<PAGE> 1
- - --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------
FORM 10-K/A
-------------------
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
----- THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended June 30, 1993
OR
----- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
---------- ----------
Commission File Number 1-7936
NATIONAL CONVENIENCE STORES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 74-1361734
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 Waugh Drive 77007
Houston, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's telephone number, including area code: (713) 863-2200
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class
-------------------
Common Stock, $.01 par value
Warrant to Purchase Common Stock
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
----
At September 15, 1993, 6,000,006 shares of the registrant's common
stock, par value $.01 per share (the "Common Stock"), were outstanding and the
aggregate market value (based on the closing price quoted on the Nasdaq
National Market System) of the voting stock of the Company, excluding shares
held by officers and directors, was approximately $89,901,000.
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
--- ---
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<PAGE> 2
ITEM 6. SELECTED FINANCIAL DATA
Financial Highlights(1)
<TABLE>
<CAPTION>
1993 1992
------------ -------------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $878,852,000 $ 958,519,000
Gasoline gallons sold . . . . . . . . . . . . . . . . . . . . . . . . 351,249,000 367,884,000
Same-store merchandise sales growth . . . . . . . . . . . . . . . . . . . 4% 12%
Same-store gasoline gallons sales growth . . . . . . . . . . . . . . . . . . 6% (4)%
Average sales per store . . . . . . . . . . . . . . . . . . . . . . . $ 1,206,000 $ 1,052,000
Average gross profit per store . . . . . . . . . . . . . . . . . . . . . $ 312,000 $ 253,000
Stores open at year end . . . . . . . . . . . . . . . . . . . . . . . 719 778
Stores selling gasoline at year end . . . . . . . . . . . . . . . . . . . 622 653
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . . . . $ 72,678,000 $(185,438,000)
Earnings per share (since March 1, 1993) . . . . . . . . . . . . . . . . . . $ 0.66 N/A
Earnings before interest, income taxes, depreciation, amortization,
reorganization items and non-recurring items ("EBITDA")(2) . . . . . . . . . . . $ 49,374,000 $ 9,202,000
Net earnings (loss), excluding non-recurring items(3) . . . . . . . . . . . . . $ 17,364,000 $ (17,332,000)
</TABLE>
(1) As a result of emerging from Chaper 11 bankruptcy reorganization and
adopting fresh-start reporting, the financial information for the year
ended June 30, 1993 includes the combined results of the predecessor
company and reorganized company and is not prepared on a comparable basis
with the information presented for the year ended June 30, 1992. (see Notes
2 and 3 of the Notes to Consolidated Financial Statements).
(2) 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.
(3) Non-recurring items excluded are the charge in 1992 for Restructuring and
Other Special Charges and the 1993 Special Charges, Fresh-Start
Adjustments and Extraordinary Gain.
<PAGE> 3
National Convenience Stores Incorporated and Subsidiaries
SELECTED FINANCIAL DATA
(amounts in thousands, except per share data, store data and ratios)
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------
1993 1992 1991 1990 1989
------------ ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
For The Year (1) (2)
Operations:
Sales . . . . . . . . . . . . . . . . . . $ 878,852 $ 958,519 $1,073,958 $1,062,183 $1,077,150
Earnings (loss) before extraordinary
gain (3) (4) (5) (6) . . . . . . . . . . 11,185 (185,438) (10,465) (1,624) (8,858)
Net earnings (loss) . . . . . . . . . . . 72,678 (185,438) (10,465) 4,963 (8,858)
Common Stock Per Share Data: (7)
Earnings before extraordinary gain . . . . $ 0.66 * * * *
Net earnings . . . . . . . . . . . . . . . 0.66 * * * *
Cash dividends . . . . . . . . . . . . . . - * * * *
As of the End of the Year (2)
Total assets . . . . . . . . . . . . . . . $ 298,428 $ 268,501 $ 364,329 $ 398,844 $ 452,289
Current assets . . . . . . . . . . . . . . 90,511 84,879 85,640 88,629 80,648
Current liabilities . . . . . . . . . . . 78,768 61,825 86,186 87,192 80,856
Capitalization:
Long-term debt . . . . . . . . . . . . . 131,559 - 191,633 204,916 280,473
Liabilities subject to compromise . . . - 301,241 - - -
Stockholders' equity (deficit) . . . . . 67,262 (115,925) 70,098 81,918 64,140
Debt to equity ratio . . . . . . . . . . 1.96 * 2.73 2.50 4.37
For the Year(1) (2)
Store Data:
Average sales per store . . . . . . . . . $ 1,206,000 $1,052,000 $1,016,000 $ 958,000 $ 983,000
Average gross profit per store . . . . . . 312,000 253,000 253,000 264,000 253,000
EBITDA per store (8) . . . . . . . . . . 67,728 10,101 19,190 42,626 44,659
Stores open at beginning of year . . . . . 778 988 1,090 1,142 1,119
Stores added . . . . . . . . . . . . . . . - 2 1 4 91
Stores closed or sold . . . . . . . . . . (59) (212) (103) (56) (68)
------------ ---------- ---------- ---------- ----------
Stores open at end of year . . . . . . . . 719 778 988 1,090 1,142
Stores selling gasoline at end of year . . 622 653 809 881 926
</TABLE>
* not meaningful.
(1) As a result of emerging from Chapter 11 bankruptcy reorganization and
adopting fresh-start reporting, the selected financial data includes the
combined results of the predecessor company and reorganized company for the
fiscal year ended June 30, 1993, and is not prepared on a comparable basis
to the information presented for 1989-1992 (see Notes 2 and 3 of the Notes
to Consolidated Financial Statements).
(2) The selected financial data reflects various acquisitions and divestitures
of convenience stores and related assets (see Note 6 of the Notes to
Consolidated Financial Statements).
(3) The 1993 results include a $6.6 million special charge related to
an increase in environmental remediation reserves and a credit of $.4
million for Fresh-Start Adjustments recorded upon the Company's emergence
from Chapter 11 bankruptcy reorganization in March 1993, which incorporate
the effects of the adoption by the Company of Statement of Financial
Accounting Standards No. 109 (see Notes 3, 10 and 11 of the Notes to
Consolidated Financial Statements).
(4) The extraordinary gain in fiscal 1993 recorded by the predecessor company
is a result of the forgiveness of debt upon the emergence from Chapter 11
bankruptcy reorganization (see Note 4 of the Notes to Consolidated
Financial Statements).
(5) The 1992 results include $168.1 million of Restructuring and Other Special
Charges as a result of the Company's December 9, 1991 Chapter 11 filing
and strategic review of operations (see Note 5 of the Notes to Consolidated
Financial Statements).
(6) The extraordinary gain in fiscal 1990 is a result of the predecessor
company's preferred stock-for-debt exchange offer that was consummated in
March 1990.
(7) Represents per share data of the reorganized company since March 1, 1993.
Earnings per share and common stock dividends for the predecessor company
are not presented because they are not meaningful as a result of the
confirmation of the Plan of Reorganization (see Note 2 of the Notes to
Consolidated Financial Statements).
(8) Earnings before interest, income taxes, depreciation, amortization,
reorganization items and any non-recurring items ("EBITDA"). 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.
9
<PAGE> 4
National Convenience Stores Incorporated and Subsidiaries
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Fresh-Start Reporting - The Company emerged from Chapter 11
bankruptcy reorganization in March 1993 as a result of the confirmation of the
Company's Revised Fourth Amended and Restated Joint Plan of Reorganization (the
"Plan of Reorganization"). Reference is made to Note 2 of the Notes to
Consolidated Financial Statements for a complete description of the terms of
the Plan of Reorganization. In connection with the confirmation of the Plan of
Reorganization, effective March 1, 1993, 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". 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 four months ended June 30, 1993 is not prepared on a
comparable basis to the information for the eight months ended February 28,
1993 or the fiscal years ended June 30, 1992 and 1991. However, except as
described below, the Company believes that the impact of the fresh-start
reporting adjustments, while material, is identifiable, and that combining the
four months ended June 30, 1993 with the eight months ended February 28, 1993
provides a useful basis for comparison to the prior periods. Therefore, the
following discussion assumes the periods in fiscal 1993 are combined.
Impact of Bankruptcy Reorganization - The Company filed for Chapter
11 bankruptcy protection on December 9, 1991 (the "Petition Date") as a result
of the loss of vendor credit which had become critical to the Company's
financing needs due to poor operating results. Immediately upon entering
Chapter 11 bankruptcy reorganization, the Company began implementing a series
of cost reductions aimed at improving operating results. Chief among the cost
reduction programs was a strategic review of store operations that evaluated
each individual store, taking into consideration such factors as historical and
projected cash flows, lease or ownership terms, age and condition of the
property, the nature and amount of insurance claims, competition and the
potential for future changes to any of the foregoing. Other cost reduction
efforts were based on utilizing the benefits of operating under Chapter 11 of
the Bankruptcy Code to reduce specific expenses. The overall effect has been a
27% downsizing of the Company's convenience store operations along with
extensive cost reductions, all as more fully described in the table below.
Virtually all of the cost reductions and reduction of operating losses had been
fully implemented upon the Company's emergence from Chapter 11 bankruptcy
reorganization in March 1993. However, because the reductions were generally
not introduced at the beginning of a fiscal year, their benefit on the
historical financial statements has been spread over at least two fiscal
reporting periods. Consequently, in order to assist the reader with an
understanding of the full extent of the cost reductions and reduction of
operating losses, the following table has been prepared to present their
estimated annual impact on the line item labeled "Earnings (Loss) Before
Reorganization Expenses, Fresh-Start Adjustments, Income Taxes and
Extraordinary Gain" included in the Consolidated Statements of Operations for
fiscal year 1993 versus fiscal year 1991 ($ in millions):
<TABLE>
<S> <C> <C>
o Elimination of operating losses associated with the
rejection of leases on 188 stores which had been closed
prior to the Petition Date . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7.4
o Elimination of operating losses (including field
management administrative costs) associated with the
267 stores identified in a strategic review of store
operations that were closed after the Petition Date . . . . . . . . . . . . . . . . . . . . . . 4.4
o Elimination of operating expenses associated with the
termination of the Corporate Kitchen distribution system . . . . . . . . . . . . . . . . . . . . 4.8
o Reduction of operating expenses due to rent reductions
generated by store and equipment lease renegotiations . . . . . . . . . . . . . . . . . . . . . 3.2
o Reduction of administrative expenses due to a reduction
in rent and associated expenses on the Company's corporate
headquarters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5
o Reduction of administrative expenses due to corporate
headquarters' staff reductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.0
o Reduction in ongoing depreciation and amortization
expense as a result of the Restructuring Charge . . . . . . . . . . . . . . . . . . . . . . . . 3.2
o Reduction in insurance expense associated with
implementing the Company's private job related injuries
insurance program in Texas and electing out of the
Texas Workers' Compensation program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.0
o Reduction in interest expense as a result of the
confirmation of the Plan of Reorganization . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3
-----
$44.8
=====
</TABLE>
Summary of Results of Operations - The Company reported net earnings
(loss) of approximately $72.7 million, $(185.4) million and $(10.5) million for
the fiscal years 1993, 1992 and 1991, respectively. The fiscal 1993 net
earnings include a $61.5 million extraordinary gain related to the forgiveness
of debt and a $6.6 million special charge for additional environmental
remediation costs.
10
<PAGE> 5
The fiscal 1992 net loss included a $168.1 million charge for Restructuring and
Other Special Charges associated with the Company's Chapter 11 filing on
December 9, 1991, and subsequent strategic review of operations. Included in
the fiscal 1991 net loss is a $13.0 million gain, before tax, related to the
sale of the Company's stores in the West Palm Beach, Florida, and El Paso, Texas
areas.
The following table sets forth the percentage of certain items in the
Consolidated Statements of Operations to sales and the percentage change of such
items as compared to the prior year:
<TABLE>
<CAPTION>
Percentage
Increase (Decrease)
Percentage of Sales From Prior Year
------------------------------ -------------------
Year Ended June 30, Year Ended June 30,
------------------------------ -------------------
1993* 1992 1991 1993 1992
----- ----- ---- ------ --------
<S> <C> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% (8)% (11)%
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 74.2 76.0 75.1 (11) (10)
----- ----- -----
Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . 25.8 24.0 24.9 (1) (14)
Operating expenses . . . . . . . . . . . . . . . . . . . . . . 18.5 21.4 21.6 (21) (11)
General and administrative expenses . . . . . . . . . . . . . . 3.6 4.0 4.1 (17) (14)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . .5 1.2 2.2 ** **
Gain on sale of assets . . . . . . . . . . . . . . . . . . . . - - (1.2) ** **
Restructuring and other special charges . . . . . . . . . . . . .7 17.5 - ** **
----- ----- -----
Earnings (loss) before reorganization expenses, fresh-start
adjustments, income taxes and extraordinary gain . . . . . . 2.5 (20.1) (1.8) ** **
Reorganization expenses, net . . . . . . . . . . . . . . . . . .9 .3 - ** **
----- ----- -----
Earnings (loss) before fresh-start adjustments,
income taxes and extraordinary gain . . . . . . . . . . . . 1.6 (20.4) (1.8) ** **
Fresh-start adjustments . . . . . . . . . . . . . . . . . . . . - - - ** **
----- ----- -----
Earnings (loss) before income taxes and extraordinary gain . . 1.6 (20.4) (1.8) ** **
Income tax expense (benefit) . . . . . . . . . . . . . . . . . .3 (1.1) (.8) ** **
----- ----- -----
Earnings (loss) before extraordinary gain . . . . . . . . . . . 1.3 (19.3) (1.0) ** **
Extraordinary gain . . . . . . . . . . . . . . . . . . . . . . 7.0 - - ** **
----- ----- -----
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . . 8.3% (19.3)% (1.0)% ** **
===== ===== =====
</TABLE>
* Reflects the combining of the four months ended June 30, 1993
(reorganized company) and the eight months ended February 28, 1993
(predecessor company).
** Not meaningful.
The following discussion should be read in conjunction with Selected
Financial Data and the Company's Consolidated Financial Statements appearing
elsewhere in this Annual Report.
