UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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 33-59144
CLARK USA, INC.
(Exact name of registrant as specified in its charter)
Delaware 43-1495734
(State or other jurisdiction (I.R.S. Employer
of 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
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 () No ( )
Number of shares of registrant's common stock, $.01 par value, outstanding
as of August 12, 1996:
Class Shares Outstanding
Common Stock 19,051,818
Class A Common Stock 10,162,509
1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Clark USA, Inc.:
We have reviewed the accompanying consolidated balance sheet of Clark USA,
Inc. (a Delaware corporation) and subsidiaries as of June 30, 1996, and the
related consolidated statements of earnings for the three and six month
periods ended June 30, 1995 and 1996 and cash flows for the six month periods
ended June 30, 1995 and 1996. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical review
procedures to the financial data and making inquiries of persons responsible
for financial and accounting matters. It is substantially less in scope than
an audit in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Clark USA, Inc. and subsidiaries
as of December 31, 1995, and the related consolidated statements of earnings,
stockholders' equity, and cash flows for the year then ended (not presented
herein); and in our report dated February 2, 1996, we expressed an unqualified
opinion on those statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1995 is fairly
stated, in all material respects, in relation to the financial statements from
which it has been derived.
COOPERS & LYBRAND L.L.P.
St. Louis, Missouri,
July 29, 1996
2
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands except per share data)
Reference December 31, June 30,
Note 1995 1996
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $103,729 $82,664
Short-term investments 2 46,116 26,791
Accounts receivable 179,763 174,999
Inventories 3 290,444 335,076
Prepaid expenses and other 22,228 24,595
Advance crude oil purchase receivable 6 6,565 11,612
Total current assets 648,845 655,737
PROPERTY, PLANT AND EQUIPMENT 7 550,872 546,159
ADVANCE CRUDE OIL PURCHASE RECEIVABLE 6 99,345 94,239
OTHER ASSETS 4 65,860 64,960
$1,364,922 $1,361,095
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 307,528 $305,976
Accrued expenses and other 5 46,301 50,905
Accrued taxes other than income 45,242 51,113
Total current liabilities 399,071 407,994
LONG-TERM DEBT 765,030 771,958
DEFERRED INCOME TAXES 7,677 --
OTHER LONG-TERM LIABILITIES 38,937 39,731
CONTINGENCIES 8 -- --
STOCKHOLDERS' EQUITY:
Common stock
Common, $.01 par value, 19,051,818 issued 190 190
Class A Common, $.01 par value, 10,162,509 issued 90 102
Class B Common 6 --
Class C Common 6 --
Paid-in capital 300,057 299,876
Advance crude oil purchase receivable
from stockholders 6 (146,890) (141,481)
Retained earnings (deficit) 2 748 (17,275)
Total stockholders' equity 154,207 141,412
$1,364,922 $1,361,095
The accompanying notes are an integral part of these statements.
3
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
Reference For the three months
Note ended June 30,
1995 1996
NET SALES AND OPERATING REVENUES $1,337,798 $1,334,877
EXPENSES:
Cost of sales (1,204,502) (1,199,129)
Operating expenses (98,210) (99,126)
General and administrative expenses (14,356) (15,141)
Depreciation (7,603) (9,239)
Amortization 4 (2,937) (2,713)
(1,327,608) (1,325,348)
OPERATING INCOME 10,190 9,529
Interest and financing costs, net 2, 4, 5, 6 (14,181) (13,568)
LOSS BEFORE INCOME TAXES (3,991) (4,039)
Income tax benefit 1,512 1,442
NET LOSS $(2,479) $(2,597)
The accompanying notes are an integral part of these statements.
