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, 1995 and 1994 and
the related consolidated statements of operations, stockholders' equity and cash
flows for the year ended April 30, 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 and for the year ended April 30, 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.
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, 1995 and 1994 and the consolidated
results of their operations and their cash flows for the year ended April 30,
1995 and for the period from July 27, 1993 to April 30, 1994 and the
consolidated results of their operations and their cash flows of the Predecessor
for the period from May 1, 1993 to July 26, 1993 and the year ended April 30,
1993 in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Phoenix, Arizona
June 14, 1995
4
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
April 30,
-----------------------
1995 1994
---------- --------
ASSETS
Current assets:
Cash and cash equivalents ....................... $ 68,575 $ 39,232
Receivables ..................................... 36,432 41,731
Inventories ..................................... 138,042 130,009
Prepaid expenses and other current assets ....... 26,927 47,671
Assets held for sale, current portion ........... 9,290 29,422
---------- --------
Total current assets ......................... 279,266 288,065
Property and equipment, net ......................... 576,840 550,570
Intangibles (principally trade name),
net of accumulated amortization of
$5,841 and $2,595 ............................... 118,608 111,963
Other assets ........................................ 44,284 33,778
Assets held for sale ................................ -- 15,519
---------- --------
Total assets .............................. $1,018,998 $999,895
========== ========
The accompanying notes are an integral
part of the financial statements.
5
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share data)
April 30,
-----------------------
1995 1994
---------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................... $ 170,112 $140,623
Accrued liabilities ............................ 124,036 154,585
Money orders sold .............................. 34,687 29,135
Current maturities of long-term obligations .... 22,571 16,030
---------- --------
Total current liabilities ................... 351,406 340,373
Long-term obligations .............................. 177,487 254,777
Other liabilities .................................. 227,288 256,397
---------- --------
Total liabilities ........................... 756,181 851,547
Stockholders' equity:
Common Stock: par value $.01 per share
authorized 150,000,000 shares; issued and
outstanding 24,224,059 and 17,675,204
shares, respectively ........................ 242 10
Additional paid-in capital ..................... 235,763 140,190
Retained earnings .............................. 26,812 8,148
---------- --------
Total stockholders' equity .................. 262,817 148,348
---------- --------
Total liabilities and stockholders' equity.. $1,018,998 $999,895
========== ========
The accompanying notes are an integral
part of the financial statements.
6
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
The Company Predecessor
------------------------------ ------------------------------
Year Period from Period from Year
Ended July 27, 1993 May 1, 1993 Ended
April 30, to April 30, to July 26, April 30,
1995 1994 1993 1993
------------ ------------ ------------ ------------
Revenues:
Sales ...................................... $ 3,516,343 $ 2,478,753 $ 794,034 $ 3,045,864
Other ...................................... 49,209 36,843 10,430 43,494
------------ ------------ ------------ ------------
Gross revenues ........................... 3,565,552 2,515,596 804,464 3,089,358
------------ ------------ ------------ ------------
Cost of sales and operating expenses:
Cost of sales .............................. 2,778,546 1,944,146 620,561 2,408,969
Operating and administrative ............... 650,518 483,116 148,879 591,301
Depreciation and amortization .............. 63,810 41,653 12,986 55,810
------------ ------------ ------------ ------------
Total cost of sales and
operating expenses ..................... 3,492,874 2,468,915 782,426 3,056,080
------------ ------------ ------------ ------------
Operating income ......................... 72,678 46,681 22,038 33,278
Interest expense .............................. (33,918) (25,917) (5,434) (22,770)
Reorganization items .......................... -- -- (3,800) (69,203)
------------ ------------ ------------ ------------
Income (loss) from continuing operations
before income taxes ........................ 38,760 20,764 12,804 (58,695)
Income taxes .................................. (16,077) (9,479) (207) (1,086)
------------ ------------ ------------ ------------
Income (loss) from continuing operations ...... 22,683 11,285 12,597 (59,781)
Discontinued operations (net of tax) .......... 280 611 199 939
------------ ------------ ------------ ------------
Income (loss) before extraordinary item ....... 22,963 11,896 12,796 (58,842)
Extraordinary loss (net of tax) ............... (4,299) (3,748) -- --
------------ ------------ ------------ ------------
Net income (loss) ............................. $ 18,664 $ 8,148 $ 12,796 $ (58,842)
============ ============ ============ ============
Income (loss) per common share:
Income from continuing operations .......... $ 1.18 $ .61 $ -- $ --
Discontinued operations .................... .01 .03 -- --
Extraordinary item ......................... (.22) (.20) -- --
------------ ------------ ------------ ------------
Net income per share .......................... $ .97 $ .44 $ -- $ --
============ ============ ============ ============
Weighted average common shares and
common share equivalents outstanding ....... 19,188,064 18,527,046 NA NA
============ ============ ============ ============
The accompanying notes are an integral
part of the financial statements.