Sales and Gross Profits - In fiscal years 1993, 1992 and 1991,
respectively, the Company's merchandise sales accounted for 58%, 60% and 54% of
the Company's total sales, and gasoline sales accounted for 42%, 40% and 46%,
respectively. Merchandise gross profits accounted for 80%, 82% and 79%,
respectively, of the Company's total gross profits, and gasoline gross profits
accounted for 20%, 18% and 21%, respectively. The following table sets forth
selected information regarding the results of the Company's operations during
fiscal years 1993, 1992 and 1991:
11
<PAGE> 6
<TABLE>
<CAPTION>
Four Months | Eight Months Year Ended June 30,
Ended | Ended -----------------------------------------
June 30, 1993 | February 28, 1993 COMBINED 1993 1992 1991
------------- | ----------------- ------------- -------- --------
<S> <C> | <C> <C> <C> <C>
Merchandise sales (millions) . . . . . . . . . . . $ 172.8 | $ 333.6 $ 506.4 $ 570.4 $ 582.9
Merchandise gross profit margin . . . . . . . . . . 35.4% | 35.8% 35.7% 33.1% 36.3%
Merchandise gross profit (millions) . . . . . . . . $ 61.2 | $ 119.4 $ 180.6 $ 189.0 $ 211.7
|
Gasoline sales (millions) . . . . . . . . . . . . . $ 125.2 | $ 247.3 $ 372.5 $ 388.1 $ 491.0
Gasoline gross profit margin . . . . . . . . . . . 11.3% | 13.1% 12.5% 10.6% 11.4%
Gasoline gross profit (millions) . . . . . . . . . $ 14.1 | $ 32.4 $ 46.5 $ 41.2 $ 55.9
|
Total sales (millions) . . . . . . . . . . . . . . $ 298.0 | $ 580.9 $ 878.9 $ 958.5 $1,073.9
Average gross profit margin . . . . . . . . . . . . 25.3% | 26.1% 25.8% 24.0% 24.9%
Total gross profit (millions) . . . . . . . . . . . $ 75.3 | $ 151.8 $ 227.1 $ 230.2 $ 267.6
|
Average number of stores . . . . . . . . . . . . . 720 | 734 729 911 1,057
|
Average sales per store (thousands): |
Merchandise . . . . . . . . . . . . . . . . . . . $ 240.0 | $ 454.5 $ 694.6 $ 626.1 $ 551.5
Gasoline . . . . . . . . . . . . . . . . . . . . 173.9 | 336.9 511.0 426.0 464.5
-------- | -------- -------- -------- --------
Total . . . . . . . . . . . . . . . . . . . . . $ 413.9 | $ 791.4 $1,205.6 $1,052.1 $1,016.0
======== | ======== ======== ======== ========
|
Gasoline gallons sold (millions) . . . . . . . . . 119.4 | 231.8 351.2 367.9 434.1
|
Average gasoline gallons sold per gas |
store (thousands) . . . . . . . . . . . . . . . . 192.8 | 369.1 561.9 491.2 508.3
</TABLE>
Merchandise sales decreased $64.0 million (11%) in fiscal 1993, as
compared with fiscal 1992, primarily due to a 20% decline in the average number
of operating stores caused by the completion of the aforementioned strategic
review of store operations. On a same-store basis, merchandise sales increased
4% in fiscal 1993 as compared with the prior year, primarily due to the
introduction of the Company's private label of cigarettes, modifications of the
Company's value pricing strategy on cigarettes and Texas Lottery commission
revenues. In addition, the prior year's merchandise sales were negatively
impacted by inventory stockouts the Company experienced during the first thirty
days after its Chapter 11 filing. Merchandise gross profits decreased $8.4
million in fiscal 1993 as compared to the same period last year. Decreased
sales from the closing of unprofitable stores contributed $22.8 million to the
decline in gross profits, but was partially offset by higher merchandise
margins which contributed $14.4 million. Merchandise gross profit margins
increased 2.6 percentage points from 33.1% in fiscal 1992 to 35.7% in fiscal
1993. The increase in the gross profit margin was primarily attributable to
the prior year's profit margin being negatively affected by a significant
reduction in rebates due to the Chapter 11 filing. Further contributing to the
improvement in gross profit margins were increased Texas Lottery commission
revenues of $5.5 million for fiscal 1993, as compared to fiscal 1992, and the
aforementioned modifications on the Company's value pricing strategy on
cigarettes.
Merchandise sales decreased $12.5 million (2%) during fiscal 1992 as
compared with fiscal 1991 primarily due to a 14% decrease in the average number
of operating stores caused by the partial implementation of the aforementioned
strategic review of store operations. Despite the occurrence of extensive
inventory stockouts during the first thirty days after its Chapter 11 filing,
the Company recorded same-store merchandise sales growth of 12% in fiscal 1992
as compared to fiscal 1991. The Company attributes the sales growth to the
continued strong results of a cigarette value pricing strategy introduced in
the first quarter of fiscal 1992. Also contributing to the increase were
several adverse factors affecting fiscal 1991 sales including a decrease in
customer traffic count as a result of the Persian Gulf conflict, coupled with
abnormally rainy weather during the third quarter of fiscal 1991. Gross profit
margins decreased 3.2 percentage points from 36.3% in fiscal 1991 to 33.1% in
fiscal 1992. The decrease was also primarily related to the aforementioned
value pricing strategy along with a decrease in rebates due to the Chapter 11
filing and
12
<PAGE> 7
was partially offset by a $3.0 million write-down in fiscal 1991 of
non-marketable inventory items. Nevertheless, on a same-store gross margin
dollar basis, the Company's value pricing strategy of increased sales at lower
margins began to provide year-over-year increases in gross margin dollars
within four months of its introduction.
Gasoline sales decreased $15.6 million (4%) for fiscal 1993 as
compared with the same period last year due primarily to a 5% decrease in
gasoline sales volumes, partially offset by a 1% increase in the average retail
selling price of gasoline. The gasoline sales volume decrease resulted
primarily from the aforementioned reduction in the average number of stores in
operation. Volumes on a same-store sales basis increased 6% from the same
period last year as a result of the Company's adoption of a volume growth
strategy in March 1992. Also contributing to the same-store gasoline sales
volume increase were the negative effects the aforementioned inventory
stockouts had on fiscal 1992 sales volumes as a result of the Chapter 11
filing. Higher gasoline gross profit margins contributed $7.2 million to the
$5.3 million increase in gasoline gross profits, and were offset by a $1.9
million decrease from gasoline sales. The improvement in gasoline gross profit
margins was caused by several sudden declines in the cost of gasoline in the
wholesale market that were not fully matched at the retail pricing level.
Gasoline gross profit margins on a volume basis averaged 13.2 cents per gallon
for fiscal 1993 (the highest annual average in the Company's history) as
compared with 11.2 cents per gallon for the same period of the prior year.
Gasoline sales decreased $102.9 million (21%) during fiscal year
1992, as compared to fiscal year 1991, due to a 15% decrease in gasoline sales
volumes coupled with a 7% decrease in the average retail selling price of
gasoline. The decrease in gasoline sales volumes resulted primarily from the
aforementioned store closure program. Gasoline sales volumes on a same-store
basis decreased 4% primarily due to the aforementioned inventory stockouts the
Company experienced in the first thirty days after its Chapter 11 filing. The
reduction in the average selling price of gasoline during fiscal 1992 reflects
the return to more normal selling prices subsequent to the resolution of the
1991 Persian Gulf crisis. The decline in gasoline sales contributed $10.9
million to the decrease in gasoline gross profits and lower gasoline sales
margins contributed $3.8 million. Gasoline gross profit on a volume basis
averaged 11.2 cents per gallon in fiscal 1992 as compared to 12.9 cents per
gallon in fiscal 1991.
An analysis of merchandise sales, gasoline sales and gasoline sales
volumes follows (amounts in millions):
<TABLE>
<CAPTION>
Four Months | Eight Months Year Ended June 30,
Ended | Ended --------------------------------------
June 30, 1993 | February 28, 1993 COMBINED 1993 1992 1991
------------- | ------------------ ------------- ------ ------
|
<S> <C> | <C> <C> <C> <C>
Merchandise Sales: |
Same-stores (a) . . . . . . . . . . . . . . . . . $171.9 | $328.7 $500.6 $479.8 $429.5
New stores . . . . . . . . . . . . . . . . . . . .6 | 1.2 1.8 1.3 .6
Stores closed or sold . . . . . . . . . . . . . . .3 | 3.7 4.0 89.3 152.8
------ | ------ ------ ------ ------
$172.8 | $333.6 $506.4 $570.4 $582.9
====== | ====== ====== ====== ======
Gasoline Sales: |
Same-stores (a) . . . . . . . . . . . . . . . . . $124.1 | $240.6 $364.7 $341.7 $383.5
New stores . . . . . . . . . . . . . . . . . . . .9 | 1.9 2.8 2.1 1.2
Stores closed or sold . . . . . . . . . . . . . . .2 | 4.8 5.0 44.3 106.3
------ | ------ ------ ------ ------
$125.2 | $247.3 $372.5 $388.1 $491.0
====== | ====== ====== ====== ======
Gasoline Gallons: |
Same-stores (a) . . . . . . . . . . . . . . . . . 118.5 | 225.2 343.7 323.6 337.6
New stores . . . . . . . . . . . . . . . . . . . .8 | 1.7 2.5 2.0 1.0
Stores closed or sold . . . . . . . . . . . . . . .1 | 4.9 5.0 42.3 95.5
------ | ------ ------ ------ ------
119.4 | 231.8 351.2 367.9 434.1
====== | ====== ====== ====== ======
</TABLE>
(a) Represents the 717 stores which opened prior to July 1, 1990, and continued
to operate through June 30, 1993.
13
<PAGE> 8
Operating Expenses - Operating expenses decreased $43.0 million (21%)
in fiscal 1993, as compared to fiscal 1992, primarily due to a decrease in
labor, rent and other store operating costs attributable to the completion of
the aforementioned store closure and lease rejection programs that began in
December 1991 with the Chapter 11 filing. Rent expense was also reduced in
fiscal 1993 due to the partial implementation of lower renegotiated store and
equipment rents. In addition, insurance expense decreased in the current
fiscal year as a result of the decreased store base and the full implementation
of the Company's private job related injuries program in Texas in lieu of the
state managed workers' compensation program. Depreciation expense also
decreased due to the reduced store base and the write-down of certain assets in
December 1991. Further contributing to the decline in operating expenses were
certain cost cutting measures implemented by the Company during the fourth
quarter of fiscal 1992 with respect to the reorganization of the Company's
Corporate Kitchen operations, which included the elimination of the truck
distribution fleet and the closing of distribution centers located in Dallas
and San Antonio, Texas. Operating expenses as a percentage of total sales
decreased from 21.4% for the fiscal year ended June 30, 1992 to 18.5% for the
same period of fiscal 1993 for the above-mentioned reasons.
Operating expenses decreased $26.3 million (11%) in fiscal 1992 as
compared to fiscal 1991, primarily due to a decrease in labor, rent and other
store operating costs resulting from the aforementioned decreased store base
associated with the commencement of the Company's store closure and lease
rejection programs. Depreciation expense also decreased both due to the
reduced store base and to the write-down of certain assets. Operating expenses
as a percentage of total sales decreased to 21.4% in fiscal 1992, as compared
to 21.6% in fiscal 1991.
General and Administrative Expenses - General and administrative
expenses for the year ended June 30, 1993 decreased $6.4 million (17%) from the
comparable period in fiscal 1992 and decreased $6.0 million (14%) in fiscal
1992, as compared to fiscal 1991, primarily due to a decrease in administrative
labor expense attributable to field management and corporate staff reductions
and the Company's suspension of stock allocations to employees in its Employee
Stock Ownership Plan (the "ESOP") effective with the Chapter 11 filing. In
addition, rent expense decreased in fiscal 1993 as the Company negotiated a new
lease agreement on its corporate office building on terms substantially more
favorable to the Company.
Interest - Interest expense decreased $6.9 million in fiscal
1993, as compared to fiscal 1992, primarily due to the suspension of
interest accruals on unsecured and undersecured pre-petition indebtedness
concurrent with the December 9, 1991 Chapter 11 filing. Subsequent to the
Petition Date, the Company recorded interest expense only for those
pre-petition debt instruments which were fully secured, and for all
debtor-in-possession financing. As of March 9, 1993 (the "Effective Date") the
Company resumed recording interest expense as incurred. Such interest expense
was less than that recorded prior to the Chapter 11 filing due to lower
outstanding debt balances and lower interest rates resulting from the adoption
of the Plan of Reorganization.
Interest expense decreased during fiscal 1992, as compared to the
prior year, primarily due to the aforementioned suspension of interest accruals
on unsecured and undersecured pre-petition indebtedness concurrent with the
Chapter 11 filing along with decreased amortization of debt issue costs due to
their write-off as part of the Restructuring Charge. Prior to the Chapter 11
filing, interest expense was lower in fiscal 1992 due to a decrease in the
average balance of interest-bearing debt outstanding, coupled with a decrease
in the average effective interest rate. The reduction in average monthly debt
outstanding is attributed primarily to the use of a significant portion of the
net cash proceeds derived from the sale of the West Palm Beach, Florida, and El
Paso, Texas areas in the fourth quarter of fiscal 1991 to reduce debt.
Gain on Sale of Assets - During 1991, the Company sold its 51
operating convenience stores together with related inventories and equipment
located in the West Palm Beach, Florida, and the El Paso, Texas areas for an
aggregate of approximately $35.4 million, resulting in a $13.0 million pretax
gain.
Restructuring and Other Special Charges - In connection with the
Chapter 11 filing, the Company recorded $168.1 million of Restructuring and
Other Special Charges at December 31, 1991, related to store closings, other
assets affected by the Chapter 11 filing, insurance and environmental matters.
An additional $6.6 million special charge was recorded in February 1993
related to an increase in environmental remediation reserves. (See Notes 5 and
11 of the Notes to Consolidated Financial Statements).
Reorganization Expenses, net - 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 years ended June
30, 1993 and 1992, the Company incurred $8.1 million and $3.4 million,
respectively, of such costs which were primarily for professional
14
<PAGE> 9
fees the Company was required to pay to attorneys, accountants and investment
bankers involved in the Chapter 11 proceeding.
