<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 December 31, 1994
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 February 1, 1995, the number of shares of Common Stock outstanding was
6,050,075.
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<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 December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . 4
Six Months Ended December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Balance Sheets
December 31, 1994 and June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of Cash Flows
Six Months Ended December 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . 7
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . 28
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 29
</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 as of December 31,
1994, and the related statements of condensed consolidated operations and
condensed consolidated cash flows for the periods ended December 31, 1994 and
1993. 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, 1994 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 August 9, 1994, 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, 1994 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
January 19, 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
December 31,
-------------------------------
1994 1993
-------- --------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $220,504 $213,722
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 162,931 157,734
Operating expenses . . . . . . . . . . . . . . . . . . . . . . 43,050 42,116
General and administrative . . . . . . . . . . . . . . . . . . 10,093 9,012
-------- ---------
216,074 208,862
-------- ---------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . 4,430 4,860
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (2,400) (2,695)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 497 304
-------- ---------
Income Before Income Tax Expense . . . . . . . . . . . . . . . . . 2,527 2,469
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . 909 941
-------- ---------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,618 $ 1,528
======== =========
Earnings Per Share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.24
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 0.27 0.24
Weighted Average Number of Shares Outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,050 6,274
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 6,050 6,316
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
4
<PAGE> 5
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
--------------------------------
1994 1993
-------- --------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $455,785 $448,002
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . 338,727 329,153
Operating expenses . . . . . . . . . . . . . . . . . . . . . . 86,891 85,107
General and administrative . . . . . . . . . . . . . . . . . . 21,541 18,741
-------- --------
447,159 433,001
-------- --------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . 8,626 15,001
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . . (4,780) (5,443)
Interest income . . . . . . . . . . . . . . . . . . . . . . . . 913 584
-------- --------
Income Before Income Tax Expense . . . . . . . . . . . . . . . . . 4,759 10,142
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . . 1,998 3,899
-------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,761 $ 6,243
======== =========
Earnings Per Share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.46 $ 1.00
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 0.46 0.99
Weighted Average Number of Shares Outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,050 6,271
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . . 6,050 6,318
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
5
<PAGE> 6
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31, June 30,
1994 1994
------------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents, $15,252 and $13,557
reserved $ 41,772 $ 41,142
Accounts receivable, net . . . . . . . . . . . . . . . . . . . 2,702 5,449
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . 36,507 39,626
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . . 3,643 4,775
-------- --------
Total Current Assets . . . . . . . . . . . . . . . . . . . . 84,624 90,992
Property and Equipment, net of Accumulated
Depreciation of $23,357 and $19,215 . . . . . . . . . . . . . . 164,046 158,075
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net . . . . . . . . . . . . . . . . . 33,616 34,542
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . . 4,402 6,071
Other assets, net . . . . . . . . . . . . . . . . . . . . . . . 9,575 9,842
-------- --------
Total Other Assets . . . . . . . . . . . . . . . . . . . . . 47,593 50,455
-------- --------
$296,263 $299,522
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . . $ 65,589 $ 69,611
Current portion of long-term debt . . . . . . . . . . . . . . . 12,222 12,103
-------- --------
Total Current Liabilities . . . . . . . . . . . . . . . . . . 77,811 81,714
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . 101,408 106,976
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . 39,535 36,084
Commitments and Contingent Liabilities
Stockholders' Equity:
Common Stock, par value $.01 per share;
50,000,000 shares authorized; 6,050,075 and 6,050,069 shares
issued and outstanding . . . . . . . . . . . . . . . . . . . 61 61
Additional paid-in capital . . . . . . . . . . . . . . . . . . 63,463 63,463
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . 13,985 11,224
-------- --------
Total Stockholders' Equity . . . . . . . . . . . . . . . . . 77,509 74,748
-------- --------
$296,263 $299,522
======== ========
</TABLE>
Note: The balance sheet at June 30, 1994 has been derived from the audited
financial statements 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.
6
<PAGE> 7
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
December 31,
---------------------------------
1994 1993
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,761 $ 6,243
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . 7,124 8,597
Deferred income taxes . . . . . . . . . . . . . . . . . . 1,669 3,570
Changes in operating assets and liabilities, net
of sales of stores:
(Increase) decrease in accounts and notes
receivable and prepaid expenses . . . . . . . . . . . 3,899 (215)
(Increase) decrease in inventories . . . . . . . . . . . 3,006 (1,145)
Decrease in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . . . (324) (3,522)
Increase in income taxes . . . . . . . . . . . . . . . . 138 75
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 366 -
------- -------
Net cash provided by operating activities . . . . . . . . . . . 18,639 13,603
------- -------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . (13,576) (6,043)
Proceeds from sales of assets . . . . . . . . . . . . . . . . . . 2,492 2,123
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 (1,084)
------- -------
Net cash used in investing activities . . . . . . . . . . . . . (10,957) (5,004)
------- -------
Cash Flows From Financing Activities:
Principal payments on long-term debt . . . . . . . . . . . . . . (7,052) (7,226)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . - (236)
------- -------
Net cash used in financing activities . . . . . . . . . . . . . (7,052) (7,462)
------- -------
Net Increase in Cash and Cash Equivalents . . . . . . . . . . . . . 630 1,137
Cash and Cash Equivalents - Beginning of period . . . . . . . . . 41,142 46,032
------- -------
Cash and Cash Equivalents - End of period . . . . . . . . . . . . $41,772 $47,169
======= =======
Supplemental Cash Flow Information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,944 $ 5,470
Income taxes paid, net . . . . . . . . . . . . . . . . . . . . . $ 193 $ 255
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
7
<PAGE> 8
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The condensed consolidated financial statements include
the accounts of National Convenience Stores Incorporated and its wholly-owned
subsidiaries (the "Company"), with all significant intercompany accounts and
transactions eliminated in consolidation. The financial information presented
for the interim periods is unaudited and the interim 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
which are, in the opinion of Management, of a normal recurring nature and
necessary for a fair presentation of financial position as of December 31,
1994, the results of operations for the three and six months ended December 31,
1994 and 1993 and the cash flows for the six months ended December 31, 1994 and
1993. Certain prior year amounts have been reclassified to conform to the
current year presentation.
