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, 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 August 12, 1998.
Class Shares Outstanding
Common Stock 13,767,829
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 June 30, 1998, and the
related consolidated statements of earnings for the three and six month
periods then ended, and the statement of cash flows for the six 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 inquiries 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.
The consolidated financial statements of the Company for the three and six
months ended June 30, 1997 were reviewed by other accountants whose report
dated July 29, 1997 expressed that they were not aware of any material
modifications that should be made to those financial statements in order
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
July 31, 1998
(except for Note 7
as to which the date
is August 10, 1998)
2
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in millions, except share data)
June 30,
Reference December 31, 1998
Note 1997 (unaudited)
--------- ------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 236.1 $ 180.0
Short-term investments 14.9 14.9
Accounts receivable 93.8 90.4
Inventories 2 261.5 267.6
Prepaid expenses and other 21.1 16.3
------------ -----------
Total current assets 627.4 569.2
PROPERTY, PLANT AND EQUIPMENT 578.0 577.2
OTHER ASSETS 3 70.2 67.2
------------ -----------
$ 1,275.6 $ 1,213.6
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 219.1 $ 213.4
Accrued expenses and other 4 72.9 62.5
Accrued taxes other than income 52.1 48.0
------------ -----------
Total current liabilities 344.1 323.9
LONG-TERM DEBT 765.9 757.4
OTHER LONG-TERM LIABILITIES 62.4 59.4
CONTINGENCIES 9 -- --
EXCHANGEABLE PREFERRED STOCK
($.01 par value per share; 5,000,000 shares
authorized; 66,623 shares issued) 64.8 68.5
COMMON STOCKHOLDERS' EQUITY:
Common stock 6
Common, $.01 par value,
14,759,782 issued at 12/31/97,
13,767,829 issued at 6/30/98 0.1 0.1
Class F Common, $.01 par value,
6,000,000 issued at 12/31/97,
6,101,010 issued at 6/30/98 0.1 0.1
Paid-in capital 230.0 209.0
Advance crude oil purchase
receivable from stockholder (26.5) --
Retained earnings (deficit) (165.3) (204.8)
------------ -----------
Total common stockholders' equity 38.4 4.4
------------ -----------
$ 1,275.6 $ 1,213.6
============ ===========
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 June 30,
Reference --------------------
Note 1997 1998
--------- ---------- --------
NET SALES AND OPERATING REVENUES $ 1,171.5 $ 975.9
EXPENSES:
Cost of sales (980.4) (794.4)
Operating expenses (104.5) (107.9)
General and administrative expenses (14.2) (19.0)
Depreciation (9.7) (9.6)
Amortization 3 (5.7) (5.9)
Inventory write-down to market 2 -- (8.2)
Equity pipelines 2.4 2.2
---------- --------
(1,112.1) (942.8)
---------- --------
OPERATING INCOME 59.4 33.1
Interest and finance costs, net 3, 4 (20.1) (15.8)
---------- --------
INCOME BEFORE INCOME TAXES 39.3 17.3
Income tax provision 5 (7.0) (0.1)
---------- --------
NET EARNINGS 32.3 17.2
Preferred stock dividends -- (1.9)
---------- --------
NET EARNINGS AVAILABLE TO COMMON STOCK $ 32.3 $ 15.3
========== ========
The accompanying notes are an integral part of these statements.