Fresh-Start Adjustments - As a result of adopting fresh-start
reporting, the Company made adjustments to record assets and liabilities at
their fair market values as of March 1, 1993 and to record the adoption of
Statement of Financial Accounting Standards No. 109 - "Accounting for Income
Taxes" ("SFAS 109"). The adjustments to record assets and liabilities at their
fair market values primarily include an increase in the reserve for litigation
costs in connection with the conclusion of the Chapter 11 reorganization offset
by the elimination of a reserve as a result of the proposed termination of the
ESOP (see Note 12 of the Notes to Consolidated Financial Statements).
Income Taxes - The effective income tax rate of the reorganized
company for the period from Inception (March 1, 1993) to June 30, 1993 differs
from the federal statutory rate primarily because of state income taxes and the
inability to deduct for tax purposes the amortization of Reorganization Value
in Excess of Amounts Allocable to Identifiable Assets ("Excess Reorganization
Value"). The effective income tax rate of the predecessor company for the
eight months ended February 28, 1993 differs from the federal statutory rate
primarily because the previous method of accounting required the use of prior
year loss carryforwards to reduce the effective federal income tax rate for
financial reporting purposes. The effective income tax of the predecessor
company for fiscal 1992 differs from the federal statutory rate primarily
because the federal income tax benefit was recorded only to the extent such
benefit could be offset against deferred income taxes payable. The effective
income tax rate of the predecessor company for fiscal 1991 differs from the
federal statutory rate primarily due to targeted jobs tax credits.
Extraordinary Gain - On the Effective Date or thereafter as provided
in the Plan of Reorganization, the Company distributed cash, debt instruments,
Common Stock and warrants to purchase Common Stock in settlement of its
liabilities subject to compromise. The fair market value of the cash and
securities that were distributed was approximately $61.5 million less than the
pre-petition liabilities and was recorded as an extraordinary gain on the
forgiveness of debt.
Inflation - The Company believes inflation has not had a material
effect on its results of operations in recent years. However, the Company has
experienced short-term fluctuations in its gasoline gross profit margins, both
positive and negative, as a result of changing market conditions for the supply
and demand of gasoline.
Pro Forma Results of Operations - Management of the Company has made
pro forma calculations of year-to-date 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 $8.8
million, $1.35 per share, for the twelve months ended June 30, 1993 (see Note 3
of the Notes to Consolidated Financial Statements).
The year-to-date pro forma operating results have exceeded the
projections prepared by management as part of the Plan of Reorganization
principally because of unusually high gasoline profits. Additionally, the pro
forma fiscal 1993 operating results do not include any expenses associated with
a proposed employee retirement plan. The Company's Plan of Reorganization
contains special provisions for such a proposed retirement plan, effective July
1, 1993. Management of the Company estimates such proposed retirement plan
expenses, or other similar proposed benefit costs, will approximate $4.0
million annually beginning in fiscal 1994.
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>
June 30,
1993 (a)
--------
<S> <C>
Cash (b) . . . . . . . . . . . . . . . . . . . $ 46.0
Current assets . . . . . . . . . . . . . . . . $ 90.5
Current liabilities . . . . . . . . . . . . . . $ 78.8
Current ratio . . . . . . . . . . . . . . . . . 1.15
Inventory turn ratios (annualized):
Merchandise . . . . . . . . . . . . . . 11.7
Gasoline . . . . . . . . . . . . . . . . 50.3
Long-term debt . . . . . . . . . . . . . . . . $ 131.6
Stockholders' equity . . . . . . . . . . . . . $ 67.3
Debt to equity ratio . . . . . . . . . . . . . 1.96
Common shares outstanding . . . . . . . . . . . 6.0
========
</TABLE>
(a) Comparable amounts for the prior fiscal year are not presented because
they are not meaningful as a result of the confirmation of the Plan of
Reorganization.
(b) Includes $6.3 million that has been reserved at the Company's option
related to the remittance of tax and lottery collections.
15
<PAGE> 10
Liquidity - The design of the Company's Plan of Reorganization was
based upon an analysis of the Company's projected future operating cash flows
and capital/environmental expenditure requirements over the next ten years. The
Plan of Reorganization resulted in the retention of approximately $145.6 million
of debt, $10.4 million of which is classified as a current liability as of June
30, 1993. Approximately $127.2 million of pre-petition liabilities were settled
through the issuance of the reorganized company's Common Stock, $.01 par value.
The terms of the Plan of Reorganization resulted in the Company emerging from
the Chapter 11 proceedings with approximately $27 million of cash funds
available for general corporate purposes and a further approximate $6 million of
reserved cash funds. The Company's recent operating results and rapid
restoration of trade credit subsequent to emergence from Chapter 11 bankruptcy
reorganization have led to a cash position in excess of the aforementioned
amounts as well as the projected amounts included in the Plan of Reorganization
Consequently, while current economic retail conditions, especially those
specific to the convenience store industry, remain unsettled, management of the
Company believes that the implementation of the Plan of Reorganization has
provided the Company with the financial resources necessary to meet its current
and anticipated needs. Furthermore, the Company believes that, with the
reorganization complete, liquidity will continue to improve since management
will be able to focus its efforts on implementing its business strategy,
including improving store appearances, introducing new products, improving
gasoline dispensing facilities and developing new marketing strategies. The
Company estimates it will pay only minimal income taxes for several years since
a substantial amount of its net operating loss carryforwards and other tax
attributes survived the 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, commencing with the 1994 fiscal year. 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 June 30, 1993, no
borrowings were outstanding under this facility; the Company has, however,
issued letters of credit totalling $6.4 million.
Cash flows from operating activities totalled $56.1 million, $28.5
million and $15.0 million for the years ended June 30, 1993, 1992 and 1991,
respectively. The increase over the prior years is due to a combination of
increases in trade credit after the Company's emergence from Chapter 11
bankruptcy reorganization, as well as improved operating results. Operating
earnings before interest, income taxes, depreciation, amortization,
reorganization items and other non-recurring items ("EBITDA") amounted to
$49,374,000, or $5,644 per store per month in 1993, compared to $9,202,000 or
$842 per store per month in 1992 and $20,284,000 or $1,599 per store per month
in 1991. 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 improvement in operating cash flows and EBITDA is due
principally to the results gained from the aforementioned strategic review of
store operations and other cost reduction activities performed during the
Company's Chapter 11 bankruptcy reorganization. Also contributing to the
improved cash flows and EBITDA in fiscal 1993 are lottery commissions
associated with the commencement of the Texas Lottery in late May 1992 and
record gasoline profit margins. See "Results of Operations" above.
As discussed in note 5 of the notes to Consolidated Financial
Statements, the Company established, in December 1991, restructuring
liabilities of $19.2 million for anticipated market divestitures and lease
settlement claims. The restructuring liabilities totalled $7.1 million at June
30, 1992 and 1993. The fiscal year 1992 reductions in the restructuring
liabilities are due to, (i) the reclassficiation to Liabilities Subject to
Compromise of the $10.2 million liability for lease settlement claims and (ii)
the effects of the sale of the Company's stores in the San Francisco Bay Area.
Liabilities Subject to Compromise are satisfied with cash and/or company stock
in conjunction with the Chapter 11 reorganization. The remaining $7.1 million
restructuring liability is related to the anticipated divestiture of the
Georgia and remaining California operations.
In December 1991, the Company also recorded a special charge of $46.6
million related to an increase in insurance liabilities. The insurance
liabilities at June 30, 1991, 1992 and 1993 totalled $3.1 million, $3.9
million and $9.8 million, respectively. During fiscal year 1992, the insurance
liabilities were increased for accruals totalling $70.8 million (includes the
$46.6 million increase in liabilities discussed above). Additionally, during
fiscal year 1992 the insurance liabilities were reduced for, (i) cash payments
of $22.1 million and (ii) a $47.9 million reclassification of insurance
liabilities to Liabilities Subject to Compromise in conjunction with the
Chapter 11 reorganization filing. During fiscal year 1993 the insurance
liability was increased for accruals of $14.4 million and decreased for cash
payments of $8.5 million.
See "Capital Resources" section below, as well as notes 5 and 11 of
the notes to the Consolidated Financial Statements for additional information
regarding the environmental liabilities.
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 sold 9 parcels of surplus real estate for $1.5 million,
net of closing costs and sold surplus store equipment for an additional $4.7
million. 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. Since emerging from
Chapter 11 bankruptcy reorganization, the Company has sold 6 additional parcels
of surplus real estate for $1.2 million, net of closing costs. Net proceeds
from such sales, and any sales in the
16
<PAGE> 11
future, are generally required to be applied against mortgage or bank long-term
debt. Because of the Company's limited plans for expansion, the Company
anticipates entering into additional real estate sales. As of June 30, 1993, an
additional 68 parcels of surplus real estate were held by the Company.
Capital Resources - The Company's Plan of Reorganization provided for
the reinstatement of $135.3 million of long-term debt. As of June 30, 1993,
such long-term debt had been reduced to $131.6 million as a result of a
quarterly principal payment and the aforementioned application of the net
proceeds derived from the sale of surplus real estate. The debt instruments
provide for repayment generally over a 7 to 10 year period with interest rates
approximating market rates at the time of confirmation. The debt levels were
based on the Company's projected future operating cash flows and capital and
environmental expenditure needs. Management of the Company believes that most
of the operating cash flows will be dedicated to these needs during the next
ten years.
The Company incurred $11.7 million of capital expenditures during
fiscal 1993 compared to $3.6 million in 1992 and $13.4 million in 1991. During
1993, the largest portion of such expenditures was comprised of $4.5 million 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 $2.7 million on store equipment
replacement, $3.6 million on store remodels and eateries and $.9 million on
miscellaneous projects.
The Company spent an additional $1.3 million in fiscal 1993 on
environmental remediation activities, compared to $1.7 million in fiscal 1992
and $3.5 million in fiscal 1991. The majority of such expenditures related to
the clean-up of contaminated soil caused by leaking underground gasoline
storage tanks and underground piping systems. During the second quarter of
fiscal year 1992 the Company completed a comprehensive plan covering its
underground storage tanks in light of the expected funding shortfalls in the
various state reimbursement programs. As a result, the Company recorded an
increase to the environmental remediation reserve of $12.8 million in the
second quarter of fiscal year 1992. The increase in the environmental
remediation liabilities from the June 30, 1991 balance of $1.3 million to the
June 30, 1992 balance of $13.0 million is due to accruals of $13.4 million
(includes the $12.8 amount discussed above), partially offset by fiscal year
1992 environmental remediation expenditures of $1.7 million. In connection with
an updated environmental remediation cost analysis, upon emerging from Chapter
11 bankruptcy reorganization the Company increased its reserve for future
environmental remediation and tank removal costs by an additional $6.6 million
in February 1993. At June 30, 1993, the environmental remediation reserves
totalled $18.2 million. The increase in the environmental remediation
liability from the June 30, 1992 balance of $13.0 million to the June 30, 1993
balance of $18.2 million is due to the $6.6 million accrual discussed above,
partially offset by fiscal year 1993 environmental remediation expenditures of
$1.3 million. Included in this reserve is approximately $4 million of
reimbursements from established state trust funds which the Company believes to
be probable of recovery. The actual cost of remediation of contaminated sites
and removing tanks may be substantially lower or higher than that reverved due
to difficulties in establishing such costs and due to potential changes in the
status of regulations and state reimbursement programs. The Company does not
believe that any such amount below or in excess of that accrued is reasonably
estimable. Reference is made to Note 11 of the Notes to Consolidated
Financial Statements for a complete description of the Company's environmental
commitments and contingencies.
The Company's long-term bank 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. For fiscal 1995, the bank long-term
debt agreements limit capital/environmental remediation expenditures to excess
cash flow, as defined, not to exceed $20.3 million. The Company currently
anticipates it will be required to spend $9.3 million in fiscal 1995 for the
purchase and installation of additional Stage II Vapor Recovery Equipment and
other capital expenditures required by environmental regulations, and an
additional $2.7 million on environmental remediation activities.
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 June 30, 1993 associated with the Company's long-term
bank debt instruments.
<TABLE>
<CAPTION>
Covenant Required Actual
-------- -------- -------------
<S> <C> <C>
Current Ratio (minimum) 90% 115%
Total Borrowed Funds to Consolidated Net Worth (maximum) 438% 415%
Maximum Total Liabilities to Consolidated Net Worth 400% 353%
Minimum Consolidated Net Worth $61,400,000 $67,262,000
Minimum Interest Coverage Ratio 200% 516%
Consolidated Fixed Charge Coverage Ratio (minimum) 105% 171%
Minimum EBITDA $ 6,825,000 $12,065,000
Capital expenditures (maximum) $ 7,600,000 $ 6,303,000
</TABLE>
Covenants noted above are computed as defined per the Company's
long-term bank debt instrument agreements. At June 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(1)(5).
17
<PAGE> 12
After an ownership change, Section 382 (1)(5) requires a reduction in
the amount of net operating loss carryforwards and other tax attributes. As of
June 30, 1993, the net operating loss carryforward is estimated to have been
reduced to $54.5 million as a result of the adjustments required by Section 382
and the application of the losses to reduce taxable income for the year ended
June 30, 1993. Section 382 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.
Risks and Uncertainties - During the fiscal year ended June 30, 1993,
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 the excise tax on tobacco
products in particular. While the Company cannot predict what impact the
increase in gasoline taxes will have, nor can it 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.
18
<PAGE> 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
National Convenience Stores Incorporated and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of
National Convenience Stores Incorporated and subsidiaries (the "Company") as of
June 30, 1993 and 1992 (Reorganized Company and Predecessor Company,
respectively), and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the period from inception
(March 1, 1993) to June 30, 1993 (Reorganized Company) and the eight months
ended February 28, 1993 and the years ended June 30, 1992 and 1991 (Predecessor
Company). 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.