With respect to the unaudited condensed consolidated financial information of
the Company as of December 31, 1994, Deloitte & Touche LLP has performed a
review (in accordance with standards established by the American Institute of
Certified Public Accountants) and not an audit, as set forth in their separate
review report appearing herein.
Significant Accounting Policies - Reference is made to the Notes to
Consolidated Financial Statements appearing in the Company's 1994 Annual Report
to Shareholders incorporated by reference in the Company's Annual Report on
Form 10-K for the fiscal year ended June 30, 1994.
Earnings per Share - The earnings per share computations are based upon income
applicable to common shares and the average number of common and common stock
equivalents outstanding for the period. For the three and six months ended
December 31, 1994, both primary and fully diluted earnings per share were
computed using 6,050,000 weighted average common shares outstanding during the
periods. Common stock equivalents were not included in the calculations as
their inclusion would have been antidilutive.
For the three and six months ended December 31, 1993, the weighted average
number of common and common stock equivalents used in computing primary
earnings per share was 6,274,000 and 6,271,000, respectively. The common and
common stock equivalents used in the fully diluted earnings per share
calculation for the three and six months ended December 31, 1993 were 6,316,000
and 6,318,000, respectively.
8
<PAGE> 9
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. INCOME TAXES
On March 15, 1994, the Company filed its federal income tax return for the year
ended June 30, 1993, which reflected net operating loss carryforwards of $55.8
million plus tax credits of $7.1 million. The net operating losses expire in
varying amounts in fiscal years 2003 to 2007; the tax credits expire in fiscal
years 2000 to 2009. These figures reflect the adjustments required by Section
382 of the Internal Revenue Code after an ownership change in the Company's
stock. Section 382 will also require the Company to reduce the tax basis of
its assets by approximately $40.0 million. 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. 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.
As of December 31, 1994, the net operating loss carryforward is estimated to
have been reduced to $19.8 million as a result of the application of the
carryforward losses to reduce current taxable income. The Company expects the
remaining net operating loss carryforwards, tax credits and other tax
attributes to be available to offset future income tax payments, 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 loss carryforwards, tax credits and other tax attributes would be
eliminated. 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 to the reorganized company's 5%
stockholders (as defined in the Plan of Reorganization) or those that would
become 5% stockholders as a result of the purported transfer.
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.
9
<PAGE> 10
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. DEBT
As of December 31, 1994 and June 30, 1994, long-term debt consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
December 31, 1994 June 30, 1994
----------------- -------------
<S> <C> <C>
Term Loan, due 2000 . . . . . . . . . . . . . . . . . . . . $ 49,232 $ 53,578
Revolving Credit Agreement . . . . . . . . . . . . . . . . . - -
Letter of Credit Agreement, due 2000 . . . . . . . . . . . . - -
Mortgage notes on real estate, due 2003 . . . . . . . . . . 58,905 59,586
Other notes payable, due through 2000 . . . . . . . . . . . 5,493 5,915
-------- --------
113,630 119,079
Less: Amounts due within one year 12,222 12,103
-------- --------
$101,408 $106,976
======== ========
</TABLE>
Revolving Credit Agreement - The Revolving Credit Agreement provides for the
borrowing and/or issuance of letters of credit in the aggregate of up to $8.0
million, increasing to $11.0 million during the period from November 1 through
May 1 of each year. The Revolving Credit Agreement requires that, during each
fiscal year, the Company pay off all outstanding cash borrowings thereunder for
a period of 30 consecutive days. The Company had no outstanding borrowings
during the six months ended December 31, 1994 and has therefore satisfied this
requirement for fiscal 1995. Letter of credit issuances cannot exceed $8.0
million and cash borrowings are limited to the commitment limit less letters of
credit 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, 1995.
10
<PAGE> 11
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Below is a table illustrating primary financial ratios and coverage tests
("Covenants") as of December 31, 1994 associated with the Company's long-term
bank debt instruments (all amounts, excluding ratios, are in thousands):
<TABLE>
<CAPTION>
Required Actual
---------- ----------
<S> <C> <C>
Current Ratio (minimum) . . . . . . . . . . . . . . . . . . . . 90% 109%
Total Borrowed Funds to Consolidated
Net Worth (maximum) . . . . . . . . . . . . . . . . . . . . 418% 303%
Total Liabilities to Consolidated
Net Worth (maximum) . . . . . . . . . . . . . . . . . . . . 360% 282%
Consolidated Net Worth (minimum) . . . . . . . . . . . . . . . $61,400 $77,509
Interest Coverage Ratio (minimum) . . . . . . . . . . . . . . . 230% 275%
Consolidated Fixed Charge Coverage
Ratio (minimum) . . . . . . . . . . . . . . . . . . . . . . 107% 112%
EBITDA (minimum for latest 4 quarters) . . . . . . . . . . . . $27,300 $27,370
Capital Expenditure (maximum for
the quarter) . . . . . . . . . . . . . . . . . . . . . . . $15,225 $14,000
</TABLE>
Covenants noted above are computed as defined in the Company's long-term bank
debt instrument agreements. At December 31, 1994, the Company was in
compliance with such Covenants.
Under the terms of certain of the Company's long-term bank debt agreements, the
Company cannot pay cash dividends on its Common Stock or purchase any treasury
stock. In addition, the Company's long-term bank debt agreements limit fiscal
1995 capital expenditures and environmental remediation expenses to excess cash
flow, as defined therein, not to exceed $20.3 million. For fiscal 1995, the
Company expects to expend approximately $30 million for environmental
remediation and for capital improvements, including upgrading store security
systems, installing state-of-the-art sales and inventory management systems,
remodeling existing stores and constructing a new prototype store. The Company
is currently negotiating a new long-term credit facility in order to facilitate
such capital and environmental remediation expenses. The outcome of such
negotiations cannot be determined at this time.
