<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, 1995
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 27, 1996: 100 all of which are owned by Clark USA, Inc.
<PAGE>
CLARK USA, INC.
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TABLE OF CONTENTS
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PAGE
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PART I
<S> <C> <C>
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.......... 33
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 33
PART III
Item 10. Directors and Executive Officers of the Registrant... 33
Item 11. Executive Compensation............................... 35
Item 12. Security Ownership of Certain Beneficial Owners and
Management......................................... 39
Item 13. Certain Relationships and Related Transactions....... 43
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K........................................ 44
Glossary of Terms...................................................... 46
Signatures............................................................. 70
</TABLE>
Certain industry terms are defined in the Glossary of Terms
<PAGE>
PART I
ITEM 1 AND 2. BUSINESS; PROPERTIES
COMPANY OVERVIEW
Clark Refining & Marketing, Inc. (the "Company" or "Clark") is a leading
independent refiner and marketer of refined petroleum products in the Central
United States with over 340,000 barrels per day of rated crude oil throughput
capacity. Clark operates through two divisions. The refining division consists
of one Texas refinery, two Illinois refineries, 16 product distribution
terminals, a crude oil terminal, a LPG terminal and pipeline interests. As of
January 31, 1996, the marketing division consisted of approximately 821 gasoline
and convenience product stores in ten Midwestern states and the wholesale
marketing of gasoline, diesel fuel and other petroleum products on a branded and
unbranded basis. Clark's retail network has conducted operations under the Clark
name for over 60 years.
COMPANY HISTORY
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 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 "AOC Stock
Purchase Agreement") with AOC L.P. to purchase and redeem all of the shares and
options to purchase shares of Clark USA owned by AOC L.P., 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 stock to a wholly
owned subsidiary of Horsham. The Horsham subsidiary immediately resold $120
million of the stock to Tiger Management Corporation ("Tiger"), representing an
equity ownership interest of 40% of Clark USA at that time. As a result, Clark
received an equity contribution of $150 million from Clark USA and used these
proceeds along with existing cash to acquire from Chevron USA, Inc. ("Chevron")
the Port Arthur, Texas refinery and related assets (the "Port Arthur Refinery")
for approximately $70 million, plus approximately $122 million for inventory and
spare parts and the assumption of certain liabilities for the remediation of
environmental contamination under the active process units (estimated at $7.5
million) and employee postretirement benefits (estimated at $11.9 million). The
Company is also obligated under certain circumstances to pay to Chevron
contingent payments (the "Chevron Contingent Payments") pursuant to a formula
based on refining industry margin indicators and the volume of crude oil
processed at the Port Arthur refinery over a five-year period. Such contingent
payments were not payable for the first measurement period which ended September
30, 1995 and would not be payable for the next annual period based on these
industry margin indicators through December 31, 1995. The maximum total amount
of the Chevron Contingent Payments is $125 million. The Port Arthur refinery
acquisition positions the Company as one of the four largest independent
refiners in the United States.
In December 1995, subsidiaries of Occidental Petroleum Corporation
("Occidental") and Gulf Resources Corporation ("Gulf") acquired approximately
23% of the equity in Clark USA in exchange for the delivery of certain amounts
of crude oil over a six year period ending in 2001. See "--The Advance Crude Oil
Purchase Transactions."
The Company's primary business 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.
1
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BUSINESS STRATEGY
The Company operates in a commodity-based industry in which market prices
for crude oil and refined products are largely beyond its control. Accordingly,
the Company's business strategy focuses on maximizing productivity, minimizing
operating costs, optimizing capital expenditures and growing both its refining
and marketing operations to strengthen the Company's business and financial
profile.
. IMPROVING PRODUCTIVITY. The Company implements relatively low cost
projects in its refining and marketing operations designed to increase
production, sales volumes and production yields and to improve sales mix
while reducing input costs and operating expenses. Improvements at the
newly acquired Port Arthur refinery, sour crude oil and deep cut projects
at its Illinois refineries and a retail reimaging program are examples of
these types of projects.
. OPTIMIZING CAPITAL INVESTMENT. The Company optimizes capital investments by
linking discretionary capital spending to cash flow generated, focusing its
efforts first on those productivity initiatives that require no capital
investment and then those which have relatively short payback periods. In
response to weak 1995 industry refining margin conditions, capital
expenditures were scaled back significantly from budget and prior year
levels. The Company has also implemented an upgraded image program within
its retail store network to incorporate its new On The Go(R) theme at a
cost per store that the Company believes is less than that incurred by
competitors for upgrades of retail facilities.
. PROMOTING ENTREPRENEURIAL CULTURE. The Company emphasizes an
entrepreneurial management approach which uses employee incentives to
enhance financial performance and safety. All of the Company's employees
participate in either its performance management, profit sharing or other
incentive plans. In addition, Clark USA has adopted a stock incentive plan
for Clark's key employees.
. GROWING THROUGH OPPORTUNISTIC ACQUISITIONS. The Company intends to
continue to expand its refining and marketing operations through
opportunistic acquisitions which can benefit from its business strategy,
create critical mass, increase market share or access new markets. Since
1994, the Company more than doubled its refining capacity by acquiring the
Port Arthur Refinery and strengthened its Northern Illinois presence by
adding 73 retail stores in this core market.
. STRENGTHENING THE BALANCE SHEET. The Company will continue to seek to
improve its capital structure. The financing of the Port Arthur refinery
acquisition principally with equity lowered the Company's leverage in early
1995 and provided an opportunity for improved results of operations.
REFINING
Overview
The refining division currently operates one refinery in Texas and two
refineries in Illinois with a combined throughput capacity of approximately
340,000 barrels per day. The Company also owns 16 product terminals located
throughout the Company's market area, a crude oil and LPG terminal associated
with the Port Arthur refinery, crude and product pipeline interests and
integrated supply, distribution, planning and support operations/services. The
Company's refining capacity of approximately 340,000 barrels per day, ranks the
Company as one of the four largest independent refiners in the United States.
2
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Port Arthur Refinery
The Port Arthur refinery acquisition more than doubled the Company's
refining capacity. 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 the Company'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 in export markets. The Company believes
that the Port Arthur Refinery has the potential for significant productivity
gains with modest capital investment, and that it will offer an opportunity for
improved results of operations and cash flow.
The feedstocks and production of the Port Arthur refinery for the ten
months it was owned in 1995 were as follows:
PORT ARTHUR REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS ENDED
DECEMBER 31, 1995
------------------
BBLS %
-------- --------
<S> <C> <C>
FEEDSTOCKS
Light Sweet Crude Oil................................ 22,269 35.0%
Light Sour Crude Oil................................. 31,518 49.5
Heavy Sour Crude Oil................................. 7,488 11.8
Unfinished & Blendstocks............................. 2,349 3.7
------ -----
Total.................................................. 63,623 100.0
====== =====
PRODUCTION
Gasoline
Unleaded............................................. 13,966 21.8
Premium Unleaded..................................... 13,060 20.4
------ -----
26,996 42.2
------ -----
Other Products
Low Sulfur Diesel Fuel............................... 14,330 22.4
High Sulfur Diesel Fuel.............................. 409 0.7
Jet Fuel............................................. 9,047 14.1
Petrochemical Products............................... 5,382 8.4
Others............................................... 7,794 12.2
------ -----
36,962 57.8
------ -----
Total.................................................. 63,958 100.0
====== =====
Output/day............................................. 207.7
</TABLE>
Illinois Refineries
The Company's Illinois refineries, Blue Island near Chicago and Hartford
near St. Louis, Missouri, are supplied by common carrier 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
Midwest location of these refineries provides relatively high refining margins
and less volatility than comparable operations located in other regions of the
United States on a historical basis principally because, 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 these
Midwest refineries with a transportation advantage.
The Hartford refinery is capable of processing a variety of grades of crude
oil, including heavy sour crude, at a rated capacity of 65,000 barrels per day.
The Hartford refinery has the capability to process approximately 50% heavy sour
crude oil such as Maya crude oil and 25% medium sour crude oil although current
crude oil differentials and transportation costs do not justify processing heavy
sour crude oil at the Hartford refinery. 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 75,000 barrels per
day. The two refineries are connected by product pipelines, increasing
flexibility relative to stand-alone operations. The Company's product terminals
allow efficient distribution of refinery production through pipeline systems.
3
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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 75,000 barrels per day, although the actual
throughput rates have been sustained at levels in excess of rated capacity. 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 RFG and low sulfur diesel fuel when the
market warrants. During most of the year, gasoline is the most profitable
refinery product.
The feedstocks and production of the Blue Island refinery for the years
ended December 31, 1993, 1994 and 1995 were as follows:
BLUE ISLAND REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 (A) 1994 1995 (B)
-------------- -------------- --------------
BBLS % BBLS % BBLS %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
FEEDSTOCKS
Light Sweet Crude Oil........ 22,016 85.9% 20,780 71.3% 18,975 74.0%
Light Sour Crude Oil......... 1,404 5.5 7,120 24.5 6,318 24.6
Unfinished & Blendstocks..... 2,211 8.6 1,233 4.2 347 1.4
------ ----- ------ ----- ------ -----
Total.......................... 25,631 100.0 29,133 100.0 25,640 100.0
====== ===== ====== ===== ====== =====
PRODUCTION
Gasoline
Unleaded..................... 9,701 38.3 12,571 43.7 12,737 50.1
Premium Unleaded............. 5,232 20.6 5,558 19.3 3,540 13.9
------ ----- ------ ----- ------ -----
14,933 58.9 18,129 63.0 16,277 64.0
------ ----- ------ ----- ------ -----
Other Products
Diesel Fuel.................. 5,329 21.0 6,376 22.2 5,133 20.2
Others....................... 5,091 20.1 4,293 14.8 4,016 15.8
------ ----- ------ ----- ------ -----
10,420 41.1 10,669 37.0 9,149 36.0
------ ----- ------ ----- ------ -----
Total.......................... 25,353 100.0 28,798 100.0 25,426 100.0
====== ===== ====== ===== ====== =====
Output/Day..................... 69.5 78.9 69.7
</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.
(b) Output during 1995 was reduced due to poor first quarter market conditions
and a fire in a processing unit.
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
65,000 barrels per day. The Hartford refinery includes a coker unit and
consequently 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 benefit from higher margins if heavy sour
crude oil, such as Maya crude oil, is at a significant discount to light sweet
crude oil.
4
<PAGE>
The feedstocks and production of the Hartford refinery for the years ended
December 31, 1993, 1994 and 1995 were as follows:
HARTFORD REFINERY FEEDSTOCKS AND PRODUCTION
(BARRELS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1993 1994 (A) 1995 (B)
-------------- -------------- --------------
BBLS % BBLS % BBLS %
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
FEEDSTOCKS
Light Sweet Crude Oil........ 4,817 19.6% 6,037 26.2% 5,008 20.8%
Light Sour Crude Oil......... 3,814 15.5 7,696 33.4 13,520 56.0
Heavy Sour Crude Oil......... 13,119 53.4 8,800 38.2 4,960 20.6
Unfinished & Blendstocks..... 2,807 11.5 506 2.2 637 2.6
------ ----- ------ ----- ------ -----
Total.......................... 24,557 100.0 23,039 100.0 24,125 100.0
====== ===== ====== ===== ====== =====
PRODUCTION
Gasoline
Unleaded..................... 10,394 43.6 9,777 43.6 11,497 47.2
Premium Unleaded............. 1,892 8.0 1,732 7.7 1,723 7.1
------ ----- ------ ----- ------ -----
12,286 51.6 11,509 51.3 13,220 54.3
------ ----- ------ ----- ------ -----
Other Products
High Sulfur Diesel Fuel...... 7,979 33.5 7,801 34.8 8,090 33.2
Others....................... 3,557 14.9 3,106 13.9 3,060 12.5
------ ----- ------ ----- ------ -----
11,536 48.4 10,907 48.7 11,150 45.7
------ ----- ------ ----- ------ -----
Total.......................... 23,822 100.0 22,416 100.0 24,370 100.0
====== ===== ====== ===== ====== =====
Output/Day..................... 65.3 61.4 66.8
</TABLE>
(a) The 1994 results reflect maintenance turnaround downtime of approximately
one month on selected units.
(b) The 1995 results reflect the reduction of heavy sour crude oil throughput
due to weak crude oil differentials.
Terminals and Pipelines
Refined products are distributed primarily through the Company's terminals,
company-owned and common carrier product pipelines and by leased barges over the
Mississippi, Illinois and Ohio rivers. The Company owns 16 product terminals in
its market area. In addition to cost efficiencies in supplying its retail
network, the terminal distribution system allows efficient distribution of
refinery production. The Company also owns a crude oil terminal and an LPG
terminal associated with the Port Arthur refinery.
The Company enters into refined product exchange agreements with
unaffiliated companies to broaden its geographical distribution capabilities,
and products are also received through exchange terminals and distribution
points throughout the Central U.S.
5
<PAGE>
The Company's terminals and respective capacities, as of December 31, 1995,
were as follows:
<TABLE>
<CAPTION>
TERMINAL CAPACITY
-------- --------
(M BBLS)
<S> <C>
Midwest
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
Texas
Beaumont, TX (crude oil and refined products).... 3,220.0
Fannett, TX (LPG)................................ 2,500.0
Port Arthur Products Station..................... 1,831.5
--------
Total capacity.............................. 11,780.5
========
</TABLE>
The Company's pipeline interests, as of December 31, 1995, 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 the Company. The Company also owns a
dedicated products pipeline from the Blue Island refinery to its terminal in
Hammond, Indiana and from the Port Arthur refinery to its LPG terminal in
Fannett, Texas.
Supply
The Company's integrated refining and marketing assets are strategically
located in the Central U.S. in close proximity to a variety of supply and
distribution channels. As a result, the Company has the flexibility to acquire
the most economic domestic or foreign crude oil and the ability to distribute
its products to its own 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.
The Company has agreements to sell to Chevron, at a spot pipeline low plus one-
half cent price, 24,000 barrels per day of gasoline and 3,000 barrels per day of
low-sulfur diesel and jet fuel through February 27, 1997. Remaining production
is used to supply the Company's current wholesale and retail needs with the
balance initially sold in the spot markets, while the Company further develops
its wholesale and retail networks.
The Company's Illinois refineries are located on major inland water
transportation routes and are connected to various local, interstate and
Canadian common carrier pipelines. The Company 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
6
<PAGE>
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.
The Company has a sour crude oil supply contract 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 50,000 barrels per day of Maya or Olmeca crude oil, with price
determination based on a market-related formula applicable to all PMI U.S.
customers. Other term crude oil supply agreements primarily relate to Canadian
crude oil delivered to Blue Island. Approximately 42,000 barrels per day are
currently under contract with three Canadian suppliers, cancelable with one or
two months' notice by either party. See "--The Advance Crude Oil Purchase
Transactions."
In addition to gasoline, the Company'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 the
Company's 16 product terminals and is sold over the Company'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.
The Company 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 being sold into the spot market.
Planning and Economics
The Company employs sophisticated linear programming models to optimize
refinery operations. These models enable the Company 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, the Company 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
The Company 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, the Company 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 the Company's markets as opposed
to the delivery point of the exchange-traded contract. These strategies are
designed to minimize, on a short-term basis, the Company's 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 and subject to
internally established risk standards and covenants contained in Clark's working
capital agreement. The results of these existing hedging activities affect
refining costs of sales and inventory costs.
With the Port Arthur refinery acquisition, the Company has the 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. There
exists a market for Gulf Coast refinery crack spreads based on published spot
market product prices and exchange-traded crude oil. Since the Company will
initially be selling the majority of the Port Arthur refinery's production into
the Gulf Coast spot market, the Company believes that forward future and option
contracts related to crack spreads may be used effectively to hedge refining
margins. Consequently, the Company is considering the feasibility and
implementation of such a program, particularly in the initial phase of the
Company's operation of the Port Arthur refinery. While the Company's 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 the Company's ability to participate in an improvement in
Gulf Coast crack spreads.
7
<PAGE>
The Company manages its total inventory position in a manner consistent
with a risk management policy which states that a normal operating inventory
level (base load) will not be offset using risk management techniques, while
material builds or draws from this level may be offset by appropriate risk
management strategies to protect against an adverse impact due to unfavorable
price moves. The Company's retail network also reduces risk by providing market
sales which represented approximately 39% of the refineries' gasoline
production. In addition, the retail network benefits from a reliable and cost-
effective source of supply.
Capital Investment
The Company continually strives to increase its refineries' efficiency and
competitive position to meet changing market and regulatory demands. The Company
believes that its current strategic capital expenditure plan to comply with
mandatory environmental and other regulatory requirements should continue to
position the Company to compete effectively. The business strategy evaluates the
costs and benefits of complying with discretionary environmental regulations,
especially those related to reformulated and low sulfur fuels . The Company
evaluates these primarily discretionary environmental compliance expenditures
with the goal of incurring such expenditures only when satisfactory returns are
expected. The Company optimizes capital investments by linking capital spending
to cash flow generated.
Clean Air Act/Reformulated Fuels
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
January 1995 for nine regions in the U.S., including Chicago and Milwaukee, the
only two currently affected metropolitan areas in the Company's existing
markets. Another 87 areas which have failed to attain ozone air quality
standards may elect to use RFG throughout the year. The Company, and virtually
all other domestic refineries producing gasoline, may be required to make
significant capital expenditures to comply with these requirements.
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 the
Company operates, based on attainment of air quality standards and the time of
the year. The Company's Port Arthur, Blue Island and Hartford refineries have
the capability to produce 60%, 40%, and 25%, respectively, of their gasoline
production in reformulated gasoline. The Port Arthur refinery has the capability
to produce 100% low sulfur diesel fuel.
Market Environment
Over the past two years the Company believes that refining margins have
been adversely impacted by uncertainties related to the transition to
reformulated gasoline and an unseasonably warm 1994-1995 Northern Hemisphere
winter that reduced demand for distillates. Several geographic areas
unexpectedly opted not to switch to RFG which caused confusion and concern in
the marketplace, which in turn caused gasoline prices to fall relative to the
price of crude oil. A narrowing price benefit from using heavy and sour crude
oil has also been experienced since the early 1990s. The Company believes that
this is principally because of the Iraqi oil embargo, new light sweet crude oil
fields coming onstream while export producers were maximizing light sweet crude
oil production. This has occurred while demand for heavy crude oil has increased
following industry construction of upgrading capability associated with the
favorable heavy and sour crude oil differentials of the early 1990s. The Company
believes that the increased supply of light sweet crude oils is a near term
phenomenon and that current heavy and sour crude oil differentials would not
justify further significant upgrading construction and that long-term crude oil
reserves favor more heavy and sour crude oils. The Company believes that these
trends may lead to a gradual improvement in heavy and sour crude oil
differentials. Since the Hartford and Port Arthur refineries
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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 Company's cash flow and earnings over the long
term.
