SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Fiscal Quarter Ended JanuaryJuly 31, 2007

Commission File Number 0-12788

 


CASEY’S GENERAL STORES, INC.

(Exact name of registrant as specified in its charter)

 


 

IOWA 42-0935283

(State or other jurisdiction of

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

 

ONE CONVENIENCE BOULEVARD,

ANKENY, IOWA

 50021
(Address of principal executive offices) (Zip Code)

(515) 965-6100

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “acceleratedaccelerated filer and large accelerated filer”filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at March 6,September 4, 2007

Common Stock, no par value per share

 50,523,65150,654,462 shares

 



CASEY’S GENERAL STORES, INC.

INDEX

 

   Page

PART I - FINANCIAL INFORMATION

  

Item 1.

 

Consolidated Financial Statements.

  
Consolidated condensed balance sheets - July 31, 2007 and April 30, 20073
Consolidated condensed statements of earnings - three months ended July 31, 2007 and 20065
Consolidated condensed statements of cash flows - three months ended July 31, 2007 and 20067
Notes to consolidated condensed financial statements9
 

Consolidated condensed balance sheets - January 31, 2007 and April 30, 2006

3

Consolidated condensed statements of earnings - three and nine months ended January 31, 2007 and 2006

5

Consolidated condensed statements of cash flows - nine months ended January 31, 2007 and 2006

7

Notes to consolidated condensed financial statements

9

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

  1716

Item 3.

 

Quantitative and Qualitative Disclosure about Market Risk.

  2725

Item 4.

 

Controls and Procedures

  2725

PART II - OTHER INFORMATION

  

Item 1.

 

Legal Proceedings.

  2825

Item 1A.

 

Risk FactorsFactors.

  2927

Item 6.

 

Exhibits.

  2927

SIGNATURE

  3129

 

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PART I—I - FINANCIAL INFORMATION

 

Item 1.Consolidated Financial Statements.

CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(Dollars in Thousands)DOLLARS IN THOUSANDS)

 

  

January 31,

2007

  

April 30,

2006

  July 31,
2007
  April 30,
2007

ASSETS

        

Current assets:

        

Cash and cash equivalents

  $32,835  75,369  $131,913  107,067

Receivables

   7,697  9,672   15,289  13,432

Inventories

   96,617  96,255   116,397  109,702

Prepaid expenses

   6,687  7,063   8,709  7,891

Income tax receivable

   9,451  3,047   —    2,733
            

Total current assets

   153,287  191,406   272,308  240,825
            

Other assets

   8,515  6,894   8,600  8,550

Goodwill

   45,538  14,414   46,758  46,588

Property and equipment, net of accumulated depreciation January 31, 2007, $529,574 April 30, 2006, $490,288

   836,134  774,825

Property and equipment, net of accumulated depreciation of $552,088 at July 31, 2007, and of $538,121 at April 30, 2007

   838,602  833,308
            
  $1,043,474  987,539  $1,166,268  1,129,271
            

See notes to unaudited consolidated condensed financial statements.

 

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CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

(Continued)

(Dollars in Thousands)DOLLARS IN THOUSANDS)

LIABILITIES AND SHAREHOLDERS’ EQUITY

   

January 31,

2007

  

April 30,

2006

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Current liabilities:

    

Note payable

  $8,200  —  

Current maturities of long-term debt

   48,045  51,628

Accounts payable

   102,468  146,121

Accrued expenses

   48,003  45,947
       

Total current liabilities

   206,716  243,696
       

Long-term debt, net of current maturities

   155,007  106,512

Deferred income taxes

   101,449  99,929

Deferred compensation

   7,977  7,236

Other long-term liabilities

   8,502  6,976
       

Total liabilities

   479,651  464,349
       

Shareholders’ equity

    

Preferred stock, no par value

   —    —  

Common stock, no par value

   52,047  49,161

Retained earnings

   511,776  474,029
       

Total shareholders’ equity

   563,823  523,190
       
  $1,043,474  987,539
       

   July 31,
2007
  April 30,
2007

Current liabilities:

    

Current maturities of long-term debt

  $47,573  47,566

Accounts payable

   133,091  134,375

Accrued expenses

   60,224  52,326

Income taxes payable

   11,966  —  
       

Total current liabilities

   252,854  234,267
       

Long-term debt, net of current maturities

   187,440  199,504

Deferred income taxes

   104,017  105,724

Deferred compensation

   9,206  9,016

Other long-term liabilities

   13,376  8,496
       

Total liabilities

   566,893  557,007
       

Shareholders’ equity

    

Preferred stock, no par value

   —    —  

Common Stock, no par value

   54,821  53,547

Retained earnings

   544,554  518,717
       

Total shareholders’ equity

   599,375  572,264
       
  $1,166,268  1,129,271
       

See notes to unaudited consolidated condensed financial statements.

 

- 4 -


CASEY’S GENERAL STORES INC.,INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in Thousands, except per share amounts)DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

  Three Months Ended
January 31,
 Nine Months Ended
January 31,
   Three Months Ended
July 31,
  2007  2006 2007  2006   2007  2006

Net sales

  $922,786  798,114  3,032,635  2,619,303   $1,279,177  1,095,594

Franchise revenue

   175  164  537  524    165  189
                   
   922,961  798,278  3,033,172  2,619,827    1,279,342  1,095,783
                   

Cost of goods sold

   783,022  680,240  2,601,684  2,216,723    1,090,993  950,242

Operating expenses

   103,651  90,380  305,325  272,814    121,714  100,375

Depreciation and amortization

   16,204  14,087  47,266  42,370    16,196  15,453

Interest, net

   2,878  2,087  7,960  6,328    2,345  2,395
                   
   905,755  786,794  2,962,235  2,538,235    1,231,248  1,068,465
                   

Earnings from continuing operations before income taxes, gain (loss) on discontinued operations, and cumulative effect of accounting change

   17,206  11,484  70,937  81,592 

Earnings from continuing operations before income taxes and loss on discontinued operations

   48,094  27,318

Federal and state income taxes

   6,000  3,928  25,694  29,550    18,143  10,229
                   

Earnings from continuing operations before gain (loss) on discontinued operations, cumulative effect of accounting change

   11,206  7,556  45,243  52,042 

Gain (loss) on discontinued operations, net of taxes (tax benefit) of $25, ($386), $48, and ($589)

   38  (603) 74  (921)

Cumulative effect of accounting Change, net of tax benefit of $692

   —    —    —    (1,083)

Earnings from continuing operations before loss on discontinued operations

   29,951  17,089

Loss on discontinued operations, net of tax benefit of $112 and $120

   175  188
                   

Net earnings

  $11,244  6,953  45,317  50,038   $29,776  16,901
                   

 

- 5 -


CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(Unaudited)

(Continued)

(Dollars in Thousands, except per share amounts)DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

 

  Three Months Ended
January 31,
 Nine Months Ended
January 31,
   

Three Months Ended

July 31,

  2007  2006 2007  2006   2007  2006

Basic

           

Earnings from continuing operations before loss on discontinued operations and cumulative effect of accounting change

  $.22  .15  .90  1.03 

Earnings from continuing operations before loss on discontinued operations

  $.59  .34

Loss on discontinued operations

   .00  (.01) .00  (.02)   —    —  

Cumulative effect of accounting change

   .00  .00  .00  (.02)
                   

Net earnings

  $.22  .14  .90  .99   $.59  .34
                   

Diluted

           

Earnings from continuing operations before loss on discontinued operations and cumulative effect of accounting change

  $.22  .15  .89  1.03 

Earnings from continuing operations before loss on discontinued operations

  $.59  .33

Loss on discontinued operations

   .00  (.01) .00  (.02)   —    —  

Cumulative effect of accounting change

   .00  .00  .00  (.02)
                   

Net earnings

  $.22  .14  .89  .99   $.59  .33
                   

Basic weighted average shares outstanding

   50,486,845  50,339,329  50,436,290  50,292,129    50,628,712  50,392,662

Plus effect of stock options

   234,220  207,163  232,023  180,061    217,143  267,485
                   

Diluted weighted average shares outstanding

   50,721,065  50,546,492  50,668,313  50,472,190    50,845,855  50,660,147
                   

See notes to unaudited consolidated condensed financial statements.

