UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 3, 2003
------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-11556
UNI-MARTS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 25-1311379
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
477 EAST BEAVER AVENUE
STATE COLLEGE, PA 16801-5690
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (814) 234-6000
-------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No []
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
7,190,895 Common Shares were outstanding at August 8, 2003.
This Document Contains 29 Pages.
-1-
UNI-MARTS, INC. AND SUBSIDIARIES
INDEX
PAGE(S)
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
July 3, 2003 and September 30, 2002 3-4
Condensed Consolidated Statements of Operations -
Quarter Ended and Three Quarters Ended
July 3, 2003 and July 4, 2002 5
Condensed Consolidated Statements of Cash Flows -
Three Quarters Ended July 3, 2003 and July 4, 2002 6-7
Notes to Condensed Consolidated Financial Statements 8-16
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17-23
Item 3. Quantitative and Qualitative Disclosures
about Market Risk 24
Item 4. Controls and Procedures 25-26
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 27
Signatures 28
Exhibit Index 29
-2-
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
UNI-MARTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
JULY 3, SEPTEMBER 30,
2003 2002
------------ -------------
ASSETS
CURRENT ASSETS:
Cash $ 3,769 $ 6,501
Accounts receivable - less allowances of $187 and
$126, respectively 5,880 8,324
Inventories 17,950 20,859
Prepaid and current deferred taxes 639 1,494
Property and equipment held for sale 40,917 1,098
Prepaid expenses and other 721 1,137
------------ ------------
TOTAL CURRENT ASSETS 69,876 39,413
PROPERTY, EQUIPMENT AND IMPROVEMENTS -
at cost, less accumulated depreciation and
amortization of $40,764 and $64,214, respectively 51,759 98,037
LOAN DUE FROM OFFICER 0 360
INTANGIBLE ASSETS 394 6,235
OTHER ASSETS 1,132 1,100
------------ ------------
TOTAL ASSETS $ 123,161 $ 145,145
============ ============
(Continued)
-3-
UNI-MARTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
(UNAUDITED)
JULY 3, SEPTEMBER 30,
2003 2002
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 12,611 $ 17,811
Gas taxes payable 40 3,460
Accrued expenses 6,558 7,207
Revolving credit 7,635 5,867
Current maturities of long-term debt 3,192 3,212
Current obligations under capital leases 102 113
------------ ------------
TOTAL CURRENT LIABILITIES 30,138 37,670
LONG-TERM DEBT, less current maturities 68,683 71,912
OBLIGATIONS UNDER CAPITAL LEASES,
less current maturities 141 214
DEFERRED TAXES 542 1,797
DEFERRED INCOME AND OTHER LIABILITIES 4,441 5,235
COMMITMENTS AND CONTINGENCIES (See Note H)
STOCKHOLDERS' EQUITY:
Preferred Stock, par value $1.00 per share:
Authorized 100,000 shares
Issued none 0 0
Common Stock, par value $.10 per share:
Authorized 16,000,000 shares
Issued 7,453,883 and 7,420,859 shares, respectively 745 742
Additional paid-in capital 23,742 23,803
Retained (deficit) earnings (3,510) 5,661
------------ ------------
20,977 30,206
Less treasury stock, at cost - 267,106 and
291,429 shares of Common Stock, respectively (1,761) (1,889)
------------ ------------
19,216 28,317
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 123,161 $ 145,145
============ ============
See notes to condensed consolidated financial statements
-4-
UNI-MARTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
QUARTER ENDED THREE QUARTERS ENDED
JULY 3, JULY 4, JULY 3, JULY 4,
2003 2002 2003 2002
------------ ------------ ------------ ------------
REVENUES:
Merchandise sales $ 36,223 $ 36,074 $ 104,252 $ 104,072
Gasoline sales 38,741 32,418 109,233 84,671
Other income 341 411 1,095 1,212
------------ ------------ ------------ ------------
75,305 68,903 214,580 189,955
------------ ------------ ------------ ------------
COSTS AND EXPENSES:
Cost of sales 61,239 54,443 172,799 147,413
Selling 9,995 9,945 30,216 29,831
General and administrative 1,787 2,122 5,673 6,165
Depreciation and amortization 1,149 1,174 3,369 3,534
Interest 824 916 2,640 2,778
------------ ------------ ------------ ------------
74,994 68,600 214,697 189,721
------------ ------------ ------------ ------------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE INCOME TAXES AND
CHANGE IN ACCOUNTING PRINCIPLE 311 303 (117) 234
INCOME TAX PROVISION 60 104 41 79
------------ ------------ ------------ ------------
EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE CHANGE IN
ACCOUNTING PRINCIPLE 251 199 (158) 155
DISCONTINUED OPERATIONS:
LOSS FROM DISCONTINUED OPERATIONS (685) (503) (2,857) (2,012)
LOSS ON DISPOSAL OF DISCONTINUED
OPERATIONS (472) 0 (720) 0
INCOME TAX PROVISION (BENEFIT) 21 (159) (110) (684)
------------ ------------ ------------ ------------
LOSS ON DISCONTINUED OPERATIONS (1,178) (344) (3,467) (1,328)
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE, NET OF INCOME
TAX BENEFIT OF $310 0 0 (5,547) 0
------------ ------------ ------------ ------------
NET LOSS $ (927) $ (145) $ (9,172) $ (1,173)
============ ============ ============ ============
EARNINGS (LOSS) PER SHARE:
EARNINGS (LOSS) PER SHARE FROM
CONTINUING OPERATIONS BEFORE CHANGE
IN ACCOUNTING PRINCIPLE $ 0.03 $ 0.03 $ (0.02) $ 0.02
LOSS PER SHARE FROM DISCONTINUED
OPERATIONS (0.16) (0.05) (0.48) (0.19)
LOSS PER SHARE FROM CHANGE IN
ACCOUNTING PRINCIPLE 0.00 0.00 (0.78) 0.00
------------ ------------ ------------ ------------
BASIC AND DILUTED NET LOSS PER SHARE $ (0.13) $ (0.02) $ (1.28) $ (0.17)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED AVERAGE
NUMBER OF COMMON SHARES
OUTSTANDING 7,186 7,112 7,157 7,092
============ ============ ============ ============
See notes to condensed consolidated financial statements
-5-
UNI-MARTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE QUARTERS ENDED
JULY 3, JULY 4,
2003 2002
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from customers and others $ 216,235 $ 192,541
Cash paid to suppliers and employees (214,267) (185,222)
Dividends and interest received 23 35
Interest paid (2,647) (3,096)
Income taxes (paid) received (21) 4
Other (payments) receipts-discontinued operations (423) 653
------------ ------------
NET CASH (USED IN) PROVIDED BY
OPERATING ACTIVITIES (1,100) 4,915
CASH FLOWS FROM INVESTING ACTIVITIES:
Receipts from sale of capital assets 29 130
Receipts from sale of discontinued operations 1,446 0
Purchase of property, equipment and improvements (1,486) (2,447)
Note receivable from officer 360 60
Net payments for intangible and other assets (242) (158)
Cash received for intangible and other assets 22 59
------------ ------------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 129 (2,356)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings on revolving credit agreement 1,768 1,252
Principal payments on debt (3,532) (2,933)
Proceeds from issuance of common stock 3 29
------------ ------------
NET CASH USED IN FINANCING ACTIVITIES (1,761) (1,652)
------------ ------------
NET (DECREASE) INCREASE IN CASH (2,732) 907
CASH:
Beginning of period 6,501 5,075
------------ ------------
End of period $ 3,769 $ 5,982
============ ============
-6-
UNI-MARTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(CONTINUED)
(UNAUDITED)
THREE QUARTERS ENDED
JULY 3, JULY 4,
2003 2002
------------ ------------
RECONCILIATION OF NET LOSS TO NET CASH
(USED IN) PROVIDED BY OPERATING ACTIVITIES:
NET LOSS $ (9,172) $ (1,173)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES:
Depreciation and amortization 3,368 3,534
Discontinued operations-depreciation and amortization 2,434 2,665
Loss on sale of capital assets and other 386 389
Discontinued operations-loss on sale 720 0
Change in accounting principle 5,547 0
Change in assets and liabilities:
