Susser Holdings 10-K 2009
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 30, 2007
Commission File Number: 001-33084
SUSSER HOLDINGS CORPORATION
(Exact name of registrant as specified in its charter)
4525 Ayers Street
Corpus Christi, Texas 78415
(Address of principal executive offices, including zip code)
Registrants telephone number, including area code: (361) 884-2463
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ¨ No x
The aggregate market value of voting common stock held by non-affiliates of the registrant as of July 1, 2007 was $120,858,356.
As of March 10, 2008, there were issued and outstanding 17,025,338 shares of the registrants common stock.
Documents Incorporated by Reference
SUSSER HOLDINGS CORPORATION
ANNUAL REPORT ON FORM 10-K/A
TABLE OF CONTENTS
Susser Holdings Corporation (the Company) is filing this Amendment No. 1 (this Amendment) to its Annual Report on Form 10-K for the fiscal year ended December 30, 2007 originally filed on March 14, 2008 (the Annual Report) for the purpose of filing revised certifications as exhibits to the Annual Report and an updated consent of the Companys independent registered public accounting firm. Except for the amended disclosure contained in the certifications and the updated consent, this Amendment does not modify or update other disclosures in, or exhibits to, the Annual Report.
We are the largest non-refining operator in Texas of convenience stores based on store count and we believe we are the largest non-refining motor fuel distributor by gallons in Texas. Our operations include retail convenience stores and wholesale motor fuel distribution. As of December 30, 2007, following our November 13, 2007 acquisition of Town & Country Food Stores, Inc., our retail segment operated 504 convenience stores in Texas, New Mexico and Oklahoma, offering merchandise, foodservice, motor fuel and other services. For the fiscal year ended December 30, 2007, we purchased 921.7 million gallons of branded and unbranded motor fuel from refiners for distribution to our retail convenience stores, contracted independent operators of convenience stores, unbranded convenience stores and commercial users. We believe our unique retail/wholesale business model, scale, and foodservice and merchandising offerings, combined with our highly productive new store model and selected acquisition opportunities, position us for ongoing growth in sales and profitability.
Our principal executive offices are located at 4433 Baldwin Boulevard, Corpus Christi, Texas 78408. Our telephone number is (361) 884-2463. Our internet address is www.susser.com. We make available through our website our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission, or the SEC. The SEC maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
References in this annual report to Susser, we, us, and our, refer to Susser Holdings Corporation, our predecessors and our consolidated subsidiaries. References to TCFS refer to TCFS Holdings, Inc., which is the parent company of Town & Country Food Stores, Inc., or Town & Country. References to years are to our fiscal years, which end on the last Sunday closest to December 31. References to 2007 are to the 52 weeks ending December 30, 2007; references to 2006 are to the 52 weeks ending December 31, 2006 and references to 2005 are to the 52 weeks ending January 1, 2006.
The Susser family entered the motor fuel retailing and distribution business in the 1930s. Sam L. Susser, our President and Chief Executive Officer, joined us in 1988, when we operated five stores and had revenues of $8.4 million. We have demonstrated a strong track record of internal growth and ability to successfully integrate acquisitions in both the retail convenience store and wholesale fuel distribution segments.
On December 21, 2005, Stripes Acquisition LLC, an affiliate of Wellspring Capital Partners III, L.P, or Wellspring, merged with and into Susser Holdings, L.L.C., with Susser Holdings, L.L.C. remaining as the surviving entity, and Wellspring becoming a significant stockholder along with Sam L. Susser and members of our senior management. On October 24, 2006, we completed an initial public offering, or IPO of our common stock, broadening our ownership base with new public stockholders. Concurrent with our initial public offering, we became the holding company of Stripes Holdings LLC and its subsidiaries.
On November 13, 2007, we acquired TCFS, which included 168 convenience stores in West Texas and Eastern New Mexico, in a transaction valued at approximately $356 million. We refer to the acquisition of TCFS and the related financing transactions as the TCFS Acquisition.