As discussed in Notes 1, 2 and 3 to the consolidated financial
statements, on February 25, 1993, the Bankruptcy Court entered an order
confirming the plan of reorganization which became effective after the close of
business on March 8, 1993. Accordingly, the accompanying Reorganized Company
financial statements have been prepared in conformity with AICPA Statement of
Position 90-7, "Financial Reporting for Entities in Reorganization Under the
Bankruptcy Code," as a new entity with assets, liabilities and a capital
structure having carrying values not comparable with prior periods.
In our opinion, the Reorganized Company consolidated financial
statements present fairly, in all material respects, the financial position of
the Company as of June 30, 1993, and the results of its operations and its cash
flows for the period from inception (March 1, 1993) to June 30, 1993 in
conformity with generally accepted accounting principles. Further, in our
opinion, the Predecessor Company consolidated financial statements referred to
above present fairly, in all material respects, the financial position of the
Predecessor Company as of June 30, 1992 and the results of its operations and
its cash flows for the eight months ended February 28, 1993 and the years ended
June 30, 1992 and 1991 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE
DELOITTE & TOUCHE
Houston, Texas
August 10, 1993
19
<PAGE> 14
National Convenience Stores Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amount)
<TABLE>
<CAPTION>
Reorganized |
Company | Predecessor Company
--------------- | ---------------------------------------
Period From |
Inception | Eight Months
(March 1, 1993) | Ended Year Ended June 30,
To June 30, | February 28, ------------------------
1993 | 1993 1992 1991
--------------- | ------------ ---------- ----------
<S> <C> | <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . $297,985 | $580,867 $ 958,519 $1,073,958
Costs and Expenses: |
Cost of sales . . . . . . . . . . . . . . . . . 222,639 | 429,019 728,322 806,380
Operating expenses . . . . . . . . . . . . . . 54,193 | 108,326 205,516 231,845
General and administrative expenses . . . . . . 10,982 | 20,793 38,181 44,224
Interest expense (Note 9) . . . . . . . . . . . 2,913 | 1,497 11,322 23,935
Gain on sale of assets (Note 6) . . . . . . . . - | - - (13,046)
Restructuring and other special charges (Note 5) - | 6,561 168,106 -
-------- | ------- ------- ---------
290,727 | 566,196 1,151,447 1,093,338
|
Earnings (Loss) Before Reorganization Expenses, |
Fresh-Start Adjustments, Income Taxes |
and Extraordinary Gain . . . . . . . . . . . . 7,258 | 14,671 (192,928) (19,380)
|
Reorganization Expenses, net . . . . . . . . . . - | 8,124 3,361 -
-------- | ------- ------- ---------
|
Earnings (Loss) Before Fresh-Start Adjustments, |
Income Taxes and Extraordinary Gain . . . . . . 7,258 | 6,547 (196,289) (19,380)
|
Fresh-Start Adjustments (Note 3) . . . . . . . . - | 382 - -
-------- | ------- ------- ---------
|
Earnings (Loss) Before Income Taxes |
and Extraordinary Gain . . . . . . . . . . . . 7,258 | 6,929 (196,289) (19,380)
|
Income Tax Expense (Benefit) (Note 10) . . . . . 2,869 | 133 (10,851) (8,915)
-------- | ------- ------- ---------
|
Earnings (Loss) Before Extraordinary Gain . . . . 4,389 | 6,796 (185,438) (10,465)
|
Extraordinary Gain (Note 4) . . . . . . . . . . . - | 61,493 - -
-------- | ------- ------- ---------
|
Net Earnings (Loss) . . . . . . . . . . . . . . . $ 4,389 | $ 68,289 $(185,438) $ (10,465)
======== | ======== ========= =========
|
Earnings Per Share . . . . . . . . . . . . . . . $ 0.66 |
======== |
|
Weighted Average Common and Common |
Equivalent Shares Outstanding . . . . . . . . . 6,872 |
======== |
</TABLE>
See Notes to Consolidated Financial Statements.
20
<PAGE> 15
National Convenience Stores Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
Reorganized | Predecessor
Company | Company
------------- | -------------
June 30, 1993 | June 30, 1992
------------- | -------------
<S> <C> | <C>
ASSETS |
Current Assets: |
Cash and equivalents, $6,254 reserved and $16,267 restricted . . . . . . . . . . . $ 46,032 | $ 32,724
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,474 | 2,288
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,308 | 41,022
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,697 | 8,845
--------- | ---------
Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,511 | 84,879
|
Property and Equipment, net (Note 6) . . . . . . . . . . . . . . . . . . . . . . . . 156,528 | 169,605
Reorganization Value in Excess of Amounts Allocable to |
Identifiable Assets, net (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . 39,587 | -
Deferred Tax Asset, net (Note 10) . . . . . . . . . . . . . . . . . . . . . . . . . . 6,065 | -
Other Assets, net (Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,737 | 14,017
--------- | ---------
$ 298,428 | $ 268,501
========= | =========
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
Current Liabilities: |
Accounts payable and accrued expenses (Note 8) . . . . . . . . . . . . . . . . . . $68,395 | $ 39,472
Current portion of long-term debt (Note 9) . . . . . . . . . . . . . . . . . . . . 10,373 | 22,353
--------- | ---------
Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,768 | 61,825
|
Liabilities Subject to Compromise . . . . . . . . . . . . . . . . . . . . . . . . . . - | 301,241
|
Long-Term Debt (Note 9) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131,559 | -
Other Liabilities and Deferred Revenue (Note 11) . . . . . . . . . . . . . . . . . . 20,839 | 21,360
|
Commitments and Contingent Liabilities (Note 11) . . . . . . . . . . . . . . . . . . - | -
|
Stockholders' Equity (Deficit) (Note 12): |
Series E Preferred Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - | 245
Common Stock, par value $.01 per share; 50,000,000 shares |
authorized; 6,000,000 shares issued and outstanding . . . . . . . . . . . . . . . 60 | -
Common Stock, par value $.412/3 per share; 50,000,000 shares |
authorized; 24,001,984 shares issued . . . . . . . . . . . . . . . . . . . . . . - | 10,001
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62,813 | 108,544
Retained earnings (deficit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,389 | (195,819)
--------- | ---------
67,262 | (77,029)
Less: |
Treasury stock, 2,542,888 shares, at cost . . . . . . . . . . . . . . . . . . . . . - | 15,729
ESOP note receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - | 23,167
--------- | ---------
Total Stockholders' Equity (Deficit) . . . . . . . . . . . . . . . . . . . . . . 67,262 | (115,925)
--------- | ---------
$ 298,428 | $ 268,501
========= | =========
</TABLE>
See Notes to Consolidated Financial Statements.
21
<PAGE> 16
National Convenience Stores Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
($ in thousands)
<TABLE>
<CAPTION>
Additional Retained
Preferred Common Paid-in Earnings Treasury Notes
Stock Stock Capital (Deficit) Stock Receivable
--------- ------- ---------- --------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
Balance at June 30, 1990. . . . . . . . $225 $10,000 $107,503 $ 4,147 $(12,941) $(27,016)
Net loss . . . . . . . . . . . . . . (10,465)
Cash dividends on Series E
Preferred Stock. . . . . . . . . . (3,475)
Conversion of 9% Debentures to
Common Stock, 750 shares . . . . . 15
Purchase of Treasury Stock,
385,200 shares . . . . . . . . . . (1,491)
Exchange of Common Stock, 400,008
shares, for Series E Preferred Stock,
20,870 shares . . . . . . . . . . 20 1,273 (1,300)
Acquisition of Series B Preferred Stock,
100 shares . . . . . . . . . . . . (249) 249
Reduction of ESOP note . . . . . . . 3,600
Other 3
---- ------- -------- --------- -------- --------
Balance at June 30, 1991 245 10,000 108,542 (9,793) (15,729) (23,167)
Net loss . . . . . . . . . . . . . . (185,438)
Cash dividends on Series E
Preferred Stock . . . . . . . . . (588)
Conversion of 9% Debentures to
Common Stock, 100 shares . . . . . 1 2
---- ------- -------- --------- -------- --------
Balance at June 30, 1992 . . . . . . . 245 10,001 108,544 (195,819) (15,729) (23,167)
Net earnings for the eight months
ended February 28, 1993. . . . . . 68,289
Cancellation of stock of
predecessor company. . . . . . . . (245) (10,001) (108,544) 127,530 15,729 23,167
Issuance of reorganized
company Common Stock . . . . . . . 60 62,813
---- ------- -------- --------- -------- --------
REORGANIZED COMPANY:
Balance at February 28, 1993. . . . . . - 60 62,813 - - -
Net earnings for the period
from Inception (March 1, 1993)
to June 30, 1993 . . . . . . . . . 4,389
Balance at June 30, 1993 . . . . . . . $ - $ 60 $ 62,813 $ 4,389 $ - $ -
==== ======= ======== ========= ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
22
<PAGE> 17
National Convenience Stores Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
<TABLE>
<CAPTION>
REORGANIZED |
COMPANY | Predecessor Company
PERIOD | ----------------------------------------
FROM INCEPTION | Eight Months
(MARCH 1, 1993) | Ended Year Ended June 30,
TO JUNE 30, | February 28, -------------------------
1993 | 1993 1992 1991
-------------- | ------------ ------------ -----------
<S> <C> | <C> <C> <C>
Cash flows from operating activities: |
Net earnings (loss) . . . . . . . . . . . . . . . . . . . . . $ 4,389 | $ 68,289 $(185,438) $ (10,465)
Adjustments to reconcile net earnings (loss) |
to net cash provided by operating activities: |
Depreciation and amortization . . . . . . . . . . . . . 5,587 | 10,887 22,702 28,775
Deferred income taxes. . . . . . . . . . . . . . . . . . 2,374 | - (11,271) (9,114)
Gain on sales of assets. . . . . . . . . . . . . . . . . - | - - (13,046)
Fresh-start adjustments. . . . . . . . . . . . . . . . . - | (382) - -
Extraordinary gain . . . . . . . . . . . . . . . . . . . - | (61,493) - -
Restructuring and other special charges. . . . . . . . . - | 6,561 168,106 -
Changes in operating assets and liabilities, net |
of sales of stores: |
(Increase) decrease in accounts and notes |
receivable and prepaid expenses . . . . . . . . . . . (111) | 727 26 (352)
(Increase) decrease in inventories . . . . . . . . . . . (2,621) | 5,691 6,052 15,810
Increase (decrease) in accounts payable and |
accrued expenses . . . . . . . . . . . . . . . . . . . 16,340 | (396) 28,409 3,745
Increase (decrease) in income taxes . . . . . . . . . . (397) | 38 175 (285)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 495 | 157 (284) (78)
-------- | -------- --------- ---------
Net cash provided by operating activities. . . . . . . . . 26,056 | 30,079 28,477 14,990
-------- | -------- --------- ---------
|
|
Cash flows from investing activities: |
Capital expenditures. . . . . . . . . . . . . . . . . . . . . (8,671) | (3,016) (3,557) (13,418)
Proceeds from sale of assets . . . . . . . . . . . . . . . . 1,528 | 6,906 2,900 33,893
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . . (962) | (1,194) (748) (838)
-------- | -------- --------- ---------
Net cash provided by (used in) investing activities. . . . (8,105) | 2,696 (1,405) 19,637
-------- | -------- --------- ---------
|
|
Cash flows from financing activities: |
Principal payments on long-term debt. . . . . . . . . . . . . (3,658) | - (5,192) (16,087)
Principal payments under capital lease obligations. . . . . . - | - (863) (1,772)
Proceeds from issuance of long-term debt. . . . . . . . . . . - | - - 1,089
Debt issue costs. . . . . . . . . . . . . . . . . . . . . . . - | (181) (2,629) (1,599)
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . - | - (882) (3,475)
Purchase of treasury stock . . . . . . . . . . . . . . . . . - | - - (1,491)
Long-term deposits . . . . . . . . . . . . . . . . . . . . . 3,005 | - (3,481) -
Cash settlement of liabilities subject to compromise. . . . . (36,584) | - - -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . - | - - 156
-------- | -------- --------- ---------
Net cash used in financing activities . . . . . . . . . . (37,237) | (181) (13,407) (23,179)
-------- | -------- --------- ---------
|
|
Net increase (decrease) in cash and equivalents . . . . . . . . . . (19,286) | 32,594 14,025 11,448
Cash and equivalents - beginning of period . . . . . . . . . . . . 65,318 | 32,724 18,699 7,251
-------- | -------- --------- ---------
- end of period. . . . . . . . . . . . . . . . $ 46,032 | $ 65,318 $ 32,724 $ 18,699
======== | ======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
23
<PAGE> 18
National Convenience Stores Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts expressed in thousands of dollars)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - 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. Certain amounts in
prior years have been reclassified to conform to the current year's
presentation.
Basis of Presentation - As more fully described in Notes 2 and 3
below, on February 25, 1993, a court order was entered confirming the Company's
Revise 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 has adopted the recommended "fresh-start reporting" treatment for
entities emerging from Chapter 11 bankruptcy reorganization, as set forth in
the 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 is 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 June 30, 1993
Consolidated Balance Sheet of the reorganized company is not comparable to the
June 30, 1992 Consolidated Balance Sheet of the predecessor company nor are the
Consolidated Statements of Operations, Cash Flows and Stockholders' Equity
(Deficit) for the period from Inception (March 1, 1993) to June 30, 1993 of the
reorganized company comparable with those for the years ended June 30, 1992 and
1991 and the eight months ended February 28, 1993 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 10).
Statements of Consolidated Cash Flows Supplemental Disclosures - For
purposes of this statement, short-term investments which have an initial
maturity of three months or less are considered cash equivalents. "Net cash
provided by operating activities" includes the following cash payments and
receipts ($ in thousands):
<TABLE>
<CAPTION>
Reorganized |
Company | Predecessor Company
------------- | --------------------------------
Period from | Eight
Inception | Months Year Ended
(March 1, | Ended June 30,
1993) to | February 28, ---------------
June 30, 1993 | 1993 1992 1991
------------- | ------------- ---- ----
<S> <C> | <C> <C> <C>
Cash paid (received) for: |
Pre-petition interest |
expense . . . . . . . . . . . . . . . $ - | $ - $13,479 $21,870
|
Post-petition interest |
expense . . . . . . . . . . . . . . . 3,073 | 85 66 -
Post-emergence interest |
income . . . . . . . . . . . . . . . (328) | - - -
Income taxes . . . . . . . . . . . . . . 396 | 196 266 474
Income tax refunds . . . . . . . . . . . - | (103) (7) (149)
Reorganization items: |
Professional fees . . . . . . . . . . 3,085 | 4,908 475 -
Interest income . . . . . . . . . . . - | (639) (196) -
Other . . . . . . . . . . . . . . . . 6 | 182 93 -
</TABLE>
Reference is made to the analysis of the reorganized company's opening
balance sheet at March 1, 1993 (see Note 3) for a complete description of the
non-cash financing activities recorded upon emergence from Chapter 11 bankruptcy
reorganization and the resultant adoption of fresh-start reporting.