The Company 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 a more favorable balance in supply and demand for refined light
petroleum products has developed in the United States since 1983. Capacity
utilization for the industry equaled an estimated 92% in 1995 (compared to 72%
in 1983). The Company 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, the Company believes that
the U.S. refining industry may evidence gradual margin improvement through the
end of the decade.
The Company 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 crude oil
processing capacity that the Company anticipates in the next few years is the
restart of up to 200,000 barrels per day of capacity at the Good Hope refinery
in Louisiana in 1996 or 1997, which the Company understands still requires
additional financing.
Since 1991, 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 may partially offset the addition of
oxygenates (ethanol, MTBE and ETBE) which were 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%
annually 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 expenditures in the United States in the early
1990s 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. Although some refineries increased light
production capabilities in conjunction with recent environmental project capital
spending, a reduction in capital spending related to poor industry earnings and
increased environmental regulations should limit the addition of incremental
light petroleum product production capacity at refineries in the United States.
Strategy
The refining division has developed a strategy consistent with the
Company's overall business strategy that focuses on improving productivity,
fully involving the workforce in the improvement of operations, linking capital
investments to cash flows generated and growth.
The refining division operates in a commodity-based market environment in
which market prices for crude oil and refined products fluctuate significantly
and are largely beyond its control. Accordingly, the refining division
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focuses on improving productivity by increasing production, enhancing yields and
minimizing operating costs. The refining business is capital intensive. The
refining division's strategy is to focus its efforts first on those productivity
initiatives that require no capital investment and then those which have
relatively short payback periods of generally less than 4 years. All capital
decisions are made while ensuring compliance with regulatory and safety
standards. Since 1993, the refining division has identified and implemented, and
is continuing to implement, numerous productivity improvement initiatives. The
Company anticipates that additional productivity improvements will be identified
and implemented in future periods. Examples of some of the previous productivity
improvements include:
Port Arthur
. Increased crude oil throughput by over 20,000 barrels per day
. Lower operating expenses by over 50c per barrel by reducing staff and
contractor levels and reduced environmental remediation requirements
Blue Island
. Increased crude oil throughput capability by approximately 10,000 barrels
per day
. Began processing of up to 25% sour crude oil
. Increased processing capability by 25% for the FCC unit
. Added capability to produce up to 40% RFG
Hartford
. Increased crude oil throughput capability by approximately 10,000 barrels
per day
. Improved cut on the crude vacuum unit yielding more valuable gasoil
. Improved the operation of the FCC unit fractionation tower in 1994 to
enable the recovery of a greater amount of higher valued light cycle gas
oil from the slurry bottoms
. Improved catalyst effectiveness in the reformer using an existing spare
tower to eliminate undesirable feed constituents prior to processing
through the primary catalyst beds
. Improved the recovery of hydrocarbon products that were previously flared
by using cool well water to improve condensation of the coker
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. The Company believes that these incentive
programs encourage employees to operate in a safe and productive manner and
promote innovation.
THE ADVANCE CRUDE OIL PURCHASE TRANSACTIONS
On December 1, 1995 (the "Effective Time"), Clark USA completed a merger
agreement (the "Occidental Merger Agreement") with subsidiaries of Occidental.
Pursuant to the merger agreement and a series of related agreements (the
"Occidental Transaction"), Clark USA acquired the right to receive the
equivalent of 17.661 million barrels of West Texas Intermediate crude oil
("WTI") to be delivered over the next six years according to a defined schedule
of (in millions of barrels) 2.17, 3.24, 3.48, 3.24, 2.90 and 2.63 in 1996, 1997,
1998, 1999, 2000 and 2001, respectively. In connection with the Occidental
Transaction, Clark USA issued common stock valued at approximately $120 million,
or $22 per share (3,954,545 shares of Common Stock and 1,500,000 shares of non-
voting Class D Common Stock which have been converted into an equal number of
shares of Common Stock), and paid $100 million in cash to Occidental. Clark
USA's right to receive oil in accordance with the contract schedule is
unconditional until $220 million (plus interest of 10% per year on any
unrecovered portion of the first $100 million) is received by Clark USA from the
sale of such oil. Subsequent to that time, this right will be subject to the
condition that certain sovereign acts (including the imposition of taxes by the
Government of the Congo) have not occurred with respect to the delivery of
certain unrelated royalty oil pursuant to an agreement between an Occidental
subsidiary and the Government of the Congo. Clark USA contracted to resell the
Occidental oil to a marketing subsidiary of Occidental immediately after
delivery at then current market prices. Occidental has guaranteed the
obligations of its subsidiaries as described above.
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On December 1, 1995, Clark USA completed a merger agreement (the ''Gulf
Merger Agreement'') with subsidiaries of Gulf. Pursuant to the Gulf Merger
Agreement and a series of related agreements (the "Gulf Transaction"), Clark USA
acquired the right to receive 3.164 million barrels of certain royalty oil to be
received by Gulf pursuant to agreements among Gulf, an Occidental subsidiary and
the Government of the Congo. The crude oil is to be delivered over the next six
years according to a minimum schedule of (in millions of barrels) 0.72, 0.62,
0.56, 0.48, 0.42 and 0.36 in 1996, 1997, 1998, 1999, 2000 and 2001, respectively
or until all barrels are received. Provided certain underlying sales
arrangements remain in effect, Clark USA will resell the Gulf oil to Gulf
immediately after delivery at the then current Congo Government selling price
for Djeno crude oil (less an agreed transportation fee). In connection with the
Gulf Transaction, Clark USA issued common stock valued at approximately $26.9
million, or $22 per share (1,222,273 shares of non-voting Class D Common Stock
which have been converted into an equal number of shares of Common Stock). The
shares issued to Gulf are pledged to Clark USA and will be released to Gulf at
the rate of one share for each $22 of net receipts received by Clark USA from
the sale of the Gulf oil. Clark USA is entitled to foreclose on pledged shares
under certain circumstances where the Gulf oil is not received as and when
currently anticipated. Clark USA's recourse under such circumstances is limited
to the value of the shares.
The Occidental Transaction and the Gulf Transaction (the "Transactions")
assist Clark USA in realizing its objectives of increasing cash flow. The
Transactions provide a significant new source of cash flow directly to Clark USA
which is not dependent upon upstreaming of funds from Clark or other
subsidiaries. Cash flows from the Transactions will enable Clark USA to
accelerate capital projects, pursue growth and increase its strategic cash
reserve. The Transactions will also increase Clark USA's equity base.
Clark USA has entered into hedging transactions with respect to certain
anticipated cash flows associated with the Occidental Transaction, with the goal
of fixing cash flows that are dependent on future oil prices on the basis of
current market prices. To date, Clark USA has entered into such hedging
transactions with respect to approximately one-half of the barrels of oil to be
received from Occidental at average monthly prices ranging from $16.95 to
$18.00.
MARKETING
The Company markets gasoline and convenience products in ten Midwestern states
through a retail network of 821 company-operated stores at January 31, 1996.
The Company also markets refined petroleum products through a wholesale program
to distributors, chain retailers and industrial consumers.
Retail Overview
The Company'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 January 31, 1996, the Company had 823 retail stores, all of which
operated under the Clark brand name. Of these 823 stores (686 owned and 137
leased), the Company directly operated 821 and the remainder were dealer-
operated. The Company believes that the high proportion of company-operated
stores enables the Company to respond more quickly and uniformly to changing
market conditions than many of its competitors, including major oil companies
which generally have most of their stores operated by dealers or jobbers. All
stores are self-service and all sell convenience products utilizing the
Company's On The Go(R) theme.
More than half of the Company's stores are in major metropolitan areas. The
Company's five highest volume core metropolitan markets are Chicago, Detroit,
Cleveland, Milwaukee and Toledo. The Company's core markets are markets in
which the Company 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. In March 1996, the
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Company signed an agreement to acquire, through operating leases, 10 high volume
stores in its core Chicago market. The Company took immediate possession of the
sites with formal closing expected in April 1996. The geographic distribution of
retail stores by state, as of January 31, 1996 was as follows:
GEOGRAPHICAL DISTRIBUTION OF RETAIL STORES
<TABLE>
<CAPTION>
COMPANY DEALER TOTAL
OPERATED OPERATED STORES
-------- -------- ------
<S> <C> <C> <C>
Illinois.......................... 267 -- 267
Ohio.............................. 178 1 179
Michigan.......................... 166 -- 166
Indiana........................... 89 -- 89
Wisconsin......................... 75 -- 75
Missouri.......................... 31 1 32
Other states (a).................. 15 -- 15
--- -- ---
Total......................... 821 2 823
=== == ===
</TABLE>
(a) Iowa, Kentucky, Pennsylvania and West Virginia
To improve gasoline sales volumes and margins, in 1989 the Company began
introducing special blending dispenser pumps to market three grades of gasoline
and began installing canopies at its stores. The Company believes the blending
pumps improve volumes and margins by enabling the Company to market a more
profitable mid-grade gasoline without the installation of costly additional
underground storage tanks. In addition, the Company believes that the
installation of canopies improves gasoline sales volumes due to better lighting
and shelter from adverse weather conditions. At January 31, 1996, approximately
60% of the Company's stores had blending pumps and approximately 80% had
canopies.
The Company 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. The Company 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 December 1998 federal underground storage tank
compliance deadline. The Company estimates that mandatory retail capital
expenditures for environmental and regulatory compliance from 1996 through 1998
will be approximately $50 million. 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 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, smaller operators have closed marginal and
unprofitable locations as a result of increasing environmental regulations
requiring replacement of underground storage tanks. The lack of 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 effect of increasing demands on
consumer time. Convenience and the time required to make a purchase are
increasingly important considerations in the buying decision.
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The Company believes these two trends may result in decreased competition and
a corresponding increase in market share in the Company'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
differential between 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
The Company's retail network is over 99% company-operated. The Company
believes that its control over its retail operations combined with its
established brand name in its market are competitive advantages. In addition,
the Company believes it can add to these advantages by implementing programs to
optimize capital expenditures, strengthen brand reputation, grow through
acquisitions and maximize customer satisfaction. The Company 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 the Company as the premier value-oriented marketer of gasoline and
On The Go(R) items in the Central United States.
. Marketing focus. The Company believes its retail market focus--high quality
products and fast delivery of services at competitive prices--has not been
fully captured in the retail gasoline industry. The Company also believes it
can exploit this opportunity by consistently providing fast service and
selected convenience products that satisfy immediate consumption demand (the
Company's On The Go(R) theme). The Company has developed the On The Go(R)
theme to capture this opportunity, strengthen the brand image and
differentiate the Company 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 offer a full range of grocery items in
addition to gasoline and have a large investment in inventory and square
footage and (iii) the unbranded independents, whose gasoline quality may be
perceived to be inferior. The Company has recently introduced a proprietary
credit card to further strengthen the brand by improving customer loyalty.
. Core markets focus. Market business planning is a management tool that was
adopted by the Company in 1992 as the principal method to define preferred
gasoline markets. This method utilizes economic, demographic and market data
to develop market-specific plans for both asset and operational strategies.
The Company 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 the Company already has a competitive strength on which to
build or where opportunities have been identified, the Company will consider
expanding through development and acquisition of stores and a branded jobber
program. For example, the Company has acquired through operating leases 73
stores in the Chicago and Peoria markets since late 1994. In those market
areas where the Clark brand name is not strong and the Company has a lower
market ranking, the Company will divest retail locations if favorable sale
opportunities arise. Since 1992, the Company has exited the Louisville,
Kentucky; Evansville, Indiana; Minnesota; Kansas and Western Missouri markets.
The retail division also has developed a strategy consistent with the
Company's overall business strategy. Key elements of this strategy include:
. Improving productivity. The retail division's 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. For example,
monthly gasoline volumes per store increased approximately 16% from 1992 to
1995, and monthly convenience product gross margins per store increased
approximately 36% from 1992 to 1995. Additionally, through an emphasis on
improved and more responsive retail gasoline pricing and increased sales of
higher margin premium grades, the Company has improved overall gasoline gross
margins.
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. Optimizing capital investments. Capital investments are linked to retail
division earnings. Capital is primarily budgeted for projects relating to the
retail division's environmental compliance plans, discretionary productivity
improvements and acquisitions. The Company began implementing in 1993 a four-
phase approach as part of its discretionary facilities upgrade strategy. This
approach is designed to improve productivity and profitability while creating
a sustainable competitive position in the marketplace. Phase I was designed
to change the convenience product offering to an On The Go(R) mix while
decreasing the reliance on tobacco products. Phase II involves a reimaging
plan for its retail network to modernize stores and convert to Clark's new
logo and vibrant color scheme. The Company began implementing this program in
March 1994 and reimaged 651 stores by the end of 1995. In Phase III, the
Company developed optimization projects which resulted from the Company's
market business planning process. This phase involves adding canopies,
enlarging selected stores, and installing new gasoline multiblend dispensers.
In Phase IV, the Company is adding new stores and product offerings such as
car washes, branded fast food, dispenser credit card readers and private label
products in concert with the financial objectives of the Company. Phases II,
III and IV are currently being implemented to varying degrees.
. Promoting entrepreneurial culture. The retail division employs a
decentralized team-oriented culture with training programs and employee
incentives designed to deliver service that exceeds customer expectations.
The Company's store managers have the flexibility to price gasoline and to
select and price convenience products, but also have the responsibility to
achieve acceptable gross margin results. The Company 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. The Company has a target of 8% to 15% market
share in core markets. In addition to improving volumes at existing
facilities, plans have been established to attain the market share target by
building new facilities and acquiring competitors' stores. Besides growth in
core markets, the Company will also consider other strategic alternatives to
improve integration with the Company's refining supply.
Wholesale Overview
The Company's wholesale marketing program consists of direct petroleum product
sales to profitable truck rack customers as an alternative to spot market sales.
In 1992, the Company began to more fully 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, the Company focused
efforts on building market presence and customer relationships with off-road
diesel fuel users. In the second and third quarters of 1995 the Company's sales
of gasoline and diesel fuel to wholesale markets represented approximately 15%
and 25%, respectively, of its gasoline and diesel fuel refining production.
The Company currently sells its gasoline and diesel fuel on an unbranded basis
to approximately 500 distributors and chain retailers. The Company believes
these sales offer higher profitability than spot market alternatives. Wholesale
sales are also made in the transportation sector, including railroads, barge
lines, other industrial end-users and, in 1995, the Company began selling jet
fuel refined at the Port Arthur refinery through contracts with several major
airlines. In order to leverage the supply from the Port Arthur refinery, the
Company started a branded jobber program in 1995 with the signing of nine
initial outlets in Southeast Texas and Louisiana . The Company 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 the Company's principal competitors are integrated multinational oil
companies that are substantially larger and better known than the Company.
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.
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The principal competitive factors affecting the Company's refining division
are crude oil and other feedstock costs, refinery efficiency, refinery product
mix and product distribution and transportation costs. Certain of the Company'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. The Company
obtains most of its crude oil requirements from unaffiliated sources. The
Company 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 the Company'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 and gas companies, as well as convenience stores which sell motor
fuel, is expected to continue. The principal competitive factors affecting the
Company's wholesale marketing business are product price and quality,
reliability and availability of supply and location of distribution points.
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 wastewater
and stormwater, 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.
The Company's existing operations are large and complex. The numerous
environmental regulations to which the Company is subject are complicated,
sometimes ambiguous, and often changing. In addition, the Company may not have
detected certain violations of environmental laws and regulations because the
conditions that constitute such violations may not be apparent. It is therefore
possible that certain of the Company's operations are not currently in
compliance with state or Federal environmental laws and regulations, and that
such non-compliance could result in fines and payments that could have a
material adverse effect on the Company's financial condition, results of
operations, cash flows or liquidity. Accordingly, the Company may be required
to make additional expenditures to comply with existing environmental
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, Resource Conservation and Recovery Act ("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 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.
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Regulations issued by the EPA in 1988 with respect to underground storage
tanks require the Company, 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 1 of regulations under authority of the
Clean Air Act requiring a reduction for summer months beginning 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 will impact the Company primarily in the following areas:
(i) beginning in late 1994, all gasoline produced and sold in the United States
must 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 the
Company's market area; (iii) Stage II hose and nozzle controls were required on
gas pumps to capture fuel vapors in nonattainment areas, which affected 400
company stores; and (iv) more stringent refinery permitting requirements take
effect. EPA regulations required that after October 1, 1993 sulfur contained in
on-road diesel fuel produced in the U.S. must be reduced. In addition, stricter
refinery waste disposal requirements now 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 of 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, the Company'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 of the site and the
number of solvent PRPs. While the Company maintains property and casualty
insurance in the normal course of its business, such insurance does not
typically cover remediation and certain other environmental expenses.
The release or discharge of petroleum and hazardous materials can occur at
refineries, terminals and stores. The Company has identified a variety of
potential environmental issues at its refineries, terminals and stores. In
addition, each refinery has a 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.
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LEGAL AND GOVERNMENTAL PROCEEDINGS
As a result of its activities, Clark is the subject of a number of legal and
administrative proceedings relating to environmental matters. While it is not
possible at this time to estimate the ultimate amount of liability with respect
to the environmental matters described below, the Company is of the opinion that
the aggregate amount of any such liability will not have a material adverse
effect on its financial position. However, an adverse outcome of any one or
more of these matters could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period.
Hartford Groundwater Contamination. Clark and other area oil companies have
been contacted by the Illinois Environmental Protection Agency ("IEPA") and the
Illinois Attorney General regarding the presence of gasoline contamination in
the groundwater beneath the northern portion of the Village of Hartford,
Illinois. Clark has cooperated with the Illinois authorities in attempting to
identify the source and the extent of the contamination. On December 21, 1990,
the IEPA issued a draft report identifying contamination and identifying Clark
as a potential source. The IEPA also asked Clark to submit comments and
proposals for remediation by January 15, 1991. While it does not admit
liability, Clark submitted a response proposing to conduct a pilot project aimed
at expanding certain gasoline recovery efforts it had been conducting in the
Hartford area. Clark went forward with that expanded program and installed a
gasoline vapor recovery system in Hartford. No claim has been filed by the
state authorities. Based upon the estimates of an independent environmental
engineering firm, in 1991 Clark established a $10 million provision for the
estimated costs of its mitigation and recovery efforts, of which approximately
$2.5 million remained for future remediation at December 31, 1995. No estimate
can be made at this time of Clark's potential loss, if any, with respect to such
contamination. Clark is also the defendant in a private civil action relating
to Hartford groundwater contamination. See "--Legal Proceedings."