7
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Series B Additional Retained
Preferred Common Paid-in Earnings Treasury
Stock Stock Capital (Deficit) Stock Total
----------- ----------- ----------- ----------- ----------- -----------
PREDECESSOR
Balance at May 1, 1992 ......... $ 50,000 $ 52,110 $ 191,340 $(1,147,721) $ (78,628) $ (932,899)
Conversion of indebtedness .. -- 56 700 -- -- 756
Net loss .................... -- -- -- (58,842) -- (58,842)
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1993 ...... 50,000 52,166 192,040 (1,206,563) (78,628) (990,985)
Net income .................. -- -- -- 12,796 -- 12,796
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 26, 1993
(pre-acquisition) ........... 50,000 52,166 192,040 (1,193,767) (78,628) (978,189)
Cancellation of Predecessor
equity .................... (50,000) (52,166) (192,040) 1,193,767 78,628 978,189
----------- ----------- ----------- ----------- ----------- -----------
Balance at July 26, 1993
(Post-acquisition) .......... $ -- $ -- $ -- $ -- $ -- $ --
=========== =========== =========== =========== =========== ===========
THE COMPANY
Balance at July 27, 1993
(inception) ................. $ -- $ -- $ -- $ -- $ -- $ --
Sale of common stock ........ -- 10 140,190 -- -- 140,200
Net income .................. -- -- -- 8,148 -- 8,148
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1994 ...... -- 10 140,190 8,148 -- 148,348
Sales of common stock ....... -- 65 95,740 -- -- 95,805
Stock split ................. -- 167 (167) -- -- --
Net income .................. -- -- -- 18,664 -- 18,664
----------- ----------- ----------- ----------- ----------- -----------
Balance at April 30, 1995 ...... $ -- $ 242 $ 235,763 $ 26,812 $ -- $ 262,817
=========== =========== =========== =========== =========== ===========
The accompanying notes are an integral
part of the financial statements.
8
THE CIRCLE K CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
The Company Predecessor
-------------------------- -------------------------
Year Period from Period from Year
Ended July 27, 1993 May 1, 1993 Ended
April 30, to April 30, to July 26, April 30,
1995 1994 1993 1993
--------- ------------- ------------ ---------
Cash flows from operating activities:
Net income (loss) ................................ $ 18,664 $ 8,148 $ 12,796 $ (58,842)
Adjustments to reconcile net income (loss) to cash
provided by operating activities:
Extraordinary loss (net of tax) .............. 4,299 3,748 -- --
Depreciation and amortization ................ 63,810 41,653 12,986 55,810
Deferred income taxes ........................ 1,647 (3,751) -- --
Net change in assets and liabilities,
net of effects of the acquisition
of Predecessor:
Receivables ................................ 3,880 7,315 (417) (7,670)
Inventories ................................ (7,231) 12,534 (7,342) 13,036
Prepaid expenses and other current assets .. 4,100 (12,464) 4,026 11,008
Accounts payable ........................... 26,659 17,724 2,062 9,256
Accrued liabilities ........................ (26,843) (10,832) 9,813 29,860
Money orders sold .......................... 5,552 9,608 (2,787) (484)
Reorganization accruals and charges ........ -- -- -- 24,721
Other assets and liabilities ............... (2,668) 10,849 (29,530) (27,181)
--------- --------- --------- ---------
Net cash provided by operating activities 91,869 84,532 1,607 49,514
--------- --------- --------- ---------
Cash flows from investing activities:
Purchases of property and equipment .............. (74,304) (62,541) (2,071) (74,230)
Proceeds from sale of assets ..................... 48,400 43,184 4,014 11,372
Acquisition of Predecessor, net of cash acquired . -- (37,628) -- --
Acquisition of stores ............................ (24,643) (10,000) -- --
Other ............................................ (10,610) -- (551) (933)
--------- --------- --------- ---------
Net cash provided (used) by investing
activities ............................. (61,157) (66,985) 1,392 (63,791)
--------- --------- --------- ---------
Cash flows from financing activities:
Proceeds from issuance of stock .................. 95,805 140,200 -- --
Repayments of short-term obligations ............. -- (50,000) -- --
Proceeds from long-term obligations .............. 20,561 -- -- --