During the eight months ended February 28, 1993, non-cash investing and
financing activities were composed of one of the Company's insurance carriers
exercising its right to draw down on outstanding pre-petition irrevocable
letters of credit in the amount of $100,700.
For the year ended June 30, 1992, non-cash investing and financing
activities were composed of the exercise by certain officers and directors of
the Company of their right to exchange $5.4 million of floating interest rate
subordinated debentures for the related promissory notes held by the
predecessor company. For financial reporting purposes, the promissory notes
and debentures were considered to offset and, therefore, the exchange had no
effect on the accompanying financial statements. In addition, $2,000 of the
predecessor company's 9% Convertible Subordinated Debentures were converted
into 100 shares of the predecessor company's common stock and draw downs of
outstanding pre-petition irrevocable letters of credit amounting to $9.2
million were made primarily by the Company's insurance carriers for the
payment of pre-petition insurance claims.
24
<PAGE> 19
In fiscal 1991, non-cash investing and financing activities were
composed of the exchange of 400,008 shares of the predecessor company's common
stock for 20,870 shares of the predecessor company's $14.375 Convertible
Exchangeable Preferred Stock, Series E (the "Series E Preferred Stock") by
Graystone Investments, a Texas general partnership in which a member of the
Company's Board of Directors is a partner, pursuant to the terms of a Share
Exchange Agreement dated November 13, 1990. Additionally, the predecessor
company reacquired and subsequently retired 100 shares of its Series B
Cumulative Convertible Preferred Stock and concurrently cancelled the related
notes receivable totalling $249,000.
Cash and Equivalents - The cash balance is comprised of cash and cash
items in stores, in transit or in banks. Total reserved/restricted cash
amounted to $6.3 million and $16.3 million at June 30, 1993 and 1992,
respectively. The reserved cash balance at the conclusion of fiscal year 1993
is composed of cash accumulated in trust accounts at the Company's option for
the payment of payroll, sales and gasoline taxes and state lottery sales
proceeds. Total restricted cash at June 30, 1992 also includes cash collateral
accounts escrowed under the terms of the Company's debtor-in-possession
financing agreement in effect at that time.
Inventories - Merchandise inventories are stated at the lower of
first-in, first-out cost or market, determined by the retail inventory method;
gasoline inventories are stated at average cost.
Property and Equipment - In accordance with SOP 90-7, property and
equipment were restated at March 1, 1993 to approximate fair market value as of
the Effective Date (see Note 3). Subsequent additions have been recorded at
cost. Provision for depreciation and amortization is made on a straight-line
basis over the estimated useful lives of the assets or the lease terms, if
shorter. Maintenance and repairs are charged to expense as incurred, whereas
renewals and betterments are capitalized. In December 1991, in connection with
the Chapter 11 filing, the Company wrote down the value of certain existing
property and equipment as a result of the Company's comprehensive strategic
review of operations and resultant Restructuring Charge (see Note 5).
Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets -Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets ("Excess Reorganization Value") is being amortized on a straight-line
basis over building lives, 25 years. In accordance with purchase accounting,
any downward revaluations of the deferred tax asset valuation allowance (see
Note 10) will result in a reassignment of a portion of Excess Reorganization
Value to Deferred Tax Assets, net.
Income Taxes - In connection with the adoption of fresh-start
reporting, the Company adopted SFAS 109, as of March 1, 1993 (see Note 10). As
a result, income tax expense of the reorganized company for the period from
Inception (March 1, 1993) to June 30, 1993 is recorded at the expected annual
effective rate based on current federal and state statutory rates, after giving
effect to the non-deductibility of the amortization of Excess Reorganization
Value.
Income tax expense for the predecessor company was recorded pursuant
to the provisions of Statement of Financial Accounting Standards No. 96,
"Accounting for Income Taxes" ("SFAS 96"). Under that method, in fiscal 1991,
a current or deferred tax liability was recognized for the tax consequences of
all events recognized in the consolidated financial statements, measured by
applying the provisions of enacted tax laws and rates to the temporary
differences between the tax basis of an asset or liability and the amount
recorded in the consolidated financial statements. However, in fiscal 1992,
the federal income tax benefit was recorded only to the extent the benefit
would be offset against existing deferred income taxes payable. For the eight
months ended February 28, 1993, the predecessor company was in a loss
carryforward position and, therefore, pursuant to SFAS 96, no federal income
tax expense was recorded, instead, all income tax expense was related to state
income taxes.
Earnings Per Share - Per share computations for the reorganized
company are computed using the weighted average number of shares of Common
Stock outstanding during the period, increased by the effect of common stock
equivalents from stock options and warrants, when dilutive. Fully-diluted
earnings per share are not shown as the difference is either immaterial or
antidilutive in all periods presented.
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.
2. CHAPTER 11 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 in the Bankruptcy Court. Subsequent to the
Petition Date, the
25
<PAGE> 20
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 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 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 (see Note 12).
3. FRESH-START REPORTING
In accounting for the effects of the reorganization, the Company has
adopted the fresh-start reporting provisions of SOP 90-7 and reflected the
effects of such adoption in the financial statements for the period from
Inception (March 1, 1993) to June 30, 1993. SOP 90-7 is 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 is 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 synonomous 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 flows projections and (iv) terminal value based
upon industry comparable multiples applied to the discounted value of its
post-estimated 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, have been reflected in the
accompanying financial statements as of February 28, 1993, as Fresh-Start
Adjustments. In addition, the reorganized company's opening balance sheet was
further adjusted to eliminate existing equity and to reflect the aforementioned
$210.0 million enterprise value, which includes the establishment of Excess
Reorganization Value. Accordingly, a vertical black line is shown in the
consolidated financial statements to separate post-emergence operations from
those prior to March 1, 1993, since they have not been prepared on a comparable
basis.
26
<PAGE> 21
The effect of the Plan of Reorganization and fresh-start reporting on
the reorganized company's unaudited opening consolidated balance sheet as of
March 1, 1993 is as follows ($ in thousands):
<TABLE>
<CAPTION>
Pre Fresh-Start Extra- Post Fresh-Start
Balance Sheet ordinary Fresh-Start Balance Sheet
February 28, 1993 Gain (a) Adjustments(b) Other (c) March 1, 1993
----------------- ----------- --------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and equivalents . . . . . . . . . . . . . . $ 65,318 $ - $ - $ - $ 65,318
Accounts and notes receivable, net . . . . . . . 4,333 - (85) - 4,248
Inventories . . . . . . . . . . . . . . . . . . . 34,779 - (292) - 34,487
Prepaid expenses . . . . . . . . . . . . . . . . 4,521 - (1,059) - 3,462
--------- ----------- ----------- ---------- ---------
Total Current Assets . . . . . . . . . . . . . 108,951 - (1,436) - 107,515
Property and Equipment, net . . . . . . . . . . . . 156,389 - (3,283) - 153,106
Reorganization Value in Excess of Amounts
Allocable to Identifiable Assets, net . . . . . . - - - 47,636 47,636
Deferred Tax Asset, net . . . . . . . . . . . . . . - - 1,349 - 1,349
Other Assets, net . . . . . . . . . . . . . . . . . 12,939 (450) (3,282) - 9,207
--------- ----------- ----------- ---------- ---------
$ 278,279 $ (450) $ (6,652) $ 47,636 $ 318,813
========= =========== =========== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses . . . . . . $ 44,097 $ - $ 8,238 $ - $ 52,335
Pre-petition liabilities payable in cash . . . . - 20,554 259 - 20,813
Current portion of long-term debt (d) . . . . . 22,353 3,968 - - 26,321
--------- ----------- ----------- ---------- ---------
Total Current Liabilities . . . . . . . . . . . 66,450 24,522 8,497 - 99,469
Liabilities Subject to Compromise . . . . . . . . . 293,817 (287,015) (6,802) - -
Long-Term Debt . . . . . . . . . . . . . . . . . . - 135,306 - - 135,306
Other Liabilities and Deferred Revenue . . . . . . 27,523 2,371 (8,729) - 21,165
Commitments and Contingent Liabilities . . . . . . - - - - -
Stockholders' Equity (Deficit):
Series E Preferred Stock . . . . . . . . . . . . 245 - - (245) -
Common Stock, par value $.01 per share;
50,000,000 shares authorized; 6,000,000
shares issued and outstanding . . . . . . . . . - 60 - - 60
Common Stock, par value $.412/3 per share;
50,000,000 shares authorized; 24,001,984
shares issued . . . . . . . . . . . . . . . . . 10,001 - - (10,001) -
Additional paid-in capital . . . . . . . . . . . 108,544 62,813 - (108,544) 62,813
Retained earnings (deficit) . . . . . . . . . . . (189,405) 61,493 382 127,530 -
--------- ----------- ----------- ---------- ---------
(70,615) 124,366 382 8,740 62,873
Less:
Treasury stock . . . . . . . . . . . . . . . . . 15,729 - - (15,729) -
Note receivable . . . . . . . . . . . . . . . . . 23,167 - - (23,167) -
--------- ----------- ----------- ---------- ---------
Total Stockholders' Equity (Deficit) . . . . . (109,511) 124,366 382 47,636 62,873
--------- ----------- ----------- ---------- ---------
$ 278,279 $ (450) $ (6,652) $ 47,636 $ 318,813
========= =========== =========== ========== =========
</TABLE>
(a) To record the settlement of liabilities subject to settlement under the
Plan of Reorganization (see Note 4).
(b) To record the adjustments to state assets and liabilities at fair market
value and to record the cumulative effect of adopting SFAS 109 as of
March 1, 1993.
(c) To record the adjustments to cancel old equity, to zero out the retained
deficit and to adjust assets to reflect the $210.0 million enterprise
value.
(d) Includes $16.0 million payable to secured debt holders on the Effective
Date.
27
<PAGE> 22
The following 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>
Twelve Months Ended June 30, 1993
----------------------------------------------------
Historical Adjustments Pro Forma
---------- ----------- ---------
<S> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $878,852 $ - $878,852
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . 651,658 - 651,658
Operating expenses . . . . . . . . . . . . . . . . . . . . 162,519 1,067 (a) 163,586
General and administrative expenses . . . . . . . . . . . . 31,775 - 31,775
Interest expense . . . . . . . . . . . . . . . . . . . . . 4,410 5,940 (b) 10,350
Special charge . . . . . . . . . . . . . . . . . . . . . . 6,561 - 6,561
--------- ----------- --------
856,923 7,007 863,930
--------- ----------- --------
Earnings (Loss) Before Reorganization Expenses,
Fresh-Start Adjustments, Income Taxes
and Extraordinary Gain . . . . . . . . . . . . . . . . . . 21,929 (7,007) 14,922
Reorganization Expenses, net . . . . . . . . . . . . . . . . 8,124 (8,124)(b) -
--------- ----------- --------
Earnings Before Fresh-Start Adjustments,
Income Taxes and Extraordinary Gain . . . . . . . . . . . . 13,805 1,117 14,922
Fresh-Start Adjustments . . . . . . . . . . . . . . . . . . . 382 (382) (b) -
--------- ----------- --------
Earnings Before Income Taxes
and Extraordinary Gain . . . . . . . . . . . . . . . . . . 14,187 735 14,922
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . 3,002 3,102 (c) 6,104
--------- ----------- --------
Earnings Before Extraordinary Gain . . . . . . . . . . . . . 11,185 (2,367) 8,818
Extraordinary Gain . . . . . . . . . . . . . . . . . . . . . 61,493 (61,493)(b) -
--------- ----------- --------
Net Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . $ 72,678 $ (63,860) $ 8,818
========= =========== ========
Earnings Per Share(d) . . . . . . . . . . . . . . . . . . . . $ 1.35
========
Weighted Average Common and Common
Equivalent Shares Outstanding . . . . . . . . . . . . . . . 6,855
========
</TABLE>
(a) To record a full year's amortization of Excess Reorganization Value.
(b) To record interest expense on the debt incurred in connection with
the Plan of Reorganization and to eliminate Reorganization Expenses,
Fresh-Start Adjustments and the Extraordinary Gain.
(c) To record income tax expense as a result of adopting SFAS 109.
(d) Earnings Per Share is calculated based on Net Earnings, as adjusted
to reflect decreased interest expense (net of tax) assuming
conversion of stock options.
(e) Pro Forma Net Earnings per share are $12,943 and $1.95, respectively when
Special Charge of $6,561, related to an increase in environmental
remediation reserves is excluded.
28
<PAGE> 23
4. EXTRAORDINARY GAIN
The Plan of Reorganization resulted in the discharge of an estimated
$309.4 million of pre-petition claims against the Company through the
distribution of $36.5 million in cash, $145.6 million of debt and the issuance
of 6.0 million shares of new Common Stock and 1.35 million warrants to purchase
Common Stock. The value of the cash, debt instruments and securities
distributed was $61.5 million less than the claims and the resultant gain was
recorded as an extraordinary gain.
