Item 3. Legal Proceedings
The Company was named as a defendant in thirty-four suits filed in December 1991 in the Circuit Court of the Third Judicial District, Madison County, Illinois, by plaintiff residents and property owners in the Village of Hartford, Illinois. These suits sought damages for the presence of gasoline in the soil and groundwater beneath plaintiff's properties. See "Business; Properties--Environmental Matters." Twenty-five of these suits were settled by the Company and Shell at a total cost to the Company of less than $150,000 with the exception of one case in the process of settlement and one remaining case. No estimate can be made of the Company's potential loss in these remaining cases, if any, at this time.
Rosolowski et al v. Clark Refining & Marketing, Inc., Cir. Ct. Cook County, Ill., Case No. 95-L-014703. This purported class action lawsuit, filed on October 11, 1995, relates to an on-site electrical malfunction at the Company's Blue Island refinery on October 7, 1994, which resulted in the release to the atmosphere of used catalyst containing low levels of heavy metals, including antimony, nickel and vanadium. This release resulted in the temporary evacuation of certain areas near the refinery, including a high school, and approximately fifty people were taken to area hospitals. The Company has offered to reimburse the medical expenses incurred by persons receiving treatment. The Company was previously sued by one individual who claimed medical costs as a result of the incident; that case was settled. The purported class action lawsuit was filed on behalf of various named individuals and purported plaintiff classes, including residents of Blue Island, Illinois and students at Eisenhower High School, alleging claims based on common law nuisance, negligence, willful and wanton negligence and the Illinois Family Expense Act as a result of this incident. Plaintiffs seek to recover damages in an unspecified amount for alleged medical expenses, diminished property values, pain and suffering and other damages. Plaintiffs also seek punitive damages in an unspecified amount. On November 22, 1995, an amended complaint was filed in this action which adds several additional plaintiffs and two supplemental counts. Otherwise, the amended complaint was substantially identical to the original complaint. On January 6, 1997, several counts of the Amended Complaint were dismissed or withdrawn subject to refiling. At this time no estimate can be made as to the Company's potential loss, if any, with respect to this matter.
Other Blue Island Tort Cases, alleging various losses due to emissions from the Blue Island refinery were filed in September and October, 1996. These cases, Banks v. UOP and Clark Refining & Marketing, Inc.; Boucher v. Clark Refining & Marketing, Inc.; Loranger v. Clark Refining & Marketing, Inc.; Marciano v. Clark Refining & Marketing, Inc.; Szabla v. Clark Refining & Marketing, Inc.; Webb v. Clark Refining & Marketing, Inc. all brought by named individuals, seek damages of less than $100,000 each. At this time, no estimate can be made as to the Company's potential loss, if any, with regard to this litigation.
EEOC v. Clark Refining & Marketing, Inc., Case No. 94 C 2779, is currently pending in the United States District Court for the Northern District of Illinois. In this action, the Equal Employment Opportunity Commission ("EEOC") has alleged that the Company engaged in age discrimination in violation of the Age Discrimination in Employment Act through a "pattern and practice" of discrimination against a class of former retail managers over the age of forty. The EEOC has identified 40 former managers it believes have been affected by the alleged pattern and practice. However, two of those managers have since been dismissed from the case. The relief sought by the EEOC includes reinstatement or reassignment of the individuals allegedly affected, payment of back wages and benefits, an injunction prohibiting employment practices which discriminate on the basis of age and institution of practices to eradicate the effects of any past discriminatory practices. Fact discovery is nearing completion. A scheduling order has been entered indicating that a trial will not be held before the fourth quarter of 1997, unless earlier dismissed. At this point, no estimate can be made as to the Company's potential loss, if any, with respect to this litigation.
On May 23, 1995 the Company was served with a Petition entitled Anderson, et al v. Chevron and Clark, filed in Jefferson County, Texas by twenty-four individual plaintiffs who were Chevron employees who did not receive offers of employment from the Company at the time of the purchase of the Port Arthur Refinery. Chevron and the outplacement service retained by Chevron are also named as defendants. An Amended Petition has now been filed increasing the number of plaintiffs to forty. The Company filed an Answer denying all material allegations of the Amended Petition. Subsequent to the filing of the lawsuit, the plaintiffs have each filed individual charges with the EEOC and the Texas Commission of Human Rights. At this point, no estimate can be made as to the Company's potential liability, if any, with respect to this litigation or the individual charges filed.
While it is not possible at this time to estimate the ultimate amount of liability with respect to the legal proceedings described above, the Company is of the opinion that the aggregate amount of any such liability will not have a material adverse effect on its financial position, however, an adverse outcome of any one or more of these matters could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period.
The Company is also the subject of various environmental and other governmental proceedings. See "Business; Properties--Environmental Matters."
In addition to the specific matters discussed above or under "Business; Properties--Environmental Matters.", the Company has also been named in various other suits and claims. While it is not possible to estimate with certainty the ultimate legal and financial liability with respect to these other legal proceedings, the Company believes the outcome of these other suits and claims will not have a material adverse effect on the Company's financial position.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders
Inapplicable.
PART II
Item 5.
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters
Inapplicable.
Item 6.
Item 6. Selected Financial Data
The following table sets forth, for the periods and dates indicated, selected financial data derived from the Consolidated Financial Statements of the Company for each of the years in the five-year period ended December 31, 1996. The Consolidated Financial Statements of the Company for each of the years in the five-year period ended December 31, 1996 were audited by Coopers & Lybrand L.L.P. This table should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related notes.
(a) Certain reclassifications have been made to prior periods to conform to current period presentation. (b) Amortization includes amortization of turnaround costs and organizational costs. (c) Interest and financing costs, net, includes amortization of debt issuance costs of $2.9 million, $1.2 million, $1.2 million, $5.2 million and $6.5 million for the years ended December 31, 1992, 1993, 1994, 1995 and 1996, respectively. Interest and financing costs, net, also includes interest on all indebtedness, net of capitalized interest and interest income. (d) Other income in 1993 includes the final settlement of litigation with Drexel Burnham Lambert Incorporated ("Drexel") of $8.5 million and a gain from the sale of non-core stores of $2.9 million. Other income in 1992 includes the settlement of litigation with Apex and Drexel of $9.2 million and $5.5 million, respectively. (e) The ratio of earnings to fixed charges is computed by dividing (i) earnings before income taxes (adjusted to recognize only distributed earnings from less than 50% owned persons accounted for under the equity method) plus fixed charges by (ii) fixed charges. Fixed charges consist of interest on indebtedness, including amortization of discount and debt issuance costs and the estimated interest components (one-third) of rental and lease expense. (f) As a result of the losses for the years ended December 31, 1992, 1993, 1995 and 1996, earnings were insufficient to cover fixed charges by $2.0 million, $1.7 million, $44.0 million and $53.6 million, respectively.
Item 7.
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Selected Financial Data and the Consolidated Financial Statements and notes thereto appearing elsewhere in this Report.
Results of Operations
Overview
The Company's results are significantly affected by a variety of factors beyond its control, including the supply of, and demand for, crude oil, gasoline and other refined products which in turn depend on, among other factors, changes in domestic and foreign economies, weather conditions, domestic and foreign political affairs and production levels, the availability of imports, the marketing of competitive fuels and the extent of government regulation. Although margins are significantly affected by industry and regional factors, the Company can influence its margins through the efficiency of its operations. While the Company's net sales and operating revenues fluctuate significantly with movements in industry crude oil prices, such prices do not generally have a direct long-term relationship to net earnings. Crude oil price movements may impact net earnings in the short-term because of fixed crude oil purchase commitments which average approximately 5 million barrels. The effect of changes in crude oil prices on the Company's operating results is determined more by the rate at which the prices of refined products adjust to reflect such changes. The Company believes that, in general, low crude oil prices indirectly benefit operating results over the longer term due to increased demand and decreased working capital requirements. Conversely, the Company believes that high crude oil prices generally result in decreased demand and increased working capital requirements over the long term. Increased refinery production is typically associated with improved results of operations, while reduced production, which generally occurs during scheduled refinery maintenance turnarounds, negatively affects results of operations.
The following table illustrates the potential pre-tax earnings impact based on historical operating rates estimated by the Company resulting from changes in: (i) sweet crude oil cracking margins--the spread between gasoline and diesel fuel prices and input (e.g., a benchmark sweet crude oil) costs; (ii) sweet/sour differentials--the spread between a benchmark sour crude oil and a benchmark sweet crude oil; (iii) heavy/light differentials--the spread between a benchmark light crude oil and a benchmark heavy crude oil and (iv) retail margins--the spread between product prices at the retail level and wholesale product costs.
(a) Based on an assumed production of approximately 210,000 barrels per day for the Port Arthur refinery and 140,000 barrels per day for the Illinois refineries.
1996 compared with 1995 and 1994:
(a) This table provides supplementary data and is not intended to represent an income statement presented in accordance with generally accepted accounting principles. (b) Certain reclassifications have been made to prior periods to conform to current period presentation. (c) The Company considers certain items in 1994 to be "unusual". Detail on these items is presented below.
The Company reported a net loss of $38.5 million in 1996 compared with a net loss of $25.5 million in 1995 and net earnings of $18.1 million in 1994. Net earnings in 1996 were below 1995, and 1995 results were below 1994. Improvements in productivity and fundamental refining industry indicators for crack spreads and crude oil quality differentials in 1996 were offset by the impact of rising, volatile and high crude oil prices. Narrow crude oil differentials, an extremely warm 1994-1995 winter and the resulting oversupply of distillates and market uncertainty related to the introduction of RFG reduced 1995 results from 1994 levels. The late February 1995 acquisition of the 210,000 barrel per day Port Arthur, Texas refinery increased net sales and operating revenues, cost of goods sold, operating and general and administrative expenses and depreciation and amortization. Net sales and operating revenues and cost of goods sold were also higher in 1996 due to higher hydrocarbon prices as reflected by 20% higher prices for benchmark WTI crude oil. Interest and financing costs, increased in 1995 and 1996 over 1994 principally because of costs associated with a larger working capital facility to support the Port Arthur refinery and capital leases. The Company's tax benefit was reduced in 1996 because the Company recorded a $6.1 million valuation reserve for its deferred income tax asset.
Several items which are considered by management as "unusual" are excluded throughout this discussion of the Company's results of operations. In 1996, in accordance with the provisions of Statement of Financial Accounting Standards No. 109, the Company recorded a valuation allowance on its deferred income tax asset of approximately $6.1 million (not included in the table above). See Note 12 "Income Taxes" to the Consolidated Financial Statements. A non-cash accounting charge of $26.5 million was taken in the fourth quarter of 1993 to reflect the decline in the value of petroleum inventories below carrying value caused by a substantial drop in petroleum prices. Crude oil and related refined product prices rose in 1994 allowing the Company to recover the original charge. Accordingly, a reversal of the inventory write-down to market was recorded in 1994. In 1994, the Company realized losses on the sale of short-term investments due to an increase in market interest rates.
Refining
(a) Certain reclassifications have been made to prior periods to conform to current period presentation.
