<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1995
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ..........to..........
Commission File Number 1-7936
NATIONAL CONVENIENCE STORES INCORPORATED
------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 74-1361734
------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Waugh Drive, Houston, Texas 77007
- ---------------------------------------- ----------------------------
(Address of principal executive offices) (Zip Code)
(713) 863-2200
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
___ ___
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No
___ ___
At November 1, 1995, the number of shares of Common Stock outstanding was
6,090,389.
================================================================================
<PAGE> 2
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (unaudited):
Independent Accountants' Review Report . . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
Three Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Balance Sheets
September 30, 1995 and June 30, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
Three Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . 21
</TABLE>
2
<PAGE> 3
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Shareholders and Board of Directors of
National Convenience Stores Incorporated
Houston, Texas
We have reviewed the accompanying condensed consolidated balance sheet of
National Convenience Stores Incorporated and subsidiaries (the "Company") as of
September 30, 1995, and the related statements of condensed consolidated
operations and condensed consolidated cash flows for the three months ended
September 30, 1995 and 1994. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of the interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of National Convenience Stores
Incorporated and subsidiaries as of June 30, 1995 and the related consolidated
statements of operations, stockholders' equity and cash flows for the year then
ended (not presented herein), and in our report dated September 19, 1995, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed
consolidated balance sheet as of June 30, 1995 is fairly stated, in all
material respects, in relation to the consolidated balance sheet from which it
has been derived.
DELOITTE & TOUCHE LLP
Houston, Texas
November 13, 1995
3
<PAGE> 4
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------------
1995 1994
--------- --------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $236,792 $235,281
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 175,421 175,354
Operating expenses . . . . . . . . . . . . . . . . . . . . . 41,015 44,209
General and administrative expenses . . . . . . . . . . . . . 10,241 11,448
-------- --------
226,677 231,011
-------- --------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . 10,115 4,270
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . (2,137) (2,380)
Interest income . . . . . . . . . . . . . . . . . . . . . . . 319 342
--------- ---------
Income Before Income Tax Expense . . . . . . . . . . . . . . . . 8,297 2,232
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . 3,468 1,089
-------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,829 $ 1,143
======== ========
Earnings Per Share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.71 $ 0.19
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . 0.70 0.19
Weighted Average Number of Shares Outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,997 6,050
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . 6,997 6,050
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
September 30, June 30,
1995 1995
------------- ------------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents, $8,395 and $9,093
reserved . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,633 $ 31,497
Accounts receivable, net . . . . . . . . . . . . . . . . . . 5,736 5,296
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 35,685 36,555
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 2,337 2,518
Deferred tax asset . . . . . . . . . . . . . . . . . . . . . 5,610 5,610
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . 90,001 81,476
Property and Equipment, net of Accumulated
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . 164,077 162,508
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net . . . . . . . . . . . . . . . 23,600 23,939
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . 2,421 5,620
Other assets, net . . . . . . . . . . . . . . . . . . . . . . 10,975 10,781
-------- --------
Total Other Assets . . . . . . . . . . . . . . . . . . . . 36,996 40,340
-------- --------
$291,074 $284,324
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . $ 66,123 $ 61,625
Current portion of long-term debt . . . . . . . . . . . . . . 10,953 12,061
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . . 77,076 73,686
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 88,360 90,256
Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . 40,250 40,342
Commitments and Contingencies
Stockholders' Equity:
Common Stock, par value $.01 per share;
50,000,000 shares authorized; 6,090,325 and
6,050,075 shares issued and outstanding . . . . . . . . . 61 61
Series A Junior Participating Preferred Stock, par
value $1.00 per share; 100,000 shares authorized
as of September 11, 1995; 0 shares issued . . . . . . . . - -
Additional paid-in capital . . . . . . . . . . . . . . . . . 63,982 63,463
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 21,345 16,516
-------- --------
85,388 80,040
-------- --------
Total Stockholders' Equity . . . . . . . . . . . . . . . . $291,074 $284,324
======== ========
</TABLE>
Note: The balance sheet at June 30, 1995 has been derived from the audited
balance sheet at that date but does not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
---------------------------
1995 1994
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,829 $ 1,143
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 4,019 3,551
