels per day to a nominal rate
of 31,000 barrels per day in 1994.
Sour crude charge. Since it began operation, the refinery has processed sweet
crude oil because of its availability. As a result, the sulfur content of the
refinery's distillate product was significantly better than market
specifications, but Clark did not receive any premium to other high-sulfur but
on-specification product. Therefore, Clark was not taking advantage of the
differential between sour and sweet crude oil with similar yields. In order
to address this opportunity, Clark made minor modifications to its operations
in 1993 to process some amount of lower cost sour crude oil. This operating
change resulted in the refinery's 1994 crude slate consisting of 25% sour
crude oil.
Crude charge. Historically, the refinery operated using a crude oil
throughput limit of approximately 70,000 barrels per day. Following studies
by consultants and Company engineers, it was determined that the equipment
could safely process higher rates of crude oil with minor unit investments of
approximately $0.5 million. Crude oil throughput rates of almost 80,000
barrels per day were achieved in 1994. Following additional planned
debottlenecking projects, crude oil throughput rates are anticipated to
increase by an additional amount in 1995.
Hartford
Deep cut project. The operating parameters for the crude vacuum unit were
changed to yield higher production of gas oil and reduced coker charge
amounts. Gas oil is a higher value product than coker charge.
FCC fractionation. The operation of the FCC unit fractionation tower was
modified to enable the recovery of a greater amount of light cycle gas oil
from the slurry bottoms. Light cycle gas oil is a higher value product than
slurry bottoms.
Reformer guard bed and reactor. This project included installing reactor
modifications constructed from an existing spare tower to eliminate
undesirable feed constituents prior to processing through the primary catalyst
beds. As a result, the improved operating efficiency of the reformer yielded
decreased production of less desirable light end products, produced more
hydrogen and decreased the amount of scheduled downtime necessary for catalyst
regeneration.
LVGO versus crude preheat. By using light vacuum gas oil (''LVGO'') waste
heat and a spare exchanger to preheat crude oil, this project resulted in
increased crude unit throughput of approximately 2,000 barrels per day.
10
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Well water cooler. The temperature in the coker trim cooler was lowered by
using 58 degrees F well water rather than 90 degrees F cooling tower water.
The lower temperature resulted in additional condensation and enabled
recovery of hydrocarbon products that were previously flared.
Refining Culture. The refining division emphasizes an entrepreneurial
approach which uses employee incentives to enhance financial performance through
productivity, regulatory compliance and safety. All refining division employees
participate in a variety of incentive programs. Clark believes that these
incentive programs encourage employees to operate in a safe and productive
manner and promote innovation.
MARKETING
Clark markets gasoline and convenience products in twelve Midwestern states
through a retail network of 839 stores at December 31, 1994. Clark also markets
refined petroleum products on a wholesale basis to distributors, chain retailers
and industrial consumers.
Retail Overview
Clark's retail system began operations during the 1930s with the opening of
Old Clark's first store in Milwaukee, Wisconsin. Old Clark then expanded
throughout the Midwest. At its peak in the early 1970s, Old Clark operated more
than 1,800 retail stores and had established a strong market reputation for high
octane gasoline at discount prices. In subsequent years, Old Clark, in line
with the general industry trends, rationalized its operating stores by closing
down marginal locations. During the 1970s, the majority of Old Clark's stores
were dealer-operated. To ensure more direct control of its marketing and
distribution network, Old Clark assumed operation of most of its stores from
1973 through 1983.
As of December 31, 1994, Clark had 839 retail stores, all of which operated
under the Clark brand name. Of these 839 stores (742 owned and 97 leased),
Clark directly operated 829 and the remainder were dealer-operated. Clark
believes that the high proportion of company-operated stores enables Clark to
respond more quickly and uniformly to changing market conditions than major oil
companies which generally have most of their stores operated by dealers or
jobbers. All stores sell gasoline on a self-service basis and all sell
convenience products.
More than half of Clark's stores are in major metropolitan areas. Clark's
three highest volume core metropolitan markets are Chicago, Detroit and
Cleveland. Clark's core markets are markets in which Clark believes it can
maintain or develop market share of 8% to 15% in order to leverage brand
recognition, promotions and other marketing and operating activities. The
geographic distribution of retail stores by state, as of December 31, 1994, was
as follows:
GEOGRAPHICAL DISTRIBUTION OF RETAIL STORES
<TABLE>
<CAPTION>
COMPANY DEALER TOTAL
OPERATED OPERATED STORES
-------- -------- ------
<S> <C> <C> <C>
Illinois.......... 229 -- 229
Ohio.............. 179 3 182
Michigan.......... 167 2 169
Indiana........... 89 -- 89
Wisconsin......... 77 4 81
Missouri.......... 48 1 49
Other states (a).. 40 -- 40
--- -- ---
Total 829 10 839
=== == ===
</TABLE>
(a) Iowa, Kansas, Kentucky, Minnesota, Pennsylvania and West Virginia
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To improve gasoline sales volumes and margins, in 1989 Clark began introducing
special blending dispenser pumps to market three grades of gasoline. Clark
believes the blending pumps improve volumes and margins by enabling Clark to
market a more profitable mid-grade gasoline without the installation of costly
additional underground storage tanks. In addition, Clark has been installing
canopies at its stores which Clark believes will improve gasoline sales volumes
due to better lighting and shelter from adverse weather conditions. At December
31, 1994, approximately one-half of Clark's stores had blending pumps and over
one-half had canopies. Clark expects that by the end of 1995 approximately 70%
of its stores will have blending dispensers, and 90% of its stores will have
canopies.
Until 1989, retail sales were primarily for cash as customers were charged a
premium for credit card purchases. In 1989, Clark upgraded its credit card
processing system, enabling it to receive payments for credit card sales within
48 hours. Simultaneously, Clark revised its pricing policy to charge the same
price for cash and credit card purchases in order to remain competitive with
other gasoline retailers. Also in 1989, a business fleet card program was
initiated to attract a new segment of customers. Fleet customers are provided
with a proprietary credit card and detailed vehicle statistical information
which is included on a convenient monthly invoice.
Clark has implemented a number of environmental projects at its retail stores.
These projects include the ongoing Company response to the September 1988
regulations that provided for a 10 year transition period through 1998, and are
related to the design, construction, installation, repair and testing of
underground storage tanks and the requirement of the Clean Air Act to install
Stage II vapor recovery systems at certain retail stores. Clark has underground
storage tank leak detection devices installed at nearly all retail locations and
has underground storage tanks and lines at approximately one-half of all
locations that meet the September 1998 federal underground storage tank
compliance deadline. Clark estimates that mandatory retail capital expenditures
for environmental and regulatory compliance from 1995 through 1998 will be
approximately $40 million in the aggregate. Costs to comply with future
regulations cannot be estimated.
Market Environment
The retail markets have historically been highly competitive with a number of
well capitalized major oil companies and both large and small independent
competitors. Industry studies indicate that over the last several years the
retail markets have been characterized by several significant trends including
(i) increased store rationalization to fewer geographic regions and (ii)
increased consumer emphasis on convenience.
. Rationalization. During the past several years, the retail market has
experienced increasing concentration of market share in selected and fewer
geographic regions as major oil companies have divested non-strategic
locations and have focused efforts on targeted areas, many of which are near
strategic supply sources. Additionally, operators have closed marginal and
unprofitable locations as a result of increasing environmental regulations
requiring replacement of underground storage tanks and lines. The lack of
numerous additional favorable sites in existing markets and the high cost of
construction of new facilities are also believed to be barriers to new
competition.
. Consumer Emphasis on Convenience. Industry studies indicate that consumer
buying behavior continues to reflect the increasing demands on consumer time.
Convenience and the time required to make a purchase are increasingly
important considerations in the buying decision.
Clark believes these two trends may result in decreased competition and a
corresponding increase in market share in Clark's core markets.
Since 1982, United States gasoline demand has grown by an average of 1% to 2%
annually and industry studies anticipate this demand will continue to track
economic growth. Other factors which contribute to the modest growth outlook
for gasoline include: (i) the lower energy content of oxygenated gasoline
compared with conventional gasoline and the resultant lower miles per gallon of
this fuel when used in the existing automobile fleet, (ii) the declining
difference in the fuel efficiency of the existing and retiring automobile fleet
and (iii) the anticipation of relatively small increases in fuel economy of new
car models.
Strategy
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<PAGE>
Clark's retail network is over 98% Company-operated. Market research
conducted in 1992 indicated that Clark was the third most recognized gasoline
brand in its core market areas. Clark believes that its control over its retail
operations combined with its established brand name in its markets are
competitive advantages. In addition, Clark believes it can add to these
advantages by implementing programs to optimize capital expenditures, strengthen
brand reputation, grow through acquisitions and maximize customer satisfaction.
Clark has developed plans to achieve its strategic goals by focusing on a market
segment philosophy designed to increase sales volumes, profits and return on
investment by positioning Clark as the premier value-oriented marketer of
gasoline and On The Go/TM/ convenience product items in the Midwestern United
States.
. Marketing focus. Clark believes its retail market focushigh quality products
and fast delivery of services at competitive priceshas not been fully captured
in the retail gasoline industry. Clark also believes it can exploit this
opportunity by consistently providing fast service and selected convenience
products that satisfy immediate consumption demand (Clark's On the Go/TM/
theme). Clark has developed the On The Go/TM/ theme to capture this
opportunity, strengthen the brand image and differentiate Clark from (i) the
major oil companies, which typically invest more in their locations and price
gasoline at a higher level, (ii) the convenience store companies, which
typically offer a full range of grocery items and may or may not offer
gasoline, and which have a large investment in inventory and square footage
and (iii) the unbranded independents, whose gasoline quality may be perceived
to be inferior.
. Core markets focus. Market business planning is a management tool that was
adopted by Clark in 1992 as the principal method to define preferred markets.
This method utilizes economic, demographic and market data to develop market-
specific plans for both asset and operational strategies. Clark focuses on
core markets where it has, or can develop, a competitive advantage with
targeted market share of between 8% and 15%. In those markets where Clark
already has a competitive strength on which to build or where opportunities
have been identified, Clark will consider expanding through development and
acquisition of stores and/or a branded jobber program. In October 1994, Clark
acquired through an operating lease 35 stores in the Chicago market, 14 of
which will be added during 1995. In addition, Clark has signed an operating
lease, subject to financial and environmental due diligence, for an additional
35 stores in another key Illinois market. Although Clark expects to close
under this operating lease in early 1995, no assurance can be given that such
operating lease will be consummated. In those market areas where the Clark
brand name is not strong and Clark has a lower market ranking, Clark will
divest retail locations if favorable sale opportunities arise. Clark has
recently exited the Louisville, Kentucky and Evansville, Indiana markets and
has identified the Minnesota, Kansas and Western Missouri markets for
potential store divestitures.
The marketing division has developed a retail strategy consistent with Clark's
overall business strategy. Key elements of this strategy include:
. Improving productivity. The marketing division's retail goal is to achieve
significant productivity gains, exclusive of market impacts. Planning and key
initiatives are based on this constant margin philosophy to focus the
organization on earnings separate from those which reflect only a market
impact. Recent productivity improvements include increased monthly gasoline
volumes per store of 9% from 1992 to 1993 and 4% from 1993 to 1994, and
increased monthly convenience product gross margins per store of 19% from 1992
to 1993 and 7% from 1993 to 1994.
. Optimizing capital investments. Capital investments are linked to the
marketing division's and Clark's overall earnings. Capital is budgeted for
projects to achieve the marketing division's productivity improvements and
acquisition plans as well as to meet Clarks environmental requirements. Funds
are allocated for investments such as the reimage program (approximately
$18,000 per location) and store expansion projects (approximately $45,000 to
$55,000 per location) which Clark believes are significantly below investments
made by its key competitors for upgrades of retail facilities.
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<PAGE>
. Promoting entrepreneurial culture. The marketing division employs a
decentralized team-oriented culture with training programs and employee
incentives designed to deliver service that exceeds customer expectations.
Clark believes that customer satisfaction is linked to employee satisfaction,
and that its incentive systems and feedback processes will contribute to the
performance and motivation of its focused workforce.
. Growing through acquisitions. Clark has a target of 8% to 15% market share
in core markets. Plans have been established to attain the market share
target by continuing to improve volumes at existing facilities, building new
facilities and acquiring locations from other operators.
Implementation and Results
Implementation of the On The Go/TM/ theme began in 1993. This program
involves many changes in Clark's human resource development, marketing programs
and facilities. Clark believes the implementation of this theme has produced
improved marketing division results in both 1993 and 1994.
. Human resources development. Clark believes that part of the improvement in
retail division results is attributable to the implementation of employee
development programs. Many management and skilled position personnel have
been hired from successful competitors and from other highly regarded
corporations and retailers with similar market and customer characteristics.
Employee performance is monitored versus aggressive goals, and this
measurement provides the basis for the division's incentive program. Clark's
store managers have the flexibility to price gasoline and to select and price
convenience products and also have the responsibility to achieve acceptable
gross margin results. Other areas of the organization are responsible for
supporting the stores' efforts to provide value and service to existing
customers as well as to attract new customers. Clark has committed
significant resources to employee training and development. Clark believes
this effort has resulted in improved operations, gasoline pricing, customer
service and convenience product merchandising.
. Marketing programs. Marketing programs have been implemented to attract new
customers as well as create a new consumer image for Clark. Clark's annual
''signature'' promotion run during selected weeks in 1993 and 1994 offered all
grades of gasoline for the same price as regular unleaded gasoline. This
program resulted in significant increases in total gallons sold during these
promotional periods. In addition, Clark believes that the promotion has
largely been responsible for the approximate 44% improvement in the sale of
higher margin mid-grade and premium gasoline from 1992 to 1994. Additional
programs have included system-wide monthly convenience product promotions with
attractive point of sale materials, and managers' specials which are targeted
to local demographics and customer preferences.
. Facility development. Clark is implementing a four-phase approach to its
facilities strategy. This approach is designed to improve productivity and
profitability while creating a sustainable competitive position in the
marketplace.
Phase I: This phase was designed to change the convenience product offering to
higher margin On The Go/TM/ convenience products while decreasing the reliance
on tobacco products. Store interior remodeling was completed in late 1993
which added fountain machines, three door coolers and attractive and
functional wall display systems that increased the available sales area in
virtually all of Clark's stores. Clark believes that this program contributed
to the increase in convenience product revenue for non-tobacco products from
32% of total convenience product sales for 1992 to 40% in 1994. Clark
believes this program has also contributed to the improvement of convenience
product gross margins from approximately $4,500 per month per store in 1992 to
$5,700 per month per store in 1994.
Phase II: In this phase, Clark developed a reimaging plan for its retail
network to modernize stores and convert to Clark's new logo and vibrant color
scheme. Clark began implementing this program in March 1994. Clark reimaged
402 stores in 1994 and expects to complete the reimaging of the remainder in
1995. Clark estimates that certain markets already imaged have realized
gasoline volume increases of approximately 10% and convenience product sales
increases of approximately 15% for 1994 compared to the prior year. No
assurance can be given that the results realized in the reimaged stores will
be sustained or duplicated in Clark's other markets.
14
<PAGE>
Phase III: In this phase, Clark developed optimization projects which resulted
from Clark's market business planning process. This phase involves adding
canopies, enlarging selected stores, and providing new gasoline dispensers and
islands and more visible signage. Clark's results indicate that the addition
of canopies increased gasoline gallons and convenience product revenues by
approximately 15% after one year of operation. Clark's goal is to have a
canopy at 90% of all stores by December 31, 1995. The implementation of
Clark's S.M.A.R.T. (Smart Merchandising And Rapid Turns) program to modestly
enlarge the store sales area to approximately 400 square feet has contributed
to gasoline sales increases at these stores of approximately 10% and
convenience product sales increases of approximately 20% for 1994 compared to
1993.
Phase IV: In this phase, Clark will add new stores and product offerings such
as car washes, branded fast food, dispenser credit card readers, private label
products and other new concepts. Clark has conducted extensive research for
all of these concepts and has developed aggressive plans for Phase IV
implementation.
Wholesale Overview
Clark's wholesale marketing program consists of direct petroleum product sales
to truck rack customers as an alternative to spot market sales. In 1992, Clark
began to develop this channel and broaden its wholesale customer base by
increasing the number of sales representatives and becoming a more consistent
supplier. In addition, in anticipation of the October 1993 deadline for low
sulfur on-road diesel fuel, Clark focused efforts on building market presence
and customer relationships with off-road diesel fuel users. In 1994, Clark's
sales of gasoline and diesel fuel to wholesale markets in the Midwest
represented approximately 36% and 67%, respectively, of its gasoline and diesel
fuel refining production.
To meet marketing requirements that at times exceed Clark's own refining
production, and to benefit from economic and logistical advantages which may
occur, Clark also supplies its retail and wholesale networks through exchanges
and purchases of refined product from other suppliers. Clark sells its gasoline
and diesel fuel on an unbranded basis to approximately 600 distributors and
chain retailers. Clark believes these sales offer higher profitability than
spot market alternatives. Railroads, barge lines and other industrial end-users
represent the largest share of other wholesale customers. Clark believes that a
branded distributor program and further focus on the transportation industry
offers significant opportunity for incremental sales volumes and earnings in the
future.
COMPETITION
The refining and marketing segment of the oil industry is highly competitive.
Many of Clark's principal competitors are integrated multinational oil companies
that are substantially larger and better known than Clark. Because of the
diversity, integration of operations, larger capitalization and greater
resources, these major oil companies may be better able to withstand volatile
market conditions, compete on the basis of price and more readily obtain crude
oil in times of shortages.
The principal competitive factors affecting Clark's refining division are
crude oil and other feedstock costs, refinery efficiency, refinery product mix
and product distribution and transportation costs. Certain of Clark's larger
competitors have refineries which are larger and, as a result, could have lower
per barrel costs or high margins per barrel of throughput. The Company has no
crude oil reserves and is not engaged in exploration. Clark obtains all of its
crude oil requirements from unaffiliated sources. Clark believes that it will
be able to obtain adequate crude oil and other feedstocks at generally
competitive prices for the foreseeable future.
The principal competitive factors affecting Clark's retail marketing division
are locations of stores, product price and quality, appearance and cleanliness
of stores and brand identification. Competition from large, integrated oil
companies, as well as convenience stores which sell motor fuel, is expected to
continue. The principal competitive factors affecting Clark's wholesale
marketing business are product price and quality, reliability and availability
of supply and location of distribution points.
15
<PAGE>
ENVIRONMENTAL MATTERS
Compliance Matters
Operators of refineries and gasoline stores are subject to comprehensive and
frequently changing federal, state and local environmental laws and regulations,
including those governing emissions of air pollutants, discharges of wastewaters
and storm waters, and the handling and disposal of non-hazardous and hazardous
waste. Many of these laws authorize the imposition of civil and criminal
sanctions upon companies that fail to comply with applicable statutory or
regulatory requirements. The Company believes that, in all material respects,
its existing operations are in compliance with such laws and regulations.
