SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_______________
FORM 10-Q
_______________
X Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended December 31, 1995
OR
_____ Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from ..........to..........
Commission File Number 1-7936
NATIONAL CONVENIENCE STORES INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 74-1361734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 Waugh Drive, Houston, Texas 77007
(Address of principal executive offices) (Zip Code)
(713) 863-2200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No___
At February 14, 1996, the number of shares of Common Stock outstanding was 100,
all of which are owned by Diamond Shamrock Refining and Marketing Company, a
wholly-owned subsidiary of Diamond Shamrock, Inc., a reporting company under
the Securities Exchange Act of 1934, as amended.
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)
Three Months Ended
December 31,
1995 1994(1)
Sales $217,638 $220,504
Costs and Expenses:
Cost of sales 165,880 162,714
Operating expenses 38,415 43,149
General and administrative expenses 10,893 10,255
Gain on sale of assets - (161)
215,188 215,957
Operating Income 2,450 4,547
Other Income (Expense):
Interest expense (1,953) (2,400)
Interest income 260 380
Non-recurring expenses arising from the acquisition
of the Company and revaluation of assets and
liabilities pursuant to accounting for the
transaction as a purchase. (70,860) -
Income (Loss) Before Income Tax Expense (70,103) 2,527
Income Tax Expense (Benefit) (25,816) 909
Net Income (Loss) $(44,287) $ 1,618
Earnings (Loss) Per Share $ (6.91) $ 0.27
Weighted Average Number of Shares Outstanding 6,408 6,050
(1) Restated to conform to presentation used for three months ended
December 31,1995.
See Notes to Condensed Consolidated Financial Statements.
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Amounts in thousands, except per share amounts)
Six Months Ended
December 31,
1995 1994(1)
Sales $ 454,430 $ 455,785
Costs and Expenses:
Cost of sales 341,301 338,218
Operating expenses 79,481 87,208
General and administrative 21,083 21,703
Gain on sale of assets - (161)
441,865 446,968
Operating Income 12,565 8,817
Other Income (Expense):
Interest expense (4,089) (4,780)
Interest income 579 722
Non-recurring expenses arising from the acquisition
of the Company and revaluation of assets and
liabilities pursuant to accounting for the
transaction as a purchase (70,860) -
Income (Loss) Before Income Tax Expense (61,805) 4,759
Income Tax Expense (Benefit) (22,348) 1,998
Net Income (Loss) $ (39,457) $ 2,761
Earnings (Loss) Per Share $ (6.32) $ 0.46
Weighted Average Number of Shares Outstanding 6,242 6,050
(1) Restated to conform to presentation used for six months ended
December 31,1995.
See Notes to Condensed Consolidated Financial Statements.
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands, except per share amounts)
December 31, June 30,
1995 1995(1)
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents, $685 and $9,093
reserved $ 18,301 $ 31,375
Accounts receivable, net 5,369 5,418
Inventories 35,176 36,555
Prepaid expenses 3,530 2,518
Deferred tax asset 4,733 5,610
Total Current Assets 67,109 81,476
Property and Equipment, net of Accumulated
Depreciation 141,395 156,751
Other Assets:
Reorganization value in excess of amounts
allocable to identifiable assets, net - 23,939
Excess of cost over acquired net assets 160,092
Deferred tax asset, net 26,629 5,620
Other assets, net 11,327 16,538
Total Other Assets 198,048 46,097
$ 406,552 $ 284,324
LIABILITIES AND STOCKHOLDERS EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 81,235 $ 61,625
Current portion of long-term debt 2,979 12,061
Total Current Liabilities 84,214 73,686
Long-Term Debt 166,335 90,256
Other Long-Term Liabilities 40,557 40,342
Stockholders Equity:
Common Stock, par value $.01 per share;
50,000,000 shares authorized; 0 and
6,050,075 shares issued and outstanding - 61
Common Stock, par value $.01 per share;
8,215,000 and 0 shares issued and outstanding 82 -
Additional paid-in capital 115,763 63,463
Retained earnings (399) 16,516
Total Stockholders Equity 115,446 80,040
$406,552 $284,324
(1) Restated to conform to presentation for December 31, 1995.
See Notes to Condensed Consolidated Financial Statements.