4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands)
For the six months
Reference ended June 30,
Note 1995 1996
NET SALES AND OPERATING REVENUES $2,165,599 $2,475,115
EXPENSES:
Cost of sales (1,963,027) (2,223,683)
Operating expenses (170,663) (199,314)
General and administrative expenses (27,770) (29,689)
Depreciation (14,636) (18,292)
Amortization 4 (5,827) (6,326)
(2,181,923) (2,477,304)
OPERATING LOSS (16,324) (2,189)
Interest and financing costs, net 2, 4, 5, 6 (27,111) (26,286)
LOSS BEFORE INCOME TAXES (43,435) (28,475)
Income tax benefit 16,355 10,638
NET LOSS $(27,080) $(17,837)
The accompanying notes are an integral part of these statements.
5
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
` For the six months
ended June 30,
1995 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(27,080) $(17,837)
Adjustments:
Depreciation 14,636 18,292
Amortization 8,434 11,506
Accretion of Zero Coupon Notes 8,390 9,163
Share of earnings of affiliates,
net of dividends (908) 59
Deferred income taxes (16,506) (11,066)
Other 638 (1,019)
Cash provided by (reinvested in) working capital -
Accounts receivable, prepaid expenses
and other (103,217) 643
Inventories (103,206) (44,715)
Accounts payable, accrued expenses, taxes other than
income, and other 164,751 9,182
Net cash used in operating activities (54,068) (25,792)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments (25,740) 25
Sales of short-term investments 7,942 19,000
Expenditures for property, plant and equipment(18,110) (14,613)
Expenditures for turnaround (2,596) (5,441)
Refinery acquisition expenditures (69,746) --
Proceeds from disposals of property, plant
and equipment 15,354 3,834
Advance crude oil purchase receivable -- 59
Net cash (used in) provided by investing
activities (92,896) 2,864
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (13) (2,234)
Proceeds from sale of stock 135,500 5,409
Stock issuance costs (2,995) --
Deferred financing costs (14,380) (1,312)
Net cash provided by financing activities 118,112 1,863
NET DECREASE IN CASH AND CASH EQUIVALENTS (28,852) (21,065)
CASH AND CASH EQUIVALENTS, beginning of period 126,384 103,729
CASH AND CASH EQUIVALENTS, end of period $ 97,532 $ 82,664
The accompanying notes are an integral part of these statements.
6
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark USA, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 1996
(tabular dollar amounts in thousands of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark USA, Inc., a Delaware
corporation, and subsidiaries (the "Company"), as of June 30, 1996, and the
related consolidated statements of earnings for the three month and six month
periods ended June 30, 1995 and 1996, and statements of cash flows for the six
month periods ended June 30, 1995 and 1996, have been reviewed by independent
accountants as noted in their report included herein. Clark Refining &
Marketing, Inc. ("Clark"), a subsidiary of the Company, makes up the majority
of the consolidated financial information. In the opinion of the management
of the Company, all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the financial statements
have been included therein. The results of this interim period are not
necessarily indicative of results for the entire year.
Certain reclassifications have been made to the operating and general
administrative expenses in the 1995 financial statements to conform to current
year presentation.
The financial statements have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, certain information and disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted.
These unaudited financial statements should be read in conjunction with the
audited financial statements and notes thereto for the year ended December 31,
1995.
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. Short-term Investments
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:
December 31, 1995 June 30, 1996
Amortized Unrealized Aggregate Amortized Unrealized Aggregate
Major Security Type Cost Gain/(Loss) Fair Value Cost Gain/(Loss) Fair Value
U.S. Debt Securities $ 46,116 $ -- $ 46,116 $27,091 $(300) $ 26,791
The net unrealized position at June 30, 1996 included gains of $0.0
million and losses of $0.3 million (December 31, 1995 -- gains of $0.1 million
and losses of $0.1 million).
7
The contractual maturities of the short-term investments at June 30, 1996
were:
Amortized Aggregate
Cost Fair Value
Due in one year or less $12,077 $12,030
Due after one year through five years 15,014 14,761
$27,091 $26,791
Although some of the contractual maturities of these short-term
investments are over one year, management's intent is to use the funds for
current operations and not hold the investments to maturity.
