<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 March 31, 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
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(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
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(Address of principal executive offices) (Zip Code)
(713) 863-2200
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(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 May 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 March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 4
Nine Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Balance Sheets
March 31, 1995 and June 30, 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Condensed Consolidated Statements of Cash Flows
Nine Months Ended March 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . 7
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . 26
</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 March 31, 1995,
and the related statements of condensed consolidated operations and condensed
consolidated cash flows for the periods ended March 31, 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, 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
May 12, 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
March 31,
-----------------------------
1995 1994
-------- --------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $213,640 $204,643
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 163,217 154,114
Operating expenses . . . . . . . . . . . . . . . . . . . . . 40,802 41,629
General and administrative . . . . . . . . . . . . . . . . . 9,048 9,002
-------- --------
213,067 204,745
-------- --------
Operating Income (Loss) . . . . . . . . . . . . . . . . . . . . . 573 (102)
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . (2,323) (2,626)
Interest income . . . . . . . . . . . . . . . . . . . . . . . 361 312
Gain on sale of assets . . . . . . . . . . . . . . . . . . . 360 -
-------- --------
Loss Before Income Tax Benefit . . . . . . . . . . . . . . . . . (1,029) (2,416)
Income Tax Benefit . . . . . . . . . . . . . . . . . . . . . . . (433) (889)
-------- --------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (596) $ (1,527)
======== ========
Loss Per Share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (0.10) $ (0.25)
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . (0.10) (0.25)
Weighted Average Number of Shares Outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,050 6,011
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . 6,050 6,011
</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>
Nine Months Ended
March 31,
-----------------------------
1995 1994
-------- --------
<S> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . $669,425 $652,645
Costs and Expenses:
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . 501,753 483,267
Operating expenses . . . . . . . . . . . . . . . . . . . . . 127,693 127,053
General and administrative . . . . . . . . . . . . . . . . . 30,589 27,426
-------- --------
660,035 637,746
-------- --------
Operating Income . . . . . . . . . . . . . . . . . . . . . . . . 9,390 14,899
Other Income (Expense):
Interest expense . . . . . . . . . . . . . . . . . . . . . . (7,103) (8,069)
Interest income . . . . . . . . . . . . . . . . . . . . . . . 1,083 896
Gain on sale of assets . . . . . . . . . . . . . . . . . . . 360 -
-------- --------
Income Before Income Tax Expense . . . . . . . . . . . . . . . . 3,730 7,726
Income Tax Expense . . . . . . . . . . . . . . . . . . . . . . . 1,565 3,010
-------- --------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,165 $ 4,716
======== ========
Earnings Per Share:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.36 $ 0.75
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . 0.36 0.75
Weighted Average Number of Shares Outstanding:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,052 6,298
Fully Diluted . . . . . . . . . . . . . . . . . . . . . . . . 6,052 6,309
</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>
March 31, June 30,
1995 1994
--------- ---------
(Unaudited) (Note)
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents, $12,545 and $14,083
reserved . . . . . . . . . . . . . . . . . . . . . . . . . $ 29,551 $ 41,370
Accounts receivable, net . . . . . . . . . . . . . . . . . . 3,959 5,449
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . 36,493 39,626
Prepaid expenses . . . . . . . . . . . . . . . . . . . . . . 2,734 4,775
Other current assets . . . . . . . . . . . . . . . . . . . . 4,259 4,259
--------- ---------
Total Current Assets . . . . . . . . . . . . . . . . . . . 76,996 95,479
Property and Equipment, net of Accumulated
Depreciation of $22,124 and $19,215 . . . . . . . . . . . . . 158,713 158,075
Other Assets:
Reorganization value in excess of amounts allocable
to identifiable assets, net . . . . . . . . . . . . . . . 24,278 34,542
Deferred tax asset, net . . . . . . . . . . . . . . . . . . . 9,737 1,812
Other assets, net . . . . . . . . . . . . . . . . . . . . . . 12,009 8,915
--------- ---------
Total Other Assets . . . . . . . . . . . . . . . . . . . . 46,024 45,269
--------- ---------
$ 281,733 $ 298,823
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses . . . . . . . . . . . . $ 56,141 $ 67,858
Current portion of long-term debt . . . . . . . . . . . . . . 12,065 12,103