Hartford Pollution Control Board Litigation. On June 7, 1995, Clark was
served with a complaint entitled People of the State of Illinois vs. Clark
Refining & Marketing, Inc. PCB No. 95-163, which is currently pending before the
Illinois Pollution Control Board. Eight counts of the complaint allege
violations relating to the operation of certain process units at the Hartford
refinery and a number of permit, recordkeeping and reporting violations. One
count concerns an impoundment area at the Hartford refinery that contains
wastes, alleged to be hazardous, that were produced as a result of past
operations. Clark's discussions with the IEPA regarding remedial options with
respect to that waste predate the enforcement proceeding by more than two years.
In April 1993, an employee of IEPA told Clark that the presence of those
allegedly 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
begun an investigation with respect to the need for a permit and consequent
corrective action. Based on the estimates of an independent engineering firm,
Clark established a $9.0 million provision for the estimated cost of site clean-
up in 1992, of which $7.6 million had been spent through December 31, 1995 under
remedial activities performed after notice to and comments from the IEPA.
Finally, four counts of the complaint allege violations relating to thirteen
(13) "release incidents" at the Hartford refinery between December, 1991 and
May, 1995, some of which had been the subject of "Pre-Enforcement Conference
Letters" sent to Clark by the IEPA in October, 1994. Clark has filed an answer
with the Illinois Pollution Control Board denying the material allegations. On
Clark's motion the Board dismissed certain of the claims because of the State's
failure to give advance notice of filing of the suit. Clark expects the hearing
on this matter to occur in the first quarter of 1996. No estimate of any
liability with respect to this complaint can be made at this time.
Hartford Clean Air Act Complaint. On January 5, 1993, Clark received a
complaint from the EPA alleging recordkeeping and related violations of the
Clean Air Act at 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 before 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 paid this penalty in May, 1995.
IEPA Pre-Enforcement Conference/Notice Letters. On August 25, 1995, the IEPA
sent a Pre-Enforcement Conference Letter to Clark in which it alleged that
certain wastewater flows at the Hartford refinery constituted a listed hazardous
waste within the meaning of the RCRA. Clark disputes the characterization of
the wastewater as hazardous waste. On September 22, 1995, the IEPA issued a
Pre-Enforcement Conference Letter to Clark alleging five release incidents at
the Hartford refinery in 1994 and 1995 which were not included in the June 1995
18
<PAGE>
complaint in case number 95-163. On November 30, 1995 , Clark was served with a
Pre-Enforcement Notice Letter from the Illinois Attorney General alleging that
for certain periods of time a data recorder or certain air emissions at the Blue
Island refinery had failed to function properly. On December 4, 1995, the IEPA
issued an Enforcement Notice Letter to Clark alleging exceedences, over the
period 1992 through 1995, of the effluent standards in the National Pollutant
Discharge Elimination System Permit for the wastewater treatment plant at the
Hartford refinery. No estimate of liability, if any, with respect to any of
these matters can be made at this time.
Blue Island, Illinois Refinery. People ex rel Ryan v. Clark Refining &
Marketing, Inc., Cir. Ct. Cook County, Ill., Case No. 95-CH-2311, is currently
pending in the Circuit Court of Cook County, Illinois. The first count of this
lawsuit concerns a fire in the isomax unit at the Blue Island refinery on March
13, 1995 in which two employees were killed and three other employees were
injured. OSHA also investigated the incident, and on September 13, 1995 Clark
and OSHA entered into a settlement agreement, independent of the pending
lawsuit, pursuant to which Clark agreed to pay a $1.257 million penalty, make
certain safety improvements and perform a safety audit. The second count of the
lawsuit concerns a release of hydrogen fluoride ("HF") on May 16, 1995 from a
catalyst regeneration portion of the HF alkylation unit at the Blue Island
refinery. At the request of the Illinois Attorney General, and with Clark's
consent, the Circuit Court of Cook County, Illinois entered an order prohibiting
the restart of the regeneration unit of the HF alkylation unit pending an
investigation of the cause of the release. On August 8, 1995, an order was
entered by the Court allowing Clark to resume operation of the HF regeneration
unit. The order also requires Clark, pursuant to an agreement between Clark and
the Illinois Attorney General, to implement certain HF release mitigation and
detection measures. While Clark has not yet identified the actual cost of these
measures, it is initially estimated that these measures may cost at least $1.8
million. The next three counts of the lawsuit concern releases into the air that
occurred in the past three years at the Blue Island refinery. One of those air
emissions, which occurred on October 7, 1994, is also the basis for Rosolowski,
et al v. Clark Refining & Marketing, Inc., Cir. Ct. Cook County, Ill., Case No
95-L-014703. See "--Legal Proceedings." The remaining five counts of the lawsuit
concern several alleged releases of process waste water and contaminated storm
water to the Cal Sag Channel from the Blue Island refinery. Clark has filed an
answer denying the material allegations in the lawsuit. No estimate of any
liability with respect to this matter can be made at this time.
EPA Notice Letters. On October 25, 1994, Clark received correspondence from
the EPA submitting a proposed Agreed Administrative Order concerning an alleged
violation in 1990 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.
Clark has met with the EPA to discuss the proposed Order. In addition, Clark
has received and is complying with a Request For Information pursuant to the
Clean Air Act from EPA concerning the October 7, 1994 Blue Island refinery
catalyst release. No estimate of liability, if any, with respect to any of
these matters can be made at this time.
RCRA Recordkeeping Claims. Clark received an administrative complaint from
the EPA on June 12, 1992 alleging record-keeping violations of 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 $140,000. Clark settled this matter for $70,000 in January, 1995.
Ninth Avenue Site. On January 5, 1995, Clark received a Unilateral
Administrative Order from the EPA pursuant to CERCLA alleging that "Clark Oil &
Refining Corp." is a PRP with respect to shipments of hazardous substances to a
solid waste disposal site known as the Ninth Avenue Site, Gary, Indiana. The
alleged shipments all occurred prior to 1987. The Order instructs Clark and the
other approximately ninety PRPs to design and implement certain remedial work at
the site. Clark has informed the EPA that it is not a proper party to this
matter, because its purchase of certain assets of a company previously operating
under the "Clark" name ("Old Clark") was "free and clear" of all Old Clark
liabilities. Information provided with the Order estimates that the remedial
work may cost approximately $25 million. No estimate of liability can be made
with respect to this proceeding at this time. In addition, on December 28,
1994, Clark was served with a summons and complaint brought by certain private
parties seeking to recover all past and future response costs with respect to
that site on the basis of shipments of hazardous substances allegedly made prior
to 1987. Clark has moved to dismiss this action on the basis that the action is
barred by the "free and clear" Order pursuant to which Clark purchased certain
assets of Old Clark. The plaintiffs and one co-defendant have opposed Clark's
motion to dismiss. No estimate of any liability with respect to this case can
be made at this time.
19
<PAGE>
Huth Oil Service Site. On August 8, 1994, Clark was served with a summons and
complaint in Ashland Oil, Inc. v. Acme Scrap Iron and Metal Corp., et al, Case
No. 1: 94-CV-1592, and Centerior Service Company, et al v. Acme, et al, Case No.
1:94-VC-1588, both pending in the Northern District of Ohio, in which Clark is
named, along with many other defendants, as one of the entities which allegedly
sent waste oil to the Huth Oil Services site in Cleveland, Ohio. The plaintiffs
agreed to dismiss the complaint against Clark with prejudice as to all pre-
November, 1988 shipments of waste, and without prejudice as to any post-
November, 1988 shipments. The Court entered an order dismissing the matter
without prejudice. Clark has moved the Court to reconsider the dismissal in
accordance with the agreement of the parties.
St. Louis Terminal. On April 13, 1995, Clark was served with two Grand Jury
Records Subpoenas issued by the Office of the United States Attorney,
Environmental Crimes Section, in St. Louis. The Subpoenas seek documentary
information primarily about the gasoline spill at the St. Louis terminal which
occurred in January, 1994. Clark is cooperating fully with the United States
Attorney Office's investigation, and on June 26, 1995 Clark produced documents
responsive to the Subpoena. At this time it is not possible to estimate any
potential exposure to Clark from this inquiry.
Sashabaw Road. On May 5, 1993 Clark received correspondence from the Michigan
Department of Natural Resources ("MDNR") indicating that the MDNR believes that
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 $450,000 for past response
activity costs incurred by MDNR in connection with this site.
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 the Company believes, as a result, that there is extensive
contamination at the site, the Company is unable to estimate the cost of
remediating such contamination. Chevron will be obligated to perform the
required remediation of most pre-closing contamination, while the Company
assumed responsibility for environmental contamination beneath and within 25 to
100 feet of the facility's active processing units (the "Excluded Area"). Based
on the estimates of independent environmental consultants, the Company accrued
approximately $7.5 million as part of the Port Arthur refinery acquisition for
its cost of remediation in the Excluded 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.
The cost of any such remediation could be substantial and could be beyond the
Company's financial ability.
EMPLOYEES
As of February 29, 1996, the Company employed approximately 7,000 people,
approximately 1,000 of whom were covered by collective bargaining agreements at
the Blue Island, Hartford and Port Arthur refineries. The Hartford and Port
Arthur refinery contracts expire in February 1999 and the Blue Island refinery
contract expires in August 1996. In addition, the Company has union contracts
for certain employees at its Hammond, Indiana and St. Louis, Missouri terminals
which expire March 31, 1998 and March 5, 1998, respectively. Historically,
relationships with the unions have been good and neither Old Clark nor the
Company has ever experienced a work stoppage as a result of labor disagreements.
20
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Clark has been named as a defendant in thirty-four suits filed in December,
1991 in the Circuit Court of the Third Judicial District, Madison County,
Illinois, by plaintiff residents and property owners in the Village of Hartford,
Illinois. Also, both Clark and Shell Oil Company have been named as defendants
in six similar suits. These suits seek unquantified damages for the presence of
gasoline in the soil and groundwater beneath plaintiff's properties. See
"--Environmental Matters." On October 12, 1995 the thirty-four lawsuits pending
solely against Clark were voluntarily dismissed without prejudice. The
plaintiffs have one year from such dismissal in which to refile their lawsuits.
In the six remaining cases, Clark and Shell have filed motions to dismiss that
are still pending. No estimate can be made of Clark's potential loss, if any, at
this time.
Rosolowski, et al v. Clark Refining & Marketing, Inc., Cir. Ct. Cook
County, Ill., Case No. 95-L-014703. This purported class action lawsuit, filed
on October 11, 1995, relates to an on-site electrical malfunction at Clark's
Blue Island refinery on October 7, 1994, which resulted in the release to the
atmosphere of used catalyst containing low levels of heavy metals, including
antimony, nickel and vanadium. This release resulted in the temporary evacuation
of certain areas near the refinery, including a high school, and approximately
fifty people were taken to area hospitals. Clark has offered to reimburse the
medical expenses incurred by persons receiving treatment. Clark was previously
sued by one individual who claimed medical costs as a result of the incident;
that case was settled. The purported class action lawsuit was filed on behalf of
various named individuals and purported plaintiff classes, including residents
of Blue Island, Illinois and students at Eisenhower High School, alleging claims
based on common law nuisance, negligence, willful and wanton negligence and the
Illinois Family Expense Act as a result of this incident. Plaintiffs seek to
recover damages in an unspecified amount for alleged medical expenses,
diminished property values, pain and suffering and other damages. Plaintiffs
also seek punitive damages in an unspecified amount. On November 22, 1995 an
amended complaint was filed in this action which adds several additional
plaintiffs and two supplemental counts. Otherwise, the amended complaint is
substantially identical to the original complaint. At this time no estimate can
be made as to Clark's potential loss, if any, with respect to this matter.
EEOC v. Clark Refining & Marketing, Inc., Case No. 94 C 2779, is currently
pending in the United States District Court for the Northern District of
Illinois. In this action, the Equal Employment Opportunity Commission ("EEOC")
has alleged that Clark engaged in age discrimination in violation of the Age
Discrimination in Employment Act through a "pattern and practice" of
discrimination against a class of former retail managers over the age of forty.
The EEOC has identified 40 former managers it believes have been affected by the
alleged pattern and practice. The relief sought by the EEOC includes
reinstatement or reassignment of the individuals allegedly affected, payment of
back wages and benefits, an injunction prohibiting employment practices which
discriminate on the basis of age and institution of practices to eradicate the
effects of any past discriminatory practices. Discovery is ongoing. A scheduling
order has been entered indicating that a trial will not be held before 1997,
unless earlier dismissed. At this point, no estimate can be made as to Clark's
potential loss, if any, with respect to this litigation.
On May 23, 1995 Clark was served with a Petition entitled Anderson, et al
vs. Chevron and Clark, filed in Jefferson County, Texas by twenty-four
individual plaintiffs who were Chevron employees who did not receive offers of
employment from Clark at the time of the purchase of the Port Arthur refinery.
Chevron and the outplacement service retained by Chevron are also named as
defendants. An Amended Petition has now been filed increasing the number of
plaintiffs to forty. Clark filed an Answer denying all material allegations of
the Amended Petition. Subsequent to the filing of the lawsuit, the plaintiffs
have each filed individual charges with the EEOC and the Texas Commission of
Human Rights. At this point, no estimate can be made as to Clark's potential
liability, if any, with respect to this litigation or the individual charges
filed.
While it is not possible at this time to estimate the amount of liability
with respect to the legal proceedings described above, the Company is of the
opinion that the aggregate amount of any such liability will not have a material
adverse effect on its financial position, however, an adverse outcome of any one
or more of these matters could have a material effect on quarterly or annual
operating results or cash flows when resolved in a future period.
The Company is also the subject of various environmental and other
governmental proceedings. See "--Environmental Matters."
21
<PAGE>
In addition to the specific matters discussed above or under
"--Environmental Matters", 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 REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Inapplicable.
22
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods and dates indicated,
selected financial data derived from the Consolidated Financial Statements of
the Company for each of the years in the five-year period ended December 31,
1995. The Consolidated Financial Statements of the Company for each of the years
in the five-year period ended December 31, 1995 were audited by Coopers &
Lybrand L.L.P. This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and related notes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1991 1992 1993 1994 1995
---------------------------------------------------
(IN MILLIONS, EXCEPT RATIOS AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales and operating revenues............................ $2,426.1 $2,253.0 $2,263.4 $2,440.0 $4,486.1
Cost of sales............................................... 2,092.7 1,952.4 1,936.6 2,092.5 4,018.3
Operating expenses.......................................... 199.7 224.4 218.1 237.3 395.0
General and administrative expenses......................... 20.8 31.2 27.5 34.0 30.6
Inventory (recovery of) write-down to market value.......... -- -- 26.5 (26.5) --
Depreciation and amortization (a)........................... 26.4 30.4 35.3 37.3 43.5
-------- -------- -------- -------- --------
Operating income............................................ $ 86.5 $ 14.6 $ 19.4 $ 65.4 $ (1.3)
Interest and financing costs, net (b)....................... 27.2 26.4 29.9 37.6 39.9
Other income (expense) (c).................................. -- 14.7 11.4 -- --
-------- -------- -------- -------- --------
Earnings (loss) before taxes, extraordinary items and
cumulative effect of change in accounting principles...... $ 59.3 $ 2.9 $ 0.9 $ 27.8 $ (41.2)
Income tax provision (benefit).............................. 22.0 (0.4) (0.5) 9.7 (15.7)
-------- -------- -------- -------- --------
Earnings before extraordinary items and cumulative effect
of changes in accounting principles....................... $ 37.3 $ 3.3 $ 1.4 $ 18.1 $ (25.5)
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 277.9 $ 218.3 $ 212.1 $ 134.1 $ 106.6
Total assets................................................ 820.4 800.0 829.1 859.5 1,188.3
Long-term debt.............................................. 426.6 401.5 401.0 400.7 420.4
Stockholder's equity........................................ 172.6 154.2 146.0 162.9 304.1
SELECTED FINANCIAL DATA:
Cash flows from operating activities........................ $ 46.0 $ 37.1 $ 68.4 $ 53.7 $ (85.6)
Cash flows from financing activities........................ 119.1 (38.7) (1.1) (5.4) 174.7
Ratio of earnings to fixed charges (d)...................... 2.37x (e) (e) 1.56x (e)
Turnaround expenditures..................................... 17.2 2.7 20.6 11.2 6.5
Capital expenditures........................................ 58.0 59.5 67.9 100.3 42.1
Refinery acquisition expenditures........................... -- -- -- 13.5 71.8
-------- -------- -------- -------- --------
Total expenditures.......................................... $ 75.2 $ 62.2 $ 88.5 $ 125.0 $ 120.4
======== ======== ======== ======== ========
OPERATING DATA:
Refining Division:
Port Arthur Refinery (acquired February 27, 1995)
Production (m bbls/day)................................ -- -- -- -- 207.7
Gross margin (per bbl)................................. -- -- -- -- $ 2.40
Operating expenses (per bbl)........................... -- -- -- -- 1.96
Blue Island, Hartford and other refining
Production (m bbls/day)................................ 129.4 142.4 134.7 140.3 136.5
Gross margin (per bbl) (f)............................. $ 3.88 $ 3.03 $ 3.24 $ 3.48 $ 2.61
Operating expenses (per bbl)........................... 2.38 2.22 2.20 2.34 2.72
Refining contribution to operating income (mm) (f).......... N/A N/A 42.5 46.5 11.1
Retail Division:
Number of stores (at period end)............................ 889 873 846 839 833
Gasoline volume (mm gals)................................... 966.2 956.7 1,014.8 1,028.5 1,063.8
Gasoline volume (m gals pmps)............................... 86.9 90.1 98.6 102.8 104.1
Gasoline gross margin (c/gal) (f)........................... 10.9c 10.0c 11.1c 10.9c 11.4c
Convenience product sales (mm).............................. $ 186.9 $ 203.4 $ 218.0 $ 231.6 $ 252.6
Convenience product sales (pmps)............................ 16.8 19.2 21.2 23.1 24.7
Convenience product gross margin (mm)....................... 45.1 47.7 54.8 57.2 62.9
Convenience product gross margin (pmps)..................... 4.0 4.5 5.3 5.7 6.1
Operating expenses (mm)..................................... 94.3 106.3 109.9 117.2 134.1
Retail contribution to operating income (mm) (f)............ N/A N/A 52.9 45.9 45.4
</TABLE>
23
<PAGE>
(a) Amortization includes amortization of turnaround costs and organizational
costs.