(Increase) decrease in:
Accounts receivable 2,444 373
Inventories 2,909 (1,114)
Prepaid expenses and other 417 2,413
Increase (decrease) in:
Accounts payable and accrued expenses (9,269) (1,861)
Deferred income taxes and other liabilities (884) (311)
------------ ------------
TOTAL ADJUSTMENTS TO NET LOSS 8,072 6,088
------------ ------------
NET CASH (USED IN) PROVIDED BY OPERATING
ACTIVITIES $ (1,100) $ 4,915
============ ============
See notes to condensed consolidated financial statements
-7-
UNI-MARTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A. FINANCIAL STATEMENTS:
The condensed consolidated balance sheet as of July 3, 2003, the condensed
consolidated statements of operations and the condensed consolidated
statements of cash flows for the three and nine months ended July 3, 2003
and July 4, 2002, respectively, have been prepared by Uni-Marts, Inc. (the
"Company") without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present
fairly the financial position of the Company at July 3, 2003 and the
results of operations and cash flows for all periods presented have been
made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. It is suggested that these consolidated financial statements be
read in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K for the fiscal year
ended September 30, 2002. Certain reclassifications have been made to the
September 30, 2002 financial statements to conform to classifications used
in fiscal year 2003. The results of operations for the interim periods are
not necessarily indicative of the results to be obtained for the full
year.
During fiscal 2003, the Company increased its valuation allowance against
the deferred tax asset because it has been determined that it is more
likely than not that the Company will not be able to utilize the Net
Operating Loss carryforwards ("NOL's"). The increase in the allowance has
resulted in a 4.0% tax benefit in the first three quarters of fiscal 2003.
In accordance with the Company's plans to pursue a divestiture strategy,
the Company plans to sell or sublet assets of 130 stores. In the third
quarter of fiscal 2003, the Company reclassified on its balance sheet
assets totaling $40.6 million relating to these stores as property and
equipment held for sale, and classified the income and expense of such
stores as discontinued operations. The Company intends to continue to
operate these stores pending successful negotiation of their sale or
sub-lease. For the first nine months of fiscal 2003, the Company recorded
a loss from discontinued operations of $2.9 million and recorded a loss on
disposal of discontinued operations of $720,000, which includes a $600,000
loss relating to the future disposal of certain locations.
-8-
B. FUTURE OPERATIONS:
The Company continues to evaluate existing stores based on their
historical contribution. The Company will consider closing or selling
underperforming stores or investing in facility upgrades to enhance their
performance. The Company retained financial advisors in fiscal year 2002,
and entered into a new contractual arrangement with one of these financial
advisors in January 2003, to evaluate operating strategies which include
the potential divestiture of certain store locations and non-operating
assets. As a result of its analysis with its financial advisor, the
Company has intensified its divestiture strategy. The Company is currently
working with its financial advisor and lenders to facilitate this
divestiture program.
Management believes that cash from operations, available credit facilities
and asset sales will be sufficient to meet the Company's obligations for
the foreseeable future. In the event that the Company is unable to
consummate proposed asset sales, on acceptable terms, there is a risk that
the Company may not be able to meet future cash obligations.
C. INTANGIBLE AND OTHER ASSETS:
Intangible and other assets consist of the following (in thousands):
JULY 3, SEPTEMBER 30,
2003 2002
------------ --------------
Goodwill $ 0 $ 8,874
Lease acquisition costs 298 315
Noncompete agreements 250 250
Other intangible assets 250 197
------------ --------------
798 9,636
Less accumulated amortization 404 3,401
------------ --------------
394 6,235
Other assets 1,132 1,100
------------ --------------
$ 1,526 $ 7,335
============ ==============
Goodwill represents the excess of costs over the fair value of net assets
acquired in business combinations. As discussed within this report under
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Critical Accounting Policies and Estimates," the Company
completed an impairment analysis during the second quarter of fiscal 2003
in connection with the adoption of Statement of Financial Accounting
Standards ("SFAS") No. 142, resulting in a write-off of goodwill in the
amount of $5.8 million. Lease acquisition costs are the bargain element of
acquired leases and are being amortized on a straight-line basis over the
related lease terms.
-9-
C. INTANGIBLE AND OTHER ASSETS (CONTINUED):
The Company's adoption of SFAS No. 142 eliminates the requirement to
amortize goodwill beginning in the first quarter of fiscal 2003 (see Note
G). Goodwill amortization in the first three quarters of fiscal 2002 was
$291,400, or $0.04 per share. The following table adjusts net earnings
(loss) and net earnings (loss) per share for the adoption of SFAS No. 142
(in thousands, except per share data):
THREE QUARTERS ENDED
JULY 3, JULY 4,
2003 2002
------------ ------------
Reported net loss $ (9,172) $ (1,173)
Add back:
Goodwill amortization 0 291
------------ ------------
Adjusted net loss $ (9,172) $ (882)
============ ============
Net loss per share $ (1.28) $ (0.17)
============ ============
Adjusted net loss per share $ (1.28) $ (0.13)
============ ============
D. REVOLVING CREDIT AGREEMENT:
On April 20, 2000, the Company executed a 3-year secured $10.0 million
revolving credit agreement (the "Agreement") with $3.5 million available
for letters of credit. Provisions of the Agreement require the maintenance
of certain covenants relating to minimum tangible net worth, interest and
fixed-charge coverage ratios, as measured on a quarterly basis. In
addition, the Agreement places limitations on capital expenditures,
additional debt and payment of dividends. In the second quarter of fiscal
year 2001, the Agreement was amended to increase the total credit line to
$13.0 million, with $3.5 million available for letters of credit, and to
revise certain financial covenants. During the first quarter of fiscal
year 2002, the Agreement was amended to extend the maturity date to April
20, 2004, to revise certain covenants and to provide an additional $2.0
million for borrowing on a seasonal basis for the months January through
April. As of September 30, 2002, the Agreement was amended to revise
covenants relating to fixed- charge coverage and interest coverage ratios
for the fourth quarter of fiscal year 2002 and the first quarter of fiscal
year 2003. Effective April 1, 2003, the Company amended the Agreement to
extend the maturity date to December 31, 2004, extend the $2.0 million
seasonal borrowing increase to April 30, 2004, and revise certain
financial covenants. The Company was in compliance with these covenants as
of July 3, 2003. Borrowings of $7.6 million and letters of credit of $3.5
million were outstanding under the Agreement at July 3, 2003. This
facility bears interest at the Company's option based on a rate of either
prime plus 1.0% or LIBOR plus 3.0%. The blended interest rate at July 3,
2003 was 4.63%. The Agreement is collateralized by substantially all of
the Company's inventories, receivables, other personal property and
selected real properties. At July 3, 2003, the net book value of these
selected real properties that are pledged as collateral was $2.4 million.
