ITEM 1. BUSINESS.
COMPANY OVERVIEW
Uni-Marts, Inc. (the "Company" or "Uni-Marts") is an independent operator of convenience stores and discount tobacco stores. At September 30, 1999, the Company operated 234 convenience stores and 22 Choice Cigarette Discount Outlets ("Choice") stores in Pennsylvania, New York, Delaware, Maryland and Virginia, of which 182 convenience stores and 12 Choice stores sold gasoline. See "Business -- Merchandising and Marketing." Most of the stores are located in small towns and rural locations where costs of operation are generally lower than in urban areas. Most Company stores located in urban and suburban areas have been acquired and are generally leased on a long-term basis.
The Company currently purchases gasoline for 32 locations from Exxon and Mobil and for 161 locations from other independent suppliers. Gasoline is sold at one location on a commission basis.
The size of the Company's stores generally ranges from approximately 1,200 to 3,300 square feet with newer stores generally having over 3,000 square feet. The Company's largest location is 10,000 square feet in size. Typically, the stores offer a complete line of over 2,500 popular consumer items. In addition, the Company offers products designed to increase store traffic, such as branded fast foods, as well as services, including the sale of lottery tickets, the acceptance of personal checks and automated teller machines ("ATMs").
The Company commenced its convenience store operations in 1972 and was incorporated in Delaware in 1977. In 1986, the Company's shares were distributed in a tax-free spin-off to the holders of the stock of Unico Corporation, formerly the Company's parent. The Company's executive offices are located at 477 East Beaver Avenue, State College, PA 16801-5690, and its phone number is (814) 234-6000.
THE CONVENIENCE STORE INDUSTRY
The convenience store industry is a retail, service-oriented industry. It is distinguished from other retail businesses by its emphasis on location and convenience and a commitment to customers who need to purchase items quickly at extended hours. Convenience stores feature a wide variety of items, including groceries, dairy products, tobacco products, beverages, prepared and self-service fast foods and health and beauty aids. In addition, many of the stores sell gasoline on a self-service basis. The stores are generally designed with ample customer parking and quick checkout procedures to maximize convenience, as well as to encourage impulse buying of high margin items.
The convenience store industry is extremely fragmented. Currently, there are many external forces exerting pressure on owners of independent and small convenience store chains. One of the major forces is the need to comply with environmental regulations for underground storage tanks. The large capital expenditures required to comply with environmental regulations are also affecting many operators of gasoline service stations. As a result of these forces, there have been and continue to be significant opportunities for consolidation in the industry.
Recent competitive trends across many retail sectors are having a positive influence on the convenience store industry as it changes the typical convenience store's merchandise mix in reaction to market conditions and customer preferences. In addition, convenience stores compete not only with other convenience stores, but with gasoline distributors which have converted retail outlets to convenience stores. To compete for a broader customer base, convenience stores are adding prepared foods and new services and improving store layouts to attract new customers. As consumer preferences and government regulations put pressure on tobacco sales, convenience store operators are improving
gasoline dispensing facilities and installing branded fast-food outlets and ATMs. In addition, many convenience store operators have aggressively closed or remodeled underperforming stores.
STRATEGY
In fiscal year 1999, the Company reevaluated several of its key strategies to enhance its current operations. The Company's key strategies include the following:
Development of a New Image for the Company and its Stores. The Company has designed a new logo and is working on the development of new exterior and interior store designs. New proprietary products have been and continue to be developed. The Company and its marketing firm continue to develop new advertising messages and design.
Enhancement of Store Accessibility. Store sites will be easy to locate with easy ingress and egress and ample parking. Stores are designed to speed transactions and be equipped with modern, low maintenance machinery.
Merchandising and Marketing. The Company has enhanced its category maintenance capabilities to deliver appealing, high quality, reasonably priced packaged products for ease of use. Foodservice products are being developed to lower employee involvement in preparation and lower customer efforts in selection and purchase.
Upgrade Business Process Efficiency. The Company intends to update its business systems and technology to streamline key business processes. Completion of this process will allow more effective and efficient store management and provide greater flexibility to respond quickly to marketplace changes.
Evaluation of Underperforming Stores. The Company has converted 22 underperforming locations to Choice stores to enhance the profitability of these locations. In fiscal year 1999, the Company closed or sold 20 locations. In fiscal year 2000, the Company is planning to convert 16 locations to Choice stores and will convert or close other locations as conditions warrant.
The Company is continuing its emphasis on customer satisfaction, upgrading retail gasoline facilities and developing stores in small towns and rural areas.
MERCHANDISING AND MARKETING
The Company's merchandising and marketing programs are designed to promote convenience through store location, hours of operation, parking, customer service, product selection and checkout procedures. Store hours are intended to meet customer needs and the characteristics of the community in which each store is located. Approximately 80% of the Company's convenience stores are open 24 hours per day, while the majority of the remaining stores are open from 6:00 a.m. to 12:00 midnight. To alleviate checkout congestion, most of the Company's products and services are sold on a self-service basis. Most Company stores provide parking for customers.
Uni-Marts has a merchandising and marketing department which develops and implements promotional and advertising programs, sometimes in conjunction with suppliers. In November 1998, the Company retained a marketing and communications firm experienced in the convenience store industry. Television, radio, billboard and newspaper advertisements are designed to generate sales, increase customer traffic and promote the Company's name and image. The Company maintains an employee training program which emphasizes the importance of service to customers and the development of merchandising and marketing skills for its store managers and store personnel.
Convenience Store Merchandise Sales. The Company's stores offer dry grocery items, health and beauty aids, newspapers and magazines, dairy products, candy, frozen foods, beverages, tobacco products, fountain drinks and freshly-ground coffee and cappuccino products. In recent years, the Company has emphasized new merchandise products such as prepared foods and branded fast foods to increase sales volume and customer traffic. In addition, the Company continues to add customer services, such as ATMs, prepaid telephone cards, the acceptance of personal checks and lottery ticket and money order sales, all of which are designed to increase customer traffic. Many stores also offer a variety of prepared and self-service fast foods, including freshly made sandwiches, hot dogs, pizzas, fresh baked goods and nachos.
In fiscal year 1994, as part of its strategy to increase sales of branded fast foods, the Company entered into an agreement with Blimpie International ("Blimpie"). The Company presently operates 30 Blimpie locations and has franchised 24 locations with third parties. The Company receives a commission on these franchise sales.
Convenience Store Gasoline Sales. Convenience store operations and merchandise sales are enhanced by self-service gasoline facilities, which the Company plans to include in as many new locations as possible. Sales of gasoline products at the Company's stores are affected by wholesale and retail price volatility, competition and marketing decisions. At September 30, 1999, the Company had 194 locations offering gasoline, with 129 of these locations also offering kerosene.
The Company offers Exxon gasoline at 21 locations, Mobil gasoline at 11 locations and Uni-Mart branded gasoline at most other locations. One location sells branded gasoline on a commission basis.
Choice Cigarette Discount Outlets. During fiscal year 1999, the Company converted two underperforming convenience store locations to discount tobacco stores operating under the name of Choice Cigarette Discount Outlet. At September 30, 1999, the Company operated 22 Choice stores, with 12 of these locations offering unleaded gasoline. The Company expects to sell gasoline at converted locations if gasoline was sold there prior to conversion. Other convenience store locations will be converted if conditions warrant. In general, profitability has improved at locations converted to Choice stores.