As of December 30, 2007, our retail segment operated 504 convenience stores in Texas, New Mexico and Oklahoma, offering merchandise, foodservice, motor fuel and other services. For the eleven and a half years ended November 2006 we were a licensee of TMC Franchise Corporation, a subsidiary of Alimentation Couche-Tard, during which our retail stores operated under the Circle K banner. We began rebranding our stores to our proprietary Stripes banner during the second quarter of 2006 and completed our rebranding during the first quarter of 2007. The Town & Country retail stores acquired operate under the Town & Country and Village Market brands. As of December 30, 2007, we had 337 stores operating under the Stripes brand, 160 stores under the Town & Country brand and 7 stores under the Village Market brand. Our business experiences substantial seasonality due to the geographic area our stores are concentrated in, as well as customer activity behaviors during different seasons. In general, sales and operating income are highest in the second and third quarters during the summer activity months, and lowest during the winter months.
The retail segment produced revenues and gross profit of $1,676.8 million and $232.7 million, respectively, for fiscal 2007 and had total assets of $730.4 million as of December 30, 2007. The following table sets forth retail revenues and gross profit for 2007, giving effect to 48 days of TCFS operating results:
Merchandise Operations. Our stores carry a broad selection of food, beverages, snacks, grocery and non-food merchandise. The following table highlights certain information regarding merchandise sales for the last five years:
We stock 2,300 to 3,000 merchandise units on average with each store offering a customized merchandise mix based on local customer demand and preferences. To further differentiate our merchandise offering, we have developed several proprietary offerings unique to our stores: Laredo Taco Company and Country Cookin restaurants, Café de la Casa custom blended coffee, Slush Monkey frozen carbonated beverages, Quake energy drink and our Royal brand cigarettes. Each of these proprietary offerings, along with our prominent fountain drink offering, generates higher gross margins than our non-proprietary merchandise average, and we emphasize these offerings in our marketing campaigns. Our stores also offer candy, packaged foods, magazines and newspapers, health and beauty aids and a variety of other non-food items. We own and operate ATM, pay telephone and proprietary money order systems in most of our stores and also provide other services such as lottery, prepaid telephone cards and wireless services, and car washes. In addition, we own a 50% interest in Cash & Go, Ltd and lease to them 38 kiosks, consisting of approximately 100 square feet per unit within our stores, for check cashing and short-term lending products. Seven of the stores acquired from Town & Country operate under the Village Market banner, and supply an extended range of grocery products to small rural communities.
Laredo Taco Company is our original in-house, proprietary restaurant operation featuring breakfast tacos, lunch tacos, fried and rotisserie chicken and other hot food offerings targeted to the local populations in the markets we serve. Laredo Taco Company is in 169 of our stores and features in-store kitchens allowing us to make fresh food on the premises daily. Country Cookin is a legacy proprietary restaurant operation of Town & Country that features breakfast sandwiches and burritos for breakfast and fried chicken, finger foods and freshly grilled hamburgers for lunch and dinner in 102 locations. These offerings generate higher margins than most other products and drive the sale of high margin complementary items, such as hot and cold beverages and snacks. We are continuing to drive same store restaurant sales growth and transaction size by broadening our menus and extending hours of operation.
Our retail segment merchandising category sales for the periods presented are as follows:
We purchase more than 40% of our merchandise, including most tobacco and grocery items, from McLane Company, Inc., or McLane, a wholly-owned subsidiary of Berkshire Hathaway Inc. McLane has been our primary supplier since 1992 and currently delivers products to substantially all of our retail stores. We entered into a new three-year supply agreement with McLane in December 2007. We purchase products at McLanes cost, reduced by any promotional allowances and volume rebates offered by manufacturers and McLane, and pay McLane an agreed upon delivery fee by region, subject to fuel cost-related surcharges or credits. We also purchase a variety of merchandise, including soda, beer, bread, dairy products, ice cream and snack foods, directly from a number of vendors and their wholesalers. All merchandise is delivered directly to our stores by McLane or other vendors. We do not maintain additional product inventories other than what is in our stores. We do not carry any significant customer receivables in the retail segment.
Motor Fuel Operations. We offer Valero, Shamrock, Chevron, Shell, Texaco, Phillips 66 and Exxon branded motor fuel and unbranded motor fuel at 496 of our convenience stores, approximately 63% of which were branded under the Valero name as of December 30, 2007. We entered into a new fuel supply agreement with Valero Marketing and Supply Company in July 2006 and completed the rebranding of most of our retail fuel locations, which had previously been branded CITGO, during first quarter 2007. We purchase all of our motor fuel from our wholesale segment at a price reflecting product cost plus our transportation cost. Most fuel is purchased by the load as needed to replenish supply at the stores, although some fuel is purchased in pipeline batches.