--------- ---------
Total Current Liabilities . . . . . . . . . . . . . . . . 68,206 79,961
Long-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . 94,440 107,204
Other Liabilities . . . . . . . . . . . . . . . . . . . . . . . . 42,174 36,910
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 . . . . . . . . . . . . . . . . . . . . . . 13,389 11,224
--------- ---------
Total Stockholders' Equity . . . . . . . . . . . . . . . . 76,913 74,748
--------- ---------
$ 281,733 $ 298,823
========= =========
</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>
Nine Months Ended
March 31,
----------------------------
1995 1994
-------- --------
<S> <C> <C>
Cash Flows From Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,165 $ 4,716
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . 10,373 13,134
Deferred income taxes . . . . . . . . . . . . . . . . . 1,075 2,516
Gain on sale of assets . . . . . . . . . . . . . . . . (360) -
Other . . . . . . . . . . . . . . . . . . . . . . . . 582 -
Changes in operating assets and liabilities, net
of sales of stores:
(Increase) decrease in accounts and notes
receivable and prepaid expenses . . . . . . . . . . 4,405 (983)
(Increase) decrease in inventories . . . . . . . . . . 2,321 (446)
Decrease in accounts payable and
accrued expenses . . . . . . . . . . . . . . . . . . (6,594) (2,802)
Increase in income taxes . . . . . . . . . . . . . . . 215 180
-------- --------
Net cash provided by operating activities . . . . . . . . 14,182 16,315
-------- --------
Cash Flows From Investing Activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . (17,944) (10,689)
Proceeds from sales of assets . . . . . . . . . . . . . . . . 4,012 -
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 2,142 1,632
-------- --------
Net cash used in investing activities . . . . . . . . . . (11,790) (9,057)
-------- --------
Cash Flows From Financing Activities:
Principal payments on long-term debt . . . . . . . . . . . . (14,396) (12,229)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . 185 208
-------- --------
Net cash used in financing activities . . . . . . . . . . (14,211) (12,021)
-------- --------
Net Decrease in Cash and Cash Equivalents . . . . . . . . . . . . (11,819) (4,763)
Cash and Cash Equivalents - Beginning of period . . . . . . . . . 41,370 46,072
-------- --------
Cash and Cash Equivalents - End of period . . . . . . . . . . . . $ 29,551 $ 41,309
======== ========
Supplemental Cash flow Information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . $ 7,305 $ 8,042
Income taxes paid, net . . . . . . . . . . . . . . . . . . . $ 276 $ 315
</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 the financial position as of
March 31, 1995, the results of operations for the three and nine months ended
March 31, 1995 and 1994 and the cash flows for the nine months ended March 31,
1995 and 1994. 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 for the periods ended March 31, 1995, 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 the weighted average number of common and common stock
equivalents outstanding for the period. For the three and nine months ended
March 31, 1995, the weighted average number of common and common stock
equivalents used in computing primary and fully diluted earnings (loss) per
share was 6,050,000 and 6,052,000, respectively. Common stock equivalents for
the three month period were not included in the calculation as their inclusion
would have been antidilutive.
For the three and nine months ended March 31, 1994, the weighted average number
of common and common stock equivalents used in computing primary earnings
(loss) per share was 6,011,000 and 6,298,000, respectively. The common and
common stock equivalents used in the fully diluted earnings (loss) per share
calculation for the three and nine months ended March 31, 1994 were 6,011,000
and 6,309,000, respectively. Common stock equivalents for the three month
period were not included in the calculation as their inclusion would have been
antidilutive.
8
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NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. 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 2009. The Company was also required to reduce
the tax basis of its assets by $26.1 million. As of March 31, 1995, the net
operating loss carryforward is estimated to have been reduced to $23.8 million
as a result of the application of the loss carryforwards to reduce current
taxable income.
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 Company expects the remaining net operating loss carryforwards, tax credit
carryforwards, and other tax attributes to be available to offset future income
taxes, subject to the expiration dates described above. However, should a
second Ownership Change occur, the Company's use of these tax loss and credit
carryforwards, and other tax attributes could be severely restricted or
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.
During the three months ended March 31, 1995, the deferred tax asset account
was increased by $9 million, largely the result of the increased probability
that the Company will utilize tax losses and credits before they expire. The
increase in the deferred tax asset was offset by a reduction to the
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets.
