Item 1. BUSINESS
General
Crown Central Petroleum Corporation and subsidiaries (the Company), which traces its origins to 1917, is one of the largest independent refiners and marketers of petroleum products in the United States. The Company owns and operates two high-conversion refineries with a combined capacity of 152,000 barrels per day of crude oil - a 100,000 barrel per day facility located in Pasadena, Texas, near Houston (the Pasadena refinery) and a 52,000 barrel per day facility located in Tyler, Texas (the Tyler refinery, and together with the Pasadena refinery, the refineries). The Company is also a leading independent marketer of refined petroleum products and merchandise through a network of 343 gasoline stations and convenience stores located in the Mid-Atlantic and Southeastern United States. In support of these businesses, the Company operates 16 product terminals located on three major product pipelines along the Gulf Coast and the Eastern Seaboard and in the Central United States.
The refineries are strategically located and have direct access to crude oil supplies from major and independent producers and trading companies, thus enabling the Company to select a crude oil mix to optimize refining margins and minimize transportation costs. The Pasadena refinery's Gulf Coast location provides access to tankers, barges and pipelines for the delivery of foreign and domestic crude oil and other feedstocks. The Tyler refinery benefits from its location in East Texas due to its ability to purchase high quality crude oil directly from nearby suppliers at a favorable cost and its status as the only supplier of a full range of refined petroleum products in its local market area. The refineries are operated to generate a product mix of over 85% higher margin fuels,
primarily transportation fuels such as gasoline, highway diesel and jet fuel as well as home heating oil. During the past five years, the Company has invested over $91 million for environmental compliance, upgrading, expansion and process improvements at its two refineries. As a result of these expenditures, the Pasadena refinery has one of the highest rates of conversion to higher margin fuels, according to a recent industry study. The Tyler refinery enjoys essentially the same product yield characteristics as the Pasadena refinery.
The Company is the largest independent retail marketer in its core retail market areas within Maryland, Virginia and North Carolina. In the Company's primary retail marketing region of Baltimore, Maryland, the Company is the leading independent gasoline retailer, with a 1996 market share of approximately 13%. In addition to its leading market position in Baltimore, the Company has a geographic concentration of retail locations in high growth areas such as Charlotte and Raleigh, North Carolina and Atlanta, Georgia. Over the past several years, the Company has rationalized and refocused its retail operations, resulting in significant improvements in average unit performance and positioning these operations for growth from a profitable base. For the year ended December 31, 1996, average merchandise sales per unit increased 6.3% on a same store basis when compared with 1995. The Company has made substantial investments of approximately $26 million at its retail locations pursuant to environmental requirements from 1989 to 1996 and believes that over 73% of its retail units are currently in full or substantial compliance with the 1998 underground storage tank environmental standards.
Sales values of the principal classes of products sold by the Company during the last three years are included in Management's Discussion and Analysis of Financial Condition and Results of Operations on page 12 of this report.
At December 31, 1996, the Company employed 2,904 employees. The total number of employees decreased approximately 4% from year-end 1995.
Regulation
Like other companies in the petroleum refining and marketing industries, the Company's operations are subject to extensive regulation and the Company has responsibility for the investigation and cleanup of contamination resulting from past operations. Current compliance activities relate to air emissions limitations, waste water and storm water discharges and solid and hazardous waste management activities. In
connection with certain of these compliance activities and for other reasons, the Company is engaged in various investigations and, where necessary, remediation of soils and ground water relating to past spills, discharges and other releases of petroleum, petroleum products and wastes. The Company's environmental activities are different with respect to each of its principal business activities: refining, terminal operations and retail marketing. The Company is not currently aware of any information that would suggest that the costs related to the air, water or solid waste compliance and clean-up matters discussed herein will have a material adverse effect on the Company. The Company anticipates that substantial capital investments will be required in order to comply with federal, state and local provisions. A more detailed discussion of environmental matters is included in Note A and Note I of Notes to Consolidated Financial Statements on pages 24 and 33 of this report, and in Management's Discussion and Analysis of Financial Condition and Results of Operations on pages 12 through 18 of this report.
Competitive Conditions
Oil industry refining and marketing is highly competitive. Many of the Company's principal competitors are integrated multinational oil companies that are substantially larger and better known than the Company. Because of their diversity, integration of operations, larger capitalization and greater resources, these major oil companies may be better able to withstand volatile market conditions, compete on the basis of price and more readily obtain crude oil in times of shortages.
The principal competitive factors affecting the Company's refining operations are crude oil and other feedstock costs, refinery efficiency, refinery product mix and product distribution and transportation costs. Certain of the Company's larger competitors have refineries which are larger and more complex and, as a result, could have lower per barrel costs or higher margins per barrel of throughput. The Company has no crude oil reserves and is not engaged in exploration. The majority of the Company's total crude oil purchases are transacted on the spot market. The Company believes that it will be able to obtain adequate crude oil and other feedstocks at generally competitive prices for the foreseeable future.
The principal competitive factors affecting the Company's retail marketing operations are locations of stores, product price and quality, appearance and cleanliness of stores and brand identification. Competition from large integrated oil companies, as
well as from convenience stores which sell motor fuel, is expected to continue. The principal competitive factors affecting the Company's wholesale marketing business are product price and quality, reliability and availability of supply and location of distribution points.
The Company maintains business interruption insurance to protect itself against losses resulting from shutdowns to refinery operations from fire, explosions and certain other insured casualties. Business interruption coverage begins for such losses at the greater of $5 million or shutdowns for periods in excess of 25 days.
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Item 2.
Item 2. PROPERTIES
Refining Operation
Overview
The Company owns and operates two strategically located, high conversion refineries with a combined capacity of 152,000 barrels of crude oil per day--a 100,000 barrel per day facility located in Pasadena, Texas, near Houston, and a 52,000 barrel per day facility located in Tyler, Texas. Both refineries are operated to generate a product mix of over 85% higher margin fuels, primarily transportation fuels such as gasoline, highway diesel and jet fuel, as well as home heating oil. When operating to maximize the production of light products, the product mix at both of the Refineries is approximately 55% gasoline, 33% distillates (such as diesel, home heating oil, jet fuel, and kerosene), 6% petrochemical feedstocks and 6% slurry oil and petroleum coke.
The Pasadena refinery and Tyler refinery averaged production of 102,925 barrels per day and 50,335 barrels per day, respectively, during 1996. While both
refineries primarily run sweet (low sulphur content) crude oil, they can process up to 20% of sour (high sulphur content) crude oil in their mix.
The Company's access to extensive pipeline networks provides it with the ability to acquire crude oil directly from major integrated and independent domestic producers, foreign producers, or trading companies, and to transport this crude to the refineries at a competitive cost. The Pasadena refinery has docking facilities which provide direct access to tankers and barges for the delivery of crude oil and other feedstocks. The Company also has agreements with terminal operators for the storage and handling of the crude oil it receives from large ocean-going vessels and which the Company transports to the refineries by pipeline. The Tyler refinery benefits from its location in East Texas since the Company can purchase high quality crude oil at favorable prices directly from nearby producers. In addition, the Tyler Refinery is the only supplier of a full range of petroleum products in its local market area. See "-- Supply, Transportation and Wholesale Marketing."
Over the past several years, the Company has made significant capital investments to upgrade its refining facilities and improve operational efficiency. Three new process units were placed in service at the Pasadena refinery in 1996. These three units include a compression facility which transports gas from the fluid catalytic cracking unit (FCCU) to a petrochemical plant where the ethylene is recovered, a reformate splitter which increases the refinery's capacity to manufacture reformulated gasoline, and a vapor destructor which allows for expanded product loading at the refinery dock. At the Tyler refinery, the FCCU and sulfur recovery units were modified, enabling the refinery to increase production of gasoline and low sulfur diesel.
Pasadena Refinery
The Pasadena refinery is located on approximately 174 acres in Pasadena, Texas and was the first refinery built on the Houston Ship Channel. The refinery has been substantially modernized since 1969 and today has a rated crude capacity of 100,000 barrels per day. During the past five years, the Company has invested approximately $110 million in major upgrades and maintenance projects.
The Company's refining strategy includes several initiatives to enhance productivity. For example, the Company has completed an extensive plant-wide distributed control system at the Pasadena refinery which is designed to improve product yields, make more efficient use of personnel and optimize process operations. The distributed control system uses technology that is fast, accurate and provides
increased information to both operators and supervisors. This equipment also allows the use of modern advanced control techniques for optimizing unit operations.
The Pasadena refinery has a crude unit with a 100,000 barrels per day atmospheric column and a 38,000 barrels per day vacuum tower. Major downstream units consist of a 52,000 barrels per day fluid catalytic cracking unit, a 12,000 barrels per day delayed coking unit, two alkylation units with a combined capacity of 10,000 barrels per day of alkylate production, and a continuous regeneration reformer with a capacity of 24,000 barrels per day. Other units include two depropanizers that can produce 5,500 barrels per day of refinery grade propylene, a liquefied petroleum gas recovery unit that removes approximately 1,000 barrels per day of liquids from the refinery fuel system and a methyl tertiary butyl ether ("MTBE") process which can produce approximately 1,500 barrels per day of MTBE for gasoline blending, a reformate splitter, and a compression facility capable of transporting up to 14 million standard cubic feed per day of process gas to a neighboring petrochemical plant.
The Clean Air Act mandates that after January 1, 1995 only reformulated gasoline ("RFG") may be sold in certain ozone non-attainment areas, including some metropolitan areas where the Company sells gasoline. Using production from its MTBE unit, the Pasadena refinery can currently produce 12,000 barrels per day of winter grade RFG. With additional purchases of MTBE, ethanol or other oxygenates, all of the Pasadena refinery's current gasoline production could meet winter grade RFG standards. In 1996, the Company completed the construction of a reformate splitter at its Pasadena refinery. This process unit enables the refinery to make 12,000 barrels per day of summer grade RFG using its own MTBE, and up to 100% of its Pasadena refinery gasoline production as summer grade RFG with the purchase of additional oxygenates. This project enables the Company to satisfy all of its retail RFG requirements.
In 1996, the Pasadena refinery operated at approximately 90% of rated crude unit capacity with production yielding approximately 57% gasoline and 32% distillates. Of the total gasoline production, approximately 23% was premium octane grades. In addition, the Pasadena refinery produced and sold by- products including propylene, propane, slurry oil, petroleum coke and sulphur.
The Company owns and operates storage facilities located on approximately 130 acres near its Pasadena refinery which, together with tanks on the refinery site, provide the Company with a storage capacity of
approximately 6.2 million barrels (2.8 million barrels for crude oil and 3.4 million barrels for refined petroleum products and intermediate stocks).
The Pasadena refinery's refined petroleum products are delivered to both wholesale and retail customers. Approximately one-half of the gasoline and distillate production is sold wholesale into the Gulf Coast spot market and one-half is shipped by the Company on the Colonial and Plantation pipelines for sale in East Coast wholesale and retail markets. The Company's retail gasoline requirements represent approximately 60% of the Pasadena refinery's total gasoline production capability.
Tyler Refinery
The Tyler refinery is located on approximately 100 of the 529 acres owned by the Company in Tyler, Texas and has a rated crude capacity of 52,000 barrels per day. This refinery, which was acquired from Texas Eastern Corporation in the fourth quarter of 1989, had been substantially modernized between 1977 and 1980. The Tyler refinery's location provides access to nearby high quality East Texas crude oil which accounts for approximately 70% of its crude supply. This crude oil is transported to the refinery on the McMurrey and Scurlock pipeline systems. The Company owns the McMurrey system and has a long-term contract for use of the Scurlock system with Scurlock Permian Pipe Line Corporation. The Company also has the ability to ship crude oil to the Tyler refinery by pipeline from the Gulf Coast and does so when market conditions are favorable. Storage capacity at the Tyler refinery exceeds 2.7 millions barrels (1.2 million barrels for crude oil and 1.5 million barrels for refined petroleum products and intermediate stocks), including tankage along the Company's pipeline system.
The Tyler refinery has a crude unit with a 52,000 barrels per day atmospheric column and a 16,000 barrels per day vacuum tower. The other major process units at the Tyler refinery include an 18,000 barrels per day fluid catalytic cracking unit, a 6,000 barrels per day delayed coking unit, a 20,000 barrels per day naphtha hydrotreating unit, a 12,000 barrels per day distillate hydrotreating unit, two reforming units with a combined capacity of 16,000 barrels per day, a 5,000 barrels per day isomerization unit, and an alkylation unit with a capacity of 4,700 barrels per day.
In 1996, the Tyler refinery operated at approximately 90% of rated crude unit capacity, with production yielding approximately 54% gasoline and approximately 36% distillates. Of the total gasoline production, approximately 29% was premium octane grades. In
addition, the refinery produced and sold by-products including propylene, propane, slurry oil, petroleum coke and sulphur. The Tyler refinery is the principal supplier of refined petroleum products in the East Texas market with approximately 60% of production sold at the refinery's truck terminal. The remaining production is shipped via the Texas Eastern Products Pipeline for sale either from the Company's terminals or from other terminals along the pipeline. Deliveries under term exchange agreements account for the majority of the truck terminal sales.
Retail Operations
Overview
The Company traces its retail marketing history to the early 1930's when it operated a retail network of 30 service stations in the Houston, Texas area. It began retail operations on the East Coast in 1943. The Company has been recognized as an innovative industry leader and, in the early 1960's, pioneered the multi- pump retailing concept which has since become an industry standard in the marketing of gasoline. In 1983 the Company significantly expanded its retail presence with the acquisition of 642 Fast Fare and Zippy Mart convenience stores located in the Southeastern United States. In 1986 the Company purchased an additional 50 gasoline stations, expanding the Company's presence in the Baltimore/Washington, D.C. region, and in 1991, the Company acquired 48 additional units in Virginia which doubled its presence in that state. Additionally, in 1995, the Company acquired 13 retail units in North Carolina and 2 retail units in Georgia.
Beginning in 1989, the Company conducted a facility by facility review of its retail units. As a result, the Company disposed of non-strategic, marginal or unprofitable units as well as certain units which would have required significant capital improvements to comply with environmental regulations. During this period, the Company rebuilt and added individual units to increase its market share in strategic core markets. Since 1990, the Company has eliminated 447 retail units and added 64 retail units. During the same period, the Company closed a number of district offices and divisional headquarters. The Company believes it has substantially completed its retail unit rationalization program.
As of December 31, 1996, the Company had 343 retail locations. Of these 343 units (235 owned and 108 leased), the Company directly operated 239 and the remainder were operated by independent dealers. The Company conducts its operations in Maryland through an independent dealer network as a result of legislation which prohibits refiners from operating gasoline stations in Maryland. The Company believes that the high proportion of Company-operated units enables it to
respond quickly and uniformly to changing market conditions.
While most of the Company's units are located in or around major metropolitan areas, its sites are generally not situated on major interstate highways or inter-city thoroughfares. These off-highway locations primarily serve local customers and, as a result, the Company's retail marketing unit volumes are not as highly seasonal or dependent on seasonal vacation traffic as locations operating on major traffic arteries. The Company is the largest independent retail marketer of gasoline in its core retail market areas within Maryland, Virginia and North Carolina. In the Company's primary retail marketing area of Baltimore, Maryland, the Company is the leading independent gasoline retailer, with a 1996 market share of approximately 13%. In addition to its leading market position in Baltimore, the Company has a geographic concentration of retail locations in high growth areas such as Raleigh and Charlotte, North Carolina and Atlanta, Georgia. The Company's three highest volume core markets are Baltimore, the suburban areas of Maryland and Virginia surrounding Washington, D.C., and the greater Norfolk, Virginia area.