Refining division contribution to operating income in 1996 was $24.2 million more than double 1995 levels ($11.1 million), but below 1994 results ($46.5 million). Contribution improved over 1995 principally because of an improvement in the Port Arthur refinery gross margin resulting from improvements in operational rates, reliability and overall yields. The Hartford refinery realized the benefit from a capital project designed to recover additional higher value products from processing units. Certain key refining market indicators also improved in 1996,
including gasoline and distillate margins and crude oil quality differentials. More normal winter weather, and corresponding demand, contributed to a 2.4% increase in fuels demand from 1995 to 1996. However, these positive market trends were more than offset by reduced by-product margins and the increased cost of crude oil acquisition activities caused by rising, volatile and high absolute crude oil prices. Refining results for 1995 were below 1994 levels as refining margins were particularly weak in 1995 and late 1994 due to the warmest Northern Hemisphere winter in 40 years, which reduced demand for heating oil, and the transition to RFG. Several geographical areas unexpectedly opted not to switch to RFG which caused confusion and concern in the marketplace, and caused gasoline prices to fall relative to the price of crude oil.
Operating expenses increased at the Port Arthur refinery from 1995 to 1996 principally due to increased refinery fuel costs associated with higher natural gas prices. Operating expenses increased in 1995 over 1994 principally due to the addition of the Port Arthur refinery and related terminal expenses in early 1995 and expenses associated with unplanned downtime at the Blue Island refinery. Reduced throughput at the Company's Illinois refineries due to poor first quarter 1995 market conditions and scheduled and unscheduled downtime also contributed to lower production and a higher per barrel operating costs in 1996 and 1995 as compared with 1994. Divisional general and administrative expenses increased in 1996 and 1995 principally because of the inclusion of administrative functions located at the Port Arthur refinery.
Retail
(a) Certain reclassifications have been made to prior periods to conform to current period presentation.
The retail division contributed $25.0 million to operating income in 1996 (1995 - $45.4 million; 1994 - $45.9 million). The retail division contribution was below 1995 levels due mostly to a sharp drop in retail gasoline margins. This resulted from an increase in wholesale gasoline costs associated with higher crude oil prices that was not fully captured in retail selling prices due to an extremely competitive Midwest retail market environment. This was particularly the case in the last half of 1996. In addition, high retail prices impaired sales of higher margin premium gasoline grades. Gross margins on convenience product sales and monthly convenience product sales and gross margins per store improved over the last three years due to the addition of larger stores and an improved mix of higher margin On The Go/(R)/(non-cigarette) products. Operating and general and administrative expenses increased in 1996 and 1995 over 1994 principally due to operating leases and other costs related to new store acquisitions and increased costs related to the expansion of the Company's credit card programs. Year over year credit card sales increased 31% in 1996 and 41% in 1995.
During 1996, the retail network continued to be upgraded in the core Great Lakes' markets. This was achieved by acquiring 10 high volume stores in the Chicago market, introducing a branded marketer program and closing underperforming stores. A further 48 store acquisition was completed in Michigan in January 1997. In 1995, the Company acquired through an operating lease 35 retail stores in central Illinois. In late 1994, the Company similarly acquired 25 stores in Chicago, Illinois. Four additional stores related to the Chicago acquisition were added in 1996. Consistent with the Company's strategy to exit non-core markets, the Company divested 41 stores in the Kansas, western Missouri and Minnesota markets in late 1995 and early 1996 and 11 Dayton, Ohio stores were converted to branded marketer locations in January 1997. As part of its overall growth strategy, the Company expects to continue to consider retail store growth in both existing and new markets while also evaluating underperforming markets for possible divestiture.
Other Financial Matters
Depreciation and amortization expenses increased in 1996 and 1995 principally because of the Port Arthur refinery acquisition and 1994 capital expenditures.
Interest and financing costs, net in 1996 were below 1995 principally due to increased interest income on larger invested balances. Net costs increased in 1996 and 1995 as compared to 1994 primarily because of higher amortization associated with the Company's larger working capital facility which was increased to support the crude oil supply needs of the Port Arthur Refinery, higher amortization of bondholder consent payments paid in connection with the acquisition of the Port Arthur refinery and capital leases. See Note 8 "Long- Term Debt" to the Consolidated Financial Statements.
In December 1995, Clark USA completed separate transactions with Occidental and Gulf. Pursuant to a merger agreement and a series of related agreements with Occidental, Clark USA acquired the right to receive the equivalent of 17.661 million barrels of WTI to be delivered over six years according to a defined schedule. This contract was contributed to the Company at market value and sold in October 1996 for $235.4 million. Pursuant to a merger agreement and a series of related agreements with Gulf, Clark USA acquired the right to receive 3.164 million barrels of certain royalty oil to be received by Gulf pursuant to agreements among Gulf, an Occidental subsidiary and the Government of the Congo. The crude oil was to be delivered over six years according to a minimum schedule of (in millions of barrels) 0.72, 0.62, 0.56, 0.48, 0.42 and 0.36 in 1996, 1997, 1998, 1999, 2000 and 2001, respectively. Gulf has not made their required deliveries since July 1996.
Outlook
Since most of the Company's products are commodities, supply and demand for crude oil and refined products has a significant impact on the Company's results. Demand for fuels products has grown by an average of 2% since 1992 primarily as a result of increased miles driven and little improvement in the fuel efficiency of the U.S. automobile fleet. The Company believes that capital spending in the refining sector is highly correlated to refining industry profitability. As a result of the high capital spending levels of the early 1990s, the industry's ability to produce products exceeded demand in recent years. Since then, industry refinery capital spending has declined. The Company expects that there will continue to be volatility in refining margins and the Company's earnings because of the seasonal nature of refined product demand and the commodity nature of the Company's products. In the first quarter of 1997 the Company completed a maintenance turnaround at its Port Arthur refinery which reduced production for the quarter by approximately one-third.
In the short-term, retail margins are generally squeezed in periods of rapid oil price increases, as was the case in 1996, and widen as prices stabilize or fall. Prices for crude oil have fallen substantially since the end of 1996. Longer term, the Company believes margins are driven by market share and concentration. The Company believes that over the last five years the Company's Midwest market has averaged among the lowest margins in the U.S. due to its relatively high level of fragmentation.
Liquidity and Capital Resources
Operating cash flow (cash generated by operating activities before working capital changes) for the year ended December 31, 1996 was negative $4.5 million compared with cash flow of $7.6 million in 1995 and $46.0 million in 1994. Cash flow declined from 1994 to 1996 principally because of the weaker refining margin environment and a decline in retail gasoline margins in 1996. Working capital at December 31, 1996 was $399.5 million, a 2.00 to 1 current ratio, versus $193.1 million at December 31, 1995, a 1.48 to 1 current ratio and $130.4 million at December 31, 1994, a 1.52 to 1 current ratio. Working capital increased in 1996 as a result of the sale of one of Clark USA's advance crude oil purchase receivables for net cash proceeds of $235.4 million. An increase was realized in 1995 due to the Port Arthur refinery acquisition and partial financing with equity of the refinery's working capital requirements.
As part of its overall inventory management and crude acquisition strategies, the Company routinely buys and sells, in varying degrees, crude oil in the spot market. Such on-going activities carry various payment terms and require the Company to maintain adequate liquidity and working capital facilities. The Company's short-term working capital requirements (primarily letter of credit issuances to support crude oil requirements) fluctuate with the pricing and sourcing of crude oil. Historically, the Company's internally generated cash flows have been sufficient to meet its needs. The Company has a $400 million committed revolving line of credit (the "Clark Credit Agreement") for limited short-term cash borrowings and for the issuance of letters of credit primarily for purchases of crude oil, other feedstocks and refined products. See Note 7 "Working Capital Facility" to the Consolidated Financial Statements. Under the defined borrowing base of the Clark Credit Agreement, $400 million was available at December 31, 1996. At December 31, 1996, $299 million of the facility was used for letters of credit. There were no direct borrowings under the Company's line of credit at December 31, 1994, 1995 or 1996.
The Clark Credit Agreement contains covenants and conditions which, among other things, limit dividends, indebtedness, liens, investments, contingent obligations and capital expenditures, and require the Company to maintain its property and insurance, to pay all taxes and comply with all laws, and to provide periodic information and conduct periodic audits on behalf of the lenders. The Company is also required to comply with certain financial covenants. The Company renegotiated certain covenants in the Clark Credit Agreement in connection with the 1995 and 1996 advance crude oil purchase transactions, received consent for the issuance of the 10 7/8% Notes by Clark USA, modified the change of control provisions and received approval of a bondholder consent solicitation. The financial covenants are: (i) maintenance of working capital of at least $150 million at all times; (ii) maintenance of a tangible net worth (as defined) of at least $254 million adjusted quarterly to give effect to a portion of future earnings or capital contributions by Clark USA to the Company; (iii) maximum indebtedness to tangible net worth ratio (as defined) of 2.5 to 1.0; (iv) maintenance of minimum levels of balance sheet cash (as defined) of $50 million at all times; and (v) a minimum ratio of adjusted cash flow (as defined) to debt service (as defined) of 1.5 to 1.0. The covenants also limit the Company's ability to pay dividends to an amount not exceeding the Net Cash Proceeds (as defined) from the sale of one of the advance crude oil purchase receivables less $40 million, plus the lesser of (i) $10 million during any consecutive two quarter period and $20 million during any consecutive four quarter period or (ii) a dividend basket, which consists of the greater of $20 million less previous dividend payments of the Company's cumulative Adjusted Free Cash Flow, as defined in the Clark Credit Agreement, provided there is no default under the Clark Credit Agreement. As of February 28, 1997, the total amount available for dividends was $215.4 million. The Clark Credit Agreement also limits the amount of future indebtedness that may be incurred by the Company without creating an event of default to an amount equal to $25 million less the amount of certain future debt incurred by the Company. From December 29, 1995 to January 31, 1997, Clark USA made $80 million
of equity contributions to the Company in connection with certain modifications to the Clark Credit Agreement. The Company was in compliance with all covenants of the Clark Credit Agreement at December 31, 1996.
Cash flows from investing activities (excluding short-term investment activities which the Company manages similar to cash and cash equivalents) are primarily affected by acquisitions and capital expenditures, including refinery maintenance turnarounds. Cash flows provided by investing activities (excluding short-term investments) in 1996 was $180.9 million as compared to cash flows used of $118.5 million in 1995 and $119.0 million in 1994. In 1996, Clark USA contributed capital to the Company in the form of the Occidental advance crude oil purchase receivable which was immediately sold for $235.4 million. Cash flows used in investing activities of $71.8 million in 1995 was related to the acquisition of the Port Arthur Refinery. Otherwise, capital spending was reduced in 1995 and 1996 from 1994 levels in line with the Company's philosophy to link capital expenditures to cash flow. Capital expenditures for property, plant and equipment totaled $45.0 million in 1996 (1995--$42.1 million; 1994--$100.3 million) and expenditures for refinery maintenance turnarounds totaled $13.9 million (1995--$6.5 million; 1994--$11.2 million). Refining division capital expenditures were $19.4 million in 1996 (1995--$15.8 million, 1994--$59.7 million). Approximately one-half of 1996 expenditures were discretionary with the balance and most of 1995 expenditures primarily for mandatory maintenance and environmental expenditures. In 1994, projects included adding the capability to produce RFG at the Blue Island refinery and a revamp of the FCC and alkylation units at the Hartford refinery. Retail capital expenditures in 1996 totaled $24.6 million (1995--$25.2 million; 1994--$38.2 million). Approximately one-half of 1996 and 1995 expenditures were for regulatory compliance, principally underground storage tank related work and vapor recovery. The remainder of 1996 and 1995 retail capital expenditures were discretionary and primarily related to new store acquisitions, a reimaging program and miscellaneous store equipment. In 1994, approximately one-third of retail division capital expenditures was for regulatory compliance with the balance for discretionary projects such as reimaging locations, canopies, expansion of store interior selling space and systems automation.
