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 March 31, 1998
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 1-13514
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 May 12, 1998.
Class Shares Outstanding
Common Stock 13,751,163
Class F Common Stock 6,101,010
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. and Subsidiaries (the "Company") as of March 31, 1998, and the
related consolidated statements of earnings and of cash flows for the
three-month period then ended. 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
procedures to financial data and making inquires of persons responsible
for financial and accounting matters. It is substantially less in scope
than an audit conducted 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 such consolidated financial statements 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 the Company as of
December 31, 1997, 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 6, 1998, we
expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the
accompanying consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
Deloitte & Touche LLP
St. Louis, Missouri
May 1, 1998
2
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
March 31,
Reference December 31, 1998
Note 1997 (unaudited)
----------- ------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 236.1 $ 133.4
Short-term investments 14.9 14.9
Accounts receivable 93.8 83.5
Inventories 2 261.5 281.0
Prepaid expenses and other 21.1 17.6
Total current assets 627.4 530.4
PROPERTY, PLANT AND EQUIPMENT 578.0 569.0
OTHER ASSETS 3 70.2 67.0
------------ ---------
$ 1,275.6 $ 1,166.4
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 219.1 $ 180.2
Accrued expenses and other 4, 5 72.9 69.8
Accrued taxes other than income 52.1 43.8
------------ ---------
Total current liabilities 344.1 293.8
LONG-TERM DEBT 765.9 758.2
OTHER LONG-TERM LIABILITIES 62.4 58.9
CONTINGENCIES 6 -- --
EXCHANGEABLE PREFERRED STOCK
($.01 par value per share; 5,000,000 shares
authorized; 63,000 shares issued) 64.8 66.6
COMMON STOCKHOLDERS' EQUITY: 7
Common stock
Common, $.01 par value, 14,759,782 issued at
12/31/97, 13,751,163 issued at 3/31/98 0.1 0.1
Class F Common, $.01 par value, 6,000,000
issued at 12/31/97, 6,101,010 issued at
3/31/98 0.1 0.1
Paid-in capital 230.0 208.9
Advance crude oil purchase receivable from
stockholder (26.5) --
Retained earnings (deficit) (165.3) (220.2)
---------- ----------
Total common stockholders' equity (deficit) 38.4 (11.1)
---------- ----------
$ 1,275.6 $ 1,166.4
========= ==========
The accompanying notes are an integral part of these statements.
3
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions)
For the three months
ended March 31,
-----------------------
Reference 1997 1998
Note (unaudited) (unaudited)
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 999.2 $ 824.1
EXPENSES:
Cost of sales (892.9) (688.7)
Operating expenses (107.6) (111.1)
General and administrative expenses (15.0) (18.2)
Depreciation (9.6) (10.1)
Amortization 3 (2.9) (5.9)
Inventory write-down to market 2 -- (22.7)
----------- -----------
(1,028.0) (856.7)
----------- -----------
OPERATING LOSS (28.8) (32.6)
Interest and finance costs, net 3, 4 (18.6) (16.0)
----------- -----------
LOSS BEFORE INCOME TAXES (47.4) (48.6)
Income tax provision 5 -- (0.1)
----------- -----------
NET LOSS (47.4) (48.7)
Preferred stock dividends -- (1.8)
----------- -----------
NET LOSS AVAILABLE TO COMMON STOCK $ (47.4) $ (50.5)
=========== ===========
The accompanying notes are an integral part of these statements.
4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
For the three months
ended March 31,
-------------------------
1997 1998
(unaudited) (unaudited)
------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (47.4) $ (48.7)
Adjustments:
Depreciation 9.6 10.1
Amortization 5.6 6.6
Accretion of Zero Coupon Notes 5.1 0.1
Share of earnings of affiliates,
net of dividends 0.1 0.5
Inventory write-down to market -- 22.7
Other 0.3 (2.5)
Cash reinvested in working capital -
Accounts receivable, prepaid expenses
and other 33.2 13.7
Inventories (62.7) (41.8)
Accounts payable, accrued expenses,
taxes other than income and other (13.9) (52.4)
------------ -----------
Net cash used in operating activities (70.1) (91.7)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments 0.1 --
Expenditures for property, plant and equipment (30.9) (9.0)
Expenditures for turnaround (27.4) (3.5)
Proceeds from disposals of property, plant and
equipment 1.5 9.4
------------ -----------
Net cash used in investing activities (56.7) (3.1)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (0.8) (7.9)
Deferred financing costs (0.1) --
------------ -----------
Net cash used in financing activities (0.9) (7.9)
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (127.7) (102.7)
CASH AND CASH EQUIVALENTS, beginning of period 339.9 236.1
------------ -----------
CASH AND CASH EQUIVALENTS, end of period $ 212.2 $ 133.4
============ ===========
The accompanying notes are an integral part of these statements.
