1
EXHIBIT 13
National Convenience Stores Incorporated and Subsidiaries
SELECTED FINANCIAL DATA
(amounts in thousands, except per share data, store data and ratios)
Reorganized Company Predecessor Company
--------------------------- | ----------------------------------------------------
Period from |
Inception | Eight
(March 1, | Months
YEAR ENDED 1993) to | Ended Year Ended June 30,
JUNE 30, June 30, | February 28, -------------------------------------
1994 1993 | 1993 1992 1991 1990
--------------------------- |-----------------------------------------------------
|
Operations (1) (2): |
Sales ........................................ $ 880,524 $ 297,985 | $ 580,867 $ 958,519 $ 1,073,958 $ 1,062,183
Earnings (loss) before extraordinary |
gain (3) (4) (6) ............................ 6,835 4,389 | 6,796 (185,438) (10,465) (1,624)
Net earnings (loss)(5) (7) ................... 6,835 4,389 | 68,289 (185,438) (10,465) 4,963
|
Common Stock Per Share Data (8): |
Earnings before extraordinary gain ........... $1.07 $0.68 | * * * *
Net earnings ................................. 1.07 0.68 | * * * *
Cash dividends ............................... -- -- | * * * *
|
Balance Sheet Data (2): |
Total assets ................................. $ 299,522 $ 298,428 | * $ 268,501 $ 364,329 $ 398,844
Current assets ............................... 90,992 90,511 | * 84,879 85,640 88,629
Current liabilities .......................... 81,714 78,768 | * 61,825 86,186 87,192
Capitalization: |
Long-term debt .............................. 106,976 131,559 | * -- 191,633 204,916
Liabilities subject to compromise ........... -- -- | * 301,241 -- --
Stockholders' equity (deficit) .............. 74,748 67,262 | * (115,925) 70,098 81,918
Debt to equity ratio ........................ 1.43 1.96 | * * 2.73 2.50
|
For The Period(1) (2) |
Store Data: |
Average sales per store ...................... $ 1,230,000 $ 414,000 | $ 792,000 $ 1,052,000 $ 1,016,000 $ 958,000
Average gross profit per store ............... 310,000 105,000 | 207,000 253,000 253,000 264,000
EBITDA per store (9) ......................... 49,187 21,886 | 45,798 10,101 19,190 42,626
Stores open at beginning of period ........... 719 721 | 778 988 1,090 1,142
Stores added ................................. 88 -- | -- 2 1 4
Stores closed or sold ........................ (98) (2) | (57) (212) (103) (56)
--------------------------- | ----------------------------------------------------
Stores open at end of period ................. 709 719 | 721 778 988 1,090
Stores selling gasoline at end of period ..... 638 622 | 624 653 809 881
* not meaningful or applicable.
(1) As a result of emerging from Chapter 11 bankruptcy reorganization and
adopting fresh-start reporting, the selected financial data for the
reorganized company is not prepared on a comparable basis to the information
presented for the predecessor company (see Note 9 of the Notes to
Consolidated Financial Statements).
(2) The selected financial data reflects various acquisitions and divestitures
of convenience stores and related assets (see Note 2 of the Notes to
Consolidated Financial Statements).
(3) The 1994 results include a $3.0 million ($1.8 million, or $0.28 per share,
on an after-tax basis) gain on sale of assets recorded in conjunction with
the April 1994 Circle K transaction (see Note 2 of the Notes to Consolidated
Financial Statements). Additionally, the 1994 results include $2.0 million
($1.2 million, or $0.19 per share, on an after-tax basis) in consulting fees
and other expenses related to the program to enhance and redefine the
Company's focus on customer service and effectiveness through the
installation of integrated state-of-the-art sales and inventory management
systems.
(4) The period ending February 28, 1993 results include a $6.6 million special
charge related to an increase in environmental remediation reserves and a
credit of $0.4 million for Fresh-Start Adjustments recorded upon the
Company's emergence from Chapter 11 bankruptcy reorganization in March 1993,
which incorporate the effects of the adoption by the Company of Statement of
Financial Accounting Standards No. 109 (see Notes 5, 9 and 10 of the Notes
to Consolidated Financial Statements).
(5) The $61.5 million Extraordinary Gain in fiscal 1993 recorded by the
predecessor company is a result of the forgiveness of debt upon the
emergence from Chapter 11 bankrupty reoganization (see Note 9 of the Notes
to Consolidated Financial Statements).
(6) The 1992 results include $168.1 million of Restructuring and Other Special
Charges (see Note 10 of the Notes to Consolidated Financial Statements).
(7) The extraordinary gain in fiscal 1990 is a result of the predecessor
company's preferred stock-for-debt exchange offer that was consummated in
March 1990.
(8) Represents per share data of the reorganized company since March 1, 1993.
Earnings per share and common stock dividends for the predecessor company
are not presented because they are not meaningful as a result of the
confirmation of the Plan of Reorganization (see Note 9 of the Notes to
Consolidated Financial Statements).
(9) Earnings before interest, income taxes, depreciation, amortization,
reorganization items and non-recurring items ("EBITDA"). EBITDA is presented
here to provide additional information about the Company's ability to meet
its future debt service, capital expenditure and working capital
requirements and should not be construed as a substitute for earnings from
operations or a better indicator of liquidity than cash flow from
operating activities.
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National Convenience Stores Incorporated and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
Fresh-Start Reporting - The Company emerged from Chapter 11 bankruptcy
reorganization in March 1993 as a result of the confirmation of the Company's
Revised Fourth Amended and Restated Joint Plan of Reorganization (the "Plan of
Reorganization"). Reference is made to Note 9 of the Notes to Consolidated
Financial Statements for a complete description of the terms of the Plan of
Reorganization. In connection with the confirmation of the Plan of
Reorganization, effective March 1, 1993, the Company adopted "fresh-start
reporting" in accordance with the American Institute of Certified Public
Accountants' Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". Accordingly, since March 1, 1993, the
Company's financial statements have been prepared as if it is a new reporting
entity.
As a result of adopting fresh-start reporting, the financial information
for the fiscal year ended June 30, 1994 and the four months ended June 30, 1993
is not prepared on a comparable basis to the information for the eight months
ended February 28, 1993 or the fiscal year ended June 30, 1992. However, except
as described below, the Company believes that the impact of the fresh-start
reporting adjustments, while material, is identifiable, and that combining the
four months ended June 30, 1993 with the eight months ended February 28, 1993
provides a useful basis for comparison to the current period, as well as fiscal
1992. Therefore, the following discussion assumes the periods in fiscal 1993 are
combined.
Summary of Results of Operations - The Company reported net earnings
(loss) of $6.8 million, or $1.07 per share, $72.7 million and $(185.4) million
for the fiscal years 1994, 1993 and 1992, respectively.
The fiscal 1994 net earnings include, (i) a $3.0 million ($1.8 million,
or $0.28 per share, on an after-tax basis) gain on sale of assets recorded in
conjunction with the April 1994 Circle K transaction and (ii) $2.0 million ($1.2
million, or $0.19 per share, on an after-tax basis) in consulting fees and other
expenses related to the program to enhance and redefine the Company's focus on
customer service and effectiveness through the installation of integrated
state-of-the-art sales and inventory management systems. The fiscal 1993 net
earnings include a $61.5 million extraordinary gain related to the forgiveness
of debt and a $6.6 million special charge for additional environmental
remediation costs (see Notes 9 and 10 of the Notes to Consolidated Financial
Statements). The fiscal 1992 net loss included a $168.1 million charge for
Restructuring and Other Special Charges (see Note 10 of the Notes to
Consolidated Financial Statements).
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The following table sets forth the percentage of certain items in the
Consolidated Statements of Operations to sales for the years ended June 30,
1994, 1993 and 1992:
Percentage of Sales
------------------------------------
Year Ended June 30,
------------------------------------
1994 1993* 1992
------------------------------------
Sales .............................................................. 100.0% 100.0% 100.0%
Cost of sales ...................................................... 74.8 74.2 76.0
------------------------------------
Gross profit ....................................................... 25.2 25.8 24.0
Operating expenses ................................................. 19.3 18.5 21.4
General and administrative expenses ................................ 3.8 3.6 4.0
Interest expense ................................................... 1.2 .5 1.2
Interest income .................................................... (.1) -- --
Gain on sale of assets ............................................. (.3) -- --
Restructuring and other special charges ............................ -- .7 17.5
------------------------------------
Earnings (loss) before reorganization expenses, fresh-start
adjustments, income taxes and extraordinary gain .............. 1.3 2.5 (20.1)
Reorganization expenses, net ....................................... -- .9 .3
------------------------------------
Earnings (loss) before fresh-start adjustments, income taxes and
extraordinary gain ............................................ 1.3 1.6 (20.4)
Fresh-start adjustments ............................................ -- -- --
------------------------------------
Earnings (loss) before income taxes and extraordinary gain ......... 1.3 1.6 (20.4)
Income tax expense (benefit) ....................................... .5 .3 (1.1)
------------------------------------
Earnings (loss) before extraordinary gain .......................... .8 1.3 (19.3)
Extraordinary gain ................................................. -- 7.0 --
------------------------------------
Net earnings (loss) ................................................ .8% 8.3% (19.3)%
====================================
* Reflects the combining of the four months ended June 30, 1993 (reorganized
company) and the eight months ended February 28, 1993 (predecessor company).
The following discussion should be read in conjunction with Selected
Financial Data and the Company's Consolidated Financial Statements appearing
elsewhere in this Annual Report.
Sales and Gross Profits -- In fiscal years 1994, 1993 and 1992 the
Company's merchandise sales accounted for 58%, 58% and 60%, respectively, of the
Company's total sales. Additionally, gasoline sales accounted for 42%, 42% and
40%, respectively, of the Company's total sales. Merchandise gross profits
accounted for 79%, 80% and 82%, respectively, and gasoline gross profits
accounted for 21%, 20% and 18%, respectively, of the Company's total gross
profits. The following table sets forth selected information regarding the
results of the Company's operations during fiscal years 1994, 1993 and 1992:
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Year Four Months | Eight Months Year Ended June 30,
Ended Ended | Ended -------------------
June 30, June 30, | February 28, (Combined)
1994 1993 | 1993 1993 1992
---------------------------|---------------------------------------------
|
Merchandise sales (millions) ............... $ 512.1 $172.8 | $333.6 $ 506.4 $ 570.4
Merchandise gross profit margin ............ 34.2% 35.4% | 35.8% 35.7% 33.1%
Merchandise gross profit (millions) ........ $ 175.1 $ 61.2 | $119.4 $ 180.6 $ 189.0
|
Gasoline sales (millions) .................. $ 368.4 $125.2 | $247.3 $ 372.5 $ 388.1
Gasoline gross profit margin ............... 12.6% 11.3% | 13.1% 12.5% 10.6%
Gasoline gross profit (millions) ........... $ 46.6 $ 14.1 | $ 32.4 $ 46.5 $ 41.2
|
Total sales (millions) ..................... $ 880.5 $298.0 | $580.9 $ 878.9 $ 958.5
Average gross profit margin ................ 25.2% 25.3% | 26.1% 25.8% 24.0%
Total gross profit (millions) .............. $ 221.7 $ 75.3 | $151.8 $ 227.1 $ 230.2
|
Average number of stores ................... 716 720 | 734 729 911
|
Average sales per store (thousands): |
Merchandise ............................... $ 715.2 $240.0 | $454.5 $ 694.6 $ 626.1
Gasoline .................................. 514.5 173.9 | 336.9 511.0 426.0
---------------------------|---------------------------------------------
Total ................................. $1,229.7 $413.9 | $791.4 $1,205.6 $1,052.1
===========================|=============================================
Gasoline gallons sold (millions) ........... 372.4 119.4 | 231.8 351.2 367.9
|
Average gasoline gallons sold per average |
gas store (thousands) .................... 597.8 192.8 | 369.1 561.9 491.2
Merchandise sales increased $5.7 million, or 1%, in fiscal 1994, as compared
with fiscal 1993. On a same-store basis, merchandise sales increased 3% in
fiscal 1994 as compared with the prior year, primarily due to increased Texas
Lottery commission revenues and money order sales, as well as the positive
impact on sales of value pricing promotions on such items as fountain drinks,
select premium beers and refrigerated juices.
Merchandise gross profits decreased $5.5 million, or 3%, in fiscal 1994
as compared with fiscal 1993 while gross profit margins decreased 1.5 percentage
points. The decrease in gross profits and gross profit margins is primarily due
to the effects of certain value pricing promotions coupled with a $2.7 million
reduction, in fiscal 1994, in supplier discounts and rebates. These decreases
were partially offset by $3.1 million and $1.0 million increases in Texas
Lottery commission revenues and money order sales, respectively, combined with
the increased gross profits and gross profit margins of cigarettes in fiscal
1994 as compared to fiscal 1993.
Merchandise sales decreased $64.0 million, or 11%, in fiscal 1993, as
compared with fiscal 1992, primarily due to a 20% decline in the average number
of operating stores caused by the completion of the strategic review of store
operations. On a same-store basis, merchandise sales increased 5% in fiscal 1993
as compared with fiscal 1992, primarily due to the introduction of the Company's
private label of cigarettes, modifications of the Company's value pricing
strategy on cigarettes and Texas Lottery commission revenues. In addition, the
fiscal 1992 merchandise sales were negatively impacted by inventory stockouts
the Company experienced during the first thirty days after its Chapter 11
filing.
Merchandise gross profits decreased $8.4 million, or 4%, in fiscal 1993
as compared to fiscal 1992. Decreased sales from the closing of unprofitable
stores contributed $22.8 million to the decline in gross profits, but was
partially offset by higher merchandise margins which contributed $14.4 million.