The Company invested $25 million in a project initiated to produce low sulfur diesel fuel at the Hartford refinery (the "DHDS Project") which was delayed in 1992 based on internal and third party analyses that indicated an oversupply of low sulfur diesel fuel capacity in the Company's marketplace. Based on these analyses, the Company projected relatively narrow price differentials between low and high sulfur diesel products. This projection has thus far been borne out. High sulfur diesel fuel is utilized by the railroad, marine and farm industries. If price differentials widen sufficiently to justify investment, the Company could install the necessary equipment over a 14 to 16 month period at an estimated additional cost of $40 million. The Company believes there may be potential for improved future economic returns related to the production of low sulfur diesel fuel, but is still deferring further construction on this project and also reviewing other options for the project. The Company believes it would not recover its entire investment in this project should it not be completed.
In February 1995, the Company acquired the Port Arthur Refinery from Chevron for approximately $70 million plus inventory and spare parts of approximately $122 million (a $5 million deposit was paid in 1994) and the assumption of certain liabilities estimated at $19.4 million. The purchase agreement also provided for contingent payments to Chevron of up to $125 million over a five year period from the closing date of the Port Arthur Refinery acquisition in the event that refining industry margin indicators exceed certain escalating levels. The Company believes that even if such contingent payments would be required to be made, they would not have a material adverse effect on the Company's results of operations since the Company would also benefit by retaining one-half of such increased margins. Such contingent payments were not payable for the first two measurement periods ended September 30, 1995 and 1996, and based on these industry margin indicators from inception through December 31, 1996, the Company has a cumulative benefit to be applied to future periods of approximately $36 million applicable to future calculations.
The Company classifies its capital expenditures into two categories, mandatory and discretionary. There are mandatory maintenance capital expenditures and mandatory environmental expenditures to comply with regulations pertaining to ground, water and air contamination and occupational, safety and health issues. The Company estimates that total mandatory expenditures through 2000 will be approximately $70 million per year in the refining division and $15 million per year in the retail division. Costs to comply with future regulations cannot be estimated.
Expenditures to comply with reformulated and low sulfur fuels regulations are primarily discretionary, subject to market conditions and economic justification. These fuel programs impose restrictions on properties of fuels to be refined and marketed, including those pertaining to gasoline volatility, oxygenate content, detergent addition and sulfur content. The regulations regarding these fuel properties vary in markets in which the Company operates, based on attainment of air quality standards and the time of the year. The Company's Port Arthur, Blue Island and
Hartford refineries have the capability to produce 60%, 60%, and 25%, respectively, of their gasoline production in RFG. Each refinery's maximum RFG production may be limited based on the clean fuels attainment of the Company's total refining system. The Port Arthur refinery has the capability to produce 100% low sulfur diesel fuel.
The Company has a philosophy to link total capital expenditures to cash generated from operations. The Company has a total capital and refinery maintenance turnaround expenditure budget of $100-$110 million for 1997. This amount includes approximately $18 million, net, related to the January 1997 acquisition of 48 retail stores in Michigan and expenditures related to a major maintenance turnaround at the Port Arthur refinery in the first quarter of 1997. Total capital expenditures may be under budget if cash flow is less than expected, and higher than budget if cash flow is better than expected.
Cash flow from financing activities was $30.0 million in 1996 and $174.7 million in 1995 compared to a use of $5.4 million in 1994. In 1995, financing activities reflected the partial financing of the Port Arthur refinery acquisition with the sale of stock (the balance was financed with cash on hand), fees related to the larger working capital facility associated with the expanded working capital needs of the Company following the Port Arthur Refinery acquisition and two capital leases associated with the sale and leaseback of certain refinery equipment at the Hartford and Port Arthur refineries. In 1994, expenditures related principally to the acquisition of a new working capital facility.
Funds generated from operating activities together with existing cash, cash equivalents and short-term investments, are expected to be adequate to fund existing requirements for working capital and capital expenditure programs for the next year. Due to the commodity nature of its products, the Company's operating results are subject to rapid and wide fluctuations. While the Company believes that its maintenance of large cash, cash equivalents and short-term investment balances and other operating philosophies will be sufficient to provide the Company with adequate liquidity through the end of 1997, there can be no assurance that refining industry conditions will not be worse than anticipated. Due to the contribution and subsequent sale of the Occidental advance crude oil purchase receivable, the Company had higher cash, cash equivalents and short-term investments at December 31, 1996 than it has historically maintained. These balances are available for investment in current operations, debt reduction or acquisitions. Future working capital, discretionary capital expenditures, environmentally-mandated spending and acquisitions may require additional debt or equity capital.
Item 8.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference to Part IV Item 14 (a) 1 and 2. Financial Statements and Financial Statement Schedules.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Inapplicable.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The directors, executive officers, Controller, Treasurer and Secretary of the Company and their respective ages and positions are set forth in the table below.
The Board of Directors of the Company consists of four directors who serve until the next annual meeting of stockholders or until a successor is duly elected. Directors do not receive any compensation for their services as such. Executive officers of the Company serve at the discretion of the Board of Directors of the Company.
Peter Munk has served as Chairman of the Board of the Company since July 1992 and as Chairman of the Board and Chief Executive Officer of the Company from August 1990 through July 1992. Mr. Munk has served as a director of the Company since November 1988. Mr. Munk has served as a director and as Chairman of the Board of Clark USA since November 1988. Mr. Munk has served as Chairman of the Board of Directors of TrizecHahn since its formation in June 1987 and as Chairman and Chief Executive Officer and a director of Barrick Gold Corporation ("Barrick") since July 1984.
Paul D. Melnuk has served as a director of the Company since October 1992, as President and Chief Executive Officer of the Company since July 1992, as Chief Operating Officer of the Company since December 1991, as President of the Company from February 1992 through July 1992, as Executive Vice President of the Company from December 1991 through February 1992, and served in various other capacities since November 1988. Mr. Melnuk has served as a director and as President of Clark USA since September 1992 and as Vice President and Treasurer of Clark USA from November 1988 through September 1992. Mr. Melnuk served as a director of TrizecHahn from March 1992 through November 1996. Mr. Melnuk served as President and Chief Operating Officer of TrizecHahn from March 1992 through April 1994 and as Executive Vice President and Chief Financial Officer of TrizecHahn from May 1990 through February 1992.
Bradley D. Aldrich has served as Executive Vice President--Refining, since December 1994. From August 1991 through November 1994, Mr. Aldrich served as Vice President, Supply & Distribution for CF Industries, Inc., a chemical fertilizer manufacturer and distributor. Mr. Aldrich previously served as Manager, Light Oil Supply-North America of Conoco, Inc. from August 1989 through July 1991.
Brandon K. Barnholt has served as Executive Vice President--Marketing of the Company since February 1995 and served as Executive Vice President--Retail Marketing from December 1993 through February 1995, as Vice President--Retail Marketing of the Company from July 1992 through December 1993 and as Managing Director--Retail Marketing of the Company from May 1992 through July 1992. Mr. Barnholt previously served as Retail Marketing Manager of Conoco, Inc. from March 1991 through March 1992.
Maura J. Clark has served as Executive Vice President--Corporate Development and Chief Financial Officer of Clark USA and the Company since August 1995. Ms. Clark previously served as Vice President--Finance at North American Life Assurance Company, a financial services company, from September 1993 through July 1995.
From May 1990 to September 1993, Ms. Clark served as Vice President Corporate Finance and Corporate Development of North American Trust Company (formerly First City Trust Company), a subsidiary of North American Life Assurance Company.
Edward J. Stiften joined Clark in March 1997 as Executive Vice President, Chief Administrative Officer. Mr. Stiften was previously in private business from June 1995 through March 1997. Mr. Stiften served as Subsidiary Executive Vice President and Acting General Manager of General Dynamics, Inc. from October 1994 through May 1995, as Corporate Staff Vice President of Internal Audit from February 1994 through October 1994 and as Corporate Staff Vice President-- Financial Analysis from December 1991 through January 1994.
C. William D. Birchall has been a director of Clark USA and the Company since November 1988. Mr. Birchall has been Chief Financial Officer of Arlington Investments Limited, a private investment holding company located in Nassau, Bahamas, for the last five years. Mr. Birchall has been a director of Barrick since July 1984 and a director of TrizecHahn since 1987.
Gregory C. Wilkins has been a director of Clark USA and the Company since August 1994 and has served as President of TrizecHahn since April 1994. Mr. Wilkins served as President of Trizec Corporation Ltd. from February 1996 through November 1996 and has served as Executive Director, Office of the Chairman of TrizecHahn and Barrick since September 1993; Executive Vice- President and Chief Financial Officer of Barrick from April 1990 through September 1993; Senior Vice-President, Finance of Barrick prior to April 1990.
Dennis R. Eichholz who joined the Company in November 1988 has served as Controller and Treasurer of Clark USA and Vice President-Controller and Treasurer of the Company since February 1995. Mr. Eichholz has served as Vice President-Treasurer of the Company since December 1991.
Katherine D. Knocke has served as Secretary of Clark USA and the Company since April 1995. Ms. Knocke has served as in-house counsel of the Company since August 1994. Ms. Knocke previously was employed as an associate with the St. Louis law firm of Armstrong, Teasdale, Schlafly & Davis from September 1989 through August 1994.
Except as described above, there are no arrangements or understandings between any director or executive officer and any other person pursuant to which such person was elected or appointed as a director or executive officer. There are no family relationships between any director or executive officer and any other director or executive officer.
Executive Committee
The Executive Committee is principally responsible for making management policy for the Company as well as developing and implementing financial and human resource strategies, and improving the Company's financial position and results of operations. The five members of the Executive Committee are: Bradley D. Aldrich, Executive Vice President--Refining; Brandon K. Barnholt, Executive Vice President--Marketing; Maura J. Clark, Executive Vice President--Corporate Development and Chief Financial Officer; Paul D. Melnuk, President, Chief Executive Officer and Chief Operating Officer; and Edward J. Stiften, Executive Vice President and Chief Administrative Officer.
Item 11.
Item 11. Executive Compensation
Executive Compensation
The following table sets forth all cash compensation paid by the Company to its Chief Executive Officer and its other executive officers whose total annual compensation exceeded $100,000 for each of the years in the three-year period ended December 31, 1996.