5
FORM 10-Q - PART I
ITEM 1 Financial Statements (continued)
Clark USA, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1998
(tabular dollar amounts in millions of US dollars)
1. Basis of Preparation
The unaudited consolidated balance sheet of Clark USA, Inc. and
Subsidiaries (the "Company") as of March 31, 1998, and the related
consolidated statements of earnings and of cash flows for the three-
month periods ended March 31, 1997 and 1998, have been reviewed by
independent accountants. 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.
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, 1997.
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.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 130, Reporting Comprehensive Income, effective January 1,
1998, with no effect on the Company's financial statements for the
three-month periods ending March 31, 1998 and 1997.
2. Inventories
The carrying value of inventories consisted of the following:
December 31, March 31,
1997 1998
------------ ----------
Crude oil ................................ $ 86.2 $ 100.8
Refined and blendstocks .................. 156.6 185.4
LIFO inventory value excess over market .. (19.2) (41.9)
Convenience products ..................... 22.4 20.2
Warehouse stock and other ................ 15.5 16.5
------------ ----------
$ 261.5 $ 281.0
============ ==========
The Company recorded an additional write-down of inventory carrying
value to market of $22.7 million for the three months ended March 31,
1998 (1997 - nil).
6
3. Other Assets
Amortization of deferred financing costs for the three-month period
ended March 31, 1998, was $0.5 million (1997 - $2.7 million) and was
included in "Interest and finance costs, net".
Amortization of refinery maintenance turnaround costs for the three-
month period ended March 31, 1998, was $5.9 million (1997 - $2.9
million).
4. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the three months
ended March 31,
--------------------
1997 1998
--------- --------
Interest expense ..................... $ 20.5 $ 18.5
Financing costs ...................... 2.7 0.5
Interest and finance income .......... (4.2) (2.6)
--------- --------
19.0 16.4
Capitalized interest ................. (0.4) (0.4)
--------- --------
Interest and finance costs, net $ 18.6 $ 16.0
========= ========
Cash paid for interest expense for the three-month period ended March
31, 1998 was $11.9 million (1997 - $8.9 million). Accrued interest
payable as of March 31, 1998, of $16.8 million (December 31, 1997 -
$10.3 million) was included in "Accrued expenses and other".
5. Income Taxes
The Company received net cash income tax refunds totaling $5.0
million during the first quarter of 1998 (1997 - nil).
6. 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. 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.
7. Gulf Settlement
In March 1998, the Company settled the obligations outstanding
between the Company and Gulf Resources Corporation ("Gulf"). The
Company paid Gulf $4 million, released 213,654 escrowed shares of Common
Stock to Gulf, and released Gulf from its obligation to deliver certain
amounts of crude oil through 2001. In exchange, Gulf agreed to release
the Company from obligations to pay further commissions related to the
crude deliveries and agreed to allow the Company to cancel the remaining
1,008,619 shares of its escrowed Common Stock.
7
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.
Results of Operations
Financial Highlights
The following tables reflect the Company's financial and operating
highlights for the three-month periods ended March 31, 1997 and 1998.
All dollar amounts listed are in millions. The tables provide
supplementary data and are not intended to represent an income statement
presented in accordance with generally accepted accounting principles.
Financial Results:
For the three months
ended March 31,
--------------------
1997 1998
--------- --------
Operating Income:
Refining contribution to operating income $ 11.7 $ 22.0
Retail contribution to operating income 4.2 3.7
Corporate general and administrative expenses (3.9) (5.6)
--------- --------
Operating contribution 12.0 20.1
Inventory timing adjustments loss (a) (28.3) (14.0)
Inventory write-down to market -- (22.7)
Depreciation and amortization (12.5) (16.0)
--------- --------
Operating loss $ (28.8) $ (32.6)
========= ========
(a) Includes adjustments to inventory costs caused by timing
differences between when crude oil is actually purchased and refined
products are actually sold, and a daily "market in, market out"
operations measurement methodology for the refining division.
The Company recorded an operating contribution of $20.1 million for
the seasonally weak quarter ended March 31, 1998, which exceeded the
operating contribution of $12.0 million in the first quarter of 1997,
principally because of less scheduled maintenance-related downtime in
the first quarter of 1998. The Company reported a net loss of $48.7
million for the first quarter of 1998 which compared to a net loss of
$47.4 million in the same period a year ago.