-10-
E. LONG-TERM DEBT:
JULY 3, SEPTEMBER 30,
2003 2002
-------------- --------------
(In thousands)
Mortgage Loan. Principal and interest will be
paid in 182 remaining monthly installments. At
July 3, 2003, the coupon rate was 9.08% and the
effective interest rate was 9.78%, net of unamortized
fees of $1,084,618 ($1,204,119 in 2002) $ 30,084 $ 31,568
Mortgage Loan. Principal and interest will be
paid in 203 remaining monthly installments. The
loan bears interest at LIBOR plus 3.75%. At July 3,
2003, the coupon rate was 5.07% and the
effective interest rate was 5.53%, net of
unamortized fees of $333,157 ($364,952 in 2002) 19,894 20,423
Mortgage Loan. Principal and interest will be
paid in 203 remaining monthly installments. At
July 3, 2003, the coupon rate was 10.39% and the
effective interest rate was 10.71%, net of unamortized
fees of $107,170 ($114,683 in 2002) 6,399 6,502
Mortgage Loans. Principal and interest are paid in
monthly installments. The loans expire in 2009,
2010, 2020 and 2021. Interest ranges from the
prime rate to LIBOR plus 3.75%. At July 3, 2003,
the blended coupon rate was 6.02% and the
effective interest rate was 6.48%, net of
unamortized fees of $139,329 ($144,626 in 2002) 6,970 7,202
Revolving Credit Agreement. Interest is paid
monthly. The blended interest rate at July 3, 2003
was 4.63%. (See Note D) 7,635 5,867
Equipment Loans. Principal and interest will be
paid in monthly installments. The loans expire
in 2010 and 2011 and bear interest at LIBOR plus
3.75%. At July 3, 2003, the blended coupon rate was
5.07% and the effective interest rate was 5.67%, net of
unamortized fees of $102,590 ($135,213 in 2002) 7,767 8,506
Equipment Loan. Principal and interest will be
paid in 82 remaining monthly installments. The loan
expires in 2010. At July 3, 2003, the coupon rate was
10.73% and the effective interest rate was 11.20%,
net of unamortized fees of $10,156 ($13,776 in 2002) 761 923
-------------- --------------
79,510 80,991
Less current maturities 10,827 9,079
-------------- --------------
$ 68,683 $ 71,912
============== ==============
-11-
E. LONG-TERM DEBT (CONTINUED):
The mortgage loans are collateralized by $65,630,000 of property, at net
book value, and the equipment loans are collateralized by $4,303,900 of
equipment, at net book value.
Aggregate maturities of long-term debt (net of loan fee amortization)
during the next five years are as follows (in thousands):
September 30,
2003 $ 8,213
2004 3,159
2005 3,398
2006 3,656
2007 3,934
Thereafter 57,150
--------
$ 79,510
========
F. RELATED PARTY TRANSACTIONS:
Certain directors and officers of the Company are also directors, officers
or controlling shareholders of other entities from which the Company
leases its corporate headquarters and various store and other locations
under agreements classified as operating leases. In addition, the Company
leases store locations from entities controlled by, or from persons
related to, certain directors and officers of the Company. Aggregate
rentals in connection with all such leases for the three quarters ended
July 3, 2003 and July 4, 2002 were $1,116,900 and $899,000, respectively.
The Company charges an affiliate for general and administrative services
provided. Such charges amounted to $8,400 and $8,400 in the three quarters
ended July 3, 2003 and July 4, 2002, respectively.
During the first three quarters of fiscal years 2003 and 2002, the Company
made payments of $0 and $59,600, respectively, to a director of the
Company for consulting fees and reimbursement of expenses.
G. RECENT ACCOUNTING PRONOUNCEMENTS:
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that
such assets with indefinite lives not be amortized but be tested annually
for impairment and provides specific guidance for such testing. This
statement also requires disclosure of information regarding goodwill and
other assets that was previously not required. In accordance with SFAS No.
142, the Company has discontinued the amortization of goodwill as of
October 1, 2002 and completed its impairment test during the 2003 second
fiscal quarter. As a result, the Company wrote-off its total goodwill
balance of $5,857,000.
-12-
G. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
The Company adopted SFAS No. 143,"Accounting for Asset Retirement
Obligations," effective for the fiscal year ending September 30, 2003.
Under the statement's provisions, (1) entities must record the fair value
of a liability for an asset retirement obligation in the period in which
it is incurred, (2) when the liability is initially recorded, the entity
must capitalize a cost by increasing the carrying amount of the related
long-lived asset, (3) over time, the liability is accreted to its present
value each period, and the capitalized cost is depreciated over the useful
life of the related asset and (4) upon settlement of the liability, the
entity either settles the obligation for its recorded amount or incurs a
gain or loss upon settlement. There was no impact on the Company's
consolidated financial position or results of operations as a result of
the adoption of SFAS No. 143.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long- Lived Assets," effective October 1, 2002. SFAS No. 144
addressed the financial accounting and reporting for the impairment or
disposal of long-lived assets. As a result of the adoption of SFAS No.
144, the Company recognized a $600,000 loss on disposal of certain
locations in the third quarter of fiscal 2003. See "Footnote A of Notes to
Condensed Consolidated Financial Statements."
The Company adopted SFAS No. 145, "Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," effective October 1, 2002. SFAS No. 145 rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," and an amendment
of that Statement, and SFAS No. 64, "Accounting for Leases," to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications
that have economic effects that are similar to sale- leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. There was no impact
on the Company's consolidated financial position or results of operations
as a result of the adoption of SFAS No. 145.
The Company adopted SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities," effective January 1, 2003. SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment
to an exit or disposal plan. Previous accounting guidance was provided by
Emerging Issues Task Force ("EITF") No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)," which required
that a liability for costs associated with an exit plan or disposal
activity be recognized at the date of an entity's commitment to an exit
plan. There was no impact on the Company's consolidated financial position
or results of operations as a result of the adoption of SFAS No. 146.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an Amendment of
FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation," to provide alternative methods of transition
for a voluntary change to the fair value based method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and
-13-
G. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
the effect of the method used on reported results. The disclosure
requirements apply to all companies for fiscal years ending after December
15, 2002. The interim disclosure provisions are effective for financial
reports containing financial statements for interim periods beginning
after December 15, 2002. The adoption of SFAS No. 148 had an impact on the
Company's disclosure requirements, but had no impact on the Company's
consolidated financial statements.