However, the Company's existing operations are large and complex. The
numerous environmental regulations to which they are subject are complicated,
sometimes ambiguous, and often changing. It is therefore possible that there
are areas in which the Company's existing operations are not currently in
compliance with all environmental laws and regulations. Accordingly, the
Company may be required to make additional expenditures to comply with existing
requirements.
The Company anticipates that, in addition to expenditures to comply with
existing environmental requirements, it will incur additional costs in the
future to comply with new regulatory requirements arising from recently enacted
statutes (such as the Clean Air Act requirements for operating permits and
control of hazardous air pollutants) and possibly with new statutory
requirements.
Federal, state and local laws and regulations establishing various health and
environmental quality standards and providing penalties for violations thereof
affect nearly all of the operations of the Company. Included among such
statutes are the Clean Air Act, the Resource Conservation and Recovery Act of
1977, as amended ("RCRA") and the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended (''CERCLA''). Also
significantly affecting the Company are the rules and regulations of the
Occupational Safety and Health Administration (''OSHA'').
The Clean Air Act requires the Company to meet certain air emission standards
and to obtain and comply with the terms of emission permits. The RCRA empowers
the EPA to regulate the treatment and disposal of industrial wastes and to
regulate the use and operation of underground storage tanks. CERCLA requires
notification to the National Response Center of releases of hazardous materials
and provides a program to remediate hazardous releases at uncontrolled or
abandoned hazardous waste sites. CERCLA was amended and reauthorized by the
Superfund Amendments and Reauthorization Act of 1986 (''SARA''). Title III of
SARA, the Emergency Planning and Community Right to Know Act of 1986, relates to
planning for hazardous material emergencies and provides for a community's right
to know about the hazards of chemicals used or manufactured at industrial
facilities. The OSHA rules and regulations call for the protection of workers
and provide for a worker's right to know about the hazards of chemicals used or
produced at facilities.
Regulations issued by the EPA in 1988 with respect to underground storage
tanks require Clark, over a period of up to ten years, to install, where not
already in place, detection devices and corrosion protection on all underground
tanks and piping at its retail gasoline outlets. The regulations also require
periodic tightness testing of underground tanks and piping. Commencing in 1998,
operators will be required under these regulations to install continuous
monitoring systems for underground tanks.
In March 1989, the EPA issued Phase I of regulations under authority of the
Clean Air Act requiring a reduction for summer months in 1989 in the volatility
of gasoline (''RVP'') (the measure of the amount of light hydrocarbons contained
in gasoline, such as normal butane, an octane booster). In June 1990, Phase II
regulations were issued by the EPA which required further reduction in RVP
beginning in May 1992. The Clean Air Act also established nationwide RVP
standards effective May 1992, but these do not exceed the EPA's Phase II
standards.
The Clean Air Act has impacted the Company primarily in the following areas:
(i) beginning in late 1994, all gasoline produced and sold in the United States
was required to contain additives designed to reduce the formation of engine
deposits; (ii) beginning in 1995, a ''reformulated'' gasoline (which would
include content standards for oxygen, benzenes and aromatics) was mandated for
gasoline sold in the nine worst ozone polluting cities, including Chicago and
Milwaukee in Clark's market area; (iii) Stage II hose and nozzle controls will
be required on gas pumps to capture fuel vapors in nonattainment areas, which
will affect 400 company stores; and (iv) more stringent refinery permitting
16
<PAGE>
requirements will be in effect. EPA regulations required that after October 1,
1993 the sulfur contained in on-road diesel fuel produced in the U.S. must be
reduced. In addition, stricter refinery waste disposal requirements will apply
as a broader group of wastes are classified as hazardous.
The Company cannot predict what environmental legislation or regulations will
be enacted 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 previously been applied. Compliance with more stringent laws or
regulations, as well as more vigorous enforcement policies of the regulatory
agencies or stricter interpretation of existing laws which may develop in the
future, could have an adverse effect on the financial position or operations of
the Company and could require substantial additional expenditures by the Company
for the installation and operation of pollution control systems and equipment.
See ''Legal Proceedings.''
Remediation Matters
In addition to environmental laws that regulate the Company's on-going
operations, Clark's various operations also are subject to liability for the
remediation of contaminated soil and groundwater. Under CERCLA and analogous
state laws, certain persons may be liable as a result of the release or
threatened release of hazardous substances into the environment. Such persons
include the current owner or operator of property where such releases or
threatened releases have occurred, any persons who owned or operated such
property during the time that hazardous substances were released at such
property, and persons who arranged for the disposal of hazardous substances at
such property. Liability under CERCLA is strict. Courts have also determined
that liability under CERCLA is, in most cases, joint and several, meaning that
any responsible party could be held liable for all costs necessary for
investigating and remediating a release or threatened release of hazardous
substances. As a practical matter, liability at most CERCLA (and similar) sites
is shared among all the solvent ''potentially responsible parties'' (''PRPs'').
The most relevant factors in determining the probable liability of a party at a
CERCLA site usually are the cost of investigation and remediation, the relative
amount of hazardous substances contributed by the party to the site and the
number of solvent PRPs.
The release or discharge of petroleum and hazardous materials can occur at
refineries, terminals and stores. Clark has identified a variety of potential
environmental issues at its refineries, terminals and stores. In addition, each
refinery has areas on-site which may contain hazardous waste or hazardous
substance contamination and which may have to be addressed in the future at
substantial cost. Many of the terminals may also require remediation due to the
age of tanks and facilities and as a result of current or past activities at the
terminal properties including several significant spills and past on-site waste
disposal practices.
In 1988 and 1989, Clark received correspondence from the EPA inquiring into
the nature of Clark's involvement with respect to certain off-site disposal
locations known as the Ninth Avenue Site (Gary, Indiana), the U.S. Scrap Site
(Chicago, Illinois) and the Tex-Tin Site (Texas City, Texas), and indicating
that the EPA believes Clark to be a PRP with respect to such sites. Information
contained in such correspondence indicates that these sites were closed and no
longer in operation prior to the time Clark commenced operations in November,
1988. Clark believes that any connection with these sites would have been on
the part of Old Clark and, as such, believes it has no liability for these sites
because of the terms of the Asset Purchase Agreement with Old Clark which
provided that Clark would not assume environmental liabilities arising prior to
the date of closing. Clark has notified the EPA of its position with respect to
each of these sites and has had no subsequent contact from the EPA with respect
to the U.S. Scrap and Tex-Tin sites since that notification. On January 6,
1995, Clark received a unilateral Administrative Order (''Order'') issued by the
EPA in connection with the Ninth Avenue site identifying ''Clark Oil & Refining
Corp.'' as a PRP, along with approximately ninety other parties. The Order
instructs the PRPs to design and implement certain remedial work at the site.
Information provided with the Order estimates that the remedial work may cost
approximately $25 million. In addition, on December 29, 1994, Clark received a
lawsuit brought by the Ninth Avenue Remedial Group (''Group'') naming ''Clark
Oil & Refining Corp.'' along with approximately eighty other parties as
defendants. The Group purports to be an unincorporated association of
approximately twenty corporations which have previously responded to
administrative orders issued by EPA in connection with the site. The suit
alleges that approximately $20 million has been expended by the Group on clean-
up activities at the site, and seeks judgment against the defendants for all
past and future response costs associated with the site.
Clark does not believe that it is a proper party to any of the above-described
claims. Clark cannot estimate costs for which it may ultimately be liable with
respect to these three sites, but, in the opinion of the management of the
17
<PAGE>
Company, these costs should not have a material adverse effect on the Company's
financial condition. There can be no assurance that the Company will not be
named as a PRP at additional sites in the future or that the costs associated
with those sites would not be substantial.
In late 1990, Clark received a letter from the Illinois Attorney General
Environmental Control Division which included a report prepared by the Illinois
Environmental Protection Agency (''IEPA'') on its investigation of the Village
of Hartford, Illinois groundwater contamination. The report cited the history
of the groundwater contamination in the area including the installation by Old
Clark in 1978 of recovery systems in Hartford for the removal of hydrocarbons
from the surface of the groundwater. The report identified Clark or Old Clark
and two other oil companies as potential contributors to the contamination. In
particular, it contended that Clark or Old Clark is the party primarily
responsible for the hydrocarbon contamination and demanded that more aggressive
and encompassing efforts be immediately initiated by Clark. Clark submitted its
response to the letter and the report on January 15, 1991. In its response
Clark indicated, without admission of legal liability, that it would continue to
cooperate with the Illinois Attorney General and the IEPA by performing a
remediation program meeting the objectives defined by the IEPA in its report.
The response also contained data which disputed many of the contentions made by
the IEPA. Clark's remediation plan was approved by the IEPA and the IEPA has
issued all necessary permits to implement the remediation plan. The IEPA is
provided with monthly progress reports. Clark successfully completed a major
portion of the remediation work under an implementation plan that was submitted
to the IEPA in August 1991. The necessity of future remediation work is being
evaluated. Based upon the estimates of an independent environmental engineering
firm, Clark established a $10 million provision for the estimated costs of its
mitigation and recovery efforts in 1991, of which $1.0 million remains for
future remediation at December 31, 1994.
Clark received an administrative complaint from the EPA on June 12, 1992
alleging record-keeping violations of the RCRA concerning 22 stores in Michigan,
Indiana and Wisconsin and seeking civil penalties of $600,000. On March 18,
1993, Clark received an amended complaint from the EPA involving similar
allegations but reducing the amount of civil penalties sought to $100,000.
Clark settled this matter for a civil penalty of $70,000 in January 1995. Clark
received an administrative complaint from the EPA on January 5, 1993 alleging
record-keeping and related violations of the Clean Air Act concerning the
Hartford refinery and seeking civil penalties of $100,000. On July 11, 1994,
the EPA filed an amended complaint alleging additional violations and increasing
the amount of the total penalty sought to $200,000. The case was tried to an
administrative law judge on August 23-24, 1994. On March 21, 1995, Clark
received the Initial Decision of the Administrative Law Judge, finding liability
against Clark and assessing a civil penalty of $140,000. Clark is considering
whether to appeal this decision.
An impoundment at the Hartford refinery contains hazardous wastes that were
produced as the result of past operations. Clark has been evaluating remedial
options with respect to that waste since 1992 and has been in discussions with
the IEPA concerning those options. In April 1993 an employee of the IEPA told
Clark that the presence of those hazardous wastes may require a permit under the
RCRA and that in turn may require corrective action with respect to the entire
refinery. Clark has received no formal notice or complaint with respect to
these issues from the IEPA. Clark has begun an investigation with respect to
the need for a permit and consequent corrective action. Based upon the
estimates of an independent engineering firm, Clark established a $9.0 million
provision for the estimated costs of site clean-up in 1992, of which $7.6
million has been spent through December 31, 1994 on remedial activities
performed after notice to and comments from the IEPA.
On May 5, 1993, Clark received correspondence from the Michigan Department of
Natural Resources (''MDNR'') indicating that the MDNR believes Clark may be a
PRP in connection with groundwater contamination in the vicinity of one of its
retail stores in the Sashabaw Road area north of Woodhull Lake and Lake Oakland,
Oakland County, Michigan. On July 22, 1994, MDNR commenced suit against Clark
and Chevron U.S.A. Products Co. seeking $300,000 for past response activity
costs incurred by MDNR in connection with this site. Based on its
investigation, Clark does not believe that it has contributed to any groundwater
contamination which may exist at the site.
On October 27, 1994, Clark received correspondence from the IEPA indicating
apparent non-compliance with the Illinois Environmental Protection Act in
connection with certain alleged environmental release incidents occurring at the
Hartford refinery from December, 1991 through September, 1994. Pursuant to the
correspondence, Clark has met with and provided certain information to the IEPA
concerning the allegations. On October 28, 1994, Clark received correspondence
from IEPA requesting a meeting with Clark officials to discuss an alleged
release of process wastewater and contaminated storm water to the Cal Sag
Channel from the Blue Island refinery, and indicating that the matter has been
referred to the office of the Attorney General for the State of Illinois for
preparation of a formal enforcement
18
<PAGE>
complaint. Clark has met with IEPA officials to discuss their concerns over the
incident. On October 25, 1994, Clark received correspondence from EPA submitting
a proposed agreed administrative order concerning an alleged violation in 1990
for violation of Section 114 of the Clean Air Act for failure to continuously
monitor opacity from the stack serving the FCC unit at the Blue Island refinery.
The Order does not seek a monetary fine or penalty from Clark. While it is not
possible to estimate with certainty the ultimate legal and financial liability
with respect to these matters, the Company believes that the outcome of these
matters individually, or in the aggregate, will not have a material adverse
effect on the Company's financial position.
Port Arthur Refinery
The original refinery on the site of the Port Arthur Refinery began operating
in 1904, prior to modern environmental laws and methods of operation. While
Clark believes that there is extensive contamination at the site, Clark is
unable to estimate the cost of remediating such contamination. Under the
purchase agreement, Chevron retained responsibility for remediating pre-closing
contamination on over 97% of the approximately 4,000 acres that comprise the
Port Arthur Refinery. Clark agreed to assume responsibility for any remediation
that is required in the area within 25 to 100 feet of the active operating units
(the ''Excluded Area''), including soil and groundwater. The Excluded Area
encompasses less than 100 acres of the total Port Arthur Refinery site surface
area. In addition, as a result of the Acquisition, Clark may become jointly and
severally liable under CERCLA for the costs of investigation and remediation at
the site. In the unlikely event that Chevron is unable (as a result of
bankruptcy or otherwise) or unwilling to perform the required remediation at the
site, Clark may be required to do so.
Chevron will be obligated to remediate the contamination in the areas for
which it has retained responsibility as and when required by law, in accordance
with remediation plans negotiated by Chevron and the applicable federal or state
agencies. Clark has agreed to take no action with the intention of accelerating
or increasing Chevron's remediation obligations, and the time period for such
remediation is indefinite. Subject to certain exceptions, Clark will generally
assume liability for future action (including action required as a result of a
subsequent change in law) with respect to each of over 20 geographic areas at
the refinery when Chevron's remediation of that area is complete and upon
acceptance by the appropriate regulatory authority. Clark is responsible for
all contamination arising after the closing of the Acquisition (unless caused by
Chevron).
The Port Arthur Refinery is not classified as a Superfund site under CERCLA,
is not on the National Priority List and is not listed as a State Superfund site
under the Texas Solid Waste Disposal Act (''SWDA''). In addition, the Port
Arthur Refinery is not in the CERCLIS (Comprehensive Response, Compensation and
Liability System) database. The EPA's CERCLIS database is a comprehensive list
of more than 35,000 identified potentially hazardous waste sites nationwide that
may require cleanup. CERCLIS sites that have achieved a certain score using the
EPA's Hazard Ranking System are eligible for the Superfund National Priority
List.
The future remediation of the Port Arthur Refinery is regulated according to
the provisions of the RCRA, SWDA and the Texas Water Code. The TNRCC has
statutory jurisdiction to implement SWDA and the Texas Water Code, and has been
granted authority by the EPA to implement the RCRA program. The remediation
mechanisms are a RCRA permit and administrative documents issued under State
authority which contain certain standards and schedules. A RCRA permit
application has been submitted to the TNRCC by Chevron but the permit has not
yet been issued. The facility will continue to operate under interim status
until the permit is issued. Evaluation of site contamination in the areas for
which Chevron is retaining responsibility has not been fully performed and is
anticipated to be addressed under the regulatory mechanisms addressed above.
Clark expects pipe trench remediation and the recovery of free phase
hydrocarbons to cost approximately $0.7 million annually for the next ten years
for these remediation efforts. The pipe trench remediation is expected to be
performed by Clark in the Excluded Area in coordination with Chevron's
remediation of the other remaining areas of the Port Arthur Refinery. Clark
will accrue approximately $7.5 million as part of the Acquisition for the
expected cost of these remediation actions. Due to the difficulty of
remediating the soil and groundwater beneath the active operating units and
because of the nature of the subsurface geology, which limits the movement of
groundwater and free phase hydrocarbons beneath the site, Clark believes that,
barring any operational problems, such remediation is not likely to be required
until the units are no longer in operation. Therefore, Clark will not accrue
any potential liability related to the remediation of the groundwater or soil
beneath the Excluded Area. However, Clark estimates in 1994 dollars,
remediation of groundwater and soil in the Excluded Area would be approximately
$27 million.
19
<PAGE>
On November 8, 1994, Clark met with representatives of the TNRCC to discuss
Clark's proposed approach for remediating the Excluded Area. In a letter dated
November 10, 1994, the TNRCC advised Clark that, based on the information
provided by Clark, Clark's proposed approach for remediating the excluded areas
is ''appropriate and consistent with TNRCC rules and policies for operating
refineries.'' However, Clark has not presented, nor has TNRCC approved, a
detailed remediation plan, and the TNRCC retains the right to enforce all laws
and regulations that may be applicable to the refinery.
Actual remediation costs, as well as the timing of such costs, are dependent
on a number of factors over which Clark has little or no control, including
changes in applicable laws and regulations, priorities of regulatory officials,
interest from local citizens groups and development of new remediation methods.
There can be no assurance as to the timing, incurrence or the extent of actual
remediation costs. If total remediation costs significantly exceed estimated
costs, or if Clark is required to incur significant capital costs sooner than
anticipated, the cost of remediation in the Excluded Area could have a material
adverse effect on Clark's financial position and results of operations.
EMPLOYEES
As of December 31, 1994, Clark employed approximately 5,700 people,
approximately 450 of whom were covered by collective bargaining agreements at
the Hartford and Blue Island refineries. The Hartford refinery contract expires
on February 28, 1996, and the Blue Island refinery contract expires on August
31, 1996. In addition, Clark has a union contract for certain employees at its
Hammond, Indiana terminal which expires March 31, 1995 and a new contract is
currently being negotiated. Historically, relationships with the unions have
been good and neither Old Clark nor Clark has ever experienced a work stoppage
as a result of labor disagreements. In connection with the Acquisition, Clark
hired approximately 850 former Chevron employees, substantially all of whom are
covered by collective bargaining agreements which expire in February 1996.
ITEM 3. LEGAL PROCEEDINGS
Forty-one civil suits by residents of Hartford, Illinois have been filed
against Clark in Madison County, Illinois, alleging damage from groundwater
contamination. The relief sought in each of these cases is an unspecified
dollar amount. The litigation proceedings are in the initial stages.