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
December 31,
1995 1994
Cash Flows From Operating Activities:
Net income (Loss) $ (39,457) $ 2,761
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,505 7,124
Deferred income taxes (20,038) 1,669
Non-recurring expenses arising from the acquisition
of the Company and revaluation of assets and
liabilities pursuant to accounting for the
transaction as a purchase 70,860 -
Other, net 1,322 366
Changes in operating assets and liabilities:
Increase in accounts and notes
receivable and prepaid expenses (3,564) 3,721
Decrease in inventories (519) 3,006
Increase (decrease) in accounts payable and
accrued expenses (6,660) (3,882)
Increase in income taxes (2,393) 138
Net cash provided by (used in) operating activities 8,056 14,903
Cash Flows From Investing Activities:
Capital expenditures (8,950) (13,576)
Other, net (10,778) 2,619
Net cash used in investing activities (19,728) (10,957)
Cash Flows From Financing Activities:
Principal payments on long-term debt (40,308) (7,052)
Increase in long-term debt 34,900 -
Proceeds from issuance of common stock 4,006 -
Net cash used in financing activities (1,402) (7,052)
Net Increase (Decrease) in Cash and Cash Equivalents (13,074) 630
Cash and Cash Equivalents - Beginning of period 31,375 41,142
Cash and Cash Equivalents - End of period $ 18,301 $ 41,772
Supplemental Cash flow Information:
Interest paid $ 4,096 $ 4,944
Income taxes paid, net $ 40 $ 193
(1) Restated to conform to presentation used for six months ended
December 31, 1995
See Notes to Condensed Consolidated Financial Statements.
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The consolidated financial statements as of December 31, 1995 and for the three
months and six months ended December 31, 1995 and 1994 are unaudited, but in
the opinion of National Convenience Stores Incorporated (the "Company"), all
adjustments (consisting only of normal accruals) necessary for a fair
presentation of consolidated results of operations, consolidated financial
position, and consolidated cash flows at the date and for the periods indicated
have been included.
The consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q. Accordingly, certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted.
Certain prior year amounts have been reclassified to conform to the current
year presentation. These unaudited condensed consolidated financial statements
should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the year ended June 30, 1995 (the "1995 Form 10-K").
1. Acquisition Transaction
On November 8, 1995, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Diamond Shamrock, Inc. ("Diamond Shamrock") and
Shamrock Acquisition Corp., a wholly owned indirect subsidiary of Diamond
Shamrock ("SAC"). Pursuant to the Merger Agreement, SAC was merged with and
into NCS on December 18, 1995 (the "Merger"). For a full discussion of the
events leading up to the Merger and Merger Agreement, reference is made to the
1995 Form 10-K and to the Current Report on Form 8-K filed by the Company on
December 29, 1995.
Merger Agreement - As a result of the acquisition of the Company by Diamond
Shamrock, the Company recorded certain non-recurring expenses, including
employee severance and relocation costs, payments under employment contracts,
buyout of stock options, investment banker fees, and other costs relating to
the change in control. The Company also revalued its assets and liabilities in
accordance with the accounting rules applicable to a transaction recorded as a
purchase. The net of these adjustments is a $70.9 million reduction in the
value of Company net assets, less income tax benefit of $26.4 million.
The total amount of funds required by SAC to acquire the entire equity interest
in the Company, including the purchase of the outstanding shares of Common
Stock, par value $.01 per share (the "Shares") and of the outstanding warrants
to purchase Shares (the "Warrants") pursuant to the Offer and the payment for
Shares and Warrants converted into the right to receive cash pursuant to the
Merger and related expenses, was approximately $182.2 million. The total
purchase cost exceeded the value of net assets by $160.5 million, which amount
will be amortized over a 20-year period.
2. Long-term Debt
Immediately following the acquisition of a controlling interest in the Company's
common stock by Diamond Shamrock, all amounts owed under the Company's Term Loan
and revolving credit agreements were paid and the agreements were cancelled.
The Company also paid approximately $2.4 million on mortgage loans, including
interest and early payment penalties. The Company issued a $34.9 million note
payable to a subsidiary of Diamond Shamrock payable on December 14, 2000
bearing an interest rate of 5.91% per annum.
Effective December 28, 1995, the Company declared a dividend in the amount of
$66.4 million, which was paid by delivery of a promissory note in that amount
payable December 28, 2000 bearing interest at 5.91%.
3. Income Taxes
The Company will file a federal income tax return for the fiscal year ended
June 30, 1995 no later than March 15, 1996. Because of the acquisition of
control of the Company by Diamond Shamrock on December 14, 1995, the Company
will be required to file a short period tax return for the period from July 1,
1995 to December 13, 1995. For the period December 14, 1995 to December 31,
1995, the Company will participate in the consolidated federal income tax
return of Diamond Shamrock for the calendar year 1995.