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
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NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. DEBT
As of March 31, 1995 and June 30, 1994, long-term debt consisted of the
following (dollars in thousands):
<TABLE>
<CAPTION>
March 31, 1995 June 30, 1994
-------------- -------------
<S> <C> <C>
Term Loan, due 2000 . . . . . . . . . . . . . . . . . $ 44,593 $ 53,806
Revolving Credit Agreement . . . . . . . . . . . . . - -
Letter of Credit Agreement, due 2000 . . . . . . . . - -
Mortgage notes on real estate, due 2003 . . . . . . . 57,019 59,586
Other notes payable, due through 2000 . . . . . . . . 4,893 5,915
-------- --------
106,505 119,307
Less: Amounts due within one year . . . . . . . . 12,065 12,103
-------- --------
$ 94,440 $107,204
======== ========
</TABLE>
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. Additionally, such long-term bank debt agreements
contain covenants whereby the Company is required to maintain certain financial
ratio and coverage tests including a minimum (as defined) (i) current ratio,
(ii) interest coverage, (iii) fixed charge coverage, (iv) net worth, and (v) a
maximum borrowed funds to net worth ratio. At March 31, 1995, the Company was
in compliance with respect to such covenants.
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, not to exceed $20.3 million. The Company is currently
negotiating to amend this covenant to increase the limit for capital and
environmental remediation expenditures for fiscal 1995 to an amount not to
exceed $30 million.
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 nine months ended March 31, 1995 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
10
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NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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.
During the second and third quarters of fiscal 1995, the Company completed
transactions whereby the Company sold 39 operating convenience stores, 23 in
the Houston market and 16 in the Dallas/Fort Worth market, together with
related inventories and equipment for cash consideration of approximately
$4,012,000.
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 and leased by the Company. Management
believes that its existing gasoline storage and
11
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NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 had capital
expenditures of $4.4 million during the first nine months of fiscal 1995 and
expects to expend an additional $645,000 for minor testing and improvements
during the last three months of the fiscal year. In addition, Management
believes that it has allocated sufficient resources in its long-term capital
budget 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 and groundwater caused by leaking underground
gasoline storage tanks and underground piping systems. At March 31, 1995 and
June 30, 1994, the remediation liability totalled $20.0 million and $20.8
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 $4.2 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.
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 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.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company recorded net losses of $0.6 million, or 10 cents per share, for
the third quarter of fiscal 1995, as compared to net losses of $1.5 million, or
25 cents per share, for the same period last year. The decrease in net losses
for the current three month period was primarily due to a decrease in operating
expenses of $0.8 million.
The Company earned $2.2 million, or 36 cents per share, for the first nine
months of fiscal 1995, as compared to net earnings of $4.7 million, or 75 cents
per share, for the same period last year. The decrease in net earnings for the
current nine month period was primarily due to lower merchandise gross profits,
which decline was partially offset by higher gas margins. In addition, the
first nine months of fiscal 1995 include consulting and other non-recurring
expenses of $3.1 million 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;
the comparable period in 1994 includes $0.4 million. The Company's nine months
of fiscal 1995 also include increased labor costs of approximately $2.8 million
related to additional full-time employees hired to improve customer service.