Deferred income taxes . . . . . . . . . . . . . . . . . 3,348 924
Other . . . . . . . . . . . . . . . . . . . . . . . . 659 -
Changes in operating assets and liabilities:
Increase in accounts and notes
receivable and prepaid expenses . . . . . . . . . . (492) (2,161)
Decrease in inventories . . . . . . . . . . . . . . . . 870 2,737
Increase (decrease) in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . . 3,342 (17,095)
------- --------
Increase in income taxes . . . . . . . . . . . . . . . 206 112
Net cash provided by (used in) operating activities . . . 16,781 (10,789)
------- --------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . (5,294) (4,103)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 95 465
------- --------
Net cash used in investing activities . . . . . . . . . . (5,199) (3,638)
------- --------
Cash Flows From Financing Activities:
Principal payments on long-term debt . . . . . . . . . . . . (2,965) (3,267)
Proceeds from issuance of common stock . . . . . . . . . . . 519 -
------- --------
Net cash used in financing activities . . . . . . . . . . (2,446) (3,267)
------- --------
Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . 9,136 (17,694)
Cash and Cash Equivalents - Beginning of period . . . . . . . . . 31,497 48,797
------- --------
Cash and Cash Equivalents - End of period . . . . . . . . . . . . $40,633 $ 31,103
======= ========
Supplemental Cash flow Information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 2,129 $ 2,561
Income taxes paid (refunded), net . . . . . . . . . . . . . . $ (30) $ 53
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The condensed consolidated financial statements included herein include the
accounts of National Convenience Stores Incorporated and its wholly-owned
subsidiaries (the "Company"), with all significant intercompany accounts and
transactions eliminated in consolidation. The financial information presented
for the interim periods is unaudited, and the interim periods' operating
results are not necessarily indicative of the results to be expected for the
full fiscal year. The interim period financial statements reflect all
adjustments (consisting solely of normal recurring adjustments) which are, in
the opinion of Management, necessary for a fair presentation of the financial
position as of September 30, 1995, and the results of operations and cash flows
for the three months ended September 30, 1995 and 1994. Certain prior year
amounts have been reclassified to conform to the current year presentation.
The accompanying condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the notes thereto
contained in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1995.
1. ACQUISITION TRANSACTION
On September 7, 1995, The Circle K Corporation ("Circle K") commenced an
unsolicited cash tender offer to purchase all the Company's outstanding common
stock (and associated rights to purchase preferred stock) and warrants to
purchase common stock at $20.00 per share and $2.25 per warrant, respectively
(the "Circle K Offer"). The Circle K Offer, as heretofore extended, is
scheduled to expire on November 30, 1995, unless further extended or
terminated.
On September 18, 1995, the Company's Board of Directors unanimously determined
to reject Circle K's tender offer and recommended that the Company's
securityholders not tender any of their securities pursuant to the offer. The
Board based its decision in part upon the opinion of the Company's financial
advisor, Merrill Lynch & Co., that the consideration offered to the Company's
securityholders in the Circle K Offer was inadequate to the Company's
securityholders from a financial point of view.
At the same meeting, the Board reviewed and discussed an unsolicited proposal
received after the close of business on September 14, 1995 from another party
to acquire the Company at a significantly higher price than the Circle K Offer.
The Board determined not to accept this proposal. However, given all of the
information available, including the unsolicited proposal, the Board instructed
Management and Merrill Lynch & Co. to explore the Company's strategic
alternatives, including the possible sale of the Company to a third party. As
a result of this process, the Company has entered into an agreement with
Diamond Shamrock, Inc. ("Diamond Shamrock") for the sale of the Company.
At a special meeting held on November 7, 1995, the Board of Directors of the
Company approved a definitive Agreement and Plan of Merger (the "Merger
Agreement") for the acquisition of the Company by Diamond Shamrock for $27.00
cash per share of Common Stock
7
<PAGE> 8
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(the "Acquisition Transaction"). The Merger Agreement has also been approved
by the Board of Directors of Diamond Shamrock and is dated as of November 8,
1995. Pursuant to the Merger Agreement, Diamond Shamrock will make a cash
tender offer for (i) all outstanding shares of Common Stock, including the
associated Rights, at $27.00 per share net to the seller (pre-tax) and (ii) all
outstanding Warrants at $9.25 per Warrant, net to the seller (pre-tax). The
tender offer is to be commenced as promptly as practicable, and, in any event,
by November 14, 1995, and will be conditioned on, among other things, the valid
tender of at least two-thirds of the shares of Common Stock on a fully diluted
basis (after giving effect to the exercise of all Warrants tendered in the
tender offer), expiration of the Hart-Scott-Rodino Act waiting period, and
other customary conditions. The Merger Agreement also includes customary
representations, warranties and covenants (including covenants relating to the
treatment of outstanding stock options in connection with the acquisition and
the indemnification of officers and directors of the Company), and provisions
relating to conditions to closing, termination (including in certain customary
circumstances the payment of a break-up fee of $7 million plus the documented
expenses of Diamond Shamrock) and other matters.