Discovery, which could be lengthy and complex, is only beginning. Clark moved
to dismiss thirty-four cases filed in December 1991 on the ground that Clark is
not liable for alleged activity of Old Clark. On September 4, 1992, the trial
court granted Clark's motions to dismiss. The plaintiffs were given leave to
re-file their complaints, but based only on alleged activity of Clark occurring
since November 8, 1988, the date on which the bankruptcy court with jurisdiction
over Old Clark's bankruptcy proceedings issued its ''free and clear'' order. In
November 1992, the plaintiffs filed thirty-three amended complaints, and nine
other plaintiffs filed additional complaints. While it is not possible to
determine whether or to what extent the Company will have any liability to other
individuals arising from the groundwater contamination, the Company believes
that the outcome of these complaints will not have a material adverse effect on
the Company's financial position.
On May 4, 1994, the United States Equal Employment Opportunity Commission
(''EEOC'') filed a class action lawsuit against Clark in the United States
District Court for the Northern District of Illinois alleging that Clark had
engaged in a pattern of practice of unlawful discrimination against certain
employees over the age of forty. The relief sought by the EEOC includes
reinstatement or reassignment of the individuals allegedly affected, payment of
back wages, an injunction prohibiting employment practices which discriminate on
the basis of age and institution of policies to eradicate the effects of any
past discriminatory practices. Clark believes the allegations to be without
merit and intends to vigorously defend this action. It is too early to predict
whether this case will go to trial, and, if so, what the risk of exposure to
Clark would be at trial.
On October 7, 1994, the FCC processing unit at the Blue Island refinery
experienced an on-site electrical malfunction which resulted in the release to
the atmosphere of used catalyst containing low levels of heavy metals, including
antimony, nickel and vanadium. The release resulted in the temporary evacuation
of certain areas near the refinery, including a high school. Approximately 50
people were taken to area hospitals. Clark has undertaken to reimburse the
medical expenses incurred by people receiving treatment. As of March 17, 1995,
no lawsuits have been filed in connection with this incident, nor have any
enforcement actions been initiated by any regulatory agencies. Clark has
received ''lien letters'' from attorneys purporting to represent approximately
22 individuals in connection with
20
<PAGE>
the incident, however, no information concerning the alleged injuries suffered
by such individuals has been received and no estimate of Clark's potential
liability can be made at this time. No enforcement action has been initiated by
any regulatory agency in connection with this incident. Clark has responded to a
Request for Information Pursuant to the Clean Air Act from the EPA concerning
the incident. The Company does not believe that the resolution of any legal
proceedings from this incident, including any governmental proceedings, will
have a material adverse effect, individually or in the aggregate, on the
Company's financial position.
On March 13, 1995, a fire occurred in the Isomax unit at the Blue Island
refinery. Two employees were fatally injured in the fire; three other employees
were injured and admitted to nearby hospitals. The Isomax unit and two other
units were out of service for maintenance at the time of the incident. The
cause of the incident has not been determined, and is under investigation by
Clark, the Illinois Attorney General and the Occupational Safety and Health
Administration. Pursuant to an Agreed Order entered in the Circuit Court of
Cook County, Illinois, Clark agreed not to resume operation of the three out of
service units without first giving five days notice to the Illinois Attorney
General, and to allow access to the site of the incident for investigatory
purposes. The units are expected to remain out of service for three to four
weeks and reduce production by approximately 20,000 barrels per day. Property
damage and related costs are expected to be covered by Clarks property, business
interuption and workers compensation insurance coverage. The Company does not
believe that the resolution of any legal proceedings from this incident,
including any governmental proceedings, will have a material adverse effect,
individually or in the aggregate, on the Company's financial position.
Clark has also been named in various other suits and claims. While it is not
possible to estimate with certainty the ultimate legal and financial liability
with respect to these other legal proceedings, the Company believes the outcome
of these other suits and claims will not have a material adverse effect on the
Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Inapplicable.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Inapplicable.
21
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and dates indicated, selected
financial data derived from the Financial Statements of the Company for each of
the years in the five-year period ended December 31, 1994. The Financial
Statements of the Company for each of the years in the five-year period ended
December 31, 1994 were audited by Coopers & Lybrand L.L.P. whose reports for the
last three years appear elsewhere in this Report. This table should be read in
conjunction with ''Management's Discussion and Analysis of Financial Condition
and Results of Operations'' and the Financial Statements and related notes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990
----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN MILLIONS, EXCEPT RATIOS AND OPERATING DATA)
INCOME STATEMENT DATA:
Net sales and operating revenues...... $2,440.0 $2,263.4 $2,253.0 $2,426.1 $2,745.7
Cost of sales......................... 2,092.5 1,936.6 1,952.4 2,092.7 2,383.9
Operating expenses.................... 237.3 218.1 224.4 199.7 195.4
General and administrative expenses... 34.0 27.5 31.2 20.8 23.3
Inventory (recovery of) write-down to
market value......................... (26.5) 26.5 -- -- --
Depreciation and amortization(1)...... 37.3 35.3 30.4 26.4 19.3
-------- -------- -------- -------- --------
Operating income...................... 65.4 19.4 14.6 86.5 123.8
Interest and financing costs, net(2).. 37.6 29.9 26.4 27.2 29.3
Other income (expense)(3)............. -- 11.4 14.7 -- (22.3)
-------- -------- -------- --------- --------
Earnings before taxes,
extraordinary items and
cumulative effect of change in
accounting principles................ 27.8 0.9 2.9 59.3 72.2
Income tax provision (benefit)........ 9.7 (0.5) (0.4) 22.0 26.1
-------- -------- -------- -------- --------
Earnings before extraordinary items
and cumulative effect of changes
in accounting principles............. $ 18.1 $ 1.4 $ 3.3 $ 37.3 $ 46.1
======== ======== ======== ======== ========
Ratio of earnings to fixed charges(4). 1.56x (5) (5) 2.37x 2.54x
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments.......................... $ 123.9 $ 194.5 $ 206.1 $ 267.0 $ 174.1
Total assets.......................... 849.4 811.5 787.8 809.5 638.8
Long-term debt........................ 400.7 401.0 401.5 426.6 301.9
Stockholders' equity.................. 162.9 146.0 154.2 172.6 135.3
OPERATING DATA:
Refining Division:
Production (m bbls/day)............... 140.3 134.7 142.4 129.4 131.7
Utilization(6)........................ 107.9% 103.6% 109.5% 99.5% 101.3%
Gross margin (per bbl)................ $ 3.23 $ 3.24 $ 3.03 $ 3.88 $ 4.20
Operating expenses (per bbl).......... 2.34 2.20 2.22 2.38 2.15
Retail Division:
Number of stores (at period end)...... 839 846 873 889 937
Gasoline volume (mm gals)............. 1,028.5 1,014.8 956.7 966.2 978.2
Gasoline volume (m gals pmps)......... 102.8 98.6 90.1 86.9 87.2
Gasoline gross margin (c/gal)......... 12.1c 11.1c 10.0c 10.9c 11.7c
Convenience product sales (mm)........ $ 231.6 $ 218.0 $ 203.4 $ 186.9 $ 187.0
Convenience product sales (pmps)...... 23,139 21,171 19,154 16,804 16,666
Convenience product gross margin (mm). 57.2 54.8 47.7 45.1 45.2
Convenience product gross margin (%
of sales)............................ 24.7% 25.2% 23.4% 24.1% 24.2%
Convenience product gross margin
(pmps)............................... $ 5,714 $ 5,320 $ 4,488 $ 4,004 $ 4,028
Operating expenses (mm)............... 117.2 109.9 106.3 94.3 94.0
OTHER DATA:
Cash flows from operating activities.. $ 61.1 $ 63.1 $ 35.9 $ 43.9 $ 118.7
Cash flows from financing activities.. (5.4) (1.1) (38.7) 119.1 (3.2)
Turnaround expenditures............... 11.2 20.6 2.7 17.2 9.0
Capital expenditures.................. 100.3 67.9 59.5 58.0 34.6
Refinery acquisition expenditures..... 13.5 -- -- -- --
-------- -------- -------- -------- --------
Total expenditures.................... $ 125.0 $ 88.5 $ 62.2 $ 75.2 $ 43.6
======== ======== ======== ======== ========
</TABLE>
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<PAGE>
(1) Amortization includes amortization of turnaround costs and organizational
costs.
(2) Interest and financing costs, net, includes amortization of debt issuance
costs of $1.2 million, $1.2 million, $2.9 million, $6.0 million, and $3.1
million for the years ended December 31, 1994, 1993, 1992, 1991 and 1990,
respectively. Interest and financing costs, net, also includes interest on
all indebtedness, net of capitalized interest and interest income.
(3) Other income in 1993 includes the final settlement of litigation with Drexel
Burnham Lambert Incorporated (''Drexel'') of $8.5 million and a gain from
the sale of non-core stores of $2.9 million. Other income in 1992 includes
the settlement of litigation with Apex and Drexel of $9.2 million and $5.5
million, respectively. Other expense in 1990 included a loss provision of
$11.6 million representing the full amount of an overnight deposit held by
Drexel. An additional 1990 loss provision of $10.0 million represents
estimated costs of mitigation and recovery efforts resulting from alleged
responsibility for groundwater contamination in the town of Hartford,
Illinois, adjacent to the Hartford refinery. A 1990 loss provision of $0.7
million reflected the inability of a former affiliate to repay its note due
Clark.
(4) The ratio of earnings to fixed charges is computed by dividing (i) earnings
before income taxes (adjusted to recognize only distributed earnings from
less than 50% owned persons accounted for under the equity method) plus
fixed charges by (ii) fixed charges. Fixed charges consist of interest on
indebtedness, including amortization of debt issuance costs and the
estimated interest components (one-third) of rental and lease expense.
(5) As a result of the losses for the years ended December 31, 1993 and 1992,
earnings were insufficient to cover fixed charges by $1.7 million and $2.0
million, respectively.
(6) Utilization is the ratio of total refinery production to the rated crude oil
capacity of the refinery. Refinery production yield may be greater than the
rated capacity of the refinery because other feedstocks (including partially
refined products and liquified petroleum gases) which add to the refinery's
output are used in the refining process.
23
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the Selected
Financial Data and the Financial Statements and notes thereto appearing
elsewhere in this Report on Form 10-K.
RESULTS OF OPERATIONS
Overview
During each of the historical periods discussed, Clark did not own the Port
Arthur Refinery. The Company's results are significantly affected by a variety
of factors beyond its control, including the supply of, and demand for, crude
oil, gasoline and other refined products which in turn depend on, among other
factors, changes in domestic and foreign economies, domestic and foreign
political affairs and production levels, the availability of imports, the
marketing of competitive fuels and the extent of government regulation.
Although margins are significantly affected by industry and regional factors,
the Company can influence its margins through the efficiency of its operations.
While the Company's net sales and operating revenues fluctuate significantly
with movements in industry crude oil prices, such prices do not have a direct
relationship to net earnings. The effect of changes in crude oil prices on the
Company's operating results is determined more by the rate at which the prices
of refined products adjust to reflect such changes. The Company believes that,
in general, low crude oil prices indirectly benefit operating results over the
longer term due to increased demand and decreased working capital requirements.
Conversely, the Company believes that high crude oil prices generally result in
decreased demand and increased working capital requirements over the long term.
Increased refinery production is typically associated with improved results of
operations, while reduced production, which generally occurs during scheduled
refinery maintenance turnarounds, negatively affects results of operations.
The following table sets forth the approximate pre-tax earnings impact based
on historical operating rates estimated by the Company on the Company's
operating results due to changes in: (i) sweet crude oil cracking marginsthe
spread between gasoline and diesel fuel prices and input (e.g., a benchmark
sweet crude oil) costs; (ii) sweet/sour differentialsthe spread between a
benchmark sour crude oil and a benchmark sweet crude oil; (iii) heavy/light
differentialsthe spread between a benchmark light crude oil and a benchmark
heavy crude oil and (iv) retail marginsthe spread between product prices at the
retail level and wholesale product costs.
<TABLE>
<CAPTION>
PRE-TAX EARNINGS IMPACT ON THE COMPANY
---------------------------------------
BEFORE PORT ARTHUR AFTER PORT ARTHUR
EARNINGS SENSITIVITY CHANGE ACQUISITION ACQUISITION (a)
-------------------- --------- ------------------ -----------------
<S> <C> <C> <C>
Refining margins
Sweet crude cracking margin $0.10 per barrel $ 5 million $12 million
Sweet/sour differentials $0.10 per barrel 1 million 7 million
Heavy/light differentials $0.10 per barrel 1 million 2 million
Retail margin $0.01 per gallon $10 million $10 million
</TABLE>
(a) Based on projected production of approximately 205,000 barrels per day for
the Port Arthur refinery.
24
<PAGE>
1994 COMPARED WITH 1993 AND 1992:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
--------------------------------
<S> <C> <C> <C>
(IN MILLIONS)
FINANCIAL RESULTS: (a)
Net sales and operating revenues...... $2,440.0 $2,263.4 $2,253.0
Cost of sales......................... 2,092.5 1,936.6 1,952.4
Operating expenses.................... 237.3 218.1 207.0
General and administrative expenses... 32.9 27.5 24.8
Depreciation and amortization......... 37.3 35.3 30.5
Interest and financing costs, net..... 32.1 29.9 28.4
-------- -------- --------
Earnings before income taxes (b)...... 7.9 16.0 9.9
Income tax provision (b).............. 2.2 5.4 4.7
-------- -------- --------
Earnings before unusual items (b)..... 5.7 10.6 5.2
Unusual items, after taxes (b)........ 12.4 (18.8) (13.4)
-------- -------- --------
Net earnings (loss)................... $ 18.1 (8.2) (8.2)
======== ======== ========
OPERATING INCOME:
Refining contribution to operating $ 33.9 $ 42.5 $ 43.6
income...............................
Retail contribution to operating 58.5 52.9 39.4
income...............................
Corporate general and administrative (15.1) (14.2) (14.2)
expenses.............................
Depreciation and amortization......... (37.3) (35.3) (30.5)
Unusual items (b)..................... 25.4 (26.5) (23.7)
-------- -------- --------
Operating income................... $ 65.4 $ (19.4) $ 14.6
======== ======== ========
</TABLE>
(a) This table provides supplementary data and is not intended to represent an
income statement presented in accordance with generally accepted accounting
principles.
(b) The Company considers certain items in 1994, 1993 and 1992 to be
"unusual." Detail on these items is presented below.
Clark reported net earnings of $18.1 million in 1994 compared with net losses
of $8.2 million in 1993 and $8.2 million in 1992. Significant unusual items,
discussed below, increased 1994 net earnings while decreasing both 1993 and 1992
earnings. Net earnings, excluding "unusual" items declined, in 1994 compared to
1993 and was flat compared to 1992 principally due to declining industry
refining margins over the period and reduced production associated with the
scheduled maintenance turnarounds at the Hartford and Blue Island refineries in
1994 and 1993, respectively. The full effect of the negative industry refining
margins was partially offset due to a combination of improved retail and
refinery productivity and retail market conditions.
Net sales and operating revenues in 1994 were higher than the prior year and
1992 due to an increase in crude oil and product prices that resulted in both
increased selling prices and costs of sales. Refining production was reduced in
the first half of 1993 when the Blue Island refinery underwent a scheduled
maintenance turnaround which reduced the volume of refined product production by
approximately three million barrels and reduced revenues by approximately $69
million. A 1994 maintenance turnaround on the FCC and alkylation units at the
Hartford refinery reduced revenues by approximately $17 million, reduced
production of refined product at the Hartford refinery by approximately 30,000
barrels per day, and increased the production of lower value intermediate
feedstocks by approximately 25,000 barrels per day for approximately one month.
A turnaround on the crude unit at the Hartford refinery is planned for 1996.
This turnaround is expected to reduce the refined product output by
approximately 37,000 barrels per day for approximately four weeks. Retail
gasoline volumes increased 1% in 1994 from 1993 and 6% in 1993 from 1992, and
wholesale volumes increased 9% in 1994 from 1993 and 21% in 1993 from 1992.
25
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
1994 1993 1992
----------------------------
<S> <C> <C> <C>
(IN MILLIONS)
UNUSUAL ITEMS:
Inventory recovery of (write-down to)
market value......................... $26.5 $(26.5) $ --
Provision for environmental
remediation cost..................... -- -- (9.6)
Provision for store closure........... -- -- (4.4)
Retirement and severance packages..... -- -- (5.0)
Other................................. (1.1) -- (4.7)
----- ------- ------
Impact on operating income......... 25.4 (26.5) (23.7)
Change in accounting principle........ -- (15.6)
Early retirement of debt.............. -- (18.7)
Litigation settlements................ -- 8.5 14.7
Sale of non-core stores............... -- 2.9 --
Short-term investment losses.......... (5.4) -- --
Other................................. -- -- 2.0
------ ------- ------
Total.............................. $20.0 $(30.7) $(25.7)
===== ====== ======
Net of income taxes................ $12.4 $(18.8) $(13.4)
===== ====== ======
</TABLE>
Several items which are considered by management as ''unusual'' are excluded
throughout this discussion of Clark's results of operations. A non-cash
accounting charge of $26.5 million was taken in the fourth quarter of 1993 to
reflect the decline in the value of petroleum inventories below carrying value
caused by a substantial drop in petroleum prices. Crude oil and related refined
product prices rose in 1994 allowing Clark to recover the original charge.
Accordingly, a reversal of the inventory write-down to market was recorded in
1994. A return to lower prices could result in future charges. In 1994, Clark
realized losses on the sale of short-term investments due to an increase in
market interest rates. As of December 31, 1994, $1.9 million of losses on
short-term investments remained unrealized. Effective January 1, 1993, Clark
adopted the provisions of SFAS No. 106 ''Employers' Accounting for
Postretirement Benefits Other Than Pensions.'' See Note 13 ''Postretirement
Benefits Other Than Pensions'' to the Financial Statements, and SFAS No. 109
''Accounting for Income Taxes'' which was accounted for by restating prior
periods. See Note 14 ''Income Taxes'' to the Financial Statements. Unusual
credits included a 1993 gain related to the sale of 21 retail stores located in
non-core markets and the favorable settlement of litigation. See Note 12
''Other Income'' to the Financial Statements. Unusual charges in 1992 included
the early retirement of Clark's 12 1/4% First Mortgage Fixed Rate Notes due 1996
and provisions related to the environmental remediation of a storm water basin
at the Hartford refinery and closures of under-performing retail stores. In
addition, ''unusual'' expenses were incurred in 1992 related to the early
retirement of approximately 50 employees and a severance program, as well as
costs associated with an initial public offering that was canceled due to a
delay caused by a lawsuit by AOC L.P. prior to the acquisition of the Minority
Interest.
