<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------
FORM 10-Q/A
-------------
X Quarterly Report Pursuant to Section 13 or 15 (d) of
_____ the Securities Exchange Act of 1934
For the quarterly period ended September 30, 1993
OR
_____ Transition Report Pursuant to Section 13 or 15 (d) of
the Securities Exchange Act of 1934
For the transition period from ..........to..........
Commission File Number 1-7936
NATIONAL CONVENIENCE STORES INCORPORATED
------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 74-1361734
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
100 Waugh Drive, Houston, Texas 77007
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(713) 863-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
At November 1, 1993, the number of shares of Common Stock outstanding was
6,000,006.
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements.
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(Amounts in thousands, except per share amount)
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
------------------- | -------------------
Three Months Ended | Three Months Ended
September 30, 1993 | September 30, 1992
------------------- | -------------------
|
<S> <C> | <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 234,280 | $ 234,083
|
Costs and Expenses: |
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 171,419 | 172,234
Operating expenses . . . . . . . . . . . . . . . . . . . . 42,991 | 41,767
General and administrative expenses . . . . . . . . . . . . 9,729 | 8,662
Interest expense . . . . . . . . . . . . . . . . . . . . . 2,468 | 565
------- | --------
226,607 | 223,228
-------- | --------
|
|
Earnings Before Reorganization Expenses |
and Income Taxes . . . . . . . . . . . . . . . . . . . . . 7,673 | 10,855
|
Reorganization Expenses, net . . . . . . . . . . . . . . . . - | 2,334
-------- | --------
|
Earnings Before Income Taxes . . . . . . . . . . . . . . . . 7,673 | 8,521
|
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . 2,958 | 50
-------- | --------
|
Net Earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 4,715 | $ 8,471
======== | ========
|
Earnings Per Share . . . . . . . . . . . . . . . . . . . . . $ 0.70 |
======== |
</TABLE>
See Notes to Consolidated Financial Statements.
2
<PAGE> 3
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
September 30, 1993 June 30, 1993
------------------ -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and equivalents, $6,295 and $6,254 reserved . . . . . . . . . . . . . . . . $ 46,240 $ 46,032
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,630 4,474
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,141 37,308
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,301 2,697
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . 92,312 90,511
Property and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154,478 156,528
Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,342 39,587
Deferred Tax Asset, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,041 6,065
Other Assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,352 5,737
-------- --------
$294,525 $298,428
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . $ 63,216 $ 68,395
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . 10,980 10,373
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . 74,196 78,768
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,166 131,559
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,186 20,839
Commitments and Contingent Liabilities . . . . . . . . . . . . . . . . . . . . . . - -
Stockholders' Equity:
Common Stock, par value $.01 per share; 50,000,000 shares
authorized; 6,000,006 and 6,000,000 shares issued and
outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 60
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,813 62,813
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,104 4,389
-------- --------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . 71,977 67,262
-------- --------
$294,525 $298,428
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE> 4
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
($ in thousands)
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
------------------- | -------------------
Three Months Ended | Three Months Ended
September 30, 1993 | September 30, 1992
------------------- | ------------------
|
<S> <C> | <C>
Cash flows from operating activities: |
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 4,715 | $ 8,471
Adjustments to reconcile net earnings to net cash |
provided by operating activities: |
Depreciation and amortization . . . . . . . . . . . . . . 4,317 | 4,220
Deferred income taxes . . . . . . . . . . . . . . . . . . 2,868 | -
Changes in operating assets and liabilities, net |
of sales of stores: |
Decrease in accounts and notes |
receivable and prepaid expenses . . . . . . . . . . . . . 236 | 2,040
(Increase) decrease in inventories . . . . . . . . . . . . (1,833) | 2,128
Decrease in accounts payable and |
accrued expenses . . . . . . . . . . . . . . . . . . . . (4,817) | (898)
Increase in income taxes . . . . . . . . . . . . . . . . . 33 | 127
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . - | 38
-------- | --------
Net cash provided by operating |
activities . . . . . . . . . . . . . . . . . . . . 5,519 | 16,126
-------- | --------
|
Cash flows from investing activities: |
Capital expenditures . . . . . . . . . . . . . . . . . . . . (1,522) | (971)
Proceeds from sale of assets . . . . . . . . . . . . . . . . 249 | 4,044
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (850) | (275)
-------- | --------
Net cash provided by (used in) investing |
activities . . . . . . . . . . . . . . . . . . . . (2,123) | 2,798
-------- | --------
|
Cash flows from financing activities: |
Principal payments on long-term debt . . . . . . . . . . . . (3,088) | -
Debt issue costs . . . . . . . . . . . . . . . . . . . . . . - | (142)
Cash settlement of liabilities subject to |
compromise . . . . . . . . . . . . . . . . . . . . . . . . (92) | -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . (8) | (96)
-------- | --------
Net cash used in financing activities . . . . . . . . . (3,188) | (238)
-------- | --------
|
|
Net increase in cash and cash equivalents . . . . . . . . . . . 208 | 18,686
Cash and cash equivalents - beginning of period . . . . . . . . 46,032 | 32,724
-------- | --------
- end of period . . . . . . . . . . . $ 46,240 | $ 51,410
======== | ========
</TABLE>
See Notes to Consolidated Financial Statements.