COMPANY OPERATIONS
Store Management. Each Company-operated store is managed by a store manager. All Company stores are divided into groups of approximately nine stores by geographic area. Each group is managed by a store supervisor. A regional manager is responsible for a number of groups and their store supervisors. The regional managers report directly to the Senior Vice President of Operations, who oversees the day-to-day operations of the stores. Managers, supervisors and regional managers are compensated in part through incentive programs which provide for quarterly bonuses based primarily on increased profitability of the stores. The number of full-time and part-time employees per store depends on the sales volume of the store and its hours of operation.
Franchises. At September 30, 1999, the Company had ten franchise stores which operate under various franchise agreements. Under all franchise agreements, the franchisee pays a royalty, which varies depending upon the agreement and whether the Company or the franchisee owns the convenience food store equipment. The royalty is based on the store's merchandise sales volume.
As part of its services to nine franchise locations, the Company provides accounting services, merchandising and advertising assistance, store layout and design guidance, supplier and product selection and ongoing operational assistance. These franchisees are required to use the same internal control systems that the Company uses for the stores it operates. The Company does not provide these
services for one franchise location. The Company has periodically closed franchised stores and does not intend to grant new franchises except in connection with new acquisitions or in other special circumstances.
SEASONALITY
The Company's business generally has been subject to moderate seasonal influences with higher sales in the third and fourth quarters of each fiscal year, since customers tend to purchase more convenience items and gasoline during the warmer months. Due to adverse weather conditions, merchandise sales for the second fiscal quarter have generally been lower than other quarters. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Seasonality and Unaudited Quarterly Results."
DISTRIBUTION AND SUPPLY
All stores are serviced at least weekly by vendors. The Company does not distribute products to its stores itself. In order to minimize costs and facilitate deliveries, the Company utilizes a single wholesale distributor for most in-store merchandise, pursuant to a six-year supply agreement that expires in July 2004. The Company believes that it could easily replace this distributor with one or more other distributors. Certain products, such as bakery items, dairy products, snacks, soft drinks, magazines and perishable products, are distributed by wholesale route salespeople. As part of the sale of its dairy operation in fiscal 1994, the Company entered into a 10-year supply agreement with the purchaser which provides for the Company's purchase of all dairy products sold at most of its Pennsylvania stores. In fiscal year 1998, the Company entered into 10-year gasoline supply agreements with Exxon and Mobil for stores that sell approximately 28% of the Company's gasoline volume. Gasoline is purchased for the remaining stores from various suppliers. A gasoline shortage, although unlikely, could adversely affect the Company's ability to sell gasoline at these locations.
MANAGEMENT CONTROLS AND INFORMATION SYSTEMS
The company developed an internal automation system that includes point-of-sale ("POS") scanning. The system is designed to improve the timeliness and accuracy of management information, reduce paperwork at the store level and enhance cash, pricing and inventory controls. As of September 30, 1999, installation of this new POS scanning system was completed in 38 of the company's convenience stores and 22 Choice stores. A new store back office system is currently being evaluated and a planned pilot test of that software will take place in fiscal 2000.
The Company utilizes its current computer systems for inventory and accounting control, financial record-keeping and management reporting, allowing management to monitor and evaluate store operations. The Company's computer systems are also programmed to identify variances from budgeted amounts by store on a monthly and year-to-date basis. In addition, profit and loss statements by store compare the current year's results for the month and year-to-date to the previous year's comparable periods.
Store managers are responsible for placing orders for grocery, tobacco, frozen food and non-food items directly into the central computer system of the Company's wholesale supplier. The computer systems are designed to compare current orders with historical order levels and to reject orders that appear to be incorrect. Orders and receiving reports are reviewed by store supervisors. Invoices are reviewed and compared to receiving reports by the Company's accounting personnel and are paid centrally.
The Company believes that its automated accounting and inventory control systems provide the information required for management decisions and expense control. An internal review has been conducted by the Company of all software used in its data processing equipment to determine its exposure, if any, to the "year 2000 problem." This problem may cause significant difficulties with the electronic processing of information in the year 2000 and subsequent years due to the inability of many computer programs to differentiate between the years 1900 and 2000. The incremental costs to make the necessary corrections to prevent any such difficulties did not have a material effect on the Company's consolidated financial statements. As discussed more fully in "Management's Discussion and Analysis of Financial Condition and Results of Operation--Impact of the Year 2000 ("Y2K") Problem," the Company does not expect material difficulties with the Y2K problem in its internal computer systems and other systems affecting the operation of its stores.
The Company believes that its existing and planned systems and controls can accommodate significant expansion in the number of Company stores.
COMPETITION
The convenience store industry is highly competitive, fragmented and regionalized. It is characterized by a few large companies, some medium-sized companies, such as the Company, and many small independent companies. Several competitors are substantially larger and have greater resources than the Company. The Company's primary competitors include national chains such as A- Plus and 7-Eleven and regional chains such as Sheetz, WaWa, Stop-N-Go, Convenient Food Mart, Turkey Hill, Coastal and Co/Go. The Company also competes with other convenience stores, small supermarkets, grocery stores and major and independent gasoline distributors who have converted units to convenience stores.
Competition for gasoline sales is based on price and location. The Company competes primarily with self-service gasoline stations operated by independent dealers and major oil companies in addition to other convenience stores.
ENVIRONMENTAL COMPLIANCE AND REGULATION
The Company's gasoline operations are subject to federal, state and local environmental laws and regulations primarily relating to the underground storage tanks. The United States Environmental Protection Agency (the "EPA") has established standards for owners and operators of underground storage tanks ("USTs") relating to, among other things: (i) maintaining leak detection systems; (ii) upgrading UST systems; (iii) implementing corrective action in response to releases; (iv) closing out-of-use USTs to prevent future releases; (v) maintaining appropriate records; and (vi) maintaining evidence of financial responsibility for corrective action and compensating third parties for bodily injury and property damage resulting from UST releases. All states in which the Company operates also have adopted these regulatory programs.
Under current federal and certain state regulatory programs, the Company was obligated to upgrade or replace all noncomplying underground storage tanks it owns or operates to meet corrosion protection and overfill/spill containment standards by December 1998. The Company has evaluated each of its stores which sell gasoline to determine the type of expenditures required to comply with these and other requirements under the federal and state UST regulatory programs.
Management believes that the Company is currently in material compliance with all applicable federal and state laws and regulations. In the last eleven years, the Company has spent substantial amounts of money to upgrade its underground storage tanks to meet the applicable standards and requirements. The Company does not expect expenditures in fiscal year 2000 to maintain compliance at
its locations to have a material adverse effect on the Company's financial position, results of operations or cash flows. The Company has adopted a program to ensure that new gasoline installations comply with federal and state regulations and that existing locations are upgraded if required under these regulations.
GOVERNMENTAL REGULATION
In addition to the laws and regulations referred to under "Environmental Compliance and Regulation," certain other aspects of the Company's business are governed by federal, state and local statutes. As a franchisor, the Company is also subject to federal and state laws governing franchising, which include, among other matters, the commencement and termination of franchises.