(b) Interest and financing costs, net, includes amortization of debt issuance
costs of $6.0 million, $2.9 million, $1.2 million, $1.2 million, and $5.2
million for the years ended December 31, 1991, 1992, 1993, 1994 and 1995,
respectively. Interest and financing costs, net, also includes interest on
all indebtedness, net of capitalized interest and interest income.
(c) Other expense in 1994 includes financing costs associated with a withdrawn
debt offering. 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.
(d) 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 discount and debt issuance costs and
the estimated interest components (one-third) of rental and lease expense.
(e) As a result of the losses for the years ended December 31, 1992, 1993 and
1995, earnings were insufficient to cover fixed charges by $2.0 million,
$1.7 million and $44.0 million, respectively.
(f) In 1995, the Company changed its pricing methodology to better reflect
external market prices for valuing product transferred between its retail
and refining divisions. Divisional results for 1993 and 1994 have been
restated to be consistent with this new methodology although there is no
annual effect on 1993. Divisional results for 1992 and prior years have not
been restated because appropriate external pricing was not available; the
Company believes that the transfer pricing change, if effected, would not
have had a material effect on such years.
24
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Consolidated Financial Statements and notes thereto
appearing elsewhere in this Report.
RESULTS OF OPERATIONS
Overview
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, weather conditions, 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 illustrates the potential pre-tax earnings impact based
on historical operating rates estimated by the Company resulting from changes
in: (i) sweet crude oil cracking margins--the spread between gasoline and diesel
fuel prices and input (e.g., a benchmark sweet crude oil) costs; (ii) sweet/sour
differentials--the spread between a benchmark sour crude oil and a benchmark
sweet crude oil; (iii) heavy/light differentials--the spread between a benchmark
light crude oil and a benchmark heavy crude oil and (iv) retail margins--the
spread between product prices at the retail level and wholesale product costs.
<TABLE>
<CAPTION>
PRE-TAX EARNINGS IMPACT ON
THE COMPANY
------------------------------
BEFORE PORT AFTER PORT
ARTHUR 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 3 million 9 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 an assumed production of approximately 200,000 barrels per day for
the Port Arthur refinery.
25
<PAGE>
1995 COMPARED WITH 1994 AND 1993:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1993 1994 1995
--------- -------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
FINANCIAL RESULTS: (A)
Net sales and operating revenues............... $2,263.4 $2,440.0 $4,486.1
Cost of sales.................................. 1,936.6 2,092.5 4,018.3
Operating expenses............................. 218.1 237.3 395.0
General and administrative expenses............ 27.5 32.9 30.6
Depreciation and amortization.................. 35.3 37.3 43.5
Interest and financing costs, net.............. 29.9 32.1 39.9
-------- -------- --------
Earnings (loss) before income taxes (b)........ 16.0 7.9 (41.2)
Income tax provision (benefit) (b)............. 5.4 2.2 (15.7)
-------- -------- --------
Earnings (loss) before unusual items (b)....... 10.6 5.7 (25.5)
Unusual items, after taxes (b)................. (18.8) 12.4 --
-------- -------- --------
Net earnings (loss)............................ $ (8.2) $ 18.1 $ (25.5)
======== ======== ========
OPERATING INCOME:
Refining contribution to operating income (c).. $ 42.5 $ 46.5 $ 11.1
Retail contribution to operating income (c).... 52.9 45.9 45.4
Corporate general and administrative expenses.. 14.2 15.1 14.3
Depreciation and amortization.................. 35.3 37.3 43.5
Unusual items (b).............................. (26.5) 25.4 --
-------- -------- --------
Operating income (loss)........................ $ 19.4 $ 65.4 $ (1.3)
======== ======== ========
</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 1993 and 1994 to be "unusual."
Detail on these items is presented below.
(c) In 1995, the Company changed its pricing methodology to better reflect
external market prices for valuing product transferred between its retail
and refining divisions. Divisional results for 1993 and 1994 have been
restated to be consistent with this new methodology although there is no
annual effect on 1993.
The Company reported a net loss of $25.5 million in 1995 compared with net
earnings of $18.1 million in 1994 and a loss of $8.2 million in 1993. Earnings
in 1995 were reduced by extremely poor refining market conditions resulting
principally from narrower crude oil differentials, an extremely warm 1994-1995
winter and the resulting oversupply of distillates and market uncertainty
related to the introduction of reformulated gasoline. Partially offsetting these
factors was the Company's acquisition on February 27, 1995 of a 200,000 barrel
per day refinery in Port Arthur, Texas which more than doubled the Company's
refining capacity. Significant unusual items, discussed below, increased 1994
net earnings while decreasing 1993 earnings. Net earnings, excluding "unusual"
items, declined in 1995 as compared to 1994 and 1993 principally due to the
declining industry refining margins over the period. In addition, finance
charges associated with the Port Arthur Refinery acquisition in early 1995
increased interest expense from 1993 to 1995.
Net sales and operating revenues reached record levels in 1995 because of
the inclusion of incremental sales of production from the Port Arthur refinery.
Operating revenues in 1994 were higher than 1993 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 revenues by
approximately $15
26
<PAGE>
million and to reduce the refined product output by approximately 770,000
barrels in 1996. Retail gasoline volumes increased approximately 5% from 1993 to
1995, and wholesale volumes increased 7% in 1995 from 1994 and 9% in 1994 from
1993.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
------ ----- -----
(IN MILLIONS)
<S> <C> <C> <C>
UNUSUAL ITEMS:
Inventory recovery of (write-down to) market value.... $(26.5) $26.5 $ --
Other................................................. -- (1.1) --
------ ----- -----
Impact on operating income.................. (26.5) 25.4 --
Change in accounting principle........................ (15.6) -- --
Litigation settlements................................ 8.5 -- --
Sale of non-core stores............................... 2.9 -- --
Short-term investment losses.......................... -- (5.4) --
------ ----- -----
Total....................................... $(30.7) $20.0 $ --
====== ===== =====
Net of income taxes......................... $(18.8) $12.4 $ --
====== ===== =====
</TABLE>
Several items which are considered by management as "unusual" are excluded
throughout this discussion of the Company'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 the Company 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, the
Company realized losses on the sale of short-term investments due to an increase
in market interest rates. . Effective January 1, 1993, the Company adopted the
provisions of SFAS No. 106 "Employers' Accounting for Postretirement Benefits
Other Than Pensions" and SFAS No. 109 "Accounting for Income Taxes", which was
accounted for by restating prior periods. See Note 12 "Postretirement Benefits
Other Than Pensions" and Note 13 "Income Taxes" to the Consolidated 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 11 "Other Income" to the Consolidated Financial Statements.
27
<PAGE>
Refining
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
----- ----- -----
(IN MILLIONS, EXCEPT OPERATING DATA)
<S> <C> <C> <C>
OPERATING STATISTICS:
PORT ARTHUR REFINERY (ACQUIRED FEBRUARY 27, 1995)
Crude oil throughput (m bbls/day).................... -- -- 198.9
Production (m bbls/day).............................. -- -- 207.7
Gross margin (per barrel of production) (a).......... -- -- $ 2.40
Operating expenses (per barrel of production)........ -- -- $ 1.96
Net margin (a)....................................... -- -- $ 28.0
BLUE ISLAND, HARTFORD AND OTHER REFINING (A)
Crude oil throughput (m bbls/day).................... 123.8 138.2 133.6
Production (m bbls/day).............................. 134.7 140.3 136.5
Gross margin (per barrel of production) (b).......... $3.24 $3.48 $2.61
Operating expenses (per barrel of production)........ $2.20 $2.34 $2.72
Net margin (b)....................................... $51.1 $57.9 $(5.7)
Divisional general and administrative expenses....... 8.6 11.4 11.2
Contribution to operating income (b)................. $42.5 $46.5 $11.1
</TABLE>
(a) Other refining includes results from all crude oil acquisition and
inventory management activities.
(b) In 1995, the Company changed its pricing methodology to better reflect
external market prices for valuing product transferred between its retail
and refining divisions. Divisional results for 1993 and 1994 have been
restated to be consistent with this new methodology although there is no
annual effect on 1993.
The Company's refining division contributed $11.1 million to operating
income in 1995, $46.5 million in 1994 and $42.5 million in 1993. Refining
margins were particularly weak in 1995 and late 1994 due to the warmest Northern
Hemisphere winter in 40 years, which reduced demand for heating oil, and the
transition to reformulated gasoline. Several geographical areas unexpectedly
opted not to switch to reformulated gasoline which caused confusion and concern
in the marketplace, and caused gasoline prices to fall relative to the price of
crude oil. Refining results for the past three years were negatively affected by
industry market conditions largely beyond the Company's control, principally
weaker refined product prices relative to crude oil costs and the narrowing
price benefit of using heavy sour crude oil versus sweet crude oil (1993--$6.41
per barrel; 1994--$4.78 per barrel; 1995--$3.98 per barrel). The Port Arthur
refinery has the ability to process approximately 20% heavy sour crude oil and
the Hartford refinery has the ability to process approximately 50% heavy sour
and 25% medium sour crude oil. General refining margin indicators in 1995
reached their lowest point since 1987. The Company believes this downward trend
in industry margins occurred from 1990 to 1995 due to several factors. Refiners
have incrementally added light product production capacity in conjunction with
environmental spending over the past five years resulting in a an estimated 4%
increase in this capacity and consequently supply. In addition, the benefit from
processing sour and heavy sour crude oil has been reduced by increased shipping
tariffs, 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 trend
occurred despite average demand for gasoline and distillate products improving
from 1992 to 1995 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. The impact of the use of derivative instruments on
cost of sales and inventory costs was not material in 1993, 1994 and 1995.
The Company had over 122% higher refinery production in 1995 due to the
acquisition of the Port Arthur refinery and crude unit debottlenecking at the
Hartford refinery (approximately 3,000 barrels per day). Somewhat reducing these
increases was a reduction of refinery production by an average of approximately
10,000 barrels per day in the first quarter of 1995 due to the poor industry
margins. Additionally, a fire in the isomax unit and unscheduled downtime in the
alkylation unit at the Blue Island refinery reduced yields and production by
28
<PAGE>
approximately 4,100 barrels per day in 1995. The Blue Island refinery returned
to full production in mid-August 1995. See "Business--Environmental Matters."
Production at the Company's Illinois refineries was reduced in 1993 and 1994 due
to the above mentioned maintenance turnarounds.
Operating expenses increased in 1995 over the comparable periods in 1994
and 1993 principally due to the addition of the Port Arthur refinery and related
terminal expenses in early 1995 and expenses associated with the Blue Island
operating difficulties. Reduced throughput at the Company's Illinois refineries
due to poor first quarter market conditions and the previously mentioned
operating interruptions also contributed to a higher per barrel operating cost
in 1995 as compared with 1994 and 1993. Divisional general and administrative
expenses in 1995 were flat as compared to 1994 despite a more than doubling of
refining capacity. Divisional general and administrative expenses in 1994 of
$11.4 million exceeded 1993 levels by $2.8 million due to enhanced refinery
planning and operations support services and other organizational changes.
Retail
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
------- ------- -------
(IN MILLIONS, EXCEPT OPERATING DATA)
<S> <C> <C> <C>
OPERATING STATISTICS:
Gasoline volume (mm gals)........................ 1,014.8 1,028.5 1,063.8
Gasoline gross margin (c/gal) (a)................ 11.1c 10.9c 11.4c
Gasoline gross margin (a)........................ $ 112.7 $ 112.3 $ 121.7
Convenience product sales........................ $ 218.0 $ 231.6 $ 252.6
Convenience product gross margin................. 54.8 57.2 62.9
Operating expenses............................... $ 109.9 $ 117.2 $ 134.1
Divisional general and administrative expenses... 4.7 6.4 5.1
Contribution to operating income (a)............. $ 52.9 $ 45.9 $ 45.4
PER MONTH PER STORE:
Company operated stores (at period end).......... 831 829 831
Gasoline volume (m gals)......................... 98.6 102.8 104.1
Convenience product sales (m).................... $ 21.2 $ 23.1 $ 24.7
Convenience product gross margin (m)............. 5.3 5.7 6.1
</TABLE>
(a) In 1995, the Company changed its pricing methodology to better reflect
external market prices for valuing product transferred between its retail
and refining divisions. Divisional results for 1993 and 1994 have been
restated to be consistent with this new methodology although there is no
annual effect on 1993.
The Company continued to refocus its retail network in its core markets
during 1995. The Company acquired through an operating lease 35 retail stores in
April 1995 in Peoria, Illinois, one of its core markets. In late 1994, the
Company similarly acquired 25 stores in Chicago, Illinois. Three additional
stores related to the Chicago acquisition were added in January 1996. In March
1996, the Company signed an agreement to acquire, through operating leases, 10
high volume stores in its core Chicago market. The Company took immediate
possession of the sites with formal closing expected in April, 1996. Consistent
with the Company's strategy to exit non-core markets, the Company divested 41
stores in the Kansas, western Missouri and Minnesota markets in late 1995 and
early 1996. The 60 new stores added since 1994 contributed approximately 12% of
earnings (net of rent expense) in 1995 despite representing only 7% of store
count. The Company will continue to consider growth through acquisitions in its
core markets. The Company also expects to continue to close underperforming
stores and review non-core markets for possible divestitures.
The Company's retail division's contribution to operating income in 1995
was relatively flat with 1994 which was 13% lower than 1993. Significant 1995
productivity improvements in gasoline and convenience product gross margins and
favorable results from the newly acquired stores were offset by higher store
operating expenses, weak market conditions and reduced results from the
Company's non-core, non-imaged markets.
29
<PAGE>
The Company leveraged it investment in its reimage program to narrow the
historical pricing discount relative to its higher priced competitors. Gasoline
margin improvements of approximately 1c per gallon were realized in 1995 from
improved pricing versus the competition. This strategy, together with the
increased sale of higher-margin premium gasoline (representing 32% of total
volume in 1995 versus 30% in 1994 and 29% in 1993) improved per gallon margins
despite an overall industry margin decline in the Company's core markets.
Gasoline gross margins were pressured early and late in 1995 because of consumer
resistance to paying for increases in the cost of gasoline caused by rising
wholesale prices. Additional productivity improvements were realized from 1993
to 1995 with average monthly per store volume increases of 6% over the period.
The Company believes these volume increases were attributable in part to the
positive impact of newly acquired stores; capital initiatives, including the
installation of canopies, blending dispensers and the reimage program; increased
promotional activity; and the expansion of the Company's credit card base,
including the introduction of a proprietary credit card in 1995. These volume
increases were tempered by a decrease in volumes in non-imaged markets of 8% in
1995 as compared to 1994.
Convenience product gross margins in 1995 improved 10% as compared to 1994
which was 4% higher than 1993. These improvements were due primarily to the
positive impact of newly acquired stores as well as an improvement in the sales
mix of higher margin On The Go(R) products (41% of sales in 1995 versus 34% in
1993). The Company's strategy is to continue to increase its sales of these On
The Go(R) type products to reduce the Company's reliance on the sale of tobacco
products. The tobacco category realized declining gross margins in 1995 due to
significant competitive pressures in several of the Company's markets.
Operating expenses increased in 1995 due to incremental lease and operating
expenses associated with the new stores added since 1994. Additional increases
related to higher store labor costs and higher credit card processing expenses
(due to a 41% increase in credit card sales over 1994), partially offset by
lower administrative labor costs. The increase in operating and divisional
general and administrative expenses from 1993 to 1994 was primarily attributable
to the creation of an operating and administrative infrastructure to support
productivity initiatives.
OTHER FINANCIAL MATTERS
Depreciation and amortization expenses for 1995 exceeded 1994 and 1993
principally because of the Port Arthur refinery acquisition and 1994 capital
expenditures
Net interest and financing costs for 1995 increased over the comparable
period in 1994 and 1993 due principally to higher financing cost amortization
associated with Clark's larger working capital facility which was increased to
support the crude oil supply needs of the Port Arthur refinery increased
financing charges related to amortization of bondholder consent payments. See
Note 15 "Certain Financings" to the Consolidated Financial Statements.
For the items that comprise other income (expenses) see Note 11 "Other
Income (Expense)" to the Consolidated Financial Statements.
OUTLOOK
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.
The Company expects that there will continue to be volatility refining margins
and the Company's earnings because of the seasonal nature of refined product
demand and the commodity nature of the Company's products.
30
<PAGE>
<TABLE>
<CAPTION>
LIQUIDITY AND CAPITAL RESOURCES
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------ ------
<S> <C> <C> <C>
(IN MILLIONS)
FINANCIAL POSITION:
Cash and short-term investments... $212.1 $134.1 $106.6
Working capital................... 203.8 130.4 193.1
Property, plant and equipment..... 360.9 429.8 549.3
Long-term debt.................... 401.0 400.7 420.4
Stockholders' equity.............. 146.0 162.9 304.1
Operating cash flow............... 61.9 46.0 7.6
</TABLE>
Operating cash flow (cash generated by operating activities before working
capital changes) for the year ended December 31, 1995 was $7.6 million compared
with $46.0 million in 1994 and $61.9 million in 1993. Cash flow declined from
1993 to 1995 principally because of the weaker refining margin environment.
Working capital at December 31, 1995 was $193.1 million, a 1.48 to 1 current
ratio, versus $130.4 million at December 31, 1994, a 1.52 to 1 current ratio and
$203.8 million at December 31, 1993, a 1.89 to 1 current ratio. Working capital
increased in 1995 due to the Port Arthur refinery acquisition and partial
financing with equity of the refinery's working capital requirements. 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 to 1994.
As part of its overall inventory management and crude acquisition strategies,
the Company routinely buys and sells, in varying degrees, crude oil in the spot
market. Such on-going activities carry various payment terms and require the
Company to maintain adequate liquidity and working capital facilities. 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 (the "Clark Credit Agreement") 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 Consolidated Financial Statements. The amount available under
the facility at December 31, 1995 was $365 million. At December 31, 1995, $221
million of the facility was used for letters of credit. There were no direct
borrowings under Clark's line of credit at December 31, 1993, 1994 or 1995.