11
<PAGE> 12
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. ASSET ACQUISITION/DIVESTITURE
On April 29, 1994, the Company completed the transaction whereby the Company
(i) exchanged its 53 operating convenience stores in Southern California,
together with related inventories and equipment, for 88 operating convenience
stores of The Circle K Corporation in the Dallas/Fort Worth and Houston, Texas
areas, together with related inventories and equipment and, (ii) sold its 27
operating convenience stores in Atlanta, Georgia, together with related
inventories and equipment, for cash consideration of $9,150,000. The Company
now operates only in the state of Texas.
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
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 leaks. 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
presently 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, leases assumed pursuant
to the terms of the Plan of Reorganization, and properties leased thereafter.
Management believes that its existing gasoline storage and dispensing
procedures and planned capital expenditures will continue to keep the Company
in compliance with all current federal and state environmental regulations.
Pursuant to the above-mentioned laws and regulations, the Company expended $3.8
million during the first six months of fiscal 1995 and expects to expend an
additional $900,000 for minor testing and improvements during the last six
months of the fiscal year. In addition, Management believes that it has
allocated sufficient resources in its long-term capital budget
12
<PAGE> 13
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
to comply with the improvements required by EPA regulations to be completed by
the end of 1998.
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. At December 31, 1994 and June
30, 1994, the remediation liability totalled $21.6 million and $21.8 million,
respectively. The actual cost of remediating contaminated sites and removing
tanks 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 not believe
that any such amount below or in excess of that accrued can be reasonably
estimated.
The states in which the Company operates, or has 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 $5.5 million with the states to recover a portion of
the funds which it has expended or expects to expend on remediation activities.
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 successfully
established that it is self-insured with the Texas Natural Resource
Conservation Commission.
Reference is made to Note 11 of the Notes to Consolidated Financial Statements
appearing in the Company's Annual Report to Shareholders incorporated by
reference in the Company's Annual Report on Form 10-K for the fiscal year ended
June 30, 1994.
13
<PAGE> 14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company earned $1.6 million, or 27 cents per share, for the second quarter
of fiscal 1995, as compared to net earnings of $1.5 million, or 24 cents per
share, for the same period last year. The increase in net earnings for the
current three month period was primarily due to the increase in gasoline gross
profits. The current quarter earnings were impacted by consulting and other
non-recurring expenses of $1.1 million ($677,000, or 11 cents per share, on an
after-tax basis) in fiscal year 1995 related to the installation of integrated
state-of-the-art sales and inventory management systems designed to enhance and
redefine the Company's focus on customer service and employee effectiveness,
coupled with increased labor costs of approximately $1.0 million ($620,000, or
10 cents per share, on an after-tax basis) related to the addition of
approximately 600 full-time employees to improve customer service.
The Company earned $2.8 million, or 46 cents per share, for the first six
months of fiscal 1995, as compared to net earnings of $6.2 million, or $1.00
per share, for the same period last year. The decrease in net earnings for the
current six month period was primarily due to lower merchandise gross profits,
along with the impact of consulting and other non-recurring expenses of $2.8
million ($1.8 million, or 29 cents per share, on an after-tax basis) in fiscal
year 1995 related to the installation of integrated state-of-the-art sales and
inventory management systems designed to enhance and redefine the Company's
focus on customer service and employee effectiveness, coupled with increased
labor costs of approximately $2.0 million ($1.2 million, or 20 cents per share,
on an after-tax basis) related to the addition of approximately 600 full-time
employees to improve customer service.
14
<PAGE> 15
The following table sets forth selected information regarding the results of
the Company's operations during the three and six months ended December 31,
1994 and 1993:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
---------------------------- ----------------------
1994 1993 1994 1993
------- ------- ------- -------
<S> <C> <C> <C> <C>
Merchandise sales (millions) . . . . $122.9 $123.1 $256.5 $262.4
Merchandise gross profit margin . . . 34.0% 34.4% 33.9% 34.5%
Merchandise gross profit (millions) . $ 41.8 $ 42.3 $ 86.9 $ 90.5
Gasoline sales (millions) . . . . . . $ 97.6 $ 90.6 $199.3 $185.6
Gasoline gross profit margin . . . . 16.2% 15.1% 15.2% 15.3%
Gasoline gross profit (millions) . . $ 15.8 $ 13.7 $ 30.2 $ 28.4
Total sales (millions) . . . . . . . $220.5 $213.7 $455.8 $448.0
Average gross profit margin . . . . . 26.1% 26.2% 25.7% 26.5%
Total gross profit (millions) . . . . $ 57.6 $ 56.0 $117.1 $118.9
Average number of stores . . . . . . 704 717 706 718
Average sales per store (thousands):
Merchandise . . . . . . . . . . . $174.6 $171.7 $363.3 $365.5
Gasoline . . . . . . . . . . . . . 138.6 126.4 282.3 258.5
------ ------ ------ ------
Total . . . . . . . . . . . . . $313.2 $298.1 $645.6 $624.0
Gasoline gallons sold (millions) . . 92.1 91.1 186.0 183.9
Average gasoline gallons sold per gas
store (thousands) . . . . . . . . . 146.7 146.9 293.8 296.1
</TABLE>
Three Months Ended December 31, 1994 Compared to the Three Months Ended
December 31, 1993:
Sales and Gross Profits - Merchandise sales remained relatively constant at
$122.9 million for the three months ended December 31, 1994 as compared to
$123.1 million for the corresponding three month period ended December 31,
1993. On a same-store basis, merchandise sales increased $2.9 million, or 3%,
primarily due to increased Texas Lottery commission revenues and increased
sales of soft drinks and beer. Such increase was offset, however, by a $3.1
million reduction in merchandise sales due to stores that closed since the
prior period and a lower volume of merchandise sold by the Texas stores
acquired in the April 29, 1994 transaction with The Circle K Corporation
("Circle K Transaction") as compared to the California and Georgia stores
divested in the same transaction.