The Company has chosen to continue to account for stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees", and
related interpretations for all periods represented. Accordingly,
compensation cost for stock options is measured as the excess, if any, of
the fair value of the Company's common stock at the date of the grant over
the amount an employee must pay to acquire the stock. The following table
illustrates the effect on net loss and net loss per share if the Company
had applied the fair value recognition provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", to stock-based employee
compensation (in thousands, except per share data):
Quarter Ended Three Quarters Ended
July 3, July 4, July 3, July 4,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net loss, as reported $ (927) $ (145) $ (9,172) $ (1,173)
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (7) (40) (9) (67)
------------ ------------ ------------ ------------
Pro forma net loss $ (934) $ (185) $ (9,181) $ (1,240)
============ ============ ============ ============
Basic and diluted net loss per share
as reported $ (0.13) $ (0.02) $ (1.28) $ (0.17)
Pro forma basic and diluted net loss
per share $ (0.13) $ (0.03) $ (1.28) $ (0.18)
-14-
G. RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED):
In November 2002, the EITF reached a consensus on Issue No. 02-16,
"Accounting by a Reseller for Cash Consideration Received from a Vendor."
Issue 02-16 provides guidance on when to classify consideration received
from a vendor as a reduction of the price of the vendor's products, a
reimbursement of costs incurred or as revenue. In addition, Issue 02-16
provides guidance on when to recognize rebates or refunds of a specified
amount of cash consideration from a vendor that are based on the
achievement of a specified cumulative level of purchases or are based on
the customer purchasing from the vendor for a specified period of time.
The guidance in Issue 02-16 has been adopted by the Company and there was
no impact on the Company's consolidated financial position or results of
operations as a result of the guidance in 02-16.
In November of 2002, the FASB issued FASB Interpretation ("FIN") No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees
Including Indirect Guarantees of Indebtedness of Others." FIN No. 45
requires entities to establish liabilities for certain types of
guarantees, and expands financial statement disclosures for others. The
accounting requirements of FIN No. 45 are effective for guarantees issued
or modified after December 31, 2002, and the disclosure requirements are
effective for financial statements of interim or annual periods ending
after December 15, 2002. There was no impact on the Company's consolidated
financial position or results of operations as a result of the adoption of
FIN No. 45.
The FASB issued Interpretation No. 46, "Consolidation of Variable Interest
Entities" ("FIN 46"). FIN 46 applies immediately to variable interest
entities created after January 31, 2003, and to variable interest entities
in which an enterprise obtains an interest after that date. Based on
management's assessment as of the date of this report, the Company does
not have any interests in variable interest entities as defined in FIN 46
that would require disclosure in the consolidated financial statements as
of July 3, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement No.
133 on Derivative Instruments and Hedging Activities." This Statement
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts. This Statement clarifies under what circumstances a contract
with an initial net investment meets the characteristic of a derivative,
clarifies when a derivative contains a financing component, amends the
definition of an underlying to conform it to language used in FASB
Interpretation ("FIN") No. 45, and amends certain other existing
pronouncements. FAS No. 149 is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated
after June 30, 2003. All provisions of the Statement, except those related
to forward purchases or sales of "when-issued" securities, should be
applied prospectively. The Company currently has no instruments that meet
the definition of a derivative, and therefore, the adoption of this
Statement will have no impact on the Company's financial position or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity." This Statement establishes standards for the classification and
measurement of certain financial instruments with characteristics of both
liabilities and equity. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise
effective at the beginning of the first interim period beginning after
June 15, 2003. The Company currently has no financial instruments which
meet these requirements.
-15-
H. COMMITMENTS AND CONTINGENCIES:
(1) Leases -- The Company leases its corporate headquarters, 126 of its
store locations, certain equipment, offices, and maintenance and
storage facilities. Future minimum lease payments under capital
leases and noncancellable operating leases with initial or remaining
terms in excess of one year at July 3, 2003 are shown below. Some of
the leases provide for additional rentals when sales exceed a
specified amount and contain variable renewal options and escalation
clauses.
Capital Operating Rental
Leases Leases Income
------------ ------------ ------------
(In thousands)
Three months ending
September 30, 2003 $ 37 $ 1,541 $ 195
Fiscal Year 2004 140 5,815 622
Fiscal Year 2005 31 4,544 495
Fiscal Year 2006 31 3,295 322
Fiscal Year 2007 31 3,091 244
Thereafter 21 8,037 381
------------ ------------ ------------
Total future minimum
lease payments 291 $ 26,323 $ 2,259
============ ============
Less amount representing
interest 48
------------
Present value of future
payments 243
Less current maturities 102
------------
$ 141
============
(2) Litigation -- The Company is involved in litigation and other legal
matters which have arisen in the normal course of business. Although
the ultimate results of these matters are not currently
determinable, management does not expect that they will have a
material adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
I. CHANGES IN SECURITIES:
During the first three quarters of fiscal 2003, the Uni-Marts, Inc.
Retirement Savings and Incentive Plan purchased 24,323 shares of the
Company's treasury stock for $128,045 to fund its 401(k) retirement plan,
resulting in a decline of additional paid-in capital of $99,525. The
Company issued 31,000 shares of common stock to its non-employee
directors, as part of their annual retainer, and 1,524 shares of common
stock to the Company's employee stock purchase plan. The issuance of these
shares resulted in an increase of $38,780 to additional paid-in capital.
The net effect of these transactions in the first three quarters of fiscal
2003 was a decrease to additional paid-in capital of $60,745.