Any unused net operating loss and tax credit carry-forwards of the Company as
of December 13, 1995 will be available to be used by Diamond Shamrock, subject
to the limitations of Section 382 of the Internal Revenue Code. The amount of
those carry-forwards available at December 31, 1995 will be reported in the
annual report on Form 10-K to be filed by Diamond Shamrock as of and for the
year ended December 31, 1995 (the "Diamond Shamrock Form 10-K").
4. Commitments and Contingencies
Reference is made to Note 11 of the Notes to Consolidated Financial Statements
contained in the 1995 Form 10-K for a complete discussion of the Company's
commitments and contingencies at June 30, 1995. Disclosure of all material
commitments and contingencies as of December 31, 1995 will be included in the
Diamond Shamrock Form 10-K.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Significant Event - On November 8, 1995, the Company entered into a Merger
Agreement with Diamond Shamrock and SAC. Pursuant to the Merger Agreement, SAC
was merged with and into the Company on December 18, 1995 (the "Merger"). As a
result of the Merger, Diamond Shamrock presently owns all of the outstanding
shares of the common stock of the Company. The Company also has outstanding
approximately 50,000 Warrants. Following the Merger, the Warrants no longer
represent the right to receive common stock of the Company. The Warrants
represent the right to receive $27.00 in cash from Diamond Shamrock upon
payment of the $17.75 exercise price.
Since December 18, 1995, the Company has been a wholly-owned indirect
subsidiary of Diamond Shamrock. The results of the Company's operations on and
after December 14, 1995 (the date on which Diamond Shamrock acquired effective
control) will be reflected in the consolidated financial statements of Diamond
Shamrock, which statements are prepared on the basis of a calendar year period.
Results of Operations - The Company reported a net loss of $44.3 million ($6.91
per share) for the quarter ended December 31, 1995 compared with net income of
$1.6 million ($0.27 per share) for the same period in 1994.
There were no material differences between the two periods with regard to total
net sales or total operating expenses. The only significant difference
affecting the two periods' results arose from recording the acquisition of the
Company by Diamond Shamrock. As a result of the acquisition, the Company
recorded certain non-recurring expenses, including employee severance and
relocation costs, payments under employment contracts, buyout of stock options,
investment banker fees and other costs relating to the change in control. The
Company also revalued its assets and liabilities in accordance with the
accounting rules applicable to a transaction recorded as a purchase. The net
of the expenses and revaluation is a $70.9 million reduction in the Company's
net asset values, less income tax benefit of $26.4 million.
The Company reported a net loss of $39.5 million ($6.32 per share) for the six
months ended December 31, 1995 compared with net income of $2.8 million ($0.46
per share) for the same period in 1994.
There were no material differences between the periods with regard to total net
sales or total operating expenses. The only significant difference affecting
the two periods' results arose from recording the acquisition of the Company by
Diamond Shamrock. As a result of the acquisition, the Company recorded certain
non-recurring expenses, including employee severance and relocation costs,
payments under employment contracts, buyout of stock options, investment
banker fees and other costs relating to the change in control. The Company
also revalued its assets and liabilities in accordance with the accounting
rules applicable to a transaction recorded as a purchase. The net of the
expenses and revaluation is a $70.9 million reduction in the Company's net
assets, less income tax benefit of $26.4 million.
Liquidity and Capital Resources
Key balance sheet figures and ratios are presented in the table below (all
amounts, excluding ratios are in millions):
December 31, 1995 June 30, 1995
Cash and cash equivalents(a) $ 18.3 $ 31.4
Current assets $ 67.1 $ 81.5
Current liabilities $ 84.2 $ 73.7
Current ratio 0.8 1.11
Inventory turn ratios (annualized):
Merchandise 11.2 11.2
Gasoline 56.3 55.1
Total debt $169.3 $102.3
Stockholders' equity $115.4 $ 80.0
Debt/Equity ratio 1.47 1.28
Common shares outstanding 8.2 6.1
_____________________
(a) Includes $0.7 million and $9.1 million that has been reserved at
December 31, 1995 and June 30, 1995, respectively. Included in the
reserved cash balances at December 31, 1995 and June 30, 1995 is cash
from the April 29, 1994 transaction with Circle K that has been held in
escrow pending the final resolution of collateral-related matters. Also
included in the reserved cash balances at June 30, 1995 is cash
accumulated in trust accounts (at the Company's option) for the
payment of payroll, sales and gasoline taxes and state lottery sales
proceeds.