Merchandise gross profits decreased $0.5 million, or 1%, in the second quarter
of fiscal 1995 as compared to the second quarter of the prior year. The
decrease in merchandise gross profits
15
<PAGE> 16
was primarily attributable to a decrease in gross profits of $ 1.2 million from
stores that have been closed since the earlier period and a decrease in gross
profits from the Texas stores acquired in the Circle K Transaction as compared
to the California and Georgia stores divested in the same transaction. Such
decrease was substantially offset by a $0.7 million increase in same-store
gross profits primarily due to increased Texas Lottery commission revenues and
increased gross profits from the sales of soft drinks and beer. Merchandise
gross profit margins decreased 0.4 percentage points from 34.4% in the second
quarter of fiscal 1994 to 34.0% in the second quarter of fiscal 1995 primarily
due to decreased gross profit margins on coffee, refrigerated juices and soft
drinks. Merchandise gross profit margins from same-store sales also decreased
0.2 percentage points when compared to the prior period for the aforementioned
reason.
Gasoline sales increased $7.0 million during the second quarter of fiscal 1995
as compared with the same quarter of the previous year due primarily to a 7%
increase in the average retail selling price of gasoline coupled with a 1%
increase in gasoline sales volumes. Gasoline sales volumes on a same-store
sales basis increased 8% from the same period last year, offset in part by a
27% decrease in gasoline sales volumes from the Texas stores acquired in the
Circle K Transaction as compared to the California and Georgia stores divested
in the same transaction. The gasoline sales volume increase resulted primarily
from the Company's continued emphasis on a volume growth strategy combined with
the positive impact from the updating of gasoline facilities in the Dallas/Fort
Worth market.
Gasoline gross profits increased $2.1 million in the second quarter of fiscal
1995 as compared to the same period of fiscal 1994, primarily due to higher
than average 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
17.2 cents per gallon for the second quarter of fiscal 1995 as compared to 15.0
cents per gallon for the same period of the prior year. The increase in margin
is primarily due to the seasonal decline in the cost of gasoline in the
wholesale market during the current quarter with retail prices remaining at
relatively high levels.
16
<PAGE> 17
An analysis of merchandise sales, gasoline sales and gasoline sales volumes
follows (amounts in millions):
<TABLE>
<CAPTION>
Three Months Ended
December 31,
------------------------------
1994 1993
---------- ---------
<S> <C> <C>
Merchandise Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . . . . $109.1 $106.2
New stores (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 13.3 -
Stores closed or sold (b) . . . . . . . . . . . . . . . . . . . . . .5 16.9
------ ------
$122.9 $123.1
====== ======
Gasoline Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . . . . $ 85.2 $ 74.4
New stores (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 12.3 -
Stores closed or sold (b) . . . . . . . . . . . . . . . . . . . . . .1 16.2
------ ------
$ 97.6 $ 90.6
====== ======
Gasoline Gallons:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . . . . 80.5 74.6
New stores (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 -
Stores closed or sold (b) . . . . . . . . . . . . . . . . . . . . . .1 16.5
------ ------
92.1 91.1
====== ======
</TABLE>
(a) Represents the 615 stores (541 of which sell gasoline) which opened
prior to July 1, 1993 and continued to operate through December 31,
1994.
(b) Includes the 88 stores acquired ("New stores") and the 80 stores
divested ("Stores closed or sold") in the April 29, 1994 transaction
with The Circle K Corporation (see Note 4 of the Notes to Condensed
Consolidated Financial Statements).
Operating Expenses - Operating expenses increased $0.9 million, or 2%, in the
second quarter of fiscal 1995 as compared with the same period of fiscal 1994
primarily due to increased salary costs of $1.2 million, primarily related to
higher wages and increased staffing levels resulting from the Company's efforts
to improve customer service, along with $0.7 million of increases in other
miscellaneous operating costs. These increases are partially offset by a $0.9
million decrease in depreciation expense due to the retirement of assets. The
Company expects the increased salary costs (on a year-over-year basis) to
continue through the end of fiscal 1995. Management continuously reviews the
results that increased staffing levels have on operating profits to determine
the merit of continuing the programs underlying the increased salary costs.
General and Administrative Expenses - General and administrative expenses for
the quarter ended December 31, 1994, increased $1.1 million, or 12%, from the
corresponding quarter for the prior year period, primarily due to an increase
in consulting fees and other related expenses
17
<PAGE> 18
of $1.0 million associated with the program to enhance and redefine the
Company's focus on customer service and employee effectiveness.
Interest Expense - Interest expense decreased $295,000 in the second quarter of
fiscal 1995 as compared to the corresponding period of the prior year primarily
due to the decrease in debt outstanding between the periods.
Interest Income - Interest income increased $193,000 in the second quarter of
fiscal 1995 as compared to the prior year period primarily due to interest
earned from higher rates on short-term investments.
Income Tax Expense - The effective income tax rate of the Company for the three
months ended December 31, 1994 and 1993 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.
Seasonality - Sales and gross profits for the quarter ended December 31, 1994
are not necessarily indicative of the entire fiscal year. The convenience
store industry in the Company's market 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.
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.
Six Months Ended December 31, 1994 Compared to the Six Months Ended December
31, 1993:
Sales and Gross Profits - Merchandise sales decreased $5.9 million, or 2%, to
$256.5 million for the six months ended December 31, 1994 as compared to $262.4
million for the corresponding six month period ended December 31, 1993. The
Company's merchandise sales decreased by $6.5 million during the first six
months of fiscal 1995 as compared to the year earlier period due to stores that
closed since the prior period combined with a decrease in the sales made by the
Texas stores acquired in the Circle K Transaction as compared to the California
and Georgia stores divested in the same transaction. On a same-store basis,
merchandise sales increased $0.6 million, primarily due to increased Texas
Lottery commission revenues.