Merchandise gross profit margins increased 2.6 percentage points from 33.1% in
fiscal 1992 to 35.7% in fiscal 1993. The increase in the gross profit margins
was primarily attributable to the fiscal 1992 profit margins being negatively
affected by a significant reduction in vendor rebates due to the Chapter 11
filing. Further contributing to the improvement in the gross profit margins were
increased Texas Lottery commis-
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sion revenues of $5.5 million for fiscal 1993, as compared to fiscal 1992,
and the aforementioned modifications of the Company's value pricing strategy
on cigarettes.
Gasoline sales decreased $4.1 million, or 1%, in fiscal 1994 as compared
with the prior year period primarily due to a 7% decrease in the average retail
selling price of gasoline during fiscal year 1994. This decrease was offset by a
6% increase in gasoline sales volumes. Volumes on a same-store sales basis
increased 9% from the same period last year as a result of the continued
emphasis and strategy to grow gasoline volume sales.
Gasoline gross profits of $46.6 million were consistent with the prior
year level of $46.5 million. Gasoline gross profit margins decreased to 12.5
cents per gallon for fiscal 1994 from 13.2 cents per gallon in fiscal 1993. The
Company attributes the decrease primarily to the California market realizing
lower margins in the current fiscal year as a result of the prior year's
temporary cost advantage derived from the state's implementation of regulations
increasing the oxygen content of gasoline, combined with the competitive
pressures in the Texas markets in the current year. This decrease in margins was
partially offset by lower gasoline costs favorably affecting gasoline margins in
the first five months of fiscal 1994.
Gasoline sales decreased $15.6 million, or 4%, for fiscal 1993 as
compared with the same period in fiscal 1992 due primarily to a 5% decrease in
gasoline sales volumes, partially offset by a 1% increase in the average retail
selling price of gasoline. The gasoline sales volumes decrease resulted
primarily from the reduction in the average number of stores in operation.
Volumes on a same-store sales basis increased 5% from the same period in fiscal
1992 as a result of the Company's adoption of a volume growth strategy in March
1992. Also contributing to the same-store gasoline sales volumes increase were
the negative effects the inventory stockouts had on fiscal 1992 sales volumes
as a result of the Chapter 11 filing.
Higher gasoline gross profit margins contributed $7.2 million to the
$5.3 million increase in gasoline gross profits for fiscal 1993 as compared to
fiscal 1992, and were offset by a $1.9 million decrease from gasoline sales.
The improvement in gasoline gross profit margins was caused by several sudden
declines in the cost of gasoline in the wholesale market that were not fully
matched at the retail pricing level. Gasoline gross profit margins on a volume
basis averaged 13.2 cents per gallon for fiscal 1993 (the highest annual
average in the Company's history) as compared with 11.2 cents per gallon for
fiscal 1992.
An analysis of merchandise sales, gasoline sales and gasoline sales
volumes follows (amounts in millions):
YEAR Four Months | Eight Months Year Ended June 30,
ENDED Ended | Ended ------------------------
JUNE 30, June 30, | February 28, (Combined)
1994 1993 | 1993 1993 1992
----------------------------|------------------------------------------
|
Merchandise Sales: |
Same-stores (a) ............... $447.7 $149.5 | $286.5 $436.0 $416.5
New stores (b) ................ 10.8 0.3 | 0.5 0.8 0.2
Stores closed or sold (b) ..... 53.6 23.0 | 46.6 69.6 153.7
----------------------------|------------------------------------------
$512.1 $172.8 | $333.6 $506.4 $570.4
============================|==========================================
|
Gasoline Sales: |
Same-stores (a) ............... $307.4 $102.7 | $198.3 $301.0 $287.6
New stores (b) ................ 9.5 0.3 | 0.5 0.8 0.2
Stores closed or sold (b) ..... 51.5 22.2 | 48.5 70.7 100.3
----------------------------|------------------------------------------
$368.4 $125.2 | $247.3 $372.5 $388.1
============================|==========================================
|
Gasoline Gallons: |
Same-stores (a) ............... 309.8 97.7 | 185.6 283.3 269.2
New stores (b) ................ 9.3 0.3 | 0.5 0.8 0.2
Stores closed or sold (b) ..... 53.3 21.4 | 45.7 67.1 98.5
----------------------------|------------------------------------------
372.4 119.4 | 231.8 351.2 367.9
============================|==========================================
(a) Represents the 622 stores (554 stores selling gasoline) which opened prior
to July 1, 1991, and continued to operate through June 30, 1994.
(b) Includes the 88 stores acquired (New stores) and the 80 stores divested
(Stores closed or sold) in the April 29, 1994 transaction with The Circle K
Corporation (see Note 2 of the Notes to Consolidated Financial Statements).
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Operating Expenses - Operating expenses increased $7.4 million, or 5%,
in fiscal 1994, as compared to fiscal 1993, primarily due to an increase in
repairs and maintenance, insurance, labor and utilities expenses. Repairs and
maintenance increased $2.7 million primarily due to the resumption of normal
repairs and maintenance activities which in certain cases included repairs for
projects determined to be non-critical and therefore, postponed while the
Company was in Chapter 11 reorganization. Insurance expense increased $2.1
million as a result of changes in the terms and provisions of existing insurance
policies. Labor costs increased $1.6 million due to a more tenured work force
and additional staffing at the store level. Utilities increased $1.0 million
primarily due to rate increases for electricity, garbage and telephone services
in the Company's key Texas market areas. These increases were partially offset
by lower than anticipated property tax rates. Operating expenses as a percentage
of total sales increased to 19.3% for the fiscal year ended June 30, 1994 from
18.5% for the same period of fiscal 1993 for the above-mentioned reasons. To
improve customer service, the Company added 600 full-time employees during the
first quarter of fiscal 1995, thereby increasing total employees to
approximately 5,300. Accordingly, the Company anticipates an increase in labor
costs by $1.0 million to $1.2 million for the quarter ending September 30, 1994.
Operating expenses decreased $43.0 million, or 21%, in fiscal 1993, as
compared to fiscal 1992, primarily due to a decrease in labor, rent and other
store operating costs attributable to the completion of the store closure and
lease rejection programs that began in December 1991 with the Chapter 11 filing.
Rent expense was also reduced in fiscal 1993 due to the partial implementation
of lower renegotiated store and equipment rents. In addition, insurance expense
decreased in fiscal year 1993 as a result of the decreased store base and the
full implementation of the Company's private job related injuries program in
Texas in lieu of the state managed workers' compensation program. Depreciation
expense also decreased due to the reduced store base and the write-down of
certain assets in December 1991. Further contributing to the decline in
operating expenses were certain cost cutting measures implemented by the Company
during the fourth quarter of fiscal 1992 with respect to the reorganization of
the Company's Corporate Kitchen operations, which included the elimination of
the truck distribution fleet and the closing of distribution centers located in
Dallas and San Antonio, Texas. Operating expenses as a percentage of total sales
decreased from 21.4% for the fiscal year ended June 30, 1992 to 18.5% for the
same period of fiscal 1993 for the above-mentioned reasons.
General and Administrative Expenses - General and Administrative
expenses for the year ended June 30, 1994 increased $2.4 million, or 8%, from
the comparable period in fiscal 1993. This increase is primarily due to (i) the
reinstatement of employee benefits effective July 1, 1993, (ii) consulting fees
and other expenses of $2.0 million, incurred in the current year period,
associated with the program to enhance and redefine the Company's focus on
customer service and employee effectiveness and (iii) increased amortization
expenses. These increases were partially offset by a reduction of $2.3 million
in certain reorganization liabilities. The Company expects to incur
approximately $1.9 million of consulting expenses in the first six months of
fiscal 1995 associated with the aforementioned program to enhance and redefine
the Company's focus.
General and administrative expenses for the year ended June 30, 1993
decreased $6.4 million, or 17%, from the comparable period in fiscal 1992,
primarily due to a decrease in administrative labor expense attributable to
field management and corporate staff reductions and the Company's suspension of
stock allocations to employees in its Employee Stock Ownership Plan (the "ESOP")
effective with the Chapter 11 filing. In addition, rent expense decreased in
fiscal 1993 as the Company negotiated a new lease agreement on its corporate
office building on terms substantially more favorable to the Company.
Restructuring and Other Special Charges - As further discussed in Note
10 of the Notes to Consolidated Financial Statements, the Company recorded
$168.1 million of Restructuring and Other Special Charges at December 31, 1991,
related to store closings, other assets affected by the Chapter 11 filing,
insurance and environmental matters. An additional $6.6 million special charge
was recorded in February 1993 related to an increase in environmental
remediation liabilities.
Interest Expense - Interest expense increased $5.8 million in fiscal
1994 as compared to the same period of the prior year, primarily due to the
resumption of interest accruals and payments on all indebtedness upon emergence
from Chapter 11 bankruptcy reorganization. Prior to March 9, 1993 (the
"Effective Date"), the Company recorded interest
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expense only for those pre-petition debt instruments which were fully secured,
and for all debtor-in-possession financing.
Interest expense decreased $6.7 million in fiscal 1993, as compared to
fiscal 1992, primarily due to the suspension of interest accruals on unsecured
and undersecured pre-petition indebtedness concurrent with the December 9, 1991
Chapter 11 filing (the "Petition Date"). Subsequent to December 9, 1991, the
Company recorded interest expense only for those pre-petition debt instruments
which were fully secured, and for all debtor-in-possession financing. As of the
Effective Date the Company resumed recording interest expense as incurred. Such
interest expense was less than that recorded prior to the Chapter 11 filing due
to lower outstanding debt balances and lower interest rates resulting from the
adoption of the Plan of Reorganization.
Interest Income - Interest income for the year ended June 30, 1994
increased $0.8 million from the prior year period. This increase was primarily
due to the increase in cash available for investment purposes in fiscal 1994 as
compared to 1993. In addition, the Company's short-term investments yielded a
higher rate of return in fiscal 1994.
Gain on Sale of Assets - During 1994, the Company completed a
transaction whereby the Company, (i) exchanged its 53 operating convenience
stores in Southern California, together with related inventories and equipment,
for 88 operating convenience stores of The Circle K Corporation in the
Dallas/Fort Worth and Houston, Texas areas, together with related inventories
and equipment and, (ii) sold its 27 operating convenience stores in Atlanta,
Georgia, together with related inventories and equipment, for cash consideration
of $9,150,000. The Company recorded a pretax gain of $3.0 million in conjunction
with this transaction.
Reorganization Expenses, net - Reorganization expenses include those
costs and income items which were incurred by the Company solely as a result of
operating under Chapter 11 of the Bankruptcy Code. During the years ended June
30, 1993 and 1992, the Company incurred $8.1 million and $3.4 million,
respectively, of such costs which were primarily for professional fees the
Company was required to pay to attorneys, accountants and investment bankers
involved in the Chapter 11 proceeding.
Fresh-Start Adjustments - As a result of adopting fresh-start
reporting, the Company made adjustments to record assets and
liabilities at their fair market values as of March 1, 1993 and to record the
adoption of Statement of Financial Accounting Standards No. 109 - "Accounting
for Income Taxes" ("SFAS 109"). The adjustments to record assets and
liabilities at their fair market values primarily include an increase in the
reserve for litigation costs in connection with the conclusion of the Chapter 11
reorganization offset by the elimination of a reserve as a result of the
proposed termination of the Company's Employee Stock Ownership Plan (see Note 10
of the Notes to Consolidated Financial Statements).
Income Taxes - The effective income tax rate of the reorganized company
for the fiscal year ended June 30, 1994 and the period from Inception (March 1,
1993) to June 30, 1993 differs from the federal statutory rate primarily because
of state income taxes and the inability to deduct for tax purposes the
amortization of Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets, offset in fiscal 1994 by targeted jobs tax credits and the
cumulative increase in the net deferred tax asset resulting from an increase in
the statutory federal tax rate. The effective income tax rate of the predecessor
company for the eight months ended February 28, 1993 differs from the federal
statutory rate primarily because the previous method of accounting required the
use of prior year loss carryforwards to reduce the effective federal income tax
rate for financial reporting purposes. The effective income tax rate of the
predecessor company for fiscal 1992 differs from the federal statutory rate
primarily because the federal income tax benefit was recorded only to the extent
such benefit could be offset against deferred income taxes payable.
Extraordinary Gain - On the Effective Date or thereafter as provided in
the Plan of Reorganization, the Company distributed cash, debt instruments,
Common Stock and warrants to purchase Common Stock in settlement of its
liabilities subject to compromise. The fair market value of the cash and
securities that were distributed was approximately $61.5 million less than the
pre-petition liabilities and was recorded as an extraordinary gain on the
forgiveness of debt (see Note 9 of the Notes to Consolidated Financial
Statements).
Inflation - The Company believes inflation has not had a material effect
on its results of operations in recent years. However, the Company has
experienced short-term fluctuations in its gasoline gross profit margins, both
positive and negative, as a result of changing market conditions for the supply
and demand of gasoline.
Pro Forma Results of Operations for Fiscal 1993 - Management of the
Company has made pro forma calculations of
19
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year-to-date operating results based on the assumption that the Plan of
Reorganization had become effective on July 1, 1992. Such calculations resulted
in pro forma unaudited net earnings of $8.8 million, or $1.35 per share, for the
twelve months ended June 30, 1993 (see Note 9 of the Notes to Consolidated
Financial Statements).