4
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(dollars in millions)
For the six months
ended June 30,
------------------------
Reference 1997 1998
Note (unaudited) (unaudited)
--------- ----------- -----------
NET SALES AND OPERATING REVENUES $ 2,169.0 $ 1,798.9
EXPENSES:
Cost of sales (1,873.3) (1,483.1)
Operating expenses (212.1) (219.0)
General and administrative expenses (29.2) (37.2)
Depreciation (19.3) (19.7)
Amortization 3 (8.6) (11.8)
Inventory write-down to market 2 -- (30.9)
Equity pipelines 4.1 3.3
----------- -----------
(2,138.4) (1,798.4)
----------- -----------
OPERATING INCOME 30.6 0.5
Interest and finance costs, net 3, 4 (38.7) (31.8)
----------- -----------
LOSS BEFORE INCOME TAXES (8.1) (31.3)
Income tax provision 5 (7.0) (0.2)
----------- -----------
NET LOSS (15.1) (31.5)
Preferred stock dividends -- (3.7)
----------- -----------
NET LOSS AVAILABLE TO COMMON STOCK $ (15.1) $ (35.2)
=========== ===========
The accompanying notes are an integral part of these statements.
5
CLARK USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in millions)
For the six months
ended June 30,
------------------------
1997 1998
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (15.1) $ (31.5)
Adjustments:
Depreciation 19.3 19.7
Amortization 13.9 13.2
Accretion of Zero Coupon Notes 10.3 0.1
Share of earnings of affiliates, net of dividends (0.1) 1.5
Inventory write-down to market -- 30.9
Other 0.4 (2.1)
Cash reinvested in working capital -
Accounts receivable, prepaid expenses and other 45.8 8.0
Inventories (12.2) (36.4)
Accounts payable, accrued expenses, taxes
other than income and other (62.5) (18.8)
----------- -----------
Net cash used in operating activities (0.2) (15.4)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment (41.3) (34.9)
Expenditures for turnaround (30.0) (11.1)
Proceeds from disposals of property, plant
and equipment 2.2 13.9
----------- -----------
Net cash used in investing activities (69.1) (32.1)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Long-term debt payments (1.5) (8.7)
Proceeds from sale of common stock -- 0.1
----------- -----------
Net cash used in financing activities (1.5) (8.6)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (70.8) (56.1)
CASH AND CASH EQUIVALENTS, beginning of period 339.9 236.1
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 269.1 $ 180.0
=========== ===========
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, 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 June 30, 1998, and the related
consolidated statements of earnings for the three month and six month
periods ended June 30, 1997 and 1998, and the related statements of cash
flows for the six month periods ended June 30, 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 and six month periods ending June 30, 1997 and 1998.
2. Inventories
The carrying value of inventories consisted of the following:
December 31, June 30,
1997 1998
------------ -----------
Crude oil $ 86.2 $ 122.9
Refined and blendstocks 156.6 158.2
LIFO inventory value excess over market (19.2) (50.1)
Convenience products 22.4 19.9
Warehouse stock and other 15.5 16.7
------------ ----------
$ 261.5 $ 267.6
============ ==========
The write-down of inventory carrying value to market for the three
and six month periods ended June 30, 1998, was $8.2 million (1997 - nil)
and $30.9 million (1997 - nil), respectively.
7
3. Other Assets
Amortization of deferred financing costs for the three and six month
periods ended June 30, 1998, was $0.8 million (1997 - $2.6 million) and
$1.3 million (1997 - $5.3 million), respectively, and was included in
"Interest and finance costs, net."
Amortization of refinery maintenance turnaround costs for the three
and six month periods ended June 30, 1998, was $5.9 million (1997 - $5.7
million) and $11.8 million (1997 - $8.6 million), respectively.
4. Interest and Finance Costs, net
Interest and finance costs, net, consisted of the following:
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
1997 1998 1997 1998
---------- -------- -------- --------
Interest expense $ 20.8 $ 18.1 $ 41.3 $ 36.6
Financing costs 2.6 0.6 5.3 1.1
Interest and finance income (3.1) (2.3) (7.3) (4.9)
---------- -------- -------- --------
20.3 16.4 39.3 32.8
Capitalized interest (0.2) (0.6) (0.6) (1.0)
---------- -------- -------- --------
$ 20.1 $ 15.8 $ 38.7 $ 31.8
========== ======== ======== ========
Cash paid for interest expense for the three and six month periods
ended June 30, 1998 was $24.3 million (1997 - $22.0 million) and $36.2
million (1997 - $30.9 million), respectively. Accrued interest payable
as of June 30, 1998, of $10.5 million (December 31, 1997 - $10.3
million) was included in "Accrued expenses and other."