In November 1994, Clark refinanced its previous working capital facility with
a group of banks. The working capital facility provides the Company with
sufficient liquidity to support the expanded letter of credit needs related to
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. Clark is also required to comply with certain financial
covenants. Clark renegotiated the covenant package in the Clark Credit Agreement
in connection with the advance oil purchase transactions and received consent
for the issuance of the 10-7/8% Notes, modification of the change of control
provisions and approval of a bondholder consent solicitation. The new financial
covenants are: (i) maintenance of working capital of at least $150 million at
all times; (ii) maintenance of a tangible net worth (as defined) of at least
$254 million adjusted quarterly to give effect to a portion of future earnings
or capital contributions by Clark USA to Clark; (iii) maximum indebtedness to
tangible net worth ratio (as defined) of 3.0 to 1.0 as of September 30, 1995,
decreasing to a maximum of 2.75 to 1.0 on December 31, 1995 and 2.5 to 1.0 on
September 30, 1996; (iv) maintenance of minimum levels of balance sheet cash (as
defined) of $50 million at all times; and (v) a minimum ratio of adjusted cash
flow (as defined) to debt service (as defined) of 1.25 to 1.0 for the two
quarters ending September 30, 1995, of 1.25 to 1.0 for the three quarters ending
December 31,1995, 1.25 to 1.0 for the four consecutive quarters ending March 31,
1996 and 1.25 to 1.0 for the four consecutive quarters ending June 30, 1996 and
1.5 to 1.0 for the four consecutive quarters thereafter. The covenants also
limit Clark's ability to pay dividends to Clark USA to an amount not exceeding
the lesser of (i) $10 million during any consecutive two quarter period and $20
million during any consecutive four quarter period or (ii) a dividend basket,
which consists of the greater of $20 million less previous dividend payments of
Clark's
31
<PAGE>
cumulative Adjusted Free Cash Flow, as defined in the Clark Credit Agreement,
provided there is no default under the Clark Credit Agreement. As of January 31,
1996, the total amount available for dividends was $20 million. The amendments
to the Clark Credit Agreement also increase the amount of future indebtedness
that may be incurred by Clark USA without creating an event of default under the
Clark Credit Agreement from $5 million to an amount equal to $25 million less
the amount of certain future debt incurred by Clark. From December 29, 1995 to
January 31, 1996, Clark USA made $40 million of equity contributions to Clark in
connection with the above modifications to the Clark Credit Agreement. Clark was
in compliance with all then existing and new covenants of the Clark Credit
Agreement at December 31, 1995.
Cash flows from investing activities (excluding short-term investment
activities which the Company manages similar to cash and cash equivalents) are
primarily affected by acquisitions and capital expenditures, including
maintenance turnarounds. Cash flows used in investing activities (excluding
short-term investments) in 1995 of $118.5 million compared to $119.0 million in
1994 and $73.9 million in 1993. Port Arthur refinery acquisition expenditures of
$71.8 million was the largest component of investing activities in 1995. Capital
expenditures for property, plant and equipment totaled $42.1 million (1994--
$100.3 million; 1993--$67.9 million) and expenditures for refinery maintenance
turnarounds totaled $6.5 million (1994--$11.2 million; 1993--$20.6 million).
Capital expenditures were reduced in 1995 in response to lower cash flow.
Refining division capital expenditures were $15.8 million in 1995 (1994--$59.7
million, 1993--$39.2 million) primarily for mandatory maintenance and
environmental expenditures. In 1994, projects included adding the capability to
produce RFG at the Blue Island refinery and a revamp of the FCC and alkylation
units at the Hartford refinery and in 1993, projects included Stretford, crude
and FCC unit upgrades at the Blue Island refinery. Retail capital expenditures
in 1995 totaled $25.2 million (1994--$38.2 million; 1993--$26.5 million) and
consisted of one-half for regulatory compliance, principally related to Stage II
vapor recovery and underground storage tank related work, and one-half for
discretionary projects primarily related to the Company's reimaging program as
well as the purchase of the existing equipment for new stores. In 1994 and 1993,
approximately one-third of retail division capital expenditures were
environmental projects related to tanks, lines, vapor recovery and underground
storage tank related work. The balance of 1994 and 1993 retail division capital
expenditures included discretionary projects such as reimaging locations using
Clark's new logo and updated color scheme at nearly half of Clark's stores in
1994, canopies, store interior remodeling and expansion of store interior
selling space, systems automation and the On The Go(R) store concept
development.
The Company invested $25 million in a project initiated to produce low sulfur
diesel fuel at the Hartford refinery (the "DHDS Project") which was delayed in
1992 based on internal and third party analyses that indicated an oversupply of
low sulfur diesel fuel capacity in the Company's marketplace. Based on these
analyses, the Company 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, the Company could
install the necessary equipment over a 14 to 16 month period at an estimated
additional cost of $40 million. The Company 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 and also
reviewing other options for the project. The Company believes it would not
recover its entire investment in this project should the project not be
completed.
In February 1995, the Company acquired the Port Arthur Refinery from Chevron
for approximately $70 million plus inventory and spare parts of approximately
$122 million (a $5 million deposit was paid in 1994) and the assumption of
certain liabilities for remediation of environmental contamination (estimated at
$7.5 million) and employee postretirement benefits (estimated at $11.9 million).
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 Port Arthur
refinery acquisition in the event that refining industry margin indicators
exceed certain escalating levels. The Company 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 were not payable for the first measurement period which ended September
30, 1995 and would not be payable for the next annual period based on these
industry margin indicators through December 31, 1995. The Company expects to
incur additional costs of approximately $4 million related to environmental due
diligence and capital expenditures during the two years following the Port
Arthur refinery acquisition to establish a baseline for environmental
contamination retained by Chevron.
32
<PAGE>
The Company classifies its capital expenditures into two categories, mandatory
and discretionary. There are mandatory maintenance capital expenditures and
mandatory environmental expenditures to comply with regulations pertaining to
ground, water and air contamination and occupational, safety and health issues.
The Company estimates that total mandatory expenditures will be approximately
$65 million per year through 1998, including $50 million related to the refining
division and the balance related to the retail division. Costs to comply with
future regulations cannot be estimated. Concurrent with the Port Arthur refinery
acquisition and based on estimates from its environmental consultants, the
Company accrued 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.
Expenditures to comply with reformulated and low sulfur fuels regulations are
primarily discretionary, subject to market conditions and economic
justification. These fuel 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 the Company operates,
based on attainment of air quality standards and the time of the year. The
Company's Port Arthur, Blue Island and Hartford refineries have the capability
to produce 60%, 40%, and 25%, respectively, of their gasoline production in
reformulated gasoline. The Port Arthur refinery has the capability to produce
100% low sulfur diesel fuel.
The Company has a philosophy to link total capital expenditures to cash
generated from operations. The Company has a total capital and refinery
maintenance turnaround expenditure budget of $90-$100 million for 1996,
excluding acquisitions, if any. Total capital expenditures may be under budget
if earnings are less than expected, and higher than budget if earnings are
better than expected.
Cash flow from financing activities was $174.7 million in 1995 compared to a
use of $5.4 million in 1994 and $1.1 million in 1993. Financing activities in
1995 reflected the partial financing of the Port Arthur refinery acquisition
with the sale of stock (the balance was financed with cash on hand), fees
related to the larger working capital facility associated with the expanded
working capital needs of the Company following the Port Arthur refinery
acquisition and two capital leases associated with the sale and leaseback of
certain refinery equipment at the Hartford and Port Arthur refineries. In 1994,
expenditures were made related to the acquisition of a new working capital
facility and equity financing for the Port Arthur refinery acquisition.
Funds generated from operating activities 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 for
the next year. Due to the commodity nature of its products, the Company's
operating results are subject to rapid and wide fluctuations. While the
Company's management believes that its maintenance of large cash, cash
equivalents and short-term investment balances and other operating philosophies
will be sufficient to provide the Company with adequate liquidity through the
end of 1996, there can be no assurance that refining industry conditions will
not be worse or continue longer than anticipated. Future working capital,
discretionary capital expenditures, environmentally-mandated spending and
acquisitions may require additional debt or equity capital.
STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED
The Financial Accounting Standards Board ("FASB")has issued Statement of
Financial Accounting Standards ("SFAS") No. 121 concerning "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of".
The standard requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable with future cash flows. The Company will adopt this standard
beginning January 1, 1996. The Company is currently undertaking analysis to
determine the actual impact of this standard but does not believe with the
possible exception of the DHDS Project, that this new standard will have a
material impact on the Company's earnings or financial position. The Company
believes that if the DHDS Project should not proceed due to continued relatively
narrow price differentials between low and high sulfur diesel fuel, future cash
flows from the asset may not support the cost expended to date of approximately
$25 million. See "--Liquidity and Capital Resources".
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, executive officers, Controller, Treasurer and Secretary 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 68 Chairman of the Board and Director
Paul D. Melnuk 41 President and Chief Executive Officer;
Chief Operating Officer; Director
Maura J. Clark 37 Executive Vice President--Corporate Development and
Chief Financial Officer
C. William D. Birchall 53 Director
Gregory C. Wilkins 40 Director
Bradley D. Aldrich 41 Executive Vice President--Refining
Brandon K. Barnholt 37 Executive Vice President--Retail Marketing
Dennis R. Eichholz 42 Controller and Treasurer
Katherine D. Knocke 38 Secretary
</TABLE>
The Board of Directors of Clark USA consists of four 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 Clark USA
since November 1988. Mr. Munk has served as Chairman of the Board of Clark since
July 1992, as Chairman of the Board and Chief Executive Officer of Clark from
August 1990 through July 1992 and as Vice Chairman of Clark from November 1988
through August 1990. Mr. Munk has served as a director of Clark since November
1988. 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 Barrick Gold 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 a director of Clark since
October 1992, as President and Chief Executive Officer 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 November 1991 through December 1991, as 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 has served as a director of Horsham since March 1992. Mr. Melnuk served
as President and Chief Operating Officer of Horsham from 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.
Maura J. Clark has served as Executive Vice President--Corporate Development
and Chief Financial Officer of Clark USA and Clark since August 1995. Ms. Clark
is an employee of Horsham serving under a management
34
<PAGE>
consulting arrangement with Clark. Ms. Clark previously served as Vice
President--Finance at North American Life Assurance Company, a financial
services company, from September 1993 through July 1995. From May 1990 to
September 1993, Ms. Clark served as Vice President Corporate Finance and
Corporate Development of North American Trust Company (formerly First City Trust
Company), a subsidiary of North American Life Assurance Company.
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.
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 President of Trizec Corporation since February 1996 and 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
Vice President-Controller and Treasurer of Clark since February 1995. Mr.
Eichholz has served as Vice President-Treasurer of Clark since December 1991 and
served as Tax Manager of Clark from November 1988 through December 1991.
Katherine D. Knocke has served as Secretary of Clark USA and Clark since April
1995. Ms. Knocke has served as in-house counsel of Clark since August 1994. Ms.
Knocke previously was employed as an associate with the St. Louis law firm of
Armstrong, Teasdale, Schlafly & Davis from September 1989 through August 1994.
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 for 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
of Clark since December 1993, as Vice President--Retail Marketing of Clark from
July 1992 through December 1993 and as Managing Director--Retail Marketing of
Clark 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.
Except as described above, 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 officer. There are no
family relationships between any director or executive officer and any other
director or executive officer.
EXECUTIVE COMMITTEE
The Executive Committee is principally responsible for making management
policy for Clark as well as developing and implementing financial and human
resource strategies, and improving Clark's financial position and results of
operations. The members of the Executive Committee, which consists of four
members, are as follows: Paul D. Melnuk, President and Chief Executive Officer;
Brandon K. Barnholt, Executive Vice President--Marketing; Maura J. Clark,
Executive Vice President--Corporate Development and Chief Financial Officer; and
Bradley D. Aldrich, Executive Vice President--Refining.
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, 1995.
<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................. 1995 $326,836 $ 75,000 $ -- 100,000 $5,479
President and Chief 1994 325,893 150,000 -- -- 7,528
Executive Officer 1993(a) 325,578 -- -- -- 8,994
Bradley D. Aldrich (b)......... 1995 176,224 42,500 6,737 130,000(c)(d) --
Executive Vice President-- 1994 6,731 60,000 -- -- --
Refining 1993 -- -- -- -- --
Brandon K. Barnholt............ 1995 176,273 75,000 6,750 50,000(c) 5,329
Executive Vice President-- 1994 171,846 100,000 -- -- 8,330
Retail Marketing 1993 143,722 100,000 -- 70,000(d) 4,500
Maura J. Clark (f)............. 1995 -- -- -- -- --
Executive Vice President-- 1994 -- -- -- -- --
Corporate Development 1993 -- -- -- -- --
and Chief Financial Officer
</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 1, 1994. See "--Employment
Agreement."
(c) Options issued pursuant to the Performance Plan as described below.
(d) Mr. Aldrich and Mr. Barnholt 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").
(e) Represents amount accrued for the account of such individuals under the
Clark Retirement Savings Plan (the "Savings Plan").
(f) Ms. Clark is an employee of Horsham serving under an management consulting
arrangement with Clark. Ms. Clark received approximately $117,000 in 1995
under such arrangement.
STOCK OPTIONS GRANTED DURING 1995
The options granted during 1995 to the named executive officers under the
Performance Plan (defined below) for services performed for Clark were as
follows:
<TABLE>
<CAPTION>
PERCENT OF
NUMBER OF TOTAL OPTIONS POTENTIAL REALIZABLE VALUE AT
SECURITIES GRANTED TO ASSUMED ANNUAL RATES OF STOCK
UNDERLYING OPTIONS ALL EMPLOYEES EXERCISE EXPIRATION PRICE APPRECIATION FOR OPTION TERM
NAME GRANTED IN 1995 PRICE DATE 5% ($) 10% ($)
- ---- ------------------ ------------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Melnuk 100,000 14.8% $15.00 2-27-04 $943,342 $2,390,614
Bradley D. Aldrich 30,000 4.4 15.00 2-27-04 283,003 717,184
Brandon K. Barnholt 50,000 7.4 15.00 2-27-04 471,671 1,195,307
</TABLE>
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, 1995, there were 154,500 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
214,506 Horsham Shares at December 31, 1995, 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, 1994 or 1995.
YEAR-END OPTION VALUES
The following table sets forth information with respect to the number and
value of unexercised options to purchase Common Stock of Clark USA and Horsham
Shares held by the executive officers named in the executive compensation table
at December 31, 1995.
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
SHARES ACQUIRED UNEXERCISED OPTIONS HELD IN-THE-MONEY OPTIONS HELD
ON EXERCISE VALUE AT DECEMBER 31, 1995 AT DECEMBER 31, 1995 (a)
DURING YEAR ENDED REALIZED -------------------------- --------------------------
NAME DECEMBER 31, 1995 ON EXERCISE EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Paul D. Melnuk (b)...... -- -- -- 100,000 $ -- $700,000
Bradley D. Aldrich (c).. -- -- -- 130,000 -- 210,000
Brandon K. Barnholt..... -- -- 66,667 73,333 240,661 411,097
</TABLE>
(a) For the Horsham Shares the value is based upon the closing price on the New
York Stock Exchange-Composite Transactions on December 31, 1995. For the
Common Stock of Clark USA the value is based on the issuance price in the
Transactions.
(b) Mr. Melnuk also 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 support personnel to 200% for the Chief Executive Officer.
The other executive officers have the opportunity to earn an annual incentive
equal to 125% of the individual's base salary. The actual award is determined
based on financial performance as measured by return on equity with individual
and executive team performance evaluated against pre-established operating
objectives designed 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 are 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 an 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
37
<PAGE>
Common Stock of Clark USA. As of December 31, 1995, 675,250 stock options have
been issued (651,500 outstanding) under the Performance Plan.
The Performance Plan is administered by the Board of Directors' Compensation
Committee. Subject to the provisions of the Performance Plan, the Compensation
Committee is 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 is 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 have a 10 year term with a three year
vesting schedule and are not exercisable until Clark USA's Common Stock is
publicly traded. In accordance with the Stock Purchase Agreement (as defined
herein), executive officers are restricted from exercising options for four
years or until Tiger's 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 Performance Plan is assignable or transferable, or payable to
or exercisable by anyone 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 Clark USA 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 exercisable 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 employer incentive
matching contributions. Savings Plan assets are held in trust by Boatmen's Trust
Company. Under the Savings Plan, each employee of Clark (and such other 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,
38
<PAGE>
of from 1% to 15% of their compensation. Clark makes matching contributions
equal to 200% of a participant's 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 employer contributions; provided that before-tax contributions and
after-tax contributions, in the aggregate, may not exceed the lesser of 15% of
compensation or $9,500 in 1996. 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 participant's 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 Clark's executive officers has historically been determined by
Clark's Board of Directors. Mr. Melnuk, Clark USA's and Clark's President and
Chief Executive Officer, is a member of Clark USA's and Clark's Board of
Directors. Other than reimbursement of their expenses, neither Clark USA's nor
Clark's directors receive any compensation for their services as directors.
There are no interlocks between the Company and other entities involving the
Company's executive officers and board members who serve as executive officers
or board members of other entities, except with respect to the Company's parent,
Horsham. Mr. Munk (Chairman and Chief Executive Officer of Horsham) serves as a
director of Clark USA and the Company, Mr. Wilkins (President of Horsham) serves
as a director of Clark USA and the Company and Mr. Melnuk (the President and
Chief Executive Officer of Clark USA and the Company) serves as a director of
Horsham.
EMPLOYMENT AGREEMENT
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.
39
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN OWNERS AND MANAGEMENT
All of Clark's common stock is owned by Clark USA. The following table and
the accompanying notes set forth certain information concerning the beneficial
ownership of the Common Stock and Class A Common Stock of Clark USA, as of the
date hereof: (i) each person who is known by Clark USA to own beneficially more
than 5% of the Common Stock of Clark USA, (ii) each director and each executive
officer who is the beneficial owner of shares of Common Stock and (iii) all
directors and executive officers as a group.
<TABLE>
<CAPTION>
PERCENT OF
----------
NAME AND ADDRESS TITLE OF CLASS NUMBER OF SHARES PERCENT OF CLASS TOTAL VOTING POWER(a)
-------------------- --------------- ---------------- ---------------- ---------------------
<S> <C> <C> <C> <C>
Peter Munk (b)....................... Common 12,375,000 65 46
The Horsham Corporation Class A Common 1,125,000 11
BCE Place
181 Bay Street, Suite 3900
P.O. Box 768
Toronto, Ontario
M5J 2T3 Canada
Julian H. Robertson, Jr. (c)......... Class A Common 9,000,000 89 31
Tiger Management Corporation
101 Park Avenue
New York, New York 10178
Paul D. Melnuk....................... Class A Common 37,509 (d) (d)
Occidental Petroleum Corporation..... Common 5,454,545 29 19
10889 Wilshire Boulevard
Los Angeles, California 90024
J. M. Salaam (e)..................... Common 1,222,273 6 4
Gulf Resources Corporation
24-26 Regent's Bridge Gardens
London SW8 1HB England
All directors and executives officers
as a group (b)..................... Common 12,375,000 65 46
Class A Common 1,162,509 11
</TABLE>
(a) Represents the total voting power of all shares of common stock beneficially
owned by the named stockholder. See "--Restrictions Under Tiger Agreements."