A significant portion, approximately 29%, of the Company's merchandise sales is derived from the sale of tobacco products at its convenience stores and Choice stores. If the government were to impose significant regulations or restrictions on the sale of tobacco products, it could have a material adverse effect on the Company.
Management believes that the Company is currently in material compliance with all applicable federal and state laws and regulations.
TRADEMARKS
The name "UNI-MART" and the Company's UNI-MART logo were registered with the U.S. Patent and Trademark Office as of May 13, 1997, and are owned by and licensed from Uni-Marts of America, Inc., a wholly owned subsidiary of the Company.
EMPLOYEES
As of September 30, 1999, the Company had approximately 2,000 employees, approximately 900 of whom were full-time. The Company believes that its employee relations are good. None of the Company's employees are covered by a collective bargaining agreement.
ITEM 2.
ITEM 2. PROPERTIES.
The following table sets forth certain information with respect to administrative and storage facilities owned or leased by the Company as of September 30, 1999:
The Company's above-referenced leased administrative offices and storage facility in State College and Oak Hall, Pennsylvania, respectively, are leased from HFL Corporation. HFL Corporation is controlled by Henry D. Sahakian, the Company's Chairman of the Board and Chief Executive Officer, and his brother, Daniel D. Sahakian, a Director of the Company.
Of the Company's 234 convenience store locations, 118 are owned by the Company, 6 are leased from affiliated parties and 110 are leased from unaffiliated parties. Most leases are for initial terms of
five to ten years with renewal terms of five years available at the Company's option. Under most leases, the Company is responsible for the payment of insurance, taxes and maintenance. Of the leased locations, 10 are subleased to franchisees. Of the Company's 22 discount tobacco locations, six are owned by the Company, one is leased from an affiliated party and 15 are leased from unaffiliated parties. The Company also owns five gasoline service stations, which are leased to unaffiliated operators. As of September 30, 1999, the Company had no stores under construction.
The Company's store leases expire as follows:
- --------------- (1) Most of the Company's leases have one or more renewal options at an agreed upon rental or fair market rental at the end of their initial terms.
The Company has generally renewed its leases prior to their expiration. Where renewals have not been available or the Company otherwise determines to change location, the Company generally has been able to locate acceptable alternative facilities.
The lease for the Company's administrative offices in State College, Pennsylvania, expires in December 2000.
Management considers all properties currently in use, owned or leased, to be in good condition, well-maintained and suitable for current operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any material pending legal proceeding.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the American Stock Exchange under the symbol "UNI." The transfer agent and registrar for shares of the Company's Common Stock is ChaseMellon Shareholder Services, L.L.C., Ridgefield Park, New Jersey. As of December 3, 1999, the Company had 6,957,914 shares of its Common Stock outstanding.
Set forth below is a table which shows the high and low sale prices as reflected on the American Stock Exchange and dividends paid on Common Stock for each quarter in the two most recent fiscal years.
In April 1997, the Company's Board of Directors elected to temporarily suspend the quarterly dividends on its Common Stock. The dividend will be considered for reinstatement upon the Company's return to profitability. However, there can be no assurance of future dividends because they are dependent not only on future earnings, but also capital requirements and financial condition. Certain of the Company's debt agreements require the Company to maintain a minimum tangible net worth of $24 million, which could possibly restrict the Company's ability to pay dividends on its Common Stock in the future.
At December 3, 1999, the Company had approximately 354 stockholders of record of Common Stock. The Company believes that approximately 44 percent of its Common Stock is held in street or nominee names.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED CONSOLIDATED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE, PER GALLON AND NUMBER OF STORES DATA)
The following table of selected consolidated financial data of the Company, except for Operating Data and pro forma information, has been derived from the financial statements and related notes of the Company which have been audited by Deloitte & Touche LLP, Independent Auditors, as indicated in their report relating to the fiscal years ended September 30, 1999, 1998 and 1997, included elsewhere in this report. The data should be read in conjunction with the financial statements, related notes and other financial information included elsewhere in this report.
ITEM 6. SELECTED FINANCIAL DATA (CONTINUED)
- --------------- (1) In fiscal year 1997, the Company changed its method of calculating ending merchandise inventories under the retail inventory method. The cumulative effect of this accounting change, net of the income tax benefit, was approximately $1.5 million. The pro forma effect as if the accounting change was in effect in each of the years presented is as follows:
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Matters discussed below should be read in conjunction with "Statements of Operations Data" and "Operating Data (Retail Locations Only)" on the preceding pages.
The Company's revenues are derived primarily from sales of merchandise and gasoline at its convenience and discount tobacco stores. Revenues from both the sale of merchandise and gasoline at the Company's stores declined in fiscal year 1999 due to fewer stores in operation. However, average annual merchandise sales for stores open two full years increased to $552,000 in fiscal year 1999 from $492,000 in fiscal year 1998 and $474,000 in fiscal year 1997. Average gallons of gasoline sold at the Company's stores open two full years were 623,000 gallons in fiscal year 1999 compared to 566,000 gallons in fiscal year 1998 and 496,000 gallons in fiscal year 1997.
This merchandise sales growth trend is primarily the result of increased sales of fast-food items and the addition of in-store traffic enhancing services, such as the sale of lottery tickets, money orders and prepaid telephone cards; ATMs; and the acceptance of personal checks. Tobacco sales represented approximately 29% of total merchandise sales in each of the last three fiscal years. There has been volatility in selling prices as a result of competition among cigarette manufacturers. Since the Company expects this volatility to continue, it has sought increased sales of other merchandise to offset the uncertainty in cigarette sales.
Convenience stores selling gasoline have been heavily affected by environmental regulations, principally concerning underground storage tanks, which require large capital expenditures in order to achieve compliance. In the late 1980s, the Company began making significant expenditures to meet, and exceed, applicable standards. Management believes that the Company is currently in compliance with all applicable federal and state environmental laws and regulations and expects minimum expenditures in fiscal year 2000 to maintain compliance. In addition, the Company has adopted a program to ensure that new gasoline installations comply with federal and state regulations.
The Company terminated its relationship with Getty Petroleum Corp. ("Getty") and its affiliates during fiscal year 1998. The Company is no longer required to purchase petroleum products from Getty and no longer operates 105 stores which were leased to the Company by Getty. In fiscal year 1998, these stores generated merchandise sales of $9.1 million and sold 7.9 million gallons of gasoline for total sales of $17.7 million. In fiscal year 1997, these stores generated merchandise sales of $44.8 million and sold 38.3 million gallons of gasoline, for total sales of $88.8 million.
Termination of the relationship with Getty permits the Company to purchase petroleum products from a variety of competing sources. The Company sells gasoline at 194 locations, including one location where gasoline is sold on a commission basis. Branded gasoline is purchased under supply agreements for 32 locations and gasoline is purchased from various sources for 161 locations. These arrangements provide for purchases of gasoline at cost levels which are less than those offered by Getty. However, gasoline margins have historically been volatile and there can be no assurance that the Company's gasoline margins will be enhanced by purchasing such products from competitive sources. In addition, the Company has suspended its program of capital expenditures for branded fast-food installations and currently does not anticipate adding new installations in the near future.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship of certain expense items to total revenues. It should be noted that the primary factors influencing the percentage relationship of cost of sales to revenues are the volatility of gasoline prices, gross profits and a proportional increase in the number of stores selling gasoline. On a percentage basis, the gross profit on gasoline sales is significantly less than the gross profit on merchandise sold in the convenience stores.