 

- 6 -


CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)THOUSANDS)

 

  Nine Months Ended
January 31,
   Three Months Ended
July 31,
 
  2007 2006   2007 2006 

Cash flows from operations:

      

Net earnings from continuing operations

  $45,243  52,042   $29,951  17,089 

Adjustments to reconcile net earnings to net cash provided by operations:

   

Cumulative effect of accounting change

   —    (1,083)

Adjustments to reconcile net income to net cash provided by operations:

   

Depreciation and amortization

   47,266  42,370    16,196  15,453 

Other amortization

   473  —      247  396 

Stock based compensation

   455  —      281  303 

Loss on sale of property and equipment

   1,769  1,329    918  237 

Deferred income taxes

   1,520  (2,011)   (1,707) (694)

Changes in assets and liabilities net of acquisition:

   

Changes in assets and liabilities:

   

Receivables

   1,975  600    (1,857) (373)

Inventories

   2,648  (15,929)   (6,695) (10,524)

Prepaid expenses

   578  (3,511)   (818) 615 

Accounts payable

   (43,653) (7,081)   (1,284) (16,578)

Accrued expenses

   1,718  9,379    7,898  (590)

Income taxes

   (5,820) (2,929)   18,925  10,587 

Other, net

   (427) (454)   (16) (178)
              

Net cash provided by operations

   53,745  72,722    62,039  15,743 
              

Cash flows from investing:

      

Purchase of property and equipment

   (68,204) (84,546)   (23,486) (23,321)

Payments for acquisition of business

   (66,729) (3,707)

Proceeds from sale of property and equipment

   1,992  3,247    442  382 
              

Net cash used in investing activities

   (132,941) (85,006)   (23,044) (22,939)
              

Cash flows from financing:

   

Proceeds from long-term debt

   50,000  —   

Payments of long-term debt

   (16,649) (14,722)

Net borrowings of short-term debt

   8,200  2,300 

Proceeds from exercise of stock options

   1,847  1,975 

Payments of cash dividends

   (7,570) (6,793)
       

Net cash provided by (used in) financing activities

   35,828  (17,240)
       

 

- 7 -


CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(Continued)

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)THOUSANDS)

 

  Nine Months Ended
January 31,
   Three Months Ended
July 31,
 
  2007 2006   2007 2006 

Cash flows of discontinued operations:

   

Cash flows from financing:

   

Payment of long-term debt

   (12,057) (15,012)

Net borrowings of short-term debt

   —    8,900 

Proceeds from exercise of stock options

   737  527 

Payment of cash dividends

   (3,292) (2,520)
       

Net cash used in financing activities

   (14,612) (8,105)
       

Cash flows from discontinued operations

   

Operating cash flows

   (86) 348    154  (65)

Investing cash flows

   920  4,076    309  —   
              

Net cash flows from discontinued operations

   834  4,424    463  (65)
              

Net decrease in cash and cash equivalents

   (42,534) (25,100)

Net increase (decrease) in cash and cash equivalents

   24,846  (15,366)

Cash and cash equivalents at beginning of the period

   75,369  49,051    107,067  75,369 
              

Cash and cash equivalents at end of the period

  $32,835  23,951   $131,913  60,003 
              

SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION

 

   

Nine Months Ended

January 31,

   2007  2006

Cash paid during the year for:

    

Interest, net of amount capitalized

  $9,223  8,916

Income taxes

   28,014  34,879

Noncash investing and financing activities:

    

Property and equipment and goodwill acquired through installment purchases, capitalized lease obligations, or business acquisitions

   11,560  28,287

Noncash operating and financing activities:

    

Increase in common stock and increase in income tax receivable due to tax benefits related to stock options

   584  506
   Three Months Ended
July 31,
 
   2007  2006 

Cash paid (received) during the period for:

   

Interest, net of amount capitalized

  $3,523  3,891 

Income taxes

   283  (518)

Noncash operating and financing activities:

   

Increase in common stock and decrease in income taxes payable due to tax benefits related to stock options

   254  270 

Noncash investing activities:

   

Remeasurement of income taxes upon adoption of FIN 48

   (646) —   

See notes to unaudited consolidated condensed financial statements.

 

- 8 -


CASEY’S GENERAL STORES, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED CONDENSED

FINANCIAL STATEMENTS

(Dollars in Thousands)

 

1.The accompanying consolidated condensed financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries. All material inter-company balances and transactions have been eliminated in consolidation.

 

2.The accompanying consolidated condensed financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. Although management believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these interim consolidated condensed financial statements be read in conjunction with the Company’s most recent audited financial statements and notes thereto. In the opinion of management, the accompanying consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to present fairly the financial position as of JanuaryJuly 31, 2007, and the results of operations for the three and nine months ended JanuaryJuly 31, 2007 and 2006, and changes inthe cash flows for the ninethree months ended JanuaryJuly 31, 2007 and 2006. Certain reclassifications for prepaid phone cards and video rental commissions were made to balances for the prior year to conform to current year presentation. The Company has separately disclosed the operating and investing portions of the cash flows attributable to its discontinued operations, which in prior periods were reported combined with operations.

 

3.The Company recognizes retail sales of gasoline, grocery and general merchandise, and prepared food and commissions on lottery, prepaid phone cards, and video rentals at the time of the sale to the customer. Wholesale sales to franchisees are recognized at the time of delivery to the franchise location. Franchise fees, license fees from franchisees, and rent for franchise signage and facades are recognized monthly when billed to the franchisees. Other maintenance services and transportation charges are recognized at the time the service is provided. Vendor rebates in the form of rack display allowances are treated as a reduction in cost of sales and are recognized incrementally over the period covered by the applicable rebate agreement. Vendor rebates in the form of billbacks are treated as a reduction in inventory cost of sales and are recognized at the time the product is sold.

 

- 9 -


4.

Effective May 1, 2006,Under the Company adoptedCompany’s stock option plans, options may be granted to non-employee directors, certain officers, and key employees to purchase an aggregate of 4,560,000 shares of common stock. Options for 366,664 shares were available for grant at July 31, 2007, and options for 930,750 shares (which expire between 2008 and 2017) were outstanding. Any additional option share requirements in the provisions of Statement of Financial Accounting Standards No. 123 (revised 2004) (FAS 123R), Share-Based Payment usingfuture would require approval by the “modified prospective” transition method. FAS 123R requires the measurementshareholders of the

– 9 –


cost of employee services received in exchange for an award of equity instruments based upon the fair value of the award on the grant date. The cost of the award Company. Additional information is recognizedprovided in the income statement over the vesting period of the award. Under the “modified prospective” transition method, awards that are granted, modified or settled beginning at the date of adoption are measured and accounted for in accordance with FAS 123R. In addition, expense must be recognized in the income statement for unvested awards that were granted prior to the date of adoption. The expense will be based on the fair value determined at the grant date. The impact of the adoption of FAS 123R on the Company’s financial statements for the year ending on April 30, 2007 is expected to be a reduction in earnings per share of approximately $0.01.Proxy Statement.

Under the Company’s stock option plans, options may be granted to non-employee directors, certain officers, and key employees to purchase an aggregate of 4,560,000 shares of common stock. Option prices for employees are not to be less than the fair market value of the stock (110% of fair market value for holders of 10% or more of the Company’s stock) at the date the options are granted. Options for 626,664 shares were available for grant at January 31, 2007, and options for 813,200 shares (which expire between 2007 and 2016) were outstanding. Any additional option share requirements in the future would require approval by the shareholders of the Company. Additional information is provided in the Company’s 2007 Proxy Statement.

On June 6, 2003,25, 2007, stock options totaling 307,000246,000 shares were granted to certain officers and key employees. These awards were granted at no cost to the employee. These awards vestedwill vest on June 6, 200625, 2010 and subsequent to adoption of FAS 123R, compensation expense wasis currently being recognized ratably over the vesting period.

On July 5, 2005, stock options totaling 234,000 shares were granted to certain officers and key employees. These awards were also granted at no cost to the employee. These awards will vest on July 5, 2010 and compensation expense is currently being recognized ratably over the vesting period.