(a) Mr. Aldrich commenced employment on December 1, 1994. See "--Employment Agreement." (b) Options issued pursuant to the Performance Plan as described below. (c) Mr. Aldrich and Mr. Barnholt (granted in 1993) hold options to acquire TrizecHahn Subordinate Voting Shares ("TrizecHahn Shares") received as compensation from TrizecHahn for services performed for the Company under the TrizecHahn Amended and Restated 1987 Stock Option Plan (the "TrizecHahn Option Plan"). (d) Represents amount accrued for the account of such individuals under the Clark Retirement Savings Plan (the "Savings Plan"). (e) In 1995 and 1996, Ms. Clark was an employee of TrizecHahn and served the Company under a management consulting arrangement. Ms. Clark earned approximately $175,000 in 1996 and $117,000 in 1995 under such arrangement. As of January 1, 1997, Ms. Clark became an employee of the Company. The amounts reflected in this table are for 1996 compensation paid by the Company in 1997.
Stock Options Granted During 1996
The were no options granted during 1996 to the named executive officers under the Performance Plan (defined below) for services performed for the Company.
Year-End Option Values
The following table sets forth information with respect to the number and value of unexercised options to purchase Common Stock of Clark USA and TrizecHahn Shares held by the executive officers named in the executive compensation table at December 31, 1996.
(a) For the TrizecHahn Shares the value is based upon the closing price on the New York Stock Exchange-Composite Transactions on December 31, 1996. For the Common Stock of Clark USA the value is based on the issuance price in the Oil Transactions. (b) Mr. Melnuk also holds options to acquire TrizecHahn Shares received as compensation for services provided to TrizecHahn.
Short-Term Performance Plan
Employees of the Company participate in an annual incentive plan which places at risk an incremental portion of their total compensation based on company, business unit and/or individual performance. The targeted at risk compensation increases with the ability of the individual to affect business performance, ranging from 12% for support personnel to 200% for the Chief Executive Officer. The other executive officers have the opportunity to earn an annual incentive equal to 125% of the individual's base salary. The actual award is determined based on financial performance as measured by return on equity with individual and executive team performance evaluated against pre-established operating objectives designed to achieve planned financial results. For essentially all other employees, annual incentives are based on specific performance indicators utilized to operate the business, principally productivity and profitability measures.
Long-Term Performance Plan
The Company has adopted a Long-Term Performance Plan (the "Performance Plan"). Under the Performance Plan, designated employees, including executive officers, of Clark USA and its subsidiaries and other related entities are eligible to receive awards in the form of stock options, stock appreciation rights and stock grants. The Performance Plan is intended to promote the growth and performance of the Company by encouraging employees to acquire an ownership interest in the Company and to provide incentives for employee performance. An aggregate of 1,250,000 shares of Common Stock may be awarded under the Performance Plan, either from authorized, unissued shares which have been reserved for such purpose or from shares purchased on the open market, subject to adjustment in the event of a stock split, stock dividend, recapitalization or similar change in the outstanding common stock of Clark USA. As of December 31, 1996, 549,000 stock options have been issued under the Performance Plan.
The Performance Plan is administered by the Board of Directors' Compensation Committee. Subject to the provisions of the Performance Plan, the Compensation Committee is authorized to determine who may participate in the Performance Plan and the number and types of awards made to each participant, and the terms, conditions and limitations applicable to each award. Awards may be granted singularly, in combination or in tandem. Subject to certain limitations, the Board of Directors is authorized to amend, modify or terminate the Performance Plan to meet any changes in legal requirements or for any other purpose permitted by law.
Payment of awards may be made in the form of cash, stock or combinations thereof and may include such restrictions as the Compensation Committee shall determine, including, in the case of stock, restrictions on transfer
and forfeiture provisions. The price at which shares of Common Stock may be purchased under a stock option may not be less than the fair market value of such shares on the date of grant. If permitted by the Compensation Committee, such price may be paid by means of tendering Common Stock, or surrendering another award, including restricted stock, valued at fair market value on the date of exercise, or any combination thereof. Further, with Compensation Committee approval, payments may be deferred, either in the form of installments or as a future lump sum payment. Dividends or dividend equivalent rights may be extended to and made part of any award denominated in stock, subject to such terms, conditions and restrictions as the Compensation Committee may establish. At the discretion of the Compensation Committee, a participant may be offered an election to substitute an award for another award or awards of the same or different type. Stock options initially have a 10 year term with a three year vesting schedule and are not exercisable until Clark USA's Common Stock is publicly traded. In accordance with the Stock Purchase Agreement (as defined herein), executive officers are restricted from exercising options for four years or until Tiger's interest in Clark USA falls below 10%.
If the employment of a participant terminates, subject to certain exceptions for retirement, resignation, death or disability, all unexercised, deferred and unpaid awards will be canceled immediately, unless the award agreement provides otherwise. Subject to certain exceptions for death or disability, or employment by a governmental, charitable or educational institution, no award or other benefit under the Performance Plan is assignable or transferable, or payable to or exercisable by anyone other than the participant to whom it was granted.
In the event of a "Change of Control" of Clark USA or TrizecHahn (as defined in the Performance Plan), with respect to awards held by Performance Plan participants who have been employed by the Company for at least six months, (a) all stock appreciation rights which have not been granted in tandem with stock options will become exercisable in full, (b) the restrictions applicable to all shares of restricted stock will lapse and such shares will be deemed fully vested, (c) all stock awards will be deemed to be earned in full, and (d) any participant who has been granted a stock option which is not exercisable in full will be entitled, in lieu of the exercise of such stock option, to obtain cash payment in an amount equal to the difference between the option price of such stock option and the offer price (in the case of a tender offer or exchange offer) or the value of common stock covered by such stock option, determined as provided in the Performance Plan.
Under the Performance Plan, a "Change in Control" includes, without limitation, with respect to Clark USA or TrizecHahn, (i) the acquisition (other than by TrizecHahn) of beneficial ownership of 25% or more of the voting power of its outstanding securities without the prior approval of at least two-thirds of its directors then in office, (ii) a merger, consolidation, proxy contest, sale of assets or reorganization which results in directors previously in office constituting less than a majority of its directors thereafter, or (iii) any change of at least a majority of its directors during any period of two years.
Clark Savings Plan
The Clark Savings Plan, which became effective in 1989, permits employees to make before-tax and after-tax contributions and provides for employer incentive matching contributions. Savings Plan assets are held in trust by Boatmen's Trust Company. Under the Savings Plan, each employee of the Company (and such other related companies as may adopt the Savings Plan) who has completed at least six months of service may become a participant. Participants are permitted to make before-tax contributions to the Savings Plan, effected through payroll deduction, of from 1% to 15% of their compensation. The Company makes matching contributions equal to 200% of a participant's before-tax contributions up to 3% of compensation. Participants are also permitted to make after-tax contributions through payroll deduction, of from 1% to 5% of compensation, which are not matched by employer contributions; provided that before-tax contributions and after-tax contributions, in the aggregate, may not exceed the lesser of 15% of compensation or $9,500 in 1996. All employer contributions are vested at a rate of 20% per year of service, becoming fully vested after five years of service. Amounts in employees' accounts may be invested in a variety of permitted investments, as directed by the employee, including in TrizecHahn Shares. Participants' vested accounts are distributable upon a participant's disability, death, retirement or separation from service. Subject to certain restrictions, employees may make loans or withdrawals of employee contributions during the term of their employment.
Compensation Committee Interlocks and Insider Participation
Compensation of the Company's executive officers has historically been determined by the Company's Board of Directors. Mr. Melnuk, Clark USA's and the Company's President and Chief Executive Officer, is a member of Clark USA's and the Company's Board of Directors. Other than reimbursement of their expenses, neither Clark USA's nor the Company's directors receive any compensation for their services as directors. There are no interlocks between the Company and other entities involving the Company's executive officers and board members who serve as executive officers or board members of other entities, except with respect to Clark USA and TrizecHahn. Mr. Munk (Chairman and Chief Executive Officer of TrizecHahn) serves as a director of the Company and Clark USA, Mr. Wilkins (President and Chief Operating Officer of TrizecHahn) serves as a director of the Company and Clark USA, and Mr. Birchall serves as a director of the Company and Clark USA and as a director and Vice Chairman of TrizecHahn.
Employment Agreement
The Company has an employment agreement with Mr. Aldrich which provides for a term of thirty months commencing December 1, 1994 at a minimum annual salary of $175,000. In addition, in February 1995 Mr. Aldrich was granted an option to purchase 100,000 shares of TrizecHahn Shares under the TrizecHahn Option Plan.
Item 12.
Item 12. Security Ownership of Certain Owners and Management
All of the Company's common stock is owned by Clark USA. The following table and the accompanying notes set forth certain information concerning the beneficial ownership of the Common Stock and Class A Common Stock of Clark USA, as of the date hereof: (i) each person who is known by the Company to own beneficially more than 5% of the common stock of Clark USA, (ii) each director and each executive officer who is the beneficial owner of shares of common stock and (iii) all directors and executive officers as a group.
(a) Represents the total voting power of all shares of common stock beneficially owned by the named stockholder. See "--Restrictions Under Tiger Agreements." (b) As of December 31, 1996, Peter Munk, the Chairman of the Board of Directors of TrizecHahn, held approximately 53% voting control of TrizecHahn and as a result is deemed to own beneficially the shares owned by TrizecHahn. (c) Tiger has informed the Company that Julian H. Robertson, Jr., Tiger's chief executive officer, may be deemed to control Tiger. Mr. Robertson's address is 101 Park Avenue, New York, New York 10178. (d) Less than 1%. (e) Gulf has informed the Company that H. M. Salaam, Gulf's chairman, may be deemed to control Gulf. Mr. Salaam's address is 24-26 Regent's Bridge Gardens, London SW8 1HB England.
Restrictions Under Tiger Agreements
Pursuant to the Stock Purchase Agreement, dated as of February 27, 1995 (the "Stock Purchase Agreement") between Clark USA, a subsidiary of TrizecHahn, TrizecHahn and Tiger, Clark USA agreed to the following:
Limitation on Certain Transactions
Pursuant to the Stock Purchase Agreement, Clark USA agreed that, so long as Tiger and/or its affiliates collectively own 20% of the issued and outstanding capital stock of Clark USA, the affirmative vote of the holders of a majority of the outstanding shares of Class A Common Stock shall be required for any of the following actions:
(a) acquisitions by Clark USA during any calendar year of equity or debt securities (other than equity or debt securities purchased in connection with Clark USA's investment of excess cash) or fixed assets (other than pursuant to operating leases and other than as part of capital expenditure programs (whether or not requiring approval as contemplated by (c) below)) or assumptions by Clark USA of liabilities which, in the aggregate, exceed $10,000,000;
(b) other than certain identified financings, financings by Clark USA (other than fully underwritten widely dispersed public offerings of common stock or pursuant to working capital arrangements) during any calendar year which in the aggregate exceed $10,000,000;
(c) any increase in any calendar year (in excess of the Consumer Price Index increase from the previous calendar year) in compensation payable at any time to any senior management member, and any termination of employment by Clark USA, or significant reduction by Clark USA in duties, of Paul D. Melnuk, the President and Chief Executive Officer of Clark USA;
(d) other than a fully underwritten widely dispersed public offering of common stock, any material change in the capital structure of Clark USA (including, without limitation, any issuance of debt securities (except as permitted by (b) above)) or equity securities (other than pursuant to the Performance Plan );
(e) any transactions between Clark USA on the one hand and any of its affiliates or TrizecHahn or its affiliates on the other hand (other than pursuant to the Performance Plan ) which (a) are not on reasonable arm's length terms at fair market valuations or (b) during any calendar year exceed, in the aggregate, $2,500,000;
(f) a merger or sale of Clark USA or more than 10% of its assets; and
(g) prior to the second anniversary of the Public Float Target Date (as defined in the Stock Purchase Agreement), any acquisition by Clark USA which is funded by the issuance of new equity securities of Clark USA.