4
<PAGE> 5
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
Basis of Presentation - The consolidated financial statements include the
accounts of National Convenience Stores Incorporated and its wholly-owned
subsidiaries (the "Company") with all significant intercompany accounts and
transactions eliminated in consolidation. The financial information presented
for the interim periods is unaudited and the interim period operating results
are not necessarily indicative of the results to be expected for the full
fiscal year. In addition, the unaudited interim financial statements reflect
all adjustments which are, in the opinion of management, necessary for their
fair presentation. These adjustments were all of a normal recurring nature.
Certain amounts in prior years have been reclassified to conform to the
current year's presentation.
As more fully described in Notes 2 and 3 below, on February 25, 1993 a court
order was entered confirming the Company's Revised Fourth Amended and Restated
Joint Plan of Reorganization (the "Plan of Reorganization") by the United
States Bankruptcy Court for the Southern District of Texas, Houston Division
(the "Bankruptcy Court"). As a result, the Company adopted the recommended
"fresh- start reporting" treatment for entities emerging from Chapter 11
bankruptcy reorganization, as set forth in American Institute of Certified
Public Accountants' Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code", ("SOP 90-7"). For
accounting purposes, the inception date for the reorganized company was deemed
to be March 1, 1993. Therefore, since March 1, 1993, the Company's
consolidated financial statements have been prepared as if it is a new
reporting entity (the reorganized company); the term "predecessor company"
relates to the Company for all periods prior to March 1, 1993. Consequently, a
vertical black line has been placed to separate post-emergence operations from
those prior to March 1, 1993. Accordingly, the Consolidated Statements of
Operations and Cash Flows for the three months ended September 30, 1993 of the
reorganized company are not comparable with those for the three months ended
September 30, 1992 of the predecessor company.
In connection with the adoption of SOP 90-7, the Company was also required to
adopt the provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS 109") as of March 1, 1993 (see Note 5).
Significant Accounting Policies - Reference is made to the Notes to
Consolidated Financial Statements appearing in the Company's Annual Report to
Shareholders incorporated by reference in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 1993.
Earnings per share for the predecessor company are not presented since such
disclosure is not meaningful as a result of the confirmation of the Plan of
Reorganization.
5
<PAGE> 6
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Bankruptcy Reorganization
Chapter 11 Bankruptcy Filing - On December 9, 1991 (the "Petition Date"), the
Company and substantially all of its wholly-owned active subsidiaries filed
voluntary petitions for reorganization under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the Bankruptcy Court. Subsequent to
the Petition Date, the Company operated its business as a debtor-in- possession
under the supervision of the Bankruptcy Court. As of the Petition Date,
actions to collect pre-petition indebtedness were stayed and other contractual
obligations could not be enforced against the Company. In addition, under the
Bankruptcy Code, the Company could reject leases and executory contracts.
Parties affected by these rejections could file claims with the Bankruptcy
Court in accordance with the reorganization process. Substantially all
liabilities as of the Petition Date were subject to settlement under a plan of
reorganization to be voted upon by the creditors and approved by the Bankruptcy
Court.
Plan of Reorganization - As a result of extensive negotiations held in December
1992, the Company reached a compromise agreement with representatives of all of
its major creditor constituencies, as well as two of the predecessor company's
largest common stockholders. This compromise agreement was then incorporated
into and became the Plan of Reorganization. Subsequently, on January 6, 1993,
a supplemental disclosure statement, along with a ballot, was sent to all
members of each class of creditors and equity interest holders entitled to vote
for acceptance or rejection of the Plan of Reorganization. As of February 16,
1993, all such classes of creditors and equity interest holders entitled to
vote had accepted the Plan of Reorganization by the requisite number.
Consequently, on February 24, 1993, the Bankruptcy Court commenced a hearing
that resulted in the entering of a court order confirming the Plan of
Reorganization on February 25, 1993. The Plan of Reorganization subsequently
became effective March 9, 1993 (the "Effective Date").
The Plan of Reorganization was designed to repay all priority creditors in full
on the Effective Date or thereafter as provided in the Plan of Reorganization
and to repay secured creditors in full over time with interest. Allowed
unsecured claims totalling approximately $137.5 million were cancelled in
exchange for $9.3 million of cash, $1.0 million of new indebtedness and 5.91
million shares of newly issued Common Stock, par value $.01 per share, of the
reorganized company. All existing $14.375 Convertible Exchangeable Preferred
Stock, Series E (the "Series E Preferred Stock") and existing common stock of
the predecessor company were exchanged for an aggregate distribution of 90,000
shares of the newly issued Common Stock of the reorganized company.
Consequently, a total of 6.0 million shares of newly issued Common Stock of the
reorganized company were issued under the Plan of Reorganization. In addition,
warrants to purchase up to an additional aggregate 1.35 million shares of newly
issued Common Stock at $17.75 per share were distributed to the holders of the
predecessor company's two publicly-held subordinated debenture series, the
Series E Preferred Stock and the old common stock. All
6
<PAGE> 7
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
alleged seniority rights arising under the indentures relating to the publicly-
held subordinated debentures were deemed satisfied and cancelled as of the
Effective Date. In addition, the Plan of Reorganization authorized the
issuance of stock options to purchase up to 900,000 shares of Common Stock of
the reorganized company to certain key employees and directors at $10.50 per
share.