The 2000 Stock Option Plan grants employees options with an exercise price equal to the fair market value of the Company’s stock on the date of grant and expire ten years after the date of grant. Vesting is generally over a three to five-year service period. The non-employee Directors’ Stock Option Plan grants directors options with an exercise price equal to the average of the last reported sale prices of shares of common stock on the last trading day of each of the 12 months preceding the award of the option. The term of such options is ten years from the date of grant, and each option is exercisable immediately upon grant. On May 1, 2007, stock options totaling 14,000 shares were granted to the directors. The aggregate number of shares of Common Stock that may be granted pursuant to the Director Stock Plan may not exceed 200,000 shares, subject to adjustment to reflect any future stock dividends, stock splits or other relevant capitalization changes.

– 10 –


Information concerning the issuance of stock options is presented in the following table:

 

   Shares Price  

2007 Weighted-

Average Exercise

Outstanding at April 30, 2006

  961,050  $15.29

Granted

  14,000   22.36

Exercised

  (139,850)  13.20

Forfeited

  (22,000)  14.80
       

Outstanding at January 31, 2007

  813,200  $15.79
       

Weighted average fair value of options granted during the nine-month period ended January 31, 2007

   $9.25

   Number of
Shares
  Weighted
Average Exercise
Price

Outstanding at April 30, 2007

  729,500  $16.10

Granted

  260,000   26.77

Exercised

  (57,250)  12.88

Forfeited

  (1,500)  17.70
       

Outstanding at July 31, 2007

  930,750  $19.28
       

Weighted average fair value of options granted during the three-month period ended July 31, 2007

   $10.17

- 10 -


At JanuaryJuly 31, 2007, all outstanding options had an aggregate intrinsic value of $7,914$5,752 and a weighted average remaining contractual life of 5.96.8 years. The vested options totaled 582,200454,750 shares with a weighted average exercise price of $13.85$14.43 per share and a weighted average remaining contractual life of 4.84.6 years. The aggregate intrinsic value for the vested options as of JanuaryJuly 31, 2007, was $6,796.$4,775. The aggregate intrinsic value for the total of all options exercised during the nine monthsquarter ended JanuaryJuly 31, 2007, was $1,723,$690, and the total fair value of shares vested during the nine monthsquarter ended JanuaryJuly 31, 2007, was $1,232.$163.

The fair value of the 2007 stock options granted was estimated utilizing the Black Scholes valuation model. The grant date fair valuevalues for the May 1, 20062007 and the June 25, 2007 options was $9.25.were $11.65 and $10.09, respectively. Significant assumptions include:

 

   May 1, 20062007June 25, 2007 

Risk-free interest rate

  4.884.84%4.65%

Expected option life

  8.758.94 years6.18 years 

Expected volatility

  3537%34%

Expected dividend yield

  1.171.35%1.15%

– 11 –


The option term of each award granted was based upon historical experience of employees’ and directors’ exercise behavior. Expected volatility was based upon historical volatility levels and future expected volatility of common stock. Expected dividend yield was based on expected dividend rate. Risk free interest rate reflects the yield on the 8.75 yearof a zero coupon U.S. Treasury.

Treasury over the expected option life. Total compensation costs recorded for the nine monthsquarters ended JanuaryJuly 31, 2007 and 2006, were $455$281 and $303, respectively, for the stock option awards. No compensation costs related to stock options had been recorded for the nine months ended January 31, 2006. As of JanuaryJuly 31, 2007, there was $968$3,261 of total unrecognized compensation costs related to the 2000 Stock Option Plan for stock options which is expected to be recognized ratably through fiscal 2011.

Prior to adopting FAS 123R, the Company applied APB Opinion 25 in accounting for its Stock Option Plan and, accordingly, no compensation cost for its stock options was recognized in the financial statements. Pursuant to the disclosure requirements of FAS 123R, pro forma net income and earnings per share for the three-month and nine-month periods ended January 31, 2006, are presented in the following table as if compensation cost for stock options was determined under the fair value method and recognized as expense over the options’ vesting periods:

 

   

Three Months

Ended 1/31/06

  

Nine Months

Ended 1/31/06

Net income, as reported

  $6,953  50,038

Deducted amount

    

Total stock-based employee compensation expense determined by fair-value method for all awards, net of related tax effects

   112  377
       

Pro forma net income

  $6,841  49,661
       

Basic earnings per share

    

As reported

  $0.14  0.99

Pro forma

  $0.14  0.99

Diluted earnings per share

    

As reported

  $0.14  0.99

Pro forma

  $0.14  0.98

– 12 –- 11 -


5.The results of operations of owned stores are presented as discontinued operations beginning in the quarter in which management commits to a plan to close the related store and actively markets the store. The results of operations of a leased store are presented as discontinued operations beginning in the quarter in which the related store ceases operations. Any such store is presented in discontinued operations beginning in the quarter in which the asset qualifies as held for sale or is disposed of and no further involvement or benefit is expected upon disposal. The results of operations include related writedowns of stores to estimated net realizable value. The Company does not allocate interest expense to discontinued operations. Amounts related to prior periods for discontinued operations determined in the currentof prior periods have been reclassified to conform to discontinued operations of the current period in the accompanying condensed consolidated statements of earnings.

The stores presented as discontinued operations had total revenues and pretax gain (loss)loss as follows for the periods presented (in thousands):

 

  

Three Months Ended

January 31,

 

Nine Months Ended

January 31,

   Three Months Ended
July 31
 
  2006  2007 2006  2007   2007 2006 

Total revenue

  $1,170  3,135  6,010  12,694   $5,283  7,456 

Pretax gain (loss)

   63  (989) 122  (1,510)

Pretax loss

   (287) (308)

Included in the pretax gain (loss)loss on discontinued operations is a gain on disposal of $270 and a loss on disposal of $993 for the nine month periods ending January 31, 2007 and 2006, respectively, and a gain on disposal of $47 and a loss on disposal of $772$239 for the three-month periodsperiod ended JanuaryJuly 31, 2007 and 2006, respectively.2007. There were no disposals during the three-month period ended July 31, 2006. Included in property and equipment in the accompanying condensed consolidated balance sheets are $755$2,275 and $1,225$2,900 in assets held for sale as of JanuaryJuly 31, 2007 and April 30, 2006,2007, respectively.

 

6.On October 3 and October 4, 2006, the Company acquired the assets comprising the HandiMart convenience store chain that was owned by Nordstrom Oil Company and headquartered in Cedar Rapids, Iowa. The Company isdid not issuingissue any stock for the transaction, nor acquiringacquire any stock of the selling company. The tradename HandiMart is included in the assets purchased. The chain acquired consisted of thirty-two (32) HandiMart convenience stores and one truckstop operated under the name Just Diesel. The Company is continuingconvenience stores will continue to operate under the convenience stores under their current names.HandiMart name for the present, though all have been converted to the Company’s system of operation and Casey’s identifying signage is being incorporated into each of them. These stores were acquired to increase our market presence within eastern Iowa.

 

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The HandiMart stores were valued using a discounted cash flow model that was done on a location by location basis. The model projects future cash flows and calculates a return on investment after capital expenditures and the purchase price is determined using a targeted rate of return. The Company also engaged several third party valuation experts to assist in assessing the fair market values of the tangible and intangible assets.

The acquisition was recorded by allocating the cost of the assets acquired, including intangible assets and liabilities assumed, based on their estimated fair values at the acquisition date. The excess of the cost of the acquisition over the net of amounts assigned to the fair value of the assets acquired and the liabilities assumed is recorded as goodwill. This allocation is preliminary and subject to change pending management’s final determination of fair values. The preliminary allocation of the purchase price of $66,729 is as follows:

Assets Acquired:

  

Inventories

  $3,010 

Prepaid expenses

   132 

Land

   11,400 

Building

   12,250 

Equipment

   9,806 

Leasehold Improvements

   1,250 
     

Total assets

   37,848 
     

Liabilities Assumed:

  

Accrued expenses

   (338)
     

Total liabilities

   (338)
     

Net tangible assets acquired, net of cash

   37,510 

Goodwill

   29,149 

Other intangible assets

   70 
     

Total consideration paid, net of cash acquired

  $66,729 
     

As of January 31, 2007, the entire purchase price of $66,729 has been paid in full. The Company also assumed leases of the real estate comprising eleven (11) of the stores. The leases vary in the amount of rent to be paid, the length of the term and the options available to the Company. The Company has capitalized five (5) of these leases with an aggregate present value of $8,383 that is included in Property and Equipment and Long-Term Debt. The remaining six (6) leases are being treated as operating leases.

