SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) May 30, 1996.
Tosco Corporation
(Exact name of registrant as specified in charter)
Nevada 1-7910 95-1865716
(State or other (Commission (IRS Employer
jurisdiction of File Number) Identification
incorporation) No.)
72 Cummings Point Road, Stamford, CT 06902
- --------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 203-977-1000
- ---------------------------------------------------------------------
(Former name or former address, if changed since last report.)
Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits.
Financial Statements
On June 12, 1996, Tosco Corporation ("Tosco") filed its Current Report on
Form 8-K reporting the May 30, 1996 acquisition of The Circle K Corporation
pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), by and
among Tosco, The Circle K Corporation ("Circle K") and Tosco Acquisition Sub,
Inc., a wholly-owned subsidiary of Tosco ("Acquisition Sub"). Pursuant to the
Merger Agreement. Acquisition Sub was merged into Circle K and Circle K became a
wholly-owned subsidiary of Tosco.
The audited financial statements of Circle K specified in Rules 3-01 and
3-02 of Regulation S-X are attached hereto.
THE CIRCLE K CORPORATION AND SUBSIDIARIES
INDEX OF FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS: PAGE
Report of independent public accountants 2
Consolidated balance sheets as of April 30, 1996 and 1995 3
Consolidated statements of income for the years ended April 5
30, 1996 and 1995; and for the period from July 27, 1993
(date of inception) to April 30, 1994; and predecessor
statement for the period from May 1, 1993 to July 26, 1993
Consolidated statements of stockholders' equity for the years 6
ended April 30, 1996 and 1995; and for the period from
July 27, 1993 (date of inception) to April 30, 1994; and
predecessor statement for the period from May 1, 1993
to July 26, 1993
Consolidated statements of cash flows for the years ended April 7
30, 1996 and 1995; and for the period from July 27, 1993
(date of inception) to April 30, 1994; and predecessor
statement for the period from May 1, 1993 to July 26, 1993
Notes to consolidated financial statements 8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of The Circle K Corporation
We have audited the accompanying consolidated balance sheets of The Circle
K Corporation and subsidiaries (the "Company") as of April 30, 1996 and 1995 and
the related consolidated statements of income, stockholders' equity and cash
flows for the years ended April 30, 1996 and 1995 and for the period from July
27, 1993 (date of inception) to April 30, 1994. We have also audited the
accompanying consolidated statements of operations, stockholders' equity, and
cash flows of the Company's predecessor and its subsidiaries (the "Predecessor")
for the period from May 1, 1993 to July 26, 1993. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
On July 26, 1993, the Company acquired the Predecessor. As more fully
described in Note 2 to the financial statements, the acquisition was accounted
for as a purchase, and a new basis of accounting was established by allocating
the purchase price to the assets acquired and the liabilities assumed. The
consolidated financial statements of the Company are presented on the new basis,
and accordingly, are not comparable to those of the predecessor.
On May 30, 1996, the Company was acquired and merged into Tosco Corporation
("Tosco"). As of that date, the Company became a wholly-owned subsidiary of
Tosco (see Note 2 to the financial statements).
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Circle K
Corporation and subsidiaries as of April 30, 1996 and 1995 and the consolidated
results of their operations and their cash flows for the years ended April 30,
1996 and 1995 for the period from July 27, 1993 to April 30, 1994 and the
consolidated results of operations and cash flows of the Predecessor for the
period from May 1, 1993 to July 26, 1993 in conformity with generally accepted
accounting principles.
Coopers & Lybrand L.L.P
Phoenix, Arizona
May 30, 1996
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
April 30,
---------------------
1996 1995
Assets
Current assets:
Cash and cash equivalents $ 39,473 $ 68,575
Receivables 51,118 36,432
Inventories 159,305 138,042
Prepaid expenses and other current assets 18,351 20,127
Deferred tax asset 23,686 16,090
--------- ---------
Total curent assets 291,933 279,266
Property and equipment, net 614,641 576,840
Intangibles (principally trade name),
net of accumulated amortization of
$9,444 and $5,841 117,055 118,608
Other assets 74,236 44,284
--------- -------
Total assets $ 1,097,865 $ 1,018,998
=========== ===========
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (cont.)
(in thousands, except share data)
April 30,
-----------------------
1996 1995
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 166,734 $ 150,112
Accrued liabilities 134,934 124,036
Money orders sold 35,968 34,687
Current maturities of long-term obligations 27,520 22,571
--------- ---------
Total current liabilities 365,156 331,406
Long-term obligations 197,814 177,487
Other liabilities 221,557 247,288
--------- --------
Total liabilities 784,527 756,181
Stockholders' equity;
Common stock: par value $.01 per share
authorized 150,000,000 shares; issued and
outstanding 25,646,153 and 24,224,059
shares, respectively 256 242
Additional paid-in capital 260,362 235,763
Retained earnings 64,538 26,812
Treasury stock (11,818) -
-------- --------
Total stockholders' equity 313,338 262,817
-------- -------
Total liabilities and stockholders' equity $ 1,097,865 $ 1,018,998
=========== ===========
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
The Company Predecessor
-------------------------------------- ------------
Period from Period from
Year Ended April 30, July 27, 1993 May 1, 1993
------------------------- to April 30, to July 26,
1996 1995 1994 1993
---------- ---------- ------------- -----------
Revenues:
Sales $ 3,507,255 $ 3,513,379 $ 2,478,753 $ 794,034
Other 55,481 48,347 36,843 10,430
---------- --------- --------- -------
Gross revenues 3,562,736 3,561,726 2,515,596 804,464
---------- --------- --------- -------
Cost of sales and operating expenses:
Cost of sales 2,763,929 2,775,729 1,944,146 620,561
Operating and administrative 630,215 649,509 483,116 148,879
Depreciation and amortization 75,577 63,810 41,653 12,986
Non-recurring charge 1,950 -- -- --
---------- --------- --------- --------
Total cost of sales and operating expenses 3,471,671 3,489,048 2,468,915 782,426
---------- --------- --------- --------
Operating income 91,065 72,678 46,681 22,038
Interest expense (25,984) (33,918) (25,917) (5,434)
Reorganization items -- -- -- (3,800)
---------- --------- ------------ ----------
Income from continuing operations
before income taxes 65,081 38,760 20,764 12,804
Income taxes (27,355) (16,077) (9,479) (207)
----------- --------- ----------- ----------
Income from continuing operations 37,726 22,683 11,285 12,597
Discontinued operations (net of tax) -- 280 611 199
----------- --------- ----------- ---------
Income before extraordinary item 37,726 22,963 11,896 12,796
Extraordinary loss (net of tax) -- (4,299) (3,748) --
----------- --------- ----------- ---------
Net income $ 37,726 $ 18,664 $ 8,148 $ 12,796
=========== ========= =========== =========
Income (loss) per common share:
Income from continuing operations $ 1.46 $ 1.18 $ 0.61 $ --
Discontinued operations -- 0.01 0.03 --
Extraordinary item -- (0.22) (0.20) --
----------- ---------- ----------- --------
Net income per share $ 1.46 $ 0.97 $ 0.44 $ --
=========== ========== =========== ========
Weighted average common shares and
common share equivalents outstanding $25,800,248 $ 19,18,064 $ 18,527,046 N/A
=========== =========== ============ =========
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
Treasury Stock
Series B Common Stock Issued Additional Retained (at cost)
Preferred ------------------- Paid-in Earnings ----------------
Stock Shares Amount Capital (Deficit) Shares Amount Total
--------- ------------ ------- ----------- -------- ------ ------ -----
Predecessor
Balance at April 30, 1993 $50,000 52,166,219 $ 52,166 $192,040 $(1,206,563) 6,838,690 $ (78,628) $ (990,985)
Net income -- 12,796 -- 12,796
------- --------- --------- -------- ----------- --------- ---------- ---------
Balance at July 26, 1993
(pre-acquisition) 50,000 52,166,219 52,166 192,040 (1,193,767) 6,838,690 (78,628) (978,189)
Cancellation of Predecessor
equity 50,000 (52,166,219) (52,166) (192,040) 1,193,767 (6,838,690) 78,628 978,189
------- ---------- ------- -------- ---------- ----------- ------- --------
Balane at July 26, 1993
(post-acquisition) $ - - $ - $ - $ - - $ - $ -
======= =========== ========= ========= =========== ========== ========== ==========
The Company
Balance at July 27, 1993
(inception) $ - - $ - $ - $ - - $ - $ -
Sale of common stock - 17,675,204 10 140,190 - - - 140,200
Net income - - - - 8,148 - - 8,148
-------- ---------- --------- -------- ----------- -------- --------- ---------
Balance at April 30, 1994 - 17,675,204 10 140,190 8,148 - - 148,348
Sale of common stock - 6,548,855 65 95,740 - - - 95,805
Stock split - - 167 (167) - - - -
Net income - - - - 18,664 - - 18,664
-------- ----------- --------- -------- ------------ -------- --------- --------
Balance at April 30, 1995 - 24,224,059 242 235,763 26,812 - - 262,817