3. Fresh-Start Reporting
In accounting for the effects of the reorganization, the Company adopted the
fresh-start reporting provisions of SOP 90-7 and has reflected the effects of
such adoption in all financial statements covering periods subsequent to March
1, 1993. SOP 90-7 was applicable because the pre-reorganization shareholders
received less than 50% of the reorganized company's newly issued Common Stock
and the enterprise value of the assets of the reorganized company was less than
the total of all pre-petition allowed claims and post-petition liabilities.
In adopting fresh-start reporting, the Company, with the assistance of its
financial advisors, was required to determine its enterprise value, which
represents the fair market value of the entity before considering liabilities
and approximates the amount a willing buyer would pay for the assets of the
entity immediately after the reorganization. The term enterprise value is
synonymous with the term reorganization value as defined by SOP 90-7.
After extensive negotiations between the Company and its various creditor
constituencies, the Company's enterprise value was determined to be within a
group of ranges that centered around a point estimate of $210.0 million. The
enterprise value of the Company was determined by consideration of several
factors and reliance on various valuation methods, including discounted future
cash flows, market comparables and price/earnings ratios. All of the
valuations depended in large part upon the Company's projected future operating
results and cash flows; such projections included assumptions as to anticipated
sales and margins, marketing plans, operating expense levels and capital
expenditure programs. Additional assumptions and methods utilized in the
determination of the enterprise value included, (i) discount rates of 11% to
14%, (ii) statutory tax rates, (iii) five year cash flow projections and (iv)
terminal value based upon industry comparable multiples applied to the
discounted value of estimated post-1998 earnings and cash flows.
The adjustments to reflect the adoption of fresh-start reporting, including the
adjustments to record assets and liabilities at their fair market values and to
reflect the adoption of SFAS 109, were all recorded as of March 1, 1993. In
addition, the reorganized company's opening balance sheet was further adjusted
to eliminate existing equity and to reflect the aforementioned $210.0 million
enterprise value, which included the establishment of Reorganization Value in
Excess of Amounts Allocable to Identifiable Assets ("Excess Reorganization
Value"). Accordingly, a vertical black line is shown in the consolidated
financial statements to separate post-emergence operations from those prior to
March 1, 1993, since they have not been prepared on a comparable basis.
7
<PAGE> 8
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following interim unaudited Consolidated Pro Forma Statement of Operations
reflects the financial results of the Company as if the Plan of Reorganization
and change in accounting principle had been effective July 1, 1992 (amounts in
thousands, except per share amount):
<TABLE>
<CAPTION>
Three Months Ended September 30, 1992
---------------------------------------------------
As Reported Adjustments Pro Forma
------------- -------------- -------------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $234,083 $ - $234,083
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . 172,234 - 172,234
Operating expenses . . . . . . . . . . . . . . . . . 41,767 402 (a) 42,169
General and administrative expenses . . . . . . . . . 8,662 1,000 (b) 9,662
Interest expense . . . . . . . . . . . . . . . . . . 565 2,217 (c) 2,782
-------- -------- --------
223,228 3,619 226,847
-------- -------- --------
Earnings Before Reorganization Expenses
and Income Taxes . . . . . . . . . . . . . . . . . . 10,855 (3,619) 7,236
Reorganization Expenses, net . . . . . . . . . . . . . 2,334 (2,334)(c) -
-------- -------- --------
Earnings Before Income Taxes . . . . . . . . . . . . . 8,521 (1,285) 7,236
Income Tax Expense . . . . . . . . . . . . . . . . . . 50 2,776 (d) 2,826
-------- -------- --------
Net Earnings . . . . . . . . . . . . . . . . . . . . . $ 8,471 $ (4,061) $ 4,410
======== ======== ========
Earnings Per Share (e) . . . . . . . . . . . . . . . . $ 0.66
========
</TABLE>
(a) To record amortization of Excess Reorganization Value.
(b) To record employee benefit expenses for programs resumed or
implemented after June 30, 1993.
(c) To record interest expense on debt incurred in connection with the
Plan of Reorganization and to eliminate Reorganization Expenses.
(d) To record income tax expense as a result of adopting SFAS 109.
(e) Earnings Per Share is calculated based on Net Earnings, as adjusted to
reflect decreased interest expense, net of tax, assuming conversion of
stock options.
8
<PAGE> 9
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Supplemental Disclosures to Consolidated Statements of Cash Flows
"Net cash provided by operating activities" includes the following cash
payments and receipts ($ in thousands):
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
------------------- | -------------------
Three Months Ended | Three Months Ended
September 30, 1993 | September 30, 1992
------------------ | ------------------
<S> <C> | <C>
Cash paid (received) for: |
Post-petition interest . . . . . . . . . . . $ 2,806 | $ 102
Post-petition interest income . . . . . . . . (226) | -
Income taxes . . . . . . . . . . . . . . . . 56 | 26
Income tax refunds . . . . . . . . . . . . . - | (103)
Reorganization items: |
Professional fees . . . . . . . . . . . . . 1,204 | 737
Interest income . . . . . . . . . . . . . . - | (211)
Other . . . . . . . . . . . . . . . . . . . - | 95
</TABLE>
Non-cash investing and financing activities of the Company were composed of
certain of the Company's insurance carriers exercising their right to draw down
on outstanding pre-petition irrevocable letters of credit in the amount of
$990,950 and $100,700 during the three months ended September 30, 1993 and
1992, respectively.