The Merger Agreement provides that following the completion of the tender
offer, a newly formed subsidiary of Diamond Shamrock will be merged into the
Company, with the Company continuing as a wholly-owned subsidiary of Diamond
Shamrock. In the merger, all remaining shares of Common Stock not tendered in
the tender offer will be converted into the right to receive $27.00 in cash.
Warrants not tendered in the tender offer and not exercised prior to the
completion of the merger will remain outstanding after the merger, but upon
exercise will represent only the right to obtain $27.00 in cash rather than one
share of Common Stock.
2. EARNINGS PER SHARE
In accordance with the modified treasury stock method, the earnings per share
computation for the three months ended September 30, 1995 is based upon income
plus $136,000 (for the primary earnings per share calculation) and $35,000 (for
the fully diluted earnings per share calculation) of interest savings from the
assumed prepayment of certain amounts of debt (net of taxes) divided by the
weighted average number of common and common stock equivalents outstanding for
the period. For the three months ended September 30, 1995, the weighted
average number of common and common stock equivalents used in computing primary
and fully diluted earnings per share was 6,997,000.
The earnings per share computation for the three months ended September 30,
1994 is based upon income divided by the weighted average number of common
shares outstanding for the period. For the three months ended September 30,
1994, the weighted average number of common shares used in computing primary
and fully diluted earnings per share was 6,050,000.
8
<PAGE> 9
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Common stock equivalents for the three month period were not included in the
calculation as their inclusion would have been antidilutive.
3. INCOME TAXES
On March 15, 1995, the Company filed its federal income tax return for the year
ended June 30, 1994, which reflected net operating loss carryforwards of $39.6
million plus tax credits of $7.8 million. The net operating losses expire if
unused by fiscal year 2007. The tax credits expire in varying amounts if
unused by fiscal years 2000 to 2010. As of September 30, 1995, the net
operating loss carryforward is estimated to have been reduced to $26.5 million
as a result of the application of the loss carryforwards to reduce taxable
income in fiscal year 1995 and in the quarter ended September 30, 1995.
The above figures reflect adjustments required by section 382 of the Internal
Revenue Code after an ownership change in the Company's stock (including a
$26.1 million reduction in the tax basis of the Company's assets). An
ownership change is defined as occurring when, during any three year period,
the Company's 5% shareholders (as defined in the Internal Revenue Code)
increase their ownership in the Company's stock by more than 50 percentage
points (an "Ownership Change"). The Plan of Reorganization, adopted with the
Company's emergence from bankruptcy on March 9, 1993, resulted in an Ownership
Change since substantially all of the new stock was issued to the creditors of
the Company. The Acquisition Transaction (see Note 1) will constitute a second
Ownership Change and will, per current tax rules, significantly restrict the
Company's use of these tax loss and credit carryforwards and other tax
attributes.
9
<PAGE> 10
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. DEBT
As of September 30, 1995 and June 30, 1995, long-term debt consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
September 30, 1995 June 30, 1995
------------------ -------------
<S> <C> <C>
Term Loan, due 2000 . . . . . . . . . . . . . . . . . $ 39,322 $ 41,298
Revolving Credit Agreement . . . . . . . . . . . . . - -
Letter of Credit Agreement, due 2000 . . . . . . . . - -
Mortgage notes on real estate, due 2003 . . . . . . . 55,871 56,511
Other notes payable, due through 2000 . . . . . . . . 4,120 4,508
-------- --------
99,313 102,317
Less: Amounts due within one year . . . . . . . . 10,953 12,061
-------- --------
$ 88,360 $ 90,256
======== ========
</TABLE>
Substantially all of the Company's assets, the assets of its subsidiaries and
the subsidiaries' stock are pledged to secure its long-term bank debt
agreements. These loans also contain 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, and precludes treasury stock purchases and the payment of cash
dividends. The loans limit capital expenditures and environmental remediation
expenses to specified amounts over defined periods during the period of the
loans and establish 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. At September 30, 1995, the
Company was in compliance with respect to such covenants. Additionally, the
loans require the Company to reduce its aggregate borrowing capacity with the
net cash proceeds from the sale of assets.
The Company's long-term bank debt agreements limit fiscal 1996
capital/environmental remediation expenditures to the lesser of (i) the
consolidated fixed charge margin, as defined, or (ii) $24.0 million, plus in
both cases, excess cash flow, as defined. As of September 30, 1995, the
Company had expended approximately $5.7 million for capital/environmental
remediation expenditures. The Company's additional requirements with respect to
its fiscal 1996 capital/environmental remediation expenditures cannot be
reasonably estimated at this time due to the Acquisition Transaction and the
resultant change in control.
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. Letter of
credit issuances cannot exceed $8.0 million, and cash borrowings are limited to
the commitment limit less letters of credit outstanding. At
10
<PAGE> 11
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
September 30, 1995, the Company had issued a letter of credit totalling $4.1
million. 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, 1996.