Repayments of long-term obligations .............. (108,967) (63,815) (4,169) (6,642)
Payment of acquisition costs ..................... -- -- (49,179) --
Other ............................................ (8,768) (4,700) -- --
--------- --------- --------- ---------
Net cash provided (used) by financing
activities ............................. (1,369) 21,685 (53,348) (6,642)
--------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents 29,343 39,232 (50,349) (20,919)
Cash and cash equivalents, beginning of period ...... 39,232 -- 152,552 173,471
--------- --------- --------- ---------
Cash and cash equivalents, end of period ............ $ 68,575 $ 39,232 $ 102,203 $ 152,552
========= ========= ========= =========
The accompanying notes are an integral
part of the financial statements.
9
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization
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. The Parent was formed by an
affiliate of Investcorp S.A. ("Investcorp") in 1993. In March 1995, the
Parent completed its initial public offering and sold 6,500,000 newly
issued shares of common stock at $16.00 per share.
Principles of Consolidation
The 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.
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.
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 approximates cost 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 approximates 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 computed 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.
Interest costs related to construction-in-progress are capitalized as
incurred. For the year ended April 30, 1995, the Company capitalized
interest of $313,885. No interest was capitalized for the periods ended
April 30, 1994, July 26, 1993 or April 30, 1993.
10
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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 incidents are made based on historical data and actuarial
analysis.
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 include video game machine income, money order fees,
commissions from the sale of lottery tickets and royalty income under
international licenses.
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.
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.
11
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Net Income Per Share
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).
The Company completed its initial public offering in March 1995. The
following unaudited pro forma information presents income from continuing
operations and related per share amounts as if the offering had occurred at
the beginning of fiscal 1995, with pro forma adjustments to give effect to
the application of the net proceeds of approximately $95.3 million to
repay, in part, outstanding long-term debt and a related reduction in
interest expense.
Three Months
Ended Year Ended
April 30, 1995 April 30, 1995
-------------- --------------
(Unaudited) (Unaudited)
Income from continuing operations ...... $ 7,409 $ 27,470
Income from continuing operations
per common share ..................... $ .30 $ 1.10
Weighted average shares outstanding .... 24,995,362 24,993,776
2. BUSINESS ACQUIRED:
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.
12
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. BUSINESS ACQUIRED: (Continued)
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
extraordinary item ................................. 18,351
Net income ........................................... 15,413
Income per common share:
Income from continuing operations before
extraordinary item ............................... $ .99
Net income ......................................... $ .83
Weighted average common shares outstanding ......... 18,527,046
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
=======
Acquisition of and Exchange of Assets
On April 29, 1994, the Company entered into two transactions with National
Convenience Stores Incorporated (NCS) whereby 88 of the Company's stores
located in Dallas and Houston were exchanged for 53 NCS stores located in
southern California. In a separate transaction, the Company purchased 27
NCS stores in the Atlanta market for approximately $10 million in cash and
the assumption of obligations under capital leases.