For the three month and six month periods ended June 30, 1996, proceeds
from the sale of Available-for-Sale securities were $15.0 million and $19.0
million, respectively, with no realized gains or losses recorded for the
periods. For the same periods in 1995, proceeds from the sale of
Available-for-Sale securities were $7.9 million with no realized gains or
losses recorded for the periods. 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 three month and six month periods ended
June 30, 1996, was a loss of $0.1 million ($0.1 million after taxes) and $0.3
million ($0.2 million after taxes), respectively. For the same periods in
1995, the change in the net unrealized holding gains or losses was a gain of
$0.7 million ($0.5 million after taxes) and a gain of $1.4 million ($0.9
million after taxes), respectively.
3. Inventories
The carrying value of inventories consisted of the following:
December 31, June 30,
1995 1996
Crude oil $90,635 $102,357
Refined and blendstocks 163,915 196,602
Convenience products 20,532 22,829
Warehouse stock and other 15,362 13,288
$290,444 $335,076
The market value of these inventories at June 30, 1996 was approximately
$37.1 million above the carrying value (December 31, 1995 - $5.4 million).
4. Other Assets
Amortization of deferred financing costs for the three month and six month
periods ended June 30, 1996, was $2.6 million (1995 - $1.8 million) and $5.1
million (1995 - $2.8 million), respectively, and is included in "Interest and
financing costs, net".
Amortization of turnaround costs for the three month and six month periods
ended June 30, 1996, was $2.7 million (1995 - $2.9 million) and $6.3 million
(1995 - $5.8 million), respectively.
<PAGE 8>
5. Interest and Financing Costs, Net
Interest and financing costs, net, consisted of the following:
For the three months For the six months
ended June 30, ended June 30,
1995 1996 1995 1996
Interest expense $14,557 $20,197 $28,968 $40,252
Financing costs 1,791 2,552 2,806 5,058
Interest income (1,667) (8,941) (3,512) (18,556)
14,681 13,808 28,262 26,754
Capitalized interest (500) (240) (1,151) (468)
$14,181 $13,568 $27,111 $26,286
Accrued interest payable at June 30, 1996, of $8.5 million (December 31,
1995 - $8.4 million) is included in "Accrued Expenses and Other".
6. Advance Crude Oil Purchase Receivable
The Company has advance crude oil purchase receivables from Occidental
Petroleum Corporation ("Occidental") and Gulf Resources Corporation ("Gulf").
These advance crude oil purchase receivables are being accounted for as
financial instruments and are recorded at cost which approximated market at
June 30, 1996. To the extent the advance crude oil purchase receivables were
acquired by the issuance of stock, they were recorded as a reduction to
Stockholders' Equity. The issuance of stock is recognized as the principal
portion of the receivables are amortized. Finance income and the reduction of
principle related to the receivables is recognized according to the interest
method of amortization with gross proceeds from the sale of crude oil
delivered allocated between principal recovery (for both the receivable
recorded as an asset and the receivables recorded as a reduction to
Stockholders' Equity) and finance income. This allocation is based on the
implicit yield of the transactions, which yield is a function of the expected
future cash flow stream relative to the value of the advance crude oil
purchase receivable assets on the date of acquisition. The projected cash
flow stream is determined by reference to the applicable forward oil markets.
At June 30, 1996, the implicit yield for the Occidental and Gulf transactions
was 9.3% and 18.3%, respectively.
The Company received proceeds, net of hedging activity, totaling $11.9
million and $19.5 million from these transactions for the three month and six
month periods ended June 30, 1996, respectively. Proceeds were from the
scheduled payments on the receivables. The Advance Crude Oil Purchase
Receivable, recorded as an asset, decreased by $0.1 million and the Advance
Crude Oil Purchase Receivable, recorded as a reduction to Stockholders'
Equity, was reduced by $5.4 million as a result of cash proceeds in the first
half of the year. This reduction had the effect of increasing Stockholders'
Equity. For the three month and six month periods ended June 30, 1996, the
Company recorded finance income of $7.0 million and $14.1 million,
respectively, which is included in "Interest and financing costs, net".