Our retail fuel margins per gallon tend to be lower than industry averages due to the saturation of hypermarkets in the markets we serve. From 1996 to 2000, our motor fuel gross profit declined by approximately four cents per gallon compared to the preceding five-year period, reflecting this competitive environment. Since 1999, we have invested in more efficient motor fueling facilities designed to handle higher volumes to offset some of the margin pressure while improving our higher margin in-store merchandise offerings and focusing on the convenience of our format. We believe that these actions, along with our combined retail and wholesale purchasing leverage, have positioned us to effectively compete with these hypermarkets. As a result, our subsequent annual motor fuel cents per gallon has stabilized and slightly improved as we are able to benefit from our more favorable procurement costs and economies of scale. The following table highlights certain information regarding our retail motor fuel operations for the last five years:
Store Locations. As of December 30, 2007, we operated 504 stores, 457 of which were in Texas, 28 of which were in New Mexico, and 19 of which were in Oklahoma. All but 56 of our stores are open 24 hours a day, 365 days a year. All but eight stores sell motor fuel. We seek to provide our customers with a convenient, accessible and clean store environment. Approximately 99% of our convenience stores are freestanding facilities, which average 3,300 square feet. The 72 stores we have built since January 2000 average approximately 4,800 square feet and are built on large lots with much larger motor fueling and parking facilities. The seven Village Market grocery stores average approximately 12,500 square feet.
The following table provides the regional distribution of our retail stores as of December 30, 2007:
The following table provides a history of our retail openings, conversions, acquisitions and closings for the last five years:
Stripes Rebranding. Our royalty expense for the rights to use the Circle K banner at our stores was $3.6 million for the fiscal year ended December 31, 2006. We elected not to renew the Circle K licensing agreement, and to rebrand all of our convenience stores to our proprietary Stripes brand. We completed the rebranding during the first quarter of 2007 for a one-time capital investment of approximately $8.6 million. To support our proprietary Stripes brand, we increased our annual marketing expense by approximately $0.8 million beginning in fiscal 2006. We did not experience any adverse impacts on our store operations or customer traffic and spending from our rebranding initiative. We believe rebranding to Stripes affords us more flexibility for future growth while enhancing our profitability. In addition, we are no longer limited by the geographic restrictions set forth in the Circle K license agreement which limited the markets we could operate under the Circle K brand. We plan to rebrand the Town & Country convenience stores to our Stripes brand, commencing in the second half of 2008. We expect to spend $9 to $14 million in the rebranding of the Town and Country stores to our Stripes brand, with $4 to $7 million expected to be spent in 2008. The rebranding effort is expected to continue into 2009. The final cost of rebranding will depend partly on our fuel branding decisions which are still pending.
Technology and Store Automation. All of our retail convenience stores use computerized management information systems, including point-of-sale scanning, that are designed to improve operating efficiencies, streamline back office functions, provide corporate management with timely access to financial and marketing data, reduce store level and corporate administrative expense and control merchandise shortage, or shrink. Our information systems platform is highly scalable, which allows new stores to be quickly integrated into our system-wide reporting.
Our management information systems obtain detailed store level sales and volume data on a daily basis and generate gross margin, payroll and store contribution data on a weekly basis. We utilize price scanning and electronic point-of-sale, or EPOS, technology in all of our retail convenience stores that is consolidated on a single platform, VeriFone Ruby/Sapphire System, supported by on-site computers that are networked to our central server and back office. We manage our motor fuel inventory through TelaPoint, which enables us to monitor and coordinate fuel inventory management with our motor fuel vendors. This product has allowed us to better control inventory levels.
All store level, back office and accounting functions, including our merchandise price book, scanning, motor fuel management, scheduling, payroll and trend reports, are supported by PDI software, a fully integrated management information and financial accounting system. This system provides us with significant flexibility to continually review and adjust our pricing, merchandising strategies and price book, automates the traditional store paperwork process and improves the speed and accuracy of category management, restaurant expenses and inventory control. Data collected by the PDI system is consolidated for financial reporting, data analysis and category management purposes by a Hyperion database. The Company leverages its information technology and finance systems to manage proprietary money order, payphone and ATM networks.