<TABLE>
<CAPTION>
Refining
YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1993 1992
--------------------------------------
<S> <C> <C> <C>
(IN MILLIONS, EXCEPT OPERATING DATA)
OPERATING STATISTICS:
Crude oil throughput (m bbls/day)..... 138.2 123.8 126.8
Production (m bbls/day)............... 140.3 134.7 142.4
Gross margin ($/bbl).................. $ 3.23 $ 3.24 $ 3.03
Gross margin.......................... $165.4 $159.3 $157.7
Operating expenses.................... 120.1 108.2 106.5 (a)
Divisional general and administrative 11.4 8.6 7.6 (a)
expenses............................. ------ ------ ------
Contribution to operating income...... $ 33.9 $ 42.5 $ 43.6 (a)
====== ====== ======
</TABLE>
(a) Excludes unusual operating expenses of $11.5 million and general and
administrative expenses of $0.5 million, primarily related to a provision
for environmental remediation and restructuring.
26
<PAGE>
Clark's refining division contributed $33.9 million to operating income in
1994, below the $42.5 million contributed in 1993 and $43.6 million, excluding
unusual items, contributed in 1992. The division's results in the past three
years were negatively affected by industry market conditions largely beyond the
Company's control, principally the narrowing price benefit of using heavy sour
crude oil (the predominant input at the Hartford refinery) versus sweet crude
oil (1994 - $4.78; 1993 - $6.41; 1992 - $7.32) and the decreased availability of
Canadian light sweet crude oil (the predominant input at the Blue Island
refinery). The Company believes a downward trend in industry margins occurred
from 1990 to 1994 due to several factors. In conjunction with environmental
spending, refiners have incrementally added light product production capacity
over the past five years resulting in a 3% increase in capacity. In addition,
the benefit from processing heavy sour crude oil has been reduced by the
increase in availability of light sweet crude oil and increased demand for heavy
crude oil caused by more industry upgrading capability construction following
the favorable margins of the early 1990s. This downward industry trend occurred
despite average demand for gasoline and distillate products increasing from 1992
to 1994 by approximately 2.5% per year and crude throughput capacity declining
by 3% over the past five years with throughput levels reaching the highest level
in 20 years. Margins were particularly weak in the fourth quarter of 1994 due
to market uncertainty regarding demand and storage for conventional fuel in
advance of the mandated transition to reformulated gasoline in certain markets.
Such uncertainty and logistical concerns have caused short-term market
volatility in the transition period which has continued into the first quarter
of 1995. In addition, unseasonably warm weather in late 1994 and into the first
quarter of 1995 reduced demand for heating oil and thereby depressed prices.
The Company does not view these factors as long-term trends. The impact of the
use of derivative instruments on cost of sales and inventory costs was not
material in 1992, 1993 and 1994.
As described above, refinery production and crude oil throughput for 1994 and
1993 were reduced versus 1992 due to maintenance turnarounds. In addition to
these turnarounds and the impact of market conditions mentioned above, earnings
were supported due to increased refining productivity. These productivity
improvements resulted from the processing of lower cost sour crude oil at the
Blue Island refinery representing 25% of crude oil throughput compared to none
in 1993 or 1992 and also a higher crude oil processing rate at the Blue Island
refinery relative to 1993 (19%) and 1992 (8%), the implementation of several
yield improvement projects at the Hartford refinery, which among other things
allowed the recovery of an additional 900 barrels per day of light cycle oil
from slurry and 300 barrels per day of hydrocarbon product previously being lost
to flare, and record wholesale marketing volumes at enhanced margins.
Operating and divisional general and administrative expenses increased over
1993 due to increased labor hours to meet operating needs related to colder than
normal weather in early 1994 ($1.3 million), organizational changes in the
refining management team ($4.0 million), sulfur processing contracts ($1.4
million), enhanced refinery planning and operations support services ($1.8
million) and increased utility costs ($1.9 million). Operating and divisional
general and administrative expenses were relatively flat in 1993 compared with
1992.
27
<PAGE>
<TABLE>
<CAPTION>
Retail
YEAR ENDED DECEMBER 31,
----------------------------------------
1994 1993 1992
----------------------------------------
(IN MILLIONS, EXCEPT OPERATING DATA)
<S> <C> <C> <C>
OPERATING STATISTICS:
Company operated stores (at period end)............. 829 836 862
Dealer operated stores (at period end).............. 10 10 11
Gasoline volume (mm gals)........................... 1,028.5 1,014.8 956.7
Gasoline volume (m gals pmps)....................... 102.8 98.6 90.1
Gasoline gross margin (c/gal)....................... 12.1c 11.1c 10.0c
Gasoline gross margin............................... $ 124.9 $ 112.7 $ 95.2
Convenience product sales........................... $ 231.6 $ 218.0 $ 203.4
Convenience product sales (pmps).................... 23,139 21,171 19,154
Convenience product gross margin..................... $ 57.2 $ 54.8 $ 47.7
Convenience product gross margin (% of sales)........ 24.7% 25.2% 23.4%
Convenience product gross margin (pmps).............. $ 5,714 $ 5,320 $ 4,488
Operating expenses................................... $ 117.2 $ 109.9 $ 100.5 (a)
Divisional general and administrative expenses....... 6.4 4.7 3.0 (a)
Contribution to operating income..................... $ 58.5 $ 52.9 $ 39.4 (a)
pmps = per month per store
</TABLE>
(a) Excludes unusual operating expenses of $5.8 million and general and
administrative expenses of $0.5 million, primarily related to restructuring
and store closures.
Clark's retail divisions contribution to operating income increased by 11%
in 1994 over 1993 and 34% in 1993 over 1992 (excluding 1992 unusual charges).
The 1994 and 1993 increases are due to numerous productivity improvements
combined with more favorable industry margins. The productivity improvements
included increased gasoline gallons sold, with average monthly per store volume
increases of 4% in 1994 over 1993 and 9% in 1993 over 1992. These volume
increases were attributable in part to the positive impact of capital
initiatives, including the installation of canopies, blending dispensers and an
image program at many of the stores, as well as increased and more aggressive
promotional activity. Margins per gallon improved in 1994 and 1993 over 1992,
due in part to productivity improvements including the increased sale of higher-
margin premium gasoline (representing 30% of total volume in 1994 versus 21% in
1992) and more responsive pricing strategies. Margins were also positively
impacted by favorable market conditions.
Productivity improvements were also realized in convenience product gross
margins which rose 4% in 1994 from 1993, and increased 15% in 1993 from 1992.
Average monthly convenience product sales per store for 1994 increased by 9%
compared to 1993 and increased by 11% in 1993 as compared to 1992. Sales
increases were due primarily to higher customer counts and average
transactions resulting from: the improved gasoline volumes; the positive impact
of the image program; expansion of the On the Go/TM/ convenience product
offering through interior store remodeling which included the addition of new
wall displays, fountain beverage machines and cooler space; increased
promotional activity; enhanced store merchandising; the favorable impact of
increased manager training and improved store personnel incentive plans. The
improvement in gross margin from convenience product sales was also attributable
to an improved sales mix of higher margin On the Go/TM/ products that
represented 40% of sales in 1994 versus 34% in 1993 and 32% in 1992.
The increase in operating and divisional general and administrative expenses
from 1992 to 1994 is primarily attributable to the creation of an operating and
administrative infrastructure to support the productivity initiatives discussed
above. These increased costs included higher store labor and related costs
associated with increased customer counts and expanded store operating hours,
higher equipment rental costs related to adding personal computers to stores and
the addition of fountain beverage machines and cooler space, increased
advertising due to the higher level of promotional acitivity, and increased
support costs related to training, merchandising, information systems and
accounting.
28
<PAGE>
While the total number of stores at December 31, 1994 declined from 1993 and
1992 due to the sale and closure of non-core and underperforming stores, this
decline was partially offset by the addition of 21 stores in the Chicago
metropolitan area acquired through an operating lease in October 1994. Under
the terms of the operating lease, an additional 14 stores are expected to be
added over the next year in this key market. In addition, Clark has signed an
operating lease, subject to financial and environmental due diligence, for an
additional 35 stores in another key Illinois market. Although Clark expects to
close under this operating lease in early 1995, no assurance can be given that
such operating lease will be consummated. Clark will continue to consider
growth through acquisitions in its core markets. Clark also expects to continue
to close underperforming stores and review non-core markets for possible
divestiture.
OTHER FINANCIAL MATTERS
Corporate General and Administrative Expense
Excluding unusual items, corporate general and administrative expenses equaled
$15.1 million in 1994, compared to $14.2 million in 1993 and $14.2 million in
1992. Expenses increased in 1994 as compared to 1993 and 1992 principally due to
higher labor and related costs, as Clark has made significant changes in its
management, systems and procedures.
Depreciation and Amortization
Depreciation and amortization expenses in the past three years increased
principally due to higher levels of property, plant and equipment, partially
offset by decreased amortization related to the March 1991 Hartford maintenance
turnaround being fully amortized in April 1994 and the Spring 1994 Hartford
maintenance turnaround being rescheduled to late 1994 and 1996.
Net Interest and Financing Costs
The Company's net interest and financing costs, excluding unusual items,
increased in 1994 and 1993 principally due to lower interest income as a result
of a decrease in average funds invested and lower interest returns. The
Company's capital structure has also changed significantly over the past three
years with the repurchase and redemption in 1992 of $200 million aggregate
principal amount of Clark's 12 1/4% First Mortgage Fixed Rate Notes due 1996
followed by the issuance of $175 million principal amount of Clark's 9 1/2%
Notes in late 1992. These changes in the Company's indebtedness resulted in
fluctuations in interest income and expense due to the timing of the issuance
and repurchase of the debt.
Other Income (Expenses)
See Note 11 ''Other Income'' to the Financial Statements for the items that
comprise other income (expenses).
Other Items
In November 1994, Clark suspended gasoline sales for a two to four-day period
at four of its terminals and approximately 200 retail stores located in St.
Louis, southern and central Illinois and central Indiana. Sales were suspended
when Clark discovered that the gasoline delivered to this area from Clark's
Hartford refinery may have failed to pass a copper strip corrosion test, one of
at least ten tests required by the American Society for Testing and Materials.
Gasoline that fails to meet this standard may cause fuel system problems in some
automobiles. Clark also notified wholesalers who purchased such gasoline from
Clark so that they could inform their retailers of the situation. Clark is
reimbursing customers for the cost of repairing any damage to their vehicles
caused by this fuel. The cost of repairing such damage is covered under Clark's
product liability insurance policy. The situation resulted from a calibration
problem with a processing unit at the Hartford refinery causing it to remove an
insufficient amount of a sulfur compound called mercaptan. Clark remedied the
problem by making an adjustment to the refinery equipment
29
<PAGE>
and operation. Clark reprocessed or treated the affected gasoline that remained
under its control and offered to reprocess or treat all of the affected gasoline
delivered to its wholesalers and exchange partners. The effect of the suspended
gasoline sales and the related expenses incurred by Clark concerning customer
repairs and gasoline reprocessing, which was recognized in the fourth quarter of
1994, did not have a material adverse effect on the Company's results of
operations or financial position.
On March 13, 1995, a fire occurred in the Isomax unit at the Blue Island
refinery. Two employees were fatally injured in the fire; three other employees
were injured and admitted to nearby hospitals. The Isomax unit and two other
units were out of service at the time of the incident. The cause of the incident
has not been determined, and is under investigation by Clark, the Illinois
Attorney General and the Occupational Safety and Health Administration. Pursuant
to an Agreed Order entered in the Circuit Court of Cook County, Illinois, Clark
agreed not to resume operation of the three out of service units without first
giving five days notice to the Illinois Attorney General, and to allow access to
the site of the incident for investigatory purposes. The units are expected to
remain out of service for three to four weeks and reduce production by
approximately 20,000 barrels per day. Property damage and related costs are
expected to be covered by Clarks property, business interuption and workers
compensation insurance coverage. Additional costs and insurance deductibles
associated with the incident are not expected to have a material adverse effect
on the Company's financial position.
OUTLOOK
Since the latter part of November 1994, the Company believes industry refining
margins have been at depressed levels due primarily to the uncertainties related
to the transition to reformulated gasoline and unseasonably warm weather. While
the Company's management believes that these industry refining conditions are
temporary, the Company has initiated a number of programs aimed at conserving
liquidity. These programs include inventory reductions (including planned
inventory reductions at the Port Arthur Refinery) and reduced capital
expenditures (other than mandatory and environmental capital expenditures) and
certain additional strategies. While the Company's management believes that
these programs will be sufficient to provide the Company with adequate liquidity
through the end of 1995, there can be no assurance that the depressed industry
conditions will not worsen or continue longer than anticipated.
Based on its experience and industry studies, the Company believes that the
U.S. refining industry may evidence gradual margin improvement through the end
of the decade. Industry studies attribute the prospect for improving refining
industry profitability to, among other things: (i) the high utilization rates of
U.S. refineries; (ii) continued economic-related growth in U.S. demand for
gasoline; (iii) the decreasing level of planned capital expenditures for
additional refining capacity capable of producing higher-value light petroleum
products, such as gasoline and diesel fuel; and (iv) the objective of those
refiners that have invested significant capital in environmental-related
projects to obtain returns on these investments through higher product margins.
30
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1993 1992
---------------------------
(IN MILLIONS)
<S> <C> <C> <C>
FINANCIAL POSITION:
Cash and short-term investments.. $123.9 $194.5 $206.1
Working capital.................. 130.4 203.8 245.1
Property, plant and equipment.... 429.8 360.9 320.9
Long-term debt................... 400.7 401.0 401.5
Stockholder's equity............. 162.9 146.0 154.2
Operating cash flow.............. 46.0 61.9 33.6
</TABLE>
Operating cash flow (cash generated by operating activities before working
capital changes) for the year ended December 31, 1994 was $46.0 million compared
with $61.9 million in 1993 and $33.6 million in 1992. Cash flow was impacted by
the fluctuation in the Company's net earnings excluding non-cash items over the
past three years. Working capital at December 31, 1994 equaled $130.4 million,
a 1.55 to 1 current ratio, versus working capital at December 31, 1993 of $203.8
million, a 1.96 to 1 current ratio and working capital at December 31, 1992 of
$245.1 million, a 2.31 to 1 current ratio. Heavy capital expenditures when
combined with decreased earnings in 1994 and varying levels of inventory,
accounts payable and accounts receivable, all of which fluctuate with market
opportunities and operational needs, combined to result in a decrease in working
capital from 1993. Pipeline movement restrictions and refinery crude oil supply
economics in 1994 favoring purchases of foreign cargos of crude oil that have
shorter payment terms than domestic pipeline purchases reduced cash and short-
term investments at December 31, 1994 by approximately $13 million.
As part of its overall inventory management and crude acquisition strategies,
Clark routinely buys and sells, in varying degrees, crude oil in the spot
market. During December 1994 and 1993, Clark sold larger amounts of crude oil
than in 1992 as part of balancing its physical inventory position. The timing
of these large crude oil sales, which carried payment terms of the following
month, principally caused the accounts receivable increase in 1994 and 1993 from
1992. Such on-going activities require the Company to maintain adequate
liquidity and working capital facilities.
In general, the Company's short-term working capital requirements (primarily
letter of credit issuances to support crude oil requirements) fluctuate with the
pricing and sourcing of crude oil. Historically, the Company's internally
generated cash flows have been sufficient to meet its needs. Clark has a $400
million committed revolving line of credit for short-term cash borrowings and
for the issuance of letters of credit primarily for purchases of crude oil,
other feedstocks and refined products. See Note 7 ''Working Capital Facility''
to the Financial Statements. At December 31, 1994, $110.0 million of the
facility was used for letters of credit. There were no direct borrowings under
Clark's line of credit at December 31, 1994, 1993 or 1992.
Clark has refinanced its previous working capital facility (the Clark Credit
Agreement) with a group of banks led by Bank of America NT&SA, as Adminstrative
Agent. The new working capital facility provides the Company with sufficient
liquidity to support the expanded letter of credit needs related to the
acquisition of the Port Arthur Refinery. The Clark Credit Agreement contains
covenants and conditions which, among other things, limit dividends,
indebtedness, liens, investments, contingent obligations and capital
expenditures, and require Clark to maintain its property and insurance, to pay
all taxes and comply with all laws, and to provide periodic information and
conduct periodic audits on behalf of the lenders. In addition, Clark is
required to comply with certain financial covenants, including: (i) maintenance
of working capital of at least $160 million from the date of the Acquisition
through June 29, 1995, $165 million from June 30, 1995 through December 30,
1995 and $175 million thereafter; (ii) maintenance of a tangible net worth, as
defined, of at least $255 million from the date of the Acquisition through
December 30, 1995, $275 million from December 31, 1995 through December 30,
1996, $295 million from December 31, 1996 through December 30, 1997, and $325
million thereafter, each as adjusted quarterly to give effect to a portion of
future earnings or capital contributions by Clark USA to Clark; (iii) a maximum
indebtedness to tangible net worth ratio, as defined, of 3.0 to 1.0, decreasing
to a maximum of 2.75 to 1.0 on December 31, 1995 and 2.5 to 1.0 on March 31,
1996; (iv) a minimum ratio of adjusted cash flow, as defined, to debt service,
as defined, of 1.2 to 1.0 for the quarter ending June 30, 1995, 1.4 to 1.0 for
the two consecutive quarters ending September 30, 1995, 1.6 to 1.0 for the three
consecutive quarters ending December 31, 1995, 1.8 to 1.0 for the four
consecutive quarters ending March 31, 1996 and 2.0 to 1.0
31
<PAGE>
for the four consecutive quarters any time thereafter; and (v) maintenance of
minimum balance sheet cash (as defined) of at least $45 million through
September 29, 1995 and $50 million thereafter.
Cash flows from investing activities (excluding short-term investment
activities which the Company manages similar to cash and cash equivalents) are
primarily affected by capital expenditures, including maintenance turnarounds.
The increase in cash used in investing activities in 1994 compared to 1993 and
1992 resulted from increased capital expenditures in 1994 and 1993 and the
absence of major maintenance turnaround expenditures in 1992. In addition,
$13.5 million was expended in 1994 for the Port Arthur Refinery Acquisition.
During 1994 capital expenditures totaled $100.3 million compared with $67.9
million in 1993 and $59.5 million in 1992. Refining division capital
expenditures were $ 59.7 million in 1994 (1993 - $39.2 million, 1992 - $49.2
million). In addition, $11.2 million, $20.6 million and $2.7 million were spent
for refining maintenance turnaround expenditures in 1994, 1993 and 1992,
respectively. The increased spending in the refining division over the past
three years has been primarily related to productivity and environmental
projects. In 1994, projects included adding the capability to produce RFG at
the Blue Island refinery and a revamp of the fluid catalytic cracking (''FCC'')
and alkalation units at the Hartford refinery. In 1993, projects included
Stretford, crude and FCC unit upgrades at the Blue Island refinery, while in
1992 projects at the Hartford refinery included the low sulfur diesel fuel
project (subsequently delayed), modifications to achieve vapor reduction and a
new flare. Retail division capital expenditures equaled $38.2 million, $26.5
million and $8.8 million in 1994, 1993 and 1992, respectively. In 1994 and
1993, approximately one-third of retail division capital expenditures were
environmental projects related to tanks, lines, vapor recovery and soil
remediation. The balance of 1994 and 1993 retail division capital expenditures
included discretionary projects such as re-imaging locations using Clark's new
logo and updated color scheme at nearly half of Clarks stores in 1994, canopies,
store interior remodeling and expansion of store interior selling space, systems
automation and the On The Go/TM/ store concept development. Retail division
capital spending declined in 1992 and was limited primarily to environmental
projects while management developed the business strategy.