7. New Accounting Standard Adopted
On January 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." The 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.
Implementation of this SFAS did not result in an impairment loss.
9
The Company has expended approximately $25 million on a project to produce
low sulfur diesel fuel at the Hartford refinery ("DHDS Project") which was
delayed in 1992. Should the Company determine in the future to permanently
discontinue this project, the carrying value of the DHDS Project may not be
fully recoverable.
8. Contingencies
Clark and the Company are subject to various legal proceedings related to
governmental regulations and other actions arising out of the normal course of
business, including legal proceedings related to environmental matters.
In early April, 1996, Clark learned that its Hartford, Illinois refinery
is the subject of a Clean Air Act enforcement referral by the United States
Environmental Protection Agency to the United States Department of Justice.
The referral pertains to alleged violations of the Clean Air Act and
regulations promulgated thereunder in the operation and permitting of the
Hartford refinery fluid catalytic cracking unit ("FCCU") and alleged
modification of the FCCU. Although a complaint has not yet been filed, the
government requested additional information from Clark pursuant to Section 114
of the Clean Air Act for the stated purpose of completing its pre-enforcement
evaluation. Clark is gathering the requested information and is otherwise
cooperating with the government in its investigation. No estimate can be made
at this time of Clark's potential liability, if any, as a result of this
enforcement referral.
While it is not possible at this time to establish the ultimate amount of
liability with respect to such contingent liabilities, Clark and the Company
are of the opinion that the aggregate amount of any such liabilities, for
which provision has not been made, will not have a material adverse effect on
their financial position, 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.
10
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
Clark USA, Inc. (the "Company") owns all of the outstanding capital stock
of Clark Refining & Marketing, Inc. ("Clark"). The Company also owns all of
the outstanding capital stock of Clark Pipe Line Company. Because Clark is
the principal subsidiary of the Company, a discussion of the Company's results
of operations consists principally of a discussion of Clark's results of
operations.
Certain reclassifications were made to 1995 operating expenses and general
and administrative expenses to conform to current period presentation. In
addition, certain reclassifications were made to 1995 refining division
results for the Port Arthur refinery and Blue Island, Hartford and Other
Refining to allocate certain crude oil acquisition and inventory management
results and conform to current period presentation. Such reclassifications
did not change the Company's total results of operations.
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three and six month periods ended June 30, 1995 and 1996.
All dollars listed are in millions except per barrel, per gallon and other
statistical data.
Financial Results:
For the three months For the six months
ended June 30, ended June 30,
1995 1996 1995 1996
Net sales and operating revenues $1,337.8 $1,334.9 $2,165.6 $2,475.1
Cost of sales 1,204.5 1,199.1 1,963.0 2,223.7
Operating expenses 98.2 99.1 170.7 199.3
General and administrative expenses 14.4 15.1 27.7 29.7
Depreciation and amortization 10.5 12.0 20.5 24.6
Interest and financing costs 15.9 22.5 30.6 44.8
Interest and financing income 1.7 8.9 3.5 18.5
Loss before income taxes (4.0) (4.0) (43.4) (28.5)
Income tax benefit 1.5 1.4 16.3 10.7
Net loss $(2.5) $(2.6) $(27.1) $ (17.8)
Operating Income:
Refining contribution to operating
income $13.2 $15.1 $(7.3) $10.4
Retail contribution to operating
income 11.4 10.0 19.5 19.0
Corporate general and administrative 3.9 3.6 8.0 7.0
Depreciation and amortization 10.5 12.0 20.5 24.6
Operating income (loss) $10.2 $ 9.5 $(16.3) $(2.2)
The Company reported a net loss of $2.6 million for the second quarter of
1996 which was flat as compared to the second quarter of 1995. Significant
operational improvements in the Company's refining division were masked by
extreme crude oil market volatility, which effectively raised the cost of the
Company's feedstocks. For the first six months of 1996, Clark reported a net
loss of $17.8 million, a $9.3 million improvement over the same period of
1995. The Company's six month net loss narrowed over the prior year due to a
first quarter rebound in refining margins reflecting more normal winter demand
for distillates. Weather was unseasonably warm in the prior year's first
quarter reducing industry-wide demand for petroleum products. The majority of
the Company's products are commodities that are subject to seasonal and market
volatility. Net sales and operating revenues were flat in the second quarter
of 1996 as compared to the prior year, while first half net sales and
operating revenues increased over 1995 because of the inclusion in 1996 of a
full six months of incremental sales from production at the Port Arthur
refinery, which was acquired on February 27, 1995.