-16-
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OPERATING DATA (RETAIL LOCATIONS ONLY)
Set forth below are selected unaudited consolidated financial data of the
Company for the periods indicated:
QUARTER ENDED THREE QUARTERS ENDED
JULY 3, JULY 4, JULY 3, JULY 4,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues:
Merchandise sales 48.1% 52.4% 48.6% 54.8%
Gasoline sales 51.4 47.0 50.9 44.6
Other income 0.5 0.6 0.5 0.6
------------ ------------ ------------ ------------
Total revenues 100.0 100.0 100.0 100.0
Cost of sales 81.3 79.0 80.5 77.6
------------ ------------ ------------ ------------
Gross profit:
Merchandise (as a percentage of
merchandise sales) 30.0 30.7 30.3 31.2
Gasoline (as a percentage of
gasoline sales) 7.4 9.2 8.4 10.5
Total gross profit 18.7 21.0 19.5 22.4
Costs and expenses:
Selling 13.3 14.4 14.1 15.7
General and administrative 2.4 3.1 2.6 3.2
Depreciation and amortization 1.5 1.7 1.6 1.9
Interest 1.1 1.3 1.2 1.5
------------ ------------ ------------ ------------
Total expenses 18.3 20.5 19.5 22.3
Earnings (loss) from continuing operations
before income taxes and change in
accounting principle 0.4 0.5 (0.0) 0.1
Income tax provision 0.1 0.2 0.0 0.0
------------ ------------ ------------ ------------
Earnings (loss) from continuing operations
before change in accounting principle 0.3 0.3 (0.0) 0.1
------------ ------------ ------------ ------------
Discontinued operations:
Loss from discontinued operations (0.9) (0.7) (1.3) (1.1)
Loss on disposal of discontinued operations (0.6) 0.0 (0.3) 0.0
Income tax benefit 0.0 (0.2) (0.1) (0.4)
------------ ------------ ------------ ------------
Loss on discontinued operations (1.5) (0.5) (1.5) (0.7)
Cumulative effect of change in
accounting principle, net of income tax
benefit 0.0 0.0 (2.6) 0.0
------------ ------------ ------------ ------------
Net loss (1.2)% (0.2)% (4.1)% (0.6)%
============ ============ ============ ============
-17-
RESULTS OF OPERATIONS:
RISKS THAT COULD AFFECT FUTURE RESULTS
A number of the matters and subject areas discussed in this Item 2 "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
elsewhere in this Form 10-Q that are not historical or current facts, including
statements regarding the Company's plans and strategies or future financial
performance, deal with potential future circumstances and developments. These
forward-looking statements frequently can be identified by the use of
terminology such as "believes," "expects," "may," "will," "should" or
"anticipates" (or the negative or other variations thereof) or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
Although the Company believes that its expectations are based on reasonable
assumptions within the bounds of its knowledge, investors and prospective
investors are cautioned that such statements are only projections and that
actual events or results may differ materially from those expressed in any such
forward-looking statements. In addition to other factors described elsewhere in
this report, the Company's actual consolidated quarterly or annual operating
results have been affected in the past, or could be affected in the future, by
factors, including, without limitation, general economic, business and market
conditions; environmental, tax and tobacco legislation or regulation; volatility
of gasoline prices, margins and supplies; competition and ability to maintain
merchandising margins; the ability to successfully consummate the Company's
divestiture program; the sufficiency of cash balances, cash from operations and
cash from asset sales to meet future cash obligations; volume of customer
traffic; weather conditions; labor costs; and the level of capital expenditures.
OVERVIEW
In the last twelve months, the Company continued its store evaluation and
strategic initiative program. During that period, three convenience stores and
one Choice Cigarette Discount Outlet ("Choice") were closed, and three
convenience stores, one Choice and two non-operating locations were sold. The
Company opened two Choice stores during this period.
From April 2002 until December 2002, the Company had retained financial advisors
to assist in the exploration and evaluation of all of its strategic alternatives
to enhance stockholder value. As a result of its analysis with its financial
advisors, the Company has intensified its divestiture strategy for certain
underperforming store locations and non-operating assets. In January 2003, the
Company entered into a new financial advisory agreement with one of these
financial advisors to assist in negotiations with the Company's debt holders to
permit the Company's ongoing divestiture plan. If the disposition of assets is
successful and is in excess of certain amounts, the Company's executive officers
will be eligible to receive bonuses pursuant to a Transaction Success Bonus Plan
adopted by the Company. The aggregate amount of such bonuses will be based upon
the total consideration received for such assets. If the Company is unsuccessful
in consummating proposed asset sales, the Company could encounter liquidity
problems. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations --Liquidity and Capital Resources."
-18-
QUARTERS ENDED JULY 3, 2003 AND JULY 4, 2002
At July 3, 2003, the Company operated 294 stores, which were comprised of 227
Uni-Mart convenience stores and 67 Choice stores. Of these locations, three were
franchised and 238 offered self-service gasoline. The Company sold one
non-operating location in the third fiscal quarter. The Company had six fewer
convenience stores and one less Choice store in operation in the third fiscal
quarter ended July 3, 2003 compared to the third fiscal quarter ended July 4,
2002.
In the third quarter ended July 3, 2003, the Company reclassified on its balance
sheet $40.6 million in assets relating to 130 stores that the Company plans to
sell or sublet, as assets of discontinued operations, and classified the income
and expense of such stores as discontinued operations. Although these stores are
now classified as discontinued operations, the Company intends to continue to
operate these stores pending successful negotiation of their sale or sub-lease.
For the third quarter of fiscal 2003, ended July 3, 2003, total revenues from
continuing operations were $75.3 million, an increase of $6.4 million, or 9.3%,
compared to total revenues of $68.9 million for the third quarter of fiscal
2002. The increase in revenues is principally due to a $6.3 million, or 19.5%,
increase in gasoline sales to $38.7 million compared to gasoline sales of $32.4
million in the third quarter of fiscal 2002. This increase is primarily the
result of a 27.3 cent per gallon increase in the average retail price per gallon
of petroleum sold at the Company's locations when compared to the third quarter
of fiscal 2002, offset by a 1.6 million, or 5.1%, decline in the total number of
gasoline gallons sold. The 27.3 cent per gallon price increase includes a 25.9
cent per gallon gasoline tax for the Company's Pennsylvania stores in June 2003
as a result of the Company's change in its payment method for gasoline taxes.
Prior to June 2003, the Company did not include gasoline taxes either in its
revenues or its cost of sales. The Company had the ability to defer payment of
such taxes until the due date established by the Pennsylvania Department of
Revenue based on sales gallons. This deferral of taxes was permitted because the
Company had posted a liquid fuels tax bond with the Pennsylvania Department of
Revenue. In June 2003, the bond expired and the Company began paying gasoline
taxes at the time payment for the gasoline is due. Accordingly, since June 2003,
the Company has included gasoline taxes in its revenues and its cost of sales.
This change has no effect on gross profits. Although the Company will pay the
taxes sooner, the Company will no longer incur the $103,000 cost of the liquid
fuels tax bond. Merchandise sales increased by $149,000, or 0.4%, to $36.2
million, compared to merchandise sales of $36.1 million in the third quarter of
fiscal 2002. Other income declined by $70,000 to $341,000 for the current fiscal
quarter. Merchandise sales from continuing operations at comparable stores
increased by 0.4%, while gasoline gallons sold from continuing operations at
comparable stores declined by 1.1% in the third quarter of fiscal 2003 compared
to the third quarter of fiscal 2002.
Gross profits on merchandise sales were $10.9 million, a decline of $225,000, or
2.0%, compared to merchandise gross profits of $11.1 million in the third
quarter of fiscal 2002. A 0.7% decline in the merchandise gross margin rate, in
addition to fewer stores in operation in the current fiscal quarter, contributed
to the decline in merchandise gross margins for the third quarter of fiscal
2003.
Gross profits on gasoline sales declined by $100,000, or 3.3%, to $2.9 million
in the third quarter of fiscal 2003 compared to gasoline gross profits of $3.0
million in the third quarter of fiscal 2002. Gasoline gross profits per gallon
sold increased by 1.9%, while total gallons sold declined by 5.1% in the current
fiscal quarter. Fewer stores in operation as well as the effects of poor weather
conditions in the current fiscal quarter compared to the same quarter of fiscal
2002, contributed to the decline in gasoline gallon sales.
-19-
Selling expenses increased by 0.5% to $10.0 million, as higher maintenance costs
were offset by fewer stores in operation for the third quarter of fiscal 2003.