Retail Unit Operations
The Company conducts its retail marketing operations through three basic store formats: convenience stores, mini-marts and gasoline stations. At December 31, 1996, the Company had 79 convenience stores, 128 mini-marts and 136 gasoline stations.
The Company's convenience stores operate primarily under the names Fast Fare and Zippy Mart. These units generally contain 1,500 to 2,800 square feet of retail space and typically provide gasoline and a variety of convenience store merchandise such as tobacco products, beer, wine, soft drinks, snacks, dairy products and baked goods and more recently food service items.
The Company's mini-marts generally contain up to 800 square feet of retail space and typically sell gasoline and much of the same merchandise as at the Company's convenience stores. The Company has installed lighted canopies at most of its locations which extend over the multi-pump fuel islands and the store itself, providing added security and protection from the elements for customers and employees.
The Company's gasoline stations generally contain up to 100 square feet of retail space in an island kiosk and typically offer gasoline and a limited amount of merchandise such as tobacco products, candies, snacks and soft drinks.
The Company's units are brightly decorated with its trademark signage to create a consistent appearance and encourage customer recognition and patronage. The Company believes that consistency of brand image is important to the successful operation and expansion of its retail marketing system. In all aspects of its retail marketing operations the Company emphasizes quality, value, cleanliness and friendly and efficient customer service. The Company has conducted customer surveys which indicate strong consumer preference for units which are well-lighted and safe. In response to such customer preferences, the Company has initiated a system-wide lighting upgrade and safety enhancement program which includes the installation of improved lighting as well as the installation of its proprietary Coronet Security System, an interactive audio and video monitoring system, at over 180 of its units.
While the Company derives approximately 79% of its retail revenue from the sale of gasoline, it also provides a variety of merchandise and other services designed to meet the non-fuel needs of its customers. Sales of these additional products are an important source of revenue, contribute to increased profitability and serve to increase customer traffic. The Company believes that its existing retail sites present significant additional profit opportunities based upon their strategic locations in high traffic areas. The Company also offers ancillary services such as compressed air service, car washes, vacuums, and automated teller machines, and management continues to evaluate the addition of new ancillary services such as the marketing of fast food from major branded chains.
Dealer Operations
The Company maintains 104 dealer-operated units, 103 of which are located in Maryland. Under the Maryland Divorcement Law, refiners are prohibited from operating gasoline stations. The Maryland units are operated under a Branded Service Station Lease and Dealer Agreement (the "Dealer Agreement"), generally with a term of three years. Pursuant to the Dealer Agreement, a dealer leases the facility from the Company and purchases and resells Crown-branded motor fuel and related products. Dealers also purchase and resell merchandise from independent third parties. The Dealer Agreement sets forth certain operating standards; however, the Company does not control the independent dealer's personnel, pricing policies or other aspects of the independent dealer's business. The Company believes that its relationship with its dealers has been very favorable as evidenced by a low rate of dealer turnover.
The Company realizes little direct benefit from the sale of merchandise or ancillary services at the dealer operated units, and the revenue from these sales is not reflected in the Company's Consolidated Financial
Statements. However, to the extent that the availability of merchandise and ancillary services increases customer traffic and gasoline sales at its units, the Company benefits from higher gasoline sales volumes.
Supply, Transportation and Wholesale Marketing
Supply
The Company's refineries, terminals and retail outlets are strategically located in close proximity to a variety of supply and distribution channels. As a result, the Company has the flexibility to acquire available domestic and foreign crude oil economically, and also the ability to cost effectively distribute its products to its own system and to other domestic wholesale markets. Purchases of crude oil and feedstocks are determined by quality, price and general market conditions.
Transportation
Most of the domestic crude oil processed by the Company at its Pasadena refinery is transported by pipeline. The Company's purchases of Alaskan and foreign crude oil are transported primarily by tankers under spot charters which are arranged by either the seller or the Company. The Company is not currently obligated under any time-charter contracts. The Company has an approximate 5% interest in the Rancho Pipeline and generally receives between 20,000 and 25,000 barrels per day of crude through this system. Foreign crudes (principally from the North Sea, West Africa and South America) account for approximately 35% of total crude supply and are delivered by tanker. Most of the crude for the Tyler refinery is gathered from local East Texas fields and delivered by two pipeline systems, one of which is owned by the Company. Foreign crude also can be delivered to the Tyler refinery by pipeline from the Gulf Coast.
Terminals
The Company operates 11 product terminals located along the Colonial and Plantation pipelines from the Pasadena refinery to Elizabeth, New Jersey and, in addition to the terminal at the Tyler refinery, operates four product terminals located along the Texas Eastern Products Pipeline system. These terminals have a combined storage capacity of 2.7 million barrels. The Company's distribution network is augmented by agreements with other terminal operators also located along these pipelines. In addition to serving the Company's retail requirements, these terminals supply
products to other refiner/marketers, jobbers and independent distributors.
Wholesale Marketing
Approximately 16% of the gasoline produced by the Company's Pasadena refinery is transported by pipeline for sale at wholesale through Company and other terminals in the Mid-Atlantic and Southeastern United States. Heating oil is also regularly sold at wholesale through these same terminals. Gasoline, heating oil, diesel fuel and other refined products are also sold at wholesale in the Gulf Coast market.
The Company has entered into long-term product exchange agreements for approximately one-third of its Tyler refinery production with two major oil companies headquartered in the United States. These agreements provide for the delivery of refined products at the Company's terminals in exchange for delivery by these companies of a similar amount of refined products to the Company. The terms of these agreements extend through March 1998 and December 1999, respectively, and require the exchange of 8,400 barrels per day and 9,800 barrels per day, respectively. These exchange agreements provide the Company with the ability to broaden its geographic distribution, supply markets not connected to the refined products pipeline systems and reduce transportation costs.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company is involved in various matters of litigation, the ultimate determination of which, in the opinion of management, will not have a material adverse effect on the Company. The Company's legal proceedings are further discussed in Note I of Notes to Consolidated Financial Statements on page 33 of this report.
In December of 1996, the Company received a Notice of Violation and Administrative Order from the Environmental Protection Agency (`` EPA'') regarding exceedances of the Pasadena refinery's Clean Water Act permit. The Company is negotiating a settlement with EPA which will include modifications to its wastewater system; these costs are expected to be less than $200,000.
The Company's Tyler, Texas refinery received a Notice of Violation from the Texas Natural Resource Conservation Commission (`` TNRCC'') in October of 1996 regarding alleged noncompliance of its waste streams with Clean Air Act requirements. The Company has submitted a compliance schedule to TNRCC, and does not
expect the costs of implementation of applicable measures will exceed $100,000.
The Pasadena and Tyler refineries and many of the Company's other facilities are involved in a number of other environmental enforcement actions or are subject to agreements, orders or permits that require remedial activities. Environmental expenditures, including these matters, are discussed in the Liquidity and Capital Resources section of Management's Discussion and Analysis of Financial Conditions and Results of Operations on pages 14 through 16 of this report, and in Note I of Notes to Consolidated Financial Statements on page 33 of this report. These enforcement actions and remedial activities, in the opinion of management, are not expected to have a material adverse effect on the Company.
In addition, the Company has been named by the EPA and by several state environmental agencies as a potentially responsible party at various federal and state Superfund sites. The Company's exposure in these matters has either been resolved, is properly reserved or is de minimis and is not expected to have a material adverse effect on the Company.
The foregoing environmental proceedings are not of material importance to Crown's accounts and are described in compliance with SEC rules requiring disclosure of such proceedings although not material.
The Company's collective bargaining agreement with the Oil Chemical & Atomic Workers Union ("OCAW") covering employees at the Pasadena refinery expired on February 1, 1996. Following a number of incidents apparently intended to disrupt normal operations at the refinery and also as a result of the unsatisfactory status of the negotiations, on February 5, 1996 the Company implemented a lock-out of employees in the collective bargaining unit at the Pasadena facility. OCAW subsequently filed a number of unfair labor practice charges with the National Labor Relations Board ("NLRB"). Of those charges that have been decided, substantially all have been dismissed by the NLRB. The lock-out and negotiations on a new contract continue.
Item 4.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the last three months of the fiscal year covered by this report.
PART II
Item 5.
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed on the American Stock Exchange under the ticker symbols CNP A and CNP B.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's Sales and operating revenues increased 12.7% in 1996 compared to a 10.1% increase in 1995. The 1996 increase in Sales and operating revenues was primarily due to a 16.7% increase in the average unit selling price of petroleum products and a $3.4 million or 3.5% increase in merchandise sales. These increases were partially offset by a 3.8% decrease in petroleum product sales volumes principally attributable to the processing contract with Statoil wherein the Company processed 20,000 barrels per day for Statoil during the last five months of 1996. The 1995 increase in Sales and operating revenues was due to a 5.8% increase in the average unit selling price of petroleum products
and a 4.5% increase in petroleum product sales volumes. Additionally, there was a $4.4 million or 5% increase in merchandise sales.
As previously mentioned, merchandise sales increased $3.4 million or 3.5% to $102 million for the year ended December 31, 1996 compared to the same period in 1995, while merchandise gross profit increased $2.6 million or 9.8% for the year ended December 31, 1996 compared to the same period in 1995. Merchandise gross margin (merchandise gross profit as a percent of merchandise sales) was 26.9% and 28.5% for the years ended December 31, 1995 and 1996, respectively. These aggregate increases occurred despite a slight reduction in the number of operating units during the period, and are attributable to the Company's merchandise pricing program which has selectively increased margins on targeted merchandise yet still maintains an everyday low pricing policy which is competitive with major retail providers in the applicable market area. As a result of the strategy, aggregate merchandise gross profit, on a same store basis, increased 13.7% in 1996 as compared to 1995. Same store average monthly gasoline volumes and merchandise sales increased approximately 5% and 6%, respectively, in 1996 as compared to 1995.
Gasoline sales accounted for 54.3% of total 1996 revenues, while distillates and merchandise sales represented 31.2% and 6.2%, respectively. This compares to a dollar mix from sales of 57.8% gasoline, 24.2% distillates and 6.8% merchandise in 1995; and 55.2% gasoline, 28.6% distillates and 7.2% merchandise in 1994.
The following table depicts the sales values of the principal classes of products sold by the Company, which individually contributed more than ten percent of consolidated Sales and operating revenues during the last three years:
Sales of Principal Products millions of dollars 1996 1995 1994
Gasoline $888.1 $839.4 $728.6 No. 2 Fuel & Diesel 436.4 335.7 296.6
Costs and operating expenses increased 11.8% in 1996 compared to a 9.8% increase in 1995. The 1996 increase was attributable to an increase in the average production cost per barrel of crude oil and feedstocks of 20.5%. This increase was partially offset by slight decreases in petroleum products sales volumes as mentioned above. Additional decreases offsetting the increase in average production per barrel mentioned above result from the Company's use of the last-in, first-out (LIFO) method to value inventory which results in a better matching of current revenues and costs. The impact of LIFO was to increase the
Company's Costs and operating expenses by approximately $.9 million and $6.7 million in 1996 and 1995, respectively. The 1995 increase was attributable to an increase in the average production cost per barrel of crude oil and feedstocks of $1.62 or 9.54% and to a 4.5% increase in petroleum products sales volumes.
The impact of the Company's use of the LIFO method was to decrease the Company's gross margins in 1996, 1995 and 1994 by $.02 per barrel ($.9 million), $.12 per barrel ($6.7 million) and $.35 per barrel ($19 million), respectively. The 1996 LIFO impact is net of gross margin increases of $5.9 million resulting from a change in base year values for a portion of the Company's LIFO inventories and reductions in LIFO inventories of $15.2 million, which were carried at lower costs prevailing in prior years. The 1995 LIFO impact is net of a $4.9 million gross margin increase resulting from a reduction in LIFO inventories.
In early 1996, the Company adjusted its gasoline and distillate production to take advantage of better distillate margins compared to gasoline margins. Correspondingly, yields of distillates were increased to 51,700 barrels per day (bpd) (33.9%) in 1996 from 46,200 bpd (29.8%) in 1995, while gasoline production was decreased from 90,700 bpd (58.6%) in 1995 to 85,500 bpd (56%) in 1996. Due to deteriorating refinery gross margins which occurred during the third quarter of 1994, the Company reduced fourth quarter 1994 operating runs at its Pasadena refinery. Additionally, in 1994, overall refinery production was reduced by the fourth quarter's maintenance turnaround of the Pasadena refinery's Fluid Catalytic Cracking Unit (FCCU) and related units. The FCCU is the primary gasoline facility. As a result, yields of gasoline increased from 79,800 bpd (54%) in 1994 to 90,700 bpd (58.6%) in 1995. Distillate yields decreased slightly from 48,200 bpd (32.6%) in 1994 to 46,200 bpd (29.8%) in 1995. Total refinery production was: 152,600 bpd in 1996, 154,800 bpd in 1995 and 147,700 bpd in 1994.
Selling and administrative expenses increased 16.1% in 1996 after decreasing 2.3% in 1995. The 1996 increase was primarily due to increases in store level operating expenses principally related to additional retail outlets acquired in the third quarter of 1995 which operated for a full year in 1996 and to a same price cash or credit gasoline marketing strategy that increased credit card processing fees. Also included in 1996 were increased labor costs resulting from the installation of branded fast food operations in certain retail outlets. Additionally the Company recorded approximately $1 million in corporate administrative expenses associated with a management reorganization, $.8 million associated with certain long-range strategic initiatives and $1 million in employee
incentive payments due to improved Company performance. The 1995 decrease was primarily due to decreased corporate level administrative costs as a result of certain cost cutting programs initiated by the Company. At December 31, 1996, the Company operated 264 retail gasoline facilities and 79 convenience stores compared to 267 retail gasoline facilities and 81 convenience stores at December 31, 1995 and 258 retail gasoline facilities and 99 convenience stores at December 31, 1994. Selling and administrative expenses in 1994 include $.5 million in reorganization costs.
Operating costs and expenses in 1996, 1995 and 1994 include $1.9 million, $3.2 million and $1.9 million, respectively, related to environmental matters and $.5 million, $.1 million and $1.6 million, respectively, of accrued non-environmental casualty related costs. Operating costs and expenses in 1996 have been reduced by $4.8 million relating to adjustments in certain liability reserves. Additionally, 1995 and 1994 expenses also include $3.7 million and $3 million, respectively, related to retail units that have been closed.
Depreciation and amortization decreased 13.3% in 1996 after decreasing 14.1% in 1995. The 1996 decreases were primarily the result of the implementation of Statement of Financial Accounting Standards No. 121 `` Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'' (SFAS 121), effective October 1, 1995, which decreased 1996 depreciation and amortization by approximately $3.9 million. The 1995 decreases were primarily the result of decreases in refinery turnaround amortization due to a $10.4 million decrease in the total underlying value of the Pasadena Refinery FCCU turnaround being amortized in 1995 compared to the total underlying value of the FCCU turnaround that was being amortized in 1994.
The loss from Write-down of property, plant and equipment of $80.5 million in 1995 is due to the initial adoption of SFAS 121 effective October 1, 1995. While all of the Company's long-lived assets are subject to the provisions of SFAS 121, circumstances indicated the carrying amount of assets used in the operation of the Tyler refinery would not be recoverable. As such, a write-down to estimated fair value was recorded. The estimated fair value of these assets was determined by an independent appraisal. There were no indications of possible impairment relating to the remainder of the Company's long-lived assets. The loss of $16.8 million from Write-downs of property, plant and equipment in 1994 resulted from the abandonment of a project to construct a hydrodesulphurization unit at the Pasadena refinery.