Incentive stock and stock
ownership plans transactions - 1,422,094 14 24,599 - 393,106 (11,818) 12,795
Net inome - - - - 37,726 - - 37,726
------- ----------- -------- -------- ------------ -------- ---------- --------
Balance at April 30, 1996 $ - 25,646,153 $ 256 $260,362 $ 64,538 393,106 $ (11,818) $ 313,338
======== ============ ========= ========= ============ ======== ========== ==========
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Predecessor
The Company --------------
----------------------------- Period from Period from
July 27, 1993 May 1, 1993
Year Ended April 30, to April 30, to July 26,
1996 1995 1994 1993
------ ------- --------------- ------------
Cash flows from operating activities;
Net income $ 37,726 $ 18,664 $ 8,148 $ 12,796
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 75,577 63,810 41,653 12,986
Deferred income taxes (76) 1,647 (3,751) -
Extraordinary loss (net of tax) - 4,299 3,748 -
Net change in assets and liabilities:
Receivables (8,019) 3,880 7,315 (417)
Inventories (26,914) (7,231) 12,534 (7,342)
Prepaid expenses or other
current assets 9,027 4,100 (12,464) 4,026
Accounts payable (9,846) 26,659 17,724 2,062
Accrued liabilities (10,870) (26,843) (10,832) 9,813
Money orders sold 1,281 5,552 9,608 (2,787)
Other assets and liabilities (20,820) (2,668) 10,849 (29,530)
---------- ----------- --------- ---------
Net cash provided by
operating activities 47,066 91,869 84,532 1,607
========== ========== ========= ==========
Cash flows from investing activities:
Purchases of property and equipment (112,933) (74,304) (62,541) (2,071)
Proceeds from sale of assets 7,530 48,400 43,184 4,014
Acquisition of Predecessor, net of cash acquired - - (37,628) -
Acquisition of stores - (24,643) (10,000) -
Other 1,222 (10,610) - (551)
----------- ----------- ---------- ---------
Net cash provided (used) by investing activities (104,181) (61,157) (66,985) 1,392
=========== =========== ============ =========
Cash flows from financing activities:
Proceeds from issuance of stock 1,611 95,805 140,200 -
Repayments of short-term obligations - - (50,000) -
Proceeds from revolving credit commitments 73,000 297,000 - -
Repayments of revolving credit commitments (39,000) (297,000) - -
Proceeds from long-term obligations - 20,561 - -
Repayments of long-term obligations (30,742) (108,967) (63,815) (4,169)
Payment of acquisition costs - - - (49,179)
Increase in book overdrafts 27,142 - - -
Other (3,998) (8,768) (4,700) -
----------- --------- ----------- ---------
Net cash provided (used) by financing activities 28,013 (1,369) 21,685 (53,348)
=========== ========= =========== ==========
Net increase (decrease) in cash and cash equivalents (29,102) 29,343 39,232 (50,349)
Cash and cash equivalents, beginning of period 68,575 39,232 - 152,552
----------- ---------- ----------- ----------
Cash and cash equivalents, end of period $ 39,473 $ 68,575 $ 39,232 $ 102,203
=============== ============ =========== =============
THE CIRCLE K CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND NATURE OF BUSINESS The Circle K Corporation (the "Parent")
is a holding company whose principal asset is its wholly-owned subsidiary,
Circle K Stores Inc. ("Operating Company"). The Operating Company and its
subsidiaries have as their principal line of business the operation of
convenience stores, which consists primarily of retail sales of groceries,
tobacco products, beverages, general merchandise and gasoline. These stores are
primarily located in the "sunbelt" region of the United States. See Note 2 for
discussion of the merger with Tosco Corporation.
PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial
statements include the accounts of the Parent and the Operating Company
(collectively the "Company"). All significant intercompany accounts and
transactions have been eliminated. The equity method of accounting is used for
an investment in an entity in which the Company has a 50% interest. Under the
equity method, the original investment is recorded at cost and adjusted by the
Company's share of earnings or losses of the entity and for declines in
estimated realizable values deemed to be other than temporary.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management estimates and
assumptions that affect the reported amounts of assets and liabilities, the
reported results of operations and disclosure of contingent assets and
liabilities.
RECLASSIFICATIONS Certain reclassifications have been made to prior year
amounts to conform to current year classifications.
STATEMENT PRESENTATION On July 26, 1993, the Parent acquired its
predecessor (hereafter referred to as "Predecessor") (see Note 2). The financial
statements for both the Company and Predecessor have been included herein and
are delineated by a line between them.
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash items on
hand in stores or in transit. As such, certain balances are not immediately
accessible for investment purposes. Cash equivalents consist of highly liquid
debt instruments purchased with original maturities of three months or less and
are carried at cost, which approximates market. Checks outstanding in excess of
offsettable cash balances are reclassified and included in accounts payable.
INVENTORIES Inventories are stated at the lower of cost or market. The cost
of store merchandise inventories is determined by the retail method and the cost
of gasoline inventories is determined by the first-in, first-out method.
ASSETS HELD FOR SALE Assets held for sale are carried at the lower of cost
or realizable values which approximate estimated sales proceeds, less selling
and carrying costs until the anticipated disposal date. The related
environmental remediation liability associated with the assets held for sale is
included in liabilities.
PROPERTY AND EQUIPMENT Property and equipment are stated at cost.
Depreciation and amortization are provided using the straight-line method over
the estimated useful lives or, for assets under capital leases, the lease terms
if shorter. The estimated useful lives average approximately twenty-five years
for buildings, five years for store equipment, and ten to twenty years for
gasoline storage equipment. Leasehold improvements are amortized over the
shorter of the estimated useful life of the asset or the remaining lease term.
Expenditures which materially increase values or extend useful lives are
capitalized. Routine maintenance, repairs, and replacement costs are expensed.
Interest costs related to construction-in-progress are capitalized as
incurred. For the years ended April 30, 1996 and 1995, the Company capitalized
interest of $575,141 and $313,855, respectively. No interest was capitalized for
the periods ended April 30, 1994 or July 26, 1993.
INTANGIBLES Intangibles, which consist principally of acquired trade name
value, are amortized on a straight-line basis over thirty-five years. It is the
Company's policy to periodically review and evaluate the recoverability of the
acquired intangibles by assessing current and future profitability and cash
flows and to determine whether the amortization of the balance over its
remaining life can be recovered through expected future results and cash flows.
OTHER ASSETS Debt issuance costs are amortized to interest expense over the
term of the related indebtedness under the effective interest method. The
Company capitalizes direct costs related to the development of computer software
for internal use. Such costs are amortized over the estimated useful lives of
the related assets.
SUPPLIER ADVANCES Advances received in connection with supplier marketing
or display allowances are amortized to income over the term of the respective
arrangement based upon purchase levels.
SELF-INSURANCE RESERVES The Company is self-insured up to certain limits
for workers' compensation (in certain states), property damage and general
liability claims. Accruals for loss incidences are made based on historical data
and actuarial analysis. Actual self-insurance losses may vary from these
estimates.
POST-EMPLOYMENT BENEFITS The Company does not provide post-retirement
benefits. Costs associated with benefits provided to former or inactive
employees prior to retirement such as severance, disability and health care are
accrued when the event occurs that gives rise to cessation of employment.
OTHER REVENUES Other revenues consist primarily of lottery ticket
commissions, money order fees, royalty and licensing fees under domestic and
international licenses, and the equity in earnings of a joint venture.
ADVERTISING AND PROMOTION EXPENSE Production costs of future media
advertising are deferred until the advertising occurs. All other advertising and
promotion costs are expensed over the fiscal year in relation to sales.
EXCISE TAXES Excise taxes (in thousands) on gasoline gallons sold, included
in sales and cost of sales, were $518,862 and $544,933 for the years ended April
30, 1996 and 1995, respectively. Excise taxes were $394,721 and $103,440 for the
periods ended April 30, 1994 and July 26, 1993, respectively.
INCOME TAXES On May 1, 1993, the Predecessor adopted Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes. Under the asset and
liability method of Statement 109, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax laws (including rates) is recognized in income in the period that includes
the enactment date.