13
<PAGE> 14
The following table sets forth selected information regarding the results of
the Company's operations during the three and nine months ended March 31, 1995
and 1994:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
March 31, March 31,
---------------------------- ----------------------
1995 1994 1995 1994
------- -------- -------- --------
<S> <C> <C> <C> <C>
Merchandise sales (millions) . . . . . . $115.8 $118.0 $372.3 $380.4
Merchandise gross profit margin . . . . . 33.9% 35.3% 33.9% 34.8%
Merchandise gross profit (millions) . . . $ 39.2 $ 41.7 $126.3 $132.2
Gasoline sales (millions) . . . . . . . $ 97.8 $ 86.7 $297.1 $272.3
Gasoline gross profit margin . . . . . . 11.5% 10.1% 13.9% 13.7%
Gasoline gross profit (millions) . . . . $ 11.2 $ 8.8 $ 41.4 $ 37.2
Total sales (millions) . . . . . . . . . $213.6 $204.7 $669.4 $652.7
Average gross profit margin . . . . . . . 23.6% 24.7% 25.1% 26.0%
Total gross profit (millions) . . . . . . $ 50.4 $ 50.5 $167.7 $169.4
Average number of stores . . . . . . . . 692 714 702 717
Average sales per store (thousands):
Merchandise . . . . . . . . . . . . . $167.3 $165.3 $530.3 $530.5
Gasoline . . . . . . . . . . . . . . 141.3 121.4 423.2 379.8
------ ------ ------ ------
Total $308.6 $286.7 $953.5 $910.3
Gasoline gallons sold (millions) . . . . 92.8 92.5 278.8 276.4
Average gasoline gallons sold per gas
store (thousands) . . . . . . . . . . 151.1 149.7 444.7 445.8
</TABLE>
Three Months Ended March 31, 1995 Compared to the Three Months Ended March 31,
1994:
Sales and Gross Profits - Merchandise sales decreased $2.2 million to $115.8
million for the three months ended March 31, 1995 as compared to $118.0 million
for the corresponding three month period ended March 31, 1994. On a same-store
basis, merchandise sales increased $2.6 million, or 3%, primarily due to
increased sales of soft drinks and beer. Such increase was offset, however, by
a $4.8 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 (the
"Circle K Transaction") as compared to the California and Georgia stores
divested in the same transaction.
Merchandise gross profits decreased $2.5 million, or 6%, in the third quarter
of fiscal 1995 as compared to the third quarter of the prior year. The
decrease in merchandise gross profits was primarily attributable to a decrease
in gross profits of $ 1.7 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
14
<PAGE> 15
K Transaction as compared to the California and Georgia stores divested in the
same transaction, coupled with a $0.8 million decrease in same-store gross
profits. Merchandise gross profit margins decreased 1.4 percentage points from
35.3% in the third quarter of fiscal 1994 to 33.9% in the third quarter of
fiscal 1995. Merchandise gross profit margins from same-store sales also
decreased 1.7 percentage points when compared to the prior period.
Gasoline sales increased $11.1 million during the third quarter of fiscal 1995
as compared with the same quarter of the previous year due primarily to a 12%
increase in the average retail selling price of gasoline. Gasoline sales
volumes on a same-store sales basis increased 7% from the same period last
year, offset in part by a 28% decrease in gasoline sales volumes from the Texas
stores acquired in the Circle K Transaction that have remained open 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 $2.4 million in the third 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
12.1 cents per gallon for the third quarter of fiscal 1995 as compared to 9.5
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
March 31,
---------------------------
1995 1994
------- -------
<S> <C> <C>
Merchandise Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . $101.8 $ 99.2
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 11.8 (b) -
Stores closed or sold . . . . . . . . . . . . . . . . . . . . 2.2 18.8 (b)
------ ------
$115.8 $118.0
====== ======
Gasoline Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . $ 83.9 $ 70.0
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 12.4 (b) -
Stores closed or sold . . . . . . . . . . . . . . . . . . . 1.5 16.7 (b)
------ ------
$ 97.8 $ 86.7
====== ======
Gasoline Gallons:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . 79.9 74.4
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 11.5 (b) -
Stores closed or sold . . . . . . . . . . . . . . . . . . . . 1.4 18.1 (b)
------ ------
92.8 92.5
====== ======
</TABLE>
(a) Represents the 591 stores (528 of which sell gasoline) which opened
prior to July 1, 1993 and continued to operate through March 31, 1995.
(b) Includes the 88 stores acquired ("New stores"), 74 of which remain
open, 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 decreased $0.8 million, or 2%, in the
third quarter of fiscal 1995 as compared with the same period of fiscal 1994
primarily due to reduced depreciation expense (due to the retirement of
assets), reduced insurance expense (as a result of lower than estimated
property and casualty insurance claims costs), which decreases were partially
offset by increased salary costs (primarily related to higher wages and
increased staffing levels resulting from the Company's efforts to improve
customer service). 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 quarters ended March 31, 1995 and 1994 remained relatively constant at $9.0
million.
16
<PAGE> 17
Interest Expense - Interest expense decreased $303,000 in the third 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 $49,000 in the third quarter of
fiscal 1995 as compared to the prior year period (despite reduced levels of
cash available for investment), due to substantially higher interest rates on
the Company's short-term investments.