– 14 –- 12 -


The results of operations of the HandiMart stores from the dates of acquisition through JanuaryJuly 31, 2007 are included in the statement of earnings and statement of cash flows.

The following unaudited pro forma information presents a summary of ourthe Company’s consolidated results of operations, andincluding the HandiMart convenience store chain acquired in October of 2006 as if the transaction occurred at the beginning of the fiscal years (amounts in thousands, except per share data):

 

   Three Months Ended
January 31,
  Nine Months Ended
January 31,
 
   2007  2006  2007  2006 

Total revenues

  $922,961  840,773  3,120,528  2,758,265 
              

Earnings from continuing operations

   11,206  7,923  46,091  53,815 

Gain (loss) on discontinued operations, net of taxes (tax benefit) of $25, ($386), $48, and ($589)

   38  (603) 74  (921)

Cumulative effect of accounting change, net of tax benefit of $0, $0, $0, and $692

   —    —    —    (1,083)
              

Net earnings

  $11,244  7,320  46,165  51,811 
              

Basic earnings per share

       

Earnings from continuing operations

  $0.22  0.16  0.92  1.07 

Loss on discontinued operations

   —    (.01) —    (.02)

Cumulative effect of accounting change

   —    —    —    (.02)
              

Net earnings

  $0.22  0.15  0.92  1.03 
              

Diluted earnings per share

       

Earnings from continuing operations

  $0.22  0.15  0.91  1.07 

Loss on discontinued operations

   —    (.01) —    (.02)

Cumulative effect of accounting change

   —    —    —    (.02)
              

Net earnings

  $0.22  0.14  0.91  1.03 
              
   Three Months Ended July 31,
   2007  2006

Total revenues

  $1,279,342  1,152,003

Earnings from continuing operations before gain or loss on discontinued operations and cumulative effect of accounting change

  $29,951  17,665

Net earnings

  $29,776  17,477

Earnings per share

    

Basic

  $.59  .35

Diluted

  $.59  .35

 

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7.On September 29, 2006, the Company authorized the issuance of $100,000 aggregate principal amount of its 5.72% Senior Notes consisting of $50,000 Series A, due September 30, 2019, and $50,000 Series B, due March 30, 2020. The Company received the $50,000 Series A proceeds on September 29, 2006, and will receivereceived the additional $50,000 Series B proceeds on March 30, 2007. Interest on the 5.72% Senior Notes, Series A and Series B, is payable on the 30th day of March and September in each year, at the rate of 5.72% per annum. Principal prepayments commence on September 30, 2012 and March 30, 2013 for Series A and Series B, respectively. The Company may prepay the 5.72% Senior Notes, Series A and B, in whole or in part at any time in an amount not less than $2,000 in the case of a partial prepayment at a redemption price calculated in accordance with the Note Purchase Agreement dated as of September 29, 2006 between the Company and the purchasers of the 5.72% Senior Notes.

 

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8.The Company is named as a defendant in five (5) lawsuits (“hot fuel” cases) brought in the federal courts in Kansas and Missouri against a variety of gasoline retailers. The complaints generally allege that the Company, along with numerous other retailers, has misrepresented gasoline volumes dispensed at its pumps by failing to compensate for expansion that occurs when fuel is sold at temperatures above 60°F. Fuel is measured at 60°F in wholesale purchase transactions and computation of motor fuel taxes in Kansas and Missouri. The complaints all seek certification as class actions on behalf of gasoline consumers within those two states, and one of the complaints also seeks certification for a class consisting of gasoline consumers in all states. The actions generally seek recovery for alleged violations of state consumer protection or unfair merchandising practices statutes, negligent and fraudulent misrepresentation, unjust enrichment, civil conspiracy and violation of the duty of good faith and fair dealing, and several seek injunction relief and punitive damages. These actions are part of a number of similar lawsuits that have been filed in recent weeks in different states against a wide range of defendants that produce, refine, distribute and/or market gasoline products in the United States. The Federal Judicial Panel on Multidistrict Litigation recently assigned all of the pending cases to the United States District Court for the Eastern District of Kansas for rulings on discovery matters, various pre-trial motions and class certification issues applicable to all of the cases. All other proceedings, including discovery, have been stayed pending rulings on various motions and proposals now pending in that Court.

ManagementThe Company also is named as defendant in an action brought under the Fair Labor Standards Act on behalf of two named plaintiffs individually and all persons who are or were employed during the three-year period immediately preceding May 31, 2007 as assistant managers at any store operated by the Company or one of its subsidiaries, who worked overtime during any given week within that period and have not filed individual complaint to recover uncompensated overtime wages. The Company has filed an answer denying the claims, as well as a motion for change of venue to the U.S. District Court for the Southern District of Iowa sitting in Des Moines, which was granted on August 30, 2007. Plaintiffs have asked the Court to conditionally certify the class so that the case may proceed as a collective action. The Company has resisted that request and has undertaken an internal investigation of matters bearing on the issue of whether class certification is appropriate.

In both of the above matters, management does not believe the Company is liable to the defendants for the conduct complained of, and intends to contest the matters

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vigorously. While the outcome of any pending litigation cannot be predicted, management does not believe that the pending litigation will have a material adverse affect on the Company’s business or its financial position. The outcome of litigation is always uncertain, however, and unforeseen results can occur. It is possible that such outcomes could materially affect net income in a particular quarter or annual period.

 

9.In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN48”), which is an Interpretation of FASB Statement No. 109, Accounting for Income Taxes. The Company was required to adopt the provisions of FIN 48, effective May 1, 2007. This interpretation was issued to clarify the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

The Company recognized additional tax liabilities of $646 with a corresponding reduction to beginning retained earnings as of May 1, 2007 as a result of the adoption of FIN 48. The total amount of gross unrecognized tax benefits was $4,037, as of May 1, 2007, the date of adoption. Of this amount, $3,286 represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate. These unrecognized tax benefits relate to the state income tax filing positions and federal tax credits claimed for the Company’s corporate subsidiaries. The Company does not expect the aggregate amount of unrecognized tax benefits to change significantly within the next twelve months. The total amount of accrued interest and penalties for such unrecognized tax benefits was $130 as of May 1, 2007, the date of adoption. Interest and penalties related to income taxes are classified as income tax expense in our financial statements.

The statute of limitations for federal and states remains open for the years 2003 and forward.

In September 2006, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 157, Fair Value Measurements, which clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company has not yet determined the impact that the implementation of SFAS No. 157 will have on the consolidated financial statements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.

- 15 -


In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, which permits many financial instruments and certain other items to be measured at fair value at the option of the Company. SFAS No. 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company does not expect SFAS No. 159 to have a significant impact on the consolidated financial statements.

10.The Company’s financial condition and results of operations are affected by a variety of factors and business influences, certain of which are described in the Cautionary

– 16 –


Statement Relatingcautionary statement relating to Forward-Looking Statements filed as Exhibit 99 toincluded in the Annual Report on Form 10-K for the fiscal year ended April 30, 2006.2007. These interim consolidated condensed financial statements should be read in conjunction with that Cautionary Statement.

 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations(Dollars in Thousands)..

Overview

Casey’s General Stores, Inc. (“Casey’s”) and its wholly-owned subsidiaries (Casey’s, together with its subsidiaries, are referred to herein as the “Company”), operate convenience stores under the name “Casey’s General Store,” “HandiMart” and “Just Diesel”Store” in nine Midwestern states, primarily Iowa, Missouri and Illinois. All stores offer gasoline for sale on a self-serve basis and carry a broad selection of food (including freshly prepared foods such as pizza, donuts and sandwiches), beverages, tobacco products, health and beauty aids, automotive products and other non-food items. On JanuaryJuly 31, 2007, there were a total of 1,4621,463 Casey’s General Stores in operation, of which 1,4441,448 were owned by the Company and 1815 stores were operated by franchisees. A typical store is generally not profitable for its first year of operation due to start-up costs and will usually attain representative levels of sales and profits during its third or fourth year of operation.

The Company derives its revenue primarily from the retail sale of gasoline and the products offered in Company stores. The Company also generates a small amount of its revenues from the Company’s franchisees and from the wholesale sale of certain grocery and general merchandise items and gasoline to franchised stores.