In addition, so long as Tiger and/or its affiliates own collectively 20% of the issued and outstanding capital stock of Clark USA, Clark USA may not, and shall cause each of its subsidiaries not to, engage in any business other than its current business.
Tiger Director
So long as Tiger and/or its affiliates own collectively 10% or more of the issued and outstanding capital stock of Clark USA, at each annual election of the Board of Directors of Clark USA thereafter, Clark USA will take all necessary action to elect to the Board of Directors of Clark USA one person nominated by Tiger. James J. Murchie currently serves as the director nominated by Tiger.
Limitations on Sale of Capital Stock of Clark USA
With respect to any public offering of common stock, Tiger on the one hand and Clark USA on the other hand may participate for the same number of shares, and TrizecHahn and its affiliates may participate (with respect only to the Common Stock into which its Class A Common Stock is convertible) for a percentage of the number of shares being offered by Tiger which is equal to the percentage that the Common Stock into which TrizecHahn's Class A Common Stock is convertible represents of the capital stock of Clark USA owned in the aggregate by Tiger; provided, however, that Clark USA shall have priority to the extent that funding is required in connection with such offering for mandatory redemption of Clark USA's Zero Coupon Notes.
Other than as provided in the preceding paragraph or with Tiger's consent (which Tiger may grant or withhold at Tiger's sole discretion), TrizecHahn shall not sell any equity securities of Clark USA owned by it (other than the Class A Common Stock issued to TrizecHahn under the Stock Purchase Agreement or the Common Stock into which it is convertible), provided, however, that TrizecHahn may sell equity securities of Clark USA after 120 days after Tiger no longer owns at least 10% of the then issued and outstanding capital stock of Clark USA unless Tiger shall at such time be actively attempting to sell any capital stock or shall have taken substantial steps in such regard.
If any Purchaser (a "Selling Purchaser") proposes to sell all or any portion of its Class A Common Stock in a private sale to an entity engaged in the refining industry (a "Proposed Sale"), the Selling Purchaser will provide Clark USA with at least 45 days' written notice prior to the closing thereof (which closing shall be subject to Clark USA's right here under), and Clark USA will have the right, prior to the date of such closing (the "Proposed Sale Closing Date"), to produce an alternative buyer for the same number of shares at a higher price than in the Proposed Sale and otherwise on terms (including the date of closing being no later than the Proposed Sale Closing Date) equal or superior to the terms of the Proposed Sale. If the transaction with such alternative buyer does not close for any reason by the Proposed Sale Closing Date (other than by reason of a breach by the Selling Purchaser of its obligations), the Selling Purchaser shall be free during the next 90 days to sell the shares it proposed to sell in the Proposed Sale to any buyer (including the buyer in the Proposed Sale). Notwithstanding the above, Clark USA shall have the right, in its sole discretion, to prohibit any sales of capital stock of Clark USA for a period of time not to exceed 90 days from (i) the date of the initial public offering (the "IPO") of Clark USA's common stock if so required by the managing underwriters of the IPO or (ii) the date of the notice referred to in the first sentence of this paragraph in the event of a pending material transaction. In the event Clark USA shall prohibit any sales of its capital stock of Clark USA pursuant to the preceding sentence, the 90 day period during which the Selling
Purchaser would have otherwise been free to sell the shares it proposed to sell in the Proposed Sale shall be extended to the date following expiration of such prohibition which is the same number of days thereafter as the number of days during such 90-day period that such prohibition was in effect.
Any executive officer of the Company exercising options issued pursuant to the Performance Plan may not sell equity securities of Clark USA issued upon exercise of options issued pursuant to the Performance Plan until the earlier of four years after February 27, 1995 or 120 days after Tiger and its affiliates own less than 10% of the capital stock of Clark USA and then only if Tiger and its affiliates shall not at such time be actively attempting to sell equity securities of Clark USA or have taken substantial steps in such regard.
Registration Rights
In connection with the execution of the Stock Purchase Agreement, Clark USA entered into a registration rights agreement (the "'Tiger Registration Rights Agreement") with Tiger, a subsidiary of TrizecHahn and Paul D. Melnuk. In the Tiger Registration Rights Agreement, Clark USA agreed, among other things, to provide Tiger with demand and piggyback registration rights with respect to their shares of Common Stock issuable upon conversion of their Class A Common Stock. Clark USA also agreed to file a shelf registration and to use its best efforts to cause the shelf registration to become effective not later than 90 days after consummation of an initial public offering and to remain effective for a period of four years from the date upon which the shelf registration is declared effective.
The Occidental Stockholders' Agreement
Clark USA and Occidental, entered into a Stockholders' Agreement (the ''Oxy Stockholders' Agreement''). The Oxy Stockholders' Agreement provides that Occidental will be entitled to designate one director to the Board of Directors of Clark USA so long as Occidental and its affiliates own at least 10% of the outstanding shares of capital stock of Clark USA on a fully diluted basis. Stephen I. Chazen currently serves as the director designated by Occidental.
The Oxy Stockholders' Agreement generally prohibits the sale of shares of capital stock of Clark USA by Occidental and its transferees except (a) pursuant to a public offering, (b) to Clark USA or any subsidiary of Clark USA, TrizecHahn, Occidental, Tiger or their respective affiliates, (c) subject to certain restrictions, pursuant to Rule 144 under the Securities Act, or (d) to third parties, subject to a right of first refusal granted to Clark USA. The Oxy Stockholders' Agreement prohibits any sale of shares of capital stock of Clark USA without the consent of Tiger whenever Tiger is actively attempting to sell any capital stock of Clark USA or has taken substantial steps in such regard.
Pursuant to the Oxy Stockholders' Agreement, Occidental will be entitled to receive additional shares of Class D Common Stock if Clark USA, whether or not for its own account, effects a public offering of common stock at a price, net of all fees, commissions and discounts (the ''Net Price'') below $22 per share. Subject to appropriate adjustments for stock dividends, recapitalizations and similar events, the additional shares of Class D Common Stock to be received by Occidental in this circumstance will be valued at a minimum of $20 per share and will not exceed 545,455 shares in the aggregate. See "--Restrictions Under Tiger Agreements".
Clark USA has granted to Occidental the right, after Clark USA has made a public offering of equity securities, to make one demand that Clark USA register under the Securities Act shares of Clark USA's capital stock held by Occidental. Occidental will also have the right to participate in registrations effected by Clark USA for its account or for the account of another stockholder.
The Gulf Stockholders' Agreement
Clark USA and Gulf entered into a Stockholders' Agreement (the ''Gulf Stockholders' Agreement''). The Gulf Stockholders' Agreement generally prohibits the sale of shares of capital stock of Clark USA by the Gulf Stockholders and their transferees except (a) to Gulf or an affiliate of Gulf or (b) in a transaction in which TrizecHahn sells any shares of capital stock of Clark USA. The Oxy Stockholders' Agreement prohibits any sale of
shares of capital stock of Clark USA without the consent of Tiger whenever Tiger is actively attempting to sell any capital stock of Clark USA or has taken substantial steps in such regard. In any such sale by TrizecHahn, Gulf shall have the right to elect to include in such sale a number of shares of common stock of Clark USA owned by Gulf proportionate to the total number of shares owned by Gulf relative to TrizecHahn.
Pursuant to the Gulf Stockholders' Agreement, Gulf will be entitled to receive additional shares of Class D Common Stock if Clark USA, whether or not for its own account, effects a public offering of common stock at a Net Price below $22 per share. Subject to appropriate adjustments for stock, dividends, recapitalizations and similar events, the additional shares of Class D Common Stock to be received by the Gulf Stockholders in this circumstance will be valued at a minimum of $20 per share and will not exceed 122,227 shares in the aggregate.
The common shares of Clark USA held by Gulf secure the obligations of Gulf in the Oil Transactions. Gulf has not made their required deliveries under the Oil Transactions since July 1996.
Item 13.
Item 13. Certain Relationships and Related Transactions
TrizecHahn and the Company have agreements to provide certain management services to each other from time to time. The Company established trade credit with various suppliers of its petroleum requirements, requiring the guarantee of TrizecHahn. Fees related to trade credit guarantees totaled $0.1 million, $0.2 million and $0.2 million in 1994, 1995 and 1996, respectively. All trade credit guarantees were terminated in August 1996.
The business relationships described above and any future business relationships between the Company and TrizecHahn will be on terms no less favorable in any respect than those which could be obtained through dealings with third parties.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K
(a) 1. and 2. Financial Statements and Financial Statement Schedules
The financial statements and schedule filed as a part of this Report on Form 10-K are listed in the accompanying index to financial statements and schedule.