Gain on Sale of Assets - During the second and third quarters of fiscal 1995,
the Company completed transactions whereby the Company sold 39 operating
convenience stores, 23 in the Houston market and 16 in the Dallas/Fort Worth
market, together with related inventories and equipment for cash consideration
of approximately $4,012,000. The Company recorded a pretax gain of $360,000 in
connection with these transactions in the third quarter of fiscal 1995.
Income Tax Expense - The Company's effective income tax rate of approximately
42% and 37% for the three months ended March 31, 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. The effective income tax rate for
the three months ended March 31, 1995 was higher than the effective income tax
rate for the three months ended March 31, 1994 as a result of the increase in
the maximum federal income tax rate from 34% to 35% and the reduction in
targeted jobs tax credits due to the termination of the program as of December
31, 1994.
During the three months ended March 31, 1995, the deferred tax asset account
was increased by $9 million, largely the result of the increased probability
that the Company will utilize tax losses and credits before they expire. The
increase in the deferred tax asset was offset by a reduction to the
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets.
Seasonality - Sales and gross profits for the quarter ended March 31, 1995 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 impact 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.
17
<PAGE> 18
Nine Months Ended March 31, 1995 Compared to the Nine Months Ended March 31,
1994:
Sales and Gross Profits - Merchandise sales decreased $8.1 million, or 2%, to
$372.3 million for the nine months ended March 31, 1995 as compared to $380.4
million for the corresponding nine month period ended March 31, 1994. The
Company's merchandise sales decreased by $11.0 million during the first nine
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 $2.9 million, or 1%, primarily
due to increased sales of soft drinks and beer, partially offset by decreases
in the sales of fountain drinks and cigarettes.
Merchandise gross profits decreased $5.9 million, or 4%, in the first nine
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 $4.2 million from stores that have closed since the prior
period coupled with 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. In addition, same-store gross profits
decreased $1.7 million primarily due to reduced gross profits from the sales of
fountain drinks, coffee and refrigerated juices. Merchandise gross profit
margins decreased 0.9 percentage points from 34.8% in the first nine months of
fiscal 1994 to 33.9% in the first nine months of fiscal 1995 for the
aforementioned reasons. Merchandise gross profit margins from same-store
sales also decreased 0.8 percentage points when compared to the prior year
period.
Gasoline sales increased $24.8 million during the first nine months of fiscal
1995 as compared with the same period of the previous year due primarily to a
8% 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
30% decrease in gasoline sales volumes from the Texas stores acquired in the
Circle K Transaction that have remained open 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 $4.2 million in the nine months ended March
31, 1995 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 14.8
cents per gallon for the nine months ended March 31, 1995 as compared to 13.5
cents per gallon for the same period of the prior year.
18
<PAGE> 19
An analysis of merchandise sales, gasoline sales and gasoline sales volumes
follows (amounts in millions):
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
-------------------------
1995 1994
------ ------
<S> <C> <C>
Merchandise Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . $322.7 $319.8
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 36.7 (b) -
Stores closed or sold . . . . . . . . . . . . . . . . . . . . 12.9 60.6 (b)
------ ------
$372.3 $380.4
====== ======
Gasoline Sales:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . $254.1 $219.2
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 35.8 (b) -
Stores closed or sold . . . . . . . . . . . . . . . . . . . 7.2 53.1 (b)
------ ------
$297.1 $272.3
====== ======
Gasoline Gallons:
Same-stores (a) . . . . . . . . . . . . . . . . . . . . . . . 239.0 222.0
New stores . . . . . . . . . . . . . . . . . . . . . . . . . 33.1 (b) -
Stores closed or sold . . . . . . . . . . . . . . . . . . . 6.7 54.4 (b)
------ ------
278.8 276.4
====== ======
</TABLE>
(a) Represents the 591 stores (528 of which sell gasoline) which opened
prior to July 1, 1993 and continued to operate through March 31, 1995.
(b) Includes the 88 stores acquired ("New stores"), 74 of which remain
open, 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 remained stable in the first nine
months of fiscal 1995 as compared with the same period of fiscal 1994. The
Company recorded increased salary costs during the first nine months of 1995 as
compared to the year earlier period (related to higher wages and increased
staffing levels resulting from the Company's efforts to improve customer
service), which increase was partially offset by a decrease in depreciation
expense (due to the retirement of assets) and a decrease in insurance expense
(as a result of lower than estimated property and casualty insurance claims
costs). 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 nine months ended March 31, 1995 increased $3.2 million, or 12%, from the
corresponding period for the prior
19
<PAGE> 20
year, primarily due to a $2.7 million increase in consulting fees and other
related expenses associated with the program to enhance and redefine the
Company's focus on customer service and employee effectiveness.