LIQUIDITY AND CAPITAL RESOURCES
Key balance sheet figures and ratios are presented in the table below
(all amounts, excluding ratios are in millions):
June 30,
---------------------
1994 1993
---------------------
Cash (a) ......................................... $ 41.1 $ 46.0
Current assets ................................... $ 91.0 $ 90.5
Current liabilities .............................. $ 81.7 $ 78.8
Current ratio .................................... 1.11 1.15
Inventory turn ratios (annualized):
Merchandise .................................... 10.8 11.7
Gasoline ....................................... 54.0 50.3
Long-term debt ................................... $107.0 $131.6
Stockholders' equity ............................. $ 74.7 $ 67.3
Debt to equity ratio ............................. 1.43 1.96
Common shares outstanding ........................ 6.1 6.0
(a) Includes $7.4 million and $6.3 million that has been reserved at the
Company's option related to the remittance of tax and lottery collections at
June 30, 1994 and 1993, respectively. June 30, 1994 also includes $6.2
million which is currently held in escrow pending the resolution of mortgage
related matters associated with the Circle K transaction completed April
29, 1994.
Liquidity - Working capital totalled $9.3 million at June 30, 1994 and
$11.7 million at June 30, 1993. Cash and equivalents were $41.1 million and
$46.0 million at June 30, 1994 and 1993, respectively.
Cash from operating activities totalled $25.3 million, $56.1 million and
$28.5 million for the years ended June 30, 1994, 1993 and 1992, respectively.
The decrease in fiscal year 1994 cash from operating activities versus fiscal
year 1993 is due primarily to the effect on cash flow from operating activities
of the Company being in reorganization prior to March 1, 1993, along with the
resumption of credit terms with the Company's trade vendors during fiscal year
1993. Operating earnings before interest, income taxes, depreciation,
amortization, reorganization items and other non-recurring items ("EBITDA")
amounted to $35,218,000, $49,374,000 and $9,202,000 during the fiscal years
ended June 30, 1994, 1993 and 1992, respectively. EBITDA is presented to provide
additional information about the Company's ability to meet its future debt
service, capital expenditures and working capital requirements and should not be
construed as a substitute for earnings from operations or a better indicator of
liquidity than cash flow from operating activities.
During the fourth quarter of fiscal 1994 the Company began the
implementation of a program to enhance and redefine the Company's focus on
customer service and employee effectiveness. This program is the result of an
extensive review by management and outside consultants. An integral component of
the program involves the upgrading of equipment and technology through the
installation of integrated state-of-the-art sales and inventory management
systems. These systems will significantly automate store operations by capturing
data on point-of-sale and scanning equipment. The Company will initiate the
program in its Dallas/Fort Worth stores and estimates that it will incur capital
expenditures of approximately $10.0 million in such market by mid fiscal 1995.
Additionally, the Company estimates that it will incur approximately $3.2
million in consulting expenses in conjunction with the program, $1.3 million of
which were incurred in fiscal 1994. These costs will be funded by cash generated
from operations, as well as cash on hand. As noted below, the Company's
long-term bank credit agreements were amended to allow an increase in the fiscal
year 1994 capital expenditures budget from $17.3 million to $25.0 million.
On April 29, 1994, the Company completed the transaction whereby the
Company, (i) exchanged its 53 operating convenience stores in Southern
California, together with related inventories and equipment, for 88 operating
convenience stores of The Circle K Corporation in the Dallas/Fort Worth and
Houston, Texas areas, together with related inventories and equipment and, (ii)
sold its 27 operating convenience stores in Atlanta, Georgia, together with
related inventories and equipment, for cash consideration of $9,150,000. The
cash proceeds were used to fund transaction costs, capital expenditures and to
reduce long-term bank debt.
As discussed in Note 10 of the Notes to Consolidated Financial
Statements, the Company established, in December 1991, restructuring liabilities
of $19.2 million for anticipated market divestitures and lease settlement
claims. The restructuring liabilities totalled $7.1 million at June 30, 1993.
The $12.1 million reduction in the restructuring liabilities
20
9
was due to, (i) the reclassification to Liabilities Subject to Compromise of the
$10.2 million liability for lease settlement claims and (ii) the effects of the
sale of the Company's stores in the San Francisco Bay area. Liabilities Subject
to Compromise were satisfied with cash and/or company stock in conjunction with
the Chapter 11 reorganization. In conjunction with the April 1994 Circle K
transaction involving the Georgia and remaining California operations, such
remaining liability balance was reduced to zero.
In December 1991, the Company also recorded a special charge of $46.6
million related to an increase in insurance liabilities. The insurance
liabilities at June 30, 1992, 1993 and 1994 totalled $3.9 million, $9.8 million
and $17.5 million, respectively. During fiscal year 1993 the insurance liability
was increased for accruals of $14.4 million and decreased for cash payments of
$8.5 million. During fiscal 1994 the insurance liability was increased for
accruals of $17.1 million and decreased for cash payments of $9.4 million.
See "Capital Resources" section below, as well as Notes 10 and 11 of the
Notes to Consolidated Financial Statements for additional information regarding
the environmental liabilities.
The Company has historically maintained a portfolio of surplus and
excess real estate properties in anticipation of expansion. During the period of
Chapter 11 bankruptcy reorganization, the Company eliminated its new store
development program and sold 9 parcels of surplus real estate for $1.5 million,
net of closing costs, and sold surplus store equipment for an additional $4.7
million. In addition, in July 1992 the Company sold its 21 operating convenience
stores, together with related inventories and equipment, located in and around
the San Francisco Bay area for $3.1 million. Net proceeds from these sales were
used to partially fund the Company's cash requirements upon emerging from
Chapter 11 bankruptcy reorganization. Since emerging from Chapter 11 bankruptcy
reorganization, the Company has sold 27 additional parcels of surplus real
estate for $3.7 million, net of closing costs. Net proceeds from such sales, and
any sales in the future, are generally required to be applied against mortgage
or bank long-term debt. As of June 30, 1994, 47 parcels of surplus real estate
were held by the Company.
Because substantially all of the Company's sales are for cash and total
inventories are converted to cash approximately once a month, the Company
considers its cash flows adequate to satisfy its daily working capital
requirements. However, in order to further enhance its liquidity, the Company
has a Revolving Credit Agreement which provides for the borrowing and/or
issuance of letters of credit in the aggregate of up to $8.0 million, increasing
to $11.0 million during the period from November 1 through May 1 of each year.
The Revolving Credit Agreement requires that, during each fiscal year, the
Company pay off all outstanding cash borrowings thereunder for a period of 30
consecutive days. The Company had no borrowings under this facility during
fiscal 1994. Letter of credit issuances cannot exceed $8.0 million and cash
borrowings are limited to the commitment limit less letters of credit
outstanding. The facility terminates on September 30, 1995. At June 30, 1994, no
letters of credit were outstanding under this facility.
Capital Resources - The Company's debt instruments provide for repayment
generally over a 7 to 10 year period, except for the aforementioned Revolving
Credit Agreement which becomes due and payable September 30, 1995. Principal is
required to be paid quarterly and bears interest at a fixed percentage ranging
from 7.4% to 9.5%, a percentage above the prime rate of the lender or various
margins above the United States Treasury Securities rate or Eurodollar rates.
Management of the Company believes that a significant portion of the operating
cash flow will be dedicated to these payments during the next nine years.
The Company's long-term bank debt agreements contain limits on the
amount of capital expenditures and environmental remediation expenses the
Company can incur. During the third quarter of fiscal 1994, the Company's
long-term bank debt agreements were amended to allow an increase in the fiscal
year 1994 capital expenditure budget from $17.3 million to $25.0 million. The
Company incurred capital expenditures of $21.9 million during fiscal 1994
compared to $11.7 million in fiscal 1993 and $3.6 million in fiscal 1992. During
1994, such expenditures were comprised primarily of $9.9 million of gasoline
dispensing equipment and installation of underground piping required to comply
with environmental laws (the "Stage II Vapor Recovery Equipment"). In addition,
the Company incurred $3.9 million on store remodels and eateries, $3.1 million
in store equipment replacement, $2.6 million upgrading security systems in the
stores, and $2.4 million on miscellaneous projects. The Company's long-term bank
debt agree-
21
10
ment limits fiscal 1995 capital expenditures/remediation to excess cash
flow, as defined, not to exceed $20.3 million. For fiscal 1995 the Company
anticipates it will incur capital expenditures/remediation as required by
environmental regulations, along with upgrading store security systems,
installation of state-of-the-art sales and inventory management systems, store
remodels, new store construction and equipment replacement which could total up
to $30.0 million. The Company is currently in negotiations to amend the
long-term bank debt agreements in order to facilitate such capital
expenditures/remediation noted above. The outcome of such negotiations cannot
be determined at this time. For fiscal 1996 the long-term bank debt agreements
limit capital/environmental remediation expenditures to excess cash flow, as
defined, not to exceed $24.0 million.
Under the terms of certain of the Company's long-term bank debt
agreements, the Company cannot pay cash dividends on its Common Stock or
purchase any treasury stock.
Below is a table illustrating primary financial ratios and coverage
tests ("Covenants") as of June 30, 1994 associated with the Company's long-term
bank debt instruments. (all amounts, excluding ratios are in thousands).
Covenant (as Defined) Required Actual
- - --------------------------------------------------------------------------------
Current Ratio (minimum) ...................... 90% 111%
Total Borrowed Funds to Consolidated
Net Worth (maximum) ......................... 418% 327%
Total Liabilities to Consolidated
Net Worth (maximum) ......................... 360% 301%
Consolidated Net Worth (minimum) ............. $61,400 $74,748
Interest Coverage Ratio (minimum) ............ 230% 332%
Consolidated Fixed Charge
Coverage Ratio (minimum) .................... 107% 129%
EBITDA (minimum) ............................. $27,300 $35,218
Capital expenditures (maximum) ............... $25,000 $23,266
Covenants noted above are computed as defined per the Company's
long-term bank debt instrument agreements. At June 30, 1994, the Company was in
compliance with such Covenants.
The Company's environmental remediation exposure is related primarily to
the clean up of contaminated soil caused by leaking underground gasoline storage
tanks and underground piping systems. The Company spent $1.3 million in fiscal
1994 on environmental remediation activities, compared to $1.3 million in fiscal
1993 and $1.7 million in fiscal 1992. The Company estimates that it will spend
$10.6 million on such expenditures through 1999. During the second quarter of
fiscal year 1992 the Company completed a comprehensive plan covering its
underground storage tanks in light of the expected funding shortfalls in the
various state reimbursement programs. As a result, the Company recorded an
increase to the environmental remediation liability of $16.8 million in the
second quarter of fiscal year 1992. Not included in this liability is
approximately $4.0 million of reimbursements from established state trust funds
which the Company believes to be probable of recovery. In connection with an
updated environmental remediation cost analysis, upon emerging from Chapter 11
bankruptcy reorganization the Company increased its liability for future
environmental remediation and tank removal costs by an additional $6.6 million
in February 1993. As of June 30, 1993, the remediation liability totalled $18.2
million, net of the aforementioned estimated $4.0 million of reimbursable costs.
At June 30, 1994, the remediation liability totalled $21.8 million; however,
this amount does not include the aforementioned estimated reimbursements. The
actual cost of remediating contaminated sites and removing tanks may be
substantially lower or higher than that reserved due to the difficulty in
estimating such costs and due to potential changes in the status of regulation
and state reimbursement programs. The Company does not believe that any such
amount below or in excess of that accrued is reasonably estimable.
On March 15, 1994, the Company filed its federal income tax return for
the year ended June 30, 1993, which reflected net operating loss carryforwards
of $55.8 million plus tax credits of $7.1 million. The net operating losses
expire in varying amounts in fiscal years 2003 to 2007 and the tax credits
expire in fiscal years 2000 to 2009. These figures reflect the adjustments
required by Section 382 of the Internal Revenue Code after an ownership change
in the Company's stock. Section 382 will also require the Company to reduce the
tax basis of its assets by approximately $40.0 million. An ownership change is
defined as occurring when, during any three year period, the Company's 5%
shareholders (as defined in the Internal Revenue Code) increase their ownership
in the Company's stock by more than 50 percentage points. The Plan of
Reorganization resulted in an ownership change since substantially all of the
new stock was issued to the creditors of the Company.
22
11
As of June 30, 1994, the net operating loss carryforward is estimated to
have been reduced to $29.5 million as a result of the application of the losses
to reduce taxable income for fiscal 1994. The Company expects the remaining net
operating losses, tax credits and other tax attributes to be available to offset
future income taxes, subject to applicable limits. However, should a second
ownership change occur within two years of the first ownership change, all the
remaining pre-confirmation net operating losses, tax credits and other tax
attributes would be eliminated. The Plan of Reorganization provided for the
Company's Restated Certificate of Incorporation dated March 9, 1993 to contain
restrictions through June 30, 1996 on the transfer of stock to the reorganized
company's 5% stockholders (as defined in the Plan of Reorganization) or those
that would become 5% stockholders as a result of the purported transfer.
Risk and Uncertainties - During the year ended June 30, 1994, the sale
of gasoline products, tobacco products and alcoholic beverages comprised 42%,
14% and 13%, respectively, of total Company sales. Under the Clinton
Administration numerous proposals have recently been made that would result in
increased excise taxes on alcoholic beverages and tobacco products. Several of
these proposals have sought substantial increases on state and federal excise
taxes, as well as additional state taxes on tobacco products in particular.
While the Company cannot predict whether the remaining tax proposals will become
law, similar previous tax increases on such products have generally had a
negative impact on the sales and results of operations of the Company.
Additionally, numerous governmental entities are considering various regulations
related to the sale of tobacco products which, if implemented, could adversely
affect the sales and results of operations of the Company.