Our physical information technology equipment consists of a wide area network that spans Texas, New Mexico and Oklahoma, providing connectivity to our corporate and regional offices and most of our convenience stores. The majority of our convenience stores communicate through broadband technology, with the balance using dial-up technology.
Our network and systems are kept up to date by annual capital investments, replacing end of life hardware and updating software versions. We also invest capital in firewall, remote access security, and virus and spam protection to ensure a high level of network security against intrusion from external threats. We have business policies and processes around access controls, password requirements, change management and systems and data redundancy to enhance systems integrity.
Town & Country also uses the PDI software and VeriFone EPOS systems, which is partly integrated into our systems at the current time. We expect to complete the systems and communications integration by mid-2008. Town & Country also utilizes the KSS pricing system as a tool for managing retail fuel pricing.
Wholesale Motor Fuel Distribution. We believe our business model of operating both retail convenience stores and wholesale motor fuel distribution provides us with significant advantages over our competitors. Unlike many of our convenience store competitors, we are able to take advantage of the combined motor fuel purchasing volumes to obtain attractive pricing and terms while reducing the variability in motor fuel margins. Our wholesale motor fuel segment purchases branded and unbranded motor fuel from refiners and distributes it to: (i) our retail convenience stores; (ii) 387 contracted independent operators of convenience stores, which we refer to as dealers; and (iii) commercial users, unbranded convenience stores and five unattended fueling facilities. We are a distributor of various brands of motor fuel, as well as unbranded motor fuel, which differentiates us from other wholesale distributors in our markets. We believe we are among the largest distributors of Valero and Chevron branded motor fuel in the United States, and we also distribute CITGO, Conoco, Exxon, Phillips 66, Shamrock, Shell and Texaco branded motor fuel. For the year ended December 30, 2007, we supplied 456.5 million gallons of motor fuel to our retail stores (including fuel purchased directly by Town & Country from the refiners) and 465.2 million gallons of motor fuel to other customers. We receive a fixed fee per gallon on approximately 79% of our third-party wholesale gallons sold, which reduces the overall variability of our financial results. We are in the process of evaluating and transferring Town & Countrys fuel supply agreements to our wholesale segment. The wholesale segment produced third-party revenues and gross profit of $1,039.6 million and $28.5 million, respectively, for fiscal 2007. The wholesale segment had total assets of $107.8 million as of December 30, 2007.
The following table highlights our total motor fuel gallons sold and the percentage of total gallons sold, by principal customer group:
No individual third-party customer is material. The following table highlights certain information regarding our wholesale motor fuel sales to third parties (excludes sales to retail segment) for the last five years:
Distribution Network. As of December 30, 2007, our wholesale motor fuel distribution locations consisted of 387 dealer locations under long-term contract. We also supply unbranded fuel to numerous other customers.
The following table provides a history of our dealer location openings, conversions, acquisitions and closings for the last five years:
Arrangements with Dealers. We distribute motor fuel to dealers either under supply agreements or consignment arrangements. Under our supply agreements, we agree to supply a particular branded motor fuel or unbranded motor fuel to a location or group of locations and arrange for all transportation. We receive a per gallon fee equal to the rack cost plus transportation costs, taxes and a fixed margin. The initial term of most supply agreements is 10 years. These supply agreements require, among other things, dealers to maintain standards established by the applicable brand. Under consignment arrangements, we provide and control motor fuel inventory and price at the site and receive the actual retail selling price for each gallon sold less a commission paid to the dealer. Consignment margins per gallon are similar to our retail motor fuel margins, less the commissions paid to the dealers. Our wholesale segment maintains minimal inventories, consisting of consigned fuel inventory at 76 dealer locations as of December 30, 2007. We may provide credit terms to our wholesale customers, which are generally seven days.
The following table describes the percentage of gallons sold by us attributable to supply agreements and consignment arrangements for fiscal 2007:
In addition to motor fuel supply, we offer dealers the opportunity to participate in merchandise purchase and promotional programs we set up with vendors. We believe the vendor relationships we have established through
our retail operations and our ability to develop these purchase and promotional programs provides us with an advantage over other distributors when recruiting new dealers into our network.