Merchandise gross profits decreased $3.6 million, or 4%, in the first six
months of fiscal 1995 as compared to the same period in the prior year. The
decrease in merchandise gross profits was primarily attributable to a decrease
in gross profits of $2.8 million from stores that have closed since the prior
period coupled with a decrease in gross profits from the Texas stores
18
<PAGE> 19
acquired in the Circle K Transaction as compared to the California and Georgia
stores divested in the same transaction. In addition, same-store gross profits
decreased $0.8 million primarily due to reduced gross profits from the sales of
fountain drinks, coffee and refrigerated juices. Merchandise gross profit
margins decreased 0.6 percentage points from 34.5% in the first six months of
fiscal 1994 to 33.9% in the first six months of fiscal 1995 for the
aforementioned reasons. Merchandise gross profit margins from same-store
sales remained relatively constant with those of the prior year.
Gasoline sales increased $13.7 million during the first six months of fiscal
1995 as compared with the same period of the previous year due primarily to a
6% increase in the average retail selling price of gasoline coupled with a 1%
increase in gasoline sales volumes. Gasoline sales volumes on a same-store
sales basis increased 8% from the same period last year, offset in part by a
26% decrease in gasoline sales volumes from the Texas stores acquired in the
Circle K Transaction as compared to the California and Georgia stores divested
in the same transaction. The gasoline sales volume increase resulted primarily
from the Company's continued emphasis on a volume growth strategy combined with
the positive impact from the updating of gasoline facilities in the Dallas/Fort
Worth market.
Gasoline gross profits increased $1.8 million in the six months ended December
31, 1994 as compared to the same period of the prior year, primarily due to
higher gasoline margins and increased sales volumes during the current period
when compared to the margins and sales volumes during the same period of the
prior year. Gasoline gross profit margins on a volume basis averaged 16.2
cents per gallon for the six months ended December 31, 1994 as compared to 15.4
cents per gallon for the same period of the prior year. The increase in margin
is primarily due to the seasonal decline in the cost of gasoline in the
wholesale market during September 1994 and continuing through December 1994
with retail prices remaining at relatively high levels.
19
<PAGE> 20
An analysis of merchandise sales, gasoline sales and gasoline sales volumes
follows (amounts in millions):
<TABLE>
<CAPTION>
Six Months Ended
December 31,
------------------------------
1994 1993
---------- ---------
<S> <C> <C>
Merchandise Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . . . . $227.2 $226.6
New stores (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 27.8 -
Stores closed or sold (b) . . . . . . . . . . . . . . . . . . . . . 1.5 35.8
------ ------
$256.5 $262.4
====== ======
Gasoline Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . . . . $173.9 $153.1
New stores (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 25.0 -
Stores closed or sold (b) . . . . . . . . . . . . . . . . . . . . . .4 32.5
------ ------
$199.3 $185.6
====== ======
Gasoline Gallons:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . . . . 162.6 151.1
New stores (b) . . . . . . . . . . . . . . . . . . . . . . . . . . 23.1 -
Stores closed or sold (b) . . . . . . . . . . . . . . . . . . . . . .3 32.8
------ ------
186.0 183.9
====== ======
</TABLE>
(a) Represents the 615 stores (541 of which sell gasoline) which opened
prior to July 1, 1993 and continued to operate through December 31,
1994.
(b) Includes the 88 stores acquired ("New stores") and the 80 stores
divested ("Stores closed or sold") in the April 29, 1994 transaction
with The Circle K Corporation (see Note 4 of the Notes to Condensed
Consolidated Financial Statements).
Operating Expenses - Operating expenses increased $1.8 million, or 2%, in the
first six months of fiscal 1995 as compared with the same period of fiscal
1994, primarily due to increased salary costs of $2.5 million related to higher
wages and increased staffing levels resulting from the Company's efforts to
improve customer service, along with $1.3 million of increases in other
miscellaneous operating costs. These increases are partially offset by a $1.6
million decrease in depreciation expense due to the retirement of assets and a
$0.7 million decrease in advertising expense as a result of fewer promotions
supported by advertising. The Company expects the increased salary costs (on a
year-over-year basis) to continue through the end of fiscal 1995. Management
continuously reviews the results the increased staffing levels have on
operating profits to determine the merit of continuing the programs underlying
the increased salary costs.
20
<PAGE> 21
General and Administrative Expenses - General and administrative expenses for
the six months ended December 31, 1994 increased $2.8 million, or 14.9%, from
the corresponding period for the prior year, primarily due to increased
consulting fees and other related expenses of $2.7 million associated with the
program to enhance and redefine the Company's focus on customer service and
employee effectiveness.
Interest Expense - Interest expense decreased $663,000 in the first six months
of fiscal 1995 as compared to the corresponding period of the prior year
primarily due to the decrease in debt outstanding between the periods.
Interest Income - Interest income increased $329,000 in the first six months of
fiscal 1995 as compared to the prior year period primarily due to interest
earned from higher rates on short-term investments.
Income Tax Expense - The effective income tax rate of the Company for the six
months ended December 31, 1994 and 1993 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.
Seasonality - Sales and gross profits for the six months ended December 31,
1994 are not necessarily indicative of the entire fiscal year. The convenience
store industry in the Company's market 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.
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.
21
<PAGE> 22
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>
December 31, 1994 June 30, 1994
----------------- -------------
<S> <C> <C>
Cash and cash equivalents (a) ......................... $ 41.8 $ 41.1
Current assets......................................... $ 84.6 $ 91.0
Current liabilities.................................... $ 77.8 $ 81.7
Current ratio.......................................... 1.09 1.11
Inventory turn ratios (annualized):
Merchandise.......................................... 11.2 10.8
Gasoline............................................. 54.6 54.0
Long-term debt......................................... $ 101.4 $107.0
Stockholders' equity................................... $ 77.5 $ 74.7
Debt/Equity ratio...................................... 1.31 1.43
Common shares outstanding.............................. 6.1 6.1
</TABLE>
_____________________
(a) Includes $9.1 million and $7.4 million related to the remittance of tax
and lottery collections at December 31, 1994 and June 30, 1994,
respectively, that has been reserved at the Company's option. Also
includes $6.2 million being held in escrow at the end of each period,
pending the resolution of mortgage-related matters associated with the
Circle K Transaction completed April 29, 1994.