The Company's environmental remediation exposure is related primarily to
the clean up of contaminated soil caused by leaking underground gasoline storage
tanks and underground piping systems. The Company is subject to additional
regulatory matters including environmental capital commitments and environmental
remediation, as further discussed in Note 11 of the Notes to Consolidated
Financial Statements. The actual cost of remediating contaminated sites and
removing tanks may be substantially lower or higher than the related accrued
liabilities.
World gasoline markets have historically been subject to periods of
sudden and extreme volatility as a result of changing supply and demand
conditions for crude oil and gasoline. The Company's liquidity and gross profits
could be adversely affected in the future should such conditions occur, and such
adverse effects could be significant.
The Clinton Administration and many members of the Congress have
proposed various legislative measures to change existing health care programs.
Due to the labor intensive nature of the convenience store business, any
legislation or regulation which increases the Company's labor costs could have a
significant adverse effect on the results of operations of the Company. As a
result of the significant amount of uncertainty surrounding any potential
changes in health care programs, the Company is unable to predict the outcome of
any of these proposals.
23
12
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
National Convenience Stores Incorporated and Subsidiaries
Houston, Texas
We have audited the accompanying consolidated balance sheets of National
Convenience Stores Incorporated and subsidiaries (the "Company") as of June 30,
1994 and 1993 and the related consolidated statements of operations,
stockholders' equity (deficit) and cash flows for the year ended June 30, 1994
and for the period from inception (March 1, 1993) to June 30, 1993 (Reorganized
Company) and the eight months ended February 28, 1993 and the year ended June
30, 1992 (Predecessor Company). 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.
As discussed in Note 9 to the consolidated financial statements, on
February 25, 1993, the Bankruptcy Court entered an order confirming the plan of
reorganization which became effective after the close of business on March 8,
1993. Accordingly, the accompanying Reorganized Company financial statements
have been prepared in conformity with American Institute of Certified Public
Accountants Statement of Position 90-7, "Financial Reporting for Entities in
Reorganization Under the Bankruptcy Code," as a new entity with assets,
liabilities and a capital structure having carrying values not comparable with
prior periods.
In our opinion, the Reorganized Company consolidated financial
statements present fairly, in all material respects, the financial position of
the Company as of June 30, 1994 and 1993, and the results of its operations and
its cash flows for the year ended June 30, 1994 and for the period from
inception (March 1, 1993) to June 30, 1993 in conformity with generally accepted
accounting principles. Further, in our opinion, the Predecessor Company
consolidated financial statements referred to above present fairly, in all
material respects, the results of its operations and its cash flows for the
eight months ended February 28, 1993 and the year ended June 30, 1992 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
August 9, 1994
24
13
National Convenience Stores Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
(amounts in thousands, except per share amounts)
Reorganized Company | Predecessor Company
----------------------------------|-------------------------------
Period from |
Inception | Eight Months
YEAR ENDED (March 1, 1993) | Ended Year Ended
JUNE 30, to June 30, | February 28, June 30,
1994 1993 | 1993 1992
----------------------------------|-------------------------------
|
Sales .................................................... $ 880,524 $ 297,985 | $ 580,867 $ 958,519
Costs and Expenses: |
Cost of sales ........................................ 658,845 222,639 | 429,019 728,322
Operating expenses ................................... 169,947 54,193 | 108,326 205,516
General and administrative expenses .................. 34,204 10,982 | 20,793 38,181
Restructuring and other special charges (Note 10) .... -- -- | 6,561 168,106
----------------------------------|-------------------------------
862,996 287,814 | 564,699 1,140,125
----------------------------------|-------------------------------
|
Operating Income (Loss) .................................. 17,528 10,171 | 16,168 (181,606)
|
Other Income (Expense): |
Interest expense (Note 4) ............................ (10,598) (3,241) | (1,547) (11,475)
Interest income ...................................... 1,220 328 | 50 153
Gain on sale of assets (Note 2) ...................... 2,965 -- | -- --
----------------------------------|-------------------------------
|
Earnings (Loss) Before Reorganization Expenses, |
Fresh-Start Adjustments, Income Taxes and |
Extraordinary Gain ................................... 11,115 7,258 | 14,671 (192,928)
Reorganization Expenses, net ............................. -- -- | 8,124 3,361
----------------------------------|-------------------------------
|
Earnings (Loss) Before Fresh-Start Adjustments, |
Income Taxes and Extraordinary Gain .................. 11,115 7,258 | 6,547 (196,289)
Fresh-Start Adjustments (Note 9) ......................... -- -- | 382 --
----------------------------------|-------------------------------
|
Earnings (Loss) Before Income Taxes and |
Extraordinary Gain ................................... 11,115 7,258 | 6,929 (196,289)
Income Tax Expense (Benefit) (Note 5) .................... 4,280 2,869 | 133 (10,851)
----------------------------------|-------------------------------
|
Earnings (Loss) Before Extraordinary Gain ................ 6,835 4,389 | 6,796 (185,438)
Extraordinary Gain (Note 9) .............................. -- -- | 61,493 --
----------------------------------|-------------------------------
Net Earnings (Loss) ...................................... $ 6,835 $ 4,389 | $ 68,289 $ (185,438)
==================================|===============================
|
Earnings Per Share ....................................... $ 1.07 $ 0.68 |
============================= |
Weighted Average Common and Common |
Equivalent Shares Outstanding ........................ 6,555 6,581 |
============================= |
See Notes to Consolidated Financial Statements.
25
14
National Convenience Stores Incorporated and Subsidiaries
CONSOLIDATED BALANCE SHEETS
($ in thousands)
June 30,
-------------------------------
1994 1993
-------------------------------
Assets
Current Assets:
Cash and equivalents, $13,557 and $6,254 reserved ... $ 41,142 $ 46,032
Accounts receivable, net ............................ 5,449 4,474
Inventories ......................................... 39,626 37,308
Prepaid expenses .................................... 4,775 2,697
-------------------------------
Total Current Assets ............................ 90,992 90,511
Property and Equipment, net (Note 2) .................... 158,075 156,528
Reorganization Value in Excess of Amounts Allocable to
Identifiable Assets, net (Note 9) ................... 34,542 39,587
Deferred Tax Asset, net (Note 5) ........................ 6,071 6,065
Other Assets, net (Note 11) ............................. 9,842 5,737
-------------------------------
$299,522 $298,428
===============================
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses (Note 3) ...... $ 69,611 $ 68,395
Current portion of long-term debt (Note 4) .......... 12,103 10,373
-------------------------------
Total Current Liabilities ....................... 81,714 78,768
Long-Term Debt (Note 4) ................................. 106,976 131,559
Other Long-Term Liabilities (Notes 3 and 11) ............ 36,084 20,839
Commitments and Contingent Liabilities (Note 11) ........ -- --
Stockholders' Equity (Note 6):
Common Stock, par value $.01 per share; 50,000,000
shares authorized; 6,050,069 and 6,000,000
shares issued and outstanding ..................... 61 60
Additional paid-in capital .......................... 63,463 62,813
Retained earnings ................................... 11,224 4,389
-------------------------------
Total Stockholders' Equity ...................... 74,748 67,262
-------------------------------
$299,522 $298,428
===============================
See Notes to Consolidated Financial Statements.
26
15
National Convenience Stores Incorporated and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
($ in thousands)
Additional Retained
Preferred Common Paid-in Earnings Treasury Notes
Stock Stock Capital (Deficit) Stock Receivable
-------------------------------------------------------------------------------
PREDECESSOR COMPANY:
Balance at June 30, 1991 ...................... $ 245 $ 10,000 $ 108,542 $ (9,793) $ (15,729) $ (23,167)
Net loss ..................................... (185,438)
Cash dividends on Series E
Preferred Stock ............................ (588)
Conversion of 9% Debentures to
Common Stock (100 shares) .................. 1 2
-------------------------------------------------------------------------------
Balance at June 30, 1992 .................... 245 10,001 108,544 (195,819) (15,729) (23,167)
Net earnings for the eight months
ended February 28, 1993 ................... 68,289
Cancellation of stock of
predecessor company ....................... (245) (10,001) (108,544) 127,530 15,729 23,167
Issuance of reorganized
company Common Stock ...................... 60 62,813
-------------------------------------------------------------------------------
REORGANIZED COMPANY:
Balance at February 28, 1993 ................ -- 60 62,813 -- -- --
Net earnings for the period
from Inception (March 1, 1993)
to June 30, 1993 ........................ 4,389
-------------------------------------------------------------------------------
Balance at June 30, 1993 .................... -- 60 62,813 4,389 -- --
Net earnings ............................... 6,835
Common Stock issued for exercise
of stock options (50,000 shares) ......... 1 524
Income tax benefit related to
stock options ............................ 125
Common Stock issued for exercise
of warrants (69 shares) .................. 1
-------------------------------------------------------------------------------
Balance at June 30, 1994 .................... $ -- $ 61 $ 63,463 $ 11,224 $ -- $ --
===============================================================================
See Notes to Consolidated Financial Statements
27
16
National Convenience Stores Incorporated
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
Reorganized Company | Predecessor Company
--------------------------- | --------------------------
Period from |
Inception | Eight Months
Year Ended (March 1, 1993) | Ended Year Ended
June 30, to June 30, | February 28, June 30,
1994 1993 | 1993 1992
--------------------------- | --------------------------
|
Cash flows from operating activities: |
Net earnings (loss) ....................................... $ 6,835 $ 4,389 | $ 68,289 $(185,438)
Adjustments to reconcile net earnings (loss) |
to net cash provided by operating activities: |
Depreciation and amortization .......................... 17,690 5,587 | 10,887 22,702
Deferred income taxes .................................. 3,578 2,374 | -- (11,271)
Gain on sale of assets ................................. (2,965) -- | -- --
Fresh-start adjustments ................................ -- -- | (382) --
Extraordinary gain ..................................... -- -- | (61,493) --
Restructuring and other special charges ................ -- -- | 6,561 168,106
Changes in operating assets and liabilities, net |
of sales of stores: |
(Increase) decrease in accounts and notes |
receivable and prepaid expenses ..................... (2,549) (111) | 727 26
(Increase) decrease in inventories ..................... (2,713) (2,621) | 5,691 6,052
Increase (decrease) in accounts payable and |
accrued expenses .................................... 5,244 16,340 | (396) 28,409
Increase (decrease) in income taxes .................... 214 (397) | 38 175
Other, net ............................................... (28) 495 | 157 (284)
--------------------------- | --------------------------
Net cash provided by operating activities .............. 25,306 26,056 | 30,079 28,477
--------------------------- | --------------------------
Cash flows from investing activities: |
Capital expenditures ................................... (21,942) (8,671) | (3,016) (3,557)
Proceeds from sale of assets ........................... 12,708 1,528 | 6,906 2,900
Other, net ............................................. (2,102) (962) | (1,194) (748)
--------------------------- | --------------------------
Net cash provided by (used in) investing activities .... (11,336) (8,105) | 2,696 (1,405)
--------------------------- | --------------------------
Cash flows from financing activities: |
Principal payments on long-term debt ................... (19,120) (3,658) | -- (5,192)
Proceeds from exercise of warrants and options ......... 526 -- | -- --
Debt issue costs ....................................... -- -- | (181) (2,629)
Dividends paid ......................................... -- -- | -- (882)
Cash settlement of liabilities subject to compromise ... (266) (36,584) | -- --
Other, net ............................................. -- 3,005 | -- (4,344)
--------------------------- | --------------------------
Net cash used in financing activities .................. (18,860) (37,237) | (181) (13,047)
--------------------------- | --------------------------
Net increase (decrease) in cash and equivalents ............. (4,890) (19,286) | 32,594 14,025
Cash and equivalents -- beginning of period ................ 46,032 65,318 | 32,724 18,699
--------------------------- | --------------------------
-- end of period ...................... $ 41,142 $ 46,032 | $ 65,318 $ 32,724
========================== | =========================
See Notes to Consolidated Financial Statements.
28
17
National Convenience Stores Incorporated and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(all tabular amounts expressed in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The consolidated financial statements
include the accounts of National Convenience Stores Incorporated and its
wholly-owned subsidiaries (the "Company") with all significant intercompany
accounts and transactions eliminated in consolidation. Certain amounts in prior
years have been reclassified to conform to the current year's presentation.
Basis of Presentation - As more fully described in Note 9 below, on
February 25, 1993, a court order was entered confirming the Company's Revised
Fourth Amended and Restated Joint Plan of Reorganization (the "Plan of
Reorganization") by the United States Bankruptcy Court for the Southern District
of Texas, Houston Division (the "Bankruptcy Court"). As a result, the Company
adopted the recommended "fresh-start reporting" treatment for entities emerging
from Chapter 11 bankruptcy reorganization, as set forth in the American
Institute of Certified Public Accountants' Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). For accounting purposes, the inception date for the reorganized
company is deemed to be March 1, 1993. Therefore, since March 1, 1993, the
Company's consolidated financial statements have been prepared as if it is a new
reporting entity (the reorganized company); the term "predecessor company"
relates to the Company for all periods prior to March 1, 1993. Consequently, a
vertical black line has been placed to separate post-emergence operations from
those prior to March 1, 1993. Accordingly, the Consolidated Statements of
Operations, Cash Flows and Stockholders' Equity (Deficit) for the periods from
Inception (March 1, 1993) to June 30, 1993 and the year ended June 30, 1994 of
the reorganized company are not comparable with those for the year ended June
30, 1992 and the eight months ended February 28, 1993 of the predecessor
company.
In connection with the adoption of SOP 90-7, the Company was also
required to adopt the provisions of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" ("SFAS 109") as of March 1, 1993 (see
Note 5).