3. Exhibits
Exhibit Number Description ------ -----------
3.1 Restated Certificate of Incorporation of Clark Refining & Marketing, Inc. (Incorporated by reference to Exhibit 3.1 filed with Clark Oil & Refining Corporation Registration Statement on Form S-1 (Registration No. 33-28146))
3.2 Certificate of Amendment to Certificate of Incorporation of Clark Refining & Marketing, Inc. (Incorporated by reference to Exhibit 3.2 filed with Clark Oil & Refining Corporation Annual Report on Form 10-K (Registration No. 1-11392))
3.3 By-laws of Clark Refining & Marketing, Inc. (Incorporated by reference to Exhibit 3.2 filed with Clark Oil & Refining Corporation Registration Statement on Form S-1 (Registration No. 33-28146))
4.1 Indenture between Clark Refining & Marketing, Inc. (formerly Clark Oil & Refining Corporation) and NationsBank of Virginia, N.A. (formerly Sovran Bank, N.A.) including the form of 10 1/2% Senior Notes due 2001 (Incorporated by reference to Exhibit 4.1 filed with Clark Oil & Refining Corporation Registration Statement on Form S-1 (File No. 33-43358))
4.2 Supplemental Indenture between Clark Refining & Marketing, Inc. and NationsBank of Virginia, N.A., dated February 17, 1995 (Incorporated by reference to Exhibit 4.4 filed with Clark USA, Inc. Annual Report on Form 10-K for the year ended December 31, 1994) (File No. 33-59144))
4.3 Indenture between Clark Refining & Marketing, Inc. (formerly Clark Oil & Refining Corporation) and NationsBank of Virginia, N.A. including the form of 9 1/2% Senior Notes due 2004 (Incorporated by reference to Exhibit 4.1 filed with Clark Oil & Refining Corporation Registration Statement on Form S-1 (File No. 33-50748))
4.4 Supplemental Indenture between Clark Refining & Marketing, Inc. and NationsBank of Virginia, N.A., dated February 17, 1995 (Incorporated by reference to Exhibit 4.6 filed with Clark USA, Inc. Annual Report on Form 10-K for the year ended December 31, 1994) (File No. 33-59144))
10.10 Amended and Restated Credit Agreement, dated as of April 19, 1995 (the "Amended and Restated Credit Agreement"), among Clark Refining & Marketing, Inc., as Borrower, Bank of America National Trust and Savings Association, as Administrative Agent, Bankers Trust Company, as Documentation Agent, The Toronto-Dominion Bank, as Syndication Agent, BA Securities, Inc., as Technical Agent, and the other financial institutions party thereto (Incorporated by reference to Exhibit 10.1 filed with Clark USA, Inc. Form 8-K, dated December 1, 1995 (File No. 33-59144))
10.12 First Amendment to Amended and Restated Credit Agreement, dated as of June 14, 1995 (Incorporated by reference to Exhibit 10.2 filed with Clark USA, Inc. Form 8-K, dated December 1, 1995 (File No. 99- 59144))
10.13 Second Amendment to Amended and Restated Credit Agreement, dated as of November 27, 1995 (Incorporated by reference to Exhibit 10.3 filed with Clark USA, Inc. Form 8-K, dated December 1, 1995 (File No. 33-59144))
10.14 Third Amendment to Amended and Restated Credit Agreement, dated as of January 31, 1996
10.15 Fourth Amendment to Amended and Restated Credit Agreement, dated as of July 12, 1996 (Incorporated by reference to Exhibit 10.2 filed with Clark Refining & Marketing, Inc. Form 8-K, dated October 4, 1996 (File No. 1-11392))
10.16 Fifth Amendment to Amended and Restated Credit Agreement, dated as of October 4, 1996 (Incorporated by reference to Exhibit 10.1 filed with Clark Refining & Marketing, Inc. Form 10-Q, for the period ending September 30, 1996 (File No. 1-11392))
10.17 Sixth Amendment to Amended and Restated Credit Agreement, dated as of December 13, 1996
10.18 Agreement Regarding Limited Consent and Waiver to the Amended and Restated Credit Agreement, dated as of September 30, 1996 (Incorporated by reference to Exhibit 10.1 filed with Clark Refining & Marketing, Inc. Form 8-K dated October 4, 1996 (File No. 1-11392))
10.20 Clark Refining & Marketing, Inc. Stock Option Plan (Incorporated by reference to Exhibit 10.5 filed with Clark Registration Statement on Form S-1 (Registration No. 33-43358))
10.21 Clark Refining & Marketing, Inc. Savings Plan, as amended and restated effective as of October 1, 1989 (Incorporated by reference to Exhibit 10.6 filed with Clark Oil & Refining Corporation Annual Report on Form 10-K for the year ended December 31, 1989 (Commission File No. 1-11392))
10.22 Employment Agreement of Bradley D. Aldrich. (Incorporated by reference to Exhibit 10.4 filed with Clark USA, Inc. Annual Report on Form 10-K for the year ended December 31, 1994 (File No. 33- 59144))
10.30 Amended and Restated Asset Sale Agreement, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.3 filed with Clark USA, Inc. Current Report on Form 8-K, dated February 27, 1995 (Registration No. 33-59144))
10.31 Chemical Facility Lease with Option to Purchase, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.9.2 filed with Clark USA, Inc. Registration Statement on Form S-1 (Registration No. 33- 84192))
10.32 Sublease of Chemical Facility Lease, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.9.3 filed with Clark USA, Inc. Registration Statement on Form S-1 (Registration No. 33-84192))
10.33 PADC Facility Lease with Option to Purchase, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.9.4 filed with Clark USA, Inc. Registration Statement on Form S-1 (Registration No. 33- 84192))
10.34 Supply Agreement for the Chemical Facility, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.9.5 filed with Clark USA, Inc. Registration Statement on Form S-1 (Registration No. 33- 84192))
10.35 Services Agreement for the Chemical Facility, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.9.6 filed with Clark USA, Inc. Registration Statement on Form S-1 (Registration No. 33- 84192))
10.36 Supply Agreement for the PADC Facility, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.9.7 filed with Clark USA, Inc. Registration Statement on Form S-1 (Registration No. 33-84192))
10.37 Services Agreement for the PADC Facility, dated as of August 16, 1994 between Chevron U.S.A. Inc. and Clark Refining & Marketing, Inc., (Incorporated by reference to Exhibit 10.9.8 filed with Clark USA, Inc. Registration Statement on Form S-1 (Registration No. 33- 84192))
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
GLOSSARY OF TERMS
Refining
Alkylation Unit - Also known as the alky unit; a refinery unit that uses hydrofluoric acid as a catalyst to combine lower value products from the FCC unit and purchased gases (isobutane) to produce gasoline.
BPD - Barrels per day.
Barrel (Bbl)- A common unit of measure in the oil industry which equates to 42 gallons.
Blendstocks - Various compounds that are combined with product from the crude separator process to make finished gasoline and diesel fuel; these may include natural gasoline, FCC gasoline, ethanol, reformate or butane, among others.
CP - Convenience products such as beverages, cigarettes and snacks.
Catalyst - A substance that alters, accelerates or instigates chemical changes, but is neither produced nor consumed in the process.
Coker Unit - A refinery unit which takes the lowest value component of crude oil after higher value products are removed, further extracts more valuable products and converts the rest into petroleum coke.
Crack Spread - A simplified model that measures the difference between the price for finished products and crude oil. A 3/2/1 crack spread is often referenced and represents the approximate revenue and cost breakdown of a barrel of crude being, three barrels of crude produce two barrels of gasoline and one barrel of diesel fuel.
Crude Unit - The initial refinery unit that the crude oil runs through where it is heated and various products separated. As crude oil is heated to certain temperatures it vaporizes and different products are separated. This is the distillation process. Listed below are the products that typically come from crude oil and the approximate temperatures at which they are separated from it:
butanes/lighter less than 90(degrees) F gasoline 90(degrees) F - 220(degrees) F naphtha 220(degrees) F - 315(degrees) F kerosene 315(degrees) F - 450(degrees) F diesel 450(degrees) F - 650(degrees) F gas oil 650(degrees) F - 800(degrees) F residue 800(degrees) F and higher
DHDS Unit - Also known as distillate hydrotreater desulfurizer; removes sulfur and other impurities from distillates, primarily diesel and jet fuel.
Distillates - Primarily diesel, jet fuel and kerosene.
Djeno Crude Oil - Also known as Djeno Melange crude oil. A heavy sweet crude oil from the Republic of the Congo.
Djeno Melange - See Djeno crude oil.
Ethanol - An alcohol, primarily derived from corn and other feed grains, sometimes used in gasoline blending.
FCC Unit - Also known as the fluid catalytic cracker; the unit takes low grade products from the crude unit and converts them to gasoline through a chemical process using catalysts.
Feedstock - Hydrocarbon compounds, such as crude oil and natural gas liquids, that are processed and blended into refined products.
Gal. - Gallon.
Heavy Crude Oil - A crude oil that is relatively viscous in texture which is harder to process yields less high value products such as gasoline and diesel fuel, but is cheaper.
Isomax Unit - Similar to FCC unit.
LPG - Also known as Liquefied Petroleum Gases. Liquefied light ends gases used for home heating and cooking.
Light Crude Oil - A crude oil that is relatively thin in texture which is easier to process and yields more high value products such as gasoline and diesel fuel, but is more expensive.
M - Thousands.
MM - Millions.
Maya - A heavy, sour crude oil from Mexico.
Naphtha - Natural or unrefined gasoline with a low octane rating that is separated out of the crude oil during the refining process.
Oxygenates - Compounds containing oxygen which, when added to conventional gasoline, reduce the carbon monoxide emissions of the gasoline.
PMPS - Per month per store.
Petroleum Coke - Also known as coke; a coal like substance that can be burned to generate electricity or used as a hardener in concrete.
Production - The finished products such as gasoline and diesel fuel which are converted from crude oil by a refinery.
Rated Crude Oil Capacity - The crude oil processing capacity of a refinery that is established by engineering design.
Refined products - The hydrocarbon compounds, such as gasoline, diesel fuel, jet fuel and residual fuel, that are produced by a refinery.
Refining margin - The difference between crude oil and other feedstock, intermediate stock and blendstock component costs and the cost of refined products sold, expressed in dollars per barrel of refined product.
Reformulated Gasoline - Gasoline blended in accordance with certain specifications, that is designed to reduce ozone-forming and toxic pollutants.
Residual Oil - Resids or residue. A derivative of crude oil obtained from the basic stages of refining operations. Also known as atmospheric or vacuum tower bottoms.
Sour Crude Oil - A crude oil that is relatively high in sulfur content, requiring additional processing to remove the sulfur, but is typically less expensive.
Sweet Crude Oil - A crude oil that is relatively low in sulfur content, requiring less processing to remove the sulfur, but is typically more expensive.
Throughput - The amount of a substance processed through a unit.
Turnaround - Shutting down various units of a refinery to service, clean and refurbish the components; maintenance turnaround occurs every three to four years or as needed.
Unusual Items - Those charges or credits not occurring in the normal course of business.
Utilization - Ratio of total refinery production to the rated crude oil capacity of the refinery.
WTI - West Texas Intermediate crude oil, a light; sweet crude oil that is used as a benchmark for other crude oil types.
Yield - The percentage of higher value refined products that are produced from feedstocks.
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of Clark Refining & Marketing, Inc.:
We have audited the accompanying balance sheets of Clark Refining & Marketing, Inc. (a Delaware corporation and wholly-owned subsidiary of Clark USA, Inc.) as of December 31, 1995 and 1996 and the related statements of earnings, 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 financial statements referred to above present fairly, in all material respects, the financial position of Clark Refining & Marketing, Inc. as of December 31, 1995 and 1996 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
St. Louis, Missouri February 4, 1997
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF EARNINGS (Dollars in thousands)
The accompanying notes are an integral part of these statements.
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
The accompanying notes are an integral part of these statements.
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (Dollars in thousands)
The accompanying notes are an integral part of these statements.
CLARK REFINING & MARKETING, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1994, 1995 and 1996
(tabular dollar amounts in thousands of US dollars)
1. General
Clark Refining & Marketing, Inc., a Delaware corporation ("Clark" or "the Company"), is wholly owned by Clark USA, Inc., a Delaware corporation ("Clark USA"). Clark's principal operations include crude oil refining, wholesale and retail marketing of refined petroleum products and retail marketing of convenience store items in the Central United States.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The Company's earnings and cash flow from operations are primarily dependent upon processing crude oil and selling quantities of refined petroleum products at margins sufficient to cover operating expenses. Crude oil and refined petroleum products are commodities, and factors largely out of the Company's control can cause prices to vary, in a wide range, over a short period of time. This potential margin volatility can have a material effect on financial position, current period earnings and cash flow.