A fall in world crude oil prices reduced net earnings in the first
quarter of 1998 and 1997, but had a greater impact on the current
quarter than the year-ago period with net earnings reduced by $36.7
million as compared to $28.3 million in 1997. This impact included a
non-cash accounting charge of $22.7 million in the first quarter of 1998
to write down inventory carrying costs to current market value.
Net sales and operating revenues decreased approximately 18% in the
first quarter as compared to the same period of 1997, principally as a
result of lower worldwide crude oil and product prices in the current
year which reduced both sales and cost of goods sold.
8
Refining
Refining Division Operating Statistics:
(dollars in millions, except per barrel data)
For the three months
ended March 31,
--------------------
1997 1998
---------- --------
Port Arthur Refinery
Crude oil throughput (m bbls/day) 166.5 222.2
Production (m bbls/day) 166.1 218.9
Gross margin ($/barrel of production) $ 3.91 $ 3.85
Operating expenses (43.1) (45.4)
Net margin $ 12.9 $ 31.3
Blue Island, Hartford and other refining
Crude oil throughput (m bbls/day) 133.4 109.5
Production (m bbls/day) 136.7 116.1
Gross margin ($/barrel of production) $ 2.88 $ 2.71
Operating expenses (32.0) (32.1)
Clark Pipe Line net margin 0.6 0.6
Net margin $ 4.1 $ (2.9)
Divisional G & A expenses (5.3) (6.4)
--------- --------
Refining contribution to operating income $ 11.7 $ 22.0
========= ========
Refining division contribution to operating income of $22.0 million
in the first quarter of 1998 nearly doubled year-ago levels. Downtime
from a scheduled maintenance turnaround at the Blue Island refinery in
the first quarter of 1998 reduced production and corresponding
operating contribution by an estimated $2.7 million which was less than
the estimated $16.1 million production and operating contribution
impact of the larger Port Arthur turnaround in the first quarter of
1997. The Blue Island refinery turnaround began in mid-March and was
completed in mid-April. The Port Arthur refinery again set several new
monthly unit throughput records in the first quarter of 1998.
Weaker margins for gasoline and distillates in the first quarter of
1998 versus the same period of 1997 were only partially offset by
favorable discounts for heavy and sour crude oil. Industry margin
indicators for the Gulf Coast and Chicago markets in the first quarter
were each down approximately 80 cents per barrel on a year-over-year
basis. Warmer-than-normal weather and the Asian financial crisis
reduced world-wide demand, and when combined with high industry
inventory levels, resulted in ample supply and a squeeze on light
products margins. Crude oil quality differentials were favorable in
the first quarter of 1998 with indicators for light sour crude oil of
$2.00 per barrel versus $2.22 per barrel in the same period of 1997 and
the benefit for heavy sour crude oil was $7.03 per barrel in 1998
versus $6.26 per barrel in 1997.
9
Retail
Retail Division Operating Statistics:
(dollars in millions, except per gallon and per store data)
For the three months
ended March 31,
---------------------
1997 1998
---------- ---------
Core Market Stores
Gasoline volume (mm gals.) 205.9 225.4
Gasoline gross margin (cents/gal) 11.0 10.5
Gasoline gross margin $ 22.6 $ 23.7
Convenience product sales $ 50.6 $ 58.9
Convenience product margin and other income 13.9 15.9
Operating expenses (27.1) (29.8)
Divisional G & A expenses (5.7) (5.7)
---------- ---------
Core market store contribution $ 3.7 $ 4.1
Non-core stores, business development and other 0.5 (0.4)
---------- ---------
Retail contribution to operating income $ 4.2 $ 3.7
========== =========
Core Market Stores - Per Month Per Store
Company operated stores (average) (a) 657 670
Gasoline volume (m gals.) 105.6 113.7
Convenience product sales (thousands) $ 25.7 $ 29.3
Convenience product gross margin (thousands) 7.0 7.9
(a) Ten stores included in 1997 operated as convenience stores only.
Retail contribution to operating income from core market stores
improved to $4.1 million in the first quarter of 1998 from $3.7 million
in the prior year. Average first quarter monthly fuel volumes and
convenience product sales and gross margins improved 8%, 14% and 13%
respectively, but competitive dynamics in the Company's market areas
continued to put pressure on fuel margins. Operating expenses
increased in the quarter versus the year-ago period principally due to
increased promotional activities and higher average core market store
count. Overall retail contribution was reduced in the current quarter
due to new business development costs and non-core store results.