5. Income Taxes
In connection with the adoption of fresh-start reporting, the Company adopted
SFAS 109, as of March 1, 1993. With the adoption of SFAS 109, income tax
expense for the three months ended September 30, 1993 is recorded at the
expected annual effective rate of 38.6% based on current federal and state
statutory rates, after giving effect to the non-deductibility of the
amortization of Excess Reorganization Value. For the three months ended
September 30, 1992, income tax expense was recognized pursuant to Statement of
Financial Accounting Standards No. 96 and consists solely of state income
taxes.
Under the liability method specified by SFAS 109, the deferred tax liability is
determined based on the difference between the financial reporting and tax
basis of assets and liabilities and enacted tax rates which will be in effect
for the years in which the differences are expected to reverse. In the
Company's case, the deferred tax liability is more than fully offset by a
deferred tax asset representing the tax-effected cumulative net operating loss
carryforwards, tax credit carryforwards, and deductible temporary differences,
subject to applicable limits and an asset
9
<PAGE> 10
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
valuation allowance.
The Company provided a valuation allowance of $15.0 million against deferred
tax assets recorded as of June 30, 1993. During the period from June 30, 1993
to September 30, 1993 the valuation allowance decreased by $2.2 million. The
valuation allowance was reduced as a consequence of the earnings generated by
the Company since June 30, 1993, indicating an increased probability of
realizing deferred tax assets in the future. The remaining valuation allowance
is deemed appropriate by management in view of the expiration dates of the net
operating losses and tax credits and the uncertainty created by tax and
economic policy proposals being considered by the federal government. The
decrease in the valuation allowance was recorded as a reduction of the Excess
Reorganization Value. If the full value of deferred tax assets is to be
realized in future years, Excess Reorganization Value will be further reduced.
On March 15, 1993, the Company filed its federal income tax return for the year
ended June 30, 1992, which reflected net operating loss carryforwards of $87.7
million plus tax credit carryforwards of $6.9 million. The net operating
losses expire in varying amounts in fiscal years 2003 to 2007 and the tax
credits expire in fiscal years 2000 to 2008. The benefit of these losses is
reduced substantially if there is an ownership change in the Company's stock as
defined in Section 382 of the Internal Revenue Code. Such an ownership change
is defined as occurring when, during any three year period, the Company's 5%
stockholders (as defined in the Internal Revenue Code) increase their ownership
of the Company's stock by more than 50 percentage points. The Plan of
Reorganization resulted in an ownership change since substantially all of the
new stock was issued to the creditors of the Company. However, since the
ownership change occurred pursuant to a Chapter 11 proceeding and because more
than 50% of the new stock was issued to qualifying creditors and shareholders,
the Company presently intends to take advantage of certain favorable rules
contained in Section 382(l)(5).
After an ownership change, Section 382(l)(5) requires a reduction in the amount
of net operating loss carryforwards and other tax attributes. As of September
30, 1993, the net operating loss carryforward is estimated to have been reduced
to $48.6 million as a result of the adjustments required by Section 382(l)(5),
as well as the application of the losses to reduce taxable income
generated after June 30, 1992. Section 382(l)(5) will also require the Company
to reduce the tax basis of its depreciable assets by approximately $40 million.
The Company expects to be able to use the remaining net operating losses, tax
credits and other tax attributes to offset future income taxes, subject to
applicable limits. However, should a second ownership change occur within two
years of the first ownership change, all of the remaining pre-confirmation net
operating losses and other tax attributes would be eliminated. Consequently,
the Plan of Reorganization provided for the Company's Restated Certificate of
Incorporation dated March 9, 1993 to contain restrictions through June 30, 1996
on the transfer of stock by the reorganized company's 5% stockholders.
10
<PAGE> 11
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Debt
Long-term debt consisted of the following as of the respective dates ($ in
thousands):
<TABLE>
<CAPTION>
September 30, 1993 June 30, 1993
------------------ -------------
<S> <C> <C>
Term Loan, due 2000 . . . . . . . . . . . . . . $ 65,824 $ 67,957
Revolving Credit Agreement . . . . . . . . . . . - -
Letter of Credit Agreement, due 2000 . . . . . . 4,150 3,988
Mortgage notes on real estate, due 2003 . . . . 62,000 62,271
Other notes payable, due through 2000 . . . . . 7,172 7,716
-------- --------
139,146 141,932
Less amounts due within one year . . . . . . 10,980 10,373
-------- --------
$128,166 $131,559
======== ========
</TABLE>
Revolving Credit Agreement - The Revolving Credit Agreement provides for the
borrowing and/or issuance of letters of credit in the aggregate of up to $8.0
million, increasing to $11.0 million during the period from November 1 through
May 1 of each year. The Revolving Credit Agreement requires that, during each
fiscal year, the Company pay off all outstanding cash borrowings thereunder for
a period of 30 consecutive days. The Company had no outstanding borrowings
during the three months ended September 30, 1993 and has therefore satisfied
this requirement for fiscal 1994. Letter of credit issuances cannot exceed
$8.0 million and cash borrowings are limited to the commitment limit less
letters of credit outstanding. At September 30, 1993, $6.4 million
letters of credit were issued and outstanding. Cash borrowings under the
Revolving Credit Agreement bear interest at 1% above the prime rate of the
Lender. Any remaining outstanding principal balance becomes due and payable on
September 30, 1994, which may be extended at the Company's option to September
30, 1995, if certain conditions are met.