11
Refining
Refining Division Operating Statistics:
For the three months For the six months
ended June 30, ended June 30,
1995 1996 1995 1996
Port Arthur Refinery (acquired February 27, 1995)
Crude oil throughput (m bbls/day) 202.2 209.7 200.5 204.3
Production (m bbls/day) 209.8 220.9 201.8 212.3
Gross margin ($/barrel of production) $ 2.62 $2.36 $ 2.45 $2.38
Operating expenses ($/barrel of production) 1.93 1.92 1.98 2.00
Net margin (millions) $13.1 $ 8.9 $ 11.6 $14.7
Blue Island, Hartford and other refining
Crude oil throughput (m bbls/day) 136.4 139.7 129.3 132.6
Production (m bbls/day) 134.8 133.0 130.1 132.6
Gross margin ($/barrel of production) $ 2.98 $3.37 $ 2.29 $2.77
Operating expenses ($/barrel of production) 2.52 2.45 2.67 2.53
Net margin (millions) $ 5.7 $ 11.2 $ (8.8) $ 5.8
Clark Pipe Line net margin 0.5 0.6 0.5 1.1
Divisional G & A expenses (millions) 6.1 5.6 10.6 11.2
Contribution to earnings (millions) $ 13.2 $15.1 $ (7.3) $10.4
The refining division contribution to operating income improved modestly
in the second quarter of 1996 to $15.1 million (1995 - $13.2 million).
Earnings benefited from improved Midwest margins and strong operational
improvement in the second quarter, including increased liquid volume recovery,
improved yields, improved throughput and lower operating expenses. However,
these benefits were partially offset by the volatile crude oil markets and
weaker margins for the Company's Port Arthur refinery as represented by a
nearly 80 c per barrel drop in the industry Gulf Coast indicator margin. For
the first six months of 1996, the refining division improved its contribution
by $17.7 million to $10.4 million (1995 - loss of $7.3 million). In the first
half, refining division results reflected operational and industry gasoline
and distillate margin improvements, but these improvements were tempered by
the volatile crude oil markets, increased refinery fuel gas costs and lower
chemical and by-product margins. Industry margins in the prior year were
particularly weak due to the transition to reformulated gasoline in certain
markets and an unseasonably warm winter, which reduced demand for heating oil.
Midwest refining production during the quarter and first half was below
capacity as routine maintenance was successfully completed on several units.
Refinery production was reduced by an average of approximately 13,400 barrels
per day in the first half of 1995 due to the poor industry refining margins
and a fire in an operating unit at the Blue Island refinery.
During the first half of 1996, the commodity markets for crude oil and
refined products were characterized by rising crude oil prices, daily
volatility and steep premiums for prompt crude oil deliveries. The Company
believes such conditions have been magnified in the first half of 1996 due to
inventory levels reaching 20 year lows and the perception of possible
shortages. The Company believes refiners reduced inventories as a result of
strong winter demand, the prospect for lower crude oil and product prices
caused by the possible return of Iraqi crude oil to the world markets and the
desire by refiners to reduce their investment in working capital. Current
commodity market conditions have disrupted many normal options and futures
relationships making it difficult for the Company to effectively hedge
short-term price risk. The Company is unable to predict what effect, if any,
the current state of commodity markets may have on the Company's future
results of operation.