Approximately 61% of all Casey’s General Stores are located in areas with populations of fewer than 5,000 persons, while approximately 13% of all stores are located in communities with populations exceeding 20,000 persons. The Company operates a central warehouse, the Casey’s Distribution Center, adjacent to its Corporate Headquarters facility in Ankeny, Iowa, through which it supplies grocery and general merchandise items to Company and franchised stores.

- 16 -


At JanuaryJuly 31, 2007, the Company owned the land at 1,3581,368 locations and the buildings at 1,3691,378 locations, and leased the land at 8680 locations and the buildings at 7570 locations. The Company treats all operating leases on a straight line basis.

Long-lived assets are reviewed quarterly for impairment or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company did not incur any impairment charges during the three-months ended July 31, 2007. The Company values the locations addressed above based on their expected resale value. The impairment charges are reported as a component of operating expenses when they occur.

– 17 –


Three Months Ended JanuaryJuly 31, 2007 Compared to Three Months Ended JanuaryJuly 31, 2006(Dollars (Dollars and AmountsGallons in Thousands)

 

Three months ended 1/31/07  Gasoline Grocery & other
merchandise
 Prepared food
& fountain
 Other Total 

Three months ended 7/31/07

  Gasoline Grocery & other
merchandise
 Prepared food
& fountain
 Other Total 

Sales

  $647,714  202,499  66,966  5,607  $922,786   $938,019  259,788  75,442  5,928  1,279,177 

Gross profit

   32,256  62,312  41,561  3,635   139,764    49,477  88,297  46,538  3,872  188,184 

Margin

   5.0% 30.8% 62.1% 64.8%  15.1%   5.3% 34.0% 61.7% 65.3% 14.7%

Gasoline Gallons

   306,716        313,385     
Three months ended 1/31/06  Gasoline Grocery & other
merchandise
 Prepared food
& fountain
 Other Total 

Three months ended 7/31/06

  Gasoline Grocery & other
merchandise
 Prepared food
& fountain
 Other Total 

Sales

  $561,218  175,655  56,167  5,074  $798,114   $799,480  225,206  65,682  5,226  1,095,594 

Gross profit

   24,588  54,925  35,130  3,231   117,874    28,545  72,636  41,305  2,866  145,352 

Margin

   4.4% 31.3% 62.5% 63.7%  14.8%   3.6% 32.3% 62.9% 54.8% 13.3%

Gasoline Gallons

   267,562        290,590     

Net sales for the thirdfirst quarter of fiscal 20072008 increased by $124,672 (15.6%$183,583 (16.8%) over the comparable period in fiscal 2006.2007. Retail gasoline sales increased by $86,496 (15.4%$138,539 (17.3%) as the number of gallons sold increased by 39,154 (14.6%22,795 (7.8%) while the average retail price per gallon increased 0.7%8.7%. During this same period, retail sales of grocery and general merchandise increased by $26,844 (15.3%$34,582 (15.4%andwhile prepared food and fountain sales increased by $10,799 (19.2%$9,760 (14.9%), due to the addition of 7145 new Company Stores the introductionand a greater number of new products, and selective price increases.stores in operation for at least three years.

- 17 -


The other sales category primarily consists of wholesale gasoline and grocery sales to franchise stores and lottery, prepaid phone cardscard, and video rental commissions received. These sales increased $533 (10.5%$702 (13.4%) for the thirdfirst quarter of fiscal 2007 primarily due to2008 while the increase in lottery and prepaid phone card commissions. The gross profit margin also increased $404 (12.5%$1,006 (35.1%) primarily due to the increase in lottery commissions of $675 (57.3%) and prepaid phone card commissions of $178 (72.2%) from the comparable period in the prior year.

Cost of goods sold as a percentage of net sales was 84.9%85.3% for the thirdfirst quarter of fiscal

– 18 –


2007, 2008, compared to 85.2%86.7% for the comparable period in the prior year. The gross profit margins on retail gasoline sales increased (to 5%5.3%) during the thirdfirst quarter of fiscal 20072008 from the thirdfirst quarter of the prior year (4.4%(3.6%). The gross profit margin per gallon also increased (to $.1052)$.1579) in the thirdfirst quarter of fiscal 20072008 from the comparable period in the prior year ($.0919). The gross profits on retail sales of grocery and general merchandise decreased (to 30.8%) from the comparable period in the prior year (31.3%), and the prepared food margin also decreased (to 62.1%) from the comparable period in the prior year (62.5%).

Operating expenses as a percentage of net sales were 11.2% for the third quarter of fiscal 2007 compared to 11.3% for the comparable period in the prior year. The slight decrease in operating expenses as a percentage of net sales was caused primarily by a slight increase in the average retail price per gallon of gasoline sold. Operating expenses increased 14.7% in the third quarter of 2007 from the comparable period in the prior year, primarily due to a 25.7% increase in bank fees resulting from customers’ greater use of credit cards, and the larger number of corporate stores.

Net earnings increased by $4,291 (61.7%). The increase in net earnings was attributable primarily to the increases in the gross profit margins per gallon of gasoline sold.

Nine Months Ended January 31, 2007 Compared to Nine Months Ended January 31, 2006(Dollars and Amounts in Thousands)

Nine months ended 1/31/07  Gasoline  Grocery & other
merchandise
  Prepared food
& fountain
  Other  Total 

Sales

  $2,168,513  645,781  201,933  16,408  $3,032,635 

Gross profit

   89,366  206,035  125,525  10,025   430,951 

Margin

   4.1% 31.9% 62.2% 61.1%  14.2%

Gasoline Gallons

   901,459     

– 19 –


Nine months ended 1/31/06  Gasoline  Grocery & other
merchandise
  Prepared food
& fountain
  Other  Total 

Sales

  $1,849,055  586,160  171,577  12,511  $2,619,303 

Gross profit

   97,457  189,388  109,323  6,412   402,580 

Margin

   5.3% 32.3% 63.7% 51.3%  15.4%

Gasoline Gallons

   830,808     

Net sales for the first nine months of fiscal 2007 increased by $413,332 (15.8%) over the comparable period in fiscal 2006. Retail gasoline sales increased by $319,458 (17.3%) as the number of gallons sold increased by 70,651 (8.5%) while the average retail price per gallon increased 8.1%. During this same period, retail sales of grocery and general merchandise increased by $59,621 (10.2%) and prepared food and fountain sales increased by $30,356 (17.7%), due to the addition of 71 new Company stores, the introduction of new products, and selective price increases.

The other sales category primarily consists of wholesale gasoline and grocery sales to franchise stores and lottery, prepaid phone cards and video rental commissions received. These sales increased $3,897 (31.1%) during the first nine months of fiscal 2007 primarily due to the increase in lottery and prepaid phone card commissions. The gross profit margin also increased $3,613 (56.3%) primarily due to the increase in lottery commissions of $1,792 (60.8%) and prepaid phone card commissions of $654 (112.5%) from the comparable period in the prior year.

Cost of goods sold as a percentage of net sales was 85.8% for the first nine months of fiscal 2007, compared to 84.6% for the comparable period in the prior year. The gross profit margins on retail gasoline sales decreased (to 4.1%) during the first nine months of fiscal 2007 from the comparable period in the prior year (5.3%). The gross profit margin per gallon also decreased (to $.0991) during the first nine months of fiscal 2007 from the comparable period in the prior year ($.1173).0982). Although the Company achieved above average gross profit margins per gallon duringfor the nine months ended January 31, 2006,first quarter of fiscal 2008, management expects market conditions to return to historical levels of 10 to 11 cents per gallon over the long term. The gross profits on retail sales of grocery and generalother merchandise decreasedincreased (to 31.9%34%) from the comparable period in the prior year (32.3%), andwhile the prepared food margin also decreased (to 62.2%61.7%) from the comparable period in the prior year (63.7%(62.9%). The decrease in the prepared food margin was caused by increased product costs primarily in the fountain and coffee areas.

Operating expenses as a percentage of net sales were 10.1%9.5% for the first nine monthsquarter of fiscal 20072008 compared to 10.4%9.2% for the comparable period in the prior year. The decrease in operating expenses as a percentage of net sales was caused primarily by an increase in the average retail price per gallon of gasoline sold. Operating expenses increased 11.9% during21.3% in the

– 20 –


first nine monthsquarter of 20072008 from the comparable period in the prior year, primarily dueyear. Nearly 3% of this increase was related to additional incentive pay resulting from a 30.2%more profitable quarter, and another 2% related to an increase in bank fees resulting from customers’ greater use of credit cards, and the larger number of corporate stores.large health insurance claims. The remaining portion of the increase was attributable to the addition of 45 more stores since the close of the comparable period in the prior year.