Liquidity - Working capital totalled $6.8 million at December 31, 1994 and $9.3
million at June 30, 1994. Cash and cash equivalents were $41.8 million and
$41.1 million at December 31, 1994 and June 30, 1994, respectively. The
$700,000 increase in cash is primarily the result of cash generated by
operations combined with proceeds from the sale of assets, mostly offset by
quarterly debt payments, capital expenditures and the payment of
reorganization-related professional fees.
Cash provided by operating activities totalled $18.6 million and $13.6 million
for the six months ending December 31, 1994 and 1993, respectively. The
increase in the six months of fiscal 1995 cash provided by operating activities
versus the prior year period is primarily due to the timing of working capital
items partially offset by lower operating earnings and the $1.9 million payment
of substantially all remaining reorganization-related professional fees. Of
the $2.0 million and $3.9 million recorded as income tax expense for the six
months ended December
22
<PAGE> 23
31, 1994 and 1993, $330,000 and $330,000, respectively, were payable in the
year reported, with the remainder reducing the deferred tax asset account as a
result of the utilization of net operating losses. Operating earnings before
interest, income taxes, depreciation, amortization and other non-recurring
items ("EBITDA") amounted to $15,750,000, or $3,718 per store per month in the
six months of fiscal 1995, compared to $23,598,000 or $5,478 per store per
month in the same period of fiscal 1994. EBITDA is presented to provide
additional information about the Company's ability to meet its future debt
service, capital expenditures and working capital requirements and should not
be construed as a substitute for earnings from operations or as a better
indicator of liquidity than cash flow from operating activities. The decrease
in EBITDA is due principally to lower operating earnings.
During the fourth quarter of fiscal 1994, the Company began implementation of a
program to enhance and redefine the Company's focus on customer service and
employee effectiveness. This program is the result of an extensive review by
Management and outside consultants. An integral component of the program
involves the upgrading of equipment and technology through the installation of
integrated state-of-the-art sales and inventory management systems. These
systems will significantly automate store operations by capturing data on
point-of-sale and scanning equipment. The Company initiated the program in its
Dallas/Fort Worth stores during the first half of fiscal 1995 and has made
approximately $10 million of capital improvements in connection with these
stores, approximately two-thirds of which is associated with equipment financed
through operating lease transactions. Additionally, the Company has expended
approximately $4.8 million in consulting and other related expenses in
connection with the program, of which $2.0 million and $2.8 million were
incurred in fiscal 1994 and the first six months of fiscal 1995, respectively.
An additional $3.4 million has been expended for software development costs
required for the overall program's implementation. The costs associated with
the program have been and will be funded by cash generated from operations as
well as cash on hand.
On April 29, 1994, the Company completed the transaction whereby the Company
(i) exchanged its 53 operating convenience stores in Southern California,
together with related inventories and equipment, for 88 operating convenience
stores of The Circle K Corporation in the Dallas/Fort Worth and Houston, Texas
areas, together with related inventories and equipment and, (ii) sold its 27
operating convenience stores in Atlanta, Georgia, together with related
inventories and equipment, for cash consideration of $9,150,000.
Management continually evaluates the profitability of its open stores taking
into consideration the cost/benefit justification for investment required for
upgrading equipment and technology through the installation of state-of-the-
art inventory management system and Stage II Vapor Recovery environmental
expenditures. Based on this evaluation, Management plans to divest stores that
do not qualify under this investment criteria. The Company completed the sale
of seven stores in the second quarter of fiscal 1995 and has signed an
agreement to sell an additional 15 stores, which transaction is expected to be
completed by March 31, 1995. The Company anticipates it will divest
approximately 20 additional stores in the third quarter of fiscal
23
<PAGE> 24
1995. The Company does not expect to incur a loss in connection with these
planned store divestures.
The Company has historically maintained a portfolio of surplus and excess real
estate properties in anticipation of expansion. During the period of Chapter
11 bankruptcy reorganization, the Company eliminated its new store development
program and began selling parcels of surplus real estate. Net proceeds from
such sales, and any sales in the future, are generally required to be applied
against mortgage or long-term bank debt. As of December 31, 1994, 44 parcels
of surplus real estate were held by the Company.
Insurance liabilities totalled $19.8 million and $17.5 million at December 31,
1994 and June 30, 1994, respectively. The liabilities were increased for
accruals of $7.9 million and decreased for payments of $5.6 million during the
period ended December 31, 1994.
Because substantially all of the Company's sales are for cash and because 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, 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. The Revolving Credit Agreement requires that, during each fiscal
year, the Company pay off all outstanding cash borrowings thereunder for a
period of 30 consecutive days. The Company had no outstanding borrowings
during the period ended December 31, 1994 and has therefore satisfied this
requirement for fiscal 1995. 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, 1995. At
December 31, 1994, no borrowings or letters of credit were outstanding under
this facility.
Capital Resources - The Company incurred $13.6 million of capital expenditures
through December 31, 1994 compared to $6.0 million for the corresponding period
of the prior fiscal year. During the first six months of fiscal 1995, the
capital expenditures consisted of $5.4 million associated with the
implementation of the Company's new customer service program (discussed above),
$4.9 million of gasoline dispensing equipment and installation of underground
piping required to comply with environmental laws (the "Stage II Vapor Recovery
Equipment"), $1.4 million in equipment replacement and store improvements,
$0.9 million on signage and security for the acquired Circle K stores and $1.0
million on miscellaneous projects.