Interest Expense - Interest expense decreased $1.0 million in the first nine
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 $187,000 in the first nine months
of fiscal 1995 as compared to the prior year period (despite reduced levels of
cash available for investment), due to substantially higher interest rates on
the Company's short-term investments.
Gain on Sale of Assets - During the nine months ended March 31, 1995, the
Company completed transactions whereby the Company sold 39 operating
convenience stores, 23 in the Houston market and 16 in the Dallas/Fort Worth
market, together with related inventories and equipment for cash consideration
of approximately $4,012,000. The Company recorded a pretax gain of $360,000 in
connection with these transactions in the third quarter of fiscal 1995.
Income Tax Expense - The Company's effective income tax rate of approximately
42% and 39% for the nine months ended March 31, 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. The effective income tax rate for
the nine months ended March 31, 1995 was higher than the effective income tax
rate for the nine months ended March 31, 1994 as a result of the increase in
the maximum federal income tax rate from 34% to 35% and the reduction in
targeted jobs tax credits due to the termination of the program as of December
31, 1994.
During the three months ended March 31, 1995, the deferred tax asset account
was increased by $9 million, largely the result of the increased probability
that the Company will utilize tax losses and credits before they expire. The
increase in the deferred tax asset was offset by a reduction to the
Reorganization Value in Excess of Amounts Allocable to Identifiable Assets.
Seasonality - Sales and gross profits for the nine months ended March 31, 1995
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 impact 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.
20
<PAGE> 21
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>
March 31, 1995 June 30, 1994
-------------- -------------
<S> <C> <C>
Cash and cash equivalents (a) . . . . . . . . . . $ 29.6 $ 41.4
Current assets . . . . . . . . . . . . . . . . . $ 77.0 $ 95.5
Current liabilities . . . . . . . . . . . . . . . $ 68.2 $ 80.0
Current ratio . . . . . . . . . . . . . . . . . . 1.13 1.19
Inventory turn ratios (annualized):
Merchandise . . . . . . . . . . . . . . . . . 11.0 10.8
Gasoline . . . . . . . . . . . . . . . . . . 54.3 54.0
Long-term debt . . . . . . . . . . . . . . . . . $ 94.4 $107.2
Stockholders' equity . . . . . . . . . . . . . . $ 76.9 $ 74.7
Debt/Equity ratio . . . . . . . . . . . . . . . . 1.23 1.44
Common shares outstanding . . . . . . . . . . . . 6.1 6.1
</TABLE>
_____________________
(a) Includes $8.7 million and $7.9 million primarily related to the remittance
of tax and lottery collections at March 31, 1995 and June 30, 1994,
respectively, that has been reserved at the Company's option. Also
includes $3.8 million and $6.2 million being held in escrow at March 31,
1995 and June 30, 1994, respectively, pending the resolution of
mortgage-related matters associated with the Circle K Transaction
completed April 29, 1994.
Liquidity - Working capital totalled $8.8 million at March 31, 1995 and $15.5
million at June 30, 1994. Cash and cash equivalents were $29.6 million and
$41.4 million at March 31, 1995 and June 30, 1994, respectively. The $11.8
million decrease in cash is primarily the result of capital expenditures and
debt payments, partially offset by cash provided by operating activities and
proceeds from the sale of assets.
Cash provided by operating activities totalled $14.2 million and $16.3 million
for the nine months ending March 31, 1995 and 1994, respectively. The decrease
in the nine months of fiscal 1995 cash provided by operating activities versus
the prior year period is primarily due to the timing of working capital items
and lower operating earnings. Of the $1.6 million and $3.0 million recorded as
income tax expense for the nine months ended March 31, 1995 and 1994, $490,000
and $495,000, 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.
21
<PAGE> 22
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 was 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
94 Dallas/Fort Worth stores during the first nine months 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 $5.1 million in consulting and other related expenses in
connection with the program, of which $2.0 million and $3.1 million were
incurred in fiscal 1994 and the first nine months of fiscal 1995, respectively.