Below is a table illustrating primary financial ratios and coverage tests
("Covenants") as of September 30, 1993 associated with the Company's long-term
bank debt instruments.
<TABLE>
<CAPTION>
Covenant Required Actual
-------- ------------ --------------
<S> <C> <C>
Current Ratio (minimum) 90% 124%
Total Borrowed Funds to Consolidated
Net Worth (maximum) 438% 377%
Maximum Total Liabilities to
Consolidated Net Worth 400% 318%
Minimum Consolidated Net Worth $61,400,000 $71,977,000
Minimum Interest Coverage Ratio 200% 552%
Consolidated Fixed Charge Coverage
Ratio (minimum) 105% 181%
Minimum EBITDA $13,650,000 $26,523,000
Capital Expenditure (maximum) $ 6,920,000 $ 2,167,000
</TABLE>
Covenants noted above are computed as defined per the Company's long-term
bank debt instrument agreements. At September 30, 1993, the Company was in
compliance with such Covenants.
7. Asset Divestiture
On July 10, 1992, the Company consummated the sale of 21 operating convenience
stores together with related inventories and equipment located in and around
the San Francisco Bay area to The Customer Company and its affiliated
California general partnership for $3.1 million. The Bankruptcy Court had
previously approved the sale of such properties on July 1, 1992. Pursuant to
the Company's then existing debtor-in-possession financing agreement, the
proceeds were held in escrow pending completion of the Chapter 11 bankruptcy
reorganization. Upon
11
<PAGE> 12
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
confirmation of the Plan of Reorganization, the proceeds
were used to pay down the Company's bank debt. The resultant loss was
previously provided for in a restructuring charge recorded in December 1991.
12
<PAGE> 13
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Liquidity and Capital Resources
Key balance sheet figures and ratios are presented in the table below (all
amounts, excluding ratios, are in millions):
<TABLE>
<CAPTION>
September 30, 1993 June 30, 1993
------------------ ----------------
<S> <C> <C>
Cash (a)............................ $ 46.2 $ 46.0
Current assets...................... $ 92.3 $ 90.5
Current liabilities................. $ 74.2 $ 78.8
Current ratio....................... 1.24 1.15
Inventory turn ratios (annualized):
Merchandise....................... 11.6 11.7
Gasoline.......................... 53.9 50.3
Long-term debt...................... $ 128.2 $ 131.6
Stockholders' equity................ $ 72.0 $ 67.3
Debt/Equity ratio................... 1.78 1.96
Common shares outstanding........... 6.0 6.0
</TABLE>
_____________________
(a) Includes $6.3 million that has been reserved at the Company's option
related to the remittance of tax and lottery collections as of
September 30, 1993 and June 30, 1993.
Liquidity - The Company's Revised Fourth Amended and Restated Joint Plan of
Reorganization (the "Plan of Reorganization") was predicated on the assumption
that the Company would fund its daily working capital requirements through its
operations and the cash balances it retained upon emergence from Chapter 11
bankruptcy reorganization. Because substantially all of the Company's sales
are for cash and total inventories are converted to cash approximately once a
month, the Company considers its cash flows adequate to satisfy its daily
working capital requirements. However, in order to further enhance its
liquidity, on March 9, 1993, the Company entered into a Revolving Credit
Agreement with NationsBank of Texas, N.A. which provides for the borrowing
and/or issuance of letters of credit in the aggregate of up to $8.0 million,
increasing to $11.0 million during the period from November 1 through May 1 of
each year. The Revolving Credit Agreement requires that, during each fiscal
year, the Company pay off all outstanding cash borrowings thereunder for a
period of 30 consecutive days. The
13
<PAGE> 14
Company had no outstanding borrowings during the three months ended
September 30, 1993 and has therefore satisfied this requirement for
fiscal 1994. Letter of credit issuances cannot exceed $8.0 million
and cash borrowings are limited to the commitment limit less letters
of credit outstanding. The facility terminates on September 30, 1994,
although it may be extended one year at the Company's option if certain
conditions are met. At September 30, 1993, no borrowings were outstanding
under this facility; the Company has, however, issued letters of credit
totalling $6.4 million.
Operating earnings before interest, income taxes, depreciation, amortization,
reorganization items and other non-recurring items ("EBITDA") amounted to
$14,458,000, or $1,676 per store per month in the first quarter of fiscal 1994,
compared to $15,640,000 or $1,733 per store per month in the same period of
fiscal 1993. EBITDA is presented here to provide additional information about
the Company's ability to meet its future debt service, capital expenditure and
working capital requirements and should not be construed as a substitute for
earnings from operations or a better indicator of liquidity than cash flow from
operating activities. The decrease in EBITDA is due principally to the
Company resuming contributions to its employee benefit plans effective July 1,
1993. Cash flows from operating activities totalled $5.5 million and $16.1
million for the three months ended September 30, 1993 and 1992, respectively.
The decrease over the prior year is due to the decrease in EBITDA, coupled
with temporary changes in working capital balances.