Interest and other income in 1996 decreased $3.4 million after increasing $3.8 million in 1995. The 1996 decrease is due primarily to the consolidation in
the fourth quarter of 1995 of the Company's wholly- owned insurance subsidiaries which reported $2.3 million in equity earnings (and recorded as '' other income'' ) in 1995. The 1996 income of the Company's wholly-owned insurance subsidiaries of approximately $.8 million is reported as part of the Company's consolidated gross margin. Additionally, interest income decreased $1.2 million due to a decrease in the average daily cash invested of $25.7 million. The 1995 increase was primarily the result of increases in other income of $2.3 million from the Company's wholly-owned insurance subsidiaries. Further, interest income increased $1.4 million due to an increase in the average daily cash invested of $9.5 million and to an increase in the average daily rate on cash invested of 196 basis points.
Interest expense in 1996 was comparable to 1995. Interest expense increased $6.9 million in 1995 compared to 1994 due primarily to an increase in the average daily cash borrowed of $59.4 million . At December 31, 1995, there were additional outstanding borrowings of $31.9 million compared to December 31, 1994. The additional outstanding borrowings were due to the sale of $125 million of Unsecured 10.875% Senior Notes in January 1995 net of the repayment of the outstanding balance of the unsecured 10.42% Senior Notes and Unsecured Credit Agreement outstanding on December 31, 1994.
As previously discussed, in January 1995, the Company retired the remaining outstanding principal balance of the unsecured 10.42% Senior Notes (including a prepayment premium of $3.4 million) with the proceeds from the sale of $125 million of Unsecured 10.875% Senior Notes due February 1, 2005 which resulted in a net extraordinary loss in the first quarter of 1995 of $3.3 million (after reduction for the income benefit of $2 million).
Liquidity and Capital Resources
The Company's cash and cash equivalents were $6 million lower at year-end 1996 than at year-end 1995. The decrease was attributable to $32.5 million of net cash outflows from investment activities and $1.2 million of net cash outflows from financing activities. These outflows were principally offset by cash provided by operating activities of $27.7 million.
Net cash outflows from investment activities in 1996 consisted principally of capital expenditures of $24.1 million (which includes $11 million related to the marketing area and $10.3 million for refinery operations) and $6.1 million in capitalized costs of
software and related business processes developed for the Company's own use. Additionally, cash outflows from investing activities include $4.8 million of refinery deferred turnaround costs. The total outflows from investment activities were partially offset by proceeds from the sale of property, plant and equipment of $2.5 million.
Net cash outflows from financing activities in 1996 relates primarily to net repayments of long-term debt of $1.5 million.
Net cash inflows from operating activities in 1996 is net of $1.9 million in net outflows relating to other assets and liabilities. These outflows were primarily the result of decreases in accrued income and excise tax liabilities and in other accounts payable and to increases in prepaid insurance premiums and in accounts receivable. Partially offsetting these cash outflows were decreases in crude oil and finished products inventories due primarily to a reduction in crude oil requirements at the Pasadena refinery, and decreases in recoverable and deferred income taxes. The timing of collection of the Company's receivables is impacted by the specific type of sale and associated terms. Bulk sales of finished products are typically sold in 25,000 barrel increments with three day payment terms. Rack sales at the Company's product terminals are sold by truckload (approximately 8,000 gallons) with seven to ten day payment terms. While the Company's overall sales are aligned to its refining capability, receivables can vary between periods depending upon the specific type of sale and associated payment terms for sales near the end of a reporting period
The ratio of current assets to current liabilities was 1.29:1 and 1:22 to 1, respectively, at December 31, 1996 and 1995. If FIFO values had been used for all inventories, the ratio of current assets to current liabilities would have been 1.60:1 at December 31, 1996 and 1.49:1 at December 31, 1995.
Like other petroleum refiners and marketers, the Company's operations are subject to extensive and rapidly changing federal and state environmental regulations governing air emissions, waste water discharges, and solid and hazardous waste management activities. The Company's policy is to accrue environmental and clean-up related costs of a non- capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. While it is often extremely difficult to reasonably quantify future environmental related expenditures, the Company anticipates that a significant capital investment will be required over the next several years to comply with existing regulations. The Company believes that cash provided from its operating activities, together with other available sources of liquidity will be sufficient to fund these costs. The Company had recorded a liability
of approximately $15.7 million as of December 31, 1996 to cover the estimated costs of compliance with environmental regulations which are not anticipated to be of a capital nature. The liability of $15.7 million includes accruals for issues extending past 1997.
Environmental liabilities are subject to considerable uncertainties which affect the Company's ability to estimate its ultimate cost of remediation efforts. These uncertainties include the exact nature and extent of the contamination at each site, the extent of required cleanup efforts, varying costs of alternative remediation strategies, changes in environmental remediation requirements, the number and financial strength of other potentially responsible parties at multi-party sites, and the identification of new environmental sites. As a result, charges to income for environmental liabilities could have a material effect on results of operations in a particular quarter or year as assessments and remediation efforts proceed or as new claims arise. However, management is not aware of any matters which would be expected to have a material adverse effect on the Company.
During the years 1997-1998, the Company estimates environmental expenditures at the Pasadena and Tyler refineries, of at least $3.8 million and $2 million, respectively. Of these expenditures, it is anticipated that $2.8 million for Pasadena and $1.5 million for Tyler will be of a capital nature, while $1 million and $.5 million, respectively, will be related to previously accrued non-capital remediation efforts. At the Company's marketing facilities, environmental expenditures relating to previously accrued non-capital compliance efforts are planned totaling approximately $2.8 million through 1998.
As a result of a strong balance sheet and overall favorable credit relationships, the Company has been able to maintain open lines of credit with its major suppliers. Under the Revolving Credit Agreement effective September 25, 1995, as amended (Credit Agreement), the Company had outstanding as of March 14, 1997, irrevocable standby letters of credit in the principal amount of $38.2 million for purposes in the ordinary course of business. At December 31, 1996, the Company was in compliance with all covenants and provisions of the Credit Agreement. Meeting the covenants imposed by the Credit Agreement is dependent, among other things, upon the level of future earnings. The Company reasonably expects to continue to be in compliance with the covenants imposed by the Credit Agreement or a successor agreement over the next twelve months.
At the Company's option, up to $37.5 million of the Unsecured 10.875% Senior Notes (Notes) may be redeemed
at 110.875% of the principal amount at any time prior to February 1, 1998. After such date, they may not be redeemed until February 1, 2000 when they are redeemable at 105.438% of the principal amount, and thereafter at an annually declining premium over par until February 1, 2003 when they are redeemable at par. The Notes were issued under an Indenture which includes certain restrictions and limitations customary with senior indebtedness of this type including, but not limited to, the payment of dividends and the repurchase of capital stock. There are no sinking fund requirements on the Notes.
The Purchase Money Lien (Money Lien) discussed in Note C of Notes to Consolidated Financial Statements on page 27 of this report, is secured by certain service station and terminal equipment and office furnishings having a cost basis of $6.5 million. The effective rate for the Money Lien is 6.65%. Ninety percent of the principal is payable in 60 equal monthly installments which commenced in February 1994 with a balloon payment of 10% of the principal payable in January 1999.
The Company's management is involved in a continual process of evaluating growth opportunities in its core business as well as its capital resource alternatives. Total capital expenditures and deferred turnaround costs in 1997 are projected to approximate $43 million. The capital expenditures relate primarily to planned enhancements at the Company's refineries, retail unit improvements and to company-wide environmental requirements. The Company believes that cash provided from its operating activities, together with other available sources of liquidity, including the Unsecured Credit Agreement or a successor agreement, will be sufficient over the next several years to make required payments of principal and interest on its debt, permit anticipated capital expenditures and fund the Company's working capital requirements. The Unsecured Credit Agreement expires on September 30, 1997 and the Company intends to renew or replace the existing facility. Any major acquisition would likely require a combination of additional debt and equity.
The Company places its temporary cash investments in high credit quality financial instruments which are in accordance with the covenants of the Company's financing agreements. These securities mature within ninety days, and, therefore, bear minimal risk. The Company has not experienced any losses on its investments.
The Company faces intense competition in all of the business areas in which it operates. Many of the Company's competitors are substantially larger and therefore, the Company's earnings can be affected by the marketing and pricing policies of its competitors, as well as changes in raw material costs.
Merchandise sales and operating revenues from the Company's convenience stores are seasonal in nature, generally producing higher sales and net income in the summer months than at other times of the year. Gasoline sales, both at the Crown multi-pumps and convenience stores, are also somewhat seasonal in nature and, therefore, related revenues may vary during the year. The seasonality does not, however, negatively impact the Company's overall ability to sell its refined products.
The Company maintains business interruption insurance to protect itself against losses resulting from shutdowns to refinery operations from fire, explosions and certain other insured casualties. Business interruption coverage begins for such losses at the greater of $5 million or shutdowns for periods in excess of 25 days.
The Company has disclosed in Note I of Notes to Consolidated Financial Statements on page 33 of this report, various contingencies which involve litigation, environmental liabilities and examinations by the Internal Revenue Service. Depending on the occurrence, amount and timing of an unfavorable resolution of these contingencies, the outcome of which cannot reasonably be determined at this time, it is possible that the Company's future results of operations and cash flows could be materially affected in a particular quarter or year. However, the Company has concluded, after consultation with counsel, that there is no reasonable basis to believe that the ultimate resolution of any of these contingencies will have a material adverse effect on the Company. Additionally, as discussed in Item 3. Legal Proceedings on page 9 of this report, the Company's collective bargaining agreement at its Pasadena refinery expired on February 1, 1996, and on February 5, 1996, the Company invoked a lock-out of employees in the collective bargaining unit. The Company has been operating the Pasadena refinery without interruption since the lock-out with management and supervisory personnel and intends to continue full operations until an agreement is reached with the collective bargaining unit.
Effects of Inflation and Changing Prices
The Company's Consolidated Financial Statements are prepared on the historical cost method of accounting and, as a result, do not reflect changes in the dollar's purchasing power. In the capital intensive industry in which the Company operates, the replacement costs for its properties would generally far exceed their historical costs. As a result, depreciation would be greater if it were based on current replacement costs. However, since the replacement
facilities would reflect technological improvements and changes in business strategies, such facilities would be expected to be more productive and versatile than existing facilities, thereby increasing profits and mitigating increased depreciation and operating costs.
In recent years, crude oil and refined petroleum product prices have been volatile which has impacted working capital requirements. If the prices increase in the future, the Company would expect a related increase in working capital needs.
Additional Factors That May Affect Future Results
The Company's operating results have been, and will continue to be, affected by a wide variety of factors that could have an adverse effect on profitability during any particular period, many of which are beyond the Company's control. Among these are the demand for crude oil and refined products, which is largely driven by the condition of local and worldwide economies, although seasonality and weather patterns also play a significant part. Governmental regulations and policies, particularly in the areas of energy and the environment, also have a significant impact on the Company's activities. Operating results can be affected by these industry factors, by competition in the particular geographic markets that the Company serves and by Company-specific factors, such as the success of particular marketing programs and refinery operations.
In addition, the Company's profitability depends largely on the difference between market prices for refined petroleum products and crude oil prices. This margin is continually changing and may significantly fluctuate from time to time. Crude oil and refined products are commodities whose price levels are determined by market forces beyond the control of the Company. Additionally, due to the seasonality of refined products and refinery maintenance schedules, results of operations for any particular quarter of a fiscal year are not necessarily indicative of results for the full year. In general, prices for refined products are significantly influenced by the price of crude oil. Although an increase or decrease in the price for crude oil generally results in a corresponding increase or decrease in prices for refined products, often there is a lag time in the realization of the corresponding increase or decrease in prices for refined products. The effect of changes in crude oil prices on operating results therefore depends in part on how quickly refined product prices adjust to reflect these changes. A substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, a substantial or prolonged decrease in refined product prices without a corresponding decrease in crude oil prices, or a substantial or prolonged decrease in demand for refined products could have a significant negative effect on the Company's earnings and cash flows.
The Company is dependent on refining and selling quantities of refined products at margins sufficient to cover operating costs, including any future inflationary pressures. The refining business is characterized by high fixed costs resulting from the significant capital outlays associated with refineries, terminals and related facilities. Furthermore, future regulatory requirements or competitive pressures could result in additional capital expenditures, which may or may not produce desired results. Such capital expenditures may require significant financial resources that may be contingent on the Company's continued access to capital markets and commercial bank financing on favorable terms.
Purchases of crude oil supply are typically made pursuant to relatively short-term, renewable contracts with numerous foreign and domestic major and independent oil producers, generally containing market- responsive pricing provisions. Futures, forwards and exchange traded options are used to minimize the exposure of the Company's refining margins to crude oil and refined product fluctuations. The Company also uses the futures market to help manage the price risk inherent in purchasing crude oil in advance of the delivery date, and in maintaining the inventories contained within its refinery and pipeline system. Hedging strategies used to minimize this exposure include fixing a future margin between crude and certain finished products and also hedging fixed price purchase and sales commitments of crude oil and refined products. While the Company's hedging activities are intended to reduce volatility while providing an acceptable profit margin on a portion of production, the use of such a program can effect the Company's ability to participate in an improvement in related product profit margins. Although the Company's net sales and operating revenues fluctuate significantly with movements in industry crude oil prices, such prices do not have a direct relationship to net earnings, which are subject to the impact of the Company's LIFO method of accounting discussed below. The effect of changes in crude oil prices on the Company's operating results is determined more by the rate at which the prices of refined products adjust to reflect such changes.
The following table estimates the sensitivity of the Company's income before taxes to price changes which impact its refining and retail margins based on a representative production rate for the Refineries and a
representative amount of total gasoline sold at the Company's retail units:
Earnings Sensitivity Change Annual Impact
Refining margin $0.10/bbl $ 5.6 million Retail margin $0.01/gal $ 5.4 million
The Company conducts environmental assessments and remediation efforts at multiple locations, including operating facilities and previously owned or operated facilities. The Company accrues environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been incurred and the amount can be reasonably estimated. Accruals for losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Estimated costs, which are based upon experience and assessments, are recorded at undiscounted amounts without considering the impact of inflation, and are adjusted periodically as additional or new information is available. Expenditures for equipment necessary for environmental issues relating to ongoing operations are capitalized.
The Company's crude oil, refined products and convenience store merchandise and gasoline inventories are valued at the lower of cost (based on the last-in, first-out or LIFO method of accounting) or market, with the exception of crude oil inventory held for resale which is valued at the lower of cost (based on the first-in first-out or FIFO method of accounting) or market. Under the LIFO method, the effects of price increases and decreases in crude oil and other feedstocks are charged directly to the cost of refined products sold in the period that such price changes occur. In periods of rising prices, the LIFO method may cause reported operating income to be lower than would otherwise result from the use of the FIFO method. Conversely, in periods of falling prices the LIFO method may cause reported operating income to be higher than would otherwise result from the use of the FIFO method. In addition, the Company's use of the LIFO method understates the value of inventories on the Company's consolidated balance sheet as compared to the value of inventories under the FIFO method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Crown Central Petroleum Corporation and Subsidiaries
Note A--Description of Business and Summary of Accounting Policies
Description of Business: Crown Central Petroleum Corporation and subsidiaries (the Company) operates primarily in one business segment as an independent refiner and marketer of petroleum products, including petrochemical feedstocks. The Company operates two refineries, one located near Houston, Texas with a rated capacity of 100,000 barrels per day of crude oil and another in Tyler, Texas with a rated capacity of 52,000 barrels per day of crude oil. Its principal business is the wholesale and retail sale of its
products through 15 product terminals located on three major product pipelines along the Gulf Coast and the Eastern Seaboard and in the Central United States and through a network of 343 gasoline stations, convenience stores and mini-marts located in the Mid-Atlantic and Southeastern United States.