12
Retail
Retail Division Operating Statistics:
For the three months For the six months
ended June 30, ended June 30,
1995 1996 1995 1996
Gasoline volume (mm gals.) 277.8 271.2 528.7 507.7
Gasoline gross margin (cents/gal) 10.5 10.6 10.2 11.2
Gasoline gross margin (millions) $29.4 $ 28.7 $ 54.2 $ 56.9
Convenience product sales (millions) $65.7 $ 66.9 $117.5 $125.4
Convenience product and
other income (millions) 16.4 17.9 30.8 34.2
Operating expenses (millions) $ 30.0 $ 30.7 $ 56.4 $60.6
Divisional G & A expenses (millions) 4.4 5.9 9.1 11.5
Contribution to operating
income (millions) $ 11.4 $ 10.0 $ 19.5 $19.0
Per Month Per Store
Company operated stores (average) 855 829 846 828
Gasoline volume (m gals.) 108.3 109.1 104.2 102.2
Convenience product sales (m) $ 25.6 $ 26.9 $ 23.1 $25.2
Convenience product gross margin (m) $ 6.4 $ 7.2 $ 6.0 $ 6.5
The retail division contributed $10.0 million to operating income in the
second quarter of 1996 (1995 - $11.4 million). The retail division's second
quarter and first half results were modestly below year ago levels primarily
due to a squeeze in overall fuel margin contribution caused by the combination
of high street prices increasing retail price sensitivity and volatile
wholesale gasoline costs. These factors were partially offset by the
favorable contribution from newly acquired stores, which exceeded
expectations, and by an improvement in contribution from convenience product
sales. Operating and general and administrative expenses increased over the
prior year principally due to operating leases and other costs related to new
store properties and increased costs related to the expansion of Clark's
credit card programs.
The Company continued to implement its targeted retail growth strategy in
1996 by adding 10 high volume stores in its core Chicago market which raised
its Chicago market share to approximately 10%. Early in 1996, the Company
completed its withdrawal from the Minnesota market, recognizing a modest gain.
As part of its overall growth strategy, the Company expects to continue to
consider retail store growth in both existing and new markets while also
evaluating current markets for possible divestiture.
13
Other Financial Highlights
Corporate general and administrative expenses for the second quarter and
first half of 1996 were below the year-ago periods principally because of the
reclassification of certain activities to other divisions in 1996.
Depreciation and amortization expenses for the second quarter and first half
of 1996 exceeded the comparable periods of 1995 principally because of the
newly acquired Port Arthur refinery.
Increases in both interest expense and finance income in the first quarter
of 1996 over 1995 were principally related to the advance crude oil production
purchases and related financing completed in the fourth quarter of 1995. In
addition, interest expense increased due to the amortization of bondholder
consent fees incurred in 1995 and costs related to the expanded working
capital facility.
Liquidity and Capital Resources
Net cash generated from operating activities, excluding working capital
changes, for the first half of 1996 was $9.1 million, an improvement of $21.5
million from the year-earlier period. The improvement in cash flows resulted
primarily from improved refining market conditions. Working capital at June
30, 1996 was $247.7 million, a 1.61 to 1 current ratio, versus $249.8 million
at December 31, 1995, a 1.63 to 1 current ratio. Working capital at June 30,
1996 was flat as compared to year-end, but cash and short-term investment
balances were lower due to a temporary incremental investment in other working
capital.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil. Clark has in place a
$400 million committed revolving line of credit expiring November 30, 1997 for
the issuance of letters of credit primarily to support purchases of crude oil,
other feedstocks and refined products. The amount available under the
borrowing base associated with such facility at June 30, 1996 was $400 million
and approximately $233 million of the facility was utilized for letters of
credit. There were no direct borrowings under Clark's line of credit at June
30, 1996.