Environmental and regulatory expenditures consist of two major
categories--mandatory projects to comply with regulations pertaining to ground,
water and air contamination and occupational, safety and health issues, and
discretionary projects which primarily involve the reformulation of refined fuel
for sale into certain defined markets. Clark estimates that total mandatory
expenditures for environmental and regulatory compliance from 1995 through 1998
will be approximately $240 million, $200 million related to the refining
division and the balance related to the retail division. Costs to comply with
future regulations cannot be estimated.
The expenditures required to comply with the Clean Air Act Amendments of 1990
(the ''Clean Air Act'') are mandated but those to comply with reformulated fuels
regulations are primarily discretionary, subject to market conditions and
economic justification. The reformulated fuels programs impose restrictions on
properties of fuels to be refined and marketed, including those pertaining to
gasoline volatility, oxygenate content, detergent addition and sulfur content.
The regulations regarding these fuel properties vary in markets in which Clark
operates, based on attainment of air quality standards and the time of the year.
Modifications implemented in 1994 in the refining division to meet the
requirements of the Clean Air Act and to produce 50% RFG at the Blue Island
refinery cost approximately $8 million.
Clark has invested $23 million in a project initiated to produce low sulfur
diesel fuel at the Hartford refinery which was delayed in 1992 based on internal
and third party analyses that indicated an oversupply of low sulfur diesel fuel
capacity in Clark's marketplace. Based on these analyses, Clark projected
relatively narrow price differentials between low and high sulfur diesel
products. This projection has thus far been borne out after the initial
transition to the low sulfur regulations. High sulfur diesel fuel is utilized
by the railroad, marine and farm industries. If price differentials widen
sufficiently to justify investment, Clark could install the necessary equipment
over a 14 to 16 month period at an estimated additional cost of $40 million.
Clark believes there may be potential for improved future economic returns
related to the production of low sulfur diesel fuel, but is still deferring
further construction on this project. Clark believes it would not recover its
entire investment in this project should the project not be completed.
The Company's cash flow used in financing activities was $5.4 million in 1994,
$1.1 million in 1993 and $38.7 million in 1992. In 1994, expenditures were made
related to the acquisiton of a new working capital facility and equity financing
for the Port Arthur Refinery acquisition. In 1992, long-term debt was retired
early and new debt was issued principally to increase available cash and extend
maturities. See Note 8 ''Long-Term Debt'' to the Financial Statements.
32
<PAGE>
In 1994 and 1993, Clark entered into several operating leases related to retail
store acquisition, retail store automation equipment, coolers and beverage
dispensers, office equipment, refinery lab equipment and filter press.
In February 1995, Clark acquired the Port Arthur Refinery from Chevron for
approximately $70 million plus inventory and spare parts of approximately $138
million (a $5 million deposit was paid in 1994). The purchase agreement
provides for contingent payments to Chevron of up to $125 million over a five
year period from the closing date of the Acquisition in the event that refining
industry margin indicators exceed certain escalating levels. Clark believes
that even if such contingent payments would be required to be made, they would
not have a material adverse effect on the Company's results of operations since
the Company would also benefit by retaining one-half of such increased margins.
Such contingent payments would not be payable based on these industry margin
indicators through December 31, 1994. Clark expects to incur additional costs
of approximately $12 million related to business and environmental due diligence
and capital expenditures during the two years following the Acquisition.
Clark financed the Acquisition with existing cash and short-term investments
and a equity contribution of $150 million from Clark USA. Based on initial due
diligence, the Company estimates that during the period 19951998, capital and
turnaround expenditures at the Port Arthur Refinery should average approximately
$50-$60 million per year, including wastewater and safety projects required to
be completed under the Purchase Agreement. It is anticipated that capital
expenditures will be allocated approximately 40% to on-going maintenance
projects, 30% to environmental projects and 30% to productivity improvement
projects. This assumes that market conditions support discretionary capital
investment with an attractive economic return, otherwise capital spending should
average approximately $25-$35 million per year. Based upon current industry
conditions, Clark expects that capital expenditures at the Port Arthur Refinery
in 1995 will be approximately $20 million. The Port Arthur Refinery completed a
major maintenance turnaround in May 1994. Concurrent with the Acquisition and
based on estimates from its environmental consultants, Clark will accrue an
estimated $7.5 million for remediation of pipe trenches and free phase
hydrocarbons in the Excluded Area. The expenditures are estimated to be
approximately $0.7 million annually over the next 10 years. Clark expects that
the cash flow from the Port Arthur Refinery will be sufficient to cover capital
expenditures at the refinery and any potential contingent payments to Chevron.
Funds generated from operating activities and the equity contribution from
Clark USA, together with existing cash, cash equivalents and short-term
investments, are expected to be adequate to fund existing requirements for
working capital and capital expenditure programs, including those relating to
the Port Arthur Refinery, for the next year. In response to the industry
refining conditions, Clark has initiated a number of programs aimed at
conserving liquidity. These programs include inventory reductions (including
planned inventory reductions at the Port Arthur Refinery), reduced capital
expenditures (other than mandatory and environmental capital expenditures) and
certain additional strategies. While Clark's management believes that these
programs will be sufficient to provide the Company with adequate liquidity
through the end of 1995, there can be no assurance that the depressed industry
conditions will not worsen or continue longer than anticipated. Future working
capital, discretionary capital expenditures, environmentally-mandated spending
and acquisitions may require additional debt or equity capital.
33
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is incorporated herein by reference to
Part IV Item 14 (a) 1 and 2. Financial Statements and Financial Statement
Schedules.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Inapplicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of the Company and their respective ages
and positions are set forth in the table below.
<TABLE>
<CAPTION>
Name Age Position
----------------------------------- --- ---------------------------------------
<S> <C> <C>
Peter Munk 67 Chairman of the Board and Director
Paul D. Melnuk 40 President and Chief Executive Officer;
Chief Operating Officer; Director
C. William D. Birchall 52 Director
Anthony Munk 34 Director
Gregory C. Wilkins 39 Director
Bradley D. Aldrich 41 Executive Vice President-Refining
Brandon K. Barnholt 36 Executive Vice President-Retail
Marketing
Kevin P. Pennington 38 Executive Vice President-Corporate
Services
Dennis R. Eichholz 41 Controller and Treasurer
Patrick F. Heider 34 Secretary
</TABLE>
The Board of Directors of the Company consists of five directors who serve
until the next annual meeting of stockholders or until a successor is duly
elected. Directors do not receive any compensation for their services as such.
Executive officers of the Company serve at the discretion of the Board of
Directors of the Company.
Peter Munk has served as a director and as Chairman of the Board of the
Company since November 1988. Mr. Munk has served as Chairman of the Board since
July 1992, as Chairman of the Board and Chief Executive Officer from August 1990
through July 1992 and as Vice Chairman from November 1988 through August 1990.
Mr. Munk has served as Chairman of the Board of Directors of Horsham since its
formation in June 1987 and as Chairman and Chief Executive Officer and a
director of American Barrick Resources Corporation (Barrick) since July 1984.
Paul D. Melnuk has served as a director and as President of Clark USA since
September 1992 and as Vice President and Treasurer of Clark USA from November
1988 through September 1992. Mr. Melnuk has served as director of Clark since
October 1992, as President and Chief Executive Office of Clark since July 1992,
as President and Chief Operating Officer of Clark from February 1992 through
July 1992, as Executive Vice President and Chief Operating Officer of Clark from
December 1991 through February 1992, as Executive Vice President and Chief
Financial Officer of Clark from August 1990 through November 1991 and as Vice
President of Clark from November 1988 through August 1990. Mr. Melnuk served as
a director of Horsham since March 1992. Mr. Melnuk served as President and
Chief Operating Officer of Horsham March 1992 through April 1994, as Executive
Vice President and Chief Financial Officer of Horsham from May 1990 through
February 1992 and as Vice President of Horsham from April 1988 through May 1990.
C. William D. Birchall has been a director of Clark USA and Clark since
November 1988. Mr. Birchall has been Chief Financial Officer of Arlington
Investments Limited, a private investment holding company located in Nassau,
Bahamas, for the last five years. Mr. Birchall has been a director of Barrick
since July 1984 and a director of Horsham since 1987.
34
<PAGE>
Anthony Munk has been a director of Clark USA and Clark since February 1995.
Mr. Munk has been a director and has served as Senior Vice President of Horsham
since January 1995. Prior to joining Horsham, Mr. Munk was Vice President of
Onex Corporation where he had been since 1988. Anthony Munk is the son of Peter
Munk, Chairman of the Board and a director of Clark and Clark USA.
Gregory C. Wilkins has been a director of Clark USA and Clark since August
1994 and has served as President of Horsham since April 1994. Mr. Wilkins has
served as Executive Director, Office of the Chairman of Horsham and Barrick
since September 1993; Executive Vice President and Chief Financial Officer of
Barrick from April 1990 through September 1993; Senior Vice President, Finance
of Barrick prior to April 1990.
Dennis R. Eichholz has served as Controller and Treasurer of Clark USA and
Clark since February 1995. Mr. Eichholz has served as Treasurer of Clark since
December 1991 and served as Tax Manager of Clark from November 1988 through
December 1991.
Patrick F. Heider has served as Secretary of Clark USA since January 1993 and
of Clark since October 1992. Mr. Heider has served as in-house counsel since
April 1990. Mr. Heider previously was employed as an associate with the St.
Louis law firm of Shepard, Sandberg & Phoenix from April 1988 through April
1990.
Bradley D. Aldrich has served as Executive Vice President-Refining, since
December 1994. From 1991 through November 1994, Mr. Aldrich served as Vice
President, Supply & Distribution of CF Industries, Inc., a chemical fertilizer
manufacturer and distributor. From 1979 to 1991, Mr. Aldrich served in various
capacities with Conoco, Inc., where he was Manager of Light Oil Supply and
Operations from 1989 to 1991.
Brandon K. Barnholt has served as Executive Vice President-Retail Marketing
since December 1993 and Vice President-Retail Marketing from July 1992 through
December 1993 and as Managing Director-Retail Marketing from May 1992 through
July 1992. Mr. Barnholt previously served as Retail Marketing Manager of
Conoco, Inc. from March 1991 through March 1992 and Lubricants Sales Manager
from April 1988 through March 1991. During 1990 and 1989, Mr. Barnholt served
as President of the Denver Conoco Credit Union.
Kevin P. Pennington has served as Executive Vice President-Corporate Services
since December 1993 and as Vice President-Human Resources from July 1993 through
December 1993. Previously Mr. Pennington served as Vice President-Human
Resources for the Mercy Health System from April 1991 through July 1993 and as
Assistant Vice President - Human Resources at GTE from June 1985 through April
1991.
There are no arrangements or understandings between any director or executive
officer and any other person pursuant to which such person was elected or
appointed as a director or executive. There are no family relationships between
any director or executive officer and any other director or executive officer,
except as noted.
35
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid by Clark to its
Chief Executive Officer and its other executive officers whose total annual
compensation exceeded $100,000 for each of the years in the three-year period
ended December 31, 1994.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM
------------------- ------------
OTHER ANNUAL COMPENSATION ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION AWARDS OPTIONS COMPENSATION (E)
----------------------------- ---- -------- ------------------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Melnuk (a)........... 1994 $325,893 $150,000 $ -- $ -- $7,768
President and Chief 1993 325,578 -- -- -- 8,994
Executive Officer 1992 311,731 -- -- -- 8,728
Bradley D. Aldrich (b)....... 1994 6,731 60,000 -- -- --
Executive Vice President- 1993 -- -- -- -- --
Refining 1992 -- -- -- -- --
Brandon K. Barnholt.......... 1994 171,846 100,000 -- -- 8,736
Executive Vice President- 1993 143,722 100,000 -- 70,000(c) 4,500
Retail Marketing 1992 87,781 53,300 -- 30,000(d) --
Kevin P. Pennington.......... 1994 175,210 75,000 -- -- 8,341
Executive Vice President- 1993 74,038 56,900 -- 100,000(c) --
Corporate Services 1992 -- -- -- -- --
</TABLE>
(a) Mr. Melnuk also received compensation from Horsham for his services in his
previous position as President and Chief Operating Officer of Horsham.
(b) Mr. Aldrich commenced employment on December 31, 1994. See Employment
Agreements.
(c) Mr. Barnholt and Mr. Pennington hold options to acquire Horsham Shares
received as compensation from Horsham for services performed for Clark under
The Horsham Corporation Amended and Restated 1987 Stock Option Plan (the
"Horsham Option Plan").
(d) These options to purchase these shares were granted under the Clark Oil &
Refining Corporation Stock Option Plan (the "Clark Option Plan") and are
exercisable for Subordinate Voting Shares of Horsham ("Horsham Shares").
(e) Represents amount accrued for the account of such individuals under the
Clark Oil & Refining Corporation Savings Plan (the "Savings Plan").
STOCK OPTIONS GRANTED DURING 1994
There were no options granted during 1994 to the named executive officers
under the Horsham Option Plan or Clark Option plan for services performed for
Clark.
36
<PAGE>
CLARK OPTION PLAN
In 1991, Clark established the Clark Option Plan under which options to
purchase Horsham shares could be granted to certain of its non-employee
directors and key employees. As of December 31, 1994, there were 219,472
options outstanding under the Clark Option Plan to purchase Horsham Shares at
prices ranging from $7.19 to $11.88 per share. Clark, under a trust agreement,
held 219,472 Horsham Shares at December 31, 1994, to meet obligations under the
Clark Option Plan. No options were granted to executive officers or directors
under the Clark Option Plan during the year ended December 31, 1993 or 1994
under such plan.
YEAR-END OPTION VALUES
The following table sets forth information with respect to the number and
value of unexercised options to purchase Horsham Shares held by the executive
officers named in the executive compensation table at December 31, 1994.
<TABLE>
<CAPTION>
SHARES ACQUIRED NUMBER OF VALUE OF UNEXERCISED
ON EXERCISE VALUE UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS HELD
DURING YEAR ENDED REALIZED AT DECEMBER 31, 1994 AT DECEMBER 31, 1994 (A)
-------------------------- --------------------------
NAME DECEMBER 31, 1994 ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------ ----------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Melnuk (b)...... -- -- -- -- -- --
Bradley D. Aldrich (c).. -- -- -- -- -- --
Brandon K. Barnholt..... 10,000 $68,400 33,333 56,667 $90,971 $126,343
Kevin K. Pennington..... -- -- 33,333 66,667 50,530 101,061
</TABLE>
(a) Based upon the closing price on the New York Stock Exchange-Composite
Transactions on December 31, 1994.
(b) Mr. Melnuk holds options to acquire Horsham Shares received as compensation
for services provided to Horsham.
(c) In February 1995, Mr. Aldrich was granted an option to purchase 100,000
shares of Horsham Shares under the Horsham Option Plan.
SHORT-TERM PERFORMANCE PLAN
Employees of Clark participate in an annual incentive plan which places at
risk an incremental portion of their total compensation based on Company,
business unit and/or individual performance. The targeted at risk compensation
increases with the ability of the individual to affect business performance,
ranging from 12% for administrative support personnel to 200% for the Chief
Executive Officer. The other senior executive officers have the opportunity to
earn an annual incentive equal to 125% of the individuals base salary. The
actual award is determined based on financial performance as measured by return
on equity with individual and senior executive team performance evaluated
against operating objectives to achieve planned financial results. For
essentially all other employees, annual incentives are based on specific
performance indicators utilized to operate the business, principally
productivity and profitability measures.
LONG-TERM PERFORMANCE PLAN
Clark USA has adopted a Long-Term Performance Plan (the Performance Plan).
Under the Performance Plan, designated employees, including executive officers,
of Clark USA and its subsidiaries and other related entities will be eligible to
receive awards in the form of stock options, stock appreciation rights and stock
grants. The Performance Plan is intended to promote the growth and performance
of Clark USA by encouraging employees to acquire ownership interest in Clark USA
and to provide incentives for employee performance. An aggregate of 1,250,000
shares of Common Stock may be awarded under the Performance Plan, either from
authorized, unissued shares which have been reserved for such purpose or from
shares purchased on the open market, subject to adjustment in the event of a
stock split, stock dividend, recapitalization or similar change in the
outstanding Common Stock of Clark USA.
37
<PAGE>
The Performance Plan will be administered by the Compensation Committee (as
defined below). Subject to the provisions of the Performance Plan, the
Compensation Committee will be authorized to determine who may participate in
the Performance Plan and the number and types of awards made to each
participant, and the terms, conditions and limitations applicable to each award.
Awards may be granted singularly, in combination or in tandem. Subject to
certain limitations, the Board of Directors will be authorized to amend, modify
or terminate the Performance Plan to meet any changes in legal requirements or
for any other purpose permitted by law.
Payment of awards may be made in the form of cash, stock or combinations
thereof and may include such restrictions as the Compensation Committee shall
determine, including, in the case of stock, restrictions on transfer and
forfeiture provisions. The price at which shares of Common Stock may be
purchased under a stock option may not be less than the fair market value of
such shares on the date of grant. If permitted by the Compensation Committee,
such price may be paid by means of tendering Common Stock, or surrendering
another award, including restricted stock, valued at fair market value on the
date of exercise, or any combination thereof. Further, with Compensation
Committee approval, payments may be deferred, either in the form of installments
or as a future lump sum payment. Dividends or dividend equivalent rights may be
extended to and made part of any award denominated in stock, subject to such
terms, conditions and restrictions as the Compensation Committee may establish.
At the discretion of the Compensation Committee, a participant may be offered an
election to substitute an award for another award or awards of the same or
different type. Stock options initially will have a 10 year term with a three
year vesting schedule and are not exercisable until the Companys common stock is
publicly traded. In accordance with the stock purchase agreement between Clark
USA and Tiger Management Corporation, executive officers are restricted from
exercising options for four years or until Tigers interest in Clark USA falls
below 10%.
If the employment of a participant terminates, subject to certain exceptions
for retirement, resignation, death or disability, all unexercised, deferred and
unpaid awards will be canceled immediately, unless the award agreement provides
otherwise. Subject to certain exceptions for death or disability, or employment
by a governmental, charitable or educational institution, no award or other
benefit under the Plan is assignable or transferable, or payable to or
exercisable by any one other than the participant to whom it was granted.