The Company's long-term bank debt agreement contains limits on the amount of
capital expenditures and environmental remediation expenses the Company can
incur. For fiscal 1995 the Company's long-term bank debt agreements limit
capital expenditures/remediation to excess cash flow, as defined, not to exceed
$20.3 million. The Company anticipates it will incur capital
expenditures/remediation as required by environmental regulations, along with
upgrading store security systems, installation of state-of-the-art sales and
inventory management systems, store remodels, new store construction and
equipment replacement which could total up to $30.0
24
<PAGE> 25
million. The Company is currently negotiating a new long-term credit facility
in order to facilitate such capital expenditures/remediation noted above. The
outcome of such negotiations cannot be determined at this time.
Under the terms of certain of the Company's long-term bank debt agreements, the
Company cannot pay cash dividends on its Common Stock or purchase any treasury
stock. For a discussion of certain financial ratios and coverage tests as of
December 31, 1994 associated with the Company's long-term bank debt
instruments, see Note 3.
During the six months ended December 31, 1994, long-term debt decreased by $5.6
million primarily as a result of principal payments and the application of
proceeds from asset sales.
The Company's environmental remediation exposure is related primarily to the
clean up of contaminated soil caused by leaking underground gasoline storage
tanks and underground piping systems. The Company spent $424,000 in the first
six months of fiscal 1995 on environmental remediation activities as compared
to $839,000 in the same period of fiscal 1994. The Company's environmental
remediation liability totalled $21.6 million and $21.8 million at December 31,
1994 and June 30, 1994, respectively. The actual cost of remediating
contaminated sites and removing tanks 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 not believe that any such amount below or in excess
of that accrued can be reasonably estimated.
The states in which the Company operates, or has 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 $5.5 million with the states to recover a portion of
the funds which it has expended or expects to expend on remediation activities.
On March 15, 1994, the Company filed its federal income tax return for the year
ended June 30, 1993, which reflected net operating loss carryforwards of $55.8
million plus tax credits of $7.1 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 2009. These figures reflect the adjustments required by
Section 382 of the Internal Revenue Code after an ownership change in the
Company's stock. Section 382 will also require the Company to reduce the tax
basis of its assets by approximately $40.0 million. 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. The Plan of
Reorganization resulted in an ownership change since substantially all of the
new stock was issued to the creditors of the Company.
As of December 31, 1994, the net operating loss carryforward is estimated to
have been reduced to $19.8 million as a result of the application of the losses
to reduce taxable income. The Company expects the remaining net operating
losses, tax credits and other tax attributes to be available to offset future
income tax payments, subject to applicable limits. However, should
25
<PAGE> 26
a second ownership change occur within two years of the first ownership change,
all of the remaining pre-confirmation net operating losses, tax credits and
other tax attributes would be eliminated. 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 to the
reorganized company's 5% stockholders (as defined in the Plan of
Reorganization) or those that would become 5% stockholders as a result of
the purported transfer.
Risks and Uncertainties - A substantial portion of the Company's revenues are
derived from products (i.e., gasoline, tobacco and alcoholic beverages) subject
to excise taxes imposed by federal and state authorities. Numerous proposals
have been made recently that would result in increased excise taxes on certain
of these products. While the Company cannot predict whether the tax proposals
will become law, similar previous tax increases on such products have generally
had a negative impact on the sales and results of operations of the Company.
Additionally, numerous governmental entities are considering various
regulations related to the sale of tobacco products which, if implemented,
could adversely affect the sales and results of operations of the Company.
The Company's environmental remediation exposure is related primarily to the
clean up of contaminated soil caused by leaking underground gasoline storage
tanks and underground piping systems. The Company is subject to additional
regulatory matters including environmental capital commitments and
environmental remediation. The actual cost of remediating contaminated sites
and removing tanks may be substantially lower or higher than the related
accrued liabilities.
World gasoline markets have historically been subject to periods of sudden and
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 occur, and such adverse
effects could be significant.
The Clinton Administration and many members of the Congress have proposed
various legislative measures to change existing health care programs and the
minimum wage. Due to the labor intensive nature of the convenience store
business, any legislation or regulation which increases the Company's labor
costs could have a significant adverse effect on the results of operations of
the Company. As a result of the significant amount of uncertainty surrounding
any potential changes in health care programs and the minimum wage, the Company
is unable to predict the outcome of any of these proposals.
26
<PAGE> 27
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Chapter 11 Reorganization Status - The Company's Revised Fourth Amended and
Restated Joint Plan of Reorganization (the "Plan of Reorganization") was
substantially consummated shortly after the effective date of March 9, 1993.
The principal hearings since that time and presently scheduled on the docket of
the United States Bankruptcy Court for the Southern District of Texas (Houston
Division) (the "Bankruptcy Court") relate to the resolution of the disputed
proofs of claim.
Pre-petition claims held by creditors of the Company which were contingent or
unliquidated at the commencement of the Chapter 11 proceedings were generally
allowable against the Company in amounts fixed by the Bankruptcy Court or
otherwise agreed upon. These claims, including, without limitation, those
which arise in connection with the rejection of executory contracts and lease
obligations and with resolution of litigation, are expected to be substantial.
The Company is continuing to research and evaluate the proofs of claims
received. As of January 24, 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 $355.6 million for the proofs of claim
specifying amounts; numerous other proofs of claim do not specify amounts.
Of the total, 2,947 claims valued at $293.3 million had been accepted for
settlement by the Company. The remaining number of claims includes other
unresolved claims, including duplicate claims filed by the same claimant and
also includes duplicate claims filed by separate parties for the same asserted
liability. The Company considers the amounts claimed in the remaining
unsettled proofs of claim to be an unreliable estimate of their liability. In
the opinion of Management, certain of these claims assert unrealistic amounts
of liability, are duplicate claims or have other defects. Consequently, as of
January 24, 1995, the Company is continuing to prosecute objections in the
Bankruptcy Court for 11 of the remaining disputed claims covering $21.5
million. Of the disputed claims, $5.9 million is the amount the Company
estimates is not covered by insurance. In addition, as of January 24, 1995,
46 claims for $36.8 million had been assigned to a mediation/settlement
procedure outlined in the Plan of Reorganization. The Company will continue to
reconcile the scheduled claims with the claims asserted in proofs of claims and
will take appropriate steps to eliminate all duplications and other
inaccuracies to ensure that only valid claims are allowed by the Bankruptcy
Court. This process will continue until all claims are resolved and is
expected to last for an extended period of time.