NET INCOME PER SHARE Net income per share is computed by dividing net
income by the weighted average common shares and common share equivalents
outstanding during the year. The treasury method is used in computing
incremental common share equivalents which would result from exercise of
outstanding stock options. Additionally, net income per share has been computed
in accordance with Securities and Exchange Commission Staff Accounting Bulletin
(SAB) No. 83. The SAB requires that common shares issued by the Company in the
twelve months immediately preceding a proposed public offering plus the number
of common stock equivalent shares, which became issuable during the same period
pursuant to the grant of stock options (using the treasury stock method) at
prices substantially less than the initial public offer price, be included in
the calculation of common stock and common stock equivalent shares as if they
were outstanding for all periods presented. For the period ended April 30, 1994,
income per share amounts reflect the March 1995 stock split (Note 15).
2. TOSCO MERGER AND OTHER ACQUISITIONS:
TOSCO MERGER On May 30, 1996, Tosco Corporation ("Tosco"), pursuant to an
Agreement and Plan of Merger dated as of February 16, 1996, as amended (the
"Merger Agreement"), by and among Tosco, The Circle K Corporation ("Circle K")
and Tosco Acquisition Sub, acquired Circle K by merger (the "Merger"). Pursuant
to the Merger Agreement, Acquisition Sub was merged into Circle K and Circle K
became a wholly-owned subsidiary of Tosco. As the result of the Merger, Tosco
agreed to issue 0.6162368 shares of its Common Stock for each outstanding share
of Circle K Common Stock, for an aggregate of 5,320,953 shares of Tosco Common
Stock.
Immediately prior to the Merger, Tosco acquired, for a combination of cash
and Tosco Common Stock, 16,749,996 shares of Circle K Common Stock from certain
stockholders of Circle K pursuant to a Stock Sale Agreement dated February 16,
1996, as amended, between Tosco and such stockholders (the "Stock Sale
Agreement"). Pursuant to the Stock Sale Agreement, Tosco issued an aggregate of
1,171,132 shares of its Common Stock and paid approximately $432.6 million in
cash.
ACQUISITION OF PREDECESSOR On July 26, 1993, the Parent, through CK
Acquisitions Corp., a wholly-owned subsidiary of the Parent ("CK Acquisitions"),
acquired the Predecessor for $399.5 million plus transaction costs and the
assumption of certain liabilities. The acquisition occurred concurrently with
the Predecessor's emergence from reorganization (see Note 17 for a discussion of
the Predecessor's reorganization under Chapter 11 of the U.S. Bankruptcy Code).
The acquisition of the Predecessor was accounted for as a purchase and,
accordingly, the results of operations of the Predecessor are included in the
Company's consolidated statements of operations since the acquisition date, July
27, 1993. Because of the application of purchase accounting and the emergence
from reorganization, the consolidated financial statements of the Predecessor
for the periods ending before July 27, 1993 are not comparable to the financial
statements for periods ending after July 26, 1993.
The unaudited condensed pro forma consolidated results of operations of the
Company, as if the acquisition and emergence from reorganization had occurred at
the beginning of the year ending April 30, 1994, are as follows (in thousands,
except share information):
Sales $ 3,272,787
Income from continuing operations before 18,351
extraordinary item
Net income 15,413
Income per common share:
Income from continuing operations before
extraordinary item $ .99
Net income $ .83
Weighted average common shares 18,527,046
outstanding
Pro forma adjustments consist principally of depreciation, interest and
amortization of intangibles and changes in rent expense all arising from
purchase accounting, along with income taxes, arising from the reorganization.
The purchase price was allocated as follows (in millions):
Fair value of assets acquired $ 960.7
Fair value of liabilities assumed (672.2)
----------------------
Net assets acquired at fair value 288.5
Intangibles (principally trade name) 111.0
----------------------
Total purchase price $ 399.5
======================
NON-RECURRING CHARGE The non-recurring charge of approximately $2.0 million
was incurred in the attempted acquisition of National Convenience Stores
Incorporated in October 1995. The charge includes the costs of investment
bankers, legal counsel, and other direct costs.
3. RECEIVABLES:
Receivables consist of the following (in thousands):
April 30, April 30,
1996 1995
-------------------------- --------------------------
Due from suppliers $ 20,165 $ 16,562
State environmental trust funds 10,000 4,000
(Note 11)
Tax settlement 7,462 6,880
Other 14,553 10,020
-------------------------- --------------------------
52,180 37,462
Less allowance for doubtful (1,062) (1,030)
accounts
-------------------------- --------------------------
$ 51,118 $ 36,432
========================== ==========================
The tax settlement receivable relates to the Predecessor's treatment for
federal income tax purposes of certain deductions as operating losses versus
capital losses. The amount recorded represents the amount the Company expects to
receive with accrued interest, net of Predecessor's federal retained tax
liability.
4. INVENTORIES:
Inventories consist of the following (in thousands):
April 30, April 30,
1996 1995
----------------------- -------------------------
Merchandise $ 110,992 $ 96,857
Gasoline 45,890 34,119
Other 2,423 7,066
----------------------- -------------------------
$ 159,305 $ 138,042
======================= =========================
5. ASSETS HELD FOR SALE:
Assets held for sale at April 30, 1996 and 1995, amounting to $5.6 million
and $9.3 million respectively, consist of closed stores or excess properties.
These amounts are included in prepaid expenses and other current assets. As part
of the Plan of Reorganization, the Company discontinued its wholesale gasoline
distribution subsidiary in September 1994 and its manufacturing subsidiary in
November 1993. No gain or loss was recognized on the disposal of these assets
since they were carried at net realizable values in connection with the
Acquisition and application of purchase accounting. The operating results of
these subsidiaries are presented as discontinued operations, net of income
taxes, on the consolidated statements of operations. Revenues from discontinued
operations were $35,828 for the year ended April 30, 1995, $61,993 for the
period ended April 30, 1994 and $20,254 for the period ended July 26, 1993.
In November 1993, the Company sold all of its rights to the Circle K name
in Japan to its Japanese license holder. The royalties receivable under these
licensing rights had been collaterally assigned by the Predecessor to secure
pre-petition borrowings outstanding from certain Japanese non-bank financial
institutions. Pursuant to the sale agreement, the acquiring party assumed the
liability for the outstanding borrowing and paid the Company $22.2 million for
the remaining licensing rights.
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
April 30, April 30,
1996 1995
----------------------- -------------------------
Land $ 120,506 $120,501
Buildings 106,541 95,107
Store fixtures and 320,598 265,869
equipment
Leasehold improvements 64,637 60,828
Other equipment 13,636 11,298
Construction in progress 52,587 37,175
Assets under capital leases 81,845 74,307
(primarily buildings)
----------------------- -------------------------
760,350 665,085
Less accumulated
depreciation and amortization (145,709) (88,245)
----------------------- -------------------------
$ 614,641 $ 576,840
======================= =========================
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $11.8 million and
$7.3 million at April 30, 1996 and 1995, respectively.
THE CIRCLE K CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. OTHER ASSETS:
Other assets consist of the following (in thousands):
April 30, April 30,
1996 1995
----------------------- -----------------------
State Environmental Trust $ 30,036 $ 21,577
Funds (Note 11)
Investment in joint venture 19,195 ---
Debt issuance costs, net of
accumulated amortization
of $4,967 and $4,159 (Note 9) 1,472 2,076
Other 23,533 20,631
----------------------- -----------------------
$ 74,236 $ 44,284
======================= =======================
JOINT VENTURE On May 1, 1995, the Company formed a joint venture with
Southguard Corporation, in which 105 of the Company's stores and 59 Southguard
stores operate under the Circle K name in Texas and Oklahoma through a
franchising arrangement with a subsidiary of the Operating Company. The
Company's initial investment in the joint venture was equal to the net book
value of the inventory, equipment, fee properties and leaseholds contributed to
the venture, less contributed liabilities as defined by the contribution
agreement. The Company's share of the joint venture net income for the year
ended April 30, 1996 was $2.0 million and is included in other revenues in the
Company's financial statements.
The carrying cost of the Company's initial investment exceeded the related
50% share of the joint venture equity by approximately $8.7 million. In
accordance with the equity method of accounting, the Company's excess investment
was allocated to the underlying assets of the joint venture based on its fair
value of such assets and is being amortized over the appropriate lives of the
underlying assets.
8. ACCRUED LIABILITIES AND MONEY ORDERS SOLD:
Accrued liabilities consist of the following (in thousands):
April 30, April 30,
1996 1995
------------------------ -------------------------
Salaries and bonuses $ 22,253 $ 15,084
Vacations and benefits 10,073 13,224
Rent and property taxes 9,503 10,715
Environmental 26,000 18,000
remediation (Note 11)
Workers' compensation 22,683 11,485
General liability claims 7,300 9,503
Lottery payables 8,307 13,796
Other 28,815 32,229
------------------------ -------------------------
$ 134,934 $ 124,036
======================== =========================
The Company maintains cash balances in excess of money orders sold and
outstanding, in accordance with agreements with various state agencies which
regulate the sale of money orders.