As an incentive to dealers, we may provide store equipment or motor fuel distribution equipment for use at designated sites. Generally, this equipment is provided to the dealer on the condition that the dealer continues to comply with the terms of its supply agreement with us. We typically own and depreciate these assets on our books.
Supplier Arrangements. We distribute branded motor fuel under the Chevron, CITGO, Conoco, Exxon, Phillips 66, Shamrock, Shell, Texaco and Valero brands to our retail convenience stores and to 387 independently operated sites within our wholesale network. Branded motor fuels are purchased from major oil companies under supply agreements. On July 28, 2006, we entered into a new supply agreement with Valero Marketing and Supply Company to supply motor fuel to all of our Stripes retail stores that were previously supplied by CITGO, new retail stores in certain geographic areas and selected wholesale locations. In connection with this new supply agreement, we rebranded all of our existing retail fuel islands that were supplied by CITGO to the Valero, Shamrock or Stripes brand. For fiscal 2007, Valero supplied approximately 52% and Chevron supplied approximately 25% of our motor fuel purchases. Our supply agreement with Valero expires in July 2018. We have been distributors for Chevron since 1996 and we have a contract with Chevron until March 2008, which we expect to be renewed on similar terms. We purchase the motor fuel at the suppliers applicable price per terminal which typically changes on a daily basis. Each supply agreement generally has an initial term of three years. In addition, each supply agreement typically contains provisions relating to, among other things, payment terms, use of the suppliers brand names, provisions relating to credit card processing, compliance with suppliers requirements, insurance coverage and compliance with legal and environmental requirements. As is typical in the industry, suppliers generally can terminate the supply contract if we do not comply with any material condition of the contract, including if we were to fail to make payments when due, or if our company is involved in fraud, criminal misconduct, bankruptcy or insolvency. Each supply agreement has provisions that obligate the supplier, subject to certain limitations, to sell up to an agreed upon number of gallons. Any amount in excess is subject to availability. Certain suppliers offer volume rebates or incentive payments to drive volumes and provide an incentive for branding new locations. Certain suppliers require that all or a portion of any such incentive payments be repaid to the supplier in the event that the sites are rebranded within a stated number of years. Moreover, in some cases, supply agreements provide that motor fuel suppliers have the right of first refusal to acquire assets used by us to sell their branded motor fuel. We also purchase unbranded motor fuel for distribution either on a spot or a rack basis.
We generally arrange for a third-party transportation provider to take delivery of the motor fuel at the terminal and deliver it to the appropriate sites in our distribution network. Under these arrangements, we take legal title to the motor fuel we purchase when we receive the motor fuel at the rack. A large portion of our motor fuel is transported by one third-party transport company, pursuant to a contract that automatically renews for six month periods unless terminated by either party. In addition, we also acquired a fleet of 18 fuel transportation vehicles in connection with our acquisition of TCFS, which continue to deliver fuel to the majority of our Town & Country branded conveniences stores. Effective with the beginning of fiscal 2008, we transferred these assets to a new wholly-owned subsidiary in our wholesale division called GoPetro Transport LLC.
Selection and Recruitment of New Dealers. We constantly evaluate potential independent site operators based on their creditworthiness and the quality of their site and operation as determined by size and location of the site, monthly volumes of motor fuel sold, monthly merchandise sales, overall financial performance and previous operating experience. In addition to adding to our network through acquiring or recruiting existing independently operating sites from other distributors, we identify new sites to be operated by existing independent operators in our network or new operators we recruit to operate the site. We also occasionally convert our retail stores to dealer locations.
Technology. Technology is an important part of our wholesale operations. We utilize a proprietary web-based system that allows our wholesale customers to access their accounts at any time from a personal
computer to obtain motor fuel prices, place motor fuel orders and review motor fuel invoices, credit card transactions and electronic funds transfer notifications. Substantially all of our dealers make payments to us by electronic funds transfer. We also use software licensed from Structured Management Systems, or SMS, for accounting, billing and motor fuel procurement processing. We extract data from SMS and upload the data into the Hyperion database for corporate financial consolidation.