The Term Loan and Revolving Credit Agreement contain provisions whereby, in the
event of a change of control (as defined), (i) all notes outstanding (together
with accrued interest thereon) are immediately due and payable, (ii) all
letters of credit are terminated, and (iii) all letters of credit outstanding
must be fully cash collateralized. The Acquisition Transaction (see Note 1)
will constitute a change of control as defined in the Term Loan and Revolving
Credit Agreement.
5. COMMITMENTS AND CONTINGENCIES
The operation and ownership of underground gasoline storage tanks ("USTs") are
subject to federal, state and local laws and regulations. The Environmental
Protection Agency ("EPA") has issued regulations, including the 1988 amendment
to the Resource Conservation and Recovery Act, that establish requirements for
(i) maintaining leak detection methods and equipment, (ii) upgrading USTs,
(iii) taking corrective action in response to releases, (iv) UST removal to
prevent future releases, (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 storage and dispensing plan. During fiscal 1993, the
Company refined the plan such that its primary focus is on upgrading gasoline
dispensing equipment in accordance with upcoming deadlines imposed by
regulatory authorities and on providing for the cleanup of existing and future
contaminated sites. The gasoline plan generally covers all properties owned
and leased by the Company. Management believes that its existing gasoline
storage and dispensing procedures and planned capital expenditures will keep
the Company in compliance with all federal and state environmental regulations.
The Company has adopted approved tank system release detection methods on all
owned or operated USTs and currently utilizes the Statistical Inventory
Reconciliation Method for the release detection on its USTs located in Texas.
This method involves statistical analysis of gasoline inventory changes to
detect UST releases.
All of the Company's USTs in Texas have been upgraded with the required
spill/overfill prevention equipment. By December 22, 1998, the Company's USTs
must be upgraded with corrosion protection equipment under applicable federal
regulations. The Company estimates
11
<PAGE> 12
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
that as of June 30, 1995, 63% of its USTs are in compliance with such
regulations, either through the installation of fiberglass or steel fiberglass
tanks or by adding cathodic protection to existing steel tanks. In addition,
the EPA has required that by January 1, 1996, UST operators must install flow
governors which restrict dispensing volumes per minute. Management of the
Company believes that the Company's long-range capital budget contains
sufficient funds necessary to make the required equipment upgrades prior to the
1996 and 1998 deadlines.
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. Houston and
Dallas/Fort Worth are two areas in which the Company currently conducts
operations which are considered to be ozone non-attainment areas. The Houston
market is 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 and the state of Texas, gasoline
dispensing facilities in the two areas were required to have Stage II Vapor
Recovery Equipment by November 15, 1994 on all units except those that have not
dispensed more than 10,000 gallons in any one month since January 1991. In
addition, the Clean Air Act mandated that UST operators in the non-attainment
areas adopt a "two point" fuel delivery unloading system which has been
installed in all of the Company's USTs which require the system (approximately
73% of the Company's USTs).
During the three months ended September 30, 1995 the Company spent $0.6 million
on environmental capital equipment. In order to ultimately comply with the
aforementioned regulations by the mandated deadlines, the Company estimates it
will be required to spend approximately $5.4 million on additional equipment
and installation through fiscal 1999. Management believes that it has allocated
sufficient resources in its long-term capital budget to comply with the
improvements required by the state of Texas and EPA regulations to be completed
by the end of 1999.
Environmental Remediation Contingency - The majority of the Company's
environmental remediation exposure relates to the cleanup of contaminated soil
and ground water caused by releases from underground gasoline storage tanks and
underground piping systems and claims for third party damages relating to such
releases. The Company spent approximately $0.4 million in the first three
months of fiscal 1996 on environmental remediation activities as compared to
$0.3 million in the same period of fiscal 1995. The Company estimates that it
will incur approximately $5.3 million for environmental remediation
expenditures through 1999. At September 30, 1995 and June 30, 1995, the
accrued environmental liability totalled $19.2 million and $19.6 million,
respectively. The actual cost of remediating contaminated sites, removing
tanks and settling third party damage claims may be substantially lower or
higher than that accrued due to the difficulty in estimating such costs and due
to potential changes in the status of regulations and state reimbursement
programs. The Company does
12
<PAGE> 13
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
not believe that any such amount below or in excess of that accrued can be
reasonably estimated.
The state of Texas and other states in which the Company previously operated,
have established trust funds for the reimbursement of costs related to certain
remediation activities. The Company has filed or expects to file claims
aggregating approximately $3.0 million with the states to recover a portion of
the funds which it has expended or expects to expend on remediation activities.