9. LONG-TERM OBLIGATIONS:
Long-term obligations are as follows (in thousands):
April 30, April 30,
1996 1995
----------------------- -------------------------
Tranche A Term Loan $ 61,504 $ 74,195
Revolving Credit Commitments 34,000 ---
Capital leases 72,723 67,319
Real estate installment purchase 56,088 57,754
Other 1,019 790
----------------------- -------------------------
225,334 200,058
Less current portion (27,520) (22,571)
----------------------- -------------------------
$ 197,814 $ 177,487
======================= =========================
SENIOR CREDIT AGREEMENT
The Senior Credit Agreement, as amended in August 1994, was comprised of
the following (in thousands):
Tranche A Term Loan $ 100,000
Tranche B Term Loan 75,000
Revolving Credit Commitments 125,000
-------------------------
$ 300,000
=========================
On May 30, 1996, the Company repaid all the remaining amounts outstanding
under the Senior Credit Agreement, including the Tranche A Term Loan and
Revolving Credit Commitments in connection with the Tosco merger, described in
Note 2.
The Senior Credit Agreement is collateralized by a pledge of the stock of
certain of the Company's indirect subsidiaries as well as by receivables,
property and equipment, inventories and intangibles. The Senior Credit Agreement
is also supported by a guaranty by the Company pursuant to which the stock of
the Operating Company is pledged to the lenders under the Senior Credit
Agreement. The Tranche A Term Loan is payable in quarterly installments ranging
from $2 million to $6 million plus interest at (A) the Eurodollar Rate plus
3/4%; or, at the option of the Company, (B) a rate that is the greater of: (i)
the prime rate, (ii) the base CD rate plus 1% or (iii) the Federal funds
Effective Rate plus 1/2% of 1% (the "alternate Base Rate"); with installments
commencing October 31, 1994 through July 31, 1999. The Tranche B Term Loan
accrued interest at the Eurodollar Rate plus 2%, or at the option of the
Company, the Alternate Base Rate plus 3/4%.
In March 1995, the Company used net proceeds of $95.3 million from its
initial public offering to repay all of the remaining Tranche B indebtedness of
$74.5 million and $21 million of Tranche A indebtedness. As a result of this
early retirement of indebtedness, the Company recorded an extraordinary loss of
$4.3 million, net of taxes of $3 million. No further amounts can be borrowed
under the Tranche B component.
In addition, the availability of the Revolving Credit Commitments was
reduced by the issuance of Standby or Commercial Letters of Credit for the
benefit of third parties. The Company was required to reimburse the issuing bank
upon demand for any payment made by the issuing bank under such letters of
credit. At April 30, 1996, letters of credit totaling $20.2 million were
outstanding.
The Senior Credit Agreement contains various financial covenants such as
limitations on capital expenditures, minimum level of earnings before interest,
taxes, and depreciation and amortization, minimum net worth and others. The
Company's Senior Credit Agreement permitted payment of dividends during any
fiscal year in an amount equal to the greater of $7,500,000 or 50% of net income
for the preceding fiscal year.
On November 1, 1993, an amendment to the original Senior Credit Agreement
was executed which provided for the prepayment of $30 million of the Tranche A
Term Loans and all $30 million of certain subordinated notes which were to
mature June 30, 2001. The subordinated notes issued by the Company were held by
AIBC, Investcorp Finance B.V. (AIBC), an affiliate of Investcorp, and were
issued concurrent with the Senior Credit Agreement to provide financing in
connection with the acquisition of the Predecessor. As a result of the
prepayment of this debt, the Company recorded an extraordinary loss of $3.7
million, net of taxes of $2.6 million. The indebtedness was prepaid using cash
generated from current operations as well as from the proceeds of the sale of
the Company's Japanese trademark licensing rights (Note 5).
CAPITAL LEASES For a description of the Company's leasing activities, see
Note 12.
REAL ESTATE INSTALLMENT PURCHASE In the year 2007 the Company will receive
title to approximately 200 convenience stores, which it currently operates in
various states. Payments under the agreement have been discounted at 9%. The
remaining principal value at April 30, 1996 was $56.1 million of which $2.2
million is current.
Maturities of long-term obligations (excluding capital leases and the
Senior Credit Agreement) for the years ending April 30 are as follows (in
thousands):
1997 $ 2,116
1998 2,312
1999 2,527
2000 2,551
2001 2,756
THE CIRCLE K CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. OTHER LIABILITIES:
Other liabilities consist of the following (in thousands):
April 30, April 30,
1996 1995
------------------------ -------------------------
Environmental remediation (Note 11) $ 48,204 $ 59,796
Predecessor retained taxes 26,816 30,283
Contract liability 41,885 42,387
Workers' compensation 11,285 44,765
General liability claims 19,411 16,460
Deferred income tax liability 10,249 2,728
Environmental
remediation settlement (Note 11) 10,879 9,652
Other 52,828 41,217
------------------------ -------------------------
$ 221,557 247,288
======================== =========================
The Predecessor retained pre-petition tax liabilities are payable based
upon a ten-year amortization over a six-year term with a balloon payment in the
final year. Interest accrues at the rate of 8% per annum and is payable
annually.
During the fourth quarter of fiscal 1996, operating and administrative
expenses include a benefit of $6.7 million from the projected reimbursements
from a workers' compensation trust fund.
11. ENVIRONMENTAL COMPLIANCE:
The Company is subject to environmental laws and regulations which include
obligations to remove or mitigate the effects on the environment of petroleum
releases from the Company's underground gasoline storage tanks (UST). The
Company has established accruals for those sites where it is probable that a
release has occurred and the amount of the loss can be reasonably estimated. The
Company adjusts its accruals based on new incidents and updated information and
is impacted by a number of factors including changes in remedial technologies,
new developments and interpretations of government policy, soil and groundwater
conditions, and other factors. At April 30, 1996, the Company had environmental
remediation accruals for sites where contamination had been detected of
approximately $60 million. The Company expects to incur substantially all of
these estimated remediation costs over the next five fiscal years.
For sites with known contamination, the Company has recorded an asset
related to estimated future claims for reimbursements of remediation costs from
various state trust fund programs totaling $40 million, which is included in
other assets and receivables in the accompanying financial statements. At April
30, 1996, all 28 states in which the Company operates stores have enacted trust
fund legislation. These trust funds are governed by differing state-specific
rules and vary in their overall benefit to the Company. The trust fund programs
have been submitted to or approved by the EPA, many of which include third-party
compensation. The available trust fund programs require the Company to pay fees
or collect taxes to pay for remediation activities. The asset related to
estimated trust fund reimbursements recorded by the Company at April 30, 1996,
as discussed above, is only for those states in which trust funds are currently
reimbursing applicants and in which the Company believes future reimbursement is
probable.
The Company also accrues for probable remediation costs that it estimates
it will incur as it implements its tank upgrade program to comply with federal
and state regulations. This estimate is based on subsurface activities, tank
data and results at current remediation sites. The Company estimates these
projected expenditures will approximate $14 million. The Company expects to
incur substantially all of these projected expenditures over a five-year period
after the related sites are upgraded.
Under a State of Florida trust fund program established to pay for
remediation costs at UST sites, the Company is able to assign its rights to
reimbursements from the trust fund to the contractors performing the remedial
work. If the contractors are not paid by the trust fund within 24 months, then
the Company will make the payment and await reimbursement from the trust fund.
The estimated remediation cost for all Company sites in the Florida program is
approximately $40 million. In April 1995, the State of Florida modified the
program and prioritized sites based on the extent of contamination and other
factors. Remedial activity at priority sites will continue and is eligible for
reimbursement. Remedial work at non-priority sites was halted and applications
for reimbursements at these sites are currently being submitted. At the present
time, applications are being paid within 20 months of submission; however, due
to the changes in the program and the resulting increase in applications being
submitted for non-priority sites, it is anticipated that payment time will
increase to 24 to 28 months. Nevertheless, once non-priority applications have
been processed, management believes that the reimbursement time period will
decrease below 24 months.
The following table represents the remediation expenditures (in thousands)
made and reimbursements received for all sites under remediation. The Company
generally expects reimbursements within 18 to 24 months of the submission of the
application for reimbursement.