We formed Applied Petroleum Technologies, Ltd., or APT, in June 1994. Headquartered in Corpus Christi, APT manages our environmental, maintenance and construction activities. In addition, APT sells and installs motor fuel pumps and tanks and also provides a broad range of environmental consulting services, such as hydrocarbon remediation and Phase I and II site assessments for our stores and for our outside customers. APT employs geologists, hydrogeologists and technicians licensed to oversee the installation and removal of underground storage tank systems. APTs revenues and net income are not material to Susser, and are included in all other in our segment reporting disclosures included in our audited consolidated financial statements.
The retail convenience store industry is highly competitive and marked by ease of entry and constant change in the number and type of retailers offering products and services of the type we sell in our stores. Our retail segment competes with other convenience store chains, independently owned convenience stores, motor fuel stations, supermarkets, drugstores, discount stores, dollar stores, club stores and hypermarkets. Over the past ten years, several non-traditional retailers, such as supermarkets, club stores and hypermarkets, have impacted the convenience store industry, particularly in the geographic areas in which we operate, by entering the motor fuel retail business. These non-traditional motor fuel retailers have captured a significant share of the retail motor fuel market, and we expect their market share will continue to grow. In addition, some large retailers and supermarkets are adjusting their store layouts and product prices in an attempt to appeal to convenience store customers. Major competitive factors for our retail segment include, among others, location, ease of access, product and service selection, motor fuel brands, pricing, customer service, store appearance, cleanliness and safety.
Our wholesale segment competes with major oil companies that distribute their own products, as well as other independent motor fuel distributors. We may encounter more significant competition if major oil companies increase their own motor fuel distribution operations or if our wholesale customers choose to purchase their motor fuel supplies directly from the major oil companies. Major competitive factors for our wholesale segment include, among others, customer service, price, range of services offered and quality of service.
Trade Names, Service Marks and Trademarks
We have registered, acquired the registration of, applied for the registration of and claim ownership of a variety of trade names, service marks and trademarks for use in our business, including Stripes, Laredo Taco Company (proprietary foodservice), Bun on the Run (stuffed pastry introduced in 2003), Texas Pride (unbranded motor fuel), Café de la Casa (custom coffee blend) and Slush Monkey (proprietary frozen carbonated beverage). We are not aware of any facts which would negatively affect our continuing use of any of the above trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal, state and local laws. A violation or change in the enforcement or terms of these laws could have a material adverse effect on our business, financial condition and results of operations. We describe below the most significant of the regulations that impact all aspects of our operations.
Environmental Laws and Regulations. We are subject to various federal, state and local environmental laws and regulations, including those relating to underground storage tanks, the release or discharge of hazardous materials into the air, water and soil, the generation, storage, handling, use, transportation and disposal of regulated materials, the exposure of persons to regulated materials, remediation of contaminated soil and groundwater and the health and safety of our employees.
Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), impose strict, and under certain circumstances, joint and several, liability on the owner and operator as well as former owners and operators of properties for the costs of investigation, removal or remediation of contamination and also impose liability for any related damages to natural resources without regard to fault. In addition, under CERCLA and similar state laws, as persons who arrange for the transportation, treatment or disposal of hazardous substances, we also may be subject to similar liability at sites where such hazardous substances come to be located. We have received notice from Texas Commission on Environmental Quality (TCEQ), that the TCEQ considers us, in addition to many other entities, to be a responsible party at a site referred to as the Industrial Roads/Industrial Metals State Superfund Site in Nueces County, Texas. Based on currently available information, we do not believe our liability, if any, will be material. We may also be subject to third-party claims alleging property damage and/or personal injury in connection with releases of or exposure to hazardous substances at, from or in the vicinity of our current or former properties or off-site waste disposal sites.