The Company believes the claims it has filed or expects to file will be paid,
although collection may occur over a period of several years. Accordingly, the
receivable for the aforementioned claims is included in Other Assets on the
Company's balance sheet.
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.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Summary of Results of Operations - The Company reported net income of $4.8
million ($0.71 per share) and $1.1 million ($0.19 per share) for the three
months ended September 30, 1995 and 1994, respectively.
Net income for the three months ended September 30, 1995 includes nonrecurring
expense of $1.1 million ($0.6 million, or $0.09 per share, on an after-tax
basis) related to professional fees incurred as a result of the unsolicited
tender offer received from Circle K. Net income for the three months ended
September 30, 1994 includes nonrecurring expense of $1.7 million ($0.9 million,
or $0.15 per share, on an after-tax basis) related to the transformation
process designed to enhance the Company's focus on customer service and
employee effectiveness ("Project Breakthrough").
The following table sets forth selected information regarding the results of
the Company's operations during the three months ended September 30, 1995 and
1994:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1995 1994
--------- ---------
<S> <C> <C>
Merchandise sales (millions) (a) . . . . . . . . . . . . . . . . . . . $133.0 $133.7
Merchandise gross profit margin (a) . . . . . . . . . . . . . . . . . . 34.6% 33.8%
Merchandise gross profit (millions) (a) . . . . . . . . . . . . . . . . $ 46.0 $ 45.2
Gasoline sales (millions) . . . . . . . . . . . . . . . . . . . . . . . $103.8 $101.6
Gasoline gross profit margin . . . . . . . . . . . . . . . . . . . . . 14.8% 14.5%
Gasoline gross profit (millions) . . . . . . . . . . . . . . . . . . . $ 15.4 $ 14.7
Total sales (millions) . . . . . . . . . . . . . . . . . . . . . . . . $236.8 $235.3
Average gross profit margin . . . . . . . . . . . . . . . . . . . . . . 25.9% 25.5%
Total gross profit (millions) . . . . . . . . . . . . . . . . . . . . . $ 61.4 $ 59.9
Average number of stores . . . . . . . . . . . . . . . . . . . . . . . 661 707
Average sales per store (thousands):
Merchandise (a) . . . . . . . . . . . . . . . . . . . . . . . . . . $201.2 $189.1
Gasoline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 157.0 143.7
------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $358.2 $332.8
Gasoline gallons sold (millions) . . . . . . . . . . . . . . . . . . . 95.2 93.9
Average gasoline gallons sold per gas store (thousands) . . . . . . . . 158.7 147.4
</TABLE>
(a) Merchandise sales include other income from the sale of money orders and
lottery tickets, as well as income from pay telephones, automatic teller
machines and game machines.
14
<PAGE> 15
Three Months Ended September 30, 1995 Compared to the Three Months Ended
September 30, 1994:
Sales and Gross Profit - Merchandise sales decreased $0.7 million to $133.0
million for the three months ended September 30, 1995 as compared to $133.7
million for the corresponding three month period ended September 30, 1994. On
a same-store basis, merchandise sales increased $5.5 million, or 4%, primarily
due to increased sales of soft drinks, cigarettes, refrigerated juices and
beer. Such increase was offset, however, by a $6.3 million reduction in
merchandise sales due to stores that have closed since the prior period.
Merchandise gross profits increased $0.8 million, or 2%, in the first quarter
of fiscal 1996 as compared to the first quarter of the prior year. On a
same-store basis, merchandise gross profits increased $2.8 million, or 7%, in
the first quarter of fiscal 1996 as compared with the same period of the prior
year, primarily due to increased profits related to cigarettes, soft drinks and
refrigerated juices. Such increase was partially offset by a $2.0 million
reduction in merchandise gross profits due to stores that have closed since the
prior period. Merchandise gross profit margins increased 0.8 percentage points
from 33.8% in the first quarter of fiscal 1995 to 34.6% in the first quarter of
fiscal 1996. Merchandise gross profit margins from same-store sales also
increased 0.7 percentage points when compared to the prior period.
Gasoline sales increased $2.2 million during the three months ended September
30, 1995 as compared with the same period of the previous year. Gasoline sales
volumes on a same-store sales basis increased 5% from the same period last
year. The gasoline sales volume increase resulted primarily from the Company's
continued emphasis on a volume growth strategy combined with the positive
impact from modernizing the Company's gasoline facilities in its Dallas/Fort
Worth market.
Gasoline gross profits increased $0.7 million in the first quarter of fiscal
1996 as compared to the same period of fiscal 1995, primarily due to higher
gasoline margins and increased sales volumes during the current quarter when
compared to the margins and sales volumes during the same quarter of the prior
year. Gasoline gross profit margins on a volume basis averaged 16.2 cents per
gallon for the first quarter of fiscal 1996 as compared to 15.7 cents per
gallon for the same period of the prior year.