Net earnings decreasedincreased by $4,721 (9.4%$12,875 (76.2%). The decreaseincrease in net earnings was attributable primarily to the decreaseincrease in the gross profit margin per gallon of gasoline sold, andsold. However, the decreasesincrease in net earnings was partially offset by the gross profit margins of grocery and other merchandise and prepared food and fountain.increases in operating expenses.

Critical Accounting Policies

Critical accounting policies are those accounting policies that management believes are important to the portrayal of the Company’s financial condition and results of operations and require management’s most difficult, subjective judgments, often because of the need to estimate the effects of inherently uncertain factors.

- 18 -


Inventory. Inventories, which consist of merchandise and gasoline, are stated at the lower of cost or market. For gasoline, cost is determined through the use of the first-in, first-out (FIFO) method. For merchandise inventories, cost is determined through the use of the last-in, first-out (LIFO) method applied to inventory values determined primarily by the FIFO method for warehouse inventories and the retail inventory method (RIM) for store inventories, except for cigarettes, beer, pop, and prepared foods, which are valued at cost. RIM is an averaging method widely used in the retail industry because of its practicality.

Under RIM, inventory valuations are at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to sales. Inherent in the RIM calculations are certain management judgments and estimates whichthat could affect the ending inventory valuation at cost and the resulting gross margins.

Vendor allowances include rebates and other funds received from vendors to promote their products. The Company often receives such allowances on the basis of quantitative contract terms that vary by product and vendor or directly on the basis of purchases made. Rebates are recognized as reductions of inventory costs when purchases are made; reimbursements of an operating expense (e.g., advertising) are recorded as reductions of the related expense.

Long-lived Assets. The Company periodically monitors under-performing stores for an indication that the carrying amount of assets may not be recoverable. If the sum of the expected future undiscounted cash flows is less than the carrying amount of the assets, including goodwill where applicable, an impairment loss is recognized. Impairment is based on the estimated fair value of the asset. Fair value is based on management’s estimate of the amount that could be

– 21 –


realized from the sale of assets in a current transaction between willing parties. The estimate is derived from offers, actual sale or disposition of assets subsequent to periodyear end, and other indications of asset value. In determining whether an asset is impaired, assets are grouped at the lowest level for which there are identifiable cash flows that are largely independent of the cash flows of other groups of assets, which for the Company is generally on a store-by-store basis. Management expects to continue its on-going evaluation of under-performing stores, and may periodically sell specific stores where further operational and marketing efforts are not likely to improve their performance. The Company did not incur any impairment charges during the three months ended July 31, 2007.

Self-insurance. The Company is primarily self-insured for employee health care, workers’ compensation, general liability, and automobile claims. The self-insurance claim liability is determined actuarially based on claims filed and an estimate of claims incurred but not yet reported. Actuarial projections of the losses are employed due to the high degree of variability in the liability estimates. Some factors affecting the uncertainty

- 19 -


of claims include the time frame of development, settlement patterns, litigation and adjudication direction, and medical treatment and cost trends. The liability is not discounted.

Recent accounting pronouncementsAccounting Pronouncements. In June 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 06–3,How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (that is, Gross versus Net Presentation), which allows companies to adopt a policy of presenting taxes in the income statement on either a gross or net basis. Taxes within the scope of this EITF would include taxes that are imposed on a revenue transaction between a seller and a customer. If such taxes are significant, the accounting policy should be disclosed as well as the amount of taxes included in the financial statements if presented on a gross basis. EITF 06–3 is effective for reporting periods beginning after December 15, 2006. The Company is currently assessing the impact, if any, of EITF Issue No. 06–3 on its consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”FIN48”), which is an interpretationInterpretation of FASB Statement No. 109,Accounting for Income Taxes. The Company was required to adopt the provisions of FIN 48, effective May 1, 2007. This interpretation prescribeswas issued to clarify the minimum recognition threshold a tax position must meet before beingaccounting for uncertainty in income taxes recognized in the financial statements. FIN 48 also provides guidance onstatements by prescribing a recognition threshold and measurement attribute for the derecognition,financial statement recognition and measurement classification, interest and penalties, accountingof a tax position taken or expected to be taken in interim periods and disclosure requirements for uncertaina tax positions. FIN 48 is effectivereturn.

The Company recognized additional tax liabilities of $646 with a corresponding reduction to beginning retained earnings as of the beginningMay 1, 2007 as a result of an entity’s first fiscal year that begins after December 15, 2006. Differences between the amounts recognized in the statements of financial position prior to the adoption of FIN 48 and the amounts reported after adoption should be accounted for48. The total amount of gross unrecognized tax benefits was $4,037, as a cumulative-effect adjustment recorded to the beginning balance of retained earnings. The cumulative effect adjustment would not apply to those items that would not have been recognized in earnings, such

– 22 –


as the effect of adopting FIN 48 on tax positions related to business combinations. The Company plans to adopt FIN 48 on May 1, 2007, the date of adoption. Of this amount, $3,286 represents the amount of unrecognized tax benefits that, if recognized, would impact our effective tax rate. These unrecognized tax benefits relate to the state income tax filing positions and isfederal tax credits claimed for the Company’s corporate subsidiaries. The Company does not expect the aggregate amount of unrecognized tax benefits to change significantly within the next twelve months. The total amount of accrued interest and penalties for such unrecognized tax benefits was $130 as of May 1, 2007, the date of adoption. Interest and penalties related to income taxes are classified as income tax expense in the process of assessing the impact of the adoption of this statement on its consolidatedour financial statements.

The statute of limitations for federal and states remains open for the years 2003 and forward.

In September 2006, the U.S. Securities and Exchange Commission staffFASB issued StaffStatement of Financial Accounting BulletinStandard (SFAS) No. 108 (“SAB 108”)157,Fair Value Measurements,Considering which clarifies the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. SAB 108 requires quantification of financial statement misstatementsprinciple that fair value should be based on the effectsassumptions that market participants would use when pricing an asset or liability. Additionally, it establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The Company has not yet determined the impact that the implementation of SFAS No. 157 will have on the consolidated financial statements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities Including an Amendment of FASB Statement No. 115, which permits many financial instruments and certain other items to be measured at fair value at the option of the misstatements on each of the company’sCompany. SFAS No. 159 is effective for financial statements and the related financial statement disclosures.issued for fiscal years beginning after November 15, 2007. The Company does not expect SAB 108SFAS No. 159 to have a materialsignificant impact on the consolidated financial statements. SAB 108 is effective

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Reclassifications. Net sales and cost of goods sold were reduced by $386 for fiscal years ending after November 15, 2006.the three months ended July 31, 2006 for video rental commissions that were previously recorded as gross rather than as net commissions.

Other accounting standards have been issued or proposed by the FASB or other standard-setting bodies that do not require adoption until a future date. These standards are not expected to have a material impact on the Company’s consolidated financial statements upon adoption.

Liquidity and Capital Resources(Dollars in Thousands)

Due to the nature of the Company’s business, most sales are for cash, and cash provided by operations is the Company’s primary source of liquidity. The Company finances its inventory purchases primarily from normal trade credit aided by the relatively rapid turnover of inventory. This turnover allows the Company to conduct its operations without large amounts of cash and working capital. As of JanuaryJuly 31, 2007, the Company’s ratio of current assets to current liabilities was .741.08 to 1. The ratio at JanuaryJuly 31, 2006 and April 30, 20062007 was .70.77 to 1 and .791.03 to 1, respectively. Management believes that the Company’s current $50,000 bank line of credit, of $50,000 ($8,200 outstanding at January 31, 2007), together with cash flow from operations will be sufficient to satisfy the working capital needs of itsour business.

Net cash provided by operations decreased $18,977 (26.1%increased $46,296 (294.1%duringin the ninethree months ended JanuaryJuly 31, 2007 from the comparable period in the prior year, primarily as a result of lowera larger net earnings from continuing operations andincome, a large decrease in accounts payable, due to the lower cost per gallon of gasoline.an increase in accrued expenses, a smaller increase in inventories and a larger increase in income taxes payable. Cash used in investing duringin the ninethree months ended JanuaryJuly 31, 2007 increased due to the acquisition of the HandiMart stores.remained relatively constant. Cash provided byused in financing increased, primarily due to an increase in the proceeds from long-termshort-term debt and short-term borrowings.for the comparable period in the prior year.