2. Summary of Significant Accounting Policies
Cash and Cash Equivalents; Short-term Investments
Clark considers all highly liquid investments, such as time deposits, money market instruments, commercial paper and United States and foreign government securities, purchased with an original maturity of three months or less, to be cash equivalents. Short-term investments consist of similar investments, as well as United States government security funds, maturing more than three months from date of purchase and are carried at fair value (see Note 3 "Short-term Investments"). Clark invests only in AA rated or better fixed income marketable securities or the short-term rated equivalent.
The Company classifies checks issued which have not yet cleared the bank account as accounts payable. Such balances included in "Accounts payable" were $12.1 million and $12.9 million at December 31, 1995 and 1996, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of trade receivables. Credit risk on trade receivables is minimized as a result of the credit quality of the Company's customer base and industry collateralization practices. As of December 31, 1996, the Company had $36.4 million (1995 - $17.0 million) due from Chevron USA Products Co. ("Chevron"). Sales to Chevron in 1996 totaled $455.8 million (1995- $448.8 million).
Inventories
Inventories are stated at the lower of cost, predominantly using the last- in, first-out "LIFO" method, or market on an aggregate basis. During the year ended December 31, 1996, total petroleum inventory quantities were reduced, resulting in a LIFO liquidation, the effect of which increased pretax earnings by $2.4 million. There was no such effect in the year ended December 31, 1995.
To limit risk related to price fluctuations, Clark employs risk strategies using crude oil and refined products futures and options contracts to manage potentially volatile market movements on aggregate physical and contracted inventory positions. At December 31, 1996, Clark's open contracts represented 0.7 million barrels of crude oil and refined products, and had terms extending into February, 1997. At December 31, 1995, Clark's open contracts represented 1.7 million barrels of crude oil and refined products, and had terms extending into December, 1996.
The Company considers all futures and options contracts to be part of its risk management strategy. Unrealized gains and losses on open contracts are recognized as a product cost component unless the contract can be identified as a price risk hedge of specific inventory positions or open commitments, in which case the unrealized gain or loss is deferred and recognized as an adjustment to the carrying amount of petroleum inventories or accounts payable if related to open commitments. Deferred gains and losses on these contracts are recognized as an adjustment to product cost when such inventories are sold or consumed. At December 31, 1996, the Company had net unrealized gains on open futures and options contracts of $1.2 million (1995 - unrealized loss of $0.4 million) all of which have been recognized in operations.
Property, Plant and Equipment
Property, plant and equipment additions are recorded at cost. Depreciation of property, plant and equipment is computed using the straight-line method over the estimated useful lives of the assets or group of assets. The cost of buildings and marketing facilities on leased land and leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life or the lease term. The Company capitalizes the interest cost associated with major construction projects based on the effective interest rate on aggregate borrowings.
Expenditures for maintenance and repairs are expensed. Major replacements and additions are capitalized. Gains and losses on assets depreciated on an individual basis are included in current income. Upon disposal of assets depreciated on a group basis, unless unusual in nature or amount, residual cost less salvage is charged against accumulated depreciation.
The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 121 concerning "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." The standard requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable with future cash flows. The Company adopted this standard beginning January 1, 1996 which did not have any effect on the financial statements. The Company believes that if a project initiated to produce low sulfur diesel fuel at the Hartford refinery ("DHDS Project"), which was delayed in 1992 due to an expectation of narrow differentials between low and high sulfur diesel fuel, does not proceed due to continued relatively narrow price differentials between low and high sulfur diesel fuel, future cash flows from the asset would not likely support the carrying value which is approximately $24.1 million as of December 31, 1996. Effective January 1, 1996, the Company began to depreciate the DHDS Project over 30 years.
Environmental Costs
Environmental expenditures are expensed or capitalized depending upon their future economic benefit. Costs which improve a property as compared with the condition of the property when originally constructed or acquired and costs which prevent future environmental contamination are capitalized. Costs which return a property to its condition at the time of acquisition or original construction are expensed.
Deferred Turnaround and Financing Costs
A turnaround is a periodically required standard procedure for maintenance of a refinery that involves the shutdown and inspection of major processing units and generally occurs approximately every three years. Turnaround costs, which are included in "Other assets", are amortized over the period to the next scheduled turnaround, beginning the month following completion.
Financing costs related to obtaining or refinancing of debt are deferred and amortized over the expected life of the debt.
Income Taxes
Clark files a consolidated U.S. federal income tax return with Clark USA but computes its provision on a separate company basis. The Company provides for deferred taxes under the asset and liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109") (see Note 12 "Income Taxes"). Deferred taxes are classified as current, included in prepaid or accrued expenses, or noncurrent depending on the classification of the assets and liabilities to which the temporary differences relate. Deferred taxes arising from temporary differences that are not related to a specific asset or liability are classified as current or noncurrent depending on the periods in which the temporary differences are expected to reverse. In accordance with the provisions of SFAS 109, the Company records a valuation allowance when necessary to reduce the net deferred tax asset to an amount expected to be realized.
Employee Benefit Plans
The Clark Refining & Marketing, Inc. Savings Plan and separate Trust (the "Plan"), a defined contribution plan, covers substantially all employees of Clark. Under terms of the Plan, Clark matches the amount of employee contributions, subject to specified limits. Contributions to the Plan during 1996 were $6.4 million (1995 - $5.5 million; 1994 - $3.4 million).
Clark provides certain benefits for most retirees once they have reached a specified age and specified years of service. These benefits include health insurance in excess of social security and an employee paid deductible amount, and life insurance equal to the employee's annual salary.
3. Short-term Investments
The Company's short-term investments are all considered Available-for- Sale and are carried at fair value with the resulting unrealized gain or loss (net of applicable taxes) shown as a component of retained earnings.
Short-term investments consisted of the following:
The net unrealized position at December 31, 1996 included gains of $0.0 million and losses of $0.1 million (1995 - gains of $0.1 million and losses of $0.1 million).
The contractual maturities of the short-term investments at December 31, 1996 were:
Amortized Aggregate
Although some of the contractual maturities of these short-term investments are over one year, management's intent is to use the funds for current operations and not hold the investments to maturity.
For the year ended December 31, 1996 the proceeds from sales of short-term investments were $31.1 million with no realized gains or losses recorded for the period. For the same period in 1995 and 1994, the proceeds from the sale of short-term investments were $25.9 million and $187.8 million, respectively, with no realized gains or losses in 1995 and $5.4 million realized losses in 1994. Realized gains and losses are presented in "Interest and financing costs, net" and are computed using the specific identification method.
The change in the net unrealized holding gains or losses on Available-for- Sale securities for the year ended December 31, 1996, was a loss of $0.1 million ($0.1 million after taxes). For the same period in 1995, there was a net unrealized holding gain of $1.9 million ($1.2 million after taxes), and in 1994, there was a net unrealized holding loss of $1.9 million ($1.2 million after taxes).
Cash and cash equivalents include $20.0 million of debt securities whose cost approximated market value at December 31, 1996 (1995 - $45.0 million) and for which there were no realized gains or losses recorded in the period.
4. Inventories
The carrying value of inventories consisted of the following:
The market value of the crude and refined product inventories at December 31, 1996 was approximately $81.7 million above the carrying value (1995 - $5.4 million above the carrying value). In the first half of 1994, crude oil and related refined product prices rose substantially, allowing the reversal of the inventory write-down to market which was recorded in 1993 due to falling crude oil and product prices.
5. Property, Plant and Equipment
Property, plant and equipment consisted of the following:
At December 31, 1996 property, plant and equipment included $43.8 million (1995- $52.2 million) of construction in progress. Capital lease assets of $22.7 million (1995- $23.9 million) are included in property, plant and equipment at December 31, 1996.
6. Other Assets
Other assets consisted of the following:
Amortization of deferred financing costs for the year ended December 31, 1996, was $6.5 million (1995 - $5.2 million; 1994 - $1.2 million). Amortization of turnaround costs for the year ended December 31, 1996 was $11.1 million (1995 -$12.0 million; 1994 - $10.8 million).
7. Working Capital Facility
At all times during 1996 Clark had in place a working capital facility which provided a revolving line of credit principally for the issuance of letters of credit which are used primarily for securing purchases of crude oil, other feedstocks and refined products, and for limited cash borrowings. This facility is collateralized by substantially all of Clark's current assets and certain intangibles. The amount of the facility is the lesser of $400 million or the amount available under a defined borrowing base, representing specified percentages of cash, investments, accounts receivable, inventory and other working capital items ($489.5 million at December 31, 1996). Clark is required to comply with certain financial covenants including maintaining defined levels of working capital, cash, tangible net worth, maximum indebtedness to tangible net worth and a minimum ratio of adjusted cash flow to debt service. At December 31, 1996, $298.5 million (1995 - $221.0 million) of the line of credit was utilized for letters of credit, of which $78.4 million (1995 - $91.4 million) supported commitments for future deliveries of petroleum products. There were no direct cash borrowings under the facility at December 31, 1996 and 1995.
8. Long-Term Debt
The estimated fair value of the long-term debt at December 31, 1996 was $431.8 million, (1995 - $442.0 million), determined using quoted market prices for these issues. The capital leases and other notes have a market value which approximates cost.
The 9 1/2% Senior Notes and 10 1/2% Senior Notes were issued by Clark in September 1992 and December 1991, respectively, and are unsecured. The 9 1/2% Senior Notes and 10 1/2% Senior Notes are redeemable at the Company's option beginning September 1997 and December 1996, respectively, at a redemption price which starts at 105.25% and decreases to 100% of principal two years later.
The Clark note indentures contain certain restrictive covenants including limitations on the payment of dividends, limitations on the payment of amounts to related parties, limitations on the level of debt, provisions related to change of control and incurrence of liens. Under these covenants, Clark must maintain a minimum net worth of $100 million.
During 1995, Clark entered into two sale/leaseback lease transactions for a total of $24.3 million. Each capital lease has a term of five years. One lease has a fixed rate of 8.36% and the other lease rate floats at a spread of 2.25% over the London Interbank Offer Rate (LIBOR).
The scheduled maturities of long-term debt during the next five years are (in thousands): 1997 - $3,067 (included in "Accrued expenses and other"); 1998 - $3,828; 1999 - $3,737; 2000 - $6,775; 2001 - $225,012; 2002 and thereafter - $175,057.
Interest and financing costs
Interest and financing costs, net, included in the statements of earnings, consisted of the following:
Cash paid for interest expense in 1995 was $42.9 million (1995 - $42.2 million; 1994 - $40.3 million). Accrued interest payable at December 31, 1996 of $6.8 million (December 31, 1995 - $6.8 million) is included in "Accrued expenses and other."