15
<PAGE> 16
An analysis of merchandise sales, gasoline sales and gasoline sales volumes
follows (amounts in millions):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
--------------------------
1995 1994
------- -------
<S> <C> <C>
Merchandise Sales: (a)
Same-stores (b) . . . . . . . . . . . . . . . . . . . . . . . $132.6 $127.1
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 0.1 -
Stores closed or sold . . . . . . . . . . . . . . . . . . . . 0.3 6.6
------- ------
$133.0 $133.7
====== ======
Gasoline Sales:
Same-stores (b) . . . . . . . . . . . . . . . . . . . . . . . $103.3 $98.0
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 -
Stores closed or sold . . . . . . . . . . . . . . . . . . . 0.1 3.6
------- ------
$103.8 $101.6
====== ======
Gasoline Gallons:
Same-stores (b) . . . . . . . . . . . . . . . . . . . . . . . 94.7 90.6
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 0.4 -
Stores closed or sold . . . . . . . . . . . . . . . . . . . . 0.1 3.3
------- ------
95.2 93.9
======= ======
</TABLE>
(a) Merchandise sales include other income from the sale of money orders and
lottery tickets, as well as income from pay telephones, automatic teller
machines and game machines.
(b) Represents the 659 stores (597 of which sell gasoline) which opened prior
to July 1, 1994 and continued to operate through September 30, 1995.
Operating Expenses - Operating expenses decreased $3.2 million, or 7%, in the
first quarter of fiscal 1996 as compared with the same period of fiscal 1995
primarily due to reduced insurance expense resulting from lower estimated costs
for the Company's employee insurance programs and credits recorded to adjust
the Company's accrued liability for its employee injury insurance programs due
to recent more favorable loss experience. Operating expenses as a percentage
of total sales decreased to 17.3% for the three months ended September 30, 1995
as compared to 18.8% for the same period of the prior year.
General and Administrative ("G&A") Expenses - G&A expenses for the three months
ended September 30, 1995 decreased $1.2 million to $10.2 million as compared to
$11.4 million for the three months ended September 30, 1994. G&A expenses for
the three months ended September 30, 1995 include $1.1 million related to
professional fees incurred as a result of the unsolicited tender offer received
from Circle K. G&A expenses for the three months ended September 30, 1994
include $1.7 million related to Project Breakthrough.
Interest Expense - Interest expense decreased approximately $0.2 million in the
first quarter of fiscal 1996 as compared to the corresponding period of the
prior year due to the decrease in debt
outstanding between the periods.
16
<PAGE> 17
Income Tax Expense - The Company's effective income tax rate of approximately
42% and 49% for the three months ended September 30, 1995 and 1994,
respectively, differs from the federal statutory rate primarily because of
state income taxes and the inability to deduct for income tax purposes the
amortization of Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets, offset in part by targeted jobs tax credits in the three
months ended September 30, 1994.
Seasonality - Sales and gross profits for the quarter ended September 30, 1995
are not necessarily indicative of the entire fiscal year. The convenience
store industry typically experiences higher sales and gross profits during the
summer months than during the winter months. Historically, the Company has
achieved higher earnings in the first and fourth quarters of its fiscal year,
as compared to its second and third quarters.
17
<PAGE> 18
LIQUIDITY AND CAPITAL RESOURCES
Key balance sheet figures and ratios are presented in the table below (all
amounts, excluding ratios are in millions):
<TABLE>
<CAPTION>
September 30, 1995 June 30, 1995
------------------ -------------
<S> <C> <C>
Cash and cash equivalents (a) . . . . . . . . . . $40.6 $31.5
Current assets . . . . . . . . . . . . . . . . . $90.0 $81.5
Current liabilities . . . . . . . . . . . . . . . $77.1 $73.7
Current ratio . . . . . . . . . . . . . . . . . . 1.17 1.11
Inventory turn ratios (annualized): . . . . . . .
Merchandise . . . . . . . . . . . . . . . . . 11.7 11.2
Gasoline . . . . . . . . . . . . . . . . . . 55.1 55.1
Total debt . . . . . . . . . . . . . . . . . . . $99.3 $102.3
Stockholders' equity . . . . . . . . . . . . . . $85.4 $80.0
Debt/Equity ratio . . . . . . . . . . . . . . . . 1.16 1.28
Common shares outstanding . . . . . . . . . . . . 6.1 6.1
- ---------------------
</TABLE>
(a) Includes $8.4 million and $9.1 million that has been reserved at the
Company's option at September 30, 1995 and June 30, 1995, respectively.