5. Income Taxes
The Company made net cash tax payments for the three months ended
June 30, 1998 of $0.6 million (1997 - $0.5 million) and received net
cash tax refunds totaling $4.4 million for the six month period ended
June 30, 1998 (1997 - net cash tax payments $0.9 million).
6. 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 oil deliveries and agreed to allow the Company to cancel the
remaining 1,008,619 shares of its escrowed Common Stock.
8
7. Lima Refinery Acquisition
On August 10, 1998, the Company's principal subsidiary, Clark
Refining & Marketing, Inc. ("Clark") acquired British Petroleum's
("BP") 170,000 barrel per day refinery and related terminals located in
Lima, Ohio (the "Lima Acquisition") for $175 million plus inventory
currently estimated at approximately $40 million. Clark funded the Lima
Acquisition and related costs with $5 million of cash on hand and the
proceeds of a private placement to institutional investors of $110
million 8 5/8% Senior Notes due 2008 and $115 million floating rate note
term loan due 2004.
In connection with the financing of the Lima Acquisition, the Company
received consents from the holders of its 10 7/8% Senior Notes and its
11 1/2% Cumulative Exchangeable Preferred Stock to permit Clark to
increase the amount of its authorized working capital and letter of
credit facility to the greater of $700 million or the amount available
under a defined borrowing base and to allow the incurrence of up to $250
million of additional indebtedness to fund the Lima Acquisition.
Also in connection with the Lima Acquisition, Clark amended its
revolving credit facility, to increase its size to the lesser of $700
million or the amount available under a borrowing base, as defined,
representing specified percentages of cash, investments, accounts
receivable, inventory and other working capital items.
8. Equity Pipelines
During July 1998, the Company sold its interests in Westshore
Pipeline Company and Wolverine Pipeline Company for net proceeds of
approximately $17 million, resulting in an after-tax book gain of
approximately $12 million. The Company has signed definitive agreements
to sell its interests in Chicap Pipeline Company and Southcap Pipeline
Company, subject to regulatory approval, for net proceeds of
approximately $57 million which would result in an after-tax book gain
of approximately $56 million. Although the Company expects to close the
remaining two transactions by September 1998, there can be no assurance
that it will be able to do so by such time or at all.
9. 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.
10. Accounting Standards Not Yet Adopted
In June 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standard ("SFAS") No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
This statement establishes new standards for reporting information about
operating segments in annual financial statements and requires selected
operating segment information to be reported in interim financial
reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and
major customers. This statement becomes effective for the Company's
financial statements beginning with the year ended December 31, 1998 at
which time restatement of prior period segment information presented for
comparative
<PAGE 9>
purposes is required. Interim period information is not
required until the second year of application, at which time comparative
information is required. The adoption of this statement is not expected
to impact the Company's consolidated financial statement disclosures.
In June 1998, the FASB adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". This statement
establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. This statement becomes effective
for all fiscal quarters of all fiscal years beginning after June 15,
1999. The Company is currently evaluating this new standard, the impact
it may have on the Company's accounting and reporting, and alternatives
for when adopt to the standard.
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.