FISCAL YEAR 1999 COMPARED TO FISCAL YEAR 1998
The Company operated 234 convenience stores and 22 discount tobacco stores at September 30, 1999. During fiscal year 1999, the Company closed or sold 20 convenience stores and converted two convenience stores to discount tobacco stores. Total revenues in fiscal year 1999 were $252.3 million, a decline of $14.1 million, or 5.3%, in comparison to total revenues in fiscal year 1998 of $266.4 million. This decline is due largely to the operation of fewer stores and lower retail gasoline prices during fiscal year 1999.
Merchandise sales in fiscal year 1999 were $146.7 million compared to $154.1 million in fiscal year 1998, a decline of $7.4 million, or 4.8%. This decline is primarily the result of fewer stores in operation. Merchandise sales at comparable stores increased 5.8%.
Gasoline sales declined $6.0 million, or 5.5%, from $109.4 million in fiscal year 1998 to $103.4 million in fiscal year 1999, primarily as a result of lower sales prices per gallon sold. Gasoline gallons sold at comparable stores increased 8.1% in fiscal year 1999.
Gross profits on merchandise sales in fiscal year 1999 declined $3.1 million compared to fiscal year 1998. The decline of 5.7% was primarily the result of the lower sales volumes caused by the operation of fewer stores. Merchandise gross profits were $52.1 million in fiscal year 1999 and $55.2 million in fiscal year 1998.
Gasoline gross profits declined in fiscal year 1999 by $819,000, or 6.0%, in comparison to fiscal year 1998. The decrease from $13.7 million in fiscal year 1998 to $12.9 million in fiscal year 1999 is the result of lower gross profits per gallon of gasoline sold and, to a lesser degree, a slight decline in the total number of gallons sold. These decreases are the result of competitive pressures and fewer stores in operation. Although the total number of gallons sold declined slightly, gallons sold at comparable stores increased 8.1% in fiscal year 1999.
Selling expenses were $52.6 million in fiscal year 1999 compared to $54.3 million in fiscal year 1998, a decline of $1.7 million, or 3.1%. This decline is the result of fewer stores in operation. Expense levels per average store increased, however, due to higher labor and maintenance costs. On average, labor cost per store increased 15.4% and maintenance cost per store almost doubled. General and administrative expense increased $528,000, or 7.6%. Certain executive officers were hired near the end of fiscal year 1998 and their salaries were reflected in expense for a full year in 1999 compared to a partial year in 1998. Officer salaries were approximately $450,000 higher in fiscal year 1999 compared to 1998. Depreciation and amortization expense declined by $420,000, or 6.6%, due to the operation of fewer stores. Interest expense also declined by $91,000, or 2.3%, primarily as a result of lower borrowing levels. The Company recorded a $208,000 provision for impairment of long-lived assets in fiscal year 1999 compared to $352,000 in fiscal year 1998.
The Company recorded a pre-tax loss of $3.2 million in fiscal year 1999 compared to a pre-tax loss of $365,000 in fiscal year 1998. The income tax benefit of these losses was $948,000 in fiscal year 1999 and $237,000 in fiscal year 1998. In connection with refinancing most of its long-term debt in fiscal year 1998, the Company recorded an extraordinary loss from debt extinguishment of $244,000, net of the income tax benefit of $126,000. The net loss for fiscal year 1999 was $2.2 million, or $0.32 per share, compared to a net loss in fiscal year 1998 of $372,000, or $0.05 per share.
FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997
At September 30, 1998, the Company operated 126 fewer stores than operated one year previously. The Company formerly leased 105 of these stores, including ten franchised locations, from Getty, and these stores were returned to Getty. During fiscal year 1998, 21 other stores were closed or sold by the Company including ten franchised locations. Also, two convenience stores were converted to discount tobacco stores and one franchised location was converted to a Company-operated store. Total revenues in fiscal year 1998 were $266.4 million compared to $352.2 million in fiscal year 1997. This decline of $85.8 million, or 24.4%, is primarily the result of fewer stores in operation, as well as lower retail prices for gasoline.
Merchandise sales declined $34.8 million, or 18.4%, from $188.9 million in fiscal year 1997 to $154.1 million in fiscal year 1998, primarily as a result of fewer stores in operation. Merchandise sales at comparable stores increased 0.7%. Sales of $12.4 million and $4.8 million at discount tobacco stores are included in merchandise sales for fiscal years 1998 and 1997, respectively.
Gasoline sales in fiscal year 1998 were $109.4 million compared to $160.7 million in fiscal year 1997, a decline of $51.3 million, or 31.9%. This decrease is the result of a decline of 26.9 million gallons sold due to fewer stores in operation and lower sales prices per gallon sold. Gasoline gallons sold at comparable stores increased 3.4%.
Gross profits on merchandise sales declined $10.0 million, or 15.4%, due largely to the decline in sales volume. Merchandise sales gross profits were $55.2 million in fiscal year 1998 compared to $65.2 million in fiscal year 1997. The gross profit decline from reduced sales volume was offset to some degree by higher gross profit rates due to changing product mix and improved purchasing arrangements.
Gasoline gross profits were $13.7 million in fiscal year 1998 compared to $17.2 million in fiscal year 1997, a decline of $3.5 million, or 20.1%. This decrease is due to less total gallons sold due to fewer stores in operation and lower gross profits per gallon of gasoline sold due to competitive pressures.
Selling expenses were $54.3 million in fiscal year 1998, a decrease of $15.0 million, or 21.7%, compared to $69.3 million in fiscal year 1997. This decline is primarily due to the fewer number of stores in operation in the current year. General and administrative expense in fiscal year 1998 declined $1.2 million, or 14.7%, due primarily to lower professional fees and staffing levels. Depreciation and amortization decreased by $951,000, or 13.0%, due to the disposal of equipment at stores closed during fiscal year 1998. Interest expense declined by $193,000, or 4.6%, due primarily to lower borrowing levels. The decline was reduced to some degree by higher interest rates.
In fiscal year 1997, the Company recorded a provision for loss on disposal of certain assets to Getty of $1.6 million, with no similar provision in fiscal year 1998.
The Company recorded a provision for the impairment of long-lived assets at certain closed and underperforming stores of $352,000 in fiscal year 1998 compared to an impairment provision in fiscal year 1997 of $1.1 million.