5. RESTRUCTURING AND OTHER SPECIAL CHARGES
In connection with the Chapter 11 filing, management of the Company
performed a comprehensive strategic review of company and store operations
which resulted in the recording of Restructuring and Other Special Charges of
$168.1 million in December 1991. The charges are summarized as follows ($ in
thousands):
Restructuring Charges:
<TABLE>
<S> <C>
Write-off of net book value of closed stores and
rejected leases and record reserves for anticipated
market divestitures and nonperforming
leaseholds . . . . . . . . . . . . . . . . . . . . . . $ 44,438
Write-down of nonoperating properties to
fair market value . . . . . . . . . . . . . . . . . . . 12,602
Write-off of net book value of goodwill . . . . . . . . . 21,357
Write-off of net book value of debt issue costs
and other deferred charges . . . . . . . . . . . . . . 9,435
Other write-offs and reserves associated
with the Chapter 11 filing . . . . . . . . . . . . . . 13,201
--------
Total Restructuring Charges . . . . . . . . . . . . . 101,033
--------
Other Special Charges:
Increase in insurance reserves . . . . . . . . . . . . . 46,632
Reserve for environmental costs . . . . . . . . . . . . . 12,822
Other . . . . . . . . . . . . . . . . . . . . . . . . . . 7,619
--------
Total Other Special Charges . . . . . . . . . . . . . 67,073
--------
Total . . . . . . . . . . . . . . . . . . . . . . . $168,106
========
</TABLE>
Restructuring Charges - A strategic review of company and store
operations performed by management resulted in the Company filing motions with
the Bankruptcy Court to reject 188 leases covering stores already closed as of
the Petition Date. In addition, after the Petition Date, the Company closed or
sold 267 stores (244 of which were leased). The Company's store closure and
associated lease rejection programs were based on evaluations of individual
stores, taking into consideration factors such as historical and projected cash
flow, lease or ownership terms, age and condition of the property, the nature
and amount of insurance claims, competition and the potential for future
changes to any of the foregoing. In connection with the review, the Company
wrote off the $16.2 million net book value of buildings and leasehold
improvements for such rejected leases and closed stores and wrote down the
related store equipment by $9.0 million to estimated salvage value. A reserve
of $10.2 million was also recorded to cover anticipated future lease settlement
claims. In addition, the strategic review identified two geographical markets
for probable divestiture and the Company recorded a reserve of $9.0 million for
the expected loss upon divestiture. On July 10, 1992, the Company consummated
the sale of one of the identified markets, San Francisco Bay area, for which
the resultant loss was adequately reserved.
In order to reduce cash expenditures, the Company's new store
development program was eliminated concurrent with the Chapter 11 filing.
Consequently, the Company elected to write down its nonoperating properties
(primarily undeveloped real estate) to current fair market value.
Due to the significant losses recorded by the Company prior to the
Petition Date, as well as the Chapter 11 filing itself, management of the
Company concluded that the goodwill previously recorded had been permanently
impaired and, therefore, it was written off.
As a result of the decline in the Company's financial condition and
the Chapter 11 filing, all debt previously classified as long-term became
immediately due and payable under the terms of the related debt instruments.
Consequently, the Company wrote off the debt issue costs of $4.9 million which
were previously scheduled to be amortized over the remaining life of the
associated loans. Similarly, management of the Company reviewed various other
intangible assets and deferred charges and concluded that their value became
permanently impaired as a result of the Chapter 11 filing.
Other charges associated with the Chapter 11 filing consist primarily
of an allowance for doubtful accounts receivable of $3.9 million and a reserve
of $5.0 million for expenses associated with the Company's Employee Stock
Ownership Plan (the "ESOP"). As a result of the proposed termination of the
ESOP, the Company eliminated the ESOP reserve as a Fresh-Start Adjustment (see
Notes 3 and 12).
Other Special Charges - As a result of significant increases in
adverse claims experience as well as an increase in the frequency of the
violence and severity of claims, management of the Company implemented a
detailed study of the Company's insurance reserves which gave consideration
to the nature and frequency of
29
<PAGE> 24
claims, as well as historical settlements. The loss development
factors are actuarially-determined ratios devised to factor in the Company's
prior history with similar claims, taking into account the age, nature,
severity and frequency of such claims. Based upon this analysis, which was
completed during the second quarter of fiscal 1992, the Company recorded a
$46.6 million charge to increase its insurance reserves.
During the second quarter of fiscal 1992, the Company completed
a comprehensive plan covering its underground storage tanks in light of the
expected funding shortfalls in the various state reimbursement programs. As a
result, the Company recorded an increase to the reserve for environmental
remediation costs in the amount of $12.8 million in the second quarter of
fiscal 1992. In connection with an updated environmental remediation cost
analysis, the Company increased its reserves for future environmental
remediation and related tank removal costs by an additional $6.6 million in
February 1993. (See Note 11)
6. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
--------------------------
1993 1992
-------- --------
<S> <C> <C>
Owned property:
Land . . . . . . . . . . . . . . . . . . . . . . $ 40,592 $ 42,646
Buildings . . . . . . . . . . . . . . . . . . . . 40,109 67,653
Leasehold improvements . . . . . . . . . . . . . 17,472 32,314
Equipment and fixtures. . . . . . . . . . . . . . 64,361 105,134
------- --------
162,534 247,747
Less accumulated depreciation 6,006 83,681
------- -------
156,528 164,066
Store property under capital leases . . . . . . . . - 17,200
Less accumulated amortization . . . . . . . . . . - 11,661
-------- --------
- 5,539
-------- --------
$156,528 $169,605
======== ========
</TABLE>
In accordance with the adoption of fresh-start reporting, adjustments
were made to restate gross property and equipment at net book value as of the
Effective Date and, accordingly, to restate accumulated depreciation to zero.
Management of the Company believes the restated balances approximate fair
market value as of the Effective Date (see Note 3).
The annual provision for depreciation has been computed principally
in accordance with the following rates and ranges of rates applied on the
straight-line method: Buildings, 4%; Leasehold improvements, 7% - 10%;
Equipment and fixtures, 11% - 17%; Store property under capital leases, 4% -
5%.
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 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 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 the restructuring charge recorded in December 1991.
On April 17, 1991, the Company completed the sale to BP Oil Company
of 27 operating convenience stores and related inventories and equipment
located in the West Palm Beach, Florida area for approximately $21.7 million.
On May 30, 1991, the Company completed the sale to Diamond Shamrock, Inc. of 24
operating convenience stores and related inventories and equipment located in
the El Paso, Texas area for approximately $13.7 million. The Company recorded
a pretax gain of $13.0 million relative to these sales during 1991. Proceeds,
net of closing costs, were used for general corporate purposes and to retire
debt.
7. OTHER ASSETS
<TABLE>
<CAPTION>
June 30,
----------------------
1993 1992
------- -------
<S> <C> <C>
Nonoperating properties . . . . . . . . . . . . . . $ 2,963 $ 5,151
Long-term deposits . . . . . . . . . . . . . . . . - 3,481
Other assets . . . . . . . . . . . . . . . . . . . 2,774 5,385
------- --------
$ 5,737 $ 14,017
======= ========
</TABLE>
Nonoperating properties include excess and surplus real estate.
30
<PAGE> 25
8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
June 30,
-------------------------
1993 1992
------- --------
<S> <C> <C>
Accounts payable . . . . . . . . . . . . . . . . . $26,205 $ 9,732
Accrued sales and property taxes . . . . . . . . . 9,991 11,929
Accrued insurance . . . . . . . . . . . . . . . . . 9,828 3,884
Accrued salaries and wages . . . . . . . . . . . . 4,573 2,925
Accrued reorganization professional fees . . . . . 9,813 2,979
Other accrued expenses . . . . . . . . . . . . . . 7,985 8,023
------- -------
$68,395 $39,472
======= =======
</TABLE>
The June 30, 1992 insurance reserve consists of liabilities related to
the period subsequent to Petition Date. Insurance reserves related to
pre-petition claims, which total $40.8 million at June 30, 1992, are reflected
in Liabilities Subject to Compromise.
9. DEBT
Pursuant to the Plan of Reorganization, the Company entered into new
long-term debt agreements which replaced certain pre- petition instruments, as
well as the Company's debtor-in-possession financing.
As of June 30, 1993, long-term debt consisted of the following ($ in
thousands):
Term Loan, due 2000 . . . . . . . . . . . . . . $ 67,957
Revolving Credit Agreement . . . . . . . . . . -
Letter of Credit Agreement, due 2000 . . . . . 3,988
Mortgage notes on real estate, due 2003 . . . . 62,271
Other notes payable, due through 2000 . . . . . 7,716
--------
141,932
Less amounts due within one year . . . . 10,373
--------
$131,559
========
Term Loan - Pursuant to the Plan of Reorganization, the Company entered
into a term loan agreement (the "Term Loan") on March 9, 1993 with NationsBank
of Texas, N. A., as agent (the "Lender") whereby all of the outstanding
balances of the Company's pre- petition credit facilities, including the ESOP
Loan (see Note 12), the revolving credit facility, as well as drawn and undrawn
letters of credit, were combined into the Term Loan. The original loan amount
of $70.9 million also included accrued interest at 7.5% during the pendency of
the Chapter 11 proceedings. The Term Loan, excluding the portion attributable
to undrawn letters of credit, bears interest at the Company's option of 1%
above the prime rate of the Lender, various margins above the United States
Treasury Securities rate or Eurodollar rates. The Company is required to make
scheduled quarterly principal payments in ascending amounts with a final
payment of $8.5 million on March 31, 2000. Principal payments attributable to
undrawn letters of credit will be held in an interest-bearing cash collateral
account until such time as the letters of credit are drawn; should the letters
of credit expire before being drawn, any excess cash held in the cash
collateral account will be refunded to the Company.
The Company is required to reduce its aggregate borrowing capacity
under the Term Loan with the net cash proceeds from the sale of assets. The
Term Loan, along with the Revolving Credit Agreement and Letter of Credit
Agreement discussed below, are secured by substantially all assets of the
Company, its subsidiaries and the subsidiaries' stock. The Term Loan contains
limitations customarily found in such agreements on the incurrence of
additional debt, the execution of sale and leaseback transactions, investments,
any consolidation or merger of the Company, treasury stock purchases and cash
dividends. The Term Loan limits capital expenditures to specified amounts over
defined periods during the period of the Term Loan. In addition, the Term Loan
establishes requirements as to the maintenance of certain financial ratios and
coverage tests relating to working capital, indebtedness, net worth and cash
flow, which must be satisfied quarterly.
Below is a table illustrating primary financial ratios and coverage
tests ("Covenants") as of June 30, 1993 associated with the Company's long-term
bank debt instruments.
<TABLE>
<CAPTION>
Covenant Required Actual
-------- -------- -------------
<S> <C> <C>
Current Ratio (minimum) 90% 115%
Total Borrowed Funds to Consolidated Net Worth (maximum) 438% 415%
Maximum Total Liabilities to Consolidated Net Worth 400% 353%
Minimum Consolidated Net Worth $61,400,000 $67,262,000
Minimum Interest Coverage Ratio 200% 516%
Consolidated Fixed Charge Coverage Ratio (minimum) 105% 171%
Minimum EBITDA $ 6,825,000 $12,065,000
Capital Expenditures (maximum) $ 7,600,000 $ 6,303,000
</TABLE>
Covenants noted above are computed as defined per the Company's
long-term bank debt instrument agreements. At June 30, 1993, the Company was in
compliance with such Covenants.
Revolving Credit Agreement - Effective with the emergence from
Chapter 11 bankruptcy reorganization on March 9, 1993, the Company entered into
a revolving credit facility (the "Revolving Credit Agreement") with the Lender,
as agent, to provide financing for general corporate purposes. The Revolving
Credit Agreement replaced the Company's previous $8.0 million
"debtor-in-possession" facility. 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, commencing with the 1994 fiscal
year. Letter of credit issuances cannot exceed $8.0 million and cash
borrowings are limited to the commitment limit less letters of credit
outstanding. At June 30, 1993, no borrowings were outstanding under the
agreement; however, $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. The
Revolving Credit Agreement contains provisions similar to the Term Loan with
respect to collateralization, reduction of outstanding loan balances with asset
sales proceeds, limitations of Company actions and the maintenance of certain
financial ratios and coverage tests.
31
<PAGE> 26
Letter of Credit Agreement - Pursuant to the Plan of Reorganization,
the Company entered into a Letter of Credit Agreement (the "Letter of Credit
Agreement") with Bank of America National Trust and Savings Association ("Bank
of America") which provided for the repayment of $4.2 million of pre-petition
letters of credit which were undrawn as of the Effective Date. The Letter of
Credit Agreement provides for an interest rate of 1% above the prime rate of
Bank of America on any subsequently drawn upon balances and the Company is
required to make quarterly principal payments in ascending amounts with a final
payment of $474,000 on March 31, 2000. All principal payments in excess of
drawn down amounts will be held in an interest-bearing cash collateral account
until such time as the letters of credit are drawn; should the letters of
credit expire before being drawn, any excess cash will be refunded to the
Company. The Letter of Credit Agreement contains provisions similar to the Term
Loan with respect to collateralization, reduction of outstanding loan balances
with asset sales proceeds, limitations of Company actions and the maintenance
of certain financial ratios and coverage tests. As of June 30, 1993, the
outstanding undrawn letters of credit amounted to $4.0 million.
Mortgage Notes on Real Estate - Pursuant to the Plan of
Reorganization, the Company modified its pre-petition mortgage notes payable
for new notes payable bearing interest at 9.5%, increasing to 11% in 2001 and
12% in 2002. The Company is required to make quarterly principal payments on
the notes payable and the unpaid balances mature on September 30, 2003.
Aggregate maturities on long-term debt for the next five fiscal years
are as follows:
June 30,
--------
1994 . . . . . . . . . . . . . $10,373
1995 . . . . . . . . . . . . . 12,385
1996 . . . . . . . . . . . . . 11,950
1997 . . . . . . . . . . . . . 11,901
1998 . . . . . . . . . . . . . 12,937
Interest - Effective with the Petition Date, the Company recorded
interest expense only for those pre-petition debt instruments which were fully
secured and for all debtor-in-possession financing. As of the Effective Date,
the Company resumed recording interest expense as incurred.