In the event of a "Change of Control" of Clark USA or Horsham (as defined in
the Performance Plan), with respect to awards held by Performance Plan
participants who have been employed by the Company for at least six months, (a)
all stock appreciation rights which have not been granted in tandem with stock
options will become exercisable in full, (b) the restrictions applicable to all
shares of restricted stock will lapse and such shares will be deemed fully
vested, (c) all stock awards will be deemed to be earned in full and (d) any
participant who has been granted a stock option which is not execisable in full
will be entitled, in lieu of the exercise of such stock option, to obtain cash
payment in an amount equal to the difference between the option price of such
stock option and the offer price (in the case of a tender offer or exchange
offer) or the value of common stock covered by such stock option, determined as
provided in the Performance Plan.
Under the Performance Plan, a "Change in Control" includes, without
limitation, with respect to Clark USA or Horsham, (i) the acquisition (other
than by Horsham) of beneficial ownership of 25% or more of the voting power of
its outstanding securities without the prior approval of at least two-thirds of
its directors then in office, (ii) a merger, consolidation, proxy contest, sale
of assets or reorganization which results in directors previously in office
constituting less than a majority of its directors thereafter or (iii) any
change of at least a majority of its directors during any period of two years.
CLARK SAVINGS PLAN
The Clark Savings Plan, which became effective in 1989, permits employees to
make before-tax and after-tax contributions and provides for incentive matching
contributions. Savings Plan assets are held in trust by Boatmens Trust Company.
Under the Savings Plan, each employee of Clark (and such related companies as
may adopt the Savings Plan) who has completed at least six months of service may
become a participant. Participants are permitted to make before-tax
contributions to the Savings Plan, effected through payroll deduction, of from
1% to 15% of their compensation. Clark makes matching contributions equal to
200% of a participants before-tax contributions up to 3% of compensation.
Participants are also permitted to make after-tax contributions through payroll
deduction, of from 1% to 5% of compensation, which are not matched by employers
contributions; provided that before-tax contributions and
38
<PAGE>
after-tax contributions, in the aggregate, may not exceed 15% of compensation.
All employer contributions are vested at a rate of 20% per year of service,
becoming fully vested after five years of service. Amounts in employees accounts
may be invested in a variety of permitted investments, as directed by the
employee, including in Horsham Shares. Participants vested accounts are
distributable upon a participants disability, death, retirement or separation
from service. Subject to certain restrictions, employees may make loans or
withdrawals of employee contributions during the term of their employment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Compensation of Clarks executive officers has historically been determined by
Clarks Board of Directors. Mr. Melnuk, the Companys and Clarks President and
Chief Executive Office, is a member of Clark USAs and Clarks Board of Directors.
Other than reimbursement of their expenses, neither Clark USAs nor Clarks
directors receive any compensation for their services as directors. There are
no interlocks between the Company and other entities involving the Companys
executive officers and board members who serve as executive officers or board
members of other entities, except with respect to the Companys parents, Clark
USA and The Horsham Corporation. Peter Munk (Chairman and Chief Executive
Officer of Horsham) serves as a director of the Company and Paul Melnuk (the
President and Chief Executive Officer of the Company) serves as a director of
Horsham. Anthony Munk (Senior Vice President of Horsham) serves as a director
of the Company.
Horsham and Clark have agreements to provide certain management services to
each other from time to time. Trade credit agreements between Clark and various
suppliers of its petroleum requirements occasionally requires a guarantee of
Clarks obligations by Horsham. Fees related to trade credit guarantees totaled
$100,000, $50,000 and $100,000 in 1994, 1993 and 1992, respectively.
In August 1993, Horsham established HSM Insurance, Inc., ("HSM"), a wholly-
owned subsidiary, to provide environmental impairment liability insurance
coverage for Clark and other companies, including unaffiliated companies. Clark
believes premiums paid to HSM are comparable to premiums that would be paid to
unaffiliated carriers for similar coverage. Premiums paid by Clark to HSM were
$2,000,000 and $600,000 for 1994 and 1993, respectively. No loss claims have
been made by Clark under this policy. The policy was terminated on December 31,
1994.
EMPLOYMENT AGREEMENTS
Clark has an employment agreement with Mr. Aldrich which provides for a term
of thirty months commencing December 1, 1994 at a minimum annual salary of
$175,000. In addition, in February 1995 Mr. Aldrich was granted an option to
purchase 100,000 shares of Horsham Shares under the Horsham Option Plan.
Clark has an employment agreement with Mr. Barnholt which provides for a term
of three years commencing May 11, 1992 at a base annual salary of $112,500. In
addition, Mr. Barnholt was granted an option to purchase 30,000 shares of
Horsham Shares under the Clark Option Plan, which option shall become
exercisable as to one-third of the shares on each of the first three anniversary
dates of the granting of the option and was granted an option to purchase 70,000
shares of Horsham Shares under the Horsham Option Plan.
39
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
All of Clark's common stock is owned by Clark USA, which is a subsidiary of
Horsham. Clark USA was formed by Horsham and AOC L.P. to acquire all of the
capital stock of Clark and certain other assets. In connection with the
Acquisition, AOC L.P., Horsham, Clark USA and Clark entered into the Shareholder
Agreement, pursuant to which Horsham purchased 60% of the equity capital of R &
M Holdings for $18 million and AOC L.P. purchased the remaining 40% of the
equity capital of R & M Holdings for $12 million. AOC L.P. is a Missouri
limited partnership, the sole general partner of which is G & N Investments,
Inc., a corporation controlled by Samuel R. Goldstein and Paul A. Novelly.
On February 27, 1995, Clark USA sold $135 million of additional equity to a
subsidiary of Horsham. The Horsham subsidiary immediately resold $120 million
of the equity to Tiger Management Corporation, an institutional money manager,
for an interest of between 35.6% and 40.0% (based on 1995 earnings) of Clark
USA.
REPURCHASE OF STOCK
On December 30, 1992, Clark USA repurchased from AOC L.P. 34.67 shares of its
common stock (approximately 87% of the shares of Clark USA common stock owned by
AOC L.P.) and the option held by AOC L.P. to acquire common stock described
above, for a purchase price of $90 million in cash and the transfer of all of
the shares of CMAT, Inc. ("CMAT"), the principal asset of which is a Colorado
ski resort. Concurrently, Horsham purchased the remaining 5.33 shares of common
stock (approximately 13% of the shares of Clark USA common stock owned by AOC
L.P.) for a purchase price of $10 million in cash and a warrant to purchase up
to 3,000,000 Horsham Shares at an exercise price of $7.625 per share. In
addition, the Shareholder Agreement was terminated.
Pursuant to the Stock Purchase Agreement, Clark USA and Horsham have agreed to
pay to AOC L.P. approximately 89% and 11%, respectively, of the Contingent
Payment described below. In addition, Horsham has agreed to indemnify Clark USA
for its Contingent Payment obligation in excess of $7 million. The Contingent
Payment is an amount, which shall not exceed in the aggregate $24 million plus
interest at 9% per annum, compounded annually, calculated as a percentage of (i)
the net cash flow of Clark for the years 1993, 1994, 1995 and 1996, in excess of
specified levels and (ii) the net proceeds from sales, prior to January 1, 1997,
of any equity security of the Company or Clark, or of certain assets of Clark or
Clark Pipe Line Company or of certain mergers involving the Company or Clark, at
prices in excess of specified levels.
The shares of CMAT transferred to AOC L.P. were valued at approximately $9.9
million, following capitalization of certain intercompany debt held by Clark.
In connection with the foregoing transaction, AOC L.P., its principals and
their affiliates, on the one hand and Horsham, Clark USA and Clark, on the other
hand, delivered a Mutual Release of all claims, known or unknown, of either
party against the other. In consideration of such release, Clark paid to AOC
L.P. $2.5 million in cash.
Clark USA financed the repurchase of shares of its common stock through short-
term borrowings of $90 million from Horsham on December 30, 1992 with a yield to
maturity of approximately 11.8%. Clark USA repaid the short-term borrowings on
February 18, 1993 with proceeds of the sales of Zero Coupon Notes for general
corporate purposes and for the payment of any portion of the AOC payment as
described below.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Horsham and Clark have agreements to provide certain management services to
each other from time to time. Trade credit agreements between Clark and various
suppliers of its petroleum requirements occasionally require a guarantee of
Clarks obligations by Horsham. Fees related to trade credit guarantees totaled
$100,000, $50,000 and $100,000 in 1994, 1993 and 1992, respectively.
40
<PAGE>
In August 1993, Horsham established HSM Insurance, Inc., ("HSM"), a wholly-
owned subsidiary, to provide environmental impairment liability insurance
coverage for Clark and other companies, including unaffiliated companies. Clark
believes premiums paid to HSM are comparable to premiums that would be paid to
unaffiliated carriers for similar coverage. Premiums paid by Clark to HSM were
$2,000,000 and $600,000 for 1994 and 1993, respectively. No loss claims have
been made by Clark under this policy. The policy was terminated on December 31,
1994.
The business relationships described above and any future business
relationships with Horsham will be on terms no less favorable in any respect
than those which could be obtained through dealings with third parties.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
(A) 1. AND 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedule filed as a part of this Report on Form
10-K are listed in the accompanying index to financial statements and schedule.
3. EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1 Restated Certificate of Incorporation of Clark (Exhibit 3.1 filed with
Clark Registration Statement on Form S-1 (Registration No. 33-
28146))
3.2 Certificate of Amendment to Certificate of Incorporation of Clark
dated September 28, 1990 (Exhibit 3.2 filed with Clark Annual Report
on Form 10-K dated December 31, 1991 (Registration No. 1-11392))
3.3 By-laws of the Company (Exhibit 3.2 filed with Clark Registration
Statement on Form S-1 (Registration No. 33-28146))
4.1 Indenture between Clark and NationsBank of Virginia, N.A. (formerly
Sovran Bank, N.A.) including the form of 10 1/2% Senior Notes due
2001 (Exhibit 4.1 filed with Clark Registration Statement on Form S-
1 (Registration No. 33-43358))
4.2 Supplemental Indenture between Clark and NationsBank of Virginia, N.A.
(formerly Sovran Bank N.A.), dated February 17, 1995 (Exhibit 4.4
filed with Clark USA Annual Report on Form 10-K dated December 31,
1994 (Registration No. 33-59144))
4.3 Indenture between Clark and NationsBank of Virginia, N.A., including
the form of 9 1/2% Senior Notes due 2004 (Exhibit 4.1 filed with
Clark Registration Statement on Form S-1 (Registration No. 33-
50748))
4.4 Supplemental Indenture between Clark and NationsBank of Virginia,
N.A., dated February 17, 1995 (Exhibit 4.6 filed with Clark USA
Annual Report on Form 10-K dated December 31, 1994 (Registration No.
33-59144))
10.1 Clark Refining & Marketing, Inc. Stock Option Plan (Exhibit 10.5
filed with Clark Registration Statement on Form S-1 (Registration
No. 33-43358))
10.2 Clark Refining & Marketing, Inc. Savings Plan, as amended and
restated effective as of October 1, 1989 (Exhibit 10.6 filed with
Clark Annual Report on Form 10-K for the year ended December 31,
1989 (Commission File No. 1-11392))
41
<PAGE>
10.3 Employment Agreement of Brandon K. Barnholt (Exhibit 10.13 filed with
Clark Quarterly Report on Form 10-Q for the quarter ended June 30,
1992 (Commission File No. 1-11392))
10.4 Employment Agreement of Bradley D. Aldrich (Exhibit 10.4 filed with
Clark USA Annual Report on Form 10-K dated December 31, 1994
(Registration No. 33-59144))
10.5 Credit Agreement dated as of November 30, 1994 among Clark Refining &
Marketing, Inc., Bank of America National Trust and Savings
Association, The First National Bank of Boston, The Toronto-Dominion
Bank, BA Securities, Inc. and the Other Financial Institutions Party
Thereto (Exhibit 10.8 filed with Clark USA, Inc. Registration
Statement on Form S-1 (Registration No. 33-84192))
10.51 First Amendment to Credit Agreement dated as of February 23, 1995
among Clark Refining & Marketing, Inc., Bank of America National
Trust and Savings Association, Bankers Trust Company, The Toronto-
Dominion Bank, The First National Bank of Boston, BA Securities,
Inc. and the Other Financial Institutions Party Thereto (Exhibit
10.51 filed with Clark USA Annual Report on Form 10-K dated December
31, 1994 (Registration No. 33-59144))
10.9.1 Amended and Restated Asset Sale Agreement by and between Chevron
U.S.A. Inc. and Clark Refining & Marketing, Inc., dated as of August
16, 1994 (Exhibit 10.3 filed with Clark USA Current Report on Form
8-K (Registration No. 33-59144))
10.9.2 Chemical Facility Lease with Option to Purchase (Exhibit 10.9.2
filed with Clark USA, Inc. Registration Statement on Form S-1
(Registration No. 33-84192))
10.9.3 Sublease of Chemical Facility Lease (Exhibit 10.9.3 filed with
Clark USA, Inc. Registration Statement on Form S-1 (Registration No.
33-84192))
10.9.4 PADC Facility Lease with Option to Purchase (Exhibit 10.9.4 filed
with Clark USA, Inc. Registration Statement on Form S-1
(Registration No. 33-84192))
10.9.5 Supply Agreement for the Chemical Facility (Exhibit 10.9.5 filed
with Clark USA, Inc. Registration Statement on Form S-1
(Registration No. 33-84192))
10.9.6 Services Agreement for the Chemical Facility (Exhibit 10.9.6 filed
with Clark USA, Inc. Registration Statement on Form S-1
(Registration No. 33-84192))
10.9.7 Supply Agreement for the PADC Facility (Exhibit 10.9.7 filed with
Clark USA, Inc. Registration Statement on Form S-1 (Registration No.
33-84192))
10.9.8 Services Agreement for the PADC Facility (Exhibit 10.9.8 filed with
Clark USA, Inc. Registration Statement on Form S-1 (Registration No.
33-84192))
12.1 Computation of Ratio of Earnings to Fixed Charges
(B) REPORTS ON FORM 8-K
December 14, 1994, Clark USA, Inc. withdraws public offerings due to
unfavorable market conditions
42
<PAGE>
GLOSSARY OF TERMS
Refining
Alkylation Unit - Also known as the alky unit; a refinery unit that uses acid
(either sulfuric or hydrofloric HF) as a catalyst to combine
lower value products from the FCC unit and purchased gases
(isobutane) to produce gasoline
Barrel - A common unit of measure in the oil industry which equates to
42 gallons
Bbl. - An abbreviation for a barrel
Black Oil - Oil that remains after higher value products such as
gasoline, diesel and jet fuel are separated. Black oil would
include asphalt, which is used in paving streets, and #6 oil
which can be burned by utilities or marine vessels to
generate electricity
Blendstocks - Various compounds that are combined to make finished gasoline
and diesel fuel; these may include natural gasoline, FCC
gasoline, ethanol, reformate or butane, among others
BPD - Barrels per day
By-products - Products that result from extracting high value products such
as gasoline, jet and diesel fuel from crude oil: these
inlcude black oil, sulfur, propane, coke and other products
Catalyst - A substance that alters, accelerates or instigates chemical
changes, but is neither produced nor consumed in the process
Coke Also known as petroleum coke; a coal like substance that can
be burned to generate electricity or used as a hardener in
concrete
Coker Unit - A refinery unit which takes the very worst part of crude oil
that is left after all other products are removed and
converts it into petroleum coke
Crack Spread - Also known as a 3/2/1 crack spread; a simplified model that
measures the difference between the price for finished
products and crude oil. 3/2/1 represents the approximate
breakdown of a barrel of crude as follows, 3 barrels of crude
produce 2 barrels of gasoline and one barrel of diesel fuel
Crude Unit - The first refinery unit that the crude oil runs through where
it is heated and the various products separated. As crude oil
is heated to certain temperatures it vaporizes and different
products are separated. This is the distillation process.
Listed below are the products that typically come from crude
oil and the approximate temperatures at which they are
separated from it:
butanes/lighter less than 90 degrees F
gasoline 90 degrees F - 220 degrees F
naphtha 220 degrees F - 315 degrees F
kerosene 315 degrees F - 450 degrees F
diesel 450 degrees F - 650 degrees F
gas oil 650 degrees F - 800 degrees F
residue 800 degrees F and higher
DHDS Unit - Also known as distillate hydrotreater desulfurizer; removes
sulfur and other impurities from distillates, primarily
diesel and jet fuel.
Distillates - Primarily diesel, jet fuel and kerosene.
43
<PAGE>
ETBE - Ethyl tertiary butyl ether. An oxygen-rich, high-octane
gasoline blendstock produced by reacting ethanol with
isobutylene.
Ethanol - An alcohol, primarily derived from corn and other feed
grains, sometimes used in gasoline blending.
FCC Unit - Also known as the fluid catalytic cracker; the unit takes low
value products from the crude unit and converts them to
gasoline through a chemical process using catalysts.
Feedstock - Raw material used to produce final products for sale.
Guard Basin - Water collection area for storm water, oil runoff, etc.
Heavy Crude Oil - A crude oil that is relatively thick in texture (viscous)
which is harder to process and yields less high value
products such as gasoline and diesel fuel, but is cheaper.
Hedging - An activity using various strategies to limit the risk of
losses due to price changes in finished products and crude
oil.
Isomax Unit - Also known as the hydrocracker. The unit takes low value
products from the crude unit and converts them into gasoline
and distillates through a high pressure process using
catalysts.
LPG Also known as Liquefied Petroleum Gases. Liquefied light ends
gases used for home heating and cooking.
Light Crude Oil - A crude oil that is relatively thin in texture which is
easier to process and yields more high value products such as
gasoline and diesel fuel, but is more expensive.
Maya - A heavy, sour crude oil from Mexico.
Naphtha - Natural or unrefined gasoline with a low octane rating and
impurities (sulfur and nitrogen) as separated out of the
crude oil during the refining process.
NYMEX - New York Mercantile Exchange, an exchange that facilitates
the buying and selling of crude oil and various refined
products for delivery at various times in the future.
Oxygenates - Compounds containing oxygen which, when added to conventional
gasoline, reduce the carbon monoxide emissions of the
gasoline.
Platformer - A refinery unit that takes low octane gasoline and converts
it to high octane gasoline by using a platinum / rhenium
catalyst.
Production - The finished products such as gasoline and diesel fuel which
are converted from crude oil by a refinery.
Reformer Unit - Same as a platformer.
Reformulated
Gasoline - Gasoline blended in accordance with certain specifications,
that is designed to reduce ozone-forming and toxic
pollutants.