On June 15, 1994, the Company purchased 16 operating convenience stores
including inventories and certain land sites for future development located
in the Phoenix metropolitan area for approximately $24.6 million.
Pro forma information giving effect to the exchange and purchase of the
above stores has not been included due to immateriality.
13
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
2. BUSINESS ACQUIRED: (Continued)
Sale and Franchise Agreement
On April 22, 1995, the Company sold 51 of its operating stores located in
New England to Gibbs Oil Co. for approximately $14 million, the net book
value of assets sold. In conjunction with the sale, Circle K Franchise
Corporation, a wholly-owned subsidiary of the Operating Company, entered
into a franchising agreement with Gibbs Oil Co. Limited Partnership,
whereby the 51 stores and the 31 stores Gibbs Oil Co. operated prior to the
agreement will be operated under the Circle K name. The Company will earn
franchise and management fees derived from revenues from all 82 stores.
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
will operate under the Circle K name in Texas and Oklahoma through a
franchising arrangement with a subsidiary of the Operating Company. The
Company's investment in the joint venture is 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.
3. RECEIVABLES:
Receivables consist of the following (in thousands):
April 30, 1995 April 30, 1994
-------------- --------------
Due from suppliers .................... $16,562 $14,699
Tax settlement ........................ 6,880 10,147
Environmental remediation settlement .. -- 8,000
Other ................................. 14,020 11,400
------- -------
37,462 44,246
Less allowance for doubtful accounts .. (1,030) (2,515)
------- -------
$36,432 $41,731
======= =======
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 at April 30, 1995 represents the
amount the Company expects to receive when the settlement is finalized with
the Department of Justice and includes accrued interest, net of
Predecessor's federal retained tax liability.
In 1988, the Predecessor purchased some stores for which the seller
retained responsibility for all future environmental remediation for the
stores. In May 1994, the seller paid the Company $8 million to assume the
remediation responsibility for these stores.
14
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
4. INVENTORIES:
Inventories consist of the following (in thousands):
April 30, 1995 April 30, 1994
-------------- --------------
Merchandise ................... $ 96,857 $ 93,903
Gasoline ...................... 34,119 26,634
Other ......................... 7,066 9,472
-------- --------
$138,042 $130,009
======== ========
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following (in thousands):
April 30, 1995 April 30, 1994
-------------- --------------
Land ............................ $120,501 $118,935
Buildings ....................... 95,107 95,288
Store fixtures and equipment .... 265,869 228,650
Leasehold improvements .......... 60,828 55,970
Other equipment ................. 11,298 9,316
Construction in progress ........ 37,175 26,344
Assets under capital leases
(primarily buildings) ........ 74,307 53,767
-------- --------
665,085 588,270
Less accumulated depreciation
and amortization ............. (88,245) (37,700)
-------- --------
$576,840 $550,570
======== ========
Accumulated depreciation and amortization, as presented above, includes
accumulated amortization of assets under capital leases of $7.3 million and
$3.2 million at April 30, 1995 and 1994, respectively.
15
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
6. OTHER ASSETS:
Other assets consist of the following (in thousands):
April 30, 1995 April 30, 1994
-------------- --------------
State Environmental Trust Funds
(Note 11) ........................... $21,577 $12,144
Debt issuance costs, net of
accumulated amortization
of $4,159 and $2,062 (Note 9) ....... 2,076 10,455
Other .................................. 20,631 11,179
------- -------
$44,284 $33,778
======= =======
7. ASSETS HELD FOR SALE:
Assets held for sale consist of the following (in thousands):
April 30, 1995 April 30, 1994
-------------------- --------------------
Long- Long-
Current Term Current Term
------- ------- ------- --------
Properties held for sale ............. $9,290 $ -- $15,000 $15,519
Discontinued operations .............. -- -- 12,347 --
Other ................................ -- -- 2,075 --
------ ------- ------- -------
$9,290 $ -- $29,422 $15,519
====== ======= ======= =======
As part of the Plan of Reorganization, the Company discontinued its
wholesale gasoline distribution subsidiary in September 1994, its real
estate subsidiary in February 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. The net
assets of these subsidiaries are included as a separate component of assets
held for sale. Revenues from discontinued operations were $35,828 for the
period ended April 30, 1995, $61,993 for the period ended April 30, 1994,
$20,254 for the period ended July 26, 1993 and $90,293 for the year ended
April 30, 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 approximately $47.0 million in 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.