32
<PAGE> 27
10. INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Reorganized |
Company | Predecessor Company
------------------ | -------------------------------------------
Period From |
Inception | Eight Months Year Ended June 30,
(March 1, 1993) to | Ended ------------------------
June 30, 1993 | February 28,1993 1992 1991
------------------ | ---------------- -------- --------
<S> <C> | <C> <C> <C>
Current: |
Federal . . . . . . . . . . . . . . . . . . . . . $ 328 | $ - $ - $ 161
State . . . . . . . . . . . . . . . . . . . . . . 167 | 133 420 38
------ | ------- -------- --------
495 | 133 420 199
Deferred . . . . . . . . . . . . . . . . . . . . 2,374 | - (11,271) (9,114)
------ | ------- -------- --------
$2,869 | $ 133 $(10,851) $ (8,915)
====== | ======= ======== ========
|
|
Deferred taxes result from: |
|
Decelerated depreciation . . . . . . . . . . . . $ (868) | $(1,736) $ (1,965) $ (2,045)
Capitalized interest . . . . . . . . . . . . . . 34 | 69 100 101
Insurance payments in excess of |
(less than) accrued amounts . . . . . . . . . . 169 | 337 4,719 (495)
Excess of tax over book losses (gains) |
on sales of assets . . . . . . . . . . . . . . 138 | 276 3,317 (4,519)
Excess of tax over book provisions for |
soil remediation and closed stores . . . . . . 190 | 381 918 132
Reorganization and restructuring |
charges providing current expense (benefit) . . 1,678 | 115 (18,360) -
Tax benefit of net operating |
loss carryforwards . . . . . . . . . . . . . . 1,295 | - - (973)
Other, net . . . . . . . . . . . . . . . . . . . (262) | 558 - (1,315)
------ | ------- -------- --------
$2,374 | $ - $(11,271) $ (9,114)
====== | ======= ======== ========
</TABLE>
A reconciliation of the Company's effective tax rate with the statutory
federal income tax rate is as follows:
<TABLE>
<CAPTION>
Reorganized |
Company | Predecessor Company
------------------ | --------------------------------------------
Period From |
Inception | Eight Months Year Ended June 30,
(March 1, 1993) to | Ended ------------------------
June 30, 1993 | February 28,1993 1992 1991
------------------ | ---------------- ------- -------
Method of accounting SFAS 109 | SFAS 96 SFAS 96 SFAS 96
<S> <C> | <C> <C> <C>
|
Income tax expense (benefit) at statutory rate . . 34.0% | 34.0% (34.0)% (34.0)%
Targeted jobs tax credit . . . . . . . . . . . . . - | - (.3) (3.9)
Net operating loss carryforwards . . . . . . . . . - | (34.0) - -
Reorganization and restructuring charges |
not providing current tax benefit . . . . . . . . - | - 28.8 -
Amortization of Excess Reorganization Value . . . . 2.5 | - - -
State income taxes, net . . . . . . . . . . . . . . 3.0 | 1.9 - -
Other, net . . . . . . . . . . . . . . . . . . . . - | - - (8.1)
---- | ----- ------ ------
39.5% | 1.9% (5.5)% (46.0)%
==== | ===== ====== ======
</TABLE>
33
<PAGE> 28
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 of the reorganized company, for the period from Inception (March 1,
1993) to June 30, 1993, is recorded at the expected annual effective rate based
on current federal and state statutory rates, after giving effect to the
non-deductibility of the amortization of Excess Reorganization Value.
Income tax expense for the predecessor company was recorded pursuant
to the provisions of SFAS 96. Under that method, in fiscal 1991, a current or
deferred tax liability was recognized for the tax consequences of all events
recognized in the consolidated financial statements, measured by applying the
provisions of enacted tax laws and rates to the temporary differences between
the tax basis of an asset or liability and the amount recorded in the
consolidated financial statements. However, in fiscal 1992, the federal income
tax benefit was recorded only to the extent the benefit would be offset against
existing deferred income taxes payable. For the eight months ended February
28, 1993, the predecessor company was in a loss carryforward position and,
therefore, pursuant to SFAS 96, no federal income tax expense was recorded,
instead, all income tax expense was related to 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 valuation allowance.
Significant components of the Company's net deferred tax asset as of
June 30, 1993, were as follows:
Deferred tax assets:
Reserves not currently deductible . . . . . . . . . $ 23,354
Interest and other expenses previously expensed
for book purposes . . . . . . . . . . . . . . . . 3,935
Operating loss carryforwards . . . . . . . . . . . 18,530
Tax credit carryforwards . . . . . . . . . . . . . 6,898
Other . . . . . . . . . . . . . . . . . . . . . . . 888
--------
53,605
--------
Deferred tax liabilities:
Tax over book depreciation . . . . . . . . . . . . (17,597)
Differences between book and tax basis of property (14,784)
Other . . . . . . . . . . . . . . . . . . . . . . . (121)
--------
(32,502)
Deferred tax asset valuation allowance . . . . . . . (15,038)
--------
Net deferred tax asset . . . . . . . . . . . . . . $ 6,065
========
The Company provided a valuation allowance of $15.0 million against
deferred tax assets recorded as of June 30, 1993. During the period from
Inception (March 1, 1993) to June 30, 1993, the valuation allowance decreased
by $5.6 million. The valuation allowance was reduced as a consequence of the
substantial earnings generated by the Company since March 1, 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 by $15.0 million.
On March 15, 1993, the Company filed its federal income tax
34
<PAGE> 29
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
June 30, 1993, the net operating loss carryforward is estimated to have been
reduced to $54.5 million as a result of the adjustments required by Section
382, as well as the application of the losses to reduce taxable income for the
year ended June 30, 1993. Section 382 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.
In the opinion of management, adequate provision has been made for
income taxes and any adjustments which have been or may be determined to be
necessary will not materially affect the Company's financial position.
11. COMMITMENTS AND CONTINGENCIES
The operation and ownership of underground gasoline storage tanks
("USTs") is subject to federal, state and local laws and regulations. Federal
regulations issued in 1984 and amended in 1988 pursuant to the Resource
Conservation and Recovery Act, required the Environmental Protection Agency
(the "EPA") to establish a comprehensive regulatory program for the detection,
prevention and clean-up of leaking USTs.
The EPA has issued regulations that establish requirements for (i)
maintaining leak detection methods and equipment, (ii) upgrading USTs, (iii)
taking corrective action in response to leaks, (iv) closing USTs to prevent
future leaks, (v) keeping appropriate records and (vi) maintaining evidence of
financial responsibility for taking corrective action and compensating third
parties for bodily injury and property damage resulting from releases. These
regulations also empower states to develop, administer and enforce their own
regulatory programs, incorporating requirements which are at least as stringent
as the federal standards. In order to ensure compliance with the federal and
state environmental laws, the Company has developed a comprehensive gasoline
plan. During fiscal 1993, the Company refined the plan such that presently its
primary focus is on upgrading gasoline dispensing equipment in accordance with
upcoming deadlines imposed by regulatory authorities and on providing for the
clean-up of existing and future contaminated sites. The gasoline plan
generally covers all properties owned by the Company and leases assumed
pursuant to the terms of the Plan of Reorganization.
Environmental Capital Commitments - To meet the minimum federal leak
detection requirements, all product lines had to have line leak detectors
installed by December 22, 1990, and by December 22, 1993, all existing USTs
owned or operated by the Company are required to maintain approved tank leak
detection methods. The Company has chosen, in most cases, to meet this
requirement by utilizing annual tank testing with daily inventory
reconciliation. Also, the Company installed pressurized distribution piping
with automatic line leak detectors by December 22, 1990, in accordance with the
regulations.
In addition, the federal regulations require the Company to have
installed spill/overfill and corrosion protection equipment by December 22,
1998. However, the State of Texas requires all USTs to be upgraded with the
spill/overfill prevention equipment by December 22, 1994. The Company estimates
that, as of June 30, 1993, 68% of its tanks have spill/overfill prevention
equipment installed. The Company's 1994 capital budget contains the necessary
funds to upgrade the remaining tanks with spill/overfill prevention equipment
and, consequently, the Company anticipates it will be in compliance with the
December 22, 1994 deadline imposed by the State of Texas. The Company further
estimates that 67% of its USTs are protected from corrosion
35
<PAGE> 30
either by installing fiberglass or steel fiberglass tanks or by upgrading
existing steel tanks with cathodic protection. Management of the Company
believes that the Company's long-range capital budget contains sufficient funds
necessary to upgrade the remaining tanks prior to the December 22, 1998
deadline.
In addition to the foregoing, the EPA has ranked the air quality in
major cities in the United States based on the level of ozone measured. Four
areas in which the Company conducts operations are considered to be ozone
non-attainment areas: Southern California, Houston, Atlanta and the
Dallas-Fort Worth area. Since the Company's Southern California properties
have been equipped with Stage II Vapor Recovery Equipment for over five years
and are in compliance with the even more stringent state regulations, further
equipment upgrades in Southern California are not necessary. Both the Houston
and Atlanta areas are classified in the severe ozone non-attainment category
while the Dallas-Fort Worth area is classified in the moderate ozone
non-attainment category. Under rules promulgated by the EPA in late 1992,
gasoline dispensing facilities in all three areas are required to have Stage II
Vapor Recovery Equipment by the following deadlines:
<TABLE>
<S> <C>
May 15, 1993 - Any new gasoline unit installed after
November 15, 1990.
November 15, 1993 - Any unit that has dispensed gasoline in excess of
100,000 gallons in any one month since January 1991.
November 15, 1994 - All remaining units except those that have not
dispensed more than 10,000 gallons in any one month
since January 1991.
</TABLE>
However, a lawsuit was filed against the EPA in late 1992 in federal
district court by two convenience store operators, seeking to require the EPA
to support the alternative installation of on-board vapor recovery canisters on
automobiles in certain instances. A settlement was reached on June 2, 1993, in
which the EPA agreed to issue a final rule by January 22, 1994, promulgating
standards for on-board canisters. Under the Clean Air Act of 1990, once the
EPA issues the on-board canister rule, gasoline dispensing facilities in
moderate ozone non-attainment areas will not be required under federal law to
install Stage II Vapor Recovery Equipment. After the on-board canister rule is
issued states may revise their State Implementation Plans ("SIP") to conform
with federal standards for the moderate ozone non-attainment areas. However, it
is the Company's understanding that the State of Texas does not intend to
revise its SIP and, consequently, the Dallas-Fort Worth area must continue to
adhere to the aforementioned Stage II Vapor Recovery Equipment implementation
schedule.
During fiscal 1993, the Company spent $4.4 million on environmental
capital equipment, including $3.1 million on Stage II Vapor Recovery Equipment.
In order to ultimately comply with the aforementioned regulations by the
deadlines described, the Company estimates it will have to spend approximately
$23.6 million on additional equipment and installation through fiscal 1999,
including $12.7 million for Stage II Vapor Recovery Equipment.
Environmental Remediation Contingency - [During the second quarter of
fiscal year 1992 the Company completed a comprehensive plan covering its
underground storage tanks in light of the expected funding shortfalls in the
various state reimbursement programs. As a result, the Company recorded an
increase to the environmental remediation reserve of $12.8 million in the
second quarter of fiscal year 1992. The majority of the Company's
environmental remediation expenditures relate to the clean-up of contaminated
soil caused by leaking underground gasoline storage tanks and underground
piping systems. In connection with an updated environmental remediation cost
analysis, upon emerging from Chapter 11 bankruptcy reorganization the Company
increased its reserve for future environmental remediation and tank removal
costs by an additional $6.6 million in February 1993. At June 30, 1993,
remediation reserve totalled $18.2 million. Included in this reserve is
approximately $4 million of reimbursements from established state trust funds
which the Company believes to be probable of recovery. The actual cost of
remediating contaminated sites and removing tanks may be substantially lower or
higher than that reserved due to the difficulty in estimating such costs and
due to potential changes in the status of regulation and state reimbursement
programs.] The Company does not believe that any such amount below or in
excess of that accrued is reasonably estimable.
The states in which the Company operates, or has previously operated,
have established trust funds for the reimbursement of costs related to
remediation activities. The Company pays different fees to each state to
participate in these trust programs and the Company has successfully filed for
reimbursement claims in Texas and Tennessee. Since 1988, the Company has spent
approximately $10.1 million for remediation activities at sites the Company is
operating or has previously operated. Approximately 46% of such costs qualify
for reimbursement from the various trust funds and the Company has been
reimbursed $3.7 million for such costs through June 30, 1993. However, the
Company received only $253,000 in reimbursements from the State of Texas during
fiscal 1993. According to published reports, the Texas Petroleum Storage Tank
Reimbursement Fund was depleted during the year which has necessitated delaying
payment on reimbursement applications. As of June 30, 1993, the Company had
filed claims with the State of Texas for $502,000 on which reimbursement has
been delayed. While the Company believes the reimbursements are collectible,
the Company estimates it could be several years before reimbursement occurs.
In addition,
36
<PAGE> 31
the State of California has received $626,000 of preliminary qualifying
applications by the Company; however, the state has grouped claimants into four
classes of priority and the Company is in the lowest priority. Consequently,
reimbursement in the next three to four years is considered remote; therefore,
the Company has charged this receivable against the remediation reserve.
The Company is required by state regulations to maintain evidence of
financial responsibility for taking corrective action on remediation
activities. In order to be in compliance with these requirements, the Company
has established and maintains a $2.0 million letter of credit issued by a
commercial bank.
Chapter 11 Proceedings - The Bankruptcy Court continues to exercise
the authority to resolve disputes on pre-petition claims of creditors, to make
rulings on matters related to the assumption or rejection of executory
contracts and leases pursuant to the Plan of Reorganization and to make
judgments on other matters related to the Plan of Reorganization. Based on the
Company's estimate of the amount of such claims that ultimately will be allowed
by the Bankruptcy Court, the Company has reserved for payment of certain
classes of claims against the Company. Both the cash portion and the deferred
portion of such amounts include amounts with respect to claims that have been
allowed, as well as amounts with respect to claims that are still being
disputed by the Company. While there can be no assurance that the actual
amounts of such claims that are ultimately allowed by the Bankruptcy Court will
not exceed the amounts reserved, the Company does not expect that any variance
between such actual and reserved amounts will have a material adverse effect on
the Company's financial position.
Litigation - The Company and its subsidiaries are parties to various
legal proceedings in the ordinary course of business. Management does not
expect that any of such proceedings will have a material adverse effect on the
Company's financial position.