Clark sold 69 non-core stores principally to Clark branded marketers in
the first quarter generating approximately $9 million of proceeds. As
of March 31, 1998, Clark operated 731 stores and distributed its
products through an additional 129 independently-operated Clark-branded
outlets.
Other Financial Highlights
Corporate general and administrative expenses increased in the first
quarter of 1998 over the comparable period in 1997 principally because
of a non-cash charge for consulting services from a shareholder that was
paid with new shares.
Interest and finance costs, net for the three months ended March 31,
1998 decreased over the comparable period in 1997 principally because of
reduced borrowing rates and reduced deferred financing cost amortization
resulting from the Company's financing activities in late 1997.
Depreciation and amortization expense increased in the first quarter
of 1998 over the comparable period in 1997 principally because of
amortization related to the first quarter 1997 Port Arthur maintenance
turnaround.
10
Liquidity and Capital Resources
Net cash used in operating activities, excluding working capital
changes, for the three months ended March 31, 1998 was $11.2 million
compared to $26.7 million in the year-earlier period. Working capital
as of March 31, 1998 was $236.6 million, a 1.81-to-1 current ratio,
versus $283.3 million as of December 31, 1997, a 1.82-to-1 current
ratio. Total working capital decreased in the first quarter due to the
non-cash inventory write-down, operating results and debt reduction.
Cash balances were additionally impacted by a temporary incremental
investment in operating working capital.
In general, the Company's short-term working capital requirements
fluctuate with the price and payment terms of crude oil and refined
petroleum products. Clark has in place a credit agreement (the "Credit
Agreement") which provides for borrowings and the issuance of letters of
credit of up to the lesser of $400 million or the amount of the
borrowing base calculated with respect to Clark's cash, investments,
eligible receivables and hydrocarbon inventories, provided that direct
borrowings are limited to the principal amount of $50 million.
Borrowings under the Credit Agreement are secured by a lien on
substantially all of the Company's cash and cash equivalents,
receivables, crude oil and refined product inventories and trademarks.
The amount available under the borrowing base associated with such
facility at March 31, 1998 was $362 million and approximately $164
million of the facility was utilized for letters of credit. As of March
31, 1998, there were no direct borrowings under the Credit Agreement.
Cash flows used in investing activities in the first three months of
1998, excluding short-term investment activities which management treats
similar to cash and cash equivalents, were $3.1 million as compared to
$56.8 million in the year-earlier period. Cash flows used in investing
activities in 1998 were reduced by proceeds of $9.4 million from the
sale of certain non-core retail stores. The higher investing activities
in 1997 resulted principally from the Port Arthur refinery turnaround
($27.4 million) and the acquisition and subsequent image conversion of
48 retail stores in Michigan ($18.6 million). Refinery capital
expenditures totaled $5.3 million in the first quarter of 1998 (1997 -
$9.0 million) principally related to a project to increase the
throughput of Canadian heavy, sour crude oil at the Hartford refinery, a
project to upgrade vacuum tower bottoms at the Blue Island refinery and
various mandatory expenditures at the Port Arthur refinery. Turnaround
expenditures in the first quarter of 1998 related to the previously-
mentioned Blue Island refinery turnaround and to a Port Arthur refinery
turnaround scheduled for late 1998 or early 1999. Retail capital
expenditures for the first three months of 1998 totaled $3.1 million
(1997 - $3.3 million, excluding the Michigan acquisition and subsequent
image conversion) and were principally for underground storage tank-
related work.
Cash flows used in financing activities for first quarter of 1998
increased as compared to the same period in 1997 principally because of
the redemption of the balance of the Company's Senior Secured Zero
Coupon Notes, due 2000 that were not tendered in late 1997 ($3.6
million), and the repurchase of Clark's 9 1/2% Senior Unsecured Notes,
due 2004 tendered under its required Change of Control offer ($3.3
million).
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.
11
PART II - OTHER INFORMATION
ITEM 5 - Other Information
On April 15, 1998, William C. Rusnack, 53, was appointed as
president, chief operating officer, chief executive officer and a
director of the Company and Clark. Mr. Rusnack replaced Paul D. Melnuk
who had previously announced he was leaving the Company and Clark,
effective May 1, 1998.
Mr. Rusnack previously served 31 years with Atlantic Richfield
Corporation ("ARCO") and was involved in all areas of its energy
business, including refining operations, retail marketing, product
transportation, exploration and production, and human resources. He
most recently served as President of ARCO Products Company from 1993 to
1997 and was President of ARCO Transportation Company from 1990 to
1993. He currently serves as a director of Flowserve (a $1 billion,
NYSE-listed company).
12
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
None
13
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)
May 12, 1998