The Company Predecessor
------------------------------------------------------------ ------------------------
Year Year Period from Period from
Ended Ended July 27, 1993 May 1, 1993
April 30, 1996 April 30, 1995 to April to July 26, 1993
30, 1994
-------------------- --------------------- ---------------------- ---------------------
Remediation payments $ 26,011 $ 18,617 $ 6,674 $ 1,382
Trust fund reimbursements 5,703 1,609 1,175 265
Environmental exposures are difficult to assess and estimate for numerous
reasons including the complexity and differing interpretations of governmental
regulations, the multiplicity of possible technologies and solutions, the years
of remedial and monitoring activity required, and changes in the Company's
strategic plans. While the Company believes that it has adequately provided for
environmental exposures, should future remediation costs or trust fund
reimbursements result in amounts unfavorable to the Company, they could have a
material adverse effect on consolidated financial position and results of
operations.
The Company may spend approximately $60 million in capital expenditures in
aggregate by December 1998 to comply with UST detection and prevention
requirements. This amount is based on management's current plan to upgrade the
Company's USTs to comply with these requirements and includes replacement of
unprotected steel USTs greater than fifteen years old. The Company's estimated
capital expenditures to comply with the UST requirements may increase if certain
upgrade alternatives at particular sites cannot be implemented thus requiring
the replacement of USTs at these sites.
Under a settlement agreement with certain state environmental agencies
prior to the Predecessor's emergence from Chapter 11 protection, the Company
retained a liability of $17 million for the environmental remediation of certain
leased stores which were rejected in the course of the bankruptcy proceedings.
Annual payments ranging from $3.5 million to $6 million commence July 27, 1996.
The payments have been discounted at 9% and their present value at April 30,
1996 is $14.9 million, of which $4.0 million is included in accrued liabilities.
12. LEASES:
The Company leases the majority of its stores and certain other properties
and equipment. The store leases usually have primary terms of up to twenty-five
years with one to three renewal options for additional five- to fifteen-year
periods. Under certain of these leases, the Company is subject to additional
rentals based upon a percentage of sales. The leases for other properties and
equipment are for terms up to fifteen years. Most of the leases require that the
Company provide for the payment of real estate taxes, repairs and maintenance
and insurance.
At April 30, 1996, future minimum rental payments due under operating and
capital leases are as follows (in thousands):
Operating Capital
YEAR ENDING APRIL 30 Leases Leases
------------------------- -------------------------
1997 $ 42,513 $ 16,927
1998 40,638 16,428
1999 38,989 12,478
2000 37,293 7,048
2001 35,884 5,501
Thereafter 289,805 81,729
------------------------- -------------------------
Total minimum lease payments $ 485,122 140,111
Imputed interest (67,388)
-------------------------
Present value of net minimum 72,723
lease payments
Less current portion (10,116)
-------------------------
Long-term portion $ 62,607
=========================
Future minimum lease payments for non-cancelable operating leases have not
been reduced by minimum sublease rentals of approximately $3.2 million due under
non-cancelable subleases as of April 30, 1996. Minimum payments also do not
include contingent rentals that may be paid under certain leases.
Minimum lease rental expenses, contingent rental expense and sublease
rental income for the following periods were (in thousands):
The Company Predecessor
------------------------------------------------------------ ------------------------
Year Year Period from Period from
Ended Ended July 27, May 1, 1993
April April 30, 1993 to July 26,
30, 1995 to April 30 1993
1996 1994
------------------- --------------------- ---------------------- --------------------
Minimum lease rental expense $ 47,057 $ 50,858 $ 35,412 $ 10,674
Contingent rental expenses 4,054 3,741 2,564 1,011
Sublease rental income (net) (692) (552) (908) (349)
------------------- --------------------- ---------------------- --------------------
Net lease rental expense $ 50,419 $ 54,047 $ 37,068 $ 11,336
=================== ===================== ====================== ====================
The Predecessor adopted FAS 109 as of May 1, 1993. The cumulative effect of
the change in accounting for income taxes, determined as of that date, was not
material to the consolidated statement of operations for the period of May 1,
1993 through July 26, 1993. The prior year financial statements have not been
restated to apply provisions of FAS 109.
The income tax expense (benefit) is as follows (in thousands):
The Company Predecessor
------------------------------------------------------- --------------------
Year Year Period from Period from
Ended Ended July 27, 1993 May 1, 1993
April 30, 1996 April 30, 1995 to April 30 to July 26,
1994 1993
------------------ ------------------ -------------------- -------------------
Current:
Federal $ 22,480 $ 13,026 $ 11,938 $ ---
State and local 4,954 1,404 1,292 207
------------------ ------------------ ------------------- ---------------
Total current 27,434 14,430 13,230 207
Deferred:
Federal (361) (865) (3,354) ---
State and local 282 2,512 (397) ---
------------------ ------------------ -------------------- -----------------
Total deferred (79) 1,647 (3,751) ---
Income tax expense
from continuing operations before
extraordinary item 27,355 16,077 9,479 207
Income tax expense on discontinued
operations --- 199 430 ---
Tax benefit of extraordinary item --- (3,050) (2,639) ---
------------------ ------------------ -------------------- --------------------
$ 27,355 $ 13,226 $ 7,270 $ 207
================== ================== ==================== ====================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April 30,
1996 and 1995 are as follows (in thousands):
1996 1995
------------------ -------------------------
Deferred tax assets:
Self-insurance reserves $ 25,073 $ 32,492
Environmental remediation 13,738 23,832
Employee-related costs 9,000 ---
Tax credit carryforwards 10,451 8,957
Other 22,114 20,838
-------------------- -------------------------
80,376 86,119
Deferred tax liabilities:
Intangibles (23,496) (30,690)
Property and equipment (26,391) (26,106)
Other (17,052) (15,964)
------------------ -------------------------
Net deferred tax assets $ 13,437 $ 13,359
===================== =========================
Consolidated income tax expense differed from the amount computed by
applying the U.S. federal income tax rate to income from continuing operations
before income taxes for the periods as shown (in thousands):
The Company Predecessor
------------------------------------------------------- --------------------
Year Year Period from Period from
Ended Ended July 27, 1993 May 1, 1993
April 30, April 30, to April 30, to July 26,
1996 1995 1994 1993
----------------- ------------------- -------------------- --------------------
Tax expense at the
federal statutory rate $ 22,778 $ 13,566 $ 7,267 $ 4,551
State and foreign taxes, net of 4,797 2,774 2,018 207
federal income tax benefit
Realized deferred tax asset --- --- --- (4,551)
Other (220) (263) 194 ---
----------------- ------------------- -------------------- --------------------
$ 27,355 $ 16,077 $ 9,479 $ 207
================= =================== ==================== ====================
Federal statutory rate 35% 35% 35% 35%
================= =================== ==================== ====================
In connection with the purchase of the Predecessor, the final tax
return was filed under Section 338 of the Internal Revenue Code and, as
a result, all net operating loss carry-forwards and other tax credits
of the Predecessor have been utilized, or are otherwise unavailable to
the Company as of July 26, 1993.
At April 30, 1996, the Company has an alternative minimum tax credit
carry forward with no expiration date of approximately $10.5 million
which is available to offset future regular income tax liabilities.
14. FINANCIAL INSTRUMENTS:
The Company does not believe that its financial instruments, primarily
cash equivalents and receivables, are subject to significant
concentrations of credit risk.
The Company invests its excess cash in both deposits with major banks
and other high quality short-term instruments. The investments
generally mature within 30 days. At April 30, 1996, the majority of the
Company's receivables related to rebates and allowances from certain of
its vendors in connection with a wide variety of marketing programs,
and receivables from major oil companies in connection with gasoline
purchases by customers through the use of credit cards. These
receivables are short-term in nature and are generally settled shortly
after sale or in the following quarter. Bad debt losses, which have
been minimal, have been considered in establishing allowances for
doubtful accounts.
The Company does not believe that it has any significant exposure to
accounting loss other than that which is already reflected in the
Company's Consolidated Financial Statements.
The carrying value of cash and cash equivalents, receivables, accounts
payable, accrued liabilities, and money orders sold approximates fair
value due to the relatively short maturity of these financial
instruments. Additionally, borrowings under the floating rate Senior
Credit Agreement approximate fair value, and the real estate
installment purchase obligation approximates fair value as the stated
interest rate is similar to current rates offered to the Company for
debt of the same remaining maturities.
15. STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING
On March 23, 1995, the Company completed a public offering of 6,500,000
common shares at $16 per share. The net proceeds of approximately $95.3
million were used to repay in part existing outstanding bank borrowings
under the Senior Credit Agreement.
Simultaneously with the public offering of its shares, the Company
effected a 17.65-for-one stock split, consummated in the form of a
stock dividend, and all prior classes of shares were converted to
common shares.