12. CAPITAL STOCK
Predecessor company - The Plan of Reorganization resulted in the
cancellation of all authorized and outstanding shares of the predecessor
company's publicly-traded securities, including its $.41 2/3 par value common
stock and its Series E Preferred Stock. In addition, all other authorized but
unissued shares of preferred stock were cancelled, including the Series A
Cumulative Convertible Preferred Stock, Series B Cumulative Convertible
Preferred Stock, Series D Cumulative Convertible Preferred Stock and Series F
Junior Participating Preferred Stock. A total of 368,652 stock options issued
and outstanding pursuant to the 1981 Incentive Stock Option Plan and 990,500
stock options issued and outstanding pursuant to the 1989 Equity Incentive Plan
were also cancelled and the related stock option plans terminated.
Reorganized company - The Plan of Reorganization provided for the
filing by the Company of its Restated Certificate of Incorporation which
authorized the issuance of 50,000,000 shares of Common Stock, $.01 par value
("the Common Stock"), and 1,000,000 shares of preferred stock. Pursuant to the
terms of the Plan of Reorganization, the Company has issued 6,000,000 shares of
its new Common Stock. No shares of preferred stock have been issued. The
Common Stock is traded on the Nasdaq National Market under the symbol "NCSI".
The Restated Certificate of Incorporation provides restrictions with respect to
the trading of Common Stock to or from persons or entities (i) who directly or
indirectly own 5% or more of the value of Common Stock or (ii) who would
directly or indirectly own 5% or more of the value of Common Stock after giving
effect to the proposed transfer. The restriction expires on June 30, 1996, and
serves as a means of preserving the benefits of the pre-confirmation tax
attributes of the Company (see Note 10).
Warrants to Purchase Common Stock - The Plan of Reorganization
provided for the issuance of 1,350,000 Warrants to Purchase Common Stock (the
"Warrants") pursuant to the terms of a Warrant Agreement dated March 9, 1993.
Each Warrant provides the holder thereof with the right to purchase an equal
number of shares of Common Stock at an exercise price of $17.75 per share. The
Warrant Agreement has a term of five years and Warrants not exercised prior to
March 9, 1998 shall automatically become void and no longer outstanding. The
Warrants are publicly traded on the Nasdaq National Market under the symbol
"NCSIW".
1993 Non-Qualified Stock Option Plan - The Plan of Reorganization
provided for the adoption on March 9, 1993 of the 1993 Non-Qualified Stock
Option Plan (the "Option Plan"). Under the Option Plan, 900,000 shares of
Common Stock are reserved for awards to be granted to certain key management
employees and directors in order to encourage participants to acquire
proprietary interests in the Company. The Option Plan provides for the
issuance of Reorganization Options, as defined, with a stated exercise price of
$10.50 per share; any cancelled Reorganization Options may be subsequently
reissued as Additional Options, as defined, at a stated exercise price equal to
the fair market value of the Common Stock on the date of grant, but not less
than $10.50
37
<PAGE> 32
per share if issued prior to March 9, 1994. All options expire ten years from
the date of the grant and are exercisable commencing one year from the date of
grant on a cumulative basis at the rate of 33 1/3% per year. As of June 30,
1993, 750,000 Reorganization Options were issued to employees at the exercise
price of $10.50 per share and none were exercisable. In addition, the Option
Plan reserved for the issuance of 15,000 Reorganization Options to each person
who is a director of the Company on August 24, 1993, and not a member of
management. As of June 30, 1993, 105,000 options were thus reserved.
Employee Stock Ownership Plan (the "ESOP")- During 1985, the
predecessor company established an ESOP to enable eligible employees to own
common stock. Employees became eligible to participate in the ESOP after one
year of employment during which they had worked a minimum of 1,000 hours. On
May 13, 1985, the ESOP purchased 3.4 million shares of the predecessor
company's common stock for approximately $40 million. To finance the ESOP's
purchase of the shares, the predecessor company contributed $1.4 million in
cash to the ESOP and loaned the ESOP an additional $38.6 million pursuant to a
ten-year unsecured nonrecourse installment note (the "ESOP Note"). The
predecessor company funded its loan to the ESOP with the proceeds of a loan
from a commercial bank (the "ESOP Loan"). The predecessor company subsequently
refinanced the loan with NationsBank of North Carolina, N.A., formerly known as
NCNB National Bank of North Carolina. Prior to the Chapter 11 filing, the
predecessor company made annual contributions to the ESOP sufficient to permit
the ESOP to make scheduled interest and principal payments on the ESOP Note
after dividends paid on unallocated shares were applied toward such payments.
These contributions were recognized as expense in the year in which they were
required to be paid. Consequently, as of the Petition Date, both the ESOP Loan
and the ESOP Note had remaining outstanding balances of $23,167,000. Primarily
as a result of stock distributions to former employees, the number of shares of
predecessor company common stock had been reduced to 2.6 million shares as of
the Petition Date. The terms of the Plan of Reorganization provided for the
ESOP Loan balance payable by the Company to NationsBank of North Carolina, N.A.
to be combined with other loan balances payable by the Company to NationsBank
of Texas, N.A. into the Term Loan and to be repaid over a 7 year period (see
Note 9). The Plan of Reorganization did not address the ESOP Note; however,
the Plan of Reorganization did provide for the cancellation of all of the
predecessor company's common stock (including the 2.6 million remaining shares
held by the ESOP). In exchange for such cancellation, the terms of the Plan of
Reorganization further provided that the ESOP, as a common stockholder of the
predecessor company, receive 9,706 shares of new Common Stock of the
reorganized company and be credited for 16,179 Warrants.
The ESOP requires that the trustee allocate to employees the new
shares of Common Stock and Warrants pro rata based upon the number of
predecessor company common shares previously allocated. Since not all of the
predecessor company shares were allocated as of the Effective Date, 5,712
shares of reorganized company new Common Stock and 9,522 Warrants were not
allocated under the aforementioned formula. Consequently, subsequent to the
Effective Date, the Company requested a ruling from the Internal Revenue
Service seeking permission to write down the ESOP Note to approximately
$126,000. Should the ruling be granted, the Company intends to contribute to
the ESOP the cash funds necessary to pay off the amended ESOP Note, which in
turn would result in the full allocation to eligible employees of the remaining
shares that are currently unallocated. The Company cannot predict whether it
will obtain the ruling requested. For financial reporting purposes, the
Company wrote off the ESOP Note upon emerging from Chapter 11 bankruptcy
reorganization and adopting fresh-start reporting (see Note 3). The ESOP Note
had previously been classified as a reduction in stockholders' equity.
13. LEASE ARRANGEMENTS
The majority of the Company's convenience stores are leased.
Generally, these leases have initial terms of ten to twenty years, with one to
three renewal options for additional five-year periods. Some of the leases
provided for additional rentals based upon a percentage of sales, and many
provide for the payment of real estate taxes, insurance and maintenance
expenses.
38
<PAGE> 33
Minimum rental commitments for non-cancellable operating leases in
effect at June 30, 1993, are:
<TABLE>
<S> <C>
Year Ending June 30,
- - --------------------
1994 . . . . . . . . . . . . . . . . . . . . $ 20,090
1995 . . . . . . . . . . . . . . . . . . . . 19,403
1996 . . . . . . . . . . . . . . . . . . . . 18,820
1997 . . . . . . . . . . . . . . . . . . . . 17,353
1998 . . . . . . . . . . . . . . . . . . . . 16,477
Thereafter . . . . . . . . . . . . . . . . . 46,103
--------
Total minimum lease payments . . . . . . . $138,246
--------
--------
</TABLE>
The above commitments have not been reduced by $2.1 million of future
rental income under non-cancellable subleases.
Rental expense under operating leases was:
<TABLE>
<CAPTION>
Reorganized |
Company |
----------- |
Period from | Predecessor Company
Inception | ---------------------------------------
(March 1, | Eight Months
1993) to | Ended Year Ended June 30,
June 30, | February 28, ---------------------
1993 | 1993 1992 1991
----------- | ------------ ------- -------
<S> <C> | <C> <C> <C>
Minimum rentals . . . . . . . . . . . . . $7,490 | $15,437 $30,401 $33,536
Percentage rentals . . . . . . . . . . . 327 | 660 906 998
Sublease rentals . . . . . . . . . . . . (470) | (1,044) (2,662) (3,416)
------ | ------- ------- -------
$7,347 | $15,053 $28,645 $31,118
====== | ======= ======= =======
</TABLE>
14. PROFIT SHARING PLAN
The Company has a profit sharing plan available to substantially all
employees. Effective January 1, 1985, the plan was amended pursuant to Section
401(k) of the Internal Revenue Code to enable employees to contribute a portion
of their salaries to the plan on a before-tax basis, with the Company matching
50% of such contributions up to 6% of the employees' salaries. During fiscal
1987, the Company's matching contribution was reduced from 50% to 25%. Due to
the Company's financial condition and the resulting Chapter 11 filing, the
Company eliminated the matching contributions effective as of October 1, 1991.
Contributions to the plan were approximately $0 in fiscal 1993, $32,000 in
fiscal 1992 and $374,000 in fiscal 1991. Effective in July of 1993, the
Company resumed matching contributions at a level equal to 100% of employees'
before-tax contributions, up to 3% of salary.
Prior to the Petition Date, the Company's matching contributions were
invested primarily in the predecessor company's common stock. As of the
Effective Date of the Plan of Reorganization, the Profit Sharing Plan owned
approximately 568,000 shares of the predecessor company's common stock.
Pursuant to the Plan of Reorganization, these shares were exchanged for 2,127
shares of newly issued Common Stock, and 3,545 Warrants. As of June 30, 1993,
the Profit Sharing Plan continued to hold these shares of Common Stock and
Warrants.
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
At June 30, 1993, the Company's financial instruments consisted of
cash and equivalents and long-term debt. Because the cash equivalents mature
in 60 days or less, their fair market value approximates carrying value as
presented on the Consolidated Balance Sheet.
Effective March 1, 1993, the Company restructured the terms of its
liabilities in accordance with the Plan of Reorganization, which resulted in
the issuance of long-term debt at fair market value. Accordingly, management
believes the carrying value of long-term debt approximates fair market value at
June 30, 1993.
39
<PAGE> 34
National Convenience Stores Incorporated and Subsidiaries
SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly Financial Data
($ in thousands, except per share data)
A summary of quarterly financial data follows:
<TABLE>
<CAPTION>
Fiscal 1993
---------------------------------------------------------------------
Predecessor Company Reorganized Company
------------------------------------- ------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
--------- --------- ----------------------------- ---------
| Period From
Two Months | Inception
Ended | (March 1, 1993)
February 28,| to March 31,
1993 | 1993
------------| ---------------
<S> <C> <C> <C> | <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . $234,083 $215,956 $130,828 | $72,349 $225,636
Gross profit . . . . . . . . . . . . . . . . . . . 61,849 54,954 35,045 | 18,665 56,681
Earnings (loss) before extraordinary gain . . . . . 8,471 2,549 (4,224) | 1,062 3,327
Net earnings . . . . . . . . . . . . . . . . . . . 8,471 2,549 57,269 | 1,062 3,327
Earnings per share . . . . . . . . . . . . . . . . * * * | 0.16 0.50
Price range of Common Stock - High . . . . . . . . * * * | 16.13 16.75
- Low . . . . . . . . * * * | 14.00 14.25
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1992
--------------------------------------------------------------
Predecessor Company
--------------------------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . $266,790 $ 240,851 $212,132 $238,746
Gross profit . . . . . . . . . . . . . . . . . . . 66,189 58,418 48,212 57,378
Net earnings (loss) . . . . . . . . . . . . . . . . (3,105) (177,729) (9,025) 4,421
Earnings per share . . . . . . . . . . . . . . . . * * * *
Price range of common stock . . . . . . . . . . . . * * * *
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1991
--------------------------------------------------------------
Predecessor Company
--------------------------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . $292,203 $283,147 $242,692 $255,916
Gross profit . . . . . . . . . . . . . . . . . . . 78,679 72,400 58,401 58,098
Net earnings (loss) . . . . . . . . . . . . . . . . 1,050 427 (6,300) (5,642)
Earnings per share . . . . . . . . . . . . . . . . * * * *
Price range of common stock . . . . . . . . . . . . * * * *
</TABLE>
* Earnings per share and price range of common stock for the predecessor
company are not presented because they are not meaningful as a result of
the confirmation the Plan of Reorganization.
Net earnings computations in each of the fourth quarters of fiscal 1992 and
1991 reflect adjustments in the estimated effective annual tax rate used
during the three preceding quarters. This change in estimate increased
fourth quarter net earnings by $140,000 in fiscal 1992 and increased the
fourth quarter net loss by $330,000in fiscal 1991.
The Common Stock of the reorganized company is traded on the Nasdaq National
Market under the symbol "NCSI". There were approximately 1,389
shareholders of record as of August 31, 1993. Shares held in "nominee"
or "street" names are not included in this number.
40
<PAGE> 35
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.
NATIONAL CONVENIENCE STORES INCORPORATED
(Registrant)
/s/ A. J. GALLERANO
---------------------------------------
A. J. Gallerano
Senior Vice President - General
Counsel and Secretary
May 4, 1994
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on May 4, 1994, by the following
persons on behalf of the Registrant and in the capacities indicated.
Name Title
---- -----
V. H. VAN HORN President, Chief Executive
- - ------------------------------------ Officer and Director
V. H. Van Horn (Principal Executive Officer)
BRIAN FONTANA Vice President - Chief
- - ------------------------------------ Financial Officer
Brian Fontana (Principal Financial Officer)
RICHARD C. STEADMAN Chairman of the Board
- - ------------------------------------ and Director
Richard C. Steadman
DUNBAR N. CHAMBERS, JR. Director
- - ------------------------------------
Dunbar N. Chambers, Jr.
CHARLES J. LUELLEN Director
- - ------------------------------------
Charles J. Luellen
LIONEL SOSA Director
- - ------------------------------------
Lionel Sosa
RAYMOND W. OELAND, JR. Director
- - ------------------------------------
Raymond W. Oeland, Jr.
ROBERT B. STOBAUGH Director
- - ------------------------------------
Robert B. Stobaugh
WILLIAM KEY WILDE Director
- - ------------------------------------
William Key Wilde