The Company has historically maintained a portfolio of surplus and excess real
estate properties in anticipation of expansion. During the period of Chapter
11 bankruptcy reorganization, the Company eliminated its new store development
program and began selling parcels of surplus real estate. In addition, in July
1992 the Company sold its 21 operating convenience stores together with related
inventories and equipment located in and around the San Francisco Bay area for
$3.1 million. Net proceeds from these sales were used to partially fund the
Company's cash requirements upon emerging from Chapter 11 bankruptcy
reorganization. During the three months ending September 30, 1993, the Company
sold three additional parcels of surplus real estate for $157,000, net of
closing costs as well as equipment and other assets for an additional $92,000.
Net proceeds from such sales, and any sales in the future, are generally
required to be applied against mortgage or bank long-term debt. The Company
anticipates entering into additional real estate sales. As of September 30,
1993, an additional 65 parcels of surplus real estate were held by the Company.
Capital Resources - The Company incurred $1.5 million of capital expenditures
during the first quarter of fiscal 1994 compared to $1.0 million in the same
period of fiscal 1993. During the first quarter of fiscal 1994 the major
portion of such expenditures consisted of $737,000 of new gasoline dispensing
equipment and installation of underground piping required to comply with
environmental laws (the "Stage II Vapor Recovery Equipment"). In
addition, the Company spent $453,000 on equipment replacement.
The Company spent an additional $644,000 in the first quarter of fiscal 1994 on
environmental remediation activities compared to $163,000 in the first quarter
of fiscal 1993. The majority of such expenditures related to the clean-up of
contaminated soil caused by leaking underground gasoline storage tanks and
underground piping systems. Environmental remediation reserves totalled $17.5
million and $18.2 million at September 30, 1993 and June 30, 1993,
respectively. These amounts include state reimbursements of approximately $4
million which the Company considers probable of recovery. The reduction in the
environmental liabilities is a result of the first quarter expenditures noted
above.
Insurance liabilities totalled $11.5 million and $9.8 million at September 30,
1993 and June 30, 1993, respectively. The liabilities were increased for
accurals of $4.1 million and decreased for payments of $2.4 million.
Restructuring liabilities totalled $7.1 million at September 30, 1993 and
June 30, 1993.
14
<PAGE> 15
The Company's bank long-term debt agreements contain limits on the amount of
capital expenditures and environmental remediation expenses the Company can
incur. For fiscal 1994, the limit is equal to $17.3 million, plus any excess
cash flow, as defined, up to an aggregate of $19.0 million. The Company
anticipates it will incur at or near the maximum amount of expenditures allowed
by the bank long-term debt agreements, with $7.1 million being dedicated to the
required purchase and installation of additional Stage II Vapor Recovery
Equipment and other capital expenditures required by environmental regulations.
An additional $2.6 million has been dedicated to environmental remediation
activities. Discretionary capital expenditures will be directed primarily at
store remodels, eatery installations, new store construction and equipment
replacement.
Under the terms of certain of the Company's long-term debt instruments, the
Company cannot pay cash dividends on its Common Stock or purchase any treasury
stock.
Below is a table illustrating primary financial ratios and coverage tests
("Covenants") as of September 30, 1993 associated with the Company's long-term
bank debt instruments.
<TABLE>
<CAPTION>
Covenant Required Actual
-------- ----------- ------------------
<S> <C> <C>
Current Ratio (minimum) 90% 124%
Total Borrowed Funds to Consolidate
Net Worth (maximum) 438% 377%
Maximum Total Liabilities to
Consolidated Net Worth 400% 318%
Minimum Consolidated Net Worth $61,400,000 $71,977,000
Minimum Interest Coverage Ratio 200% 552%
Consolidated Fixed Charge Coverage
Ratio (minimum) 105% 181%
Minimum EBITDA $13,650,000 $26,523,000
Capital Expenditures (maximum) $ 6,290,000 $ 2,167,000
</TABLE>
Covenants noted above are computed as defined per the Company's long-term bank
debt instrument agreements. At September 30, 1993, the Company was in
compliance with such Covenants.
On March 15, 1993, the Company filed its federal income tax return for the year
ended June 30, 1992, which reflected net operating loss carryforwards of $87.7
million plus tax credit carryforwards of $6.9 million. The net operating
losses expire in varying amounts in fiscal years 2003 to 2007 and the tax
credits expire in fiscal years 2000 to 2008. The benefit of these losses is
reduced substantially if there is an ownership change in the Company's stock as
defined in Section 382 of the Internal Revenue Code. Such an ownership change
is defined as occurring when, during any three year period, the Company's 5%
stockholders (as defined in the Internal Revenue Code) increase their ownership
in the Company's stock by more than 50 percentage points. The Plan of
Reorganization resulted in an ownership change since substantially all of the
new stock was issued to the creditors of the Company. However, since the
ownership change occurred pursuant to a Chapter 11 proceeding and because more
than 50% of the new stock was issued to qualifying creditors and
shareholders, the Company presently intends to take advantage of certain
favorable rules contained in Section 382(l)(5).
After an ownership change, Section 382 (l)(5) requires a reduction in the
amount of net operating loss carryforwards and other tax attributes. As of
September 30, 1993, the net operating loss carryforward is estimated to have
been reduced to $48.6 million as a result of the adjustments required by
Section 382(l)(5), as well as the application of the losses to reduce taxable
income generated after June 30, 1992. Section 382(l)(5) will also require the
Company to reduce the tax basis of its depreciable assets by approximately $40
million. The Company expects to be able to use the remaining net operating
losses, tax credits and other tax attributes to offset future income taxes,
subject to applicable limits. However, should a second ownership change occur
within two years of the first ownership change, all of the remaining
pre-confirmation net operating losses and other tax attributes would be
eliminated. Consequently, the Plan of Reorganization provided for the
Company's Restated Certificate of Incorporation dated March 9, 1993 to contain
restrictions through June 30, 1996 on the transfer of stock by
15
<PAGE> 16
the reorganized company's 5% stockholders.