16
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
8. ACCRUED LIABILITIES AND MONEY ORDERS SOLD:
Accrued liabilities consist of the following (in thousands):
April 30, 1995 April 30, 1994
-------------- --------------
Salaries and bonuses .................. $ 15,084 $ 21,952
Vacations and benefits ................ 13,224 16,033
Rent and property taxes ............... 10,715 10,439
Environmental remediation (Note 11) .. 18,000 12,000
Workers' compensation ................. 11,485 11,468
General liability claims .............. 9,503 8,885
Lottery payables ...................... 13,796 14,915
Other ................................. 32,229 58,893
-------- --------
$124,036 $154,585
======== ========
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, 1995 April 30, 1994
-------------- --------------
Tranche A Term Loan ................. $ 74,195 $ 80,000
Tranche B Term Loan ................. - 75,000
Capital leases ...................... 67,319 51,907
Real estate installment purchase .... 57,754 62,929
Other ............................... 790 971
-------- --------
200,058 270,807
Less current portion ................ (22,571) (16,030)
-------- --------
$177,487 $254,777
======== ========
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
========
17
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. LONG-TERM OBLIGATIONS: (Continued)
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 $3.0 million. No
further amounts can be borrowed under the Tranche B component.
The Revolving Credit Commitments extend through August 12, 1999. Borrowings
under these commitments may be made at the Eurodollar Rate plus 3/4%, or,
at the option of the Company, the Alternate Base Rate. The Company is
obligated to pay a commitment fee of 1/4 of 1% per annum on the average
daily amount of the available revolving credit commitment. Such fees are
payable quarterly, in arrears.
In addition, the availability of the Revolving Credit Commitments is
reduced by the issuance of standby or commercial letters of credit for the
benefit of third parties. The Company is required to reimburse the issuing
bank upon demand for any payment made by the issuing bank under such
letters of credit. At April 30, 1995, letters of credit totalling $30
million were outstanding.
The Senior Credit Agreement contains various financial covenants such as
limitations on capital expenditures, minimum level of earnings before
interest, taxes, depreciation and amortization, minimum net worth and
others. The Senior Credit Agreement permits 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 Loan 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 7).
18
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
9. LONG-TERM OBLIGATIONS: (Continued)
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, 1995 was $57.8 million of which $1.7 million is current.
Maturities of long-term obligations (excluding capital leases) for the
years ending April 30 are as follows (in thousands):
1996 .................. $ 14,540
1997 .................. 16,749
1998 .................. 20,850
1999 .................. 24,968
2000 .................. 8,407
10. OTHER LIABILITIES:
Other liabilities consist of the following (in thousands):
April 30, 1995 April 30, 1994
-------------- --------------
Environmental remediation (Note 11) .... $ 59,796 $ 69,258
Predecessor retained taxes ............. 30,283 44,585
Contract liability ..................... 42,387 42,427
Workers' compensation .................. 44,765 32,887
Deferred income tax liability .......... 2,728 21,535
General liability claims ............... 16,460 14,502
Environmental remediation settlement
(Note 11) ........................... 9,652 12,525
Other .................................. 21,217 18,678
-------- --------
$227,288 $256,397
======== ========
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 sixth year. Interest accrues at the rate of 8% per annum and is payable
annually.
19
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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
(USTs). 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
interpretation of government policy, soil and groundwater conditions, and
other factors. At April 30, 1995, the Company had environmental remediation
accruals for sites where contamination had been detected of approximately
$55 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 totalling $25.6 million, which is
included in other assets and receivables in the accompanying financial
statements. At April 30, 1995, 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. These 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, 1995, 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 $23 million. The
Company expects to incur substantially all of these projected expenditures
over a five-year period after the related sites are upgraded.