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, 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 For the six months
ended June 30, ended June 30,
-------------------- ------------------
1997 1998 1997 1998
---------- -------- -------- --------
Operating Income:
Refining contribution to operating
income $ 75.3 $ 68.7 $ 87.0 $ 90.7
Retail contribution to operating income 5.9 4.1 10.1 7.8
Corporate general and administrative
expenses (3.6) (5.5) (7.5) (11.1)
---------- -------- -------- --------
Operating Contribution 77.6 67.3 89.6 87.4
Inventory timing adjustments loss (a) (2.8) (10.5) (31.1) (24.5)
Inventory write-down to market -- (8.2) -- (30.9)
Depreciation and amortization (15.4) (15.5) (27.9) (31.5)
---------- -------- -------- --------
Operating income $ 59.4 $ 33.1 $ 30.6 $ 0.5
========== ======== ======== ========
(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 (earnings before
interest, taxes, depreciation, amortization and inventory related
charges) of $67.3 million for the quarter ended June 30, 1998 which
compared to a record Operating Contribution of $77.6 million in the same
period of 1997. For the six months ended June 30, 1998 Operating
Contribution was $87.4 million compared to $89.6 million in the first
six months of 1997. Net earnings for the quarter ended June 30, 1998
were $17.2 million compared to $32.3 million for the same period of
1997. For the first six months of 1998, the Company reported a net loss
of $31.5 million compared to a net loss of $15.1 million in the first
six months of 1997.
A decrease in crude oil prices of over $1.50 per barrel in the second
quarter of 1998 and approximately $3.50 per barrel for the year to date
resulted in a negative impact on net earnings of $18.7 million for the
second quarter and $55.4 million for the first half of 1998 as compared
to a negative impact of $2.8 million and $31.1 million in the same
periods a year ago. These inventory-related charges in 1998 included
non-cash accounting charges of $22.7 million and $8.2 million in the
first and second quarters of 1998, respectively, to write down inventory
carrying costs to current market value. The Company believes it may
recover these charges if hydrocarbon prices increase.
11
Net sales and operating revenues decreased approximately 17% in the
three and six months ended June 30, 1998 as compared to the same periods
of 1997, principally as a result of lower worldwide crude oil and
product prices in the current year which reduced both sales and cost of
goods sold.
Refining
Refining Division Operating Statistics:
(dollars in millions, except per barrel data)
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
1997 1998 1997 1998
---------- -------- -------- --------
Port Arthur Refinery
Crude oil throughput (m bbls/day) 218.4 233.2 192.6 227.7
Production (m bbls/day) 230.5 241.4 198.5 230.2
Gross margin
($/barrel of production) $ 4.17 $ 4.09 $ 3.99 $ 4.00
Operating expenses (40.6) (42.6) (83.7) (88.0)
Net margin $ 46.8 $ 47.2 $ 59.7 $ 78.5
Blue Island, Hartford and other
refining
Crude oil throughput (m bbls/day) 137.2 128.0 135.3 118.8
Production (m bbls/day) 145.7 124.9 141.2 120.5
Gross margin
($/barrel of production) $ 4.87 $ 5.31 $ 3.92 $ 4.08
Operating expenses (31.3) (32.1) (63.3) (64.2)
Clark Pipe Line net margin 0.5 0.6 1.1 1.2
Net margin $ 33.8 $ 28.8 $ 37.9 $ 25.9
Divisional G & A expenses (5.3) (7.3) (10.6) (13.7)
---------- -------- -------- --------
Refining contribution to
operating income $ 75.3 $ 68.7 $ 87.0 $ 90.7
========== ======== ======== ========
Refining division contribution to operating income of $68.7 million
in the second quarter of 1998 was below year-ago levels of $75.3
million principally due to the nearly $5 million estimated impact of a
scheduled maintenance turnaround at the Blue Island refinery that
reduced throughput during the first few weeks of the quarter. For the
six months ended June 30, 1998, contribution to operating income of
$90.7 million exceeded the $87.0 million recorded in the first half of
1997 principally because there was less total scheduled downtime in
1998. In the first six months of 1997 a maintenance turnaround at the
Port Arthur refinery reduced refining contribution by an estimated $16
million versus a total impact of scheduled downtime of approximately $9
million during 1998. During the Blue Island refinery turnaround,
improvements were made to the Blue Island refinery's vacuum unit that
are designed to upgrade approximately 2,000 barrels per day of asphalt-
type material to diesel fuel. During the second quarter and first half
of 1998, the Port Arthur refinery continued its significant
productivity improvements under Clark's ownership with record
throughput rates achieved on the crude and FCC units.