Risks and Uncertainties - During the year ended June 30, 1993 (the most recent
annual period for which such data is kept), the sale of gasoline products
comprised 42% of total sales whereas the sale of tobacco products comprised 15%
and alcoholic beverages comprised 14%. Recently, the Clinton Administration
proposed and the Congress passed a federal budget deficit reduction package
that included a 4.3 cent per gallon increase on the federal excise tax on
gasoline, to be effective October 1, 1993. In addition, numerous proposals
have been made recently that would result in increased excise taxes on
alcoholic beverages and tobacco products. Several of these proposals have
sought substantial increases on state and federal excise tax as well as
additional state taxes on tobacco products in particular. As more fully
described in "Results of Operations" below, the Company was not immediately
able to pass along to the retail customer all of the gasoline tax increase.
Furthermore, while the Company cannot predict whether the remaining tax
proposals will become law, similar previous tax increases on such products have
generally had a negative impact on the sales and profits of the Company.
In addition, world gasoline markets have historically been subject to periods
of sudden extreme volatility as a result of changing supply and demand
conditions for crude oil and gasoline. The Company's liquidity and gross
profits could be adversely affected in the future should such conditions
return, and such adverse effects could be significant.
Results of Operations
In connection with the confirmation of the Plan of Reorganization, the Company
adopted "fresh-start reporting" in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" effective March 1,
1993. Accordingly, since March 1, 1993, the Company's financial statements
have been prepared as if it is a new reporting entity. As a result of adopting
fresh-start reporting, the financial information for the three months ended
September 30, 1993 is not prepared on a comparable basis to the information for
the three months ended September 30, 1992. However, the Company believes the
impact of the fresh-start reporting adjustments, while material, are
identifiable and therefore the following discussion provides comparisons
between the two reporting periods.
16
<PAGE> 17
THREE MONTHS ENDED SEPTEMBER 30, 1993 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1992:
Sales and Gross Profits - The following table sets forth selected information
regarding the results of the Company's operations during the first quarter of
fiscal 1994 and 1993:
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
------------------- | -------------------
Three Months | Three Months
Ended | Ended
September 30, 1993 | September 30, 1992
------------------ | -------------------
|
<S> <C> | <C>
|
Merchandise sales (millions) . . . . . . . . $139.3 | $134.9
Merchandise gross profit margin . . . . . . . 34.5% | 36.1%
Merchandise gross profit (millions) . . . . . $ 48.1 | $ 48.7
|
Gasoline sales (millions) . . . . . . . . . . $ 95.0 | $ 99.2
Gasoline gross profit margin . . . . . . . . 15.5% | 13.2%
Gasoline gross profit (millions) . . . . . . $ 14.7 | $ 13.1
|
Total sales (millions) . . . . . . . . . . . $234.3 | $234.1
Average gross profit margin . . . . . . . . . 26.8% | 26.4%
Total gross profit (millions) . . . . . . . . $ 62.8 | $ 61.8
|
Average number of stores . . . . . . . . . . 719 | 752
|
Average sales per store (thousands): |
Merchandise. . . . . . . . . . . . . . . . $193.8 | $179.4
Gasoline . . . . . . . . . . . . . . . . . 132.1 | 131.9
------ | ------
Total . . . . . . . . . . . . . . . . . $325.9 | $311.3
|
Gasoline gallons sold (millions) . . . . . . 92.8 | 90.3
Average gasoline gallons sold per gas |
store (thousands) . . . . . . . . . . . . . 149.1 | 141.3
</TABLE>
Merchandise sales increased $4.4 million, 3%, in the three months ended
September 30, 1993, as compared with the same period last year primarily due to
a 5% increase in same-store merchandise sales. The average number of stores
decreased 4% from the prior year due to the Company's bankruptcy strategy of
closing marginal stores as quickly as possible and selling operations in cities
where the Company had minimal market presence. The increase in same-store
merchandise sales is attributed to favorable hot, dry weather conditions in the
Company's key Texas markets, as well as, to value pricing promotions on
fountain drinks, select premium beers and cigarettes. In addition, the Company
experienced strong lottery commission revenues. Nevertheless, merchandise
gross profits decreased $.6 million in the first quarter of fiscal 1994 as
compared to the same period last year because of reduced merchandise margins
which contributed $2.1 million to the decrease in gross profits and were
partially offset by a $1.5 million increase attributable to the sales
increase. Merchandise gross profit margins decreased
17
<PAGE> 18
1.6 percentage points from 36.1% in the first quarter of fiscal 1993 to 34.5%
in the first quarter of fiscal 1994. This decrease in the gross profit margin
was primarily attributable to the aforementioned price promotions, partially
offset by higher volume rebates on cigarettes. Management continually reviews
the need for and appropriateness of value pricing and other promotional
strategies based upon customer purchasing trends and patterns.