The reserved cash balances are comprised 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. Also included in the
reserved cash balances at September 30, 1995 and June 30, 1995 is cash from
the April 29, 1994 transaction with Circle K that has been held in escrow
pending the final resolution of collateral-related matters.
Liquidity - Working capital totalled $12.9 million at September 30, 1995 and
$7.8 million at June 30, 1995. Cash and cash equivalents were $40.6 million
and $31.5 million at September 30, 1995 and June 30, 1995, respectively. The
$9.1 million increase in cash is primarily the result of $16.8 million of cash
provided by operating activities, which amount was partially offset by $5.3
million of capital expenditures and $3.0 million of debt payments.
Cash provided by (used in) operating activities totalled $16.8 million for the
three months ended September 30, 1995 and ($10.8) million for the three months
ended September 30, 1994. The $27.6 million increase between the two quarterly
periods is primarily due to the timing of working capital items and increased
operating income. Of the $3.5 million and $1.1 million recorded as income tax
expense for the three months ended September 30, 1995 and 1994, $119,000 and
$165,000, respectively, was payable in the year reported, with the remainder
reducing the deferred tax asset account as a result of the utilization of net
operating losses.
18
<PAGE> 19
The Company initiated Project Breakthrough in its 94 Dallas/Fort Worth stores
during the first three months of fiscal 1995 and, during that period made
approximately (i) $0.4 million of capital improvements, (ii) $1.2 million of
software development expenditures required for the overall program's
implementation, and (iii) $1.7 million of consulting and other related
expenditures. The costs associated with the program which were not financed
through operating lease transactions were funded by cash generated from
operations as well as cash on hand.
Because substantially all of the Company's sales are for cash and because total
merchandise inventories are converted to cash approximately once a month (or,
in the case of gasoline inventories, approximately once a week), the Company
considers its cash flows adequate to satisfy its daily working capital
requirements. However, in order to further enhance its liquidity, the Company
has a Revolving Credit Agreement 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. 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, 1996. During the first
quarter of fiscal 1996, the Company utilized $4.1 million of the credit
agreement for the issuance of a letter of credit.
Capital Resources - The Company incurred $5.3 million of capital expenditures
through September 30, 1995 compared to $4.1 million for the corresponding
period of the prior fiscal year. During the first three months of fiscal 1996,
the capital expenditures consisted of $2.3 million of gasoline dispensing
equipment and installation of underground piping required to comply with
environmental laws, $1.1 million on new store development, $0.9 million in
equipment replacement and store improvements and $1.0 million on miscellaneous
projects.
For a discussion of certain long-term bank debt agreement covenants, including
limitations on the amount of capital expenditures which can be made by the
Company during fiscal 1996 and acceleration of payment obligations in the event
of a change of control (as defined), see Note 4. For a discussion of the
Company's expenditures with respect to environmental remediation and
environmental capital equipment, see Note 5.
19
<PAGE> 20
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Circle K Tender Offer - As previously reported, the Circle K tender offer
referred to in Note 1 of the Notes to Condensed Consolidated Financial
Statements has generated litigation in state and federal courts in Delaware. In
view of the execution of the Merger Agreement, counsel for the plaintiffs in
the active cases have agreed to postpone indefinitely discovery initiatives at
trial settings pending completion of the tender offer and merger contemplated
therein.
Chapter 11 Claims - The Company is continuing to resolve the proofs of claims
received in its Chapter 11 proceedings. As of November 3, 1995, 3,006 proofs of
claims had been filed against the Company which had not been withdrawn and
which had a stated aggregate value of approximately $345.6 million for the
proofs of claim specifying amounts; numerous other proofs of claim do not
specify amounts. Of the total, 2,981 claims valued at $296.6 million had been
resolved. As of November 3, 1995, the Company is continuing to prosecute
objections for the remaining disputed claims. Of the disputed claims, the
Company estimates the amount not covered by insurance to be less than $6.0
million. The final resolution of these disputed claims is expected to last for
an extended period of time.
All of the outstanding disputed claims are general unsecured claims. Pursuant
to the terms of the Plan of Reorganization, a total of 1,616,559 shares of
Common Stock were issued to Boatmen's Trust Company as agent for the general
unsecured creditors, pending allowance of their respective claims. As of
November 3, 1995, Boatmen's had allocated 1,242,971 shares to individual
unsecured creditors for resolved claims totalling $41.5 million and had issued
the appropriate share certificates. The remaining 373,588 shares will be
allocated in the future to the heretofore and hereafter allowed general
unsecured claims.