STOCK INCENTIVE PLANS
On July 26, 1993, the Company established a Management Stock Incentive
Plan (the "1993 Incentive Plan") for members of senior management,
certain other officers, and key employees of the Company ("eligible
Employees"). The Incentive Plan provides for the grant of options that
qualify as incentive stock options ("ISOs") under the Internal Revenue
Code, as amended, as well as options that do not qualify as ISOs
("Non-qualified Options") (collectively referred to as the "Options").
The Options are exercisable at the earlier of (i) an initial public
offering, (ii) achievement of certain earnings targets, or (iii) 10
years from their issuance. Additionally, the Incentive Plan provides
for the grant of stock appreciation rights and for the sale or grant of
restricted stock. Under the Incentive Plan, 1,057,376 shares of common
stock are reserved for grants. As a result of the initial public
offering, grants of 809,138 shares became exercisable.
In October 1994, the Company's Board of Directors approved the fiscal
1995 Stock Incentive Plan (the "1995 Incentive Plan") pursuant to which
officers, directors and employees of the Company are eligible to
receive stock-based awards. Awards under the Fiscal 1995 Incentive Plan
are not restricted as to any specific form or structure and may include
stock options, stock appreciation rights, phantom stock, restricted
stock and performance shares. The maximum number of shares of Common
Stock which may be issued pursuant to awards granted under this Plan is
3,088,750 shares and the maximum number of shares which may be issued
to any one employee during any calendar year is 3,088,750 shares.
Grants under the Plan are made at a price not less than the fair market
value on the date of the grant.
A summary of activity for the stock plans is as follows:
1993 Incentive Plan 1995 Incentive Plan
--------------------- --------------------
Number Option Number Option
of Shares Price of Shares Price
--------- ------ --------- ------
Fiscal 1994
Granted 1,053,140 $ 7.93 --- $ --
Exercised -- -- --- --
Canceled 15,278 7.93 --- --
Outstanding, end of year 1,037,862 7.93 --- --
Exercisable, end of year -- -- --- --
Available for options, end of year 19,514 -- --- --
Fiscal 1995
Granted 3,530 15.30 1,389,324 13.60-16.00
Exercised -- -- --- --
Canceled 21,151 7.93 --- --
Outstanding, end of year 1,020,241 7.93-15.30 1,389,324 13.60
Exercisable, end of year 1,016,711 7.93-15.30 --- --
Available for options, end of year 37,135 -- 1,699,426 --
Fiscal 1996
Granted 19,121 17.88 3,510 15.30
Exercised 995,729 7.93-17.88 400,821 13.60-16.00
Canceled 994 7.93-17.88 41,686 13.60-16.00
Outstanding, end of year 42,639 7.93-17.88 950,327 13.60-16.00
Exercisable, end of year 35,550 7.93-17.88 521,445 13.60-16.00
Availale for options, end of year 19,008 -- 1,737,602 --
The options granted under the 1995 Incentive Plan will become
exercisable one-third equally on October 31, 1995, April 30, 1996, and
April 30, 1997.
During fiscal 1996, 1,396,550 stock options were exercised of which
1,216,407 were exercised subsequent to the announcement of the
Agreement and Plan of Merger with Tosco Corporation, discussed in Note
2. In connection with the exercise of the 1,216,407 options, the
Company received 388,166 shares of Circle K common shares as
consideration toward the exercise of certain shares or to pay the
participants applicable payroll taxes. Such shares are shown as
treasury stock in the accompanying financial statements. In connection
with the exercise of such options, the Company recorded a tax
receivable and a corresponding increase directly to stockholders'
equity of approximately $11.2 million representing the tax effects of
compensation expense which will be reported by the Company in its
calendar 1996 tax returns.
In connection with the exercises, the participants sold to Tosco for
cash, through an independent broker, a portion of the Circle K shares
received upon exercise at prevailing market prices. As of April 30,
1996, Tosco had purchased 289,106 shares of the Company's common stock
from stock option participants.
16. COMMITMENTS AND CONTINGENCIES:
An action entitled BINH TRINH, ET AL. V. THE CIRCLE K CORPORATION is
pending in the United States District Court for the Southern District
of Texas, Houston Division. The suit is brought by sixteen former
employees of Vietnamese nationality, and alleges they were the subject
of wrongful discrimination because they are Vietnamese. The suit is
brought under 42 U.S.C. Sections 1981 and 2000e. Summary judgment on
behalf of the Company was granted as to six of the plaintiffs. The six
plaintiffs have a motion to reconsider pending, which the Company
intends to vigorously oppose. In May 1996, a jury awarded four of the
plaintiffs approximately $2.2 million dollars in actual damages and $16
million in punitive damages. Judgment has not yet been entered, and the
Company intends to file prejudgment motions, including a motion that
Title VII's cap on damages should apply (which limits the award to
$300,000 for compensatory and punitive damages for each plaintiff, in
addition to back pay awarded). To the extent required, the Company
intends to appeal the verdict to the appellate courts and aggressively
pursue its reversal. The Company believes that the trial court or an
appellate court will apply Title VII's statutory cap, reducing the
total jury award to about $1.4 million, or will otherwise reduce the
size of the damages award. There remain six plaintiffs whose cases have
not been set for trial. If tried, the Company intends to vigorously
oppose those claims. Based on this litigation, the Company provided $2
million in the fourth quarter of 1996 to cover its estimated exposure;
however, the exact amount of the ultimate loss may vary depending upon
future developments in the cases.
The predecessor to the Company (the "Predecessor") emerged from Chapter
11 with a confirmed Plan of Reorganization (the "Plan") on July 26,
1993, and the Plan was substantially consummated on that date. The
following matter relates to the confirmed Plan: S.N. Phelps & Co.,
Inc., Commonwealth Oil Refining Co., Inc. and Realmark Holdings, Inc.
(The "Phelps Group") filed an action in the Bankruptcy Court seeking to
revoke the confirmation order on the grounds that it was procured by
fraud. The alleged fraud relates to the participation by the
Predecessor's management in a post-confirmation stock incentive program
that the Phelps Group maintains was not adequately disclosed. On June
1, 1994, the Bankruptcy Court dismissed the action as moot. On
September 23, 1994, the Bankruptcy Court granted the Phelps Group's
motion to further amend its complaint, pursuant to Section 105 of the
Bankruptcy Code, to seek additional remedies other than revocation. The
Company's motions for summary judgment on a dismissal of the amended
complaint were denied on March 9, 1995. On May 23, 1995, a motion for
intervention and to proceed as a class action was filed by a former
bondholder of the Predecessor. The bondholder alleges to represent the
$40 million in bonds of the Predecessor not represented by the Phelps
Group. On August 30, 1995, the Court granted the motion for
intervention; class action status has not yet been decided. The
litigation is complex, and the ultimate outcome cannot presently be
determined. Furthermore, management is unable to predict a potential
range of monetary exposure, if any, to the Company.
In conjunction with the Tosco Merger (Note 2), the obligations of the
Binh Trinh and Phelps Group matters have been assumed by the selling
shareholders.
On January 10, 1996, an action entitled THE COCA-COLA COMPANY V. CIRCLE
K STORES INC. was filed against the Company by The Coca-Cola Company
("Coke") in the United District Court for the Northern District of
Georgia. Coke alleges that the Company wrongfully terminated an
agreement under which its convenience stores sold Coca-Cola fountain
products on a virtually exclusive basis. On March 8, 1996, the District
Court denied Coke's motion for a preliminary injunction, ruling that
Coke had not demonstrated a likelihood of success on the merits of the
case. On March 28, 1996, Coke appealed that ruling. Alternatively, Coke
is seeking to recover damages in excess of $12 million. The Company is
seeking a judicial determination that it had an express right to
terminate the agreement or, alternatively, that the agreement will
expire by its own terms in January 1997. This litigation is progressing
and the Company intends to defend its position vigorously. The outcome
of the litigation is not currently predictable.
A series of actions have been filed against the Company in Idaho state
courts entitled VERNITA BUNCH AND HELEN LEWIS V. CIRCLE K CORPORATION
(Bannock County), RHONDA TERRELL V. CIRCLE K CORPORATION (Ada County)
and CONSTANCE CLARK, ET. AL. V. CIRCLE K CORPORATION (Ada County).
These cases involve former employees who allege they have been
discriminated against and terminated due to their gender and age.
Discovery is underway in all three cases. The Company's motions for
summary judgment based upon releases signed by the plaintiffs have been
denied in the first two cases. Plaintiffs in the Clark action are
attempting to certify that case as a class action on behalf of
themselves and others similarly situated. A hearing was held on class
certification on May 28, 1996. Certification of the class was granted.