Cash flows used in investing activities in the first six months of 1996,
excluding short-term investment activities for which management's intent is
similar to cash and cash equivalents, decreased to $16.2 million from $75.1
million in the year-earlier period. The higher investing activities in 1995
resulted principally from the Port Arthur refinery acquisition which closed on
February 27, 1995. Capital expenditures for property, plant and equipment
totaled $14.6 million (1995 - $18.1 million) during the first half of 1996
with an additional $5.4 million (1995 - $2.6 million) for refinery maintenance
turnaround expenditures. Refinery capital expenditures totaled $8.3 million
in the first half of 1996 (1995 - $2.8 million), the majority of which was for
discretionary projects at the Port Arthur and Hartford refineries. Retail
capital expenditures on numerous projects for the first half of 1996 totaled
$6.1 million (1995 - $14.4 million), including the purchase of equipment
associated with the acquisition of stores.
Cash flows from financing activities declined in the first half of 1996 as
compared to the prior year. Financing activities in 1995 related to the
financing of the Port Arthur refinery acquisition.
Collection of gross proceeds from the advance crude oil purchase
receivable from Occidental Petroleum ("Occidental") in excess of the Company's
original cost of $220 million (plus interest of 10% per year on any
unrecovered portion of the first $100 million) was subject to Occidental
receiving certain crude oil royalty payments in the Republic of the Congo
("Congo"). In late July 1996, Occidental sold its Congo crude oil royalty
interests. As a result, collection of gross proceeds from the advance crude
oil purchase receivable is no longer subject to Occidental receiving such
royalty payments. See Exhibit 10.9 filed with Clark USA, Inc. Form 8-K, dated
December 1, 1995 (File No. 33-59144).
Funds generated from operating activities together with the Company's
existing cash, cash equivalents and short-term investments are expected to be
adequate to fund requirements for working capital and capital expenditure
programs for the next year. Future working capital, discretionary or
non-discretionary capital expenditures or acquisitions may require additional
debt or equity financing.
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PART II - OTHER INFORMATION
ITEM 1 - Legal Proceedings
In early April, 1996, Clark learned that its Hartford, Illinois refinery
is the subject of a Clean Air Act enforcement referral by the United States
Environmental Protection Agency to the United States Department of Justice.
The referral pertains to alleged violations of the Clean Air Act and
regulations promulgated thereunder in the operation and permitting of the
Hartford refinery fluid catalytic cracking unit ("FCCU") and alleged
modification of the FCCU. Although a complaint has not yet been filed, the
government requested additional information from Clark pursuant to Section 114
of the Clean Air Act for the stated purpose of completing its pre-enforcement
evaluation. Clark is gathering the requested information and is otherwise
cooperating with the government in its investigation. No estimate can be made
at this time of Clark's potential liability, if any, as a result of this
enforcement referral.
On January 5, 1995, Clark received a Unilateral Administrative Order from
the EPA pursuant to CERCLA alleging that "Clark Oil & Refining Corp." is a
potential responsible party ("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 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 opposed Clark's motion to dismiss. On April
19, 1996, the District Court denied Clark's Motion to Dismiss holding that at
this early procedural stage of the case and prior to gathering facts regarding
the plaintiffs opportunity to participate in the bankruptcy case which issued
the "free and clear" order, the Court would not dismiss the case. No estimate
of any liability with respect to this case can be made at this time.
ITEM 5 - Other Information
The Company has signed a new three year collective bargaining agreement,
expiring August 31, 1999, for certain Blue Island refinery employees. The
current agreement would have expired August 31, 1996.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CLARK USA, INC.
(Registrant)
/s/ Dennis R. Eichholz
Dennis R. Eichholz
Controller and Treasurer
(Authorized Officer and
Chief Accounting Officer)
August 12, 1996
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