20
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
11. ENVIRONMENTAL COMPLIANCE: (Continued)
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 $45.0 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 18 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 and that the likelihood that the Company will have to fund a
material amount of remediation expenditures for a significant period of
time is remote.
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 Period from Period from Year
Ended July 27, 1993 May 1, 1993 Ended
April 30, to April 30, to July 26, April 30,
1995 1994 1993 1993
--------- -------------- ------------ ----------
Remediation payments ........... $18,617 $6,674 $1,382 $8,071
Trust fund reimbursements ...... 1,609 1,175 265 2,103
The Company may spend approximately $80 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 March 29, 1996. The payments have been discounted at
9% and the present value at April 30, 1995 is $13.7 million.
21
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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, 1995, future minimum rental payments due under operating and
capital leases are as follows (in thousands):
Operating Capital
Year Ending April 30 Leases Leases
-------------------- --------- ---------
1996 ........................................ $ 44,423 $ 13,873
1997 ........................................ 42,890 13,702
1998 ........................................ 39,889 11,925
1999 ........................................ 38,184 6,500
2000 ........................................ 37,602 4,488
Thereafter .................................. 332,262 83,661
-------- --------
Total minimum lease payments ................ $535,250 134,149
========
Imputed interest ............................ (66,830)
--------
Present value of net minimum lease payments . 67,319
Less current portion ........................ (8,031)
--------
Long-term portion ........................... $ 59,288
========
Future minimum lease payments for non-cancelable operating leases have not
been reduced by minimum sublease rentals of approximately $2.2 million due
under non-cancelable subleases as of April 30, 1995. 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 Period from Period from Year
Ended July 27, 1993 May 1, 1993 Ended
April 30, to April 30, to July 26, April 30,
1995 1994 1993 1993
--------- -------------- ------------- ----------
Minimum lease rental expense ............. $50,858 $35,412 $10,674 $53,332
Contingent rental expense ................ 3,741 2,564 1,011 3,614
Sublease rental income (net) ............. (552) (908) (349) (1,313)
------- ------- ------- -------
Net lease rental expense ................. $54,047 $37,068 $11,336 $55,633
======= ======= ======= =======
22
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES:
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 Period from Period from Year
Ended July 27, 1993 May 1, 1993 Ended
April 30, to April 30, to July 26, April 30,
1995 1994 1993 1993
--------- ------------- ------------ ----------
Current:
Federal .................................. $13,026 $11,938 $ -- $ --
State and local .......................... 1,404 1,292 207 1,086
------- ------- ----- ------
Total current ........................ 14,430 13,230 207 1,086
Deferred:
Federal .................................. (865) (3,354) -- --
State and local .......................... 2,512 (397) -- --
------- ------- ----- ------
Total deferred ....................... 1,647 (3,751) -- --
Income tax expense from continuing
operations before extraordinary item .... 16,077 9,479 207 1,086
Income tax expense on discontinued
operations .............................. 199 430 -- --
Tax benefit of extraordinary item .......... (3,050) (2,639) -- --
------- ------- ----- ------
$13,226 $ 7,270 $ 207 $1,086
======= ======= ===== ======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at April
30, 1995 and 1994 are as follows (in thousands):
1995 1994
-------- --------
Deferred tax assets:
Self-insurance reserves ............. $32,492 $21,266
Environmental remediation ........... 23,832 27,499
Tax credit carryforwards ............ 8,957 -
Other ............................... 24,399 22,180
------- -------
89,680 70,945
Deferred tax liabilities:
Intangibles ......................... (30,690) (32,060)
Property and equipment .............. (27,139) (22,016)
Other ............................... (18,492) (14,472)
------- -------
Net deferred tax assets ................ $13,359 $ 2,397
======= =======
23
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
13. INCOME TAXES: (Continued)
Consolidated income tax expense differed from the amount computed by
applying the U.S. federal income tax rate to income (loss) before income
taxes for the periods as shown (in thousands):
The Company Predecessor
------------------------- --------------------------
Year Period from Period from Year
Ended July 27, 1993 May 1, 1993 Ended
April 30, to April 30, to July 26, April 30,
1995 1994 1993 1993
--------- ------------- ---------- ---------
Tax expense (benefit) at the
federal statutory rate .................. $13,566 $7,267 $ 4,551 $(36,964)
State and foreign taxes, net of
federal income tax benefit .............. 2,774 2,018 207 1,086
Realized deferred tax asset ................ -- -- (4,551) --
Unrecognized deferred tax asset ............ -- -- -- 36,964
Other ...................................... (263) 194 -- --
------- ------ ------- --------
$16,077 $9,479 $ 207 $ 1,086
======= ====== ======= ========
Federal statutory rate ..................... 35% 35% 35% 34%
======= ====== ======= ========
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, 1995, the Company has a minimum tax credit carryforward of
approximately $9 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, 1995, the majority of the Company's
receivables relate 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 Company believes that the carrying values of its financial instruments
approximate their respective fair values at April 30, 1995.