The majority of 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 ("Boatmen's") as
agent for the general unsecured creditors, pending allowance of their
respective claims. As of January 12, 1995, Boatmen's had allocated 968,479
shares to individual unsecured creditors and had issued the appropriate share
certificates. The remaining 648,080 shares will be allocated in the future as
additional general unsecured claims
27
<PAGE> 28
are allowed.
Other Litigation - There is no other litigation pending or threatened against
the Company that Management believes is likely to have a material adverse
effect on the financial position or the business of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1994 Annual Meeting of Shareholders on November 10, 1994
(the "Annual Meeting"). Pursuant to the Company's Plan of Reorganization,
confirmed by order of the Bankruptcy Court, entered on February 25, 1993, and
which became effective on March 9, 1993, a number of shares of Common Stock
which were beneficially owned by certain of the Company's creditors were issued
to Boatmen's, as agent for such creditors, pending determination of the number
of shares properly allocable to each creditor. For the Annual Meeting,
Boatmen's held 742,712 of such shares as agent, constituting approximately
12.3% of the outstanding Common Stock (the "Agent Shares"). Boatmen's attended
the Annual Meeting by means of a limited proxy for the sole purpose of
establishing a quorum; however, Boatmen's declined to vote any of the Agent
Shares and, therefore, those shares were not counted in calculating the result
of the votes taken at the Annual Meeting as described below.
The following proposals were submitted to a vote of shareholders through the
solicitation of proxies:
(1) Election of two directors to serve through the 1997 Annual Meeting of
shareholders:
Robert B. Stobaugh was approved by a vote of 4,549,083, with 23,947
withheld.
Dunbar N. Chambers, Jr. was approved by a vote of 4,548,983 with
24,047 withheld.
In addition to the newly elected directors, the terms of Messrs.
Steadman, Van Horn, Oeland, Wilde, Luellen and Sosa continued after
the meeting.
(2) Ratification of the appointment of Deloitte & Touche LLP as
independent auditors for the Company for the fiscal year ending June
30, 1995, was made by a vote of 4,556,228 affirmative, 6,384 against
and 10,418 abstaining.
28
<PAGE> 29
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Index to Exhibits on Page 31.
b) Reports on Form 8-K
None.
29
<PAGE> 30
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 February 13, 1995 /s/ A. J. Gallerano
---------------------------------------
A. J. Gallerano - Senior Vice President,
General Counsel and Secretary
Date February 13, 1995 /s/ Brian Fontana
---------------------------------------
Brian Fontana - Vice President -
Chief Financial Officer
30
<PAGE> 31
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Page
Number
------
<S> <C> <C>
EXHIBITS:
*11(a) Computation of primary and fully diluted earnings
per share for the three months ended December 31,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
*11(b) Computation of primary and fully diluted earnings
per share for the six months ended December 31,
1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
*27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . 34
</TABLE>
__________________
* Filed Herewith
31
<PAGE> 1
EXHIBIT 11(a)
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
December 31,
-------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Primary Earnings Per Share
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,618,000 $1,528,000
========== ==========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 6,050,000 6,000,000
Common stock equivalents - assumed exercise of options . . . . . . . . . - 274,000
---------- ----------
Average Common and Common Stock Equivalents . . . . . . . . . . . . . 6,050,000 6,274,000
========== ==========
Primary Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.24
========== ==========
Fully Diluted Earnings Per Share
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,618,000 $1,528,000
========== ==========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 6,050,000 6,000,000
Common stock equivalents - assumed exercise of options . . . . . . . . . - 316,000
---------- ----------
Average Common and Common Stock Equivalents . . . . . . . . . . . . . 6,050,000 6,316,000
========== ==========
Fully Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . $ 0.27 $ 0.24
========== ==========
</TABLE>
32
<PAGE> 1
EXHIBIT 11(b)
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended
December 31,
-------------------------------
1994 1993
----------- -----------
<S> <C> <C>
Primary Earnings Per Share
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,761,000 $6,243,000
========== ==========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 6,050,000 6,000,000
Common stock equivalents - assumed exercise of options . . . . . . . . . - 271,000
---------- ----------
Average Common and Common Stock Equivalents . . . . . . . . . . . . . 6,050,000 6,271,000
========== ==========
Primary Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . $ 0.46 $ 1.00
========== ==========
Fully Diluted Earnings Per Share
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,761,000 $6,243,000
========== ==========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . 6,050,000 6,000,000
Common stock equivalents - assumed exercise of options . . . . . . . . . - 318,000
---------- ----------
Average Common and Common Stock Equivalents . . . . . . . . . . . . . 6,050,000 6,318,000
========== ==========
Fully Diluted Earnings Per Share . . . . . . . . . . . . . . . . . . . . . $ 0.46 $ 0.99
========== ==========
</TABLE>
33
<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 six months ended December 31, 1994
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> DEC-31-1994
<CASH> 41,772
<SECURITIES> 0
<RECEIVABLES> 2,702
<ALLOWANCES> 0
<INVENTORY> 36,507
<CURRENT-ASSETS> 84,624
<PP&E> 187,403
<DEPRECIATION> 23,357
<TOTAL-ASSETS> 296,263
<CURRENT-LIABILITIES> 77,811
<BONDS> 101,408
<COMMON> 61
0
0
<OTHER-SE> 77,448
<TOTAL-LIABILITY-AND-EQUITY> 296,263
<SALES> 455,785
<TOTAL-REVENUES> 455,785
<CGS> 338,727
<TOTAL-COSTS> 425,618
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,867
<INCOME-PRETAX> 4,759
<INCOME-TAX> 1,998
<INCOME-CONTINUING> 2,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,761
<EPS-PRIMARY> 0.46
<EPS-DILUTED> 0.46
</TABLE>