General and administrative expense declined by $335,000, or 15.8%, to $1.8
million due to a reduction in the number of employees and a decline in
miscellaneous expenses in the current fiscal quarter. Depreciation and
amortization expense declined by $25,000, or 2.1%, to $1.1 million as the result
of the adoption of SFAS 142, lower levels of capital expenditures and fewer
stores in operation in the current fiscal quarter. Interest expense declined by
10.0% to $824,000 for the third quarter of fiscal 2003, due to lower borrowing
rates and levels in the third fiscal quarter of 2003, in comparison to the third
fiscal quarter of 2002.
For the third quarter of fiscal 2003, net earnings from continuing operations,
before income taxes and change in accounting principle, were $311,000, compared
to net earnings from continuing operations, before income taxes and change in
accounting principle, of $303,000 in the third quarter of fiscal 2002. The
Company recorded a provision for income taxes of $60,000, compared to an income
tax provision of $104,000 in the third quarter of fiscal 2002. The Company
reported net earnings from continuing operations before the change in accounting
principle of $251,000, or $0.03 per share, for the third quarter of fiscal 2003,
compared to net earnings from continuing operations before the change in
accounting principle of $199,000, or $0.03 per share, for the prior year's third
fiscal quarter.
The loss from discontinued operations was $685,000 compared to a loss of
$503,000 in the third quarter of fiscal 2002. The increase in loss from
discontinued operations was the result of lower gross profits on merchandise and
gasoline sales, offset by lower depreciation and amortization and interest
expenses. In the third quarter of fiscal 2003, a loss on disposal of
discontinued operations was recorded for $472,000, which includes a provision
for loss on disposal of $600,000 relating to the future disposals of 23
locations anticipated to be sold in the fourth quarter of fiscal 2003, offset by
a gain on the sale of one non-operating location in the third fiscal quarter.
The Company had no provision in the third quarter of fiscal 2002 for the loss on
disposal of discontinued operations. In the third quarter of fiscal 2003, the
Company recorded a tax provision of $21,000, compared to a tax benefit of
$159,000 for the comparable period of fiscal 2002. The net loss on discontinued
operations for the third fiscal quarter of 2003 was $1.2 million, or $0.16 per
share, compared to a net loss on discontinued operations of $344,000, or $0.05
per share, in the third quarter of fiscal 2002.
During fiscal 2003, the Company increased its valuation allowance against the
deferred tax asset because it was determined that it is more likely than not
that the Company will not be able to fully utilize the NOL's. This increase in
the reserve has resulted in a 9.6% tax provision in comparison to a 28.0% tax
benefit in the third quarter of fiscal 2002.
Total net losses for the quarter ended July 3, 2003 were $927,000, or $0.13 per
share, compared to total net losses of $145,000, or $0.02 per share, for the
third quarter of fiscal 2002.
THREE QUARTERS ENDED JULY 3, 2003 AND JULY 4, 2002
Total revenues from continuing operations for the first three quarters of fiscal
2003 were $214.6 million, an increase of $24.6 million, or 13.0%, compared to
total revenues of $190.0 million for the three quarters ended July 4, 2002.
Revenues increased due principally to a $24.6 million, or 29.0%, increase in
gasoline sales for the current reporting period to $109.2 million, compared to
$84.7 million for the first nine months of fiscal 2002. The increase in gasoline
sales was due to a 28.8 cent per gallon increase in the average retail price per
gallon of petroleum sold in the current reporting period, as the result of
higher retail petroleum prices in the first nine months of fiscal 2003. For the
first nine months of fiscal 2003, merchandise sales increased slightly to $104.3
million, compared to merchandise sales
-20-
of $104.1 million in the first nine months of fiscal 2002. At comparable stores,
merchandise sales from continuing operations increased by 0.6% and gasoline
gallons sold at comparable stores increased by 1.2% from the first nine months
of fiscal 2002. Other income declined by $117,000, or 9.7%, to $1.1 million for
the current nine-month period.
Gross profits on merchandise sales were $31.6 million, a 2.7% decline compared
to merchandise gross profits of $32.5 million for the first nine months of
fiscal 2002. A slight increase in merchandise sales levels was offset by a 0.9%
decline in the merchandise gross margin rate for the first three quarters of
fiscal 2003.
Gross profits on gasoline sales for the first three quarters of fiscal 2003
increased by 2.8% to $9.1 million compared to gasoline gross profit margins of
$8.9 million reported in the first three quarters of fiscal 2002. The increase
was due to a 2.5% increase in the gross margin rate per gallon sold and a 0.3%
increase in gasoline gallons sold in the first nine months of fiscal 2003.
Selling expenses increased by 1.3% to $30.2 million due to increases in credit
card fees resulting from higher retail petroleum prices and higher levels of
store maintenance. General and administrative expense declined by 8.0% to $5.7
million for the first nine months of fiscal 2003 due to fewer employees, offset
by increased legal and professional fees. Depreciation and amortization expense
for the first nine months of fiscal 2003 declined by 4.7% to $3.4 million due to
the adoption of SFAS No. 142, lower levels of capital expenditures and fewer
stores in operation. Interest expense declined by 5.0% to $2.6 million for the
first nine months of fiscal 2003 compared to $2.8 million for the first nine
months of fiscal 2002 due to lower interest rates and borrowing levels.
For the first nine months of fiscal 2003, net losses from continuing operations,
before income taxes and change in accounting principle, were $117,000, compared
to net earnings from continuing operations, before income taxes and change in
accounting principle, of $234,000 for the first nine months of fiscal 2002. The
Company recorded a provision for income taxes of $41,000, compared to an income
tax provision of $79,000 for the first nine months of fiscal 2002. Net losses
from continuing operations before a change in accounting principle were
$158,000, or $0.02 per share, compared to net earnings from continuing
operations before the change in accounting principle of $155,000, or $0.02 per
share, for the first nine months of fiscal 2002.
The Company reported a loss from discontinued operations of $2.9 million for the
first nine months of fiscal 2003, compared to a net loss from discontinued
operations of $2.0 million in the first nine months of fiscal 2002. The increase
in loss from discontinued operations was primarily the result of lower
merchandise and gasoline gross profits, increased credit card fees resulting
from higher petroleum prices and higher levels of store maintenance, offset by
reductions in depreciation and amortization and interest expenses. In the three
quarters ended July 3, 2003, the loss on disposal of discontinued operations was
$720,000 in comparison to no loss in the comparable period of fiscal year 2002.
The Company recorded an income tax benefit of $110,000 for the loss on
discontinued operations for the first nine months of fiscal year 2003, compared
to an income tax benefit of $684,000 for the same period of fiscal year 2002.
Net losses on discontinued operations for the nine months ended July 3, 2003 was
$3.5 million, or $0.48 per share, compared to a net loss of $1.3 million, or
$0.19 per share, for the first nine months of fiscal 2002.
The loss from change in accounting principle for the first nine-months of fiscal
2003 was a one-time, non-cash charge of $5.5 million, or $0.78 per share, due to
the adoption of SFAS 142 and the write-off of the Company's goodwill.