Consolidated Statements of Cash Flows Supplemental Disclosures - For
purposes of this statement, short-term investments which have an initial
maturity of three months or less are considered cash equivalents. "Net cash
provided by operating activities" includes the following cash payments and
receipts:
Reorganized | Predecessor
Company | Company
------------------------------- | -------------------------------
Period from |
Inception | Eight
Year (March 1, | Months Year
Ended 1993) to | Ended Ended
June 30, June 30, | February 28, June 30,
1994 1993 | 1993 1992
------------------------------- | -------------------------------
|
Cash paid (received) for: |
Interest expense ....................................... $ 10,525 $ 3,073 | $ 85 $ 13,545
Interest income ........................................ (1,145) (328) | -- --
Income taxes, net |
of refunds ........................................... 446 396 | 93 259
Reorganization items: |
Professional fees ..................................... 2,537 3,085 | 4,908 475
Interest income ....................................... -- -- | (639) (196)
Other ................................................. -- 6 | 182 93
Reference is made to the analysis of the reorganized company's opening
balance sheet at March 1, 1993 (see Note 9) for a complete description of the
non-cash financing activities recorded upon emergence from Chapter 11 bankruptcy
reorganization and the resultant adoption of fresh-start reporting.
For the year ended June 30, 1992, non-cash investing and financing
activities were composed of the exercise by certain officers and directors of
the Company of their right to exchange $5.4 million of floating interest rate
subordinated debentures for the related promissory notes held by the predecessor
company. For financial reporting purposes, the promissory notes and debentures
were considered to offset and, therefore, the exchange had no effect on the
accompanying consolidated financial statements. In addition, $2,000 of the
predecessor company's 9% Convertible Subordinated Debentures were converted into
100 shares of the predecessor company's common stock and draw downs of
outstanding pre-petition irrevocable letters of credit amounting to $9.2 million
were made primarily by the Company's insurance carriers for the payment of
pre-petition insurance claims.
Cash and Equivalents - The cash balance is comprised of cash and cash
items in stores, in transit or in banks. The reserved cash balances at June 30,
1994 and 1993 of $13.6 million and $6.3 million, respectively, are composed of
cash accumulated in trust accounts at the Company's option for the payment of
payroll, sales and gasoline taxes and state lottery sales proceeds. Also
included in the reserved cash bal-
29
18
ance at June 30, 1994 is cash from the Circle K transaction that has been held
in escrow pending substitution of collateral related matters, which is
expected to be released by the end of the second quarter of fiscal 1995.
Inventories - Merchandise inventories are stated at the lower of
first-in, first-out cost or market, determined by the retail inventory method;
gasoline inventories are stated at average cost.
Property and Equipment - In accordance with SOP 90-7, property and
equipment were restated at March 1, 1993 to approximate fair market value as of
the Effective Date (see Note 9). Subsequent additions have been recorded at
cost. Provision for depreciation and amortization is made on a straight-line
basis over the estimated useful lives of the assets or the lease terms, if
shorter. Maintenance and repairs are charged to expense as incurred, whereas
renewals and betterments are capitalized.
Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets-Reorganization Value in Excess of Amounts Allocable to Identifiable
Assets ("Excess Reorganization Value") is being amortized on a straight-line
basis over 20 years. Amortization in amounts of $1.5 million and $0.5 million
were recorded for the year ended June 30, 1994 and the period from March 1, 1993
to June 30, 1993, respectively. In accordance with purchase accounting, any
downward revaluations of the deferred tax asset valuation allowance (see Note 5)
will result in a reassignment of a portion of Excess Reorganization Value to
Deferred Tax Assets, net.
Income Taxes - In connection with the adoption of fresh-start reporting,
the Company adopted SFAS 109, as of March 1, 1993 (see Note 5). Under SFAS 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to the differences between the financial statement
carrying value of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured by using enacted tax
rates that are applicable to the future years in which deferred tax assets or
liabilities are expected to be realized or settled. Under SFAS 109, the effect
of a change in tax rates on deferred tax assets and liabilities is recognized in
net earnings in the period in which the tax rate change was enacted. Income tax
expense of the predecessor company was recorded pursuant to the provisions of
Statement of Financial Accounting Standards No. 96, "Accounting for Income
Taxes" ("SFAS 96").
Earnings Per Share - Earnings per share have been computed by dividing
the weighted average number of shares of Common Stock outstanding during the
period, increased by the effect of common stock equivalents from stock options
and warrants, when dilutive, into net earnings. Fully-diluted earnings per share
are not shown as the difference is either immaterial or antidilutive in all
periods presented.
Earnings per share for the predecessor company are not presented since
such disclosure is not meaningful as a result of the confirmation of the Plan of
Reorganization.
Fair Value of Financial Instruments - Statement of Financial Accounting
Standards No. 107, "Disclosure About Fair Value of Financial Instruments",
requires disclosure of the fair value of certain financial instruments. Cash,
accounts receivable, accounts payable and accrued liabilities are reflected in
the financial statements at fair value consistent with the short-term maturity
of these instruments.
When considering the current interest rates and the terms of the
Company's long-term debt instruments, management believes the fair value of its
long-term debt to be approximately $9.0 million less than the carrying value due
primarily to the favorable interest rates related to its long-term debt.
June 30,
-------------------------
1994 1993
-------------------------
Land ......................................... $ 40,470 $ 40,592
Buildings .................................... 37,713 40,109
Leasehold improvements ....................... 20,059 17,472
Equipment and fixtures ....................... 79,048 64,361
-------------------------
177,290 162,534
Less accumulated depreciation .............. 19,215 6,006
-------------------------
$158,075 $156,528
=========================
The annual provision for depreciation has been computed principally in
accordance with the following rates and ranges of rates applied on the
straight-line method: Buildings, 4%; Leasehold improvements, 7%-10%; Equipment
and fixtures, 11%-17%.
On April 29, 1994, the Company completed the transaction whereby the
Company, (i) exchanged its 53 operating convenience stores in Southern
California, together with related inventories and equipment, for 88 operating
convenience stores of The Circle K Corporation in the Dallas/Fort Worth
30
19
and Houston, Texas areas, together with related inventories and equipment and,
(ii) sold its 27 operating convenience stores in Atlanta, Georgia, together with
related inventories and equipment, for cash consideration of $9,150,000. The
Company recorded a pretax gain of $3.0 million in conjunction with this
transaction.
On July 10, 1992, the Company consummated the sale of 21 operating
convenience stores together with related inventories and equipment located in
and around the San Francisco Bay area to The Customer Company and its affiliated
California general partnership for $3.1 million. The Bankruptcy Court approved
the sale of such properties on July 1, 1992. Pursuant to the Company's then
existing debtor-in-possession financing agreement, the proceeds were held in
escrow pending completion of the Chapter 11 bankruptcy reorganization. Upon
confirmation of the Plan of Reorganization, the proceeds were used to pay down
the Company's bank debt. The resultant loss was previously provided for in the
restructuring charge recorded in December 1991.
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
June 30,
---------------------
1994 1993
---------------------
Accounts payable ................................... $32,343 $26,205
Accrued sales and property taxes ................... 11,126 9,991
Accrued insurance .................................. 6,915 9,828
Accrued salaries and wages ......................... 3,907 4,573
Accrued reorganization professional fees ........... 4,019 9,813
Accrued environmental remediation .................. 3,660 2,288
Other accrued expenses ............................. 7,641 5,697
---------------------
$69,611 $68,395
=====================
At June 30, 1994, the Company's insurance liability totalled
approximately $17.5 million of which $6.9 million is included in accrued
liabilities as noted above with the remaining $10.6 million included in Other
Long-Term Liabilities. Also, at June 30, 1994 and 1993 the environmental
remediation liability totalled $21.8 million and $18.2 million, respectively, of
which $3.7 million and $2.3 million, respectively, are included in accrued
liabilities as noted above. The remaining balances are included in Other
Long-Term Liabilities (see Note 11).
4. DEBT
As of June 30, 1994 and 1993, long-term debt consisted of the following:
June 30,
-----------------------
1994 1993
-----------------------
Term Loan, due 2000 .............................. $ 53,578 $ 67,957
Revolving Credit Agreement ....................... -- --
Letter of Credit Agreement, due 2000 ............. -- 3,988
Mortgage notes on real estate, due 2003 .......... 59,586 62,271
Other notes payable, due through 2000 ............ 5,915 7,716
-----------------------
119,079 141,932
Less amounts due within one year ............ 12,103 10,373
-----------------------
$106,976 $131,559
=======================
Term Loan - On March 9, 1993, the Company entered into a term loan
agreement (the "Term Loan") with NationsBank of Texas, N. A., as agent (the
"Lender") whereby all of the outstanding balances of the Company's pre-petition
credit facilities, including the Employee Stock Ownership Plan, the revolving
credit facility, as well as drawn and undrawn letters of credit, were combined
into the Term Loan for a total of $70.9 million. At June 30, 1994, 85% of the
Term Loan, excluding the portion attributable to undrawn letters of credit,
bears interest at a fixed rate of 7.39%, with the remainder bearing interest, at
the Company's option, of 1% above the prime rate of the Lender, various margins
above the United States Treasury Securities rate or Eurodollar rates. The
Company is required to make scheduled quarterly principal payments in ascending
amounts with a final payment of $1.3 million on March 31, 2000. Principal
payments attributable to undrawn letters of credit will be held in an
interest-bearing cash collateral account until such time as the letters of
credit are drawn; should the letters of credit expire before being drawn, any
excess cash held in the cash collateral account will be refunded to the Company.
The Term Loan, along with the Revolving Credit Agreement and Letter of
Credit Agreement discussed below, are secured by substantially all assets of the
Company, its subsidiaries and the subsidiaries' stock. The Term Loan contains
limitations customarily found in such agreements on the incurrence of additional
debt, the execution of sale and leaseback transactions, investments, any
consolidation or merger of the Company, treasury stock purchases and the payment
of cash dividends. The Term Loan limits capital expenditures and environmental
remediation expenses to specified amounts over de-
31
20
fined periods during the period of the Term Loan. The Term Loan establishes
requirements as to the maintenance of certain financial ratios and coverage
tests relating to working capital, indebtedness, net worth and cash flow, which
must be satisfied quarterly. The Company is required to reduce its aggregate
borrowing capacity under the Term Loan with the net cash proceeds from the sale
of assets.
Below is a table illustrating primary financial ratios and coverage
tests ("Covenants") as of June 30, 1994 associated with the Company's long-term
bank debt instruments.
Covenant (as defined) Required Actual
- - ------------------------------------------------------------------------------
Current Ratio (minimum) ...................... 90% 111%
Total Borrowed Funds to Consolidated
Net Worth (maximum) ..................... 418% 327%
Total Liabilities to Consolidated
Net Worth (maximum) ..................... 360% 301%
Consolidated Net Worth (minimum) ............. $61,400 $74,748
Interest Coverage Ratio (minimum) ............ 230% 332%
Consolidated Fixed Charge
Coverage Ratio (minimum) ................ 107% 129%
EBITDA (minimum) ............................. $27,300 $35,218
Capital Expenditures (maximum) ............... $25,000 $23,266
Covenants noted above are computed as defined per the Company's
long-term bank debt instrument agreements. At June 30, 1994, the Company was in
compliance with such Covenants.
Revolving Credit Agreement - On March 9, 1993 the Company entered into a
revolving credit facility (the "Revolving Credit Agreement") with the Lender, as
agent, to provide financing for general corporate purposes. The Revolving Credit
Agreement replaced the Company's previous $8.0 million "debtor-in-possession"
facility. The Revolving Credit Agreement provides for the borrowing and/or
issuance of letters of credit in the aggregate of up to $8.0 million, increasing
to $11.0 million during the period from November 1 through May 1 of each year.
The Revolving Credit Agreement requires that, during each fiscal year, the
Company pay off all outstanding cash borrowings thereunder for a period of 30
consecutive days. The Company had no borrowings under this facility during
fiscal 1994. Letter of credit issuances cannot exceed $8.0 million and cash
borrowings are limited to the commitment limit less letters of credit
outstanding. Cash borrowings under the Revolving Credit Agreement bear interest
at 1% above the prime rate of the Lender. Any remaining outstanding principal
balance becomes due and payable on September 30, 1995. The Revolving Credit
Agreement contains provisions similar to the Term Loan with respect to
collateralization, reduction of outstanding loan balances with asset sales
proceeds, limitations of Company actions and the maintenance of certain
financial ratios and coverage tests.
Letter of Credit Agreement - On March 9, 1993 the Company entered into a
Letter of Credit Agreement (the "Letter of Credit Agreement") with Bank of
America National Trust and Savings Association ("Bank of America") which
provided for the repayment of $4.2 million of pre-petition letters of credit
which were undrawn as of the Effective Date. During the fiscal year 1994, a
bankruptcy proof of claim was settled thereby reducing the then outstanding
letter of credit balance to zero. At June 30, 1994, no amounts were outstanding
under the Letter of Credit Agreement.
Mortgage Notes on Real Estate - Mortgage notes payable bear interest at
9.5%, increasing to 11% in 2001 and 12% in 2002. The Company is required to make
quarterly principal payments on the notes payable with the unpaid balances
maturing on September 30, 2003.
Aggregate maturities on long-term debt for the next five fiscal years
are as follows:
June 30,
1995 ...................... $12,103
1996 ...................... 11,691
1997 ...................... 11,667
1998 ...................... 12,651
1999 ...................... 13,192
Interest - Effective with the Petition Date, the Company recorded
interest expense only for those pre-petition debt instruments which were fully
secured and for all debtor-in-possession financing. As of the Effective Date,
the Company has been recording interest expense as incurred.