Weaker margins for gasoline and distillates in the second quarter
and first half of 1998 versus the same period of 1997 were largely
offset by favorable discounts for heavy and medium sour crude oil.
Industry margin indicators for the Gulf Coast and Chicago markets were each
down approximately 10 cents per barrel in the second quarter and were down
approximately 40 cents per barrel in the first half of 1998 as compared to
the same periods of 1997. 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.
12
Retail
Retail Division Operating Statistics:
(dollars in millions, except per gallon and per store data)
For the three months For the six months
ended June 30, ended June 30,
-------------------- ------------------
1997 1998 1997 1998
---------- -------- -------- --------
Core Market Stores
Gasoline volume (mm gals.) 228.8 225.7 434.7 451.1
Gasoline gross margin (cents/gal) 9.5 10.3 10.2 10.4
Gasoline gross margin $ 21.8 $ 23.2 $ 44.4 $ 46.9
Convenience product sales $ 64.9 $ 70.9 $115.5 $129.8
Convenience product margin
and other income 16.5 18.5 30.4 34.4
Operating expenses (28.0) (31.1) (55.1) (60.9)
Divisional G & A expenses (5.3) (5.8) (11.0) (11.5)
---------- -------- -------- --------
Core market store contribution $ 5.0 $ 4.8 $ 8.7 $ 8.9
Non-core stores, business development
and other 0.9 (0.7) 1.4 (1.1)
---------- -------- -------- --------
Retail contribution to operating
income $ 5.9 $ 4.1 $ 10.1 $ 7.8
========== ======== ========= =========
Core Market Stores - Per Month Per Store
Company operated stores (average) (a) 669 670 663 670
Gasoline volume (m gals.) 115.6 113.8 110.6 113.7
Convenience product sales
(thousands) $ 32.3 $ 35.3 $ 29.0 $ 32.3
Convenience product gross margin
(thousands) 8.3 9.2 7.7 8.6
(a) Ten stores were operated as convenience stores only.
Retail contribution to operating income from core market stores of
$4.8 million in the second quarter of 1998 and $8.9 million for the
first six months of 1998 were relatively flat with year-ago
contributions. Improvements in retail fuel and convenience product
gross margins were offset by higher operating expenses associated with
increased advertising and labor costs. Total retail contribution was
reduced in the current quarter due to new business development costs
and non-core store results. The Company has sold 110 non-core stores
principally to Clark branded marketers in the first half of 1998
generating approximately $13.9 million of proceeds. As of June 30,
1998, the Company's program to reposition its assets in non-core
markets was substantially complete.
Other Financial Highlights
Corporate general and administrative expenses increased in the second
quarter and first half of 1998 over the comparable periods in 1997
principally because of increased consulting services and increased
information services costs related to year 2000 upgrades.
Interest and finance costs, net for the three and six months ended
June 30, 1998 decreased over the comparable periods 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 six
months of 1998 over the comparable period in 1997 principally because of
amortization related to the Port Arthur maintenance turnaround performed
in the first quarter of 1997.
13
Liquidity and Capital Resources
Net cash provided by operating activities, excluding working capital
changes, for the six months ended June 30, 1998 was $31.8 million
compared to $28.7 million in the year-earlier period. Working capital
as of June 30, 1998 was $245.3 million, a 1.76-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 half of 1998
principally due to the non-cash inventory write-down of $30.9 million
and debt reduction.
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. In connection with the Lima Acquisition (as defined below), the
Credit Agreement was amended on August 10, 1998 to increase the facility
to the lesser of $700 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 $150 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 June 30, 1998, and prior
to the Lima Acquisition, was $372 million and approximately $197 million
of the facility was utilized for letters of credit. As of June 30,
1998, there were no direct borrowings under the Credit Agreement.