-21-
During fiscal 2003, the Company increased its valuation allowance against the
deferred tax asset because it was determined that it is more likely than not
that the Company will not be able to fully utilize the NOL's. This increase in
the reserve has resulted in a 4.0% tax benefit in comparison to a 34.0% tax
benefit in the first three quarters of fiscal 2002.
Total net losses for the three quarters ended July 3, 2003 were $9.2 million, or
$1.28 per share, compared to total net losses of $1.2 million, or $0.17 per
share, for the three quarters ended July 4, 2002.
LIQUIDITY AND CAPITAL RESOURCES:
Most of the Company's sales are for cash and its inventory turns over rapidly.
As a result, the Company's daily operations generally do not require large
amounts of working capital. From time to time, the Company utilizes portions of
its cash to construct new stores and renovate existing locations.
As of April 1, 2003, the Company amended its revolving credit agreement (the
"Agreement") to extend the maturity date to December 31, 2004 and revise
covenants relating to interest and fixed- charge coverage ratios. At July 3,
2003, $3.8 million was available for borrowing under this Agreement. See
Footnote D to the Consolidated Financial Statements included in this report for
additional information regarding the Agreement. In addition, the Company's
liquid fuels tax bond expired in the third fiscal quarter of 2003. Due to the
expiration of the bond, the Company will pay the liquid fuels tax on purchases
(presently 25.9 cents per gallon) directly to the vendors within its normal
payment terms. The Company intends to utilize its amended working capital credit
facility to mitigate the cash flow impact of the liquid fuels tax bond
expiration, resulting in increased borrowings of approximately $2.1 million on
average throughout the year.
Capital requirements for debt service and capital leases for the balance of
fiscal year 2003 are approximately $8.2 million, which includes $7.6 million in
revolving credit that has been classified as current. The Company anticipates
capital expenditures in the remainder of fiscal year 2003 of $500,000, funded by
cash flows from operations. These capital expenditures include normal
replacement of store equipment and gasoline-dispensing equipment and upgrading
of the Company's in-store and corporate data processing systems.
Operating lease commitments for the remainder of fiscal year 2003 are
approximately $1.5 million. These commitments for fiscal years 2004, 2005, 2006
and 2007 are approximately $5.8 million, $4.5 million, $3.3 million, and $3.1
million, respectively.
Management believes that cash from operations, available credit facilities and
asset sales will be sufficient to meet the Company's obligations for the
foreseeable future. In the event that the Company is unable to successfully
consummate proposed asset sales, there is risk that the Company will not be able
to meet future cash obligations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The discussion and analysis of the Company's financial condition and results of
operations are based upon its consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements
-22-
requires the Company to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, and expenses, and related disclosure
of contingent assets and liabilities. On an on- going basis, the Company
evaluates its estimates, including those related to self-insured liabilities,
impairment of long-lived assets and goodwill and income taxes. The Company bases
its estimates on historical experience, current and anticipated business
conditions, the condition of the financial markets, and various other
assumptions that are believed to be reasonable under existing conditions. Actual
results may differ from these estimates.
The Company believes that the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements:
Self-insurance liabilities -- The Company records estimates for self-insured
worker's compensation and general liability insurance coverage. Should a greater
amount of claims occur compared to what was estimated, or costs increase beyond
what was anticipated, reserves recorded may not be sufficient, and additional
expense may be recorded.
Impairment -- The Company evaluates long-lived assets, including stores, for
impairment quarterly, or whenever events or changes in circumstances indicate
that the assets may not be recoverable. The impairment is measured by
calculating the estimated future cash flows expected to be generated by the
store, and comparing this amount to the carrying value of the store's assets.
Cash flows are calculated utilizing individual store forecasts and total company
projections for the remaining estimated lease lives of the stores being
analyzed. Should actual results differ from those forecasted and projected, the
Company may be subject to future impairment charges related to these facilities.
During the first quarter of fiscal year 2003, the Company adopted Statement of
Financial Accounting Standards ("SFAS") Nos. 142 and 144. SFAS No. 142 requires
that assets with indefinite lives not be amortized but tested annually for
impairment and provides specific guidance for such testing. SFAS No. 144
provides additional guidance for impairment testing and determination of when an
asset is considered to be for sale. The Company completed its impairment test
during the second quarter of fiscal 2003 and the adoption of SFAS No. 142
resulted in the write-off of goodwill in the amount of $5,857,000. Furthermore,
in accordance with the adoption of SFAS No. 144, the Company reclassified as
assets of discontinued operations $40.6 million in assets relating to 130 stores
that the Company plans to sell or sublet, and classified the income and expense
of such stores as discontinued operations. In addition, the Company recognized a
$600,000 loss relating to the future disposal of certain locations that were
expected to be sold in the fourth quarter of 2003. Negotiations for the sale of
18 locations, which were expected to take place in the fourth fiscal quarter,
were terminated. The Company cannot be certain that sales of assets will occur
at the time or for the values that the Company estimates.
Income taxes -- The Company currently has NOL's that can be utilized to offset
future income for federal and state tax purposes. These NOL's generate a
significant deferred tax asset. However, the Company has recorded a valuation
allowance against this deferred tax asset as it has determined that it is more
likely than not that it will not be able to fully utilize the NOL's. Should the
Company's assumptions regarding the utilization of these NOL's change, it may
reduce some or all of this valuation allowance, which would result in the
recording of an income tax benefit.
-23-
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company uses its revolving credit facility and its mortgage and equipment
loans to finance a significant portion of its operations. These on-balance sheet
financial instruments, to the extent they provide for variable rates of
interest, expose the Company to interest rate risk resulting from changes in the
LIBOR or prime rate.
To the extent that the Company's financial instruments expose the Company to
interest rate risk, they are presented in the table below. The table presents
principal cash flows and related interest rates by year of maturity for the
Company's revolving credit facility, mortgage loans and equipment loans at July
3, 2003.
The carrying amounts of cash and short-term debt approximate fair value. The
Company estimates the fair value of its long-term, fixed-rate debt generally
using discounted cash flow analysis based on the Company's current borrowing
rates for debt with similar maturities. The Company estimates the fair value of
its long-term, variable-rate debt based on carrying amounts plus unamortized
loan fees associated with the debt.