These cases are in preliminary stages of discovery and the Company
intends to defend its position vigorously. The outcome of this
litigation is not currently predictable.
An action entitled JANET JACKIM V. CIRCLE K STORES INC., ET AL was
filed against the Company by a former Vice President. The Plaintiff
alleges wrongful discharge, gender discrimination, sexual harassment,
breach of contract, and various associated tort claims. The discovery
period is nearly complete. The court has dismissed Plaintiff's claim
that she was improperly denied more than $100,000 in vacation pay, as
well as the Plaintiff's claim that she was retaliated against and
eventually discharged because she had requested maternity leave. The
Company intends to file a motion for summary judgment before the end of
July. The outcome of this litigation is not currently predictable.
GENERAL LITIGATION
In addition to the above matters, the Company is a party to other legal
proceedings and claims which have arisen in the ordinary course of
business. Management does not believe the outcome of these other legal
matters will have a material effect on the Company's results of
operations, cash flows or financial position.
17. PREDECESSOR REORGANIZATION PROCEEDINGS:
On May 15, 1990, the Predecessor and its domestic subsidiaries (the
"Debtors") filed petitions for reorganization under Chapter 11 of the
United States Bankruptcy Code in the United States Bankruptcy Court for
the District of Arizona (the "Court"). On June 16, 1993, the Court
approved and confirmed the Debtors' Plan of Reorganization, and the
Plan was substantially consummated on July 26, 1993. In general, the
Plan of Reorganization provided for resolution of all outstanding
claims against the Debtors as of July 26, 1993, as well as resolution
of certain other legal disputes, in exchange for cash. All previously
outstanding debt and equity securities of the Predecessor were
canceled, and 1,000 new shares of stock were issued, which were
purchased by CK Acquisitions. A limited number of disputed claims were
not funded at the acquisition date due to their small face amounts.
Amounts allowed, if any, on these claims have been or will be paid by
the Company. The Company believes the maximum financial exposure on
these unfounded claims is not material.
18. EMPLOYEE BENEFIT PLANS:
The Company has a savings plan which is administered by trustees, all
of whom are officers of the Company. Employee contributions to the plan
are tax deductible under Section 401(k) of the Internal Revenue Code.
The Company matches certain employee contributions. The Company
contributed $1.6 million, $1.5 million, $1.1 million and $0.3 million
for the periods ended April 30, 1996, April 30, 1995, April 30, 1994
and July 26, 1993, respectively.
In July 1994, the Company adopted an elective non-qualifying deferred
compensation plan, under which participants can defer up to 50% of
their base salaries and 100% of their cash bonuses for any given year.
Interest accrues on the deferral and amounts due to the participants
are generally payable upon retirement, except in certain limited
circumstances. The amount payable by the Company at April 30, 1996 is
$1.3 million.
19. RELATED PARTY TRANSACTIONS:
In connection with the acquisition of the Predecessor, the Company
issued $30 million in junior subordinated indebtedness to AIBC (see
Note 9). The Company paid interest on the subordinated notes of
approximately $1.3 million. In addition, the Company paid $1.5 million
as a prepayment fee when the indebtedness was repaid.
In connection with the acquisition of the Company, CK Acquisitions
entered into various agreements with affiliates of Investcorp. These
included (i) a Financing Advisory Agreement, pursuant to which
Investcorp International Inc. ("III") received a fee of $3,250,000 for
certain advisory and related services rendered by III in arranging
financing for the Acquisition, (ii) a Bankruptcy Services Advisory
Agreement, pursuant to which III received a fee of $2,275,000 for
certain advisory and related services rendered by III in connection
with the Chapter 11 proceedings and the preparation of the Plan of
Reorganization, (iii) a Real Property Advisory Services Agreement,
pursuant to which III received a fee of $5,000,000 for certain advisory
and related services rendered by III in connection with the negotiation
of certain rent and lease concessions in respect of real property
leased by the Predecessor and (iv) an International Services Advisory
Agreement pursuant to which Investcorp Securities Limited, an affiliate
of Investcorp ("ISL"), received a fee of $100,000 for certain advisory
and related services rendered by ISL with respect to an evaluation of
the assets of the Predecessor located outside of the United States. All
of these fees were paid at the closing of the Acquisition on July 26,
1993.
CK Acquisitions also entered into an agreement for Management Advisory
and Consulting Services with III pursuant to which CK Acquisitions
agreed to pay III consultancy service fees of $3,750,000 for the
five-year term of the agreement. Upon the execution of this agreement
on July 26, 1993, CK Acquisitions made an initial payment of $2,250,000
covering the first three years of the term. The Company, as successor
to CK Acquisitions, is required to make quarterly payments of $187,500
commencing on July 1, 1996, for the remainder of the term. The Company
recorded a management fee expense of $750,000 for each of the periods
ended April 30, 1996 and 1995, respectively. This agreement was
terminated upon the merger with Tosco (Note 2).
20. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company Predecessor
--------------------------------------------- -----------
Year Year Period from Period from
Ended Ended July 27, 1993 May 1, 1993
April 30, April 30, to April 30, to July 26,
1996 1995 1994 1993
-------- --------- ------------- -----------
Cash paid during the year for (in thousands):
Interest, net of amounts capitalized $ 23,829 $ 31,183 $ 17,900 $ 3,826
Income taxes 18,801 17,319 18,495 1,386
Scedule of non-cash investing and
financing activities (in thousands):
Equipment acquired under capital leases 20,444 19,470 5,127 --
Net assets conributed to joint venture 17,943 -- -- --
Treasury shares received upon exercise
of stock options 11,818 -- -- --
Tax benefits receivable upon exercise
of stock options 11,184 -- -- --
Pro Forma Financial Information
The Pro Forma financial information specified in Article II of Regulation S-X
are attached hereto.
The following pro forma combined balance sheet of Tosco as of March 31,
1996 and the combined statements of operations for the three months and year
then ended, give effect to (i) the purchase of an aggregate of 16,749,996 shares
of Circle K Common Stock following the financing of the cash to be paid pursuant
to the Stock Sale Agreement and (ii) the acquisition of the remaining shares of
Circle K Common Stock pursuant to the Merger Agreement, including shares
expected to be issued upon the exercise of outstanding options. The pro forma
balance sheet assumes that the transactions occurred as of the balance sheet
date. The pro forma combined statements of income gives effect to these
transactions as if they had occurred at January 1, 1995 The pro forma combined
financial statements may not be indicative of the results that actually would
have occurred if the Merger had occurred at January 1, 1995 or the results which
may be obtained in the future. The pro forma combined statements of operations
do not reflect the possible improvement in operating contribution or the planned
reduction in operating and administrative costs expected from the consolidation
of the Seattle, Washington office of Tosco with the Phoenix, Arizona office of
Circle K, net of non-recurring costs of consolidation. The information resented
herein should be read in conjunction with the separate historical consolidated
financial statements of Tosco and Circle K previously filed.
Tosco Corporation
Pro-Forma Combined Balance Sheet
As of March 31,1996
(In thousands, except per share amounts)
(Unaudited)
Historical (Notes A)
--------------------
Tosco Circle K Consolidated Pro-Forma Adjustments Eliminations Pro-Forma
----- -------- -------------- ------------ --------- ------------ ----------
Cash, cash equivalents, short-term
Investments and deposits $ 60,973 $ 39,473 $ 100,446 ($4,261)(a) (5,300)(b) $ 84,247
(6,638)(d)
Other Current assets 854,500 252,460 1,106,960 1,106,960
-------- -------- ---------- ---------- ---------- -------- ---------
Total current assets 915,473 291,933 1,207,406 (10,899) (5,300) 1,191,207
Property and equipment 1,036,882 614,641 1,651,523 1,651,523
Investment in Circle K 7,714 7,714 4,261(a) 6,638(d) (313,338)
492,399(b) (469,508)(g)
271,834(c)
Intangibles, net of acc,amortization 57,062 117,055 174,117 4,800(c) 469,508(g) 649,868
1,443(f)
Other long-term assets 119,286 74,236 193,522 2,867(b) (1,443)(f) 194,946
-------- ------- ---------- --------- ---------- ---------- -------
Total Assets $2,136,417 $1,097,865 $3,234,282 $766,705 ($105) ($313,338) $3,687,544
========== ========== =========== =========== ========== ========== ==========
Current liabilities $656,004 $337,636 $993,640 $993,640
Current maturities of long-term
obligations 771 27,520 28,291 (14,644)(f) 13,647
-------- -------- --------- ----------- ------------ --------
656,775 365,156 1,021,931 (14,644) 1,007,287
Long-term obligations 738,122 197,814 935,936 435,436(b) (87,860)(f) 1,386,016
102,504(f)
Other liabilities 96,440 221,557 317,997 317,997
Shareholders' equity
Common Stock 29,757 256 30,013 878(b) 3,991(c) (256) 34,626
Additional paid in capital 641,231 260,362 901,593 58,952(b) (500)(e) (260,362) 967,526
267,843(c)
Retained earnings 45,925 64,538 110,463 (64,538) 45,925
Reductions from capital (71,833) (11,818) (83,651) 11,818 (71,833)
--------- -------- ---------- ----------- ---------- -------- -------
645,080 313,338 958,418 327,673 3,491 (313,338) 976,244
--------- -------- ----------- ------------ --------- --------- -------
Total liabilities and equity $2,136,417 $1,097,865 $3,234,282 $865,613 ($99,013) ($313,338) $3,687,544
========== ========== ========== ======== ========= ========= ==========
Pro-forma adjustments:
(a) Record Tosco's acquisition, subsequent to March 31, 1996, of 136,974 shares
of Circle K Common Stock for $4,261 million. Tosco purchased, at prevailing
market prices, a portion of the Circle K shares received upon exercise of
vested options. Tosco purchased an aggregate of 394,532 shares of Circle K
Common Stock for $11.975 million from the date of the Merger announcement
through the Merger date.