Cash flows used in investing activities in the first six months of
1998, excluding short-term investment activities which management treats
similar to cash and cash equivalents, were $32.1 million as compared to
$69.1 million in the year-earlier period. Cash flows used in investing
activities in 1998 were reduced by proceeds of $13.9 million from the
sale of certain non-core retail stores. The higher investing activities
in 1997 resulted principally from the Port Arthur refinery turnaround
($30.0 million) and the acquisition and subsequent image conversion of
48 retail stores in Michigan ($20.1 million). Refinery capital
expenditures totaled $22.6 million in the first half of 1998 (1997 -
$12.5 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 half of 1998 related to the previously-
mentioned Blue Island refinery turnaround and to a Port Arthur refinery
turnaround scheduled for early 1999. Retail capital expenditures for
the first six months of 1998 totaled $10.5 million (1997 - $7.0 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 half 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).
On August 10, 1998, the Company acquired British Petroleum's 170,000
barrel per day refinery and related terminals located in Lima, Ohio (the
"Lima Acquisition") for $175 million plus inventory currently
estimated at approximately $40 million. The Company funded the Lima
Acquisition and related costs with $5 million of cash on hand and the
proceeds of a private placement to institutional investors of $110
million 8 5/8% Senior Notes due 2008 and $115 million floating rate note
term loan due 2004. From 1991 to 1997 BP invested an aggregate of
approximately $212 million in the Lima Refinery. Based on the Company's
due diligence, it expects mandatory capital expenditures to average
approximately $20 million per year for the period from 1999 to 2002 and
turnaround expenditures to cost approximately $30 million once every
five years. The Lima Refinery is scheduled to have the first such major
maintenance turnaround in 1999. The Company expects cash flows from the
Lima Refinery to be adequate to cover incremental financing and
mandatory capital and turnaround costs.
14
In 1997, the Company determined that its minority interests in
Westshore Pipeline Company, Wolverine Pipeline Company, Chicap Pipeline
Company and Southcap Pipeline Company were not strategic since the
Company's shipping rights are assured due to the pipelines' operation as
common carrier pipelines and the Company's historical throughput on such
pipelines. During July 1998, the Company sold its interests in
Westshore Pipeline Company and Wolverine Pipeline Company for net
proceeds of approximately $17 million, resulting in an after-tax book
gain of approximately $12 million. The Company has signed definitive
agreements to sell the remaining two pipeline interests, subject to
regulatory approval, for net proceeds of approximately $57 million, which
would result in an after-tax book gain of approximately $56 million.
Although the Company expects to close the remaining two transactions by
September 1998, there can be no assurance that it will be able to do so
by such time or at all. The above referenced pipelines contributed
approximately $8 million of earnings before interest, taxes,
depreciation and amortization for the year ended December 31, 1997.
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.
PART II - OTHER INFORMATION
ITEM 5 - Other Information
On May 18, 1998, Glenn H. Hutchins, 42, was appointed as a director
of the Company filling an existing vacancy. Mr. Hutchins is a Senior
Managing Director of The Blackstone Group L.P., which he joined in
1994. Mr. Hutchins was a Managing Director of Thomas H. Lee Co.
("THL") from 1987 until 1994 and, while on leave from THL during parts
of 1993 and 1994, was a Special Advisor in the White House. Mr.
Hutchins is a member of the boards of directors of American Axle
Manufacturing Inc., CommNet Cellular Inc., Corp. Banca (Argentina)
S.A., Corp. Group. C.V., and Haynes International Inc. In 1994, Mr.
Hutchins was also appointed Chairman of the board of directors of the
Western N.I.S. Enterprise Fund by President Clinton.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.0 - Financial Data Schedule
(b) Reports on Form 8-K
July 7, 1998, Item 5. Other Events - Acquisition of BP's
Lima, Ohio refinery and related Consent Solicitation
Statement including financing plan, update on recent results
and sale of minority pipeline interests.
15
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 13, 1998