An additional $3.9 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. The Company expects to begin the next phase of the
program's implementation in the first quarter of fiscal 1996. An evaluation is
currently being done to determine the number of stores that will be included in
the next phase.
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 of the 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. During the
second and third quarters of fiscal 1995, the Company completed transactions
whereby the Company sold 39 operating convenience stores, 23 in the Houston
market and 16 in the Dallas/Fort Worth market, together with related
inventories and equipment for cash consideration of approximately $4,012,000.
Accordingly, the Company recorded a pretax net gain of $360,000 during the
third quarter of fiscal 1995. The Company intends to divest approximately four
additional stores in the fourth quarter of fiscal 1995. The Company does not
expect to incur a loss in connection with these four planned store
divestitures. Net proceeds from these sales, and any such sales in the future
are generally required to be applied against mortgage or long-term bank debt.
22
<PAGE> 23
Insurance liabilities totalled $21.0 million and $17.5 million at March 31,
1995 and June 30, 1994, respectively. During the nine month period ended
March 31, 1995, the insurance liabilities were increased by $13.0 million for
expense accruals and decreased by $9.5 million due to claims and premium
payments and certain favorable adjustments related to prior years' claims
experience.
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 March 31, 1995 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 March
31, 1995, no borrowings or letters of credit were outstanding under this
facility.
Capital Resources - The Company incurred $17.9 million of capital expenditures
through March 31, 1995 compared to $10.7 million for the corresponding period
of the prior fiscal year. During the first nine months of fiscal 1995, the
capital expenditures consisted of $6.5 million associated with the
implementation of the Company's new customer service program (discussed above),
$6.3 million of gasoline dispensing equipment and installation of underground
piping required to comply with environmental laws (the "Stage II Vapor Recovery
Equipment"), $2.3 million in equipment replacement and store improvements, $1.2
million on security for stores, $0.8 million on new store development and $0.8
million on miscellaneous projects.
The Company's long-term bank debt agreements contain certain convenants, one of
which limits the amount of capital expenditures and environmental
remediation expenses the Company can incur. For fiscal 1995, the Company's
capital expenditures/remediation expense is limited to excess cash flow, as
defined, not to exceed $20.3 million. The Company anticipates it may expend as
much as $30.0 million in fiscal 1995, which expenditures include upgrading
store security systems, installing state-of-the-art sales and inventory
management systems, remodeling existing stores, constructing a new store and
replacing equipment. The Company is currently negotiating to amend the
aforementioned covenant to increase the limit for capital expenditures and
remediation expenses for fiscal 1995 to an amount not to exceed $30.0 million.
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
March 31, 1995 associated with the Company's long-term bank debt agreements,
see Note 3.
23
<PAGE> 24
During the nine months ended March 31, 1995, long-term debt decreased by $12.8
million as a result of principal payments.
The Company's environmental remediation exposure is related primarily to the
clean-up of contaminated soil and groundwater caused by leaking underground
gasoline storage tanks and underground piping systems. The Company spent
approximately $660,000 in the first nine months of fiscal 1995 on environmental
remediation activities as compared to $1.1 million in the same period of fiscal
1994. The Company's environmental remediation liability totalled $20.0 million
and $20.8 million at March 31, 1995 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 $4.2 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.
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 and groundwater 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.
24
<PAGE> 25
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 April 25, 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 $349.2 million for the proofs of claim specifying amounts;
numerous other proofs of claim do not specify amounts. Of the total, 2,973
claims valued at $296.4 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 April 25,
1995, the Company is continuing to prosecute objections in the Bankruptcy Court
for 9 of the remaining disputed claims covering $24.6 million. Of the disputed
claims, $9.0 million is the amount the Company estimates is not covered by
insurance. In addition, as of April 25, 1995, 24 claims for $28.2 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 April 10, 1995, Boatmen's had allocated 1,180,671
shares to individual unsecured creditors and had issued the appropriate share
certificates. The remaining 435,888 shares will be allocated in the future as
additional general unsecured claims are allowed.
25
<PAGE> 26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
See Index to Exhibits on Page 28.
b) Reports on Form 8-K
None.