9. LEASE COMMITMENTS
Clark leases premises and equipment under lease arrangements, many of which are non-cancelable. Clark leases store property and equipment with lease terms extending to 2015, some of which have escalation clauses based on a set amount or increases in the Consumer Price Index. Clark also has operating lease agreements for certain equipment at the refineries, retail stores, and the general office. These lease terms range from 1 to 8 years with the option to purchase some of the equipment at the end of the lease term at fair market value. The leases generally provide that Clark pay taxes, insurance, and maintenance expenses related to the leased assets. At December 31, 1996, future minimum lease payments under capital leases and non-cancelable operating leases were as follows (in millions): 1997 - $17.2; 1998 - $16.8; 1999 - $15.8; 2000 - $17.8; 2001 - $9.8; and $122.0 in the aggregate thereafter. Rental expense during 1996 was $16.5 million (1995 - $9.1 million; 1994 - $7.6 million).
10. RELATED PARTY TRANSACTIONS
Transactions of significance with related parties not disclosed elsewhere in the footnotes are detailed below:
Clark USA, Inc.
Clark USA contributed $268.6 million of capital to its subsidiary, Clark, during 1996. Clark USA contributed $33.6 million from the proceeds of debt issued in the Occidental/Gulf transactions in January of 1996. In addition, $235.0 million was contributed to Clark from the contribution and subsequent sale of the Occidental advance crude oil purchase receivable and the associated hedge contracts in October of 1996. During 1995, Clark USA contributed $165.6 million to Clark. Upon the issuance of stock in the first quarter of 1995, Clark USA contributed $150.0 million for the purchase of the Port Arthur Refinery (see Note 13 "Acquisition of Port Arthur Refinery") and also contributed $9.2 million for operating purposes. In addition, from the proceeds of debt issued in the Occidental/Gulf transactions, Clark USA contributed $6.4 million in December 1995 to Clark.
HSM Insurance Inc.
Clark USA paid premiums of $2.0 million in 1994 to HSM Insurance, Inc., an affiliate of TrizecHahn Corporation (formerly the Horsham Corporation) ("TrizecHahn"), the Clark USA's 46 % shareholder, for providing environmental impairment liability insurance. No loss claims have been made under the policy. The policy was terminated on December 31, 1994.
Management Services and Trade Credit Guarantees
TrizecHahn and Clark have agreements to provide certain management services to each other from time to time. Clark established trade credit with various suppliers of its petroleum requirements, occasionally requiring the guarantee of TrizecHahn. Fees related to trade credit guarantees totaled $0.1 million, $0.2 million and $0.2 million in 1994, 1995 and 1996, respectively. The last trade credit guarantee was terminated in August, 1996.
11. POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The following table sets forth the unfunded status for the post retirement health and life insurance plans:
The components of net periodic postretirement benefit costs are as follows:
A discount rate of 7.50% (1995 - 7.25%) was assumed as well as a 4.25% (1995 - 4.25%) rate of increase in the compensation level. For measuring the expected postretirement benefit obligation, the health care cost trend rate ranged from 7.25% to 10.25% in 1996, grading down to an ultimate rate in 2003 of 5.25%. The effect of increasing the average health care cost trend rates by one percentage point would increase the accumulated postretirement benefit obligation, as of December 31, 1996, by $4.3 million and increase the annual aggregate service and interest costs by $0.6 million.
12. INCOME TAXES
Clark provides for deferred taxes under the asset and liability approach which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
The income tax provision (benefit) is summarized as follows:
A reconciliation between the income tax provision computed on pretax income at the statutory federal rate and the actual provision for income taxes is as follows:
The following represents the approximate tax effect of each significant temporary difference giving rise to deferred tax liabilities and assets as of December 31, 1995 and 1996.
As of December 31, 1996, Clark has made payments of $15.4 million under the Federal alternative minimum tax system which are available to reduce future regular income tax payments. As of December 31, 1996, Clark had a Federal net operating loss carryforward of $183.1 million and Federal tax credit carryforwards in the amount of $1.5 million. Such operating loss and tax credit carryforwards have carryover periods of 15 years and are available to reduce future tax liabilities through the years ending December 31, 2011 and 2010, respectively.
Clark recorded a valuation allowance of $6.1 million at December 31, 1996 (1995--None). In calculating the increase in the valuation allowance, Clark assumed as future taxable income only future reversals of existing taxable temporary differences.
During 1996 Clark made a Federal tax payment of $2.7 million in settlement of an Internal Revenue Service examination for tax years ended December 31, 1991 and December 31, 1992 and made net cash state tax payments of $0.6 million. (1995 - net cash tax payments of $0.7 million; 1994 - net cash tax refunds of $2.9 million).
Section 382 of the Internal Revenue Code restricts the utilization of net operating losses upon the occurrence of an ownership change, as defined. An ownership change that restricts future operating loss utilization occurred during 1995, but based upon and to the extent of future taxable income from reversals of existing taxable temporary differences management believes such limitations will not restrict Clark's ability to significantly utilize the net operating losses over the 15 year carryforward period.
13. Acquisition of Port Arthur Refinery
On February 27, 1995, Clark purchased Chevron U.S.A. Inc.'s ("Chevron") Port Arthur, Texas refinery, acquiring the refinery assets and certain related terminals, pipelines, and other assets for a purchase price of approximately $70 million (excluding acquired hydrocarbon and non-hydrocarbon inventories of $121.7 million and assumed liabilities of $19.4 million) plus related acquisition costs of $14.9 million and accrued liabilities of $5.7 million. The total assumed and accrued liabilities of $25.1 million were considered non-cash activity for purposes of the Statement of Cash Flows. The total cost of the acquisition was accounted for using the purchase method of accounting with $110.0 million allocated to the refinery long-term assets and $121.7 million charged to current assets for hydrocarbon and non-hydrocarbon inventories.
The purchase agreement also provides for contingent payments to Chevron of up to $125 million over a five year period from the closing date of the acquisition in the event refining industry margin indicators exceed certain escalating levels. These contingent payments are calculated annually and the appropriate liability, if any, will be recorded at that time. At December 31, 1996 and 1995, Clark had no obligation to Chevron relating to the contingent payment agreement. While Chevron retained primary responsibility for required remediation of most pre-closing environmental contamination, Clark assumed responsibility for environmental contamination beneath and within 25 to 100 feet of the facility's active processing units. Clark accrued $7.5 million as part of the acquisition for the expected cost of remediating pipe trenches and the recovery of free phase hydrocarbons in its responsibility area of the Port Arthur refinery.
On February 27, 1995, Clark USA obtained a portion of the funds necessary to finance the Port Arthur acquisition from a subsidiary of its major shareholder, TrizecHahn. Clark USA sold 9,000,000 shares of Class A Common Stock, 562,500 shares of Class B Common Stock and 562,500 shares of Class C Common stock for an aggregate consideration of $135 million. Subsequently, the TrizecHahn subsidiary sold 8,000,000 shares of Class A Common Stock and 500,000 shares of Class C Common Stock to Tiger Management Corporation for $120 million. Clark USA subsequently contributed $150 million to Clark for the purchase of the Port Arthur refinery.
14. Stock Option Plans
The Company has adopted a compensatory Long-Term Performance Plan (the "Performance Plan"). Under the Performance Plan, designated employees, including executive officers, of the Company and its subsidiaries and other related entities are eligible to receive awards in the form of stock options, stock appreciation rights and stock grants. An aggregate of 1,250,000 shares of Clark USA Inc., Common Stock may be awarded under the Performance Plan, either from authorized, unissued shares which have been reserved for such purpose or from shares purchased on the open market, subject to adjustment in the event of a stock split, stock dividend, recapitalization or similar change in the outstanding Common Stock of the Company. The options normally extend for 10 years and become exercisable within 3 years of the grant date. Additionally, under this plan the stock options granted may not be sold or otherwise transferred, and are not exercisable until after a public offering of stock is completed by the Company or change of control (as defined in the Plan). Stock granted under this plan is priced at the fair market value at the date of grant.
During 1996 no additional shares were granted under this Plan. In 1995, 549,000 shares were granted under this Plan and priced at the fair market value at the date of grant. As of December 31, 1996, 549,000 stock options were outstanding (1995 - 549,000) at an exercise price of $15 per share.
15. Contingencies
Clark USA and the Company are subject to various legal proceedings related to governmental regulations and other actions arising out of the normal course of business, including legal proceedings related to environmental matters. Among those actions and proceedings are the following:
The Equal Employment Opportunity Commission ("EEOC") has alleged that Clark had engaged in age discrimination in violation of the Age Discrimination in Employment Act. The action involves 38 former managers it believes have been affected by an alleged pattern and practice. The relief sought by the EEOC includes reinstatement or reassignment of the individuals allegedly affected, payment of back wages and benefits, an injunction prohibiting employment practices which discriminate on the basis of age, and institution of practices to eradicate the effects of any past discriminatory practices.
A Petition entitled Anderson, et al vs. Chevron and Clark, was filed in Jefferson County, Texas by forty individual plaintiffs who were Chevron employees who did not receive offers of employment by Clark at the time of purchase of the Port Arthur Refinery. Chevron and the outplacement service retained by Chevron are also named as defendants. Subsequent to the filing of the lawsuit, the plaintiffs have each filed individual charges with the EEOC and the Texas Commission of Human Rights.
The Company is the subject of a purported class action lawsuit related to an on-site electrical malfunction at Clark's Blue Island refinery on October 7, 1994, which resulted in the release to the atmosphere of used catalyst containing low levels of heavy metals, including antimony, nickel and vanadium. This release resulted in the temporary evacuation of certain areas near the refinery, including a high school, and approximately fifty people were taken to area hospitals. Clark offered to reimburse the medical expenses incurred by persons receiving treatment. The purported class action lawsuit was filed on behalf of various named individuals and purported plaintiff classes, including residents of Blue Island, Illinois and Eisenhower High School students, alleging claims based on common law nuisance, negligence, willful and wanton negligence and the Illinois Family Expense Act as a result of this incident. Plaintiffs seek to recover damages in an unspecified amount for alleged medical expenses, diminished property values, pain and suffering and other damages. Plaintiffs also seek punitive damages in an unspecified amount.
While it is not possible at this time to establish the ultimate amount of liability with respect to the Company's contingent liabilities, Clark USA and the Company are of the opinion that the aggregate amount of any such liabilities, for
which provision has not been made, will not have a material adverse effect on their financial position, however, an adverse outcome of any one or more of these matters could have a material effect on quarterly or annual operating results or cash flows when resolved in a future period.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Clark Refining & Marketing, Inc.
By: /s/ Paul D. Melnuk ----------------------------- Paul D. Melnuk President and Chief Executive Officer
March 20, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
Signature Title --------- -----
/s/ Peter Munk Director and Chairman of the Board ------------------------- Peter Munk
/s/ Paul D. Melnuk Director, Chief Executive Officer, ------------------------- Chief Operating Officer and President Paul D. Melnuk
/s/ C. William D. Birchall Director ------------------------- C. William D. Birchall
/s/ Gregory C. Wilkins Director ------------------------- Gregory C. Wilkins
/s/ Maura J. Clark Executive Vice President, Corporate -------------------------- Development and Chief Financial Maura J. Clark Officer (Principal Financial Officer)
/s/ Dennis R. Eichholz Controller and Treasurer (Principal ------------------------- Accounting Officer) Dennis R. Eichholz
March 20, 1997