Crude oil and refined products are the Company's principal raw materials and finished goods, respectively. The price of crude oil and refined products are subject to worldwide market forces of supply and demand. Prices can be volatile and fluctuations influence the Company's financial results.
Employment at the Company's Pasadena and Tyler refineries represent approximately 12% and 8%, respectively, of the Company's total employment at December 31, 1996. Additionally, approximately 68% of the Pasadena refinery employees and approximately 69% of the Tyler refinery employees are subject to collective bargaining agreements. The Company's collective bargaining agreement with the Oil Chemical & Atomic Workers Union (OCAW) covering employees at the Pasadena refinery expired on February 1, 1996. The Pasadena refinery employees subject to the OCAW agreement were locked out by the Company on February 5, 1996. Negotiations for a new agreement are ongoing.
Locot Corporation, a wholly-owned subsidiary of the Company, is the parent company of La Gloria Oil and Gas Company (La Gloria) which operates the Tyler refinery, a pipeline gathering system in Texas and product terminals located along the Texas Eastern Products Pipeline system.
F Z Corporation, a wholly-owned subsidiary of the Company, is the parent company of Fast Fare, Inc. which operates two convenience store chains in six states, retailing both merchandise and gasoline.
The following summarizes the significant accounting policies and practices followed by the Company:
Principles of Consolidation: The consolidated financial statements include the accounts of Crown Central Petroleum Corporation and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash in excess of daily requirements is invested in marketable securities with maturities of three months or less. Such investments
are deemed to be cash equivalents for purposes of the statements of cash flows.
Accounts Receivable: The majority of the Company's accounts receivable relate to sales of petroleum products to third parties operating in the petroleum industry.
Inventories: The Company's crude oil, refined products, and convenience store merchandise and gasoline inventories are valued at the lower of cost (last-in, first-out) or market with the exception of crude oil inventory held for resale which is valued at the lower of cost (first-in, first-out) or market. Materials and supplies inventories are valued at cost. Incomplete exchanges of crude oil and refined products due the Company or owing to other companies are reflected in the inventory accounts.
Property, Plant and Equipment: Property, plant and equipment is carried at cost. Costs assigned to property, plant and equipment of acquired businesses are based on estimated fair value at the date of acquisition. Depreciation and amortization of plant and equipment are primarily provided using the straight-line method over estimated useful lives. Construction in progress is recorded in property, plant and equipment.
Expenditures which materially increase values, change capacities or extend useful lives are capitalized in property, plant and equipment. Routine maintenance, repairs and replacement costs are charged against current operations. At intervals of two or more years, the Company conducts a complete shutdown and inspection of significant units (turnaround) at its refineries to perform necessary repairs and replacements. Costs associated with these turnarounds are deferred and amortized over the period until the next planned turnaround, which generally ranges from 24 to 48 months.
Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in income.
Software Capitalization: Costs of developing and implementing software and related business processes designed for the Company's own use are capitalized as incurred. Amortization is provided using the straight- line method over the estimated remaining useful lives of the related software.
Environmental Costs: The Company conducts environmental assessments and remediation efforts at multiple locations, including operating facilities, and
previously owned or operated facilities. Estimated closure and post-closure costs for active, refinery and finished product terminal facilities are not recognized until a decision for closure is made. Estimated closure and post-closure costs for active and operated retail marketing facilities and costs of environmental matters related to ongoing refinery, terminal and retail marketing operations are recognized as follows. Expenditures for equipment necessary for environmental issues relating to ongoing operations are capitalized. The Company accrues environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. Accruals for losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Estimated costs, which are based upon experience and assessments, are recorded at undiscounted amounts without considering the impact of inflation, and are adjusted periodically as additional or new information is available.
Sales and Operating Revenues: Resales of crude oil are recorded net of the related crude oil cost (first-in, first-out) in sales and operating revenues.
Interest Capitalization: Interest costs incurred during the construction and preoperating stages of significant construction or development projects is capitalized and subsequently amortized by charges to earnings over the useful lives of the related assets.
Amortization of Goodwill: The excess purchase price of acquisitions of businesses over the estimated fair value of assets acquired is being amortized on a straight-line basis over 20 years.
Derivative Financial Instruments: Futures, forwards and exchange traded options are used to minimize the exposure of the Company's refining margins to crude oil and refined product price fluctuations. The Company also uses the futures market to manage the price risk inherent in purchasing crude oil in advance of the delivery date, and in maintaining the inventories contained within its refinery and pipeline system. Hedging strategies used to minimize this exposure include fixing a future margin between crude oil and certain finished products and also hedging fixed price purchase and sales commitments of crude oil and refined products. Futures, forwards and exchange traded options entered into with commodities brokers and other integrated oil and gas companies are utilized to execute the Company's strategies. These instruments generally allow for settlement at the end of their term in either cash or product.
Net realized gains and losses from these hedging strategies are recognized in costs and operating expenses when the associated refined products are sold. Unrealized gains and losses represent the difference
between the market price of refined products and the price of the derivative financial instrument, inclusive of refining costs. Individual transaction unrealized gains and losses are deferred in other current assets and liabilities to the extent that the associated refined products have not been sold. While the Company's hedging activities are intended to reduce volatility while providing an acceptable profit margin on a portion of production, the use of such a program can effect the Company's ability to participate in an improvement in related refined product profit margins.
Credit Risk - The Company is potentially subjected to concentrations of credit risk with accounts receivable and futures, forwards and exchange traded options for crude oil and finished products. Because the Company has a large and diverse customer base with no single customer accounting for a significant percentage of accounts receivable, there was no material concentration of credit risk in these accounts at December 31, 1996. The Company evaluates the credit worthiness of the counterparties to futures, forwards and exchange traded options and considers non- performance credit risk to be remote. The amount of exposure with such counterparties is generally limited to unrealized gains on outstanding contracts.
Stock Based Compensation - Effective January 1, 1996, the Company has adopted Statement of Financial Accounting Standards No. 123 `` Accounting for Stock- Based Compensation,'' (SFAS 123). The new standard establishes a fair value based method of measuring stock-based compensation. The Company has adopted the disclosure provisions prescribed by SFAS 123 which permit companies to continue to value their stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 while providing proforma disclosures of net income and earnings per share calculated using the fair value based method.
Reclassifications - To conform to the 1996 presentation, Sales and operating revenues and Costs and operating expenses for 1995 and 1994 have been adjusted to exclude all federal and state excise taxes. As a result, Sales and operating revenues and Costs and operating expenses decreased $413,290,000 in 1995 and $380,610,000 in 1994, respectively. This adjustment had no effect on net (loss) for either period.
Note B--Inventories
Note C--Long-Term Debt and Credit Arrangements
On January 24, 1995, the Company completed the sale of $125 million of unsecured 10.875% Senior Notes due February 1, 2005 priced at 99.75% (Notes). Approximately $55 million of the net proceeds from the sale was used to retire the Company's outstanding 10.42% Senior Notes, including a prepayment premium of $3.4 million, and $8 million was used to reduce amounts outstanding under the Company's unsecured bank lines. The Notes were issued under an Indenture which includes certain restrictions and limitations customary with senior indebtedness of this type including, but not limited to, the payment of dividends and the repurchase of capital stock. The retirement of the Company's outstanding 10.42% Senior Notes resulted in a net extraordinary loss in the first quarter of 1995 of $3.3 million.
Effective as of September 25, 1995, the Company entered into a two year Unsecured Revolving Credit Agreement (Agreement) with NationsBank of Texas, N.A., as administrative agent and letter of credit agent, and The First National Bank of Boston and Texas Commerce Bank National Association, as agents. Additionally, there are six other participant banks. Under the Agreement, the banks have committed a maximum of $130 million to the Company for cash borrowings and letters of credit. The Agreement allows for interest on outstanding borrowings to be computed under one of three methods based on the Base Rate, the London Interbank Offered Rate, or the Certificates of Deposit Rate (all as defined). The Agreement limits indebtedness (as defined) and cash dividends and requires the maintenance of various covenants including, but not limited to, minimum consolidated tangible net worth, minimum working capital and minimum FIFO net income or (loss) (all as defined). The Company intends to use the Agreement for general corporate and working capital purposes.
As of December 31, 1996, the Company had outstanding irrevocable standby letters of credit in the principal amount of $59.6 million. Unused commitments under the terms of the Credit Agreement totaling $70.4 million were available for future borrowings and issuance of letters of credit at December 31, 1996. The Company pays an annual commitment fee on the unused portion of the credit line.
The Purchase Money Lien is secured by certain service station equipment and office furnishings having a cost basis of $6.5 million. The effective rate for the Money Lien is 6.65%. Ninety percent of the principal is repayable in 60 monthly installments with a balloon payment of 10% of the principal payable in January 1999.
Note D--Crude Oil and Refined Product Hedging Activities
The net deferred loss from crude oil and refined product hedging strategies was $3.4 million and $1.6 million at December 31, 1996 and 1995, respectively. Included in these hedging strategies are contracts maturing from January 1997 to March 1997. The Company is using these contracts to defer the pricing of approximately 14% of its crude oil commitments and to fix the margin on approximately 2% of its refined products, for the aforementioned period.
No valuation allowance is considered necessary for the above deferred tax assets. The company has tax credit carryforwards of $303,000 which expire in the years 2008 through 2010, along with net operating loss carryforwards of $44.4 million which expire in the years 2009 through 2011.
Recoverable income taxes include an income tax receivable for the anticipated refund from the current use of net operating losses and the estimated benefit from net operating loss carryforwards that will be used in 1997.
Significant components of the income tax (benefit) for the years ended December 31 follows.
Note F--Capital Stock and Net Income Per Common Share
Class A Common stockholders are entitled to one vote per share and have the right to elect all directors other than those to be elected by other classes of stock. Class B Common stockholders are entitled to one-tenth vote per share and have the right to elect two directors. Net (loss) per share for 1996, 1995 and 1994 is based upon the weighted average of common shares outstanding of 9,721,693, 9,697,611 and 9,742,598, respectively, in each year. The average outstanding and equivalent shares excludes 249,700, 255,300 and 105,500 shares of Performance Vested Restricted Stock (PVRS) shares registered to participants in the 1994 Long-Term Incentive Plan (Plan) at December 31, 1996, 1995 and 1994, respectively. The PVRS shares are not considered outstanding for net income (loss) per share calculations until the shares are released to the Plan participants.
Note G--Long-Term Incentive Plan
Under the terms of the 1994 Long-term Incentive Plan (Plan), the Company may distribute to selected employees restricted shares of the Company's Class B Common Stock and options to purchase Class B Common Stock. Up to 1.1 million shares of Class B Common Stock may be distributed under the Plan. The balance sheet caption "Unearned restricted stock" is charged for the market value of restricted shares at their grant date and changes in the market value of shares outstanding until the vesting date, and is shown as a reduction of stockholders' equity. The impact is further reflected within Class B Common Stock and Additional paid-in-capital.
Performance Vested Restricted Stock (PVRS) awards are subject to the attainment of performance goals and certain restrictions including the receipt of dividends and transfers of ownership. As of December 31, 1996, 249,700 shares of PVRS have been registered in participants names and are being held by the Company subject to the attainment of the related performance goals. PVRS awards to employees who have left the Company are canceled.
Under the 1994 Long-term Incentive Plan, non-qualified stock options are granted to participants at a price not less than 100% of the fair market value of the stock on the date of grant. The exercise period is ten years with the options vesting one-third per year over three years after a one-year waiting period
Under the terms of the 1995 Management Stock Option Plan, the Company may award to participants non-
qualified stock options to purchase shares of the Company's Class B Common Stock at a price equal to 100% of the fair market value of the stock at the date of grant. Up to 500,000 shares of Class B Common Stock may be distributed under the Plan. The exercise period is ten years with the options vesting one-third per year over three years after a one-year waiting period.
Shares of Class B Common Stock available for issuance under options or awards amounted to 399,536 and 377,940 at December 31, 1996 and 1995, respectively.
The weighted average remaining life for options outstanding at December 31, 1996 was nine years for the Long Term Incentive Plan and also nine years for the Management Stock Plan.
All options were granted at an exercise price equal to the fair market value of the common stock at the date of grant. The weighted average fair value at the date of grant for options granted under the Long Term Incentive Plan was $3.36and $3.88 for 1996 and 1995, respectively. The fair value at the date of grant for options granted under the Management Stock Option Plan was $4.00 for 1995. There were no grants under the Management Stock Option Plan in 1996. The fair value of options at date of grant was estimated using the Black-Scholes model with the following assumptions:
The Company granted 45,450 and 149,800 of shares of Performance Vested Restricted Stock Awards during 1996 and 1995, respectively. The weighted average fair value at date of grant for Performance Vested Restricted Stock Awards granted in 1996 and 1995 was $17.05 and $12.81, respectively, which in each case represents the market value of the Company's Class B Common Stock at the date of grant. The amount of compensation expense recognized for Performance Vested Stock Awards was not significant for 1996. There was no compensation expense recognized in 1995 for these awards.
Stock-based compensation costs would have increased the pretax loss by $1,320,000 ($805,000 after tax or $.08 per share) and $1,530,000 ($939,000 after tax or $.10 per share) for the years ended 1996 and 1995, respectively, had the fair values of options and the Performance Vested Restricted Stock granted since 1995 been recognized as compensation expense on a straight line basis over the vesting period of the grant giving consideration to achievement of performance objectives where applicable. The proforma effect on net income for 1996 and 1995 is not representative of the proforma effect on net income in future years as it does not consider the proforma compensation expense related to grants made prior to 1995.
Note H--Employee Benefit Obligations
The Company has a defined benefit pension plan covering the majority of full-time employees. The Company also has several defined benefit plans covering only certain senior executives. Plan benefits are generally based on years of service and employees' average compensation. The Company's policy is to fund the pension plans in amounts which comply with contribution limits imposed by law. Plan assets consist principally of fixed income securities and stocks.
In addition to the defined benefit pension plan, the Company provides certain health care and life insurance benefits for eligible employees who retire from active service. The postretirement health care plan is contributory, with retiree contributions consisting of copayment of premiums and other cost sharing features such as deductibles and coinsurance. Beginning in 1998, the Company will "cap" the amount of premiums that it will contribute to the medical plans. Should costs exceed this cap, retiree premiums would increase to cover the additional cost.
The weighted average discount rate used in determining the APBO was 7.5% and 7.25% in 1996 and 1995, respectively.
The Company's policy is to fund postretirement costs other than pensions on a pay-as-you-go basis.
A 10% increase in the cost of medical care was assumed for 1996. This medical trend rate is assumed to decrease 1% annually to 9% in 1997, and decrease to 0% thereafter as a result of the expense cap in 1998. The medical trend rate assumption affects the amounts reported. For example, a 1% increase in the medical trend rate would increase the APBO by $394,000, and the net periodic cost by $71,000 for 1996.
Note I--Litigation and Contingencies
The Company has been named as a defendant in various matters of litigation, some of which are for substantial amounts, and involve alleged personal injury and property damage from prolonged exposure to petroleum, petroleum related products and substances used at its refinery or in the petroleum refining process. The Company is a co-defendant with numerous other defendants in a number of these suits. The Company is vigorously defending these actions, however,
the process of resolving these matters could take several years. The liability, if any, associated with these cases was either accrued in accordance with generally accepted accounting principles or was not determinable at December 31, 1996. The Company has consulted with counsel with respect to each such proceeding or large claim which is pending or threatened. While litigation can contain a high degree of uncertainty and the risk of an unfavorable outcome, in the opinion of management, there is no reasonable basis to believe that the eventual outcome of any such matter or group of related matters will have a material adverse effect on the Company.