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL CONVENIENCE STORES INCORPORATED
(Registrant)
Date May 15, 1995 /s/ A. J. Gallerano
----------------- ---------------------------------------------------
A. J. Gallerano - Senior Vice President,
General Counsel and Secretary
Date May 15, 1995 /s/ Janice E. Bryant
----------------- ---------------------------------------------------
Janice E. Bryant - Vice President - Controller
27
<PAGE> 28
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 (loss) per share
for the three months ended March 31, 1995 and 1994 . . . . . . . . . . 29
*11(b) Computation of primary and fully diluted earnings per share
for the nine months ended March 31, 1995 and 1994 . . . . . . . . . . . . . . 30
*27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
</TABLE>
_____________
*Filed Herewith
28
<PAGE> 1
EXHIBIT 11(a)
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1995 1994
----------- -----------
<S> <C> <C>
Primary Earnings (Loss) Per Share
- ---------------------------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (596,000) $(1,527,000)
=========== ===========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . 6,050,000 6,011,000
Common stock equivalents - assumed exercise of options (1) . . . - -
----------- -----------
Average Common and Common Stock Equivalents . . . . . . . . . 6,050,000 6,011,000
=========== ===========
Primary Loss Per Share . . . . . . . . . . . . . . . . . . . . . . . $ (0.10) $ (0.25)
=========== ===========
Fully Diluted Earnings (Loss) Per Share
- ---------------------------------------
Net Loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (596,000) $(1,527,000)
=========== ===========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . . 6,050,000 6,011,000
Common stock equivalents - assumed exercise of options (1) . . . . - -
----------- -----------
Average Common and Common Stock Equivalents . . . . . . . . . . 6,050,000 6,011,000
=========== ===========
Fully Diluted Loss Per Share . . . . . . . . . . . . . . . . . . . . $ (0.10) $ (0.25)
=========== ===========
</TABLE>
(1) Common stock equivalents were antidilutive for the three month periods
ended March 31, 1995 and 1994.
29
<PAGE> 1
EXHIBIT 11(b)
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Nine Months Ended
March 31,
--------------------------------
1995 1994
----------- ------------
<S> <C> <C>
Primary Earnings Per Share
- --------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,165,000 $ 4,716,000
=========== ===========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . 6,050,000 6,004,000
Common stock equivalents - assumed exercise of options . . . . 2,000 294,000
----------- -----------
Average Common and Common Stock Equivalents . . . . . . . . 6,052,000 6,298,000
=========== ===========
Primary Earnings Per Share . . . . . . . . . . . . . . . . . . . . $ 0.36 $ 0.75
=========== ===========
Fully Diluted Earnings Per Share
- --------------------------------
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,165,000 $ 4,716,000
=========== ===========
Average Common and Common Stock Equivalents:
Average shares outstanding . . . . . . . . . . . . . . . . . . 6,050,000 6,004,000
Common stock equivalents - assumed exercise of options . . . . 2,000 305,000
----------- -----------
Average Common and Common Stock Equivalents . . . . . . . . 6,052,000 6,309,000
=========== ===========
Fully Diluted Earnings Per Share . . . . . . . . . . . . . . . . . $ 0.36 $ 0.75
=========== ===========
</TABLE>
30
<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 NINE MONTHS ENDED MARCH 31, 1995
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> MAR-31-1995
<CASH> 29,551,000
<SECURITIES> 0
<RECEIVABLES> 3,959,000
<ALLOWANCES> 0
<INVENTORY> 36,493,000
<CURRENT-ASSETS> 76,996,000
<PP&E> 180,837,000
<DEPRECIATION> 22,124,000
<TOTAL-ASSETS> 281,733,000
<CURRENT-LIABILITIES> 68,206,000
<BONDS> 94,440,000
<COMMON> 61,000
0
0
<OTHER-SE> 76,852,000
<TOTAL-LIABILITY-AND-EQUITY> 281,733,000
<SALES> 669,425,000
<TOTAL-REVENUES> 669,425,000
<CGS> 501,753,000
<TOTAL-COSTS> 629,446,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,020,000
<INCOME-PRETAX> 3,730,000
<INCOME-TAX> 1,565,000
<INCOME-CONTINUING> 2,165,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,165,000
<EPS-PRIMARY> .36
<EPS-DILUTED> .36
</TABLE>