The Company incurred a loss before income taxes, extraordinary item and cumulative effect of an accounting change of $365,000 in fiscal year 1998 compared to a loss of $6.8 million in fiscal year 1997. The net change of $6.5 million is the result of a $13.2 million decline in gross profits offset by a $19.7 million decrease in various expense categories. The Company recorded a $237,000 income tax benefit in fiscal year 1998 compared to an income tax benefit of $2.3 million in fiscal year 1997. This decline is due to the lower loss level, as well as changes in state income tax laws regarding the carry forward of net operating losses. In fiscal year 1998, the Company recorded a loss from debt extinguishment of $244,000, net of income tax benefit of $126,000. In fiscal year 1997, the Company recorded the cumulative effect of an accounting change of $1.5 million, net of income tax benefit of $0.7 million. The Company incurred a net loss of $372,000, or $0.05 per share, in fiscal year 1998, compared to a net loss in fiscal year 1997 of $6.0 million, or $0.91 per share.
SEASONALITY AND UNAUDITED QUARTERLY RESULTS
The Company's business generally has been subject to moderate seasonal influences with higher sales in the third and fourth fiscal quarters of each year, since customers tend to purchase more convenience items, such as ice, beverages and fast food, and more gasoline during the warmer months. Due to adverse weather conditions, merchandise sales for the second fiscal quarter have generally been lower than other quarters. However, because of price volatility, gasoline profit margins fluctuate significantly throughout the year. When the Company's relationship with Getty was terminated at the end of the first quarter of fiscal year 1998, it no longer operated 105 stores formerly leased from Getty. The loss of these stores reduced sales and operating expenses for the remainder of fiscal year 1998 and the closing of 20 stores in fiscal year 1999 had a similar effect.
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 do not generally require large amounts of working capital. From time to time, the Company utilizes substantial portions of its cash to acquire and construct new stores and renovate existing locations.
On December 30, 1998, the Company entered into a secured $10.0 million revolving loan agreement with a bank, with $3.0 million reserved for letters of credit. The Company utilized $3.5 million of this facility to pay its existing revolving credit facility and property loan. The Company also used this facility to replace its outstanding letter of credit which expired June 30, 1999. The revolving credit facility is subject to renewal at December 31, 1999. As of December 29, 1999, the bank has committed to an extension of up to nine months on a revolving credit facility subject to the Company's compliance with certain restrictive covenants at March 30, 2000 and June 29, 2000. The restrictive covenants include a minimum debt service coverage ratio, a minimum level of tangible net worth, a maximum debt to tangible net worth ratio, and a limit on unfunded capital expenditures. These covenants are unchanged from the existing credit agreement, except that the bank has agreed to reduce the required minimum tangible net worth covenant from $24 million at December 31, 1999 and September 30, 2000, to $23 million at March 31, 2000 and June 30, 2000. An additional covenant requirement of the extension agreement is that the Company's results from operations for the six and nine-month periods ending March 30, 2000 and June 29, 2000 must meet or exceed the budgeted amounts provided to the bank.
Management is currently evaluating their refinancing alternatives and has obtained approval from its existing mortgage lender for a $10 million one-year revolving line of credit secured by real estate and store equipment. The terms of this loan are subject to completion of a formal commitment, but would include certain provisions which would require the Company to maintain a minimum net worth of $20 million and an aggregate fixed charge ratio of 1.25:1. If the Company elects to close on this facility, the bank loan would be repaid from the proceeds.
Management believes that cash from operations and the available credit facilities will be sufficient to meet the Company's obligations for the fiscal year ending September 30, 2000.
Capital requirements for debt service and capital leases for fiscal year 2000 are approximately $1.2 million. The Company anticipates capital expenditures of approximately $3.0 million in fiscal year 2000 for acquisition of real estate, remodeling of stores and upgrades of store equipment and gasoline-dispensing equipment. These expenditures are expected to be funded from cash flows from operations. The Company also is considering the start of a $4.0 million project pending the availability of funding. Approximately $1.25 million of the $4.0 million is committed contractually.
IMPACT OF THE YEAR 2000 ("Y2K") PROBLEM
BACKGROUND
Many computer systems in use today were designed to utilize just two digits to represent a year rather than four digits. If a system element uses the two-digit convention for dates and the system is date sensitive, the system will malfunction when it first encounters the date January 1, 2000. The Company uses a variety of computers and computer software programs to operate and manage its business. The functioning of these systems is subject to problems if it does not properly interpret dates in the year 2000 and beyond. The Company also utilizes certain date-sensitive electronic equipment with embedded microchips such as cash registers and credit card readers. In addition, the Company deals with numerous suppliers of merchandise and services whose Y2K failure could be disruptive to the Company's business. The Company has been involved since early 1997 in developing and completing a program to deal with the Y2K problem.
THE COMPANY'S Y2K PROGRAM
The Company's Y2K program involved identification of Y2K problems in its various computer systems and date-sensitive electronic equipment, replacement or modification of the computer systems and software as required and extensive testing of the replacements and modifications. This portion of the Company's Y2K program has been completed. The Company has ranked its suppliers of goods and services according to the probability and impact of a Y2K problem with each vendor. The Company has contacted all suppliers except noncritical or nonessential suppliers to request written statements from them regarding their Y2K compliance. With the exception of some utility providers, positive responses have been received from over 95% of the other suppliers contacted. The Company has also completed contingency plans to handle Y2K problems with critical suppliers. Although the Company's Y2K program has been essentially completed, testing of systems and plans will continue until December 31, 1999. The total cost of the program will be approximately $400,000 most of which was expended prior to September 30, 1999.
SUMMARY
Based on its assessment and corrective efforts to date, the Company does not expect material difficulties with the Y2K problem in its internal computer systems. In addition, the Company does not expect material Y2K problems with other date-sensitive hardware or materially disruptive Y2K failures of its suppliers of merchandise and services. The Company's stores are geographically dispersed and it has a diverse supplier base. Although the Company does have a diverse supplier base, it does deal with a limited number of large suppliers whose Y2K failure could have a material effect on the Company's business. The Company believes that it could find alternative suppliers or handle developing Y2K problems with its current contingency plans. The Company's contingency plans were developed to mitigate possible Y2K failures. In management's opinion, the largest Y2K risks facing the Company are the inability of the Company's stores to process retail sales transactions or obtain merchandise to sell, as well as potential failure of public utility systems.
IMPACT OF INFLATION
The Company believes that inflation has not had a material effect on its results of operations in recent years. Generally, increases in the Company's cost of merchandise can be quickly reflected in higher prices of goods sold. However, any upward movement of gasoline costs may have short-term negative effects on profit margins, since the Company's ability to raise gasoline prices can be limited due to competition from other self-service gasoline outlets. In addition, fluctuation of gasoline prices can limit the ability of the Company to maintain stable gross margins.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report are forward looking, such as statements regarding the Company's plans and strategies or future financial performance. 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 the factors discussed 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 additional factors, including, without limitation, general economic, business and market conditions; environmental, tax and tobacco legislation or regulation; volatility of gasoline prices, margins and supplies; merchandising margins; customer traffic; weather conditions; labor costs and the level of capital expenditures.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Uni-Marts, Inc. State College, Pennsylvania
We have audited the accompanying consolidated balance sheets of Uni-Marts, Inc. and subsidiary (the "Company"), as of September 30, 1999 and 1998, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended September 30, 1999. 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.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Uni-Marts, Inc. and subsidiary as of September 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 1999, in conformity with generally accepted accounting principles.