The Company's federal income tax returns for the fiscal years 1990 through 1995 are currently under examination by the Internal Revenue Service. The Company has not received any Notices of Proposed Adjustments and is not aware of any such matters which will have a material adverse effect on the Company.
Like other petroleum refiners and marketers, the Company's operations are subject to extensive and rapidly changing federal and state environmental regulations governing air emissions, waste water discharges, and solid and hazardous waste management activities. The Company's policy is to accrue environmental and clean-up related costs of a non- capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. While it is often extremely difficult to reasonably quantify future environmental related expenditures, the Company anticipates that continuing capital investments will be required over the next several years to comply with existing regulations. The Company had recorded a liability of approximately $15.7 million as of December 31, 1996 relative to the estimated costs of a non-capital nature related to compliance with environmental regulations. This liability is anticipated to be expended over the next five years and is included in the balance sheet as a noncurrent liability. No amounts have been accrued as receivables for potential reimbursement or recoveries to offset this liability. Included in Costs and operating expenses in the Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 were costs related to environmental remediation in the amount of $1.6 million, $3.2 million and $1.9 million, respectively.
Environmental liabilities are subject to considerable uncertainties which affect the Company's ability to estimate its ultimate cost of remediation efforts. These uncertainties include the exact nature and extent of the contamination at each site, the extent of required cleanup efforts, varying costs of alternative remediation strategies, changes in environmental remediation requirements, the number and strength of other potentially responsible parties at multi-party sites, and the identification of new environmental
sites. It is possible that the ultimate cost, which cannot be determined at this time, could exceed the Company's recorded liability. As a result, charges to income for environmental liabilities could have a material effect on the results of operations in a particular quarter or year as assessments and remediation efforts proceed or as new claims arise. However, management is not aware of any matters which would be expected to have a material adverse effect on the Company.
Note J--Noncancellable Lease Commitments
The Company has noncancellable operating lease commitments for refinery, computer, office and other equipment, transportation equipment, an airplane, service station and convenience store properties, and office space. Lease terms range from three to ten years for refinery, computer, office and other equipment and four to eight years for transportation equipment. The airplane lease commenced in 1992 and has a term of seven years. The majority of service station properties have lease terms of 20 years. The average lease term for convenience stores is approximately 13 years. The Corporate Headquarters office lease commenced in 1993 and has a ten year term beginning in 1993. Certain of these leases have renewal provisions.
Rental expense for the years ended December 31, 1996, 1995 and 1994 was $12,935,000, $12,955,000 and $13,658,000, respectively.
Accumulated amortization of goodwill was $4,809,000 and $4,395,000 at December 31, 1996 and 1995, respectively.
Note L--Fair Value of Financial Instruments
The Company considers cash and cash equivalents, accounts receivable, investments in subsidiaries, long- term notes receivable, accounts payable, long-term debt and interest rate swap agreements to be its financial instruments. The carrying amount reported in the balance sheet for cash and cash equivalents, accounts receivable and accounts payable, represent their fair values. The fair value of the Company's long-term notes receivable at December 31, 1996 was estimated using a discounted cash flow analysis, based on the assumed interest rates for similar types of arrangements. The approximate fair value of the Company's Long-Term Debt at December 31, 1996 was estimated using a discounted cash flow analysis, based on the Company's assumed incremental borrowing rates for similar types of borrowing arrangements. The fair value of its investments in subsidiaries is considered to be their carrying amount since these investments do not have quoted market prices.
The following summarizes the carrying amounts and related approximate fair values as of December 31, 1996
of the Company's financial instruments whose carrying amounts do not equal its fair value:
REPORT OF INDEPENDENT AUDITORS
To the Stockholders Crown Central Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Crown Central Petroleum Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crown Central Petroleum Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note A of the consolidated financial statements, in the fourth quarter of 1995, the Company changed its method of accounting for impairment of long-lived assets in accordance with the adoption of SFAS No. 121.
/s/---Ernst & Young LLP
Baltimore, Maryland February 27, 1997
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not filed a Form 8-K within the last twenty-four (24) months reporting a change of independent auditors or any disagreement with the independent auditors.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of Crown Central Petroleum Corporation's executive officers, their ages and their positions and offices as of March 1, 1997:
Henry A. Rosenberg, Jr. (67) Director since 1955, Chairman of the Board and Chief Executive Officer since May 1975 and also President since March 1, 1996. Also a director of Signet Banking Corporation and USF&G Corporation.
Phillip W. Taff (55) Executive Vice President and Chief Financial Officer since April 1996; Senior Vice President - Finance and Chief Financial Officer from June 1994 to March 1996. Director of the Company from 1992 until his employment
by the Company. Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Greyhound Lines, Inc. from April 1993 to May 1994. Senior Vice President and Chief Financial Officer of American Trading and Production Corporation from May 1991 to April 1993.
Randall M. Trembly (50) Executive Vice President since April 1996; Senior Vice President - Refining from July 1995 to March 1996; Vice President - Refining from December 1991 to June 1995.
Edward L. Rosenberg (41) Senior Vice President - Supply and Transportation since April 1996. Senior Vice President - Administration - Corporate Development and Long Range Planning from June 1994 to March 1996; Senior Vice President - Finance and Administration from December 1991 to June 1994. Edward L. Rosenberg is the son of Henry A. Rosenberg, Jr., and the brother of Frank B. Rosenberg.
John E. Wheeler, Jr. (44) Senior Vice President - Finance and Treasurer since October 1996; Senior Vice President - Finance from April 1996 to September 1996; Senior Vice President - Treasurer and Controller from June 1994 to March 1996; Vice President - Treasurer and Controller from December 1991 to June 1994.
Frank B. Rosenberg (38) Senior Vice President - Marketing since April 1996; Vice President - Marketing from January 1993 to March 1996; Southern Marketing Division Manager from January 1992 to January 1993. Frank B. Rosenberg is the son of Henry A. Rosenberg, Jr. and the brother of Edward L. Rosenberg.
Thomas L. Owsley (56) Vice President - Legal since April 1983.
Paul J. Ebner (39) Vice President - Shared Services since April 1996; Vice President - Marketing Support Services from December 1991 to March 1996.
J. Michael Mims (47) Vice President - Human Resources since June 1992. Vice President - Internal Auditing and Consulting Services from December 1991 to June 1992.
Dennis W. Marple (48) Vice President - Wholesale Sales and Terminals since January 1996. General Manager - Wholesale Sales from February 1995 to December 1995. Vice President - LaGloria Supply, Trading and Transportation from October 1989 to January 1995.
Dolores B. Rawlings (59) Vice President - Secretary since April 1996; Secretary from November 1990 to March 1996.
James R. Evans (50) Vice President - Retail Marketing since June 1996; General Manager of Retail Operations from February 1995 to May 1996; General Manager of Direct Operations from November 1993 to January 1995; Division Manager - Retail from October 1990 to October 1993.
Jan L. Ries (48) Corporate Controller since November 1996; Marketing Division Controller from January 1992 to October 1996.
There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any Director or Executive Officer during the past five years. The information required in this Item 10 regarding Directors of the Company and all persons nominated or chosen to become directors is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
Item 11. EXECUTIVE COMPENSATION
The information required in this Item 11 regarding executive compensation is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this Item 12 regarding security ownership of certain beneficial owners and management is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this Item 13 regarding certain relationships and related transactions is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) LIST OF FINANCIAL STATEMENTS The following Consolidated Financial Statements of Crown Central Petroleum Corporation and Subsidiaries, are included in Item 8 on pages 19 through 35 of this report:
o Consolidated Statements of Operations -- Years ended December 31, 1996, 1995 and 1994
o Consolidated Balance Sheets -- December 31, 1996 and
o Consolidated Statements of Changes in Common Stockholders' Equity -- Years ended December 31, 1996, 1995 and 1994
o Consolidated Statements of Cash Flows -- Years ended December 31, 1996, 1995 and 1994
o Notes to Consolidated Financial Statements -- December 31, 1996
(a) (2) LIST OF FINANCIAL STATEMENT SCHEDULES
The schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted.
(a) (3) and (c) LIST OF EXHIBITS
EXHIBIT NUMBER
3 Articles of Incorporation and Bylaws
(a) Amended and Restated Charter of Crown Central Petroleum Corporation was previously filed with the Registrants' Proxy Statement dated March 15, 1996 for the Annual Meeting of Shareholders held on April 25, 1996 as Exhibit A of Appendix A, herein incorporated by reference.
(b) Bylaws of Crown Central Petroleum Corporation as amended and restated a February 29, 1996 was previously filed with the Registrant's Form 10-K for the year ended December 31, 1995 as Exhibit 3(b), herin incorporated by reference.
4 Instruments Defining the Rights of Security Holders, Including Indentures
(a) Credit Agreement dated as of September 25, 1995 between the Registrant and various banks was previously filed with the Registrant's Form 10-Q for the quarter ended September 30, 1995 as Exhibit 4(a), herein incorporated by reference.
(b) Amendment effective as of October 1, 1995 to the Credit Agreement dated as of September 25, 1995 was previously filed with the Registrant's Form 10-K for the year ended December 31, 1995 as Exhibit 4(b), herein incorporated by reference.
(c) Amendment effective as of April 1, 1996 to the Credit Agreement dated as of September 25, 1995 was previously filed with the Registrant's Form 10-Q for the quarter ended June 30, 1996 as Exhibit 4(a), herein incorporated by reference.
(d) Form of Indenture for the Registrant's 10 7/8% Senior Notes due 2005 filed on January 17, 1995 as Exhibit 4.1 of Amendment No. 3 to Registration Statement on Form S-3, Registration No. 33-56429, herein incorporated by reference.
10 Material Contracts
(a) Crude oil processing agreement between the Registrant and Statoil North America, Inc.is filed as part of this Annual Report on Form 10-K. Certain portions of the Agreement have been omitted because of their confidential nature, and have been filed separately with the Securities and Exchange Commission marked `` Confidential Treatment''.
(b) Crown Central Petroleum Retirement Plan effective as of July 1, 1993, was previously filed with the Registrant's Form 10-K for the year ended December 31, 1993 as Exhibit 10(a), herein incorporated by reference.
(c) Supplemental Retirement Income Plan for Senior Executives as Restated effective September 26, 1996 was previously filed with the Registrant's Form 10-Q for the quarter ended September 30, 1996 as Exhibit 10(b), herein incorporated by reference.
(d) Employee Savings Plan as amended and restated effective January 1, 1987 9cwas previously filed with the Registrant's Form 10-K for the year ended December 31, 1995 as Exhibit 10(c), herin incorporated by reference., 1987.
(e) Amendment effective as of September 26, 1996 to the Crown Central Petroleum Employees Savings Plan was previously filed with the Registrant's Form 10-Q for the quarter ended September 30, 1996 as Exhibit 10(c), herein incorporated by reference.
(f) Directors' Deferred Compensation Plan adopted on August 25, 1983 was previously filed with the Registrant's Form 10-Q for the quarter ended September 30, 1983 as Exhibit 19(b), herein incorporated by reference.
(g) The 1994 Long-Term Incentive Plan was previously filed as an exhibit to the Registrant's Proxy Statement dated March 24, 1994, herein incorporated by reference.
(h) Amendment effective as of September 26, 1996 to the Crown Central Petroleum Corporation 1994 Long-Term Incentive Plan was previously filed with the Registrant's Form 10-Q for the quarter ended September 30, 1996 as Exhibit 10(d), herein incorporated by reference.
(i) Annual Performance Incentive Plan for the year ended December 31, 1997.
(j) Executive Severance Plan effective as of September 26, 1996 was previously filed with the Registrant's Form 10-Q for the quarter ended September 30, 1996 as Exhibit 10(a), herein incorporated by reference.
(k) The 1995 Management Stock Option Plan filed on April 28, 1995 as Exhibit 4 of Registration Statement on Form S-8, Registration No. 33-58927, herein incorporated by reference.
(l) Advisory and Consultancy Agreement dated October 28, 1993 between Jack Africk, Director and Crown Central Petroleum Corporation was previously filed with the Registrant's Form 10-Q for the quarter ended September 30, 1994 as Exhibit 99, herein incorporated by reference.
(m) Employees Supplementary Savings Plan filed on February 27, 1995 as Exhibit 4 of Registration Statement on Form S-8, Registration No. 33-57847, herein incorporated by reference.
11 Statement re: Computation of Earnings Per Share Exhibit 11 is included on page 42 of this report.
13 Annual Report to Security Holders, Form 10-Q or Quarterly Report to Security Holders Annual Report Exhibits: (a) Shareholders' Letter dated February 27, 1997 (b) Operating Results and Key Financial Statistics (c) Directors and Officers of the Company (d) Corporate Information (e) Supplement to the Annual Report - Operating Statistics
21 Subsidiaries of the Registrant
Exhibit 21 is included on page 43 of this report.
23 Consent of Independent Auditors Exhibit 23 is included on page 44 of this report.
24 Power of Attorney Exhibit 24 is included on page 45 of this report.
27 Financial Data Schedule
99 Form 11-K will be filed under cover of Form 10-K/A by June 30, 1997.
(b) REPORTS ON FORM 8-K There were no reports filed on Form 8-K for the three months ended December 31, 1996.
NOTE: Certain exhibits listed on pages 40 and 41 of this report and filed with the Securities and Exchange Commission, have been omitted. Copies of such exhibits may be obtained from the Company upon written request, for a prepaid fee of 25 cents per page.
EXHIBIT 21
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form S-8 No. 33-53457) pertaining to the 1994 Long Term Incentive Plan and Employees Savings Plan and the Registration Statement (Form S-8 No. 33-57847) pertaining to the Employees Supplemental Savings Plan of Crown Central Petroleum Corporation and Subsidiaries of our report dated February 27, 1997, with respect to the consolidated financial statements of Crown Central Petroleum Corporation and Subsidiaries included in the Annual Report (Form 10-K) for the year ended December 31, 1996.
ERNST & YOUNG LLP
Baltimore, Maryland March 20, 1997
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
CROWN CENTRAL PETROLEUM CORPORATION
By ____________ *_______________
__ _
Henry A. Rosenberg, Jr. Chairman of the Board, President and Chief Executive Officer
By _________________ /s/---Jan L. Ries__________
__ _
Jan L. Ries Controller
Date: March 24, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 24, 1997 by the following persons on behalf of the registrant and in the capacities indicated:
____________________________________________________ *
___________________________________________________ *
Jack Africk, Director William L. Jews, Director
___________________________________________________ *
___________________________________________________ *
George L. Bunting, Jr., Director Rev. Harold E. Ridley, Jr., S.J., Director
___________________________________________________ *
___________________________________________________ *
Michael F. Dacey, DirectorHenry A. Rosenberg, Jr., Director Chairman of the Board, President and Chief Executive Officer
___________________________________________________ *
___________________________________________________ *
Thomas M. Gibbons, Director Sanford V. Schmidt, Director
__________________________________________________ *
Patricia A. Goldman, Director
*By Power of Attorney (Jan L. Ries)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The Company's Sales and operating revenues increased 12.7% in 1996 compared to a 10.1% increase in 1995. The 1996 increase in Sales and operating revenues was primarily due to a 16.7% increase in the average unit selling price of petroleum products and a $3.4 million or 3.5% increase in merchandise sales. These increases were partially offset by a 3.8% decrease in petroleum product sales volumes principally attributable to the processing contract with Statoil wherein the Company processed 20,000 barrels per day for Statoil during the last five months of 1996. The 1995 increase in Sales and operating revenues was due to a 5.8% increase in the average unit selling price of petroleum products
and a 4.5% increase in petroleum product sales volumes. Additionally, there was a $4.4 million or 5% increase in merchandise sales.