(b) Record purchase of 16,749,996 shares of Circle K Common Stock from the
Selling Shareholders for $25.825 per share in cash and 1,171,132 shares of
Tosco Common Stock valued at $3.572 per share of Circle K Common Stock
(total value of $29.397 based upon the average of the closing prices of
Tosco Common Stock during the ten consecutive trading days ending May 28,
1996 of $51.0875 per share (the "Average Stock Price"). Cash proceeds of
$432.569 million were generated from the issuance of $240 million of 7-5/8%
senior unsecured notes due 2006, not of discounts and fees totalling $2.867
million, with the balance from cash borrowings from Tosco's working capital
facility.
(c) Record issuance of 5,320,953 shares of Tosco Common Stock in exchange for
shares of Circle K Common Stock held by Exchanging Shareholders.
Based upon the Average Stock Price, the value per share of Circle K Common
Stock to the Exchanging Shareholders was $31,482.
(d) Records cancellation of 390 and 436,913 options which were not exercised or
did not vest, respectively, prior to the consummation of the Merger for
$6.638 million (equal to the product of such options multiplied by the
excess of $29.00 over the exercise price per share of such options.
(e) Record costs of issuance of Common Stock ($.5 million) and other
transaction costs of $4.8 million.
(f) Record retirement of $102.504 million of debt of Circle K from cash
borrowings under Tosco's revolving credit facility and the write off of
deferred financing costs related to the debt retired.
(g) Record merger of Circle K into Tosco Acquisition Sub. The purchase price of
Circle K will be allocated to the assets and liabilities of Circle K based
upon appraisals and other evaluations currently in progress. The above pro
forma balance sheet does not reflect such allocations.
Note A - The historical balance sheets of Tosco and Circle K are as of March 31,
1996 and April 30, 1996, respectively.
Tosco Corporation
Pro-Forma Combined Statement of Income
For the Year Ended December 31, 1995
(In thousands, except per share date)
(Unaudited)
Historicals (Note A-1)
----------------------------------
Pro-Forma
Tosco Circle K Consolidated Pro-Forma Adjustments (Note B)
------- ---------- -------------- ---------------------- -----------
Sales $7,284,051 $3,540,531 $10,824,582 ($526,000)(h) $10,298,582
Cost of Sales (7,004,501) (2,747,071) ( 9,751,572) 526,000 (h) (9,225,572)
Operating and selling,
general and administrative
expense (95,858) (709,559) (805,417) (11,449)(i) (816,866)
Interest expense, net (56,253) (26,547) (82,800) (29,854) (287)(k) (112,941)
---------- --------- ---------- ---------- --------- ---------
(7,156,612) (3,483,177) (10,639,789) 484,697 (287) (10,155,379)
----------- ----------- ------------- ----------- --------- ------------
Income before income taxes 127,439 57,354 184,793 (41,303) (287) 143,203
Provision for income taxes (50,381) (23,956) (74,337) 11,906(l) (62,431)
---------- --------- ---------- ----------- ------- -------------
Income before
extraordinary item $77,058 $33,398 $110,456 ($29,397) ($287) $80,772
========== ========= ============== ========== ======== ============
Earnings per share
before extraordinary item:
Primary: $2.06 $1.29 $184 (m)
===== ====== =========
Fully diluted: $2.04 $1.29 $1.83(m)
===== ====== =========
Pro-forma adjustments:
(h) Remove excise taxes of Circle K included in sales and cost of sales for
consistency of presentation.
(i) Record amortization of $593 million of Circle K intangibles (primarily
trademarks) over 40 years (the revised useful life over which the benefit
of the intangible assets are expected to be realized).
(j) Record interest on $435.436 million of additional debt incurred to finance
the acquisition. The acquisition was financed by the issuance of $240
million of 7-5/8% senior unsecured notes due 2006 and cash borrowings under
Tosco's working capital facility.
(k) Record amortization of debt financing costs over 10 year term of debt.
(l) Record income taxes on taxable pro-forma adjustments at Tosco's current
effective tax rate of 39.5% No deduction has been taken on amortization of
intangibles which will not be deductible for income tax purposes.
(m) Pro forma earnings per share are based on the number of common and common
equivalent shares that would have been outstanding had the Merger occurred
on January 1, 1995.
Note A-1 - The historical statements of Tosco and Circle K are for the
years ended December 31, 1995 and January 31, 1996, respectively.
Note B - The pro-forma income statement does not reflect the improvement in
operating contribution anticipated from the merger or the possible
reduction in operating and administrative costs expected from the
consolidation of the Seattle office of Tosco with the Phoenix, Arizona
office of Circle K, net of non-recurring costs of consolidation.
Tosco Corporation
Pro-Forma Combined Statement of Income
For the Three Months Ended March 31, 1996
(In thousands, except per share date)
(Unaudited)
Historicals (Note A-2)
----------------------------------
Pro-Forma
Tosco Circle K Consolidated Pro-Forma Adjustments (Note B)
------- ---------- -------------- ---------------------- -----------
Sales $2,020,023 $902,166 $2,922,189 ($129,921)(h) $2,792,268
Cost of Sales (1,937,412) (706,886) (2,644,298) 129,921 (h) (2,514,377)
Operating and selling, general
and administrative expense (27,070) (169,715) (196,785) (2,862)(j) (199,647)
Interest expense, net (15,923) (6,847) (22,770) (7,464)(j) (72)(k) (30,306)
----------- ------- ---------- -------- ----- --------
(1,980,405) (883,448) (2,863,853) 119,595 (72) (2,744,330)
----------- -------- ---------- -------- ------ ----------
Income before income taxes 39,618 18,718 58,336 (10,326) (72) 47,938
Provision for income taxes (15,652) (7,880) (23,532) 2,976 (i) (20,556)
---------- -------- -------- ------- ----- --------
Income before extraordinary item $23,966 $10,838 $34,804 ($7,350) ($72) $27,382
========== ======== ======== ======== ===== =======
Earnings per share
before extraordinary item
Primary: $0.63 $0.42 0.62(m)
====== ====== ====
Fully diluted: $0.63 $0.42 0.61(m)
====== ====== ====
(h) Remove excise taxes of Circle K included in sales and cost of sales for
consistency of presentation.
(i) Record amortization of $593 million of Circle K intangibles (primarily
trademarks) over 40 years (the revised useful life over which the benefit
of the intangible assets are expected to be realized.
(j) Record interest on $435.436 million of additional debt incurred to finance
the acquisition. The acquisition was financed by the issuance of $240
million of 7-5/8% senior unsecured notes due 2006 and cash borrowings under
Tosco's working capital facility.
(k) Record amortization of debt financing costs over 10 year term of debt.
(l) Record income taxes on taxable pro-forma adjustments at Tosco's current
effective tax rate of 39.5% No deduction has been taken on amortization of
intangibles which will not be deductible for income tax purposes.
(m) Pro forma earnings per share are based on the number of common and common
equivalent shares that would have been outstanding had the Merger occurred
on January 1, 1995.
Note A-2 - The historical interim statements of Tosco and Circle K are for the
three months ended March 31, 1996 and April 30, 1996, respectively.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Amendment to this Report to be signed on its
behalf by the undersigned thereunto duly authorized.
TOSCO CORPORATION
Dated: August 12, 1996 By:/s/ Jefferson F. Allen
----------------------
Jefferson F. Allen,
Executive Vice President and
Chief Financial Officer