As discussed in Note C, the Company changed its method of accounting for inventory in 1997.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche, LLP Philadelphia, Pennsylvania November 11, 1999 (December 29, 1999 as to Note F)
UNI-MARTS, INC. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS
See notes to consolidated financial statements
UNI-MARTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS
See notes to consolidated financial statements
UNI-MARTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
See notes to consolidated financial statements
UNI-MARTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
UNI-MARTS, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
Supplemental Schedule of Noncash Operating Activity:
During fiscal year 1997, the Company sold marketable securities for $448,300 and recognized a gain of $97,100. The cash proceeds from the sale were not received until after September 30, 1997.
See notes to consolidated financial statements
UNI-MARTS, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED SEPTEMBER 30, 1999, 1998 AND 1997
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The Company is an independent operator of convenience stores and discount tobacco stores located in Pennsylvania, New York, Delaware, Maryland and Virginia.
(1) Principles of Consolidation -- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All material intercompany balances and transactions have been eliminated.
(2) Inventories -- The Company values its merchandise inventories at the lower of cost (first-in, first-out method) or market, as determined by the retail inventory method. Gasoline inventories are valued at the lower of cost (first-in, first-out method) or market (see Note C).
(3) Property, Equipment and Improvements -- Depreciation and amortization are calculated using the straight-line method over the useful lives of the related assets. Amortization of improvements to leased properties is based on the remaining terms of the leases or the estimated useful lives of such improvements, whichever is shorter. Interest costs incurred on borrowed funds during the period of construction of capital assets are capitalized as a component of the cost of acquiring those assets. The amount of interest capitalized in fiscal year 1997 was $57,400. No interest was capitalized in fiscal years 1999 and 1998.
(4) Intangible and Other Assets -- Intangible and other assets consist of the following:
Goodwill represents the excess of cost over the fair value of net assets acquired in business combinations and is amortized on a straight-line basis. Lease acquisition costs are the bargain element of acquired leases and are being amortized on a straight-line basis over the related lease terms. Amortization expense was $267,500 (1999), $439,500 (1998) and $431,200 (1997).
(5) Asset Impairment -- It is the Company's policy to periodically review and evaluate the recoverability of fixed and intangible assets by assessing current and future profitability and cash flows and to determine whether the depreciation or amortization of the balances over their
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
remaining lives can be recovered through expected future results and cash flows. The Company recorded provisions of $208,300 (1999), $352,000 (1998) and $1,063,200 (1997) for asset impairment for certain real estate, leasehold improvements, store and gasoline equipment and goodwill at certain closed or underperforming stores. Fair value was determined based on a review of historical and projected cash flows. The Company also recorded a provision for loss on disposal of $1,624,600 in fiscal year 1997 for certain assets that were sold in January 1998.
(6) Self-Insurance Reserves -- The Company assumes the risks for general liability and workers' compensation insurance exposures up to certain loss thresholds set forth in separate insurance contracts. The Company has established self-insurance reserves for these risks, which are recorded on a present value basis using a risk-free discount rate of 7.0%, using actuarial valuations provided by independent companies. At September 30, 1999 and 1998, the Company had self-insurance reserves totaling $2,868,900 and $2,551,500, respectively.
(7) Income Taxes -- The Company recognizes deferred tax assets and liabilities for temporary differences between the financial statement and tax basis of assets and liabilities using enacted tax rates.
(8) Deferred Income and Other Liabilities -- The Company generally records revenues when products are sold or services rendered. In certain instances, the Company receives advance payments for purchase commitments or other services and records revenue from such payments in accordance with the terms of the related contractual arrangements. Deferred income and other liabilities includes the following:
(9) Earnings Per Share -- Earnings per share for the years ended September 30, 1999, 1998 and 1997 were calculated based on the weighted average number of shares of common stock outstanding. Although there were potentially dilutive stock options for 576,441, 535,566 and 555,035 shares outstanding in fiscal years 1999, 1998 and 1997, respectively, they were not included as the effect was antidilutive.
(10) Advertising Costs -- The Company expenses advertising costs in the period in which they are incurred. The Company incurred advertising costs of $1,894,600, $2,084,800 and $1,885,500 in fiscal years 1999, 1998 and 1997, respectively.
(11) Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates and assumptions.
(12) New Accounting Pronouncements -- In fiscal year 1999, the Company adopted Statement Nos. 130, 131 and 132 of the Financial Accounting Standards Board ("FASB"). FASB
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Statement No. 130, "Reporting Comprehensive Income," was adopted although the Company had no transactions involving other comprehensive income in any of the periods presented. FASB Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," was adopted by the Company although the Company does not have more than one segment on which to report. FASB Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," was adopted by the Company although its disclosures were in compliance with this statement.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards for derivative instruments. The Company is not required to adopt this standard until fiscal year 2001. At this time, the Company has not determined the impact this standard will have on the Company's financial statements.
(13) Reclassifications -- Certain reclassifications have been made to the 1998 and 1997 financial statements to conform to the classifications used in 1999.
B. OPERATIONS AND FINANCING:
The Company has experienced net losses for each of the three years in the period ended September 30, 1999. The Company's ability to continue to operate beyond the immediate future will ultimately depend upon its ability to achieve levels of revenues necessary to support the Company's cost structure, reduce the costs of operating its stores and maintain adequate financing.
Management's plans include the renewal or refinancing of its existing working credit facility (see Note F) and improved operating efficiencies resulting from the management and operational changes made during fiscal year 1999. The changes include the reduction of certain fixed expenses, the implementation of merchandising programs designed to improve gross margins and the closing or divesting of 20 underperforming stores.
Management believes that cash from operations and the available credit facility will be sufficient to meet the Company's obligations for the fiscal year ending September 30, 2000.
C. INVENTORIES:
The following is a summary of inventories at September 30:
During fiscal year 1997, the Company changed its method of calculating ending merchandise inventories under the retail inventory method. Prior to 1997, the Company utilized an average cost-to-retail ratio to value ending inventory. In fiscal year 1997, the Company began utilizing a method that weights the cost-to-retail ratio using multiple inventory categories. Management believes that this change in accounting improves the measurement of the Company's profitability based upon a changing product mix.
C. INVENTORIES (CONTINUED):
The cumulative effect of this accounting change was a charge to earnings of approximately $1,468,000, net of the related income tax benefit of $725,000. The pro forma effect as if the accounting change was in effect in the year presented is as follows:
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* Includes cumulative effect of accounting change of $1,468,140.
D. PROPERTY HELD FOR SALE:
Property held for sale is carried at the lower of cost or net realizable value. The properties have been classified as current assets because the Company expects the properties to be sold within the next fiscal year. The properties are undeveloped land, a vacant rental property and closed convenience stores.
E. PROPERTY, EQUIPMENT AND IMPROVEMENTS -- AT COST:
Depreciation expense in fiscal years 1999, 1998 and 1997 was $5,700,700, $5,948,900 and $6,908,000, respectively, including the amortization of capitalized property and equipment leases.
F. SHORT-TERM CREDIT FACILITIES:
The Company has a short-term credit facility which is a secured $10.0 million revolving loan agreement with $3.0 million reserved for letters of credit. Borrowings of $1.8 million and letters of credit of $2.7 million were outstanding at September 30, 1999. This facility bears interest at a floating rate of LIBOR plus 2.8%. The interest rate at September 30, 1999 was 8.175%. The revolving credit facility is subject to renewal at December 31, 1999.