As previously mentioned, merchandise sales increased $3.4 million or 3.5% to $102 million for the year ended December 31, 1996 compared to the same period in 1995, while merchandise gross profit increased $2.6 million or 9.8% for the year ended December 31, 1996 compared to the same period in 1995. Merchandise gross margin (merchandise gross profit as a percent of merchandise sales) was 26.9% and 28.5% for the years ended December 31, 1995 and 1996, respectively. These aggregate increases occurred despite a slight reduction in the number of operating units during the period, and are attributable to the Company's merchandise pricing program which has selectively increased margins on targeted merchandise yet still maintains an everyday low pricing policy which is competitive with major retail providers in the applicable market area. As a result of the strategy, aggregate merchandise gross profit, on a same store basis, increased 13.7% in 1996 as compared to 1995. Same store average monthly gasoline volumes and merchandise sales increased approximately 5% and 6%, respectively, in 1996 as compared to 1995.
Gasoline sales accounted for 54.3% of total 1996 revenues, while distillates and merchandise sales represented 31.2% and 6.2%, respectively. This compares to a dollar mix from sales of 57.8% gasoline, 24.2% distillates and 6.8% merchandise in 1995; and 55.2% gasoline, 28.6% distillates and 7.2% merchandise in 1994.
The following table depicts the sales values of the principal classes of products sold by the Company, which individually contributed more than ten percent of consolidated Sales and operating revenues during the last three years:
Sales of Principal Products millions of dollars 1996 1995 1994
Gasoline $888.1 $839.4 $728.6 No. 2 Fuel & Diesel 436.4 335.7 296.6
Costs and operating expenses increased 11.8% in 1996 compared to a 9.8% increase in 1995. The 1996 increase was attributable to an increase in the average production cost per barrel of crude oil and feedstocks of 20.5%. This increase was partially offset by slight decreases in petroleum products sales volumes as mentioned above. Additional decreases offsetting the increase in average production per barrel mentioned above result from the Company's use of the last-in, first-out (LIFO) method to value inventory which results in a better matching of current revenues and costs. The impact of LIFO was to increase the
Company's Costs and operating expenses by approximately $.9 million and $6.7 million in 1996 and 1995, respectively. The 1995 increase was attributable to an increase in the average production cost per barrel of crude oil and feedstocks of $1.62 or 9.54% and to a 4.5% increase in petroleum products sales volumes.
The impact of the Company's use of the LIFO method was to decrease the Company's gross margins in 1996, 1995 and 1994 by $.02 per barrel ($.9 million), $.12 per barrel ($6.7 million) and $.35 per barrel ($19 million), respectively. The 1996 LIFO impact is net of gross margin increases of $5.9 million resulting from a change in base year values for a portion of the Company's LIFO inventories and reductions in LIFO inventories of $15.2 million, which were carried at lower costs prevailing in prior years. The 1995 LIFO impact is net of a $4.9 million gross margin increase resulting from a reduction in LIFO inventories.
In early 1996, the Company adjusted its gasoline and distillate production to take advantage of better distillate margins compared to gasoline margins. Correspondingly, yields of distillates were increased to 51,700 barrels per day (bpd) (33.9%) in 1996 from 46,200 bpd (29.8%) in 1995, while gasoline production was decreased from 90,700 bpd (58.6%) in 1995 to 85,500 bpd (56%) in 1996. Due to deteriorating refinery gross margins which occurred during the third quarter of 1994, the Company reduced fourth quarter 1994 operating runs at its Pasadena refinery. Additionally, in 1994, overall refinery production was reduced by the fourth quarter's maintenance turnaround of the Pasadena refinery's Fluid Catalytic Cracking Unit (FCCU) and related units. The FCCU is the primary gasoline facility. As a result, yields of gasoline increased from 79,800 bpd (54%) in 1994 to 90,700 bpd (58.6%) in 1995. Distillate yields decreased slightly from 48,200 bpd (32.6%) in 1994 to 46,200 bpd (29.8%) in 1995. Total refinery production was: 152,600 bpd in 1996, 154,800 bpd in 1995 and 147,700 bpd in 1994.
Selling and administrative expenses increased 16.1% in 1996 after decreasing 2.3% in 1995. The 1996 increase was primarily due to increases in store level operating expenses principally related to additional retail outlets acquired in the third quarter of 1995 which operated for a full year in 1996 and to a same price cash or credit gasoline marketing strategy that increased credit card processing fees. Also included in 1996 were increased labor costs resulting from the installation of branded fast food operations in certain retail outlets. Additionally the Company recorded approximately $1 million in corporate administrative expenses associated with a management reorganization, $.8 million associated with certain long-range strategic initiatives and $1 million in employee
incentive payments due to improved Company performance. The 1995 decrease was primarily due to decreased corporate level administrative costs as a result of certain cost cutting programs initiated by the Company. At December 31, 1996, the Company operated 264 retail gasoline facilities and 79 convenience stores compared to 267 retail gasoline facilities and 81 convenience stores at December 31, 1995 and 258 retail gasoline facilities and 99 convenience stores at December 31, 1994. Selling and administrative expenses in 1994 include $.5 million in reorganization costs.
Operating costs and expenses in 1996, 1995 and 1994 include $1.9 million, $3.2 million and $1.9 million, respectively, related to environmental matters and $.5 million, $.1 million and $1.6 million, respectively, of accrued non-environmental casualty related costs. Operating costs and expenses in 1996 have been reduced by $4.8 million relating to adjustments in certain liability reserves. Additionally, 1995 and 1994 expenses also include $3.7 million and $3 million, respectively, related to retail units that have been closed.
Depreciation and amortization decreased 13.3% in 1996 after decreasing 14.1% in 1995. The 1996 decreases were primarily the result of the implementation of Statement of Financial Accounting Standards No. 121 `` Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of'' (SFAS 121), effective October 1, 1995, which decreased 1996 depreciation and amortization by approximately $3.9 million. The 1995 decreases were primarily the result of decreases in refinery turnaround amortization due to a $10.4 million decrease in the total underlying value of the Pasadena Refinery FCCU turnaround being amortized in 1995 compared to the total underlying value of the FCCU turnaround that was being amortized in 1994.
The loss from Write-down of property, plant and equipment of $80.5 million in 1995 is due to the initial adoption of SFAS 121 effective October 1, 1995. While all of the Company's long-lived assets are subject to the provisions of SFAS 121, circumstances indicated the carrying amount of assets used in the operation of the Tyler refinery would not be recoverable. As such, a write-down to estimated fair value was recorded. The estimated fair value of these assets was determined by an independent appraisal. There were no indications of possible impairment relating to the remainder of the Company's long-lived assets. The loss of $16.8 million from Write-downs of property, plant and equipment in 1994 resulted from the abandonment of a project to construct a hydrodesulphurization unit at the Pasadena refinery.
Interest and other income in 1996 decreased $3.4 million after increasing $3.8 million in 1995. The 1996 decrease is due primarily to the consolidation in
the fourth quarter of 1995 of the Company's wholly- owned insurance subsidiaries which reported $2.3 million in equity earnings (and recorded as '' other income'' ) in 1995. The 1996 income of the Company's wholly-owned insurance subsidiaries of approximately $.8 million is reported as part of the Company's consolidated gross margin. Additionally, interest income decreased $1.2 million due to a decrease in the average daily cash invested of $25.7 million. The 1995 increase was primarily the result of increases in other income of $2.3 million from the Company's wholly-owned insurance subsidiaries. Further, interest income increased $1.4 million due to an increase in the average daily cash invested of $9.5 million and to an increase in the average daily rate on cash invested of 196 basis points.
Interest expense in 1996 was comparable to 1995. Interest expense increased $6.9 million in 1995 compared to 1994 due primarily to an increase in the average daily cash borrowed of $59.4 million . At December 31, 1995, there were additional outstanding borrowings of $31.9 million compared to December 31, 1994. The additional outstanding borrowings were due to the sale of $125 million of Unsecured 10.875% Senior Notes in January 1995 net of the repayment of the outstanding balance of the unsecured 10.42% Senior Notes and Unsecured Credit Agreement outstanding on December 31, 1994.
As previously discussed, in January 1995, the Company retired the remaining outstanding principal balance of the unsecured 10.42% Senior Notes (including a prepayment premium of $3.4 million) with the proceeds from the sale of $125 million of Unsecured 10.875% Senior Notes due February 1, 2005 which resulted in a net extraordinary loss in the first quarter of 1995 of $3.3 million (after reduction for the income benefit of $2 million).
Liquidity and Capital Resources
The Company's cash and cash equivalents were $6 million lower at year-end 1996 than at year-end 1995. The decrease was attributable to $32.5 million of net cash outflows from investment activities and $1.2 million of net cash outflows from financing activities. These outflows were principally offset by cash provided by operating activities of $27.7 million.
Net cash outflows from investment activities in 1996 consisted principally of capital expenditures of $24.1 million (which includes $11 million related to the marketing area and $10.3 million for refinery operations) and $6.1 million in capitalized costs of
software and related business processes developed for the Company's own use. Additionally, cash outflows from investing activities include $4.8 million of refinery deferred turnaround costs. The total outflows from investment activities were partially offset by proceeds from the sale of property, plant and equipment of $2.5 million.
Net cash outflows from financing activities in 1996 relates primarily to net repayments of long-term debt of $1.5 million.
Net cash inflows from operating activities in 1996 is net of $1.9 million in net outflows relating to other assets and liabilities. These outflows were primarily the result of decreases in accrued income and excise tax liabilities and in other accounts payable and to increases in prepaid insurance premiums and in accounts receivable. Partially offsetting these cash outflows were decreases in crude oil and finished products inventories due primarily to a reduction in crude oil requirements at the Pasadena refinery, and decreases in recoverable and deferred income taxes. The timing of collection of the Company's receivables is impacted by the specific type of sale and associated terms. Bulk sales of finished products are typically sold in 25,000 barrel increments with three day payment terms. Rack sales at the Company's product terminals are sold by truckload (approximately 8,000 gallons) with seven to ten day payment terms. While the Company's overall sales are aligned to its refining capability, receivables can vary between periods depending upon the specific type of sale and associated payment terms for sales near the end of a reporting period
The ratio of current assets to current liabilities was 1.29:1 and 1:22 to 1, respectively, at December 31, 1996 and 1995. If FIFO values had been used for all inventories, the ratio of current assets to current liabilities would have been 1.60:1 at December 31, 1996 and 1.49:1 at December 31, 1995.
Like other petroleum refiners and marketers, the Company's operations are subject to extensive and rapidly changing federal and state environmental regulations governing air emissions, waste water discharges, and solid and hazardous waste management activities. The Company's policy is to accrue environmental and clean-up related costs of a non- capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. While it is often extremely difficult to reasonably quantify future environmental related expenditures, the Company anticipates that a significant capital investment will be required over the next several years to comply with existing regulations. The Company believes that cash provided from its operating activities, together with other available sources of liquidity will be sufficient to fund these costs. The Company had recorded a liability
of approximately $15.7 million as of December 31, 1996 to cover the estimated costs of compliance with environmental regulations which are not anticipated to be of a capital nature. The liability of $15.7 million includes accruals for issues extending past 1997.
Environmental liabilities are subject to considerable uncertainties which affect the Company's ability to estimate its ultimate cost of remediation efforts. These uncertainties include the exact nature and extent of the contamination at each site, the extent of required cleanup efforts, varying costs of alternative remediation strategies, changes in environmental remediation requirements, the number and financial strength of other potentially responsible parties at multi-party sites, and the identification of new environmental sites. As a result, charges to income for environmental liabilities could have a material effect on results of operations in a particular quarter or year as assessments and remediation efforts proceed or as new claims arise. However, management is not aware of any matters which would be expected to have a material adverse effect on the Company.
During the years 1997-1998, the Company estimates environmental expenditures at the Pasadena and Tyler refineries, of at least $3.8 million and $2 million, respectively. Of these expenditures, it is anticipated that $2.8 million for Pasadena and $1.5 million for Tyler will be of a capital nature, while $1 million and $.5 million, respectively, will be related to previously accrued non-capital remediation efforts. At the Company's marketing facilities, environmental expenditures relating to previously accrued non-capital compliance efforts are planned totaling approximately $2.8 million through 1998.
As a result of a strong balance sheet and overall favorable credit relationships, the Company has been able to maintain open lines of credit with its major suppliers. Under the Revolving Credit Agreement effective September 25, 1995, as amended (Credit Agreement), the Company had outstanding as of March 14, 1997, irrevocable standby letters of credit in the principal amount of $38.2 million for purposes in the ordinary course of business. At December 31, 1996, the Company was in compliance with all covenants and provisions of the Credit Agreement. Meeting the covenants imposed by the Credit Agreement is dependent, among other things, upon the level of future earnings. The Company reasonably expects to continue to be in compliance with the covenants imposed by the Credit Agreement or a successor agreement over the next twelve months.
At the Company's option, up to $37.5 million of the Unsecured 10.875% Senior Notes (Notes) may be redeemed
at 110.875% of the principal amount at any time prior to February 1, 1998. After such date, they may not be redeemed until February 1, 2000 when they are redeemable at 105.438% of the principal amount, and thereafter at an annually declining premium over par until February 1, 2003 when they are redeemable at par. The Notes were issued under an Indenture which includes certain restrictions and limitations customary with senior indebtedness of this type including, but not limited to, the payment of dividends and the repurchase of capital stock. There are no sinking fund requirements on the Notes.
The Purchase Money Lien (Money Lien) discussed in Note C of Notes to Consolidated Financial Statements on page 27 of this report, is secured by certain service station and terminal equipment and office furnishings having a cost basis of $6.5 million. The effective rate for the Money Lien is 6.65%. Ninety percent of the principal is payable in 60 equal monthly installments which commenced in February 1994 with a balloon payment of 10% of the principal payable in January 1999.
The Company's management is involved in a continual process of evaluating growth opportunities in its core business as well as its capital resource alternatives. Total capital expenditures and deferred turnaround costs in 1997 are projected to approximate $43 million. The capital expenditures relate primarily to planned enhancements at the Company's refineries, retail unit improvements and to company-wide environmental requirements. The Company believes that cash provided from its operating activities, together with other available sources of liquidity, including the Unsecured Credit Agreement or a successor agreement, will be sufficient over the next several years to make required payments of principal and interest on its debt, permit anticipated capital expenditures and fund the Company's working capital requirements. The Unsecured Credit Agreement expires on September 30, 1997 and the Company intends to renew or replace the existing facility. Any major acquisition would likely require a combination of additional debt and equity.
The Company places its temporary cash investments in high credit quality financial instruments which are in accordance with the covenants of the Company's financing agreements. These securities mature within ninety days, and, therefore, bear minimal risk. The Company has not experienced any losses on its investments.
The Company faces intense competition in all of the business areas in which it operates. Many of the Company's competitors are substantially larger and therefore, the Company's earnings can be affected by the marketing and pricing policies of its competitors, as well as changes in raw material costs.
Merchandise sales and operating revenues from the Company's convenience stores are seasonal in nature, generally producing higher sales and net income in the summer months than at other times of the year. Gasoline sales, both at the Crown multi-pumps and convenience stores, are also somewhat seasonal in nature and, therefore, related revenues may vary during the year. The seasonality does not, however, negatively impact the Company's overall ability to sell its refined products.