(b) As of December 31, 1995, Peter Munk, the Chairman of the Board of Directors
of Horsham, held approximately 79% voting control of Horsham and as a result
is deemed to own beneficially the shares owned by Horsham.
(c) Tiger has informed the Company that Julian H. Robertson, Jr., Tiger's chief
executive officer, may be deemed to control Tiger. Mr. Robertson's address
is 101 Park Avenue, New York, New York 10178.
(d) Less than 1%.
(e) Gulf has informed the Company that H. M. Salaam, Gulf's chairman, may be
deemed to control Gulf. Mr. Salaam's address is 24-26 Regent's Bridge
Gardens, London SW8 1HB England.
REPURCHASE OF STOCK
On December 30, 1992, Clark USA entered into the AOC Stock Purchase Agreement
and repurchased from AOC L.P. 34.67 shares of (the equivalent of 6,567,293
shares, following a 1995 stock split) 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, the principal
asset of which was a Colorado ski resort. Concurrently, Horsham purchased the
remaining 5.33 shares (the equivalent of 1,009,624 shares, following the 1995
stock split) of common stock (approximately 13% of the shares of Clark USA
common stock then 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 Stockholder Agreement was terminated.
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.
40
<PAGE>
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 sale of the Zero Coupon Notes.
The AOC L.P. Contingent Payment is an amount which shall not exceed in the
aggregate $24 million plus interest at 9% per annum compounded annually through
December 31, 1996. The AOC L.P. Contingent Payment is payable 89% by Clark USA
and 11% by Horsham. The Port Arthur Financing (excluding the separate purchase
of shares retained by Horsham), caused calculation on the part of Clark USA to
determine whether a payment was due to AOC L.P. Clark USA believes that no
payment was due based, in part, upon the value of shares sold. Clark USA
believes the Transactions do not trigger an obligation on Clark USA to calculate
or make a payment to AOC L.P. Despite Clark USA's calculations of the amount of
the AOC L.P. Contingent Payment related to the Port Arthur Financing and Clark
USA's belief related to the Transactions, it is possible that AOC L.P. will
assert, through litigation or otherwise, that an amount is payable as a result
of the Port Arthur Financing or the Transactions (but such amount would not
exceed $24.0 million plus interest at 9% per annum compounded annually through
December 31, 1995, or approximately $31.1 million). There can be no assurance
that Clark USA's calculation related to the Port Arthur Financing will prevail
in the event that AOC L.P. contests such amounts in litigation or otherwise.
Horsham has agreed to indemnify Clark USA for any Contingent Payment in excess
of $7 million.
RESTRICTIONS UNDER TIGER AGREEMENTS
Pursuant to the Stock Purchase Agreement, dated as of February 27, 1995 (the
"Stock Purchase Agreement") between Clark USA, a subsidiary of Horsham, Horsham
and Tiger, the Company agreed to the following:
Limitation on Certain Transactions
Pursuant to the Stock Purchase Agreement, Clark USA agreed that, so long as
Tiger and/or its affiliates collectively own 20% of the issued and outstanding
capital stock of Clark USA, the affirmative vote of the holders of a majority of
the outstanding shares of Class A Common Stock shall be required for any of the
following actions:
(a) acquisitions by Clark USA during any calendar year of equity or debt
securities (other than equity or debt securities purchased in connection with
Clark USA's investment of excess cash) or fixed assets (other than pursuant to
operating leases and other than as part of capital expenditure programs
(whether or not requiring approval as contemplated by (c) below)) or
assumptions by Clark USA of liabilities which, in the aggregate, exceed
$10,000,000;
(b) other than certain identified financings, financings by Clark USA
(other than fully underwritten widely dispersed public offerings of Common
Stock or pursuant to working capital arrangements) during any calendar year
which in the aggregate exceed $10,000,000;
(c) during calendar year 1995, capital expenditures by Clark USA which in
the aggregate exceed $100,000,000 or, in any calendar year thereafter, which
in the aggregate exceed $120,000,000 for such year;
(d) any increase in any calendar year (in excess of the Consumer Price
Index increase from the previous calendar year) in compensation payable at any
time to any senior management member, and any termination of employment by
Clark USA, or significant reduction by Clark USA in duties, of Paul Melnuk,
the President and Chief Executive Officer of Clark USA;
41
<PAGE>
(e) other than a fully underwritten widely dispersed public offering of
Common Stock, any material change in the capital structure of Clark USA
(including, without limitation, any issuance of debt securities (except as
permitted by (b) above)) or equity securities (other than pursuant to the
Performance Plan );
(f) any transactions between Clark USA on the one hand and any of its
affiliates or Horsham or its affiliates on the other hand (other than pursuant
to the Performance Plan ) which (a) are not on reasonable arm's length terms
at fair market valuations or (b) during any calendar year exceed, in the
aggregate, $2,500,000;
(g) a merger or sale of Clark USA or more than 10% of its assets; and
(h) prior to the second anniversary of the Public Float Target Date (as
defined in the Stock Purchase Agreement), any acquisition by Clark USA which
is funded by the issuance of new equity securities of Clark USA.
In addition, so long as Tiger and/or its affiliates own collectively 20% of
the issued and outstanding capital stock of Clark USA, Clark USA may not, and
shall cause each of its subsidiary not to, engage in any business other than its
current business.
Tiger Director
So long as Tiger and/or its affiliates own collectively 10% or more of the
issued and outstanding capital stock of Clark USA, at each annual election of
the Board of Directors of Clark USA thereafter, Clark USA will take all
necessary action to elect to the Board of Directors of Clark USA one person
nominated by Tiger. James J. Murchie currently serves as the director nominated
by Tiger.
Limitations on Sale of Capital Stock of Clark USA
With respect to any public offering of Common Stock, Tiger on the one hand and
Clark USA on the other hand may participate for the same number of shares, and
Horsham and its affiliates may participate (with respect only to the Common
Stock into which its Class A Common Stock is convertible) for a percentage of
the number of shares being offered by Tiger which is equal to the percentage
that the Common Stock into which Horsham's Class A Common Stock is convertible
represents of the capital stock of Clark USA owned in the aggregate by Tiger;
provided, however, that Clark USA shall have priority to the extent that funding
is required in connection with such offering for mandatory redemption of Clark
USA's Zero Coupon Notes.
Other than as provided in the preceding paragraph or with Tiger's consent
(which Tiger may grant or withhold in Tiger's sole discretion), Horsham shall
not sell any equity securities of Clark USA owned by it (other than the Class A
Common Stock issued to Horsham under the Stock Purchase Agreement or the Common
Stock into which it is convertible), provided, however, that Horsham may sell
equity securities of Clark USA after 120 days after Tiger no longer owns at
least 10% of the then issued and outstanding capital stock of Clark USA unless
Tiger shall at such time be actively attempting to sell any capital stock or
shall have taken substantial steps in such regard.
If any Purchaser (a "Selling Purchaser") proposes to sell all or any portion
of its Class A Common Stock or its Class C Common Stock in a private sale to an
entity engaged in the refining industry (a "Proposed Sale"), the Selling
Purchaser will provide Clark USA with at least 45 days' written notice prior to
the closing thereof (which closing shall be subject to Clark USA's right here
under), and Clark USA will have the right, prior to the date of such closing
(the "Proposed Sale Closing Date"), to produce an alternative buyer for the same
number of shares at a higher price than in the Proposed Sale and otherwise on
terms (including the date of closing being no later than the Proposed Sale
Closing Date) equal or superior to the terms of the Proposed Sale. If the
transaction with such alternative buyer does not close for any reason by the
Proposed Sale Closing Date (other than by reason of a breach by the Selling
Purchaser of its obligations), the Selling Purchaser shall be free during the
next 90 days to sell the shares it proposed to sell in the Proposed Sale to any
buyer (including the buyer in the Proposed Sale). Notwithstanding the above,
Clark USA shall have the right, in its sole discretion, to prohibit any sales of
capital
42
<PAGE>
stock of Clark USA for a period of time not to exceed 90 days from (i) the date
of the initial public offering (the "IPO") of Clark USA's Common Stock if so
required by the managing underwriters of the IPO or (ii) the date of the notice
referred to in the first sentence of this paragraph in the event of a pending
material transaction. In the event Clark USA shall prohibit any sales of its
capital stock of Clark USA pursuant to the preceding sentence, the 90 day period
during which the Selling Purchaser would have otherwise been free to sell the
shares it proposed to sell in the Proposed Sale shall be extended to the date
following expiration of such prohibition which is the same number of days
thereafter as the number of days during such 90-day period that such prohibition
was in effect.
Any executive officer of Clark USA exercising options issued pursuant to the
Performance Plan may not sell equity securities of Clark USA issued upon
exercise of options issued pursuant to the Performance Plan until the earlier of
four years after February 27, 1995 or 120 days after Tiger and its affiliates
own less than 10% of the capital stock of Clark USA and then only if Tiger and
its affiliates shall not at such time be actively attempting to sell equity
securities of Clark USA or have taken substantial steps in such regard.
Clark USA has agreed that it will not undertake an initial public offering for
its own account prior to January 1, 1997 at a Net Price less than $20 per share
without the consent of (a) Oxy Partners, unless Clark USA issues to Oxy Partners
additional shares of Class D Common Stock (or an equivalent value in cash)
sufficient to result in all the shares issued to Oxy Partners under the
Occidental Merger Agreement or the Oxy Stockholders' Agreement (together with
any such cash payment) having an aggregate value of $120 million based on the
Net Price, and (b) Tiger.
Registration Rights
In connection with the execution of the Stock Purchase Agreement, Clark USA
entered into a registration rights agreement (the "Tiger Registration Rights
Agreement") with TMC, a subsidiary of Horsham and Paul D. Melnuk. In the
Tiger Registration Rights Agreement, Clark USA agreed, among other things, to
provide Tiger with demand and piggyback registration rights with respect to
their shares of Class C Stock and shares of Common Stock issuable upon
conversion of their Class A Stock (including shares of Class A Stock issuable
upon conversion of shares of Class C Stock). Clark USA also agreed to file a
shelf registration and to use its best efforts to cause the shelf registration
to become effective not later than the later of (i) 90 days after consummation
of an initial public offering or (ii) August 27, 1995, and to remain effective
for a period of four years from the date upon which the shelf registration is
declared effective.
THE OXY STOCKHOLDERS' AGREEMENT
Clark USA and Oxy Partners entered into a Stockholders' Agreement (the "Oxy
Stockholders' Agreement"). The Oxy Stockholders' Agreement provides that Oxy
Partners will be entitled to designate one director to the Board of Directors of
Clark USA so long as Oxy Partners and its affiliates own at least 10% of the
outstanding shares of capital stock of Clark USA on a fully diluted basis.
Stephen I. Chazen currently serves as the director designated by Oxy Partners.
The Oxy Stockholders' Agreement generally prohibits the sale of shares of
capital stock of Clark USA by Oxy Partners and its transferees except (a)
pursuant to a public offering, (b) to Clark USA or any subsidiary of Clark USA,
Horsham, Oxy Partners, Tiger or their respective affiliates, (c) subject to
certain restrictions, pursuant to Rule 144 under the Securities Act, or (d) to
third parties, subject to a right of first refusal granted to Clark USA. The
Oxy Stockholders' Agreement prohibits any sale of shares of capital stock of
Clark USA without the consent of Tiger whenever Tiger is actively attempting to
sell any capital stock of Clark USA or has taken substantial steps in such
regard.
Pursuant to the Oxy Stockholders' Agreement, Oxy Partners will be entitled to
receive additional shares of Class D Common Stock if Clark USA, whether or not
for its own account, effects a public offering of common stock at a price, net
of all fees, commissions and discounts (the "Net Price") below $22 per share.
Subject to appropriate adjustments for stock dividends, recapitalizations and
similar events, the additional shares of Class D Common Stock to be received by
Oxy Partners in this circumstance will be valued at a minimum of $20 per share
and will not exceed 545,455 shares in the aggregate. See "--Restrictions Under
Tiger Agreements".
43
<PAGE>
Clark USA has granted to Oxy Partners the right, after Clark USA has made a
public offering of equity securities, to make one demand that Clark USA register
under the Securities Act shares of Clark USA's capital stock held by Oxy
Partners. Oxy Partners will also have the right to participate in registrations
effected by Clark USA for its account or for the account of another stockholder.
THE GULF STOCKHOLDERS' AGREEMENT
Clark USA, Gulf and Gulf Holdings, entered into a Stockholders' Agreement (the
"Gulf Stockholders' Agreement"). The Gulf Stockholders' Agreement generally
prohibits the sale of shares of capital stock of Clark USA by the Gulf
Stockholders and their transferees except (a) to Gulf or an affiliate of Gulf or
(b) in a transaction in which Horsham sells any shares of capital stock of Clark
USA. The Oxy Stockholders' Agreement prohibits any sale of shares of capital
stock of Clark USA without the consent of Tiger whenever Tiger is actively
attempting to sell any capital stock of Clark USA or has taken substantial steps
in such regard. In any such sale by Horsham, Gulf shall have the right to elect
to include in such sale a number of shares of common stock of Clark USA owned by
Gulf proportionate to the total number of shares owned by Gulf relative to
Horsham.
Pursuant to the Gulf Stockholders' Agreement, Gulf and Gulf Holdings will be
entitled to receive additional shares of Class D Common Stock if Clark USA,
whether or not for its own account, effects a public offering of Common Stock at
a Net Price below $22 per share. Subject to appropriate adjustments for stock,
dividends, recapitalizations and similar events, the additional shares of Class
D Common Stock to be received by the Gulf Stockholders in this circumstance will
be valued at a minimum of $20 per share and will not exceed 122,227 shares in
the aggregate.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Horsham and Clark have agreements to provide certain management services to
each other from time to time. Clark has established trade credit with various
suppliers of its petroleum requirements, occasionally requiring the guarantee of
Horsham. Fees related to trade credit guarantees totaled $50,000, $100,000 and
$200,000 in 1993, 1994 and 1995, 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. The
Company believes premiums paid to HSM were comparable to premiums that would be
paid to unaffiliated carriers for similar coverage. Premiums paid by Clark to
HSM were $0.6 million and $2.0 million for 1993 and 1994, respectively. No loss
claims have been made by Clark under the policy. The policy was terminated on
December 31, 1994.
The business relationships described above and any future business
relationships between the Company and Horsham will be on terms no less favorable
in any respect than those which could be obtained through dealings with third
parties.
In February 1995, Clark USA sold 9,000,000 shares of Class A Common Stock and
562,500 shares of Class C Common Stock to a Horsham subsidiary for an aggregate
consideration of $135 million. Such funds, together with available cash of
Clark USA and Clark, were used to fund the purchase of the Port Arthur Refinery,
including inventory and spare parts. In connection with the sale of the Class A
Common Stock and the Class C Common Stock, Horsham and its affiliates exchanged
their Common Stock for a combination of Common Stock and Class B Common Stock.
Thereafter, the Horsham subsidiary sold 8,000,000 of such shares of Class A
Common Stock and 500,000 of such shares of Class C Common Stock to Tiger for
$120 million. Each share of Class C Common Stock has subsequently been converted
into two shares of Class A Common Stock and Class B Common Stock shares have
been cancelled based on a predetermined ratio tied to Clark USA's 1995 earnings.
44
<PAGE>
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 Refining & Marketing,
Inc. (Incorporated by reference to Exhibit 3.1 filed with Clark Oil
& Refining Corporation Registration Statement on Form S-1
(Registration No. 33-28146))
3.2 Certificate of Amendment to Certificate of Incorporation of Clark
Refining & Marketing, Inc. (Incorporated by reference to Exhibit 3.2
filed with Clark Oil & Refining Corporation Annual Report on Form
10-K (Registration No. 1-11392))
3.3 By-laws of Clark Refining & Marketing, Inc. (Incorporated by
reference to Exhibit 3.2 filed with Clark Oil & Refining Corporation
Registration Statement on Form S-1 (Registration No. 33-28146))
4.1 Indenture between Clark Refining & Marketing, Inc. (formerly Clark
Oil & Refining Corporation) and NationsBank of Virginia, N.A.
(formerly Sovran Bank, N.A.) including the form of 10 1/2% Senior
Notes due 2001 (Incorporated by reference to Exhibit 4.1 filed with
Clark Oil & Refining Corporation Registration Statement on Form S-1
(File No. 33-43358))
4.2 Supplemental Indenture between Clark Refining & Marketing, Inc. and
NationsBank of Virginia, N.A., dated February 17, 1995 (Incorporated
by reference to Exhibit 4.4 filed with Clark USA, Inc. Annual
Report on Form 10-K for the year ended December 31, 1994) (File No.
33-59144))
4.3 Indenture between Clark Refining & Marketing, Inc. (formerly Clark
Oil & Refining Corporation) and NationsBank of Virginia, N.A.
including the form of 9 1/2% Senior Notes due 2004 (Incorporated by
reference to Exhibit 4.1 filed with Clark Oil & Refining Corporation
Registration Statement on Form S-1 (File No. 33-50748))
4.4 Supplemental Indenture between Clark Refining & Marketing, Inc. and
NationsBank of Virginia, N.A., dated February 17, 1995
(Incorporated by reference to Exhibit 4.6 filed with Clark USA, Inc.
Annual Report on Form 10-K for the year ended December 31, 1994)
(File No. 33-59144))
10.1 Amended and Restated Credit Agreement, dated as of April 19, 1995
(the "Amended and Restated Credit Agreement"), among Clark Refining
& Marketing, Inc., as Borrower, Bank of America National Trust and
Savings Association, as Administrative Agent, Bankers Trust Company,
as Documentation Agent, The Toronto-Dominion Bank, as Syndication
Agent, BA Securities, Inc., as Technical Agent , and the other
financial institutions party thereto (Incorporated by reference to
Exhibit 10.1 filed with Clark USA, Inc. Form 8-K, dated December 1,
1995 (File No. 33-59144))
45
<PAGE>
10.2 First Amendment to Amended and Restated Credit Agreement, dated as
of June 14, 1995 (Incorporated by reference to Exhibit 10.2 filed
with Clark USA, Inc. Form 8-K, dated December 1, 1995 (File No.