Liquidity - As a wholly owned subsidiary of Diamond Shamrock, the Company will
rely on Diamond Shamrock and its consolidated subsidiaries to provide funds for
current operating expenses, as well as for capital expenditures. It is
anticipated that any new sources of funds for the Company from non-related
lenders or from equity sources will be arranged by Diamond Shamrock.
Capital Resources - The Company incurred $9.0 million of capital expenditures
through December 31, 1995 compared to $13.6 million for the corresponding
period of the prior fiscal year. During the first six months of fiscal 1996,
the capital expenditures consisted of $3.2 million for gasoline dispensing
equipment and installation of underground piping required to comply with
environmental laws, $2.3 million for new store development, $2.3 million in
equipment replacement and store improvements and $1.2 million for miscellaneous
projects.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
Circle K Tender Offer. All proceedings pending in the Delaware Court of
Chancery and in Delaware District Court in connection with the cash tender
offer by The Circle K Corporation to purchase all of the Company's outstanding
common stock, as previously reported, have been dismissed, with the exception
of Thomas J. McKula v. William K. Wilde, et. al., CA 14481, pending in the
Court of Chancery of the State of Delaware, in and for New Castle County. The
only unresolved matter in that case relates to plaintiff's asserted right to
reimbursement for legal expenses incurred in connection with the case.
ITEM 2. Change in Securities
The Company's Restated Certificate of Incorporation, defining and governing
certain rights existing in connection the Company's common stock, par value
$.01 per share, was amended and restated effective January 8, 1996, to reduce
the number of shares of common stock the Company is authorized to issue; to
eliminate the Company's authority to issue preferred stock; to eliminate
super-majority voting requirements with respect to amendment of the Company's
certificate of incorporation, the merger of the Company, the conveyance of
substantially all of the Company's assets, the dissolution of the Company, and
the revocation of the dissolution of the Company; to eliminate certain
requirements that the approval of the Company's Board of Directors be obtained
for purchase of over 5% of the Company's outstanding common stock or that such
purchaser conduct a tender offer under the Securities Exchange Act of 1934 to
purchase at least 2/3 of such stock followed by a back-end merger in which non-
tendering shareholders would receive consideration equal to that received by
tendering shareholders; to eliminate certain rights of "appraisal" with respect
to the Company's common stock; and to eliminate certain provision providing for
the classification of the Company's Board of Directors.
The Company's Restated Bylaws were amended and restated effective January 8,
1996 to eliminate certain provisions governing nominations for election to the
Company's Board of Directors, and to eliminate certain requirements for
shareholder approval of amendments to Bylaw provisions.
Certain rights to purchase preferred stock which were outstanding and
exercisable in connection with the Company's common stock, par value $.01 per
share, were redeemed effective January 3, 1996.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits
2.1 Agreement and Plan of Merger dated November 8, 1995, among Diamond
Shamrock, Inc., Shamrock Acquisition Corp., and National Convenience
Stores, Incorporated (incorporated by reference to Exhibit 1 to the
Company's Schedule 14D-9 Solicitation/Recommendation Statement filed
with the Securities and Exchange Commission on November 14, 1995)
3.1 Amended and Restated Certificate of Incorporation of National
Convenience Stores Incorporated
3.2 Amended and Restated Bylaws of National Convenience Stores
Incorporated
27.1 Financial Data Schedule
b) Reports on Form 8-K
On October 30, 1995, the Company filed a Current Report on Form 8-K describing
a declaratory judgment action filed by the Company, with respect to a contract
relating to automated teller machines, and the answer and counterclaim filed in
response thereto.
On December 29, 1995, the Company filed a Current Report on Form 8-K describing
the merger of a wholly-owned subsidiary of Diamond Shamrock, Inc. with and into
the Company.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL CONVENIENCE STORES INCORPORATED
(Registrant)
Date February 20, 1996 /s/ Gary E. Johnson
Gary E. Johnson - Vice President and Controller
NATIONAL CONVENIENCE STORES INCORPORATED AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBITS:
2.1 Agreement and Plan of Merger dated November 8, 1995, among Diamond
Shamrock, Inc., Shamrock Acquisition Corp., and National Convenience
Stores, Incorporated (incorporated by reference to Exhibit 1 to the
Company's Schedule 14D-9 Solicitation/Recommendation Statement filed
with the Securities and Exchange Commission on November 14, 1995)
3.1 Amended and Restated Certificate of Incorporation of National
Convenience Stores Incorporated
3.2 Amended and Restated Bylaws of National Convenience Stores Incorporated
27.1 Financial Data Schedule
W4003.TW