32
21
5. INCOME TAXES
Income tax expense (benefit) consists of:
Reorganized Company | Predecessor Company
--------------------------------| ---------------------------------
Period from |
YEAR Inception | Eight Months Year
ENDED (March 1, 1993) to| Ended Ended
JUNE 30, 1994 June 30,1993 | February 28, 1993 June 30, 1992
--------------------------------| ---------------------------------
|
Current: |
Federal ............................................... $ 426 $ 328 | $ -- $ --
State ................................................. 276 167 | 133 420
--------------------------------| ---------------------------------
702 495 | 133 420
Deferred .............................................. 3,578 2,374 | -- (11,271)
--------------------------------| ---------------------------------
$ 4,280 $ 2,869 | $ 133 $(10,851)
================================| =================================
Deferred taxes result from: |
Book depreciation in excess of tax depreciation .......... $ (4,934) $ (868) | $ (1,736) $ (1,965)
Insurance payments in excess of (less than) |
accrued amounts .................................. (101) 169 | 337 4,719
Excess of tax over book losses (gains) |
on sales of assets ............................... (1,598) 138 | 276 3,317
Excess of tax over book provisions for soil |
remediation and closed stores .................... 162 190 | 381 918
Reorganization and restructuring charges providing |
current expense (benefit) ........................ 428 1,678 | 115 (18,360)
Tax benefit of net operating loss |
carryforwards .................................... 9,194 1,295 | -- --
Other, net ............................................ 427 (228) | 627 100
--------------------------------| ---------------------------------
$ 3,578 $ 2,374 | $ -- $(11,271)
================================| =================================
A reconciliation of the Company's effective tax rate with the statutory
federal income tax rate is as follows:
Reorganized Company Predecessor Company
--------------------------------| ---------------------------------
Period from |
YEAR Inception | Eight Months Year
ENDED (March 1, 1993) to| Ended Ended
JUNE 30, 1994 June 30,1993 | February 28, 1993 June 30, 1992
--------------------------------| ---------------------------------
|
Method of accounting ..................................... SFAS 109 SFAS 109 | SFAS 96 SFAS 96
|
Income tax expense (benefit) at statutory rate ........... 35.0% 34.0% | 34.0% (34.0)%
Amortization of Excess Reorganization Value .............. 5.2 2.5 | -- --
Targeted jobs tax credit ................................. (2.8) -- | -- (.3)
Net operating loss carryforwards ......................... -- -- | (34.0) --
Reorganization and restructuring charges |
not providing current tax benefit ................... -- -- | -- 28.8
State income taxes, net .................................. 3.0 3.0 | 1.9 --
Increase in net deferred tax asset resulting |
from increase in federal income tax rate ............ (2.1) -- | -- --
Other, net ............................................... .2 -- | -- --
--------------------------------| ---------------------------------
38.5% 39.5% | 1.9% (5.5)%
================================| =================================
33
22
In connection with the adoption of fresh-start reporting, the Company
adopted SFAS 109, as of March 1, 1993 (see Note 1). The effective income tax
rate of the reorganized company for the fiscal year ended June 30, 1994 and the
period from Inception (March 1, 1993) to June 30, 1993 differs from the federal
statutory rate primarily because of state income taxes and the inability to
deduct for tax purposes the amortization of Excess Reorganization Value, offset
in fiscal 1994 by targeted jobs tax credits and the cumulative increase in the
net deferred tax asset resulting from an increase in the statutory federal tax
rate. Income tax expense for the predecessor company was recorded pursuant to
the provisions of SFAS 96. SFAS 96 uses an asset and liability approach similar
to SFAS 109. However, under SFAS 96, consideration of future events, other than
the reversal of temporary differences, is not permitted. For the eight months
ended February 28, 1993, the predecessor company incurred a federal net
operating loss and therefore, income tax expense was comprised solely of state
income taxes. In fiscal 1992 the tax benefit of the net operating losses was
recorded only to the extent the benefit could be offset against existing
deferred income taxes payable.
Significant components of the Company's net deferred tax asset as of
June 30, 1994 and 1993, were as follows:
June 30,
----------------------
1994 1993
----------------------
Deferred tax assets:
Accruals and provisions not
currently deductible ..................... $ 23,646 $ 23,354
Interest and other expenses previously
expensed for book purposes ............... 1,479 3,935
Operating loss carryforwards .................. 10,327 18,530
Tax credit carryforwards ...................... 7,974 6,898
Other ......................................... 975 888
----------------------
44,401 53,605
----------------------
Deferred tax liabilities:
Tax over book depreciation .................... (13,139) (17,597)
Differences between book and tax
basis of property ........................ (13,563) (14,784)
Other ......................................... (124) (121)
----------------------
(26,826) (32,502)
Deferred tax asset valuation allowance ............. (11,504) (15,038)
----------------------
Net deferred tax asset ........................ $ 6,071 $ 6,065
======================
The deferred tax asset valuation allowance decreased by $3.5 million
during fiscal 1994 and by $5.6 million during the period from Inception (March
1, 1993) to June 30, 1993. The decrease in the valuation allowance was recorded
as a reduction of the Excess Reorganization Value. The remaining valuation
allowance is deemed appropriate by management in view of the expiration date of
the net operating losses and credits and the amount of future taxable income
necessary to utilize such losses and credits. If the full value of the deferred
tax assets were to be realized in future years, Excess Reorganization Value
would be further reduced by $11.5 million.
On March 15, 1994, the Company filed its federal income tax return for
the year ended June 30, 1993, which reflected net operating loss carryforwards
of $55.8 million plus tax credits of $7.1 million. The net operating losses
expire in varying amounts in fiscal years 2003 to 2007 and the tax credits
expire in fiscal years 2000 to 2009. These figures reflect the adjustments
required by Section 382 of the Internal Revenue Code after an ownership change
in the Company's stock. Section 382 will also require the Company to reduce the
tax basis of its assets by approximately $40.0 million. An ownership change is
defined as occurring when, during any three year period, the Company's 5%
shareholders (as defined in the Internal Revenue Code) increase their ownership
in the Company's stock by more than 50 percentage points. The Plan of
Reorganization resulted in an ownership change since substantially all of the
new stock was issued to the creditors of the Company.
As of June 30, 1994, the net operating loss carryforward is estimated to
have been reduced to $29.5 million as a result of the application of the losses
to reduce taxable income for fiscal 1994. The Company expects the remaining net
operating losses, tax credits and other tax attributes to be available to offset
future income taxes, subject to applicable limits. However, should a second
ownership change occur within two years of the first ownership change, all the
remaining pre-confirmation net operating losses, tax credits and other tax
attributes would be eliminated. The Plan of Reorganization provided for the
Company's Restated Certificate of Incorporation dated March 9, 1993 to contain
restrictions through June 30, 1996 on the transfer of stock to the reorganized
company's 5% stockholders (as defined in the Plan of Reorganization) or those
that would become 5% stockholders as a result of the purported transfer.
In the opinion of management, adequate provision has been made for
income taxes and any adjustments which have been or may be necessary will not
material affect the4 Company's financial position.
34
23
6. CAPITAL STOCK
Capital Stock - The Plan of Reorganization provided for the filing by
the Company of its Restated Certificate of Incorporation which authorized the
issuance of 50,000,000 shares of Common Stock, $.01 par value ("the Common
Stock"), and 1,000,000 shares of preferred stock. Pursuant to the terms of the
Plan of Reorganization, the Company issued 6,000,000 shares of its new Common
Stock. No shares of preferred stock have been issued. The Common Stock is traded
on the Nasdaq National Market under the symbol "NCSI". The Restated Certificate
of Incorporation provides restrictions with respect to the trading of Common
Stock to or from persons or entities (i) who directly or indirectly own 5% or
more of the value of Common Stock or (ii) who would directly or indirectly own
5% or more of the value of Common Stock after giving effect to the proposed
transfer. The restriction expires on June 30, 1996, and serves as a means of
preserving the benefits of the pre-confirmation tax attributes of the Company
(see Note 5). As of June 30, 1994, the Company had 6,050,069 shares of Common
Stock outstanding.
Warrants to Purchase Common Stock - The Plan of Reorganization provided
for the issuance of 1,350,000 Warrants to Purchase Common Stock (the "Warrants")
pursuant to the terms of a Warrant Agreement dated March 9, 1993. Each Warrant
provides the holder thereof with the right to purchase an equal number of shares
of Common Stock at an exercise price of $17.75 per share. The Warrant Agreement
has a term of five years and Warrants not exercised prior to March 9, 1998 shall
automatically become void and no longer outstanding. The Warrants are publicly
traded on the Nasdaq National Market under the symbol "NCSIW". During fiscal
year 1994, 69 warrants were exercised at a price of $17.75, resulting in
1,349,931 Warrants outstanding at June 30, 1994.
1993 Non-Qualified Stock Option Plan - The Plan of Reorganization
provided for the adoption on March 9, 1993 of the 1993 Non-Qualified Stock
Option Plan (the "Option Plan"). Under the Option Plan, 900,000 shares of Common
Stock are reserved for awards to be granted to certain key management employees
and directors in order to encourage participants to acquire proprietary
interests in the Company. The Option Plan provides for the original issuance of
Reorganization Options, as defined, with a stated exercise price of $10.50 per
share; any cancelled Reorganization Options may be subsequently reissued as
Additional Options, as defined, at a stated exercise price equal to the fair
market value of the Common Stock on the date of grant. All options expire ten
years from the date of the grant and are exercisable commencing one year from
the date of grant on a cumulative basis at the rate of 33 1/3% per year. The
following summarizes the stock option transactions:
Caption>
Option
Number of Prices
Shares Per Share
--------------------------
Original grant on March 9, 1993 .................... 885 $10.50
Cancelled ..................................... (30) 10.50
Exercised ..................................... --
----
Options outstanding at
June 30, 1993 .................................... 855 $10.50
Granted ....................................... 30 15.75
Cancelled ..................................... (50) 10.50
Exercised ..................................... (50) 10.50
----
Options outstanding at
June 30, 1994 .................................... 785 $10.50-15.75
====
Exercisable at June 30, 1994 ....................... 190 $10.50
====
7. LEASE ARRANGEMENTS
The Company leases a majority of its convenience stores and support
facilities, its corporate headquarters and certain equipment under operating
lease agreements. Generally, these leases have initial terms of ten to twenty
years, with one to three renewal options for additional five-year periods. It is
expected that these leases will be renewed or replaced with similar leases. Some
of the leases provide for additional rentals based upon a percentage of sales,
and many provide for the payment of real estate taxes, insurance and maintenance
expenses. Some of these leases also have escalation clauses. The Company has no
significant capital leases.
Future non-cancelable minimum rental commitments for operating leases
with an initial or remaining term of more than one year as of June 30, 1994,
are:
Year Ending June 30,
1995 ................................ $ 19,432
1996 ................................ 18,219
1997 ................................ 17,301
1998 ................................ 16,481
1999 ................................ 15,424
Thereafter .......................... 21,722
--------
Total minimum lease payments ... $108,579
========
The above commitments have not been reduced by $2.4 million of future
rental income under non-cancelable subleases.
35
24
Rent expenses under operating leases were:
Reorganized | Predecessor
Company | Company
----------------------- |-----------------------
Period from |
Inception | Eight
Year (March 1, | Months Year
Ended 1993) to | Ended Ended
June 30, June 30, |February 28, June 30,
1994 1993 | 1993 1992
----------------------- |-----------------------
|
Minimum rentals ............ $ 22,177 $ 7,490 | $ 15,437 $ 30,401
Percentage rentals ......... 1,115 327 | 660 906
Sublease rentals ........... (1,503) (470) | (1,044) (2,662)
----------------------- |-----------------------
$ 21,789 $ 7,347 | $ 15,053 $ 28,645
======================= |=======================
8. BENEFIT PLANS
The Company has a profit sharing plan available to substantially all
employees. The plan allows participants to contribute to the plan on a
before-tax basis pursuant to Section 401(k) of the Internal Revenue Code. Since
fiscal 1987, the Company matched 25% of such contributions up to 6% of the
employees' compensation. The Company suspended the matching contributions
effective as of October 1, 1991. Effective on July 1, 1993, the Company resumed
matching contributions at a level equal to 100% of the employees' before-tax
contributions, up to 3% of compensation. In addition to the matching
contributions, in fiscal 1994 the Company made a special $1.5 million
contribution to the plan, to be allocated to all eligible employees using a
formula based on tenure and compensation. Contributions to the plan were
$2,540,000 in fiscal 1994, $0 in fiscal 1993 and $32,000 in fiscal 1992.
Prior to the Petition Date, the Company's matching contributions were
invested primarily in the predecessor company's common stock. Effective in July
of 1993, employees were given the option of investing company contributions in a
number of different investment funds, including a company stock fund. As of the
Effective Date of the Plan of Reorganization, the Profit Sharing Plan owned
approximately 568,000 shares of the predecessor company's common stock. Pursuant
to the Plan of Reorganization, these shares were exchanged for 2,127 shares of
newly issued Common Stock, and 3,545 Warrants. As of June 30, 1994 the Profit
Sharing Plan owned 9,127 shares of Company Common Stock and 3,545 Warrants.
On March 31, 1994, the Company adopted two non-qualified retirement
plans for (i) certain officers and other key employees, and (ii) directors. The
plan covering key employees provides benefit payments based on years of service
and the employees' average earnings over the last five years. The plan covering
directors provides benefit payments based on years of service and the annual
retainer fees paid to the director. The Company has established two irrevocable
trusts to hold and invest assets to be used for the payment of benefits under
the plans. Such assets, totalling $175,000 at June 30, 1994, are considered
general assets of the Company. Charges to expense and funding amounts are based
upon amounts computed by independent actuaries. The Company made contributions
and recorded corresponding expenses totalling $175,000 in fiscal 1994. Also, an
additional liability of $2,067,000 and an intangible asset of equal amount were
recorded on the balance sheet at June 30, 1994.