The Company's revolving loan agreement contains covenants which provide for the maintenance of minimum tangible net worth as well as limitations on future indebtedness, sales and leasebacks and dispositions of assets, among other things. This agreement may restrict the Company's ability to declare and pay dividends on common stock.
As of December 29, 1999, the bank has committed to an extension of up to nine months on a revolving credit facility subject to the Company's compliance with certain restrictive covenants at March 30, 2000 and June 29, 2000. The restrictive covenants include a minimum debt service coverage ratio, a minimum level of tangible net worth, a maximum debt to tangible net worth ratio, and a limit on unfunded capital expenditures. These covenants are unchanged from the existing credit agreement, except that the bank has agreed to reduce the required minimum tangible net worth covenant from $24 million at December 31, 1999 and September 30, 2000, to $23 million at March 31, 2000 and June 30, 2000. An additional covenant requirement of the extension agreement is that the Company's results from operations for the six and nine-month periods ending March 30, 2000 and June 29, 2000 must meet or exceed the budgeted amounts provided to the bank.
Management is currently evaluating their refinancing alternatives and has obtained approval from its existing mortgage lender for a $10 million one-year revolving line of credit secured by real estate and store equipment. The terms of this loan are subject to completion of a formal commitment, but would include certain provisions which would require the Company to maintain a minimum net worth of $20 million and an aggregate fixed charge ratio of 1.25:1. If the Company elects to close on this facility, the bank loan would be repaid from the proceeds.
G. LONG-TERM DEBT:
The mortgage loans are collateralized by $48,211,900 of property, at cost.
G. LONG-TERM DEBT (CONTINUED):
Aggregate maturities of long-term debt during the next five years are as follows:
On June 30, 1998, the Company completed a 20-year mortgage financing with Franchise Finance Corporation of America ("FFCA") pursuant to which the Company received long-term financing of $36.0 million. The Company repaid all of its long-term debt with these funds except for one mortgage with a balance of $220,300.
Certain provisions of the loan agreements with FFCA require the Company's maintenance of a minimum net worth of $20 million and an aggregate fixed charge ratio of 1.25:1. This agreement could possibly restrict the Company's ability to declare and pay dividends on its common stock.
H. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate fair value:
CASH -- Cash is carried at fair value.
CREDIT LINE PAYABLE -- Credit line payable is carried at fair value.
LONG-TERM DEBT -- Fair value of the Company's long-term debt is estimated based on quoted market prices for the same or similar issues or on the current rates offered to the Company for similar debt.
OBLIGATIONS UNDER CAPITAL LEASES -- Fair value of capital lease obligations is estimated based on current rates offered to the Company for similar debt.
The estimated fair values of the Company's financial instrument liabilities are as follows:
I. COMMITMENTS AND CONTINGENCIES:
(1) Leases -- The Company leases its corporate headquarters, approximately one-half of its store locations and certain equipment. Future minimum lease payments under capital leases and noncancellable operating leases with initial or remaining terms in excess of one year at September 30, 1999 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. Rental
I. COMMITMENTS AND CONTINGENCIES (CONTINUED):
income in connection with the leases of certain properties is also provided. Such rental income was $549,100 in 1999, $1,330,000 in 1998 and $1,299,700 in 1997.
Rental expense under operating leases was as follows:
(2) Change of Control Agreements -- The Company has change of control agreements with its executive officers pursuant to which each executive officer will receive remuneration of 2.99 times his base compensation if his employment is terminated due to a change of control as defined in the agreements. Remuneration which might be payable under these agreements has not been accrued in the consolidated financial statements as a change of control has not occurred.
(3) Pursuant to ten-year agreements with two gasoline suppliers, the Company receives from the suppliers partial funding of the cost of the aboveground gasoline equipment and rebates for the purchase of gasoline. As of September 30, 1999, the total funding subject to this arrangement is $1,176,000. If the Company terminates these agreements before the expiration of the ten years, part of this funding must be repaid to the suppliers.
(4) The Company has an agreement to purchase a property in Milroy, Pennsylvania, for $800,000, which is due on January 15, 2000. In addition, the Company is obligated to site work cost of approximately $450,000.
(5) 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.
J. INCOME TAXES:
The provision for income taxes includes the following:
The tax provision for fiscal year 1999 includes the benefit of net operating loss carryforwards of $2,204,400 for federal income tax purposes and $441,500 for state income tax purposes. During fiscal year 1999, the Company received tax refunds of approximately $753,700 resulting from the filing of its tax returns for fiscal years 1998 and 1997.
Deferred tax liabilities (assets) are comprised of the following at September 30:
The financial statements include noncurrent deferred tax liabilities of $2,561,500 and $4,131,400 in 1999 and 1998, respectively, and current deferred tax assets of $2,034,900 and $1,967,300 which are included in prepaid and current deferred taxes.
J. INCOME TAXES (CONTINUED): A reconciliation of the provision for income taxes to an amount determined by application of the statutory federal income tax rate follows:
K. RELATED PARTY TRANSACTIONS:
During fiscal year 1997, the Company granted a loan of $800,000 to the Company's Chairman of the Board and Chief Executive Officer. Beginning in January 1999, the loan bears interest at the brokerage call rate plus 0.5% (7.5% at September 30, 1999) and requires payments of $60,000 plus interest on November 1, 1999, 2000, 2001, 2002 and 2003. A final payment of $300,000 is due on November 1, 2004. The loan is collateralized by 303,397 shares of the Company's Common Stock and 73,000 shares of the common stock of Unico Corporation.
Certain directors and officers of the Company are also directors, officers and shareholders of Unico Corporation ("Unico"), formerly the Company's parent, and other affiliated companies. The following is a summary of significant transactions with these entities:
(1) The Company leases three stores and certain other locations from Unico and leases its corporate headquarters and four additional locations from affiliates of Unico. Aggregate rentals in connection with these leases were $646,300 (1999), $629,800 (1998) and $672,600 (1997).
(2) The Company charges an affiliate of Unico for general and administrative services provided. Such charges amounted to $12,300 (1999), $8,500 (1998) and $11,700 (1997).
The Company received commissions from TeleBeam Incorporated ("TeleBeam") for coin-operated telephones installed at convenience store locations and for the sale of prepaid telephone cards. Payments received from TeleBeam were $213,900 (1999), $296,700 (1998) and $428,800 (1997). The Company also made payments to TeleBeam for discounted prepaid telephone cards and telephone service. Payments made to TeleBeam were $1,199,600 (1999), $748,700 (1998) and $577,000 (1997). The majority of the stock of TeleBeam is beneficially owned or controlled by persons related to the Company's Chairman and Chief Executive Officer.
In fiscal year 1997, the Company purchased a property for $1,500,000 from a partnership in which a former director is also a partner. Prior to the purchase, the Company paid rents to the partnership of $35,500 (1997).
The Company made payments of approximately $81,000 to a director of the Company during fiscal year 1999 for consulting fees and reimbursement of expenses.