FISCAL YEAR OF MATURITY
(DOLLAR AMOUNTS IN THOUSANDS)
TOTAL FAIR
DUE AT VALUE AT
2003 2004 2005 2006 2007 THEREAFTER MATURITY 7/3/03
------- ------- ------- ------- ------- ---------- -------- --------
Interest-rate sensitive assets:
Noninterest-bearing
checking accounts $ 2,182 $ 0 $ 0 $ 0 $ 0 $ 0 $ 2,182 $ 2,182
Interest-bearing
checking accounts $ 1,587 $ 0 $ 0 $ 0 $ 0 $ 0 $ 1,587 $ 1,587
Average interest rate 1.15% 1.15% --
------- ------- ------- ------- ------- --------- ------- -------
Total $ 3,769 $ 0 $ 0 $ 0 $ 0 $ 0 $ 3,769 $ 3,769
Total average interest rate 0.48% 0.48% --
Interest-rate sensitive
liabilities:
Variable-rate borrowings $ 8,008 $ 1,945 $ 2,051 $ 2,164 $ 2,282 $ 24,230 $40,680 $40,680
Average interest rate 4.98% 5.07% 5.07% 5.07% 5.07% 5.07% 5.05% --
Fixed-rate borrowings $ 205 $ 1,214 $ 1,347 $ 1,492 $ 1,652 $ 32,920 $38,830 $42,013
Average interest rate 9.34% 9.34% 9.34% 9.34% 9.34% 9.35% 9.34% --
------- ------- ------- ------- ------- --------- ------- -------
Total $ 8,213 $ 3,159 $ 3,398 $ 3,656 $ 3,934 $ 57,150 $79,510 $82,693
Total average interest rate 5.09% 7.38% 7.41% 7.45% 7.49% 7.53% 7.40% --
-24-
ITEM 4 - CONTROLS AND PROCEDURES
CEO AND CFO CERTIFICATIONS. Appearing as Exhibits 31.1 and Exhibit 31.2 of this
Quarterly Report are two certifications, one by each of our Chief Executive
Officer and our Chief Financial Officer (the "Section 302 Certifications"). This
Item 4 of our Quarterly Report contains information concerning the evaluation of
the Company's disclosure controls and procedures and matters regarding our
internal controls that are referred to in the Section 302 Certifications. This
information should be read in conjunction with the Section 302 Certifications
for a more complete understanding of the topics presented.
EVALUATION OF OUR DISCLOSURE CONTROLS AND PROCEDURES. The Securities and
Exchange Commission (the "SEC") requires that as of the end of the quarter
covered by this Report, the CEO and the CFO must evaluate the effectiveness of
the design and operation of our disclosure controls and procedures and report on
the effectiveness of the design and operation of our disclosure controls and
procedures.
"Disclosure controls and procedures" mean the controls and other procedures that
are designed with the objective of ensuring that information required to be
disclosed in our reports filed under the Securities Exchange Act of 1934 (the
"Exchange Act"), such as this Quarterly Report, is recorded, processed,
summarized and reported within the time periods specified in the rules and forms
promulgated by the Securities and Exchange Commission (the "SEC"). Disclosure
controls and procedures are also designed with the objective of ensuring that
such information is accumulated and communicated to our management, including
the CEO and CFO, as appropriate to allow timely decisions regarding required
disclosure.
EVALUATION OF OUR INTERNAL CONTROL OVER FINANCIAL REPORTING. The SEC also
requires that the CEO and CFO certify certain matters regarding our internal
control over financial reporting.
"Internal control over financial reporting" means the process designed by, or
under the supervision of, our CEO and CFO, and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles and includes those policies and procedures that: (i)
pertain to the maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of the issuer;
(ii) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the issuer are
being made only in accordance with authorizations of management and directors of
the issuer; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use or disposition of the issuer's
assets that could have a material effect on the financial statements.
Among the matters our CEO and CFO must certify in the Section 302 Certifications
are whether all "significant deficiencies" or "material weakness" in the design
or operation of our internal control over financial reporting that are likely to
adversely affect our ability to record, process, summarize and report financial
information have been disclosed to our auditors and the Audit Committee of our
Board of Directors. "Significant deficiencies" has the same meaning as the term
"reportable conditions" in auditing literature. Both terms represent
deficiencies in the design or operation of internal control over financial
reporting that could adversely affect a company's ability to record, process,
summarize and report financial data consistent with the assertions of management
in a company's financial statements. A "material weakness" is defined in the
auditing literature as a particularly serious reportable condition
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where the design or operation of one or more internal control over financial
reporting components does not reduce to a relatively low level the risk that
misstatements caused by error or fraud may occur in amounts that would be
material in relation to the financial statements and not be detected within a
timely period by employees in the normal course of performing their assigned
functions. A "material weakness" constitutes a greater deficiency than a
"significant deficiency, but an aggregation of significant deficiencies may
constitute a material weakness in a company's internal control over financial
reporting.
LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS. The Company's management,
including the CEO and CFO, does not expect that our disclosure controls and
procedures or our internal controls will prevent all error and all fraud. A
control system, no matter how well conceived and operated, can provide only
reasonable, as opposed to absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within an entity have been
detected. These inherent limitations include the realities that judgments in
decision-making can be faulty, and that breakdowns can occur because of simple
error or mistake. Additionally, controls can be circumvented by the individual
acts of some persons, by collusion of two or more people, or by management
override of the control. The design of any system of controls also is based in
part upon certain assumptions about the likelihood of future events, and there
can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions; over time, control may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.
CEO/CFO CONCLUSIONS ABOUT THE EFFECTIVENESS OF THE DISCLOSURE CONTROLS AND
PROCEDURES. As required by Rule 13a-15(b), the Company's management, including
our CEO and CFO, conducted an evaluation as of the end of the period covered by
this report, of the effectiveness of the Company's disclosure controls and
procedures. Based on that evaluation, the CEO and CFO concluded that, subject to
the limitations noted above, our disclosure controls and procedures are
effective to provide reasonable assurance that the disclosure controls and
procedures will meet their objectives.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. As required by Rule
13a-15(d), the Company's management, including the CEO and CFO conducted an
evaluation of the Company's internal control over financial reporting to
determine whether any changes occurred during the period covered by this report
that have materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting. Based on that
evaluation, there has been no such change during the quarter covered by this
report.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.1 Amended and Restated Certificate of Incorporation of the Company (Filed
as exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the
period ended July 4, 2002 and incorporated herein by reference
thereto).
3.2 Amended and Restated By-Laws of the Company (Filed as exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q for the period ended July
4, 2002 and incorporated herein by reference thereto).
11 Statement regarding computation of per share loss.
31.1 Certification of the Chairman and Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002.
32.1 Certification of the Chairman and Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002.
(b) REPORTS ON FORM 8-K
The Company filed a report on Form 8-K on April 28, 2003, announcing its
financial results for the fiscal 2003 second quarter, ended April 3, 2003.
The Company filed a report on Form 8-K on June 3, 2003, announcing the
execution of a letter of intent for the sale of the Company to HFL
Corporation.
The Company filed a report on Form 8-K on June 19, 2003, announcing the
termination of the letter of intent with HFL Corporation.
-27-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Uni-Marts, Inc.
(Registrant)
------------------------------
Date August 15, 2003 /S/ HENRY D. SAHAKIAN
--------------- ------------------------------
Henry D. Sahakian
Chairman of the Board
(Principal Executive Officer)
Date August 15, 2003 /S/ N. GREGORY PETRICK
--------------- ------------------------------
N. Gregory Petrick
Executive Vice President and
Chief Financial Officer
(Principal Accounting Officer)
(Principal Financial Officer)
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UNI-MARTS, INC. AND SUBSIDIARIES
EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
11 Statement regarding computation of per share loss.
31.1 Certification of the Chairman and Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes- Oxley Act of 2002.
32.1 Certification of the Chairman and Chief Executive Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of the Chief Financial Officer pursuant to Section 906
of the Sarbanes- Oxley Act of 2002.
-29-