Resid - Residual fuel oil or residue. A deriviative of crude oil
obtained from the basic stages of refining operations. Also
known as atmospheric or vacuum tower bottoms.
Sour Crude Oil - A crude oil that is relatively high in sulfur content,
requiring additional processing to remove the sulfur, but is
less expensive.
44
<PAGE>
Sweet Crude Oil - A crude oil that is relatively low in sulfur content,
requiring less processing to remove the sulfur, but is more
expensive.
TAME - Tertiary amyl methyl ether. An oxygen-rich, high-octane
gasoline blendstock produced by reacting methanol with
isoamylene.
TIP Unit - Also known as the Total Isomerization Process unit; a
refinery unit that changes lower octane products received
from the crude unit into higher octane materials used in
gasoline.
Throughput - The amount of a substance processed through a unit.
Turnaround - Shutting down various units of a refinery to service, clean
and refurbish the components; a maintenance turnaround occurs
every three - four years or as needed.
Unifier Unit - A refinery unit that removes sulfur, nitrogen and other
impurities from naphtha separated at the crude unit.
WTI - West Texas Intermediate crude oil, a light; sweet crude oil
that is used as a benchmark for other crude oil types.
Retail
CP - Convenience products such as beverages, cigarettes and
snacks.
Gal. - Gallon.
Grade Splits - Regular unleaded versus extra unleaded versus premium
unleaded. Commonly used in referring to improvement in
selling higher profit gasoline such as extra and premium
unleaded.
PMPS - Per month per store.
General
Baseline - A selected financial measurement against which results are
compared.
G & A - General and administrative expenses.
MM - Millions.
M - Thousands.
Unusual Items - Those charges or credits not occurring in the normal course
of business.
45
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Clark Refining & Marketing, Inc.:
Annual Financial Statements
Report of Independent Accountants..... 47
Balance Sheets as of December 31,
1994 and 1993........................ 48
Statements of Earnings for the years
ended December 31, 1994, 1993 and
1992................................. 49
Statements of Cash Flows for the
years ended December 31, 1994, 1993
and 1992............................. 50
Statement of Stockholders' Equity for
the years ended December 31, 1994,
1993 and 1992........................ 51
Notes to Financial Statements......... 52
</TABLE>
46
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark Refining & Marketing, Inc:
We have audited the accompanying balance sheets of Clark Refining & Marketing,
Inc.(formerly Clark Oil & Refining Corporation) (a Delaware corporation and
wholly-owned subsidiary of Clark USA, Inc.), as of December 31, 1994 and 1993
and the related statements of earnings, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1994. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Clark Refining & Marketing,
Inc. as of December 31, 1994 and 1993 and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1994 in conformity with generally accepted accounting principles.
As discussed in Note 3 to the financial statements, in 1994 the Company
changed its method of accounting for short-term investments. As discussed in
Note 12 to the financial statements, in 1993 the Company changed its method of
accounting for postretirement benefits other than pensions.
Coopers & Lybrand L.L.P.
St. Louis, Missouri
February 3, 1995, except for
Notes 15 and 16 for which the
date is February 27, 1995
47
<PAGE>
CLARK REFINING & MARKETING, INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
REFERENCE DECEMBER 31, DECEMBER 31,
ASSETS NOTE 1994 1993
--------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents... 2 $ 95,282 $ 60,771
Short-term investments...... 2, 3 28,658 133,752
Accounts receivable......... 77,794 58,103
Inventories................. 2, 4 151,466 147,961
Prepaid expenses and other.. 15,659 15,573
-------- --------
Total current assets.... 368,859 416,160
PROPERTY, PLANT AND EQUIPMENT.. 2, 5 429,805 360,945
OTHER ASSETS................... 2, 6 50,717 34,349
-------- --------
$849,381 $811,454
======== ========
</TABLE>
LIABILITIES AND STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
CURRENT LIABILITIES:
<S> <C> <C> <C>
Accounts payable......................... 7 $155,442 $138,321
Accrued expenses and other............... 8 41,639 43,151
Accrued taxes other than income.......... 41,407 30,860
-------- --------
Total current liabilities............. 238,488 212,332
LONG-TERM DEBT.............................. 8, 9 400,734 401,038
DEFERRED TAXES.............................. 2, 13 29,178 35,248
LIABILITY FOR POSTRETIREMENT BENEFITS....... 12 18,129 16,858
CONTINGENCIES............................... 14 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per share;
1,000 shares authorized and 100 shares
issued and outstanding)..................
Paid-in capital.......................... 30,000 30,000
Retained earnings........................ 3, 7 132,852 115,978
-------- --------
Total stockholder's equity............ 162,852 145,978
-------- --------
$849,381 $811,454
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
48
<PAGE>
CLARK REFINING & MARKETING, INC.
STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
REFERENCE FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
NOTE 1994 1993 1992
--------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 2,440,028 $ 2,263,410 $ 2,252,964
EXPENSES:
Cost of sales............................... (2,092,516) (1,936,563) (1,952,360)
Operating expenses.......................... (237,332) (218,087) (224,368)
General and administrative expenses......... (33,990) (27,533) (31,164)
Depreciation................................ 2 (26,540) (23,402) (21,122)
Amortization................................ 2, 6 (10,797) (11,907) (9,290)
Inventory recovery of (write-down to)
market value............................... 4 26,500 (26,500) --
----------- ----------- -----------
(2,374,675) (2,243,992) (2,238,304)
----------- ----------- -----------
OPERATING INCOME.............................. 65,353 19,418 14,660
Interest and financing costs, net........... 8 (37,547) (29,933) (26,373)
Other income................................ 11 -- 11,370 14,662
----------- ----------- -----------
EARNINGS BEFORE INCOME TAXES,
EXTRAORDINARY ITEM AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE................................... 27,806 855 2,949
Income tax (provision) benefit.............. 2, 13 (9,732) 513 344
----------- ----------- -----------
EARNINGS BEFORE EXTRAORDINARY ITEM............
AND CUMULATIVE EFFECT OF CHANGE
IN ACCOUNTING PRINCIPLE....................... 18,074 1,368 3,293
Extinguishment of debt
(net of tax benefit of $7,192)............ 8 -- -- (11,538)
Cumulative effect of change in accounting
principle (net of tax benefit of $5,992).. 12 -- (9,595) --
----------- ----------- -----------
NET EARNINGS (LOSS)........................... $ 18,074 $ (8,227) $ (8,245)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
49
<PAGE>
CLARK REFINING & MARKETING, INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
1994 1993 1992
---------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings (loss)....................................... $ 18,074 $ (8,227) $ (8,245)
Extraordinary item........................................ -- -- 11,538
Cumulative effect of change in accounting principle....... -- 9,595 --
Non-cash items:
Depreciation........................................... 26,540 23,402 21,122
Amortization........................................... 11,973 13,025 12,217
Realized (gain) loss on investments.................... 5,396 (373) (3,265)
Share of earnings of affiliates, net of dividends...... (468) 197 182
Deferred taxes......................................... 9,732 (3,536) 267
Inventory (recovery of) write-down to market value..... (26,500) 26,500 --
Other.................................................. 1,271 1,271 (206)
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other....... (21,135) 2,328 13,171
Inventories........................................... 22,995 (23,378) (31,334)
Accounts payable, accrued expenses, taxes other than
income, and other..................................... 13,264 22,288 20,418
--------- --------- ----------
Net cash provided by operating activities............ 61,142 63,092 35,865
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments....................... (89,987) (114,534) (987,883)
Sales of short-term investments........................... 187,785 168,843 1,030,318
Expenditures for property, plant and equipment............ (100,276) (67,938) (59,518)
Expenditures for turnaround............................... (11,191) (20,577) (2,729)
Refinery acquisition expenditures......................... (13,514) -- --
Payment received on CMAT, Inc. note....................... -- 10,000 --
Proceeds from disposals of property, plant and equipment.. 5,941 4,582 995
Other investing activity.................................. -- (201) (5,006)
--------- --------- ----------
Net cash used in investing activities................ (21,242) (19,825) (23,823)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.................. -- -- 175,000
Long-term debt payments................................... (585) (775) (207,396)
Deferred financing costs.................................. (4,804) (663) (6,458)
Other..................................................... -- 299 135
--------- --------- ----------
Net cash used in financing activities................ (5,389) (1,139) (38,719)
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS........................................... 34,511 42,128 (26,677)
CASH AND CASH EQUIVALENTS, beginning of period.............. 60,771 18,643 45,320
--------- --------- ----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 95,282 $ 60,771 $ 18,643
========= ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
50
<PAGE>
CLARK REFINING & MARKETING, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ------- -------- --------
<S> <C> <C> <C> <C>
BALANCE - January 1, 1992............... $-- $30,000 $142,633 $172,633
Net loss.............................. -- -- (8,245) (8,245)
Dividends paid........................ -- -- (10,183) (10,183)
--- ------- -------- --------
BALANCE - December 31, 1992............. -- 30,000 124,205 154,205
Net loss.............................. -- -- (8,227) (8,227)
--- ------- -------- --------
BALANCE - December 31, 1993............. -- 30,000 115,978 145,978
Net earnings.......................... -- -- 18,074 18,074
Change in unrealized short-term
investment gains and losses, net of
tax benefit of $700.................. -- -- (1,200) (1,200)
--- ------- -------- --------
BALANCE - December 31, 1994............. $-- $30,000 $132,852 $162,852
=== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
51
<PAGE>
CLARK REFINING & MARKETING, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1993, AND 1992
(TABULAR DOLLAR AMOUNTS IN THOUSANDS OF US DOLLARS)
1. GENERAL
Clark Refining & Marketing, Inc., a Delaware corporation ("Clark"), is wholly
owned by Clark USA, Inc., a Delaware corporation ("Clark USA). Clark USA is
indirectly wholly owned by The Horsham Corporation, a Quebec corporation
(Horsham). Prior to December 30, 1992, Clark USA was 60% owned by Horsham and
40% owned by AOC Limited Partnership, a Missouri limited partnership (the
minority shareholders). On December 30, 1992, Horsham and Clark USA purchased
all of the outstanding Clark USA shares owned by the minority shareholders,
resulting in Horsham owning 100% of Clark USA (see Note 16 "Certain
Financings").
Clarks principal operations include crude oil refining, wholesale and retail
marketing of refined petroleum products and retail marketing of convenience
store items in the Midwestern United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents; Short-term Investments
Clark considers all highly liquid investments, such as time deposits, money
market instruments, commercial paper and United States and foreign government
securities, purchased with a maturity of three months or less, to be cash
equivalents. Short-term investments consist of similar investments, as well as
United States government security funds, maturing more than three months from
date of purchase and are carried at fair value (see Note 3 "Short-term
Investments"). Clark invests only in AA rated or better fixed income marketable
securities or the short-term rated equivalent.
Inventories
Inventories are stated at the lower of cost, predominantly using the last-in,
first-out "LIFO" method, adjusted for realized hedging gains or losses on
petroleum products, or market on an aggregate basis. To limit risk related to
price fluctuations, Clark purchases and sells crude oil and refined products
futures and options contracts as hedges of its production requirements and
physical inventories. At December 31, 1994, Clarks open contracts have terms
extending into December, 1995. Gains and losses on these contracts are
recognized in earnings as a product cost component and as an adjustment to the
carrying amount of petroleum inventories and are reflected when such inventories
are consumed or sold. Unrealized gains and losses on open contracts are
deferred and included in Accounts Payable. At December 31, 1994, Clark had net
unrealized losses of $2.0 million.
Property, Plant and Equipment
Depreciation of property, plant and equipment is computed using the straight-
line method over the estimated useful lives of the assets or group of assets.
The cost of buildings and marketing facilities on leased land and leasehold
improvements are amortized on a straight-line basis over the shorter of the
estimated useful life or the lease term. Clark capitalizes the interest cost
associated with major construction projects based on the effective interest rate
on aggregate borrowings.
52
<PAGE>
Expenditures for maintenance and repairs are expensed. Major replacements and
additions are capitalized. Gains and losses on assets depreciated on an
individual basis are included in current income. Upon disposal of assets
depreciated on a group basis, unless unusual in nature or amount, residual cost
less salvage is charged against accumulated depreciation.
Environmental Costs
Environmental expenditures are expensed or capitalized depending upon their
future economic benefit. Costs which improve a property as compared with the
condition of the property when originally constructed or acquired and costs
which prevent future environmental contamination are capitalized. Costs which
return a property to its condition at the time of acquisition are expensed.
Deferred Turnaround and Financing Costs
A turnaround is a periodically required standard procedure for maintenance of
a refinery that involves the shutdown and inspection of major processing units
and occurs approximately every three years. Turnaround costs, which are
included in "Other assets", are amortized over the period to the next scheduled
turnaround, beginning the month following completion.
Financing costs related to obtaining or refinancing of debt are deferred and
amortized over the expected life of the debt.
Income Taxes
Clark files a consolidated US federal income tax return with Clark USA but
computes its provision on a separate company basis. Clark provides deferred
taxes under the asset and liability method in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") (see Note 13 "Income Taxes").
Deferred taxes are classified as current, included in prepaid or accrued
expenses, or noncurrent depending on the classification of the assets and
liabilities to which the temporary differences relate. Deferred taxes arising
from temporary differences that are not related to a specific asset or liability
are classified as current or noncurrent depending on the periods in which the
temporary differences are expected to reverse.
Employee Benefit Plans
The Clark Refining & Marketing, Inc. Savings Plan and separate Trust (the
"Plan"), a defined contribution plan, covers substantially all employees of
Clark. Under terms of the Plan, Clark matches the amount of employee
contributions, subject to specified limits. Contributions to the Plan during
1994 were $3.4 million (1993 - $2.7 million; 1992 - $2.7 million).
Clark provides certain benefits for retirees once they have reached specified
years of service. These benefits include health insurance in excess of social
security and an employee paid deductible amount, and life insurance equal to the
employee's annual salary. On January 1, 1993, Clark adopted Statement of
Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("SFAS 106"), which changed the
method of accounting for such benefits from a cash to an accrual basis (see Note
12 "Postretirement Benefits Other Than Pensions").
3. SHORT-TERM INVESTMENTS
On January 1, 1994, Clark adopted Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). This standard requires the classification of short-term
investments into three categories and many debt securities to be shown at fair
value on the balance sheet. Clarks short-term investments are all considered
"Available-for-Sale" and are carried at fair value with the resulting unrealized
gain or loss, adjusted for applicable income taxes, shown as a component of
retained earnings.
53
<PAGE>
Short-term investments consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1993
------------------------------------ ----------------------------------
AMORTIZED UNREALIZED AGGREGATE AMORTIZED UNREALIZED AGGREGATE
MAJOR SECURITY TYPE COST GAIN/(LOSS) FAIR VALUE COST GAIN/(LOSS) FAIR VALUE
------------------- ----------- ----------- ---------- --------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
U.S. Debt Securities $30,558 $(1,900) $28,658 $ 52,646 $ 43 $ 52,689
Variable Rate Government Funds -- -- -- 55,506 (423) 55,083
Corporate Debt Securities -- -- -- 12,651 146 12,797
Mortgage Backed Debt Securities -- -- -- 12,949 (173) 12,776
------- ------- ------- -------- -------- --------
$30,558 $(1,900) $28,658 $133,752 $(407) $133,345
======= ======= ======= ======== ========= ========
</TABLE>
The contractual maturities of the short-term investments at December 31,
1994 were:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE
COST FAIR VALUE
---------- ----------
<S> <C> <C>
Due in one year or less $ 2,027 $ 1,970
Due after one year through five years 28,531 26,688
-------- -------
$30,558 $28,658
======== =======
</TABLE>
Although some of the contractual maturities of these short-term
investments are over one year, management's intent is to use the funds for
current operations and not hold the investments to maturity.
For the year ended December 31, 1994, the proceeds from sales of
Available-for-Sale securities were $187.8 million with $5.4 million of realized
losses recorded for the period and shown in "Interest and financing costs, net."
For the same period in 1993, the proceeds from the sale of short-term
investments were $168.8 million with $0.4 million of realized gains, and in 1992
proceeds from the sale of short-term investments were $1,030.3 million with
realized gains of $3.3 million. Realized gains and losses are computed using
the specific identification method.
The change in the net unrealized holding gains or losses on Available-for-
Sale securities for year ended December 31, 1994, was $1.9 million ($1.2 million
after taxes). This net unrealized loss is included as a component of retained
earnings. Unrealized gains or losses were not recognized in 1993 or 1992 as SFAS
115 had not been adopted by Clark, therefore, the carrying value at December 31,
1993 was the adjusted cost of the short-term investments.
4. INVENTORIES
The carrying value of inventories consisted of the following:
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Crude oil.............................. $ 42,760 $ 53,860
Refined products and blendstocks....... 87,957 102,604
Convenience products................... 14,904 12,044
Warehouse stock and other.............. 5,845 5,953
Inventory write-down to market......... -- (26,500)
-------- --------
$151,466 $147,961
======== ========
</TABLE>
The market value of these inventories at December 31, 1994, was
approximately $1.9 million above the carrying value. Inventories at December 31,
1993 were written down to market value which was $26.5 million lower than LIFO
cost. In the first half of 1994, crude oil and related refined product prices
rose substantially, allowing the reversal of the inventory write-down to market.
54
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Land............................................. $ 17,933 $ 17,206
Refineries....................................... 311,479 255,218
Retail stores.................................... 164,518 132,542
Product terminals and pipelines.................. 44,261 40,731
Other............................................ 10,416 9,677
--------- --------
548,607 455,374
Accumulated depreciation and amortization........ (118,802) (94,429)
--------- --------
$ 429,805 $360,945
========= ========
</TABLE>
At December 31, 1994, property, plant and equipment included $103.6
million (1993 - $48.2 million) of construction in progress.
6. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
1994 1993
--------- --------
<S> <C> <C>
Deferred financing costs......................... $11,915 $ 8,287
Deferred turnaround costs........................ 19,719 19,324
Deferred refinery acquisition costs.............. 13,514 --
Investment in non-consolidated affiliates........ 4,878 4,410
Other............................................ 691 2,328
------- -------
$50,717 $34,349
======= =======
</TABLE>
Amortization of deferred financing costs for the year ended December 31,
1994, was $1.2 million (1993 - $1.2 million; 1992 - $2.9 million).
Amortization of turnaround costs during 1994 was $10.8 million (1993 - $11.8
million; 1992 - $9.2 million).
The deferred refinery acquisition costs will be capitalized upon the
purchase of the Port Arthur refinery and amortized over the useful life of the
assets acquired (see Note 15 "Acquisition of Port Arthur Refinery").