24
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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. The 1993 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. 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 1993
Incentive Plan provides for the grant of stock appreciation rights and for
the sale or grant of restricted stock. Under the 1993 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 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 1995 Incentive 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
1995 Incentive Plan are made at a price not less than the fair market value
of shares on the date of the grant.
25
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
15. STOCKHOLDERS' EQUITY: (Continued)
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.
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 13.60-16.00
Exercisable, end of year .............. 1,016,711 7.93-15.30 -- --
Available for options, end of year .... 37,135 -- 1,699,426 --
26
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
16. COMMITMENTS AND CONTINGENCIES:
Status of Bankruptcy Court Actions
The Predecessor emerged from Chapter 11 with a confirmed Plan of
Reorganization (the "Plan"). The Plan, confirmed by order of the Bankruptcy
Court entered on June 16, 1993, became effective according to its terms on
July 26, 1993 and was substantially consummated at that date. The following
matters relate to the confirmed Plan:
o On October 8, 1993, the Phelps Group filed an action in Harris County,
Texas, against several banks and CK Acquisitions Corp. The Phelps
Group claims that CK Acquisitions Corp. interfered with and induced
the banks to violate a credit agreement entered into with the Phelps
Group prior to the bankruptcy of the Predecessor. The Company removed
the action from Texas state court, and it is now pending before the
U.S. Bankruptcy Court. On September 23, 1994, the Bankruptcy Court
entered an oral ruling dismissing the action and on December 12, 1994,
referred the action to the United States District Court ("District
Court") for entry of the final order. The Phelps Group filed
objections to the order of referral and the recommended decision of
the Bankruptcy Court on February 27, 1995. The District Court has not
yet set a hearing on the Phelps Group's objections.
o Bankruptcy Court: 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 results from 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 for reasons similar to those expressed by the Ninth
Circuit when it dismissed the Phelps Group's appeal. 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 and dismissal in respect to the amended
complaint were denied on March 9, 1995. The Company has filed a motion
with the District Court to appeal the Bankruptcy Court's denial of the
Company's motion to dismiss. The District Court has not yet decided
whether to accept the appeal. Pending a decision on this matter, the
case is proceeding in the Bankruptcy Court.
On May 23, 1995, a motion for intervention and to proceed as a class
action was filed in this case by a former bondholder of the Company's
predecessor. The bondholder alleges to represent the $40 million in
bonds of the Predecessor not represented by the Phelps Group. The
Court has scheduled a hearing on the motion for August 1, 1995.
General Litigation
In addition to the above matters, the Company is a party to other lawsuits
which have arisen in the ordinary course of business. Management does not
believe the outcome of any of the litigation matters will have a material
effect on the Company's results of operations, cash flows or financial
position.
27
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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.
Notwithstanding the confirmation and effectiveness of the Plan of
Reorganization, the Court continues to have jurisdiction to determine,
among other things, applications for allowances of fees and expenses paid
to professionals during the pendency of the reorganization, any
applications for the rejection or assumption of executory contracts or
unexpired leases, and resolution of other matters that may arise in
connection with the Plan of Reorganization or its confirmation.