Net pension cost in fiscal 1994 for the two plans included the following
components:
Service cost - benefits earned during the period .................. $ 52
Interest cost on projected benefit obligation ..................... 69
Amortization of unrecognized past service cost .................... 54
-------
Net pension cost .................................................. $175
=======
Actuarial present value of accumulated benefit obligation:
Vested ......................................................... $ 590
Nonvested ...................................................... 1,652
-------
Accumulated benefit obligation .................................... 2,242
Additional obligation related to projected salary increases ....... 1,139
-------
Total projected benefit obligation ................................ 3,381
Plan assets at fair value ......................................... 0
-------
Projected benefit obligation in excess of
fair value of assets ........................................... (3,381)
Unrecognized prior service cost ................................... 3,206
Adjustment needed to recognize minimum liability .................. (2,067)
-------
Accrued pension liability ......................................... $(2,242)
=======
Actuarial amounts were determined using an assumed discount rate of 8%,
a rate of increase in future compensation levels of 5% and an expected long-term
rate of return on plan assets of 8%.
36
25
9. CHAPTER 11 BANKRUPTCY REORGANIZATION
Chapter 11 Bankruptcy Filing - On December 9, 1991 (the "Petition
Date"), the Company and substantially all of its wholly-owned active
subsidiaries filed voluntary petitions for reorganization under Chapter 11 of
the United States Bankruptcy Code in the Bankruptcy Court. Subsequent to the
Petition Date, the Company operated its business as a debtor-in-possession under
the supervision of the Bankruptcy Court. As of the Petition Date, actions to
collect pre-petition indebtedness were stayed and other contractual obligations
could not be enforced against the Company. In addition, under the Bankruptcy
Code, the Company could reject leases and executory contracts. Parties affected
by these rejections could file claims with the Bankruptcy Court in accordance
with the reorganization process. Substantially all liabilities as of the
Petition Date were subject to settlement under a plan of reorganization to be
voted upon by the creditors and approved by the Bankruptcy Court.
Plan of Reorganization - As a result of extensive negotiations held in
December 1992, the Company reached a compromise agreement with representatives
of all of its major creditor constituencies, as well as two of the predecessor
company's largest common stockholders. This compromise agreement was then
incorporated into and became the Plan of Reorganization. Subsequently, on
January 6, 1993, a supplemental disclosure statement, along with a ballot, was
sent to all members of each class of creditors and equity interest holders
entitled to vote for acceptance or rejection of the Plan of Reorganization. As
of February 16, 1993, all such classes of creditors and equity interest holders
entitled to vote had accepted the Plan of Reorganization by the requisite
number. Consequently, on February 24, 1993, the Bankruptcy Court commenced a
hearing that resulted in the entering of a court order confirming the Plan of
Reorganization on February 25, 1993. The Plan of Reorganization subsequently
became effective March 9, 1993 (the "Effective Date").
The Plan of Reorganization was designed to repay all priority creditors
in full on the Effective Date or thereafter as provided in the Plan of
Reorganization and to repay secured creditors in full over time with interest.
Allowed unsecured claims totalling approximately $137.5 million were cancelled
in exchange for $9.3 million of cash, $1.0 million of new indebtedness and 5.91
million shares of newly issued Common Stock, par value $.01 per share, of the
reorganized company. All existing Series E Preferred Stock and existing common
stock of the predecessor company were exchanged for an aggregate distribution of
90,000 shares of the newly issued Common Stock of the reorganized company.
Consequently, a total of 6.0 million shares of newly issued Common Stock of the
reorganized company were issued under the Plan of Reorganization. In addition,
warrants to purchase up to an additional aggregate 1.35 million shares of newly
issued Common Stock at $17.75 per share were distributed to the holders of the
predecessor company's two publicly-held subordinated debenture series, the
Series E Preferred Stock and the old common stock. All alleged seniority rights
arising under the indentures relating to the publicly-held subordinated
debentures were deemed satisfied and cancelled as of the Effective Date. In
addition, the Plan of Reorganization authorized the issuance of stock options to
purchase up to 900,000 shares of Common Stock of the reorganized company to
certain key employees and directors at $10.50 per share (see Note 6).
Fresh-start Reporting - In accounting for the effects of the
reorganization, the Company has adopted the fresh-start reporting provisions of
SOP 90-7 and reflected the effects of such adoption in the financial statements
beginning March 1, 1993. SOP 90-7 is applicable because the pre-reorganization
shareholders received less than 50% of the reorganized company's newly issued
Common Stock and the enterprise value of the assets of the reorganized company
is less than the total of all pre-petition allowed claims and post-petition
liabilities.
In adopting fresh-start reporting, the Company, with the assistance of
its financial advisors, was required to determine its enterprise value, which
represents the fair market value of the entity before considering liabilities
and approximates the amount a willing buyer would pay for the assets of the
entity immediately after the reorganization. The term enterprise value is
synonymous with the term reorganization value as defined by SOP 90-7. After
extensive negotiations between the Company and its various creditor
constituencies, the Company's enterprise value was determined to be within a
group of ranges that centered around a point estimate of $210.0 million. The
enterprise value of the Company was determined by consideration of several
factors and reliance
37
26
on various valuation methods, including discounted future cash flows, market
comparables and price/earnings ratios. All of the valuations depended in large
part upon the Company's projected future operating results and cash flows; such
projections included assumptions as to anticipated sales and margins, marketing
plans, operating expense levels and capital expenditure programs. Additional
assumptions and methods utilized in the determination of the enterprise value
included, (i) discount rates of 11% to 14%, (ii) statutory tax rates, (iii) five
year cash flows projections and (iv) terminal value based upon industry
comparable multiples applied to the discounted value of its post-estimated 1998
earnings and cash flows.
The adjustments to reflect the adoption of fresh-start reporting,
including the adjustments to record assets and liabilities at their fair market
values and to reflect the adoption of SFAS 109, have been reflected in the
accompanying consolidated financial statements as of February 28, 1993, as
Fresh-Start Adjustments. In addition, the reorganized company's opening balance
sheet was further adjusted to eliminate existing equity and to reflect the
aforementioned $210.0 million enterprise value, which includes the establishment
of Excess Reorganization Value. Accordingly, a vertical black line is shown in
the consolidated financial statements to separate post-emergence operations from
those prior to March 1, 1993, since they have not been prepared on a comparable
basis.
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27
The effect of the Plan of Reorganization and fresh-start reporting on
the reorganized company's unaudited opening consolidated balance sheet as of
March 1, 1993 is as follows:
Pre Fresh-Start Extra- Post Fresh-Start
Balance Sheet ordinary Fresh-Start Balance Sheet
February 28, 1993 Gain (a) Adjustments (b) Other (c) March 1, 1993
----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and equivalents ........................... $ 65,318 -- -- $-- $ 65,318
Accounts and notes receivable, net ............. 4,333 -- (85) -- 4,248
Inventories .................................... 34,779 -- (292) -- 34,487
Prepaid expenses ............................... 4,521 -- (1,059) -- 3,462
----------------------------------------------------------------------------
Total Current Assets ...................... 108,951 -- (1,436) -- 107,515
Property and Equipment, net ......................... 156,389 -- (3,283) -- 153,106
Reorganization Value in Excess of Amounts
Allocable to Identifiable Assets, net .......... -- -- -- 47,636 47,636
Deferred Tax Asset, net ............................. -- -- 1,349 -- 1,349
Other Assets, net ................................... 12,939 (450) (3,282) -- 9,207
----------------------------------------------------------------------------
$ 278,279 $ (450) $ (6,652) $ 47,636 $ 318,813
============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable and accrued expenses .......... $ 44,097 -- $ 8,238 $ -- $ 52,335
Pre-petition liabilities payable in cash ....... -- 20,554 259 -- 20,813
Current portion of long-term debt (d) .......... 22,353 3,968 -- -- 26,321
----------------------------------------------------------------------------
Total Current Liabilities ................. 66,450 24,522 8,497 -- 99,469
Liabilities Subject to Compromise ................... 293,817 (287,015) (6,802) -- --
Long-Term Debt ...................................... -- 135,306 -- -- 135,306
Other Liabilities and Deferred Revenue .............. 27,523 2,371 (8,729) -- 21,165
Commitments and Contingent Liabilities .............. -- -- -- -- --
Stockholders' Equity (Deficit):
Series E Preferred Stock ....................... 245 -- -- (245) --
Common Stock, par value $.01 per share;
50,000,000 shares authorized; 6,000,000
shares issued and outstanding ............. -- 60 -- -- 60
Common Stock, par value $.41 2/3 per share;
50,000,000 shares authorized; 24,001,984
shares issued ............................. 10,001 -- -- (10,001) --
Additional paid-in capital ..................... 108,544 62,813 -- (108,544) 62,813
Retained earnings (deficit) .................... (189,405) 61,493 382 127,530 --
----------------------------------------------------------------------------
(70,615) 124,366 382 8,740 62,873
LESS:
Treasury stock ................................. 15,729 -- -- (15,729) --
Note receivable ................................ 23,167 -- -- (23,167) --
----------------------------------------------------------------------------
Total Stockholders' Equity (Deficit) ...... (109,511) 124,366 382 47,636 62,873
----------------------------------------------------------------------------
$ 278,279 $ (450) $ (6,652) $ 47,636 $ 318,813
============================================================================
(a) To record the settlement of liabilities subject to settlement under the Plan
of Reorganization.
(b) To record the adjustments to state assets and liabilities at fair market
value and to record the cumulative effect of adopting SFAS 109 as of March
1, 1993.
(c) To record the adjustments to cancel old equity, to zero out the retained
deficit and to adjust assets to reflect the $210.0 million enterprise value.
(d) Includes $16.0 million payable to secured debt holders on the Effective
Date.
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28
The following unaudited Consolidated Pro Forma Statement of Operations
reflects the financial results of the Company as if the Plan of Reorganization
and change in accounting principle had been effective July 1, 1992:
Twelve Months Ended June 30, 1993
---------------------------------------------
Historical Adjustments Pro Forma
---------------------------------------------
Sales .............................................................. $ 878,852 $ -- $ 878,852
Costs and Expenses:
Cost of sales ................................................. 651,658 -- 651,658
Operating expenses ............................................ 162,519 1,067 (a) 163,586
General and administrative expenses ........................... 31,775 -- 31,775
Interest expense .............................................. 4,410 5,940 (b) 10,350
Special charge ................................................ 6,561 -- 6,561
---------------------------------------------
856,923 7,007 863,930
---------------------------------------------
Earnings (Loss) Before Reorganization Expenses,
Fresh-Start Adjustments, Income Taxes
and Extraordinary Gain ........................................ 21,929 (7,007) 14,922
Reorganization Expenses, net ....................................... 8,124 (8,124)(b) --
---------------------------------------------
Earnings Before Fresh-Start Adjustments,
Income Taxes and Extraordinary Gain ........................... 13,805 1,117 14,922
Fresh-Start Adjustments ............................................ 382 (382)(b) --
---------------------------------------------
Earnings Before Income Taxes
and Extraordinary Gain ........................................ 14,187 735 14,922
Income Tax Expense ................................................. 3,002 3,102 (c) 6,104
---------------------------------------------
Earnings Before Extraordinary Gain ................................. 11,185 (2,367) 8,818
Extraordinary Gain ................................................. 61,493 (61,493)(b) --
---------------------------------------------
Net Earnings (Loss) ................................................ $ 72,678 $ (63,860) $ 8,818
=============================================
Earnings per share(d) .............................................. $ 1.35
============
Weighted Average Common and Common
Equivalent Shares Outstanding ................................. 6,855
============
(a) To record a full year's amortization of Excess Reorganization Value.
(b) To record interest expense on the debt incurred in connection with the Plan
of Reorganization and to eliminate Reorganization Expenses, Fresh-Start
Adjustments and the Extraordinary Gain.
(c) To record income tax expense as a result of adopting SFAS 109.
(d) Earnings per share is calculated based on Net Earnings, as adjusted to
reflect decreased interest expense (net of tax) assuming conversion of stock
options.
(e) Pro Forma Net Earnings and earnings per share are $12.9 million and $1.95,
respectively when Special charge of $6.6 million, related to an increase in
environmental remediation reserves is excluded.
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29
Extraordinary Gain - The Plan of Reorganization resulted in the
discharge of an estimated $309.4 million of pre-petition claims against the
Company through the distribution of $36.5 million in cash, $145.6 million of
debt and the issuance of 6.0 million shares of new Common Stock and 1.35
million warrants to purchase Common Stock. The value of the cash, debt
instruments and securities distributed was $61.5 million less than the claims
and the resultant gain was recorded as an extraordinary gain.