The Company maintains business interruption insurance to protect itself against losses resulting from shutdowns to refinery operations from fire, explosions and certain other insured casualties. Business interruption coverage begins for such losses at the greater of $5 million or shutdowns for periods in excess of 25 days.
The Company has disclosed in Note I of Notes to Consolidated Financial Statements on page 33 of this report, various contingencies which involve litigation, environmental liabilities and examinations by the Internal Revenue Service. Depending on the occurrence, amount and timing of an unfavorable resolution of these contingencies, the outcome of which cannot reasonably be determined at this time, it is possible that the Company's future results of operations and cash flows could be materially affected in a particular quarter or year. However, the Company has concluded, after consultation with counsel, that there is no reasonable basis to believe that the ultimate resolution of any of these contingencies will have a material adverse effect on the Company. Additionally, as discussed in Item 3. Legal Proceedings on page 9 of this report, the Company's collective bargaining agreement at its Pasadena refinery expired on February 1, 1996, and on February 5, 1996, the Company invoked a lock-out of employees in the collective bargaining unit. The Company has been operating the Pasadena refinery without interruption since the lock-out with management and supervisory personnel and intends to continue full operations until an agreement is reached with the collective bargaining unit.
Effects of Inflation and Changing Prices
The Company's Consolidated Financial Statements are prepared on the historical cost method of accounting and, as a result, do not reflect changes in the dollar's purchasing power. In the capital intensive industry in which the Company operates, the replacement costs for its properties would generally far exceed their historical costs. As a result, depreciation would be greater if it were based on current replacement costs. However, since the replacement
facilities would reflect technological improvements and changes in business strategies, such facilities would be expected to be more productive and versatile than existing facilities, thereby increasing profits and mitigating increased depreciation and operating costs.
In recent years, crude oil and refined petroleum product prices have been volatile which has impacted working capital requirements. If the prices increase in the future, the Company would expect a related increase in working capital needs.
Additional Factors That May Affect Future Results
The Company's operating results have been, and will continue to be, affected by a wide variety of factors that could have an adverse effect on profitability during any particular period, many of which are beyond the Company's control. Among these are the demand for crude oil and refined products, which is largely driven by the condition of local and worldwide economies, although seasonality and weather patterns also play a significant part. Governmental regulations and policies, particularly in the areas of energy and the environment, also have a significant impact on the Company's activities. Operating results can be affected by these industry factors, by competition in the particular geographic markets that the Company serves and by Company-specific factors, such as the success of particular marketing programs and refinery operations.
In addition, the Company's profitability depends largely on the difference between market prices for refined petroleum products and crude oil prices. This margin is continually changing and may significantly fluctuate from time to time. Crude oil and refined products are commodities whose price levels are determined by market forces beyond the control of the Company. Additionally, due to the seasonality of refined products and refinery maintenance schedules, results of operations for any particular quarter of a fiscal year are not necessarily indicative of results for the full year. In general, prices for refined products are significantly influenced by the price of crude oil. Although an increase or decrease in the price for crude oil generally results in a corresponding increase or decrease in prices for refined products, often there is a lag time in the realization of the corresponding increase or decrease in prices for refined products. The effect of changes in crude oil prices on operating results therefore depends in part on how quickly refined product prices adjust to reflect these changes. A substantial or prolonged increase in crude oil prices without a
corresponding increase in refined product prices, a substantial or prolonged decrease in refined product prices without a corresponding decrease in crude oil prices, or a substantial or prolonged decrease in demand for refined products could have a significant negative effect on the Company's earnings and cash flows.
The Company is dependent on refining and selling quantities of refined products at margins sufficient to cover operating costs, including any future inflationary pressures. The refining business is characterized by high fixed costs resulting from the significant capital outlays associated with refineries, terminals and related facilities. Furthermore, future regulatory requirements or competitive pressures could result in additional capital expenditures, which may or may not produce desired results. Such capital expenditures may require significant financial resources that may be contingent on the Company's continued access to capital markets and commercial bank financing on favorable terms.
Purchases of crude oil supply are typically made pursuant to relatively short-term, renewable contracts with numerous foreign and domestic major and independent oil producers, generally containing market- responsive pricing provisions. Futures, forwards and exchange traded options are used to minimize the exposure of the Company's refining margins to crude oil and refined product fluctuations. The Company also uses the futures market to help manage the price risk inherent in purchasing crude oil in advance of the delivery date, and in maintaining the inventories contained within its refinery and pipeline system. Hedging strategies used to minimize this exposure include fixing a future margin between crude and certain finished products and also hedging fixed price purchase and sales commitments of crude oil and refined products. While the Company's hedging activities are intended to reduce volatility while providing an acceptable profit margin on a portion of production, the use of such a program can effect the Company's ability to participate in an improvement in related product profit margins. Although the Company's net sales and operating revenues fluctuate significantly with movements in industry crude oil prices, such prices do not have a direct relationship to net earnings, which are subject to the impact of the Company's LIFO method of accounting discussed below. The effect of changes in crude oil prices on the Company's operating results is determined more by the rate at which the prices of refined products adjust to reflect such changes.
The following table estimates the sensitivity of the Company's income before taxes to price changes which impact its refining and retail margins based on a representative production rate for the Refineries and a
representative amount of total gasoline sold at the Company's retail units:
Earnings Sensitivity Change Annual Impact
Refining margin $0.10/bbl $ 5.6 million Retail margin $0.01/gal $ 5.4 million
The Company conducts environmental assessments and remediation efforts at multiple locations, including operating facilities and previously owned or operated facilities. The Company accrues environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been incurred and the amount can be reasonably estimated. Accruals for losses from environmental remediation obligations generally are recognized no later than completion of the remedial feasibility study. Estimated costs, which are based upon experience and assessments, are recorded at undiscounted amounts without considering the impact of inflation, and are adjusted periodically as additional or new information is available. Expenditures for equipment necessary for environmental issues relating to ongoing operations are capitalized.
The Company's crude oil, refined products and convenience store merchandise and gasoline inventories are valued at the lower of cost (based on the last-in, first-out or LIFO method of accounting) or market, with the exception of crude oil inventory held for resale which is valued at the lower of cost (based on the first-in first-out or FIFO method of accounting) or market. Under the LIFO method, the effects of price increases and decreases in crude oil and other feedstocks are charged directly to the cost of refined products sold in the period that such price changes occur. In periods of rising prices, the LIFO method may cause reported operating income to be lower than would otherwise result from the use of the FIFO method. Conversely, in periods of falling prices the LIFO method may cause reported operating income to be higher than would otherwise result from the use of the FIFO method. In addition, the Company's use of the LIFO method understates the value of inventories on the Company's consolidated balance sheet as compared to the value of inventories under the FIFO method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Crown Central Petroleum Corporation and Subsidiaries
Note A--Description of Business and Summary of Accounting Policies
Description of Business: Crown Central Petroleum Corporation and subsidiaries (the Company) operates primarily in one business segment as an independent refiner and marketer of petroleum products, including petrochemical feedstocks. The Company operates two refineries, one located near Houston, Texas with a rated capacity of 100,000 barrels per day of crude oil and another in Tyler, Texas with a rated capacity of 52,000 barrels per day of crude oil. Its principal business is the wholesale and retail sale of its
products through 15 product terminals located on three major product pipelines along the Gulf Coast and the Eastern Seaboard and in the Central United States and through a network of 343 gasoline stations, convenience stores and mini-marts located in the Mid-Atlantic and Southeastern United States.
Crude oil and refined products are the Company's principal raw materials and finished goods, respectively. The price of crude oil and refined products are subject to worldwide market forces of supply and demand. Prices can be volatile and fluctuations influence the Company's financial results.
Employment at the Company's Pasadena and Tyler refineries represent approximately 12% and 8%, respectively, of the Company's total employment at December 31, 1996. Additionally, approximately 68% of the Pasadena refinery employees and approximately 69% of the Tyler refinery employees are subject to collective bargaining agreements. The Company's collective bargaining agreement with the Oil Chemical & Atomic Workers Union (OCAW) covering employees at the Pasadena refinery expired on February 1, 1996. The Pasadena refinery employees subject to the OCAW agreement were locked out by the Company on February 5, 1996. Negotiations for a new agreement are ongoing.
Locot Corporation, a wholly-owned subsidiary of the Company, is the parent company of La Gloria Oil and Gas Company (La Gloria) which operates the Tyler refinery, a pipeline gathering system in Texas and product terminals located along the Texas Eastern Products Pipeline system.
F Z Corporation, a wholly-owned subsidiary of the Company, is the parent company of Fast Fare, Inc. which operates two convenience store chains in six states, retailing both merchandise and gasoline.
The following summarizes the significant accounting policies and practices followed by the Company:
Principles of Consolidation: The consolidated financial statements include the accounts of Crown Central Petroleum Corporation and all majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents: Cash in excess of daily requirements is invested in marketable securities with maturities of three months or less. Such investments
are deemed to be cash equivalents for purposes of the statements of cash flows.
Accounts Receivable: The majority of the Company's accounts receivable relate to sales of petroleum products to third parties operating in the petroleum industry.
Inventories: The Company's crude oil, refined products, and convenience store merchandise and gasoline inventories are valued at the lower of cost (last-in, first-out) or market with the exception of crude oil inventory held for resale which is valued at the lower of cost (first-in, first-out) or market. Materials and supplies inventories are valued at cost. Incomplete exchanges of crude oil and refined products due the Company or owing to other companies are reflected in the inventory accounts.
Property, Plant and Equipment: Property, plant and equipment is carried at cost. Costs assigned to property, plant and equipment of acquired businesses are based on estimated fair value at the date of acquisition. Depreciation and amortization of plant and equipment are primarily provided using the straight-line method over estimated useful lives. Construction in progress is recorded in property, plant and equipment.
Expenditures which materially increase values, change capacities or extend useful lives are capitalized in property, plant and equipment. Routine maintenance, repairs and replacement costs are charged against current operations. At intervals of two or more years, the Company conducts a complete shutdown and inspection of significant units (turnaround) at its refineries to perform necessary repairs and replacements. Costs associated with these turnarounds are deferred and amortized over the period until the next planned turnaround, which generally ranges from 24 to 48 months.
Upon sale or retirement, the costs and related accumulated depreciation or amortization are eliminated from the respective accounts and any resulting gain or loss is included in income.
Software Capitalization: Costs of developing and implementing software and related business processes designed for the Company's own use are capitalized as incurred. Amortization is provided using the straight- line method over the estimated remaining useful lives of the related software.
Environmental Costs: The Company conducts environmental assessments and remediation efforts at multiple locations, including operating facilities, and
previously owned or operated facilities. Estimated closure and post-closure costs for active, refinery and finished product terminal facilities are not recognized until a decision for closure is made. Estimated closure and post-closure costs for active and operated retail marketing facilities and costs of environmental matters related to ongoing refinery, terminal and retail marketing operations are recognized as follows. Expenditures for equipment necessary for environmental issues relating to ongoing operations are capitalized. The Company accrues environmental and clean-up related costs of a non-capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. Accruals for losses from environmental remediation obligations generally are recognized no later than completion of the remediation feasibility study. Estimated costs, which are based upon experience and assessments, are recorded at undiscounted amounts without considering the impact of inflation, and are adjusted periodically as additional or new information is available.
Sales and Operating Revenues: Resales of crude oil are recorded net of the related crude oil cost (first-in, first-out) in sales and operating revenues.
Interest Capitalization: Interest costs incurred during the construction and preoperating stages of significant construction or development projects is capitalized and subsequently amortized by charges to earnings over the useful lives of the related assets.
Amortization of Goodwill: The excess purchase price of acquisitions of businesses over the estimated fair value of assets acquired is being amortized on a straight-line basis over 20 years.
Derivative Financial Instruments: Futures, forwards and exchange traded options are used to minimize the exposure of the Company's refining margins to crude oil and refined product price fluctuations. The Company also uses the futures market to manage the price risk inherent in purchasing crude oil in advance of the delivery date, and in maintaining the inventories contained within its refinery and pipeline system. Hedging strategies used to minimize this exposure include fixing a future margin between crude oil and certain finished products and also hedging fixed price purchase and sales commitments of crude oil and refined products. Futures, forwards and exchange traded options entered into with commodities brokers and other integrated oil and gas companies are utilized to execute the Company's strategies. These instruments generally allow for settlement at the end of their term in either cash or product.
Net realized gains and losses from these hedging strategies are recognized in costs and operating expenses when the associated refined products are sold. Unrealized gains and losses represent the difference
between the market price of refined products and the price of the derivative financial instrument, inclusive of refining costs. Individual transaction unrealized gains and losses are deferred in other current assets and liabilities to the extent that the associated refined products have not been sold. While the Company's hedging activities are intended to reduce volatility while providing an acceptable profit margin on a portion of production, the use of such a program can effect the Company's ability to participate in an improvement in related refined product profit margins.
Credit Risk - The Company is potentially subjected to concentrations of credit risk with accounts receivable and futures, forwards and exchange traded options for crude oil and finished products. Because the Company has a large and diverse customer base with no single customer accounting for a significant percentage of accounts receivable, there was no material concentration of credit risk in these accounts at December 31, 1996. The Company evaluates the credit worthiness of the counterparties to futures, forwards and exchange traded options and considers non- performance credit risk to be remote. The amount of exposure with such counterparties is generally limited to unrealized gains on outstanding contracts.
Stock Based Compensation - Effective January 1, 1996, the Company has adopted Statement of Financial Accounting Standards No. 123 `` Accounting for Stock- Based Compensation,'' (SFAS 123). The new standard establishes a fair value based method of measuring stock-based compensation. The Company has adopted the disclosure provisions prescribed by SFAS 123 which permit companies to continue to value their stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 while providing proforma disclosures of net income and earnings per share calculated using the fair value based method.
Reclassifications - To conform to the 1996 presentation, Sales and operating revenues and Costs and operating expenses for 1995 and 1994 have been adjusted to exclude all federal and state excise taxes. As a result, Sales and operating revenues and Costs and operating expenses decreased $413,290,000 in 1995 and $380,610,000 in 1994, respectively. This adjustment had no effect on net (loss) for either period.
Note B--Inventories
Note C--Long-Term Debt and Credit Arrangements
On January 24, 1995, the Company completed the sale of $125 million of unsecured 10.875% Senior Notes due February 1, 2005 priced at 99.75% (Notes). Approximately $55 million of the net proceeds from the sale was used to retire the Company's outstanding 10.42% Senior Notes, including a prepayment premium of $3.4 million, and $8 million was used to reduce amounts outstanding under the Company's unsecured bank lines. The Notes were issued under an Indenture which includes certain restrictions and limitations customary with senior indebtedness of this type including, but not limited to, the payment of dividends and the repurchase of capital stock. The retirement of the Company's outstanding 10.42% Senior Notes resulted in a net extraordinary loss in the first quarter of 1995 of $3.3 million.
Effective as of September 25, 1995, the Company entered into a two year Unsecured Revolving Credit Agreement (Agreement) with NationsBank of Texas, N.A., as administrative agent and letter of credit agent, and The First National Bank of Boston and Texas Commerce Bank National Association, as agents. Additionally, there are six other participant banks. Under the Agreement, the banks have committed a maximum of $130 million to the Company for cash borrowings and letters of credit. The Agreement allows for interest on outstanding borrowings to be computed under one of three methods based on the Base Rate, the London Interbank Offered Rate, or the Certificates of Deposit Rate (all as defined). The Agreement limits indebtedness (as defined) and cash dividends and requires the maintenance of various covenants including, but not limited to, minimum consolidated tangible net worth, minimum working capital and minimum FIFO net income or (loss) (all as defined). The Company intends to use the Agreement for general corporate and working capital purposes.