7. WORKING CAPITAL FACILITY
At all times during 1994, Clark had in place a working capital facility
which provided a revolving line of credit for cash borrowings and for the
issuance of letters of credit primarily for securing purchases of crude oil,
other feedstocks and refined products. A new facility was put into place on
November 30, 1994 for the lesser of $220 million or the amount available under a
defined borrowing base, as defined in the Clark Credit Agreement, representing
specified percentages of eligible cash, investments, receivables, inventory and
other working capital items (see Note 16 "Certain Financings"). Clark is
required to comply with certain financial covenants including maintaining
defined levels of working capital, tangible net worth, maximum indebtedness to
tangible net worth and a minimum ratio of adjusted cash flow to debt service. At
December 31, 1994, $110.0 million (1993 - $51.5 million) of the line of credit
was utilized for letters of credit, of which $48.5 million (1993 - $8.7 million)
supports commitments for future deliveries of petroleum products. There were no
direct borrowings outstanding under the facility at December 31, 1994 or 1993.
55
<PAGE>
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
10 1/2% Senior Notes due December 1, 2001
("10 1/2% Senior Notes")......................... $225,000 $225,000
9 1/2% Senior Notes due September 15, 2004
("9 1/2% Senior Notes").......................... 175,000 175,000
Obligations under capital leases and other notes... 771 1,355
-------- --------
400,771 401,355
Less current portion..................... 37 317
-------- --------
$400,734 $401,038
======== ========
</TABLE>
The estimated fair value of the long-term debt at December 31, 1994 was
$397.6 million, determined using quoted market prices for these issues.
The 9 1/2% and 10 1/2% Senior Notes were issued by Clark in September 1992
and December 1991, respectively, and are unsecured. The 9 1/2% Senior Notes and
10 1/2% Senior Notes are redeemable by Clark beginning September 1997 and
December 1996, respectively, at a redemption price which starts at 105% and
decreases to 100% of principal two years later. The Clark indentures contain
certain restrictive covenants including limitations on the payment of dividends,
the payment of amounts to related parties, the level of debt, change of control
and incurrence of liens (see Note 16 "Certain Financings"). In addition, Clark
must maintain a minimum net worth of $100 million.
The scheduled maturities of long-term debt during the next five years are
(in thousands): 1995 - $37 (included in "Accrued expenses and other"); 1996 -
$32; 1997 - $32; 1998 - $122; 1999 - $32; 2000 and thereafter $400,516.
Interest and financing costs
Interest and financing costs, net, included in the statements of earnings,
consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Interest expense.......................... $40,979 $40,479 $45,736
Financing costs........................... 1,178 1,593 3,541
Interest income........................... (2,201) (9,363) (17,796)
------- ------- -------
39,956 32,709 31,481
Capitalized interest...................... (2,409) (2,776) (5,108)
------- ------- -------
Interest and financing costs, net......... $37,547 $29,933 $26,373
======= ======= =======
</TABLE>
Cash paid for interest in 1994 was $ 40.3 million (1993 - $40.1 million;
1992- $52.1 million).
Accrued interest payable at December 31, 1994, of $6.9 million (1993 - $6.9
million) is included in "Accrued expenses and other".
Early Extinguishment of Debt
In 1992, Clark repurchased $95.9 million of its First Mortgage Notes on the
open market for $103.0 million and redeemed the remaining $104.1 million at 106%
of principal amount, or $110.4 million. Available cash was used to extinguish
the debt. The costs of the early extinguishment of debt of $11.5 million (net
of tax benefit of $7.2 million) included the premium amount, deferred financing
costs, and defeasance-related interest expense.
56
<PAGE>
9. LEASE COMMITMENTS
Clark leases premises and equipment under lease arrangements, many of which
are non-cancelable. Clark leases store property and equipment with lease terms
extending to 2013, some of which have escalation clauses based on a set amount
or increases in the Consumer Price Index. Clark also has operating lease
agreements for certain pieces of equipment at the refineries, retail stores, and
the general office. These lease terms range from 1 to 7 years with the option
to purchase the equipment at the end of the lease term at fair market value.
The leases generally provide that Clark pay taxes, insurance, and maintenance
expenses related to the leased assets. At December 31, 1994, future minimum
lease payments under capital leases and non-cancelable operating leases were as
follows (in millions): 1995 - $8.0; 1996 - $7.8; 1997 - $5.5; 1998 - $5.1; 1999
- $4.2; and $3.3 in the aggregate thereafter. Rental expense during 1994 was
$7.6 million (1993 - $3.4 million; 1992 - $3.7 million).
10. RELATED PARTY TRANSACTIONS
Transactions of significance with related parties not disclosed elsewhere
in the footnotes are detailed below:
Clark Executive Trust
Clark established a deferred compensation plan called the Clark Refining &
Marketing, Inc. Stock Option Plan (the "Stock Option Plan") which became
effective May 1, 1991. Under the Stock Option Plan, as amended, options to
purchase up to 600,000 subordinate voting shares of Horsham could be granted to
certain employees and non-employee directors. Exercise prices reflect the
market value of Horsham stock on the date of issuance. As of December 31, 1994,
there were 219,472 options outstanding to purchase shares of Horsham at prices
ranging from $7.19 to $11.88 per share. The trust held 219,472 Horsham shares
at December 31, 1994.
HSM Insurance Inc.
Clark paid premiums of $2.0 million (1993 - $0.6 million) to HSM Insurance,
Inc. for providing environmental impairment liability insurance. Clark believes
the premiums paid to HSM Insurance, Inc. are comparable to premiums charged by
other unaffiliated carriers for similar coverage. No loss claims have been made
under the policy. The policy was terminated on December 31, 1994.
11. OTHER INCOME
Other income consisted of the following:
<TABLE>
<CAPTION>
1994 1993 1992
------ -------- -------
<S> <C> <C> <C>
Drexel litigation................... $ -- $ 8,468 $ 5,530
Apex litigation..................... -- -- 9,132
Sale of "non-core" retail stores.... -- 2,902 --
------ -------- --------
$ -- $ 11,370 $ 14,662
====== ======== ========
</TABLE>
Litigation Settlements
In 1993 and 1992, Clark settled litigation and recovered all previous
losses incurred related to a line of credit with a lending syndicate (led by
Drexel Trade Finance) that had filed bankruptcy in 1990. Also in 1992, Clark
settled litigation against Apex Oil Company, Inc. and Subsidiaries (Apex)
related to a dispute arising out of the November 1988 acquisition of Clark's
assets from Apex.
57
<PAGE>
Retail Stores
In June, 1993, Clark sold 21 "non-core" retail stores in Kentucky and
Minnesota which resulted in the recognition of other income of $2.9 million.
12. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
On January 1, 1993, Clark adopted SFAS 106. The adoption of this standard
requires that Clark accrue the actuarially determined costs of postretirement
benefits during the employees' active service periods. Previously, Clark had
accounted for these benefits on a "pay as you go" basis, recognizing an expense
when an obligation was paid. The cost of such benefits in 1992 was not
significant and that year was not restated. In accordance with SFAS 106, Clark
elected to recognize the cumulative liability, a non-cash "Transition
Obligation" of $9.6 million, net of tax benefit of $6.0 million, as of January
1, 1993.
The following table sets forth the unfunded status for the postretirement
health and life insurance plans:
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $12,617 $10,536
Fully eligible plan participants 914 1,189
Other plan participants 5,419 6,465
------- ------
Total 18,950 18,190
Accrued postretirement benefit cost -- --
Less: Plan assets at fair value -- --
Less: Unrecognized net loss (821) (1,332)
------- -------
Accrued postretirement benefit liability $18,129 $16,858
======= =======
The components of net periodic postretirement
benefit costs are as follows:
Service Costs $ 415 $ 620
Interest Costs 1,271 1,270
------- -------
Net periodic postretirement benefit cost $ 1,686 $ 1,890
======= =======
</TABLE>
A discount rate of 8.25% (1993 - 7.25%) was assumed as well as a 4.5% (1993 -
4.5%) rate of increase in the compensation level. For measuring the expected
postretirement benefit obligation, the health care cost trend rate ranged from
9.0% to 12.3% in 1994, grading down to an ultimate rate in 2001 of 6.0%. The
effect of increasing the average health care cost trend rates by one percentage
point would increase the accumulated postretirement benefit obligation, as of
December 31, 1994, by $2.2 million and increase the annual aggregate service and
interest costs by $0.3 million.
13. INCOME TAXES
Clark provides deferred taxes under the asset and liability approach which
requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of temporary differences between the carrying amounts
and the tax basis of assets and liabilities.
58
<PAGE>
The income tax provision (benefit) (including the impact of the accounting
change in 1993 and the extraordinary item in 1992) is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- --------
<S> <C> <C> <C>
Earnings (loss) before provision for
income taxes.......................... $27,806 $(14,732) $(15,781)
======= ========= ========
Current provision (benefit) - Federal... $ -- $ 1,204 $ (5,796)
- State..... -- 1,819 (2,007)
------- -------- --------
-- 3,023 (7,803)
------- -------- --------
Deferred provision (benefit) - Federal.. 7,755 (6,866) (697)
- State.. 1,977 (2,662) 964
------- -------- --------
9,732 (9,528) 267
------- -------- --------
Income tax provision (benefit).......... $ 9,732 $ (6,505) $ (7,536)
======= ======== ========
</TABLE>
A reconciliation between the income tax provision computed on pretax income at
the statutory federal rate and the actual provision for income taxes is as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Federal taxes computed at 35% (34%
in 1993 and 1992)...................... $ 9,732 $(5,009) $(5,366)
State income taxes, net of federal effect 1,285 (556) (689)
Nontaxable dividend income............... (1,453) (1,276) (1,208)
Other items, net......................... 168 336 (273)
------- ------- -------
Income tax provision (benefit)........... $ 9,732 $(6,505) $(7,536)
======= ======= =======
</TABLE>
The following represents the approximate tax effect of each significant
temporary difference giving rise to deferred tax liabilities and assets as of
December 31, 1994 and 1993.
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment....... $62,416 $52,590
Turnaround costs.................... 11,983 7,543
Inventory........................... 13,922 3,027
Other............................... 1,760 1,097
------- -------
90,081 64,257
------- -------
Deferred tax assets:
Alternative minimum tax credit...... 19,215 14,286
Trademarks.......................... 4,491 4,491
Environmental and other future costs 12,166 15,329
Tax loss carryforwards.............. 13,766 --
Other............................... 2,626 1,366
------- -------
52,264 35,472
------- -------
Net deferred tax liability............ 37,817 28,785
Current asset (liability)............. (8,639) 6,463
------- -------
Deferred taxes (noncurrent)........... $29,178 $35,248
======= =======
</TABLE>
59
<PAGE>
As of December 31, 1994, Clark has made payments of $19.2 million under the
Federal alternative minimum tax system which are available to reduce future
regular income tax payments. Clark currently has a Federal net operating loss
carryforward of $32.7 million and Federal tax credit carryforwards in the amount
of $1.4 million, which carryforwards have a carryover period of 15 years and are
available to reduce future tax liabilities through the year ending December 31,
2009. Net cash tax refunds of $2.9 million were received during 1994 (1993 -
tax payment of $3.2 million; 1992 - tax payment of $2.2 million).
14. CONTINGENCIES
Forty-one civil suits by residents of Hartford, Illinois have been filed
against Clark in Madison County Illinois, alleging damage from groundwater
contamination. The relief sought in each of these cases is an unspecified
dollar amount. The litigation proceedings are in the initial stages.
Discovery, which could be lengthy and complex, is only beginning. Clark moved
to dismiss thirty-four cases filed in December 1991 on the ground that Clark is
not liable for alleged activity of Old Clark. On September 4, 1992, the trial
court granted Clark's motions to dismiss. The plaintiffs were given leave to
re-file their complaints but based only on alleged activity of Clark occurring
since November 8, 1988, the date on which the bankruptcy court with jurisdiction
over Old Clark's bankruptcy proceedings issued its "free and clear" order. In
November 1992, the plaintiffs filed thirty-three amended complaints, and nine
other plaintiffs filed additional complaints. While it is not possible to
determine whether or to what extent Clark will have any liability to other
individuals arising from the groundwater contamination, Clark believes that the
outcome of these complaints will not have a material adverse effect on its
financial position.
Clark is subject to various legal proceedings related to an age discrimination
class action lawsuit, governmental regulations and other actions arising out of
the normal course of business, including legal proceedings related to
environmental matters. While it is not possible at this time to establish the
ultimate amount of liability with respect to such contingent liabilities, Clark
is of the opinion that the aggregate amount of any such liabilities, for which
provision has not been made, will not have a material adverse effect on their
financial position or results of operations, however, an adverse outcome of
these matters could have a material effect on quarterly or annual operating
results when resolved in a future period.
15. ACQUISITION OF PORT ARTHUR REFINERY
On February 27, 1995 Clark purchased Chevron U.S.A. Inc.s (Chevron) Port
Arthur, Texas refinery, acquiring the refinery assets and certain related
terminals, pipelines, and other assets for a purchase price of approximately $70
million. The purchase price of the assets, including all acquisition costs and
assumed liabilities will be allocated over all of the refinery and related
assets using the purchase method of accounting. In addition, Clark purchased
the related petroleum inventory in storage and pipelines, and various spare
parts and supplies for approximately $138 million. A final allocation of the
purchase price will be determined during 1995 when appraisals and other studies
are completed. The purchase agreement also provides for contingent payments to
Chevron of up to $125 million over a five year period from the closing date of
the acquisition in the event refining industry margin indicators exceed certain
escalating levels. These contingent payments will be calculated annually and
the appropriate liability, if any, will be recorded at that time. While Chevron
retained primary responsibility for required remediation of most pre-closing
environmental contamination, Clark assumed responsibility for environmental
contamination beneath and within 25 to 100 feet of the facility's active
processing units.
16. CERTAIN FINANCINGS
In order to finance a portion of the Port Arthur refinery acquisition, Clark
anticipated receiving a capital contribution from Clark USA as a result of its
proposed public offering of 7.5 million shares of common stock and a $100
million note offering. In December 1994, the proposed offerings were withdrawn
due to adverse industry and capital market conditions.
On February 27, 1995, Clark USA obtained a portion of the funds necessary to
finance the Port Arthur acquisition from a subsidiary of Horsham by selling to
the subsidiary shares of new classes of common stock ("New Common Stock") of
Clark USA for $135 million. Subsequently, the Horsham subsidiary resold $120
million of such New Common Stock, representing an interest of from 35.6% to
40.0% in Clark USA, to an institutional money manager.
60
<PAGE>
In connection with the financing and closing of the Port Arthur acquisition,
Clark sought consents from the holders of its 9 1/2% Senior Notes and its 10
1/2% Senior Notes, to waive or amend the terms of certain covenants under the
indentures governing these securities. On February 17, 1995, Clark received the
requisite consents from their respective note holders.
These consents allowed the waiver or amendment of certain indentures which
principally (i) permit Clark to increase the amount of its authorized working
capital and letter of credit facility to the greater of $400 million or the
amount available under a defined borrowing base, (ii) permit the incurrence of
$75 million of additional tax-exempt indebtedness for qualifying projects, (iii)
exempt the contingent payment obligation to Chevron of up to $125 million over a
five year period from the definition of Indebtedness and (iv) amend provisions
relating to the use of asset disposition proceeds.
Clark has agreed to make payments to each holder whose duly executed consent
was received and not revoked. A cash consent payment of $7.50 per $1,000
aggregate principal amount of Notes is due for each $1,000 in principal amount
of the 9 1/2% Notes and 10 1/2% Notes.
In connection with the Port Arthur acquisition and the above financing
transactions, Clark entered into a new three year revolving credit facility,
collateralized by substantially all of Clark's current assets and certain
intangibles (see Note 7 Working Capital Facility). With the acquisition, the
amount of the amended facility is the lesser of $400 million or the amount
available under a borrowing base, as defined, representing specified percentages
of cash, investments, accounts receivable, inventory and other working capital
items.
61
<PAGE>
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.
Clark Refining & Marketing, Inc.
By: /s/ Paul D. Melnuk
--------------------
Paul D. Melnuk
Chief Executive Officer, Chief Operating
Officer and President
March 30, 1995
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities and on the date indicated.
Signature Title
--------- -----
/s/ Peter Munk Director and Chairman of the Board
--------------------------
Peter Munk
/s/ Paul D. Melnuk Director, Chief Executive Officer, Chief
-------------------------- Operating Officer and President
Paul D. Melnuk (Principal Financial Officer)
/s/ C. William D. Birchall Director
---------------------------
C. William D. Birchall
/s/ Anthony Munk Director
---------------------------
Anthony Munk
/s/ Gregory C. Wilkins Director
---------------------------
Gregory C. Wilkins
/s/ Dennis R. Eichholz Controller and Treasurer (Principal
--------------------------- Accounting Officer)
Dennis R. Eichholz
March 30, 1995
62
<PAGE>
Exhibit 12.1
CLARK REFINING & MARKETING, INC.
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
EARNINGS AVAILABLE FOR FIXED CHARGES
Pretax earnings $27,806 $ 855 $ 2,949 $ 59,287 $ 72,233
Fixed charges (a) 42,281 40,429 45,403 40,584 44,591
Other (b) (468) 197 182 1,254 (489)
------- ------- ------- -------- --------
$69,619 $41,481 $48,534 $101,125 $116,335
======= ======= ======= ======== ========
FIXED CHARGES
Gross interest expense (c) $42,157 $42,072 $49,277 $ 41,581 $ 44,672
Interest factor attributable
to real expense 2,533 1,133 1,234 1,124 1,077
------- ------- ------- -------- --------
$44,690 $43,205 $50,511 $ 42,705 $ 45,749
======= ======= ======= ======== ========
RATIO OF EARNINGS TO FIXED CHARGES 1.56 0.96 0.96 2.37 2.54
======= ======= ======= ======== ========
</TABLE>
(a) As adjusted for capitalized interest
(b) Represents the total of adjustments to recognize only distributed earnings
for less than 50% owned companies accounted for under the equity method
(c) Represents interest expense on long-term and short-term debt and
amortization of debt discount and debt issue costs
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 95,282
<SECURITIES> 28,658
<RECEIVABLES> 70,608
<ALLOWANCES> 1,677
<INVENTORY> 151,466
<CURRENT-ASSETS> 368,859
<PP&E> 548,607
<DEPRECIATION> 118,802
<TOTAL-ASSETS> 849,381
<CURRENT-LIABILITIES> 238,488
<BONDS> 400,734
<COMMON> 0
0
0
<OTHER-SE> 162,852
<TOTAL-LIABILITY-AND-EQUITY> 849,381
<SALES> 2,434,224
<TOTAL-REVENUES> 2,440,028
<CGS> 2,092,516
<TOTAL-COSTS> 2,374,675
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (480,000)
<INTEREST-EXPENSE> 37,547
<INCOME-PRETAX> 27,806
<INCOME-TAX> 9,732
<INCOME-CONTINUING> 18,074
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,074
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