10. RESTRUCTURING AND OTHER SPECIAL CHARGES
During the second quarter of fiscal year 1992, management of the
Company performed a comprehensive strategic review of company and store
operations which resulted in the recording of Restructuring and Other Special
Charges of $168.1 million in December 1991. The charges are summarized as
follows:
Restructuring Charges:
Write-off of net book value of closed stores
and rejected leases and record liabilities for
anticipated market divestitures and
nonperforming leaseholds ................................... $ 44,438
Write-down of nonoperating properties
to fair market value ....................................... 12,602
Write-off of net book value of goodwill ......................... 21,357
Write-off of net book value of debt issue
costs and other deferred charges ........................... 9,435
Other write-offs ................................................ 13,201
--------
Total Restructuring Charges ........................... 101,033
--------
Other Special Charges:
Increase in insurance liabilities .......................... 46,632
Increase in environmental remediation
liabilities ........................................... 12,822
Other ...................................................... 7,619
--------
Total Other Special Charges ........................... 67,073
--------
Total ............................................ $168,106
========
Restructuring Charges - A strategic review of company and store
operations performed by management resulted in the Company filing motions with
the Bankruptcy Court to reject 188 leases covering stores already closed as of
the Petition Date. In addition, after the Petition Date, the Company closed or
sold 267 stores (244 of which were leased). The Company's store closure and
associated lease rejection programs were based on evaluations of individual
stores, taking into consideration factors such as historical and projected cash
flow, lease or ownership terms, age and condition of the property, the nature
and amount of insurance claims, competition and the potential for future
changes to any of the foregoing. In connection with the review, the Company
wrote off the $16.2 million net book value of buildings and leasehold
improvements for such rejected leases and closed stores and wrote down the
related store equipment by $9.0 million to estimated salvage value. A liability
of $10.2 million was also recorded to cover anticipated future lease settlement
claims. In addition, the strategic review identified two geographical markets
for probable divestiture and the Company recorded a liability of $9.0 million
for the expected resultant loss. The Company subsequently sold the two
identified geographical markets, San Francisco Bay area and Atlanta, Georgia on
July 10, 1992 and April 29, 1994, respectively, at which time the liability was
depleted.
In order to reduce cash expenditures, the Company's new store
development program was eliminated concurrent with the Chapter 11 filing.
Consequently, the Company elected to write down its nonoperating properties
(primarily undeveloped real estate) to current fair market value.
Due to the significant losses recorded by the Company prior to the
Petition Date, as well as the Chapter 11 filing itself, management of the
Company concluded that the goodwill previously recorded had been permanently
impaired and, therefore, it was written off.
As a result of the decline in the Company's financial condition and the
Chapter 11 filing, all debt previously classified as long-term became
immediately due and payable under the terms of the related debt instruments.
Consequently, the Company wrote off the debt issue costs of $4.9 million which
were previously scheduled to be amortized over the remaining life of the
associated loans. Similarly, management of the Company reviewed various other
intangible assets and deferred charges and concluded that their value became
permanently impaired as a result of the Chapter 11 filing.
Other charges consist primarily of an allowance for doubtful accounts
receivable of $3.9 million and a reserve of $5.0 million for expenses
associated with the Company's Employee Stock Ownership Plan (the "ESOP"). As a
result of the proposed termination of the ESOP, the Company eliminated the ESOP
reserve as a Fresh-Start Adjustment (see Note 9). The Company has requested a
ruling from the Internal Revenue Service regarding the tax consequences of the
aformentioned
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30
proposed termination of the ESOP, but to date has not received such ruling.
Other Special Charges - As a result of significant increases in adverse
claims experience, as well as an increase in the frequency of the violence and
severity of claims, management of the Company implemented a detailed study of
the Company's insurance reserves which gave consideration to the nature and
frequency of claims, as well as historical settlements. The loss development
factors are actuarially-determined ratios devised to factor in the Company's
prior history with similar claims, taking into account the age, nature, severity
and frequency of such claims. Based upon this analysis, which was completed
during the second quarter of fiscal 1992, the Company recorded a $46.6 million
charge to increase its insurance liabilities.
During the second quarter of fiscal 1992, the Company completed a
comprehensive plan covering its underground storage tanks in light of the
expected funding shortfalls in the various state reimbursement programs. As a
result, the Company recorded an increase to liabilities for environmental
remediation costs in the amount of $12.8 million in the second quarter of fiscal
1992. In connection with an updated environmental remediation cost analysis, the
Company increased its liabilities for future environmental remediation and
related tank removal costs by an additional $6.6 million in February 1993.
11. COMMITMENTS AND CONTINGENCIES
The operation and ownership of underground gasoline storage tanks ("USTs")
are subject to federal, state and local laws and regulations.
The Environmental Protection Agency ("EPA") has issued regulations,
including most recently the 1988 amendment to the Resource Conservation and
Recovery Act, that establish requirements for (i) maintaining leak detection
methods and equipment, (ii) upgrading USTs, (iii) taking corrective action in
response to leaks, (iv) closing USTs to prevent future leaks, (v) keeping
appropriate records and (vi) maintaining evidence of financial responsibility
for taking corrective action and compensating third parties for bodily injury
and property damage resulting from releases. These regulations also empower
states to develop, administer and enforce their own regulatory programs,
incorporating requirements which are at least as stringent as the federal
standards. In order to ensure compliance with the federal and state
environmental laws, the Company has developed a comprehensive gasoline storage
and dispensing plan. During fiscal 1993, the Company refined the plan such that
presently its primary focus is on upgrading gasoline dispensing equipment in
accordance with upcoming deadlines imposed by regulatory authorities and on
providing for the clean-up of existing and future contaminated sites. The
gasoline plan generally covers all properties owned by the Company and leases
assumed pursuant to the terms of the Plan of Reorganization.
Environmental Capital Commitments - To meet the minimum federal leak
detection requirements, all product lines had to have line leak detectors
installed as of December 22, 1990, and as of December 22, 1993, the Company had
adopted approved tank system leak detection methods on all owned or operated
USTs. The Company chose, in most cases, to meet this requirement by utilizing
annual tank testing with daily inventory reconciliation. The Company installed
pressurized distribution piping with automatic line leak detectors as of
December 22, 1990, in accordance with the regulations. Beginning in fiscal year
1995, the Company will adopt the Statistical Inventory Reconciliation Method
("SIR") for the detection of leaking tanks. This method involves statistical
analysis of gasoline inventory changes to detect leaking USTs.
The federal regulations require the Company to have installed
spill/overfill and corrosion protection equipment by December 22, 1998. However,
the State of Texas requires all USTs to be upgraded with the spill/overfill
prevention equipment by December 22, 1994. The Company estimates that, as of
June 30, 1994, 82% of its tanks have spill/overfill prevention equipment
installed. The Company's 1995 capital budget contains the necessary funds to
upgrade the remaining tanks with spill/overfill prevention equipment and,
consequently, the Company anticipates it will be in compliance with the December
22, 1994 deadline imposed by the State of Texas. The Company further estimates
that 70% of its USTs are protected from corrosion either by installing
fiberglass or steel fiberglass tanks or by upgrading existing steel tanks with
cathodic protection. Management of the Company believes that the Company's
long-range capital budget contains sufficient funds necessary to upgrade the
remaining tanks prior to the December 22, 1998 deadline.
In addition to the foregoing, the EPA has ranked the air quality in major
cities in the United States based on the level of ozone measured. Two areas in
which the Company currently conducts operations are considered to be ozone
non-
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31
attainment areas: Houston and the Dallas/Fort Worth area. The Houston market is
classified in the severe ozone non-attainment category while the Dallas/Fort
Worth area is classified in the moderate ozone non-attainment category. Under
rules promulgated by the EPA and the State of Texas, gasoline dispensing
facilities in the two areas are required to have Stage II Vapor Recovery
Equipment, by November 15, 1994, on all units except those that have not
dispensed more than 10,000 gallons in any one month since January 1991.
During fiscal 1994 and 1993, the Company spent $6.6 million and $4.4
million, respectively, on environmental capital equipment, including $6.1
million and $3.1 million, respectively, on Stage II Vapor Recovery Equipment.
In order to ultimately comply with the aforementioned regulations by the
deadlines described, the Company estimates it will have to spend approximately
$11.8 million on additional equipment and installation through fiscal 1999,
including $6.0 million for Stage II Vapor Recovery Equipment.
Environmental Remediation Contingency - The majority of the Company's
environmental remediation expenditures relate to the clean-up of contaminated
soil caused by leaking underground gasoline storage tanks and underground
piping systems. During the second quarter of fiscal year 1992 the Company
completed a comprehensive plan covering its underground storage tanks in light
of the expected funding shortfalls in the various state reimbursement programs.
As a result, the Company recorded an increase to the environmental remediation
liability of $16.8 million in the second quarter of fiscal year 1992. Not
included in this liability is approximately $4.0 million of reimbursements from
established state funds which the Company believes to be probable of recovery.
In connection with an updated environmental remediation cost analysis the
Company increased its liability for future environmental remediation and tank
removal costs by an additional $6.6 million in February 1993. As of June 30,
1993, the remediation liability totalled $18.2 million, net of the
aforementioned estimated $4.0 million of reimbursable costs. At June 30, 1994,
the remediation reserve totalled $21.8 million which included a $4.0 million
reclassification, recorded during the third quarter of fiscal year 1994,
related to anticipated reimbursements for future expenditures from established
state trust funds which the Company believes to be probable of recovery.
Beginning with the third quarter of fiscal year 1994, this $4.0 million amount
is also included as an other asset in the Company's balance sheet. The states
in which the Company operates, or has previously operated, have established
trust funds for the reimbursement of costs related to remediation activities.
The actual cost of remediating contaminated sites and removing tanks may be
substantially lower or higher than that reserved due to the difficulty in
estimating such costs and due to potential changes in the status of regulation
and state reimbursement programs. The Company does not believe that any such
amount below or in excess of that accrued is reasonably estimable.
Since 1988, the Company has spent approximately $11.4 million for
remediation activities at sites the Company is operating or has previously
operated. Approximately 43% of such costs qualify for reimbursement from the
various trust funds and the Company has been reimbursed $3.7 million for such
costs through June 30, 1994. According to published reports, the Texas
Petroleum Storage Tank Reimbursement Fund was depleted during 1993 which has
necessitated delaying payment on reimbursement applications. As of June 30,
1994, the Company had filed claims with the State of Texas for the
reimbursement of $1.2 million for past expenditures. Such reimbursement is
included in other assets. While the Company believes the reimbursements are
collectible, the Company estimates it could be several years before
reimbursement occurs.
The Company is required by state regulations to maintain evidence of
financial responsibility for taking corrective action on remediation
activities. In order to be in compliance with these requirements, the Company
has successfully established that it is self-insured, with verification by the
Texas Natural Resource Conservation Commission.
Litigation - The Company and its subsidiaries are parties to various
legal proceedings in the ordinary course of business. Management does not
expect that any of such proceedings will have a material adverse effect on the
Company's financial position.
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SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly Financial Data
($ in thousands, except per share data)
A summary of quarterly financial data follows:
Fiscal 1994
----------------------------------------------------------
Reorganized Company
----------------------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
----------------------------------------------------------
Sales ............................................................. $ 234,280 $ 213,722 $ 204,664 $ 227,858
Gross profit ...................................................... 62,861 55,988 50,549 52,281
Net earnings (loss) (1) ........................................... 4,715 1,528 (1,527) 2,119
Earnings (loss) per share ......................................... 0.73 0.24 (0.25) 0.33
Price range of Common Stock -- High ............................. 16.75 16.75 20.00 17.00
-- Low ............................. 13.25 14.25 16.25 10.25
Fiscal 1993
-------------------------------------------------------------
Predecessor Company Reorganized Company
-------------------------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
-------------------------------------------------------------
| Period from
Two Months | Inception
Ended | (March 1, 1993)
February 28,| to March 31,
1993 | 1993
-----------------------------------| -----------------------
|
Sales ........................................................ $ 234,083 $ 215,956 $ 130,828 | $ 72,349 $ 225,636
Gross profit ................................................. 61,849 54,954 35,045 | 18,665 56,681
Earnings (loss) before extraordinary gain .................... 8,471 2,549 (4,224) | 1,062 3,327
Net earnings (2) ............................................. 8,471 2,549 57,269 | 1,062 3,327
Earnings per share ........................................... * * * | 0.16 0.51
Price range of Common Stock -- High ...................... * * * | 16.13 16.75
-- Low ....................... * * * | 14.00 14.25
Fiscal 1992
----------------------------------------------------------
Predecessor Company
----------------------------------------------------------
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
----------------------------------------------------------
Sales.............................................................. $266,790 $ 240,851 $212,132 $238,746
Gross profit ...................................................... 66,189 58,418 48,212 57,378
Net earnings (loss) (3) ........................................... (3,105) (177,729) (9,025) 4,421
Earnings per share ................................................ * * * *
Price range of common stock ....................................... * * * *
* Earnings per share and price range of common stock for the predecessor
company are not presented because they are not meaningful as a result of the
confirmation of the Plan of Reorganization.
(1) The fourth quarter of fiscal 1994 results include, (i) a $3.0 million ($1.8
million, or $0.28 per share, on an after-tax basis) gain recorded in
conjunction with the Circle K transaction and (ii) consulting fees and other
expenses of $1.6 million ($1.0 million, or $0.15 per share, on an after-tax
basis) related to the program to enhance and redefine the Company's focus on
customer service and effectiveness.
(2) The period ending February 28, 1993 results include a $61.5 million
Extraordinary Gain as a result of the forgiveness of debt upon emergence
from Chapter 11 bankruptcy reorganization in March 1993, a $6.6 million
special charge related to an increase in environmental remediation reserves
and a credit of $0.4 million for Fresh-Start Adjustments recorded upon the
Company's emergence from Chapter 11 bankruptcy reorganization, which
incorporate the effects of the adoption by the Company of Statement of
Financial Accounting Standards No. 109.
(3) The second quarter of fiscal 1992 results include $168.1 million of
Restructuring and Other Special Charges as a result of the Company's
December 9, 1991 Chapter 11 filing and strategic review of operations.
The Common Stock of the reorganized company is traded on the Nasdaq National
Market under the symbol "NCSI". There were approximately 1380 shareholders of
record as of August 31, 1994. Shares held in "nominee" or "street" names are not
included in this number.
44