Capital expenditures represent the single largest use of Company funds. Management believes that by reinvesting in Company stores, the Company will be better able to respond to competitive challenges and increase operating efficiencies. During the first ninethree months of fiscal 2007,2008, the Company expended $134,933$23,486 for property and equipment, and goodwill, primarily for

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the construction, acquisition and remodeling of Company stores, including the HandiMart acquisition, compared to $88,253$23,321 for the comparable period in the prior year. The Company anticipates expending approximately $160,000$135,000 in fiscal 20072008 for construction, acquisition and remodeling of Company stores, primarily from existing cash and funds generated by operations.

As of JanuaryJuly 31, 2007, the Company had long-term debt of $155,007,$187,440, consisting of $50,000$100,000 in principal amount of 5.72% Senior Notes, Series A and B, $30,000 in principal amount of 7.38% Senior Notes, $28,000$23,000 in principal amount of Senior Notes, Series A through Series F, with interest rates ranging from 6.18% to 7.23%, $34,286$22,857 in principal amount of 7.89% Senior Notes, Series A, $3,317$2,370 of mortgage notes payable, and $9,404$9,213 of capital lease obligations.

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To date, the Company has funded capital expenditures primarily from the proceeds of the sale of Common Stock, issuance of 6-1/4%6- 1/4% Convertible Subordinated Debentures (which were converted into shares of Common Stock in 1994), the above-described Senior Notes, a mortgage note, and through funds generated from operations. Future capital needs required to finance operations, improvements and the anticipated growth in the number of Company stores are expected to be met from cash generated by operations, the bank line of credit, and additional long-term debt or other securities as circumstances may dictate, and are not expected to adversely affect liquidity.

Cautionary Statements(Dollars in Thousands)

The foregoing Management’s Discussion and Analysis of Financial Condition and Results of Operations contains various “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements represent the Company’s expectations or beliefs concerning future events, including (i) any statements regarding future sales and gross profit percentages, (ii) any statements regarding the continuation of historical trends and (iii) any statements regarding the sufficiency of the Company’s cash balances and cash generated from operations and financing activities for the Company’s future liquidity and capital resource needs. The Company cautions that these statements are further qualified by important factors that could cause actual results to differ materially from those in the forward-looking statements, including, without limitations, the following factors described more completely in the Cautionary Statement Relating to Forward-Looking Statements included as Exhibit 99 to the Form 10-K for the fiscal year ended April 30, 2006:2007:

Competition. The Company’s business is highly competitive, and marked by ease of entry and constant change in terms of the numbers and type of retailers offering the products and services found in Company stores. Many of the food (including prepared foods) and non-food

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items similar or identical to those sold by the Company are generally available from a variety of competitors in the communities served by Company stores, and the Company competes with other convenience store chains, gasoline stations, supermarkets, drug stores, discount stores, club stores, mass merchants and “fast-food” outlets (with respect to the sale of prepared foods). Sales of such non-gasoline items (particularly prepared food items) have contributed substantially to the Company’s gross profits from retail sales in recent years. Gasoline sales are also intensely competitive. The Company competes with both independent and national brand gasoline stations in the sale of gasoline, other convenience store chains and several non-traditional gasoline retailers such as supermarkets in specific markets. Some of these other gasoline retailers may have access to more favorable arrangements for gasoline supply thanthen do the Company or the firms that supply its stores. Some of the Company’s competitors have

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greater financial, marketing and other resources than the Company, and, as a result, may be able to respond better to changes in the economy and new opportunities within the industry.

Gasoline operations. Gasoline sales are an important part of the Company’s sales and earnings, and retail gasoline profit margins have a substantial impact on the Company’s net income. Profit margins on gasoline sales can be adversely affected by factors beyond the control of the Company, including the supply of gasoline available in the retail gasoline market, uncertainty or volatility in the wholesale gasoline market, increases in wholesale gasoline costs generally during a period and price competition from other gasoline marketers. The market for crude oil and domestic wholesale petroleum products is marked by significant volatility, and is affected by general political conditions and instability in oil producing regions such as the Middle East and Venezuela.South America. The volatility of the wholesale gasoline market makes it extremely difficult to predict the impact of future wholesale cost fluctuation on the Company’s operating results and financial conditions. These factors could materially impact the Company’s gasoline gallon volume, gasoline gross profit and overall customer traffic levels at Company stores. Any substantial decrease in profit margins on gasoline sales or in the number of gallons sold by Company stores could have a material adverse effect on the Company’s earnings.

The Company purchases its gasoline from a variety of independent national and regional petroleum distributors. Although in recent years the Company’s suppliers have not experienced any difficulties in obtaining sufficient amounts of gasoline to meet the Company’s needs, unanticipated national and international events could result in a reduction of gasoline supplies available for distribution to the Company. Any substantial curtailment in gasoline supplied to the Company could adversely affect the Company by reducing its gasoline sales. Further, management believes that a significant amount of the Company’s business results from the patronage of customers primarily desiring to purchase gasoline and, accordingly, reduced gasoline supplies could adversely affect the sale of non-gasoline items. Such factors could have a material adverse impact upon the Company’s earnings and operations.

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Tobacco Products. Sales of tobacco products represent a significant portion of the Company’s revenues. Significant increases in wholesale cigarette costs and tax increases on tobacco products, as well as national and local campaigns to discourage smoking in the United States, could have an adverse affect on the demand for cigarettes sold by Company stores. The Company attempts to pass price increases onto its customers, but competitive pressures in specific markets may prevent it from doing so. These factors could materially impact the retail price of cigarettes, the volume of cigarettes sold by Company stores and overall customer traffic.

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Environmental Compliance Costs. The United States Environmental Protection Agency and several states, including Iowa, have established requirements for owners and operators of underground gasoline storage tanks (USTs) with regard to (i) maintenance of leak detection, corrosion protection and overfill/spill protection systems; (ii) upgrade of existing tanks; (iii) actions required in the event of a detected leak; (iv) prevention of leakage through tank closings; and (v) required gasoline inventory recordkeeping. Since 1984, new Company stores have been equipped with non-corroding fiberglass USTs.USTs, including many with double-wall construction, over-fill protection and electronic tank monitoring. The Company currently has 3,0983,088 USTs, of which 2,6042,623 are fiberglass and 494465 are steel. Management believes that its existing gasoline procedures and planned capital expenditures will continue to keep the Company in substantial compliance with all current federal and state UST regulations.

Several of the states in which the Company does business have trust fund programs with provisions for sharing or reimbursing corrective action or remediation costs incurred by UST owners, including the Company. The extent of available coverage or reimbursement under such programs for costs incurred by the Company is not fully known at this time. In each of the years ended April 30, 20062007 and 2005,2006, the Company spent approximately $1,519$1,431 and $1,414,$1,519, respectively, for assessments and remediation. During the ninethree months ended JanuaryJuly 31, 2007, the Company expended approximately $984$259 for such purposes. Substantially all of these expenditures have been submitted for reimbursement from state-sponsored trust fund programs and as of JanuaryJuly 31, 2007, approximately $9,872$10,253 has been received from such programs since their inception. Such amounts are typically subject to statutory provisions requiring repayment of the reimbursed funds for non-compliance with upgrade provisions or other applicable laws. The Company has an accrued liability at JanuaryJuly 31, 2007 of approximately $356$354 for estimated expenses related to anticipated corrective actions or remediation efforts, including relevant legal and consulting costs. Management believes the Company has no material joint and several environmental liability with other parties.

Although the Company regularly accrues expenses for the estimated costs related to its future corrective action or remediation efforts, there can be no assurance that such accrued amounts will be sufficient to pay such costs, or that the Company has identified all environmental liabilities at all of its current store locations. In addition, there can be no assurance that the

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Company will not incur substantial expenditures in the future for remediation of contamination or related claims that have not been discovered or asserted with respect to existing store locations or locations that the Company may acquire in the future, or that the Company will not be subject to any claims for reimbursement of funds disbursed to the Company under the various state programs or that additional regulations, or amendments to existing regulations, will not require additional expenditures beyond those presently anticipated.