L. RETIREMENT SAVINGS AND INCENTIVE PLAN:
The Company has a contributory retirement savings plan covering all employees meeting minimum age and service requirements. The Company will match one-half of employee contributions up to 3% of the employee's compensation. The Company's contributions are invested in the Company's Common Stock. The Board of Directors may elect to make additional contributions to be allocated among all eligible employees in accordance with provisions of the plan. The retirement savings plan expense, which is funded currently, was $96,600 (1999), $110,300 (1998) and $127,000 (1997).
M. DEFERRED COMPENSATION PLAN AND PERFORMANCE UNIT PLAN:
The Company has a nonqualified deferred compensation plan which permits key executives to elect annually (via individual contracts) to defer a portion of their compensation until their retirement, death or disability. The Company makes a 50% matching contribution not exceeding $5,000 annually per executive. The deferred compensation expense was $21,300, $15,600 and $25,700 for the years ended September 30, 1999, 1998 and 1997, respectively.
The Company has recorded the assets and liabilities for the deferred compensation plan in the consolidated balance sheets because such assets and liabilities belong to the Company rather than to any plan or trust. The asset and matching liability of $237,600 and $487,500 at September 30, 1999 and 1998, respectively, include employee deferrals, accrued earnings and matching contributions of the Company. The asset amount is included in net intangible and other assets and the liability amount is included in deferred income and other liabilities. Subsequent to September 30, 1999, the deferred compensation plan assets were distributed to participants in satisfaction of plan liabilities. Liabilities for the deferred compensation plan at December 1, 1999 were $0.
The Company also has a Performance Unit Plan to provide long-term incentives to senior executives. Under the Performance Unit Plan, the amount of compensation is determined over the succeeding three-year period based upon performance of the Company as well as individual goals for the senior executives. Compensation expense recognized under this plan was $0, $29,000 and $0 for fiscal years 1999, 1998 and 1997, respectively.
N. EQUITY COMPENSATION PLANS:
The Company has an Equity Compensation Plan, pursuant to which no additional stock options may be granted, and a 1996 Equity Compensation Plan, which became effective November 1, 1996. The Company has reserved 122,080 shares of common stock which can be issued in accordance with the terms of the Equity Compensation Plan and 1,000,000 shares of common stock which can be issued in accordance with the terms of the 1996 Equity Compensation Plan.
Both the Equity Compensation Plan and the 1996 Equity Compensation Plan are collectively discussed as the "Plans" below.
A committee of the Board of Directors has authority to administer the Plans, and the committee may grant qualified incentive stock options to employees of the Company, including officers, whether or not they are directors. The Plans also provide that all nonemployee directors will receive annual non-qualified stock option grants for 2,000 shares of common stock plus 500 shares for each full year the director has served as a member of the board, up to a maximum of 4,000 shares per grant, on the date of each annual meeting. In addition, newly appointed or elected nonemployee directors receive an initial grant for 5,000 shares. Nonemployee directors will also receive grants of stock equal in value to and in lieu of two-thirds of the retainer due to such director. The Company granted options to purchase 14,000, 32,000 and 26,000 shares of common stock to nonemployee directors under the Plans during
N. EQUITY COMPENSATION PLANS (CONTINUED):
fiscal years 1999, 1998 and 1997, respectively. The Company also granted 8,695, 7,140 and 6,223 shares of common stock to nonemployee directors during fiscal years 1999, 1998 and 1997, respectively, as part of their annual retainer.
The exercise price of all options granted under the Plans may not be less than the fair market value of the common stock on the date of grant, and the maximum allowable term of each option is ten years. For qualified stock options granted to any person who holds more than 10% of the voting power of the outstanding stock, the exercise price may not be less than 110% of the fair market value, and the maximum allowable term is five years. Options granted under the Plans generally have various vesting schedules.
Information regarding outstanding options is presented below. All options outstanding are exercisable according to their vesting schedule.
Outstanding Options for Shares of Common Stock:
The weighted average fair value of the stock options granted during fiscal years 1999, 1998 and 1997 were $1.03, $1.88 and $2.97, respectively. The fair value of each stock option granted is estimated on
N. EQUITY COMPENSATION PLANS (CONTINUED):
the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in the years ended September 30,
The Company accounts for the Plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Plans been determined in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), the Company's pro forma net earnings (loss) and earnings (loss) per share for the fiscal years ended September 30, 1999, 1998 and 1997 would have been as follows:
O. EMPLOYEE STOCK PURCHASE PLAN:
In February 1999, the Company's stockholders approved a stock purchase plan. Under the stock purchase plan, eligible employees may purchase common stock in quarterly offering periods through payroll deductions of up to 25% of compensation. The price per share is 90% of the average market price throughout the quarter but not less than 90% of the lower of the market price at the beginning or end of the market period. The stock purchase plan provides for purchases by employees of up to an aggregate of 500,000 shares. During fiscal year 1999, employees purchased 2,004 shares pursuant to the stock purchase plan.
P. NONQUALIFIED STOCK OPTIONS:
On February 26, 1993, the Company made a one-time, special grant of non-qualified stock options to each of Henry D. Sahakian and Daniel D. Sahakian to purchase 150,000 shares of common stock of the Company at a price of $4.50 per share in exchange for their relinquishment of effective voting control of the Company as a result of the elimination of the super-majority voting provisions of the Class B Common Stock. These nonqualified stock options are not related to the Company's Equity Compensation Plan. Henry D. Sahakian exercised his option during fiscal year 1996 by exchanging 84,375 shares of the Company's Common Stock valued at $675,000. Daniel D. Sahakian exercised his option during fiscal year 1998 for a cash payment to the Company of $675,000.
SUPPLEMENTARY FINANCIAL INFORMATION
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
In accordance with Instruction G(3), the information called for by Items 10, 11, 12 and 13 is incorporated by reference from the Registrant's Definitive Proxy Statement pursuant to Regulation 14A, to be filed with the Commission not later than 120 days after September 30, 1999, the end of the fiscal year covered by this report.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND SCHEDULES
The Financial Statements listed below are filed as part of this Annual Report on Form 10-K.
(1) Financial Statements
(2) Financial Statement Schedules
The following financial statement schedule should be read in conjunction with the financial statements and notes thereto included in this report. Schedules not included below have been omitted because they are not applicable or required or because the required information is not material or is included in the financial statements or notes thereto.
The following schedule for the years ended September 30, 1999, 1998 and 1997 is included in this report:
(B) REPORTS ON FORM 8-K
Uni-Marts, Inc. filed no reports on Form 8-K with the Securities and Exchange Commission during the last quarter of the fiscal year ended September 30, 1999.
(C) EXHIBITS
(D) SCHEDULES
The schedules listed in Item 14(A) are filed as part of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/ HENRY D. SAHAKIAN ------------------------------------ Henry D. Sahakian Chairman of the Board (Principal Executive Officer)
By: /s/ N. GREGORY PETRICK ------------------------------------ N. Gregory Petrick Senior Vice President and Chief Financial Officer (Principal Accounting Officer) (Principal Financial Officer)
Dated: December 29, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated:
UNI-MARTS, INC. AND SUBSIDIARY SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
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(1) Specific account or note receivable written off to allowance.
UNI-MARTS, INC. AND SUBSIDIARY EXHIBIT INDEX