99-59144))
10.3 Second Amendment to Amended and Restated Credit Agreement, dated as
of November 27, 1995 (Incorporated by reference to Exhibit 10.3
filed with Clark USA, Inc. Form 8-K, dated December 1, 1995 (File
No. 33-59144))
10.1 Clark Refining & Marketing, Inc. Stock Option Plan (Incorporated by
reference to 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 (Incorporated by reference
to Exhibit 10.6 filed with Clark Oil & Refining Corporation Annual
Report on Form 10-K for the year ended December 31, 1989 (Commission
File No. 1-11392))
10.3 Employment Agreement of Bradley D. Aldrich. (Incorporated by
reference to Exhibit 10.4 filed with Clark USA, Inc. Annual Report
on Form 10-K for the year ended December 31, 1994 (File No. 33-
59144))
10.40 Amended and Restated Asset Sale Agreement, dated as of August 16,
1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing,
Inc., (Incorporated by reference to Exhibit 10.3 filed with Clark
USA, Inc. Current Report on Form 8-K, dated February 27, 1995
(Registration No. 33-59144))
10.41 Chemical Facility Lease with Option to Purchase (Incorporated by
reference to Exhibit 10.9.2 filed with Clark USA, Inc. Registration
Statement on Form S-1 (Registration No. 33-84192))
10.42 Sublease of Chemical Facility Lease (Incorporated by reference to
Exhibit 10.9.3 filed with Clark USA, Inc. Registration Statement on
Form S-1 (Registration No. 33-84192))
10.43 PADC Facility Lease with Option to Purchase (Incorporated by
reference to Exhibit 10.9.4 filed with Clark USA, Inc. Registration
Statement on Form S-1 (Registration No. 33-84192))
10.44 Supply Agreement for the Chemical Facility (Incorporated by
reference to Exhibit 10.9.5 filed with Clark USA, Inc. Registration
Statement on Form S-1 (Registration No. 33-84192))
10.45 Services Agreement for the Chemical Facility (Incorporated by
reference to Exhibit 10.9.6 filed with Clark USA, Inc. Registration
Statement on Form S-1 (Registration No. 33-84192))
10.46 Supply Agreement for the PADC Facility (Incorporated by reference to
Exhibit 10.9.7 filed with Clark USA, Inc. Registration Statement on
Form S-1 (Registration No. 33-84192))
10.47 Services Agreement for the PADC Facility (Incorporated by reference
to 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 1, 1995, Clark USA, Inc. completes mergers with subsidiaries of
Occidental Petroleum Corporation and Gulf Resources Corporation
46
<PAGE>
GLOSSARY OF TERMS
Refining
API Gravity - A density measure of heavy or light crude oil
Alkylation Unit - Also known as the alky unit; a refinery unit that uses
hydrofluoric acid as a catalyst to combine lower value
products from the FCC unit and purchased gases (isobutane) to
produce gasoline.
BPD - Barrels per day
Barrel (Bbl) - A common unit of measure in the oil industry which equates to
42 gallons
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 with product from the
crude separator process to make finished gasoline and diesel
fuel; these may include natural gasoline, FCC gasoline,
ethanol, reformate or butane, among others
By-products - Products that result from extracting high value products such
as gasoline, jet and diesel fuel from crude oil: these
include black oil, sulfur, propane, coke and other products.
CP - Convenience products such as beverages, cigarettes and
snacks.
Catalyst - A substance that alters, accelerates or instigates chemical
changes, but is neither produced nor consumed in the process.
Coker Unit - A refinery unit which takes the lowest value component of
crude oil after higher value products are removed, further
extracts more valuable products and converts the rest into
petroleum coke.
Crack Spread - A simplified model that measures the difference between the
price for finished products and crude oil. A 3/2/1 crack
spread is often referenced and represents the approximate
revenue and cost breakdown of a barrel of crude being, three
barrels of crude produce two barrels of gasoline and one
barrel of diesel fuel.
Crude Unit - The initial refinery unit that the crude oil runs through
where it is heated and 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/./F
gasoline 90/./F - 220/./F
naphtha 220/./F - 315/./F
kerosene 315/./F - 450/./F
diesel 450/./ - 650/./F
gas oil 650/./F - 800/./F
residue 800/./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.
47
<PAGE>
Djeno Crude Oil - Also known as Djeno Melange crude oil. A heavy sweet crude
oil from the Republic of the Congo.
Djeno Melange - See Djeno crude oil.
Dual Train - Two parallel paths for refining hydrocarbons. Each path
contains the same or similar processing equipment (i.e. most
major processing units are present in each path with some
minor variations in the processing units and/or capacities.
ETBE - Ethyl tertiary butyl ether, an oxygenate blendstock. Ethers
are oxygen containing organic compounds and one added to
gasoline to increase oxygen content and boost octane
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
grade products from the crude unit and converts them to
gasoline through a chemical process using catalysts.
Feedstock - Hydrocarbon compounds, such as crude oil and natural gas
liquids, that are processed and blended into refined
products.
G & A - General and administrative expenses.
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.
Guard Basin - Water collection area for storm water, oil runoff, etc.
Heavy Crude Oil - A crude oil that is relatively viscous in texture which is
harder to process yields less high value products such as
gasoline and diesel fuel, but is cheaper.
Isomax Unit - Similar to FCC unit.
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.
M - Thousands.
MM - Millions.
MTBE - Methyl tertiary butyl ether, an oxygenate blendstock. Ethers
are oxygen containing organic compounds and are added to
gasoline to increase oxygen content and boost octane.
Maya - A heavy, sour crude oil from Mexico.
Naphtha - Natural or unrefined gasoline with a low octane rating that
is separated out of the crude oil during the refining
process.
48
<PAGE>
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.
PMPS - Per month per store.
Petroleum Coke - Also known as coke; a coal like substance that can be burned
to generate electricity or used as a hardener in concrete.
Platformer - A refinery unit that takes low octane gasoline and converts
it to high octane gasoline by using a platinum / rhenium
catalyst. Also known as a reformer.
Production - The finished products such as gasoline and diesel fuel which
are converted from crude oil by a refinery.
Rated Crude Oil
Capacity - The crude oil processing capacity of a refinery that is
established by engineering design.
Refined products - The hydrocarbon compounds, such as gasoline, diesel fuel, jet
fuel and residual fuel, that are produced by a refinery.
Refinery
conversion - The ability of a refinery to produce high-value lighter
refined products such as gasoline, diesel fuel and jet fuel
from crude oil and other feedstocks.
Refining margin - The difference between crude oil and other feedstock,
intermediate stock and blendstock component costs and the
cost of refined products sold, expressed in dollars per
barrel of refined product .
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 derivative of crude oil
obtained from the basic stages of refining operations. Also
known as atmospheric or vacuum tower bottoms.
Single Train - A standard refinery configuration consisting of crude unit
and several downstream conversion units with no significant
amount of redundancy in such units.
Sour Crude Oil - A crude oil that is relatively high in sulfur content,
requiring additional processing to remove the sulfur, but is
typically less expensive.
Sweet Crude Oil - A crude oil that is relatively low in sulfur content,
requiring less processing to remove the sulfur, but is
typically 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 modifies 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.
49
<PAGE>
Turnaround - Shutting down various units of a refinery to service, clean
and refurbish the components; maintenance turnaround occurs
every three to four years or as needed.
Unifier Unit - A refinery unit that removes sulfur, nitrogen and other
impurities from the naphtha separated at the crude unit.
Unusual Items - Those charges or credits not occurring in the normal course
of business.
Utilization - Ratio of total refinery production to the rated crude oil
capacity of the refinery.
WTI - West Texas Intermediate crude oil, a light; sweet crude oil
that is used as a benchmark for other crude oil types.
Yield - The percentage of refined products that are produced from
feedstocks
50
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Clark Refining & Marketing, Inc. and Subsidiaries:
Annual Financial Statements
Report of Independent Accountants...................................................................................... 52
Consolidated Balance Sheets as of December 31, 1994 and 1995........................................................... 53
Consolidated Statements of Earnings for the years ended December 31, 1993, 1994 and 1995............................... 54
Consolidated Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995............................. 55
Consolidated Statement of Stockholder's Equity for the years ended December 31, 1993, 1994 and 1995.................... 56
Notes to Consolidated Financial Statements............................................................................. 57
</TABLE>
51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark Refining & Marketing, Inc:
We have audited the accompanying consolidated balance sheets of Clark Refining
& Marketing, Inc. and Subsidiary, (a Delaware corporation and wholly-owned
subsidiary of Clark USA, Inc.), as of December 31, 1994 and 1995 and the related
consolidated statements of earnings, stockholder's equity and cash flows for
each of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Clark Refining &
Marketing, Inc. and Subsidiary as of December 31, 1994 and 1995 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
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 2, 1996
52
<PAGE>
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Reference December 31, December 31,
ASSETS Note 1994 1995
--------- ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 2 $105,450 $ 60,477
Short-term investments 2, 3 28,658 46,116
Accounts receivable 77,794 179,200
Inventories 2, 4 151,466 290,444
Prepaid expenses and other 15,659 18,875
-------- ----------
Total current assets 379,027 595,112
PROPERTY, PLANT AND EQUIPMENT 2, 5 429,805 549,292
OTHER ASSETS 2, 6 50,717 43,930
-------- ----------
$859,549 $1,188,334
======== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable 7 $165,610 $ 315,236
Accrued expenses and other 8, 9 41,639 41,501
Accrued taxes other than income 41,407 45,240
-------- ----------
Total current liabilities 248,656 401,977
LONG-TERM DEBT 8, 9 400,734 420,441
DEFERRED INCOME TAXES 2, 13 29,178 22,861
OTHER LONG-TERM LIABILITIES 12 18,129 38,937
CONTINGENCIES 16 -- --
STOCKHOLDER'S EQUITY:
Common stock ($.01 par value per
share; 1,000 shares authorized
and 100 shares issued and
outstanding) -- --
Paid-in capital 10, 15 30,000 195,610
Retained earnings 3, 7 132,852 108,508
-------- ----------
Total stockholder's equity 162,852 304,118
-------- ----------
$859,549 $1,188,334
======== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
53
<PAGE>
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
Reference -------------------------------------
Note 1993 1994 1995
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
NET SALES AND OPERATING REVENUES $ 2,263,410 $ 2,440,028 $ 4,486,083
EXPENSES:
Cost of sales (1,936,563) (2,092,516) (4,018,274)
Operating expenses (218,087) (237,332) (395,039)
General and administrative
expenses (27,533) (33,990) (30,618)
Depreciation 2 (23,402) (26,540) (31,435)
Amortization 2, 6 (11,907) (10,797) (12,001)
Inventory recovery of (write-down
to) market value 4 (26,500) 26,500 --
----------- ----------- -----------
(2,243,992) (2,374,675) (4,487,367)
----------- ----------- -----------
OPERATING INCOME (LOSS) 19,418 65,353 (1,284)
Interest and financing costs, net 8 (29,933) (37,547) (39,916)
Other income 11 11,370 -- --
----------- ----------- -----------
EARNINGS (LOSS) BEFORE INCOME TAXES
AND CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE 855 27,806 (41,200)
Income tax benefit (provision) 2, 13 513 (9,732) 15,656
----------- ----------- -----------
EARNINGS (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE 1,368 18,074 (25,544)
Cumulative effect of change in
accounting principle (net of
tax benefit of $5,992) 12 (9,595) -- --
----------- ----------- -----------
NET EARNINGS (LOSS) $ (8,227) $ 18,074 $ (25,544)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
54
<PAGE>
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
For the year ended December 31,
---------------------------------------
1993 1994 1995
--------- -------- ----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ (8,227) $ 18,074 $ (25,544)
Cumulative effect of change in accounting principle 9,595 -- --
Adjustments:
Depreciation 23,402 26,540 31,435
Amortization 13,025 11,973 17,370
Realized (gain) loss on sales of investments (373) 5,396 --
Share of earnings of affiliates, net of dividends 197 (468) (1,413)
Deferred income taxes (3,536) 9,732 (15,656)
Inventory (recovery of) write-down to market value 26,500 (26,500) --
Other 1,271 1,271 1,385
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses and other 2,328 (21,135) (110,966)
Inventories (23,378) 22,995 (138,978)
Accounts payable, accrued expenses, taxes other than
income, and other 27,627 5,859 156,814
--------- --------- ---------
Net cash (used in) provided by operating activities 68,431 53,737 (85,553)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (114,534) (89,987) (41,500)
Sales of short-term investments 168,843 187,785 25,942
Expenditures for property, plant and equipment (67,938) (100,276) (42,093)
Expenditures for turnaround (20,577) (11,191) (6,525)
Refinery acquisition expenditures -- (13,514) (71,776)
Proceeds from disposals of property, plant and equipment 4,582 5,941 1,866
Payment received on CMAT, Inc. note 10,000 -- --
Other investing activity (201) -- --
--------- --------- ---------
Net cash used in investing activities (19,825) (21,242) (134,086)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from capital lease transactions -- -- 24,301
Long-term debt payments (775) (585) (1,620)
Capital contribution -- -- 165,610
Deferred financing costs (663) (4,804) (13,625)
Other 299 -- --
--------- --------- ---------
Net cash provided by (used in) financing activities (1,139) (5,389) 174,666
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 47,467 27,106 (44,973)
CASH AND CASH EQUIVALENTS, beginning of period 30,877 78,344 105,450
--------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period $ 78,344 $ 105,450 $ 60,477
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
55
<PAGE>
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDER'S EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Paid-in Retained
Stock Capital Earnings
------- -------- --------
<S> <C> <C> <C>
BALANCE - January 1, 1993 -- 30,000 124,205
Net Loss -- (8,227)
------- -------- --------
BALANCE - December 31, 1993 -- 30,000 115,978
Net Earnings -- -- 18,074
Change in unrealized short-term investment
gains and losses, net of tax benefit of $700 -- -- (1,200)
------- -------- --------
BALANCE - December 31, 1994 -- 30,000 132,852
Net Loss -- -- (25,544)
Capital contributions -- 165,610 --
Change in unrealized short-term investment
gains and losses, net of tax provision of $700 -- -- 1,200
------- -------- --------
BALANCE - December 31, 1995 $ -- $195,610 $108,508
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
56
<PAGE>
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994, AND 1995
(TABULAR DOLLAR AMOUNTS IN THOUSANDS OF US DOLLARS)
1. GENERAL
Clark Refining & Marketing, Inc., a Delaware corporation ("Clark" or "the
Company"), is wholly owned by Clark USA, Inc., a Delaware corporation ("Clark
USA"). Clark's principal operations include crude oil refining, wholesale and
retail marketing of refined petroleum products and retail marketing of
convenience store items in the Central United States.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
The Company's earnings and cash flow from operations are primarily dependent
upon processing crude oil and selling quantities of refined petroleum products
at margins sufficient to cover operating expenses. Crude oil and refined
petroleum products are commodities, and factors largely out of the Company's
control can cause prices to vary, in a wide range, over a short period of time.
This potential margin volatility can have a material effect on financial
position, current period earnings and cash flow.
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 an original 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.
The Company has reclassified certain items in its 1993 and 1994 Consolidated
Financial Statements to include checks issued which have not yet cleared the
bank account into accounts payable. Such negative balances included in
"Accounts payable" were $17.6 million, $10.2 million and $12.1 million at
December 31, 1993, 1994 and 1995 respectively.
Cash and cash equivalents include $45.0 million of debt securities whose cost
approximated market value at December 31, 1995 (1994 - none) and for which there
were no realized gains or losses recorded in the period.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration
of credit risk consist primarily of trade receivables. Credit risk on trade
receivables is minimized as a result of the credit quality of the Company's
customer base and industry collateralization practices. As of December 31, 1995
the Company had $17.0 million due from Chevron USA Products Co. and 1995 sales
to Chevron of $448.8 million.
57
<PAGE>
Inventories
Inventories are stated at the lower of cost, predominantly using the last-in,
first-out "LIFO" method, or market on an aggregate basis. To limit risk related
to price fluctuations, Clark employs risk strategies using crude oil and refined
products futures and options contracts to manage potentially volatile market
movements on aggregate physical and contracted inventory positions. At December
31, 1995, Clark's open contracts representing 1.7 million barrels of crude and
products had terms extending into December, 1996. The Company considers all
futures and options contracts to be part of its risk management strategy.
Unrealized gains and losses are adjusted to market value and recognized as a
product cost component unless the contract can be identified as a price risk
hedge of specific inventory positions or open commitments, in which case the
unrealized gain or loss is deferred and recognized as an adjustment to the
carrying amount of petroleum inventories or accounts payable if related to fixed
commitments. Deferred gains and losses on these contracts are recognized as an
adjustment to product cost when such inventories are sold or consumed. At
December 31, 1995, the Company had net unrealized losses on open futures and
option contracts of $0.4 million all of which have been recognized in
operations. At December 31, 1994, the Company had net unrealized losses on open
futures and option contracts, $2.0 million of which was deferred.
Property, Plant and Equipment
Property, plant and equipment additions are recorded at cost. 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.
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.
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 121 concerning "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
The standard requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable with future cash flows. The Company will adopt this standard
beginning January 1, 1996. The Company believes that if a project initiated to
produce low sulfur diesel fuel at the Hartford refinery ("DHDS Project"), which
was delayed in 1992 due to an expectation of narrow differentials between low
and high sulfur diesel fuel, should not proceed due to continued relatively
narrow price differentials between low and high sulfur diesel fuel, future cash
flows from the asset may not support the cost expended to date of approximately
$25 million. The Company is currently still undertaking analysis to determine
the actual impact of this standard, but does not believe, with the possible
exception of the DHDS Project, that adoption of this new standard will have a
material impact on the Company's earnings and financial position.
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 generally 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.
58
<PAGE>
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 for 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
1995 were $5.5 million (December 31, 1994 - $3.4 million; 1993 - $2.7 million).
Clark provides certain benefits for most retirees once they have reached a
specified age and 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 certain debt securities to be shown at
fair value on the balance sheet. The Company's short-term investments are all
considered "Available-for-Sale" and are carried at fair value with the resulting
unrealized gain or loss (net of applicable taxes) shown as a component of
retained earnings.
Short-term investments consisted of the following:
<TABLE>
<CAPTION>
1994 1995
---------------------------------- ----------------------------------
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 $46,116 $ -- $46,116
</TABLE>
The net unrealized position at December 31, 1995 included gains of $0.1
million and losses of $0.1 million (1994 - gains of $0.0 million and losses of
$1.9 million).
59
<PAGE>
The contractual maturities of the short-term investments at December 31, 1995
were:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE
COST FAIR VALUE
--------- ----------
<S> <C> <C>
Due in one year or less $26,980 $26,988
Due after one year through five years 19,136 19,128
------- -------
$46,116 $46,116
======= =======
</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 year ended December 31, 1995, the proceeds from sales of Available-for-
Sale securities were $25.9 million with no realized gains or losses recorded for
the period. For the same period in 1994, the proceeds from the sale of short-
term investments were $187.8 million with $5.4 million of realized losses, and
in 1993, proceeds from the sale of short-term investments were $168.8 million
with realized gains of $0.4 million. Realized gains and losses are presented in
"Interest and financing costs, net" and are computed using the specific
identification method.