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 unfunded claims is not material.
The items included in the reorganization line in the Predecessor's
accompanying consolidated statements of operations included the following
(in thousands):
Period from
May 1, 1993 to Year Ended
July 26, 1993 April 30, 1993
-------------- --------------
Professional fees and related expenses ..... $3,800 $39,999
Severance/retention program ................ -- 8,570
Accruals and settlement of claims .......... -- 24,721
Interest earned on cash accumulated
during Chapter 11 proceedings ........... -- (4,087)
------ -------
$3,800 $69,203
====== =======
The accrual and settlement of claims in fiscal 1993 represents the
settlement with various state environmental agencies related to claims on
rejected leases. The severance retention program was approved by the
Bankruptcy Court and represented an incentive for employees to remain with
the Predecessor through the reorganization proceedings.
28
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
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
$1.5 million, $1.1 million, $0.3 million and $1.4 million for the periods
ended April 30, 1995, April 30, 1994, July 26, 1993 and April 30, 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, 1995 is $401,000.
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 and $562,500 for the periods ended April 30, 1995 and
1994, respectively.
29
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
19. RELATED PARTY TRANSACTIONS: (Continued)
As of April 30, 1995, the Company has a receivable of approximately
$350,000 from an officer which bears interest at 7.5% and is collateralized
by a pledge of stock of the Company.
20. SUPPLEMENTAL CASH FLOW INFORMATION:
The Company Predecessor
-------------------------- ----------------------------
Year Period from Period from Year
Ended July 27, 1993 May 1, 1993 Ended
April 30, to April 30, to July 26, April 30,
1995 1994 1993 1993
--------- ------------- ----------- ----------
Cash paid during the year for (in thousands):
Interest, net of amounts capitalized ........... $31,183 $17,900 $3,826 $2,943
Income taxes ................................... 17,319 18,495 1,386 988
Schedule of non-cash investing and
financing activities (in thousands):
Equipment acquired under capital leases ...... 19,470 5,127 -- 7,506
Conversion of debt to equity ................. -- -- -- 756
21. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1995 and 1994 is as follows (in
thousands, except per share data):
July 31, October 31, January 31, April 30,
1994 1994 1995 1995
--------- ----------- ----------- ----------
Year Ended April 30, 1995
Revenues .................................... $910,836 $890,062 $848,006 $867,439
Gross profit ................................ 193,168 206,477 196,734 190,627
Income before extraordinary item ............ 553 9,755 6,146 6,510
Net income .................................. 553 9,755 6,146 2,211
Income per share:
Income from continuing operations ......... $0.02 $0.52 $0.33 $0.31
Net income ................................ $0.03 $0.53 $0.33 $0.10
July 31, October 31, January 31, April 30,
1993 1993 1994 1994
--------- ----------- ----------- ----------
Year Ended April 30, 1994
Revenues .................................... $841,562 $821,883 $785,864 $823,478
Gross profit ................................ 195,862 192,850 186,849 179,792
Income (loss) before extraordinary item ..... 13,958 6,505 4,599 (370)
Net income (loss) ........................... 13,958 6,505 851 (370)
Income (loss) per share:
Income from continuing operations ......... $0.06 $0.35 $0.23 $(0.03)
Net income (loss) ......................... $0.06 $0.35 $0.05 $(0.02)
30
THE CIRCLE K CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Continued)
21. QUARTERLY FINANCIAL DATA (UNAUDITED): (Continued)
The results of operations for the three months ended July 31, 1993
represent the combined results of the Company and the Predecessor (Note 2).
Earnings per share for the period ended July 31, 1993 represents only the
activity for the period July 26, 1993 through July 31, 1993. The first
quarter of fiscal 1994 reflects $4.5 million of non-recurring income
related to the introduction of a proprietary brand cigarette program. The
third quarter of fiscal 1994 and the fourth quarter of fiscal 1995 include
extraordinary items for the early retirement of indebtedness. See Long-Term
Obligations (Note 9) for a description of the extraordinary items.
31