Gasoline sales decreased $4.2 million during the first quarter of fiscal 1994
as compared with the same quarter of the previous year due primarily to a 7%
decrease in the average retail selling price of gasoline partially offset by a
3% increase in gasoline sales volumes. The gasoline sales volume increase
resulted primarily from the continued benefit being received due to the
Company's adoption of a volume growth strategy in March 1992. Volumes on a
same-store sales basis increased 7% from the same period last year. Gasoline
gross profits increased $1.6 million in the first quarter of fiscal 1994 as
compared to the same period of 1993, primarily due to the higher sales volumes
and stable pricing policies being followed by the major oil companies.
Gasoline gross profit margins on a volume basis averaged 15.9 cents per gallon
for the first quarter of fiscal 1994, a first quarter record, as compared with
14.5 cents per gallon for the same period of the prior year.
An analysis of merchandise sales, gasoline sales and gasoline sales volumes
follows (amounts in millions):
<TABLE>
<CAPTION>
Reorganized Company | Predecessor Company
------------------- | ---------------------
Three Months | Three Months
Ended | Ended
September 30, 1993 | September 30, 1992
------------------- | -------------------
<S> <C> | <C>
Merchandise Sales: |
Same-stores (a) . . . . . . . . . . . . . $139.2 | $132.1
New stores . . . . . . . . . . . . . . . - | -
Stores closed or sold . . . . . . . . . . .1 | 2.8
------ | ------
$139.3 | $134.9
====== | ======
|
Gasoline Sales: |
Same-stores (a) . . . . . . . . . . . . . $ 95.0 | $ 95.9
New stores . . . . . . . . . . . . . . . - | -
Stores closed or sold . . . . . . . . . . - | 3.3
------ | -----
$ 95.0 | $ 99.2
====== | ======
|
Gasoline Gallons: |
Same-stores (a) . . . . . . . . . . . . . 92.8 | 86.9
New stores . . . . . . . . . . . . . . . - | -
Stores closed or sold . . . . . . . . . . - | 3.4
----- | -----
92.8 | 90.3
===== | =====
</TABLE>
(a) Represents the 718 stores which opened prior to July 1, 1992, and
continuted to operate through September 30, 1993.
Recent Sales Trends - Effective October 1, 1993 the federal excise tax on
gasoline was increased 4.3 cents per gallon. In addition, the Company
experienced an approximate 2.0 cent per gallon increase in the cost of gasoline
purchases in early October. Due to competitive pressures, the Company was not
able to immediately pass along to the retail customer all of the cost increase
18
<PAGE> 19
until late October.
In addition, during October the Company continued to experience a softening in
its merchandise gross profit margin, principally due to the aforementioned
value pricing promotions and due to seasonal effects. While the reduced
margins are partially offset by increased sales, the Company is continuing to
experience a reduction in merchandise gross profit dollars as compared to the
prior year's second quarter.
Operating Expenses - Operating expenses increased $1.2 million, 3%, in the
first quarter of fiscal 1994 as compared with the same period of fiscal 1993,
primarily due to increases in utilities, repairs and maintenance and insurance.
The increase in utilities is attributable to an increase in electricity usage
caused by above average temperatures in the Company's key Texas markets during
the first quarter of fiscal 1994. The increase in repairs and maintenance was
the result of higher maintenance costs on air conditioning, fountain and
refrigeration equipment, coupled with the prior year's maintenance activities
being scaled down to only those activities considered as essential repair and
maintenance during the bankruptcy. Insurance expenses increased primarily due
to increased policy premiums costs.
General and Administrative Expenses - General and administrative expenses for
the quarter ended September 30, 1993, increased $1.1 million (12.3%) from the
comparable period in 1992, primarily due to the commencement of a $1.0 million
per quarter accrual for the enhancement of employee benefits effective July 1,
1993. This increase was partially offset by a reduction in rent expense as the
Company negotiated a new lease agreement on its corporate office building on
terms substantially more favorable to the Company and a reduction in corporate
payroll costs.
Interest Expense - Interest expense increased $1.9 million in the first quarter
of fiscal 1994 as compared to the same period of the prior year primarily due
to the resumption of interest accruals on all indebtedness upon emergence from
Chapter 11 bankruptcy reorganization. Prior to the Effective Date, the Company
recorded interest expense only for those pre-petition debt instruments which
were fully secured, and for all debtor-in-possession financing.
Reorganization Expenses - Reorganization expenses include those costs and
income items which were incurred by the Company solely as a result of operating
under Chapter 11 of the Bankruptcy Code. During the quarter ended September
30, 1992 the Company incurred $2.3 million of such costs which were primarily
for professional fees the Company is required to pay to attorneys, accountants
and investment bankers involved in the Chapter 11 proceeding.
Pro Forma Results of Operations - Management of the Company has made pro forma
calculations of first quarter operating results based on the assumption that
the Plan of Reorganization had become effective on July 1, 1992. Such
calculations resulted in pro forma unaudited net earnings of $4.4 million, $.66
per share, for the three months ended September 30, 1992. (See "Item 1 -
Financial Statements, Note 3 of the Notes to Consolidated Financial
Statements").
19
<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL CONVENIENCE STORES INCORPORATED
(Registrant)
Date May 4, 1994 /s/ A. J. GALLERANO
---------------------------------------
A. J. Gallerano
Senior Vice President, General
Counsel and Secretary
Date May 4, 1994 /s/ BRIAN FONTANA
---------------------------------------
Brian Fontana
Vice President-Chief
Financial Officer
20