20
<PAGE> 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Index to Exhibits on Page 23.
b) Reports on Form 8-K
On August 14, 1995, the Company filed a Current Report on Form 8-K related to
(i) the receipt of an unsolicited acquisition proposal from Circle K whereby
Circle K offered to buy all of the Company's Common Stock for $17.00 cash per
share (the "Circle K Tender Offer"), (ii) the adoption of an amendment to the
Company's Restated By-Laws which provides that any change in the number of
directors must be approved by 75% of the stockholders, and (iii) proposals
received by the Company to increase the number of directors and additional
nominees.
On August 21, 1995, the Company filed a Current Report on Form 8-K related to
proposals received by the Company to increase the number of directors and to
submit nominees for directorship positions. In addition, a class action
lawsuit was filed against the Company and its directors seeking, among other
things, the invalidation of the amendment to the By-Laws adopted by the Board
of Directors of the Company on August 10, 1995 and unspecified damages.
On September 5, 1995, the Company filed a Current Report on Form 8-K to
announce its response to the Circle K Tender Offer and to describe the adoption
of a stockholder rights plan.
On September 15, 1995, the Company filed a Current Report on Form 8-K to
describe (i) certain employment agreements and benefit plans of the Company
which had been amended and restated, (ii) a Master Agreement for ATM Facilities
between the Company and NationsBank of Texas, N.A., and (iii) an Order
Providing for Closing Chapter 11 cases which was signed on September 6, 1995.
In addition, the Company described and/or updated the status of four lawsuits
filed against the Company during the first quarter of fiscal 1996.
On October 30, 1995, the Company filed a Current Report on Form 8-K describing
a declaratory judgment action filed by the Company, with respect to a contract
relating to automated teller machines, and the answer and counterclaim filed in
response thereto.
21
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL CONVENIENCE STORES INCORPORATED
(Registrant)
Date November 14, 1995 /s/ A. J. GALLERANO
----------------------------------------------
A. J. Gallerano - Senior Vice President,
General Counsel and Secretary
Date November 14, 1995 /s/ JANICE E. BRYANT
----------------------------------------------
Janice E. Bryant - Vice President - Controller
22
<PAGE> 23
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBITS:
*11 Computation of primary and fully diluted earnings per share
for the three months ended September 30, 1995 and 1994
*27 Financial Data Schedule
_____________
*Filed Herewith
23
<PAGE> 1
EXHIBIT 11
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------------------
1995 1994
------------- --------------
<S> <C> <C>
Primary Earnings Per Share:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,829 $1,143
Interest expense adjustment assuming conversion
of options and warrants, net of tax . . . . . . . . . . . . . . . 136 -
------ ------
Net earnings applicable to common and
common stock equivalents . . . . . . . . . . . . . . . . . . . . $4,965 $1,143
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . 6,075 6,050
Common stock equivalents - assumed exercise of options (1) 922 -
------ ------
Average Common and Common Stock Equivalents . . . . . . . . . 6,997 6,050
====== ======
Primary Earnings Per Share . . . . . . . . . . . . . . . . . . . . . $ 0.71 $ 0.19
====== ======
Fully Diluted Earnings Per Share:
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,829 $1,143
Interest expense adjustment assuming conversion
of options and warrants, net of tax . . . . . . . . . . . . . . . 35 -
------ ------
Net earnings applicable to common and common
stock equivalents . . . . . . . . . . . . . . . . . . . . . . . . $4,864 $1,143
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . 6,075 6,050
Common stock equivalents - assumed exercise of options (1) . . . . 922 -
------ ------
Average Common and Common Stock Equivalents . . . . . . . . . . 6,997 6,050
====== ======
Fully Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . $ 0.70 $ 0.19
====== ======
</TABLE>
(1) Common stock equivalents were antidilutive for the three months ended
September 30, 1994.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial informatiOn extracted from the
consolidated financial statements and related notes of National Convenience
Stores Incorporated and Subsidiaries for the three months ended September 30,
1995 and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1995
<CASH> $40,633
<SECURITIES> 0
<RECEIVABLES> 5,736
<ALLOWANCES> 0
<INVENTORY> 35,685
<CURRENT-ASSETS> 90,001
<PP&E> 194,285
<DEPRECIATION> 30,208
<TOTAL-ASSETS> 291,074
<CURRENT-LIABILITIES> 77,076
<BONDS> 88,360
<COMMON> 61
0
0
<OTHER-SE> 85,327
<TOTAL-LIABILITY-AND-EQUITY> 291,074
<SALES> 236,792
<TOTAL-REVENUES> 236,792
<CGS> 175,421
<TOTAL-COSTS> 216,436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,818
<INCOME-PRETAX> 8,297
<INCOME-TAX> 3,468
<INCOME-CONTINUING> 4,829
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,829
<EPS-PRIMARY> $0.71
<EPS-DILUTED> $0.70
</TABLE>