 

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Item 3.Quantitative and Qualitative Disclosures about Market Risk(Dollars in Thousands).

The Company’s exposure to market risk for changes in interest rates relates primarily to its investment portfolio and long-term debt obligations. The Company places its investments with high quality credit issuers and, by policy, limits the amount of credit exposure to any one issuer. As stated in its policy, the Company’s first priority is to reduce the risk of principal loss. Consequently, the Company seeks to preserve its invested funds by limiting default risk, market risk and reinvestment risk. The Company mitigates default risk by investing in only high quality credit securities that it believes to be low risk and by positioning its portfolio to respond appropriately to a significant reduction in a credit rating of any investment issuer or guarantor. The portfolio includes only marketable securities with active secondary or resale markets to ensure portfolio liquidity. The Company believes that an immediate 100 basis point move in interest rates affecting the Company’s floating and fixed rate financial instruments as of JanuaryJuly 31, 2007 would have an immaterial effect on the Company’s pretax earnings.

 

Item 4.Controls and Procedures.

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer of the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rule 240.13a-15(e)). Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s current disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Notwithstanding the foregoing, there can be no assurance that the Company’s disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in the Company’s report.

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There were no changes in the Company’s internal control over financial reporting that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II—II - OTHER INFORMATION

 

Item 1.Legal Proceedings.

The Company is named as a defendant in five (5) lawsuits (“hot fuel”(hot fuel cases) brought in the federal courts in Kansas and Missouri against a variety of gasoline retailers. The complaints generally allege that the Company, along with numerous other retailers, has misrepresented gasoline volumes dispensed at its pumps by failing to compensate for

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expansion that occurs when fuel is sold at temperatures above 60°60ºF. Fuel is measured at 60°60ºF in wholesale purchase transactions and computation of motor fuel taxes in Kansas and Missouri. The complaints all seek certification as class actions on behalf of gasoline consumers within those two states, and one of the complaints also seeks certification for a class consisting of gasoline consumers in all states. The actions generally seek recovery for alleged violations of state consumer protection or unfair merchandising practices statutes, negligent and fraudulent misrepresentation, unjust enrichment, civil conspiracy, and violation of the duty of good faith and fair dealing, anddealing; several seek injunctioninjunctive relief and punitive damages.

These actions are part of a number of similar lawsuits that have been filed in recent weeksmonths in differentapproximately 25 states against a wide range of defendants that produce, refine, distribute, and/or market gasoline products in the United States.

The Company is supporting efforts in On June 18, 2007, the actions in which it is a defendantFederal Judicial Panel on Multidistrict Litigation ordered that all of the pending hot fuel cases be transferred to consolidate the different actions underU.S. District Court for the multidistrict litigation procedures available under federal law,Eastern District of Kansas for coordinated or consolidated pretrial proceedings, including rulings by a single court on discovery matters, various pre-trialpretrial motions, and class certification issues.certification. All other proceedings have been stayed pending rulings on such matters. Management does not believe the Company is liable to the defendants for the conduct complained of, and intends to contest the matters vigorously.

On May 30, 2007, a complaint was filed against the Company in the United States District Court for the Northern District of Iowa by two former employees, in which the claim is made that Casey’s failed to properly pay overtime compensation properly to two or more of its assistant managers. Specifically, plaintiffs claim that the assistant managers were treated as nonexempt employees entitled to overtime pay, but that the Company did not properly record all hours worked and failed to pay the assistant managers overtime pay for all hours worked in excess of 40 per week. The action purports to be a collective action under the Fair Labor Standards Act (essentially equivalent to a class action) brought on behalf of all persons who are currently or were employed during the three-year period immediately preceding the filing of [the] complaint as ‘Assistant Managers’ at any Casey’s General Store operated by [the] Defendant (directly or through one of its wholly owned subsidiaries), who worked overtime during any given week within that period, and who have not filed a complaint to recover overtime wages. The complaint seeks relief in the form of back wages owed all members of the class during the three-year period preceding the filing of the complaint, liquidated damages, attorneys fees, and costs.

The Company filed an answer denying the claims, as well as a motion for change of venue to the U.S. District Court for the Southern District of Iowa sitting in Des Moines. That motion was granted on August 30, 2007 and the case will now be transferred to Des Moines. Plaintiffs have asked the Court to conditionally certify the

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class so that the case may proceed as a collective action. The Company has resisted that request and has undertaken an internal investigation of matters bearing on the class certification issue. Management does not believe the Company is liable to the plaintiffs for the conduct complained of, and intends to contest the matter vigorously.

The Company from time to time is a party to other legal proceedings arising from the conduct of its business operations, including proceedings relating to personal injury, property damage and employment claims, environmental remediation activities or contamination-related claims, disputes under franchise agreementscontamination, and claims by state and federal regulatory authorities relating to the sale of products pursuant to state or federal licenses or permits. Claims for compensatory or exemplary damages in those actions may be substantial. Management does not believe that the potential liability of the Company with respect to such other proceedings pending as of the date of this Form 10-Q is material in the aggregate.

 

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Item 1A.Risk Factors.

There have been no material changes in our “risk factors” from those disclosed in our 20062007 Annual Report on Form 10-K.

 

Item 6.Exhibits.

(a) The following exhibits are filed with this Report or, if so indicated, incorporated by reference:reference.

 

Exhibit No. 

Description

  4.2 Rights Agreement between Casey’s General Stores, Inc. and United Missouri Bank of Kansas City, N.A., as Rights Agent (incorporated(incorporated by reference from the Registration Statement on Form 8-A (0-12788) filed June 19, 1989 relating to Common Share Purchase Rights),and amendments thereto (incorporated by reference from the Form 8 (Amendment No. 1 to the Registration Statement on Form 8-A filed June 19, 1989) filed September 10, 1990; the Form 8-A/A (Amendment No. 3 to the Registration Statement on Form 8-A filed June 19, 1989) filed March 30, 1994; the Form 8-A12G/A (Amendment No. 2 to the Registration Statement on Form 8-A filed June 19, 1989) filed July 29, 1994; the Current Report on Form 8-K filed May 10, 1999; and the Current Report on Form 8-K filed September 27, 1999.)

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  4.4  Note Agreement dated as of December 1, 1995 between Casey’s General Stores, Inc. and Principal Mutual Life Insurance Company (incorporated(incorporated by reference from the Current Report on Form 8-K filed January 11, 1996).
  4.6  Note Agreement dated as of April 15, 1999 among the Company and Principal Life Insurance Company and other purchasers of the 6.18% to 7.23% Senior Notes, Series A through Series F (incorporated(incorporated by reference from the Current Report on Form 8-K filed May 10, 1999).
  4.7  Note Purchase Agreement dated as of May 1, 2000 among the Company and the purchasers of the 7.89% Senior Notes, Series 2000-A (incorporated(incorporated by reference from the Current Report on Form 8-K filed May 23, 2000).

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  4.8  Note Purchase Agreement dated as of September 29, 2006 among the Company and the purchasers of the 5.72% Senior Notes, Series A and Series B(incorporated by reference from the Current Report on Form 8-K filed September 29, 2006).
31.1  Certification of Robert J. Myers under Section 302 of the Sarbanes Oxley Act of 2002
31.2  Certification of William J. Walljasper under Section 302 of the Sarbanes Oxley Act of 2002
32.1  Certificate of Robert J. Myers under Section 906 of Sarbanes-Oxley Act of 2002
32.2  Certificate of William J. Walljasper under Section 906 of Sarbanes-Oxley Act of 2002

 

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SIGNATURE

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.

 

 CASEY’S GENERAL STORES, INC.
Date: March 8,September 7, 2007 By: 

/s/ William J. Walljasper

 William J. Walljasper
Its: Senior Vice President and& Chief Financial Officer
  (Authorized Officer and Principal Financial Officer)

 

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EXHIBIT INDEX

The following exhibits are filed herewith:

 

Exhibit No. 

Description

31.1 Certification of Robert J. Myers under Section 302 of the Sarbanes Oxley Act of 2002
31.2 Certification of William J. Walljasper under Section 302 of the Sarbanes Oxley Act of 2002
32.1 Certificate of Robert J. Myers under Section 906 of Sarbanes-Oxley Act of 2002
32.2 Certificate of William J. Walljasper under Section 906 of Sarbanes-Oxley Act of 2002

 

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