The change in the net unrealized holding gains or losses on Available-for-Sale
securities for the year ended December 31, 1995, was a gain of $1.9 million
($1.2 million after taxes). For the year ended December 31, 1994, there was a
net unrealized holding loss of $1.9 million ($1.2 million after taxes).
Unrealized gains or losses were not recognized in 1993 as SFAS 115 had not yet
been adopted and, therefore, the carrying value at that time was the adjusted
cost.
4. INVENTORIES
The carrying value of inventories consisted of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
Crude oil......................... $ 42,760 $ 90,635
Refined products and blendstocks.. 87,957 163,915
Convenience products.............. 14,904 20,532
Warehouse stock and other......... 5,845 15,362
-------- --------
$151,466 $290,444
======== ========
</TABLE>
The market value of these inventories at December 31, 1995 was approximately
$5.4 million above the carrying value (1994 - $1.9 million above the carrying
value). 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
which was recorded in 1993 due to falling crude oil and product prices.
60
<PAGE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
Property, plant and equipment consisted of the following:
1994 1995
--------- ---------
<S> <C> <C>
Land.................................................. $ 17,933 $ 20,006
Refineries............................................ 311,479 418,675
Retail stores......................................... 164,518 187,921
Product terminals and pipelines....................... 44,261 59,151
Other................................................. 10,416 11,346
--------- ---------
548,607 697,099
Accumulated depreciation and amortization............. (118,802) (147,807)
--------- ---------
$ 429,805 $ 549,292
========= =========
</TABLE>
At December 31, 1995, property, plant and equipment included $52.2 million
(1994 - $103.6 million) of construction in progress. Capital lease assets of
$23.9 million (1994 - $0.2 million) are included in property, plant and
equipment at December 31, 1995.
6. OTHER ASSETS
Other assets consisted of the following:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Deferred financing costs............................. $11,915 $20,255
Deferred turnaround costs............................ 19,719 14,243
Deferred refinery acquisition costs.................. 13,514 --
Investment in non-consolidated affiliates............ 4,878 6,291
Other 691 3,141
------- -------
$50,717 $43,930
======= =======
</TABLE>
Amortization of deferred financing costs for the year ended December 31,
1995, was $5.2 million (1994 - $1.2 million; 1993 - $1.2 million). Amortization
of turnaround costs for the year ended December 31, 1995 was $12.0 million (1994
- - $10.8 million; 1993 - $11.8 million).
Deferred financing costs at December 31, 1995 reflect costs incurred
during the year due to the Port Arthur acquisition financing, working capital
agreement and related consent agreements. In addition, the deferred refinery
acquisition costs were capitalized upon the purchase of the Port Arthur refinery
and depreciated over the useful life of the assets acquired (see Note 14
"Acquisition of Port Arthur Refinery").
7. WORKING CAPITAL FACILITY
At all times during 1995, Clark had in place a working capital facility which
provided a revolving line of credit principally for the issuance of letters of
credit which are used primarily for securing purchases of crude oil, other
feedstocks and refined products, and for limited cash borrowings. This facility
is collateralized by substantially all of Clark's current assets and certain
intangibles. In connection with the Port Arthur refinery acquisition (see Note
14, Acquisition of Port Arthur Refinery), Clark entered into a new three year
revolving credit facility used primarily for the issuance of letters of credit
to secure purchases of crude oil. The amount of the facility is the lesser of
$400 million or the amount available under a defined borrowing base,
representing specified percentages of cash, investments, accounts receivable,
inventory and other working capital items ($364.6 million at December 31, 1995).
Clark is required to comply with certain financial covenants including
maintaining defined levels of working capital, cash, tangible net worth, maximum
indebtedness to tangible net worth and a minimum ratio of adjusted cash flow to
debt service. At December 31, 1995, $221.0 million of the line of credit was
utilized for letters of credit, of which $91.4 million supports commitments for
future deliveries of petroleum products. At December 31, 1994, $110.0 million
of the line of credit was utilized for letters of credit, of which $48.5 million
61
<PAGE>
supported commitments for future deliveries of petroleum products There were no
direct borrowings under the facility at December 31, 1994 or 1995.
8. LONG-TERM DEBT
<TABLE>
<CAPTION>
1994 1995
-------- --------
<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 23,498
-------- --------
400,771 423,498
Less current portion 37 3,057
-------- --------
$400,734 $420,441
======== ========
</TABLE>
The estimated fair value of the long-term debt at December 31, 1995 was $442.0
million, (1994 - $397.6 million), determined using quoted market prices for
these issues.
The 9-1/2% Senior Notes 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 at the Company's option
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, limitations on the payment of amounts
to related parties, limitations on the level of debt, provisions related to
change of control and incurrence of liens (see Note 15 "Certain Financings").
During 1995, Clark entered into two sale/leaseback lease transactions for a
total of $24.3 million. These transactions were recorded as capital leases and
interest expense of $1.0 million was incurred during the year. Each capital
lease has a term of five years. One lease has a fixed rate of 8.36% and the
other lease rate floats at a spread of 2.25% over the London Interbank Offer
Rate (LIBOR).
The scheduled maturities of long-term debt during the next five years are (in
thousands): 1996 - $3,057 (included in "Accrued expenses and other"); 1997 -
$3,045; 1998 - $3,282, 1999 - $3,296; 2000 - $10,750; 2001 and thereafter -
$400,068.
Interest and financing costs
Interest and financing costs, net, included in the statements of earnings,
consisted of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Interest expense........................ $40,479 $40,979 $42,150
Financing costs......................... 1,593 1,178 5,244
Interest income......................... (9,363) (2,201) (6,074)
------- ------- -------
32,709 39,956 41,320
Capitalized interest.................... (2,776) (2,409) (1,404)
------- ------- -------
Interest and financing costs, net....... $29,933 $37,547 $39,916
======= ======= =======
</TABLE>
Cash paid for interest in 1995 was $42.2 million (1994 - $40.3 million; 1993 -
$40.1 million).
Accrued interest payable at December 31, 1995 of $6.8 million (December 31,
1994 - $6.9 million) is included in "Accrued expenses and other."
62
<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 2015, 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 equipment at the refineries, retail stores, and the
general office. These lease terms range from 1 to 8 years with the option to
purchase some of 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, 1995, future
minimum lease payments under capital leases and non-cancelable operating leases
were as follows (in millions): 1996 - $14.0; 1997 - $10.7; 1998 - $10.5; 1999 -
$9.8; 2000 - $16.3; and $56.9 in the aggregate thereafter. Rental expense
during 1995 was $9.1 million (1994 - $7.6 million; 1993 - $3.4 million).
10. RELATED PARTY TRANSACTIONS
Transactions of significance with related parties not disclosed elsewhere in
the footnotes are detailed below:
Clark USA, Inc.
Clark received capital contributions of $165.6 million from its parent
company, Clark USA, during 1995. Upon the issuance of stock in the first
quarter of 1995, Clark USA contributed $150.0 million for the purchase of the
Port Arthur refinery (see Note 14 - "Acquisition of Port Arthur Refinery") and
also contributed $9.2 million for operating purposes. In addition, from the
proceeds of debt issued late in 1995, Clark USA contributed $6.4 million in
December of 1995 and $33.4 million in January of 1996 to Clark.
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. Horsham owned a majority interest
in Clark USA from 1988 to 1995. Exercise prices reflect the market value of
Horsham stock on the date of issuance. As of December 31, 1995, there were
154,500 options outstanding to purchase shares of Horsham at prices ranging from
$7.19 to $11.88 per share. The trust held 214,506 Horsham shares at December
31, 1995.
HSM Insurance Inc.
Clark paid premiums of $2.0 million in 1994, and $0.6 million in 1993, to HSM
Insurance, Inc. (a subsidiary of Horsham) 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 and no premiums were paid to Horsham in 1995.
63
<PAGE>
11. OTHER INCOME (EXPENSE)
Other income (expense) consisted of the following:
<TABLE>
<S> <C> <C> <C>
1993 1994 1995
------- ---- ----
Drexel litigation................ $ 8,468 $ -- $ --
Sale of "non-core" retail stores. 2,902 -- --
------- ---- ----
$11,370 $ -- $ --
======= ==== ====
</TABLE>
Litigation Settlements
In 1993, 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.
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. 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 post retirement
health and life insurance plans:
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees $12,617 $12,045
Fully eligible plan participants 914 1,288
Other plan participants 5,419 20,025
------- -------
Total 18,950 33,358
Accrued postretirement benefit cost -- --
Less: Plan assets at fair value -- --
Less: Unrecognized net loss 821 1,921
------- -------
Accrued postretirement benefit liability $18,129 $31,437
======= =======
</TABLE>
The components of net periodic postretirement benefit costs are as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- ------
<S> <C> <C> <C>
Service Costs $ 620 $ 415 $ 999
Interest Costs 1,270 1,271 2,174
------- ------- ------
Net periodic postretirement benefit cost $ 1,890 $ 1,686 $3,173
======= ======= ======
</TABLE>
In relation to the acquisition of the Port Arthur refinery, the Company
assumed a liability of $11.9 million for the projected postretirement
obligation.
A discount rate of 7.25% (1994 - 8.25%) was assumed as well as a 4.25% (1994 -
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 12.0% in 1995, grading down to an ultimate rate in 2001 of 5.25%. 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, 1995, by $5.2 million and increase the annual aggregate service and
interest costs by $0.5 million.
64
<PAGE>
13. INCOME TAXES
Clark provides for 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 bases of assets and liabilities.
The income tax provision (benefit) (including the impact of the accounting
change in 1993) is summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Earnings (loss) before provision for
income taxes......................... $(14,732) $27,806 $(41,200)
======== ======= ========
Current provision (benefit) - Federal.. $ 1,204 $ -- $ --
- State.... 1,819 -- --
-------- ------- --------
3,023 -- --
-------- ------- --------
Deferred provision (benefit) - Federal. (6,866) 7,755 (15,656)
- State... (2,662) 1,977 --
-------- ------- --------
(9,528) 9,732 (15,656)
-------- ------- --------
Income tax provision (benefit)......... $ (6,505) $ 9,732 $(15,656)
======== ======= ========
</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>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Federal taxes computed at 35% (34%
in 1993)................................. $(5,009) $ 9,732 $(14,420)
State income taxes, net of federal effect.. (556) 1,285 (1,649)
Nontaxable dividend income................. (1,276) (1,453) (2,172)
Other items, net........................... 336 168 2,585
------- ------- --------
Income tax provision (benefit)............. $(6,505) $ 9,732 $(15,656)
======= ======= ========
</TABLE>
65
<PAGE>
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 1995.
<TABLE>
<CAPTION>
1994 1995
------- --------
<S> <C> <C>
Deferred tax liabilities:
Property, plant and equipment.... $62,416 $ 79,191
Turnaround costs................. 11,983 5,559
Inventory........................ 13,922 19,204
Other............................ 1,760 4,297
------- --------
90,081 108,251
------- --------
Deferred tax assets:
Alternative minimum tax credit... 19,215 19,376
Trademarks....................... 4,491 4,491
Environmental and other costs.... 12,166 22,958
Tax loss carryforwards........... 13,766 36,438
Other............................ 2,626 2,127
------- --------
52,264 85,390
------- --------
Net deferred tax liability......... 37,817 22,861
Current asset (liability).......... (8,639) --
------- --------
Deferred taxes (noncurrent)........ $29,178 $ 22,861
======= ========
</TABLE>
As of December 31, 1995, Clark has made payments of $19.4 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 $90.1 million and Federal tax credit carryforwards in the amount
of $1.4 million, such carryforwards have a carryover period of 15 years and are
available to reduce future tax liabilities through the year ending December 31,
2010. No cash tax refunds or payments were received or paid during 1995 (1994 -
tax refund of $2.9 million; 1993 - tax payment of $0.7 million).
Based on management's assessment, it is more likely than not that the deferred
tax assets will be realized through future taxable earnings resulting from
realization of deferred tax liabilities.
14. 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 (excluding acquired hydrocarbon and non-hydrocarbon inventories of
$121.7 million and assumed liabilities of $25.1 million) plus related
acquisition costs of $14.9 million which were fully allocated to the acquired
assets and liabilities based upon their estimated fair values. The assumed
liabilities of $25.1 million are considered non-cash activity for purposes of
the Statement of Cash Flows. The total cost of the acquisition was accounted
for using the purchase method of accounting with $110.0 million allocated to the
refinery long-term assets and $121.7 million charged to current assets for
hydrocarbon and non-hydrocarbon inventories. Port Arthur refinery operating
results for ten months are included in Clark's results of operations for the
year ended December 31, 1995.
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 are calculated annually and the appropriate
liability, if any, will be recorded at that time. At December 31, 1995 Clark
had no obligation to Chevron relating to the contingent payment agreement.
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. Clark accrued $7.5 million as part of the acquisition
for the expected cost of remediating pipe trenches and the recovery of free
phase hydrocarbons in its responsibility area of the Port Arthur refinery.
66
<PAGE>
15. CERTAIN FINANCINGS
On February 27, 1995, Clark USA obtained a portion of the funds necessary to
finance the Port Arthur acquisition from a subsidiary of its major shareholder,
The Horsham Corporation, a Quebec corporation ("Horsham"). The Company sold
9,000,000 shares of Class A Common Stock, 562,500 shares of Class B Common Stock
and 562,500 shares of Class C Common stock for an aggregate consideration of
$135 million. Subsequently, the Horsham subsidiary sold 8,000,000 shares of
Class A Common Stock and 500,000 shares of Class C Common Stock to Tiger
Management Corporation for $120 million. Clark USA subsequently contributed
$150 million to Clark for the purchase of the Port Arthur refinery.
In connection with the financing and closing of the Port Arthur acquisition,
Clark received consent 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. In connection with the Port Arthur
acquisition and the above financing transactions, Clark entered into a new three
year working capital facility (see Note 7 "Working Capital Facility").
16. CONTINGENCIES
Clark has been named as a defendant in forty civil lawsuits filed by residents
of Hartford, Illinois, seeking unquantified damages for the presence of gasoline
in the soil and groundwater beneath the plaintiffs' properties. Shell Oil has
been named as a co-defendant in six of the above-referenced lawsuits. The
plaintiffs in thirty-four of the lawsuits, which are pending solely against
Clark, have all voluntarily dismissed their lawsuits without prejudice. The
plaintiffs have one year from such dismissal in which to refile their claims.
Clark and Shell have filed motions to dismiss the six remaining cases.
The United States Equal Employment Opportunity Commission ("EEOC") has filed a
class action lawsuit against Clark alleging that Clark had engaged in a pattern
or 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. The plaintiff class consists of 40 class members and is now
tentatively closed. Discovery is ongoing. A scheduling order has been entered
indicating that a trial will not be held before 1997, unless earlier dismissed.
Clark believes the allegations to be without merit and intends to vigorously
defend this action.
A Petition was filed in Jefferson County, Texas by twenty-four individual
plaintiffs who were Chevron employees who did not receive offers of employment
by Clark at the time of purchase of the Port Arthur refinery. Chevron and the
outplacement service retained by Chevron are also named as defendants. An
Amended Petition has now been filed increasing the number of plaintiffs to
forty. Clark filed an Answer denying all material allegations of the Amended
Petition. Subsequent to the filing of the lawsuit, the plaintiffs have each
filed individual charges with the EEOC and the Texas Commission of Human Rights.
Clark believes the allegations to be without merit and intends to vigorously
defend this action.
A class action lawsuit was filed against Clark and two Clark employees on
behalf of purported plaintiff classes including residents of Blue Island,
Illinois and Eisenhower High School students arising out of the Blue Island
refinery spent catalyst release of October 7, 1994. The complaint alleges
claims based on common law nuisance, negligence, wilful and wanton negligence
and the Illinois Family Expenses Act. Plaintiffs seek to recover damages in an
unspecified amount for alleged medical expenses, diminished property values,
pain and suffering and other damages. Plaintiffs also seek punitive damages in
an unspecified amount. Clark believes the alleged claims to be without merit
and intends to vigorously defend this action.
Clark is subject to various other legal proceedings related to 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
67
<PAGE>
has not been made, will not have a material adverse effect on its financial
position, however, an adverse outcome of any one or more of these matters could
have a material effect on quarterly or annual operating results or cash flows
when resolved in a future period.
68
<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
President, Chief Executive Officer and
Chief Operating Officer
March 27, 1996
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
/s/ C. William D. Birchall Director
- ----------------------------
C. William D. Birchall
/s/ Gregory C. Wilkins Director
- ----------------------------
Gregory C. Wilkins
/s/ Maura J. Clark Executive Vice President, Corporate
- ---------------------------- Development and Chief Financial Officer
Maura J. Clark (Principal Financial Officer)
/s/ Dennis R. Eichholz Controller and Treasurer (Principal
- ---------------------------- Accounting Officer)
Dennis R. Eichholz
March 27, 1996
69
<PAGE>
Exhibit 12.1
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1991 1992 1993 1994 1995
-------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
EARNINGS AVAILABLE FOR FIXED CHARGES
Pretax earnings $ 59,287 $ 2,949 $ 855 $27,806 $(41,200)
Fixed charges (a) 40,584 45,403 40,429 42,281 49,423
Other (b) 1,254 182 197 (468) (1,413)
-------- ------- ------- -------- ---------
$101,125 $48,534 $41,481 $69,619 $ 6,810
======== ======= ======= ======== =========
FIXED CHARGES
Gross interest expense (c) $ 41,581 $49,277 $42,072 $42,157 $ 47,394
Interest factor attributable
to rent expense 1,124 1,234 1,133 2,533 3,433
-------- ------- ------- -------- ---------
$ 42,705 $50,511 $43,205 $44,690 $ 50,827
======== ======= ======= ======== =========
RATIO OF EARNINGS TO FIXED CHARGES 2.37x 0.96x 0.96x 1.56x 0.13x
======== ======= ======= ======== =========
</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
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 60,477
<SECURITIES> 46,116
<RECEIVABLES> 180,933
<ALLOWANCES> 1,733
<INVENTORY> 290,444
<CURRENT-ASSETS> 595,112
<PP&E> 697,099
<DEPRECIATION> 147,807
<TOTAL-ASSETS> 1,188,334
<CURRENT-LIABILITIES> 401,977
<BONDS> 420,441
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,188,334
<SALES> 4,476,255
<TOTAL-REVENUES> 4,492,157
<CGS> 4,018,274
<TOTAL-COSTS> 4,443,931
<OTHER-EXPENSES> 42,032
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 47,394
<INCOME-PRETAX> (41,200)
<INCOME-TAX> (15,656)
<INCOME-CONTINUING> (25,544)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (25,544)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