As of December 31, 1996, the Company had outstanding irrevocable standby letters of credit in the principal amount of $59.6 million. Unused commitments under the terms of the Credit Agreement totaling $70.4 million were available for future borrowings and issuance of letters of credit at December 31, 1996. The Company pays an annual commitment fee on the unused portion of the credit line.
The Purchase Money Lien is secured by certain service station equipment and office furnishings having a cost basis of $6.5 million. The effective rate for the Money Lien is 6.65%. Ninety percent of the principal is repayable in 60 monthly installments with a balloon payment of 10% of the principal payable in January 1999.
Note D--Crude Oil and Refined Product Hedging Activities
The net deferred loss from crude oil and refined product hedging strategies was $3.4 million and $1.6 million at December 31, 1996 and 1995, respectively. Included in these hedging strategies are contracts maturing from January 1997 to March 1997. The Company is using these contracts to defer the pricing of approximately 14% of its crude oil commitments and to fix the margin on approximately 2% of its refined products, for the aforementioned period.
No valuation allowance is considered necessary for the above deferred tax assets. The company has tax credit carryforwards of $303,000 which expire in the years 2008 through 2010, along with net operating loss carryforwards of $44.4 million which expire in the years 2009 through 2011.
Recoverable income taxes include an income tax receivable for the anticipated refund from the current use of net operating losses and the estimated benefit from net operating loss carryforwards that will be used in 1997.
Significant components of the income tax (benefit) for the years ended December 31 follows.
Note F--Capital Stock and Net Income Per Common Share
Class A Common stockholders are entitled to one vote per share and have the right to elect all directors other than those to be elected by other classes of stock. Class B Common stockholders are entitled to one-tenth vote per share and have the right to elect two directors. Net (loss) per share for 1996, 1995 and 1994 is based upon the weighted average of common shares outstanding of 9,721,693, 9,697,611 and 9,742,598, respectively, in each year. The average outstanding and equivalent shares excludes 249,700, 255,300 and 105,500 shares of Performance Vested Restricted Stock (PVRS) shares registered to participants in the 1994 Long-Term Incentive Plan (Plan) at December 31, 1996, 1995 and 1994, respectively. The PVRS shares are not considered outstanding for net income (loss) per share calculations until the shares are released to the Plan participants.
Note G--Long-Term Incentive Plan
Under the terms of the 1994 Long-term Incentive Plan (Plan), the Company may distribute to selected employees restricted shares of the Company's Class B Common Stock and options to purchase Class B Common Stock. Up to 1.1 million shares of Class B Common Stock may be distributed under the Plan. The balance sheet caption "Unearned restricted stock" is charged for the market value of restricted shares at their grant date and changes in the market value of shares outstanding until the vesting date, and is shown as a reduction of stockholders' equity. The impact is further reflected within Class B Common Stock and Additional paid-in-capital.
Performance Vested Restricted Stock (PVRS) awards are subject to the attainment of performance goals and certain restrictions including the receipt of dividends and transfers of ownership. As of December 31, 1996, 249,700 shares of PVRS have been registered in participants names and are being held by the Company subject to the attainment of the related performance goals. PVRS awards to employees who have left the Company are canceled.
Under the 1994 Long-term Incentive Plan, non-qualified stock options are granted to participants at a price not less than 100% of the fair market value of the stock on the date of grant. The exercise period is ten years with the options vesting one-third per year over three years after a one-year waiting period
Under the terms of the 1995 Management Stock Option Plan, the Company may award to participants non-
qualified stock options to purchase shares of the Company's Class B Common Stock at a price equal to 100% of the fair market value of the stock at the date of grant. Up to 500,000 shares of Class B Common Stock may be distributed under the Plan. The exercise period is ten years with the options vesting one-third per year over three years after a one-year waiting period.
Shares of Class B Common Stock available for issuance under options or awards amounted to 399,536 and 377,940 at December 31, 1996 and 1995, respectively.
The weighted average remaining life for options outstanding at December 31, 1996 was nine years for the Long Term Incentive Plan and also nine years for the Management Stock Plan.
All options were granted at an exercise price equal to the fair market value of the common stock at the date of grant. The weighted average fair value at the date of grant for options granted under the Long Term Incentive Plan was $3.36and $3.88 for 1996 and 1995, respectively. The fair value at the date of grant for options granted under the Management Stock Option Plan was $4.00 for 1995. There were no grants under the Management Stock Option Plan in 1996. The fair value of options at date of grant was estimated using the Black-Scholes model with the following assumptions:
The Company granted 45,450 and 149,800 of shares of Performance Vested Restricted Stock Awards during 1996 and 1995, respectively. The weighted average fair value at date of grant for Performance Vested Restricted Stock Awards granted in 1996 and 1995 was $17.05 and $12.81, respectively, which in each case represents the market value of the Company's Class B Common Stock at the date of grant. The amount of compensation expense recognized for Performance Vested Stock Awards was not significant for 1996. There was no compensation expense recognized in 1995 for these awards.
Stock-based compensation costs would have increased the pretax loss by $1,320,000 ($805,000 after tax or $.08 per share) and $1,530,000 ($939,000 after tax or $.10 per share) for the years ended 1996 and 1995, respectively, had the fair values of options and the Performance Vested Restricted Stock granted since 1995 been recognized as compensation expense on a straight line basis over the vesting period of the grant giving consideration to achievement of performance objectives where applicable. The proforma effect on net income for 1996 and 1995 is not representative of the proforma effect on net income in future years as it does not consider the proforma compensation expense related to grants made prior to 1995.
Note H--Employee Benefit Obligations
The Company has a defined benefit pension plan covering the majority of full-time employees. The Company also has several defined benefit plans covering only certain senior executives. Plan benefits are generally based on years of service and employees' average compensation. The Company's policy is to fund the pension plans in amounts which comply with contribution limits imposed by law. Plan assets consist principally of fixed income securities and stocks.
In addition to the defined benefit pension plan, the Company provides certain health care and life insurance benefits for eligible employees who retire from active service. The postretirement health care plan is contributory, with retiree contributions consisting of copayment of premiums and other cost sharing features such as deductibles and coinsurance. Beginning in 1998, the Company will "cap" the amount of premiums that it will contribute to the medical plans. Should costs exceed this cap, retiree premiums would increase to cover the additional cost.
The weighted average discount rate used in determining the APBO was 7.5% and 7.25% in 1996 and 1995, respectively.
The Company's policy is to fund postretirement costs other than pensions on a pay-as-you-go basis.
A 10% increase in the cost of medical care was assumed for 1996. This medical trend rate is assumed to decrease 1% annually to 9% in 1997, and decrease to 0% thereafter as a result of the expense cap in 1998. The medical trend rate assumption affects the amounts reported. For example, a 1% increase in the medical trend rate would increase the APBO by $394,000, and the net periodic cost by $71,000 for 1996.
Note I--Litigation and Contingencies
The Company has been named as a defendant in various matters of litigation, some of which are for substantial amounts, and involve alleged personal injury and property damage from prolonged exposure to petroleum, petroleum related products and substances used at its refinery or in the petroleum refining process. The Company is a co-defendant with numerous other defendants in a number of these suits. The Company is vigorously defending these actions, however,
the process of resolving these matters could take several years. The liability, if any, associated with these cases was either accrued in accordance with generally accepted accounting principles or was not determinable at December 31, 1996. The Company has consulted with counsel with respect to each such proceeding or large claim which is pending or threatened. While litigation can contain a high degree of uncertainty and the risk of an unfavorable outcome, in the opinion of management, there is no reasonable basis to believe that the eventual outcome of any such matter or group of related matters will have a material adverse effect on the Company.
The Company's federal income tax returns for the fiscal years 1990 through 1995 are currently under examination by the Internal Revenue Service. The Company has not received any Notices of Proposed Adjustments and is not aware of any such matters which will have a material adverse effect on the Company.
Like other petroleum refiners and marketers, the Company's operations are subject to extensive and rapidly changing federal and state environmental regulations governing air emissions, waste water discharges, and solid and hazardous waste management activities. The Company's policy is to accrue environmental and clean-up related costs of a non- capital nature when it is both probable that a liability has been incurred and that the amount can be reasonably estimated. While it is often extremely difficult to reasonably quantify future environmental related expenditures, the Company anticipates that continuing capital investments will be required over the next several years to comply with existing regulations. The Company had recorded a liability of approximately $15.7 million as of December 31, 1996 relative to the estimated costs of a non-capital nature related to compliance with environmental regulations. This liability is anticipated to be expended over the next five years and is included in the balance sheet as a noncurrent liability. No amounts have been accrued as receivables for potential reimbursement or recoveries to offset this liability. Included in Costs and operating expenses in the Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 were costs related to environmental remediation in the amount of $1.6 million, $3.2 million and $1.9 million, respectively.
Environmental liabilities are subject to considerable uncertainties which affect the Company's ability to estimate its ultimate cost of remediation efforts. These uncertainties include the exact nature and extent of the contamination at each site, the extent of required cleanup efforts, varying costs of alternative remediation strategies, changes in environmental remediation requirements, the number and strength of other potentially responsible parties at multi-party sites, and the identification of new environmental
sites. It is possible that the ultimate cost, which cannot be determined at this time, could exceed the Company's recorded liability. As a result, charges to income for environmental liabilities could have a material effect on the results of operations in a particular quarter or year as assessments and remediation efforts proceed or as new claims arise. However, management is not aware of any matters which would be expected to have a material adverse effect on the Company.
Note J--Noncancellable Lease Commitments
The Company has noncancellable operating lease commitments for refinery, computer, office and other equipment, transportation equipment, an airplane, service station and convenience store properties, and office space. Lease terms range from three to ten years for refinery, computer, office and other equipment and four to eight years for transportation equipment. The airplane lease commenced in 1992 and has a term of seven years. The majority of service station properties have lease terms of 20 years. The average lease term for convenience stores is approximately 13 years. The Corporate Headquarters office lease commenced in 1993 and has a ten year term beginning in 1993. Certain of these leases have renewal provisions.
Rental expense for the years ended December 31, 1996, 1995 and 1994 was $12,935,000, $12,955,000 and $13,658,000, respectively.
Accumulated amortization of goodwill was $4,809,000 and $4,395,000 at December 31, 1996 and 1995, respectively.
Note L--Fair Value of Financial Instruments
The Company considers cash and cash equivalents, accounts receivable, investments in subsidiaries, long- term notes receivable, accounts payable, long-term debt and interest rate swap agreements to be its financial instruments. The carrying amount reported in the balance sheet for cash and cash equivalents, accounts receivable and accounts payable, represent their fair values. The fair value of the Company's long-term notes receivable at December 31, 1996 was estimated using a discounted cash flow analysis, based on the assumed interest rates for similar types of arrangements. The approximate fair value of the Company's Long-Term Debt at December 31, 1996 was estimated using a discounted cash flow analysis, based on the Company's assumed incremental borrowing rates for similar types of borrowing arrangements. The fair value of its investments in subsidiaries is considered to be their carrying amount since these investments do not have quoted market prices.
The following summarizes the carrying amounts and related approximate fair values as of December 31, 1996
of the Company's financial instruments whose carrying amounts do not equal its fair value:
REPORT OF INDEPENDENT AUDITORS
To the Stockholders Crown Central Petroleum Corporation
We have audited the accompanying consolidated balance sheets of Crown Central Petroleum Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Crown Central Petroleum Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
As discussed in Note A of the consolidated financial statements, in the fourth quarter of 1995, the Company changed its method of accounting for impairment of long-lived assets in accordance with the adoption of SFAS No. 121.
/s/---Ernst & Young LLP
Baltimore, Maryland February 27, 1997
Item 9. CHANGES IN AND DISAGREEMENTS WITH AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has not filed a Form 8-K within the last twenty-four (24) months reporting a change of independent auditors or any disagreement with the independent auditors.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Following is a list of Crown Central Petroleum Corporation's executive officers, their ages and their positions and offices as of March 1, 1997:
Henry A. Rosenberg, Jr. (67) Director since 1955, Chairman of the Board and Chief Executive Officer since May 1975 and also President since March 1, 1996. Also a director of Signet Banking Corporation and USF&G Corporation.
Phillip W. Taff (55) Executive Vice President and Chief Financial Officer since April 1996; Senior Vice President - Finance and Chief Financial Officer from June 1994 to March 1996. Director of the Company from 1992 until his employment
by the Company. Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Greyhound Lines, Inc. from April 1993 to May 1994. Senior Vice President and Chief Financial Officer of American Trading and Production Corporation from May 1991 to April 1993.
Randall M. Trembly (50) Executive Vice President since April 1996; Senior Vice President - Refining from July 1995 to March 1996; Vice President - Refining from December 1991 to June 1995.
Edward L. Rosenberg (41) Senior Vice President - Supply and Transportation since April 1996. Senior Vice President - Administration - Corporate Development and Long Range Planning from June 1994 to March 1996; Senior Vice President - Finance and Administration from December 1991 to June 1994. Edward L. Rosenberg is the son of Henry A. Rosenberg, Jr., and the brother of Frank B. Rosenberg.
John E. Wheeler, Jr. (44) Senior Vice President - Finance and Treasurer since October 1996; Senior Vice President - Finance from April 1996 to September 1996; Senior Vice President - Treasurer and Controller from June 1994 to March 1996; Vice President - Treasurer and Controller from December 1991 to June 1994.
Frank B. Rosenberg (38) Senior Vice President - Marketing since April 1996; Vice President - Marketing from January 1993 to March 1996; Southern Marketing Division Manager from January 1992 to January 1993. Frank B. Rosenberg is the son of Henry A. Rosenberg, Jr. and the brother of Edward L. Rosenberg.
Thomas L. Owsley (56) Vice President - Legal since April 1983.
Paul J. Ebner (39) Vice President - Shared Services since April 1996; Vice President - Marketing Support Services from December 1991 to March 1996.
J. Michael Mims (47) Vice President - Human Resources since June 1992. Vice President - Internal Auditing and Consulting Services from December 1991 to June 1992.
Dennis W. Marple (48) Vice President - Wholesale Sales and Terminals since January 1996. General Manager - Wholesale Sales from February 1995 to December 1995. Vice President - LaGloria Supply, Trading and Transportation from October 1989 to January 1995.
Dolores B. Rawlings (59) Vice President - Secretary since April 1996; Secretary from November 1990 to March 1996.
James R. Evans (50) Vice President - Retail Marketing since June 1996; General Manager of Retail Operations from February 1995 to May 1996; General Manager of Direct Operations from November 1993 to January 1995; Division Manager - Retail from October 1990 to October 1993.
Jan L. Ries (48) Corporate Controller since November 1996; Marketing Division Controller from January 1992 to October 1996.
There have been no events under any bankruptcy act, no criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any Director or Executive Officer during the past five years. The information required in this Item 10 regarding Directors of the Company and all persons nominated or chosen to become directors is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
Item 11. EXECUTIVE COMPENSATION
The information required in this Item 11 regarding executive compensation is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required in this Item 12 regarding security ownership of certain beneficial owners and management is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required in this Item 13 regarding certain relationships and related transactions is hereby incorporated by reference to the definitive Proxy Statement which will be filed with the Commission pursuant to Regulation 14A on or about March 28, 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) LIST OF FINANCIAL STATEMENTS The following Consolidated Financial Statements of Crown Central Petroleum Corporation and Subsidiaries, are included in Item 8