We are required to make financial expenditures to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. Pursuant to the Resource Conservation and Recovery Act of 1976, as amended, the Environmental Protection Agency, or EPA, has established a comprehensive regulatory program for the detection, prevention, investigation and cleanup of leaking underground storage tanks. Compliance with existing and future environmental laws regulating underground storage tank systems of the kind we use may require significant capital expenditures in the future. These expenditures may include upgrades, modifications, and the replacement of underground storage tanks and related piping to comply with current and future regulatory requirements designed to ensure the detection, prevention, investigation and remediation of leaks and spills. State or local agencies are often delegated the responsibility for implementing the federal program or developing and implementing equivalent state or local regulations. We have a comprehensive program in place for performing routine tank testing and other compliance activities which are intended to promptly detect and investigate any potential releases. We spent approximately $0.8 million on these compliance activities for the fiscal year ended December 30, 2007. In addition, the Federal Clean Air Act and similar state laws impose requirements on emissions to the air from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. These laws may require the installation of vapor recovery systems to control emissions of volatile organic compounds to the air during the motor fueling process. We believe we are in compliance in all material respects with applicable environmental requirements, including those applicable to our underground storage tanks.
We are in the process of investigating and remediating contamination at a number of our sites as a result of recent or historic releases of petroleum products. At many sites, we are entitled to reimbursement from third parties for certain of these costs under third-party contractual indemnities, state trust funds and insurances policies, in each case, subject to specified deductibles, per incident, annual and aggregate caps and specific eligibility requirements. To the extent third parties (including insurers) fail to pay for remediation as we anticipate, and/or insurance is unavailable, and/or the state trust funds cease to exist or become insolvent, we will be obligated to pay these additional costs. We recorded expenses of $0.4 million during fiscal 2007 for remediation activities for which we do not expect to receive reimbursement.
We are required to comply with federal and state financial responsibility requirements to demonstrate that we have the ability to pay for cleanups or to compensate third parties for damages incurred as a result of a release of regulated materials from our underground storage tank systems. We seek to comply with these requirements by maintaining insurance which we purchase from private insurers and in certain circumstances, rely on
applicable state trust funds, which are funded by underground storage tank registration fees and taxes on wholesale purchase of motor fuels. More specifically, in Texas, for 2007 and prior years we met our financial responsibility requirements by state trust fund coverage for claims asserted prior to December 1998 (claims reported after that date are ineligible for reimbursement) and met such requirements for claims asserted after that date through private insurance. In Oklahoma and New Mexico, we meet our financial responsibility requirements by state trust fund coverage for cleanup liability and meet the requirements for third-party liability through private insurance. The coverage afforded by each fund varies and is dependent upon the continued maintenance and solvency of each fund.
Environmental Reserves. As of December 30, 2007, Susser had environmental reserves of $2.6 million for estimated costs associated with investigating and remediating known releases of regulated materials, including overfills, spills and releases from underground storage tanks, at approximately 47 currently and formerly owned and operated sites. Approximately $1.5 million of the total environmental reserve is for the investigation and remediation of contamination at 21 of these sites, for which we estimate we will receive approximately $1.6 million in reimbursement from the Texas Petroleum Storage Tank Remediation fund. Reimbursement will depend upon the continued maintenance and solvency of the state fund through its scheduled expiration on August 31, 2011. The remaining reserve of $1.1 million represents our estimate of deductibles under insurance policies that we anticipate being required to pay with respect to 26 additional sites for which we expect to receive insurance coverage over the deductible amount, subject to per occurrence and aggregate caps contained in the policies. There are 27 additional sites that we own and/or operate with known contamination, which are being investigated and remediated by third parties (primarily former site owners) pursuant to contractual indemnification agreements imposing responsibility on the former owners for pre-existing contamination. We maintain no reserves for these sites. There can be no assurance that the third parties will be able or willing to pay all costs for these sites in which case we could incur additional costs. We have additional reserves of $3.7 million that represent our estimate for future asset retirement obligations for underground storage tanks.
There are currently 17 sites with known contamination owned or operated by Town & Country. We believe all remediation obligations with respect to these sites will be eligible for reimbursement under Texas or New Mexico remediation funds.
Sale of Alcoholic Beverages and Tobacco Products. In certain areas where our stores are located, state or local laws limit the hours of operation for the sale of alcoholic beverages, or prohibit the sale of alcoholic beverages, and restrict the sale of alcoholic beverages and cigarettes to persons older than a certain age. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of alcoholic beverages, as well as to issue fines to stores for the improper sale of alcoholic beverages and cigarettes. Failure to comply with these laws may result in the loss of necessary licenses and the imposition of fines and penalties on us. Such a loss or imposition could have a material adverse effect on our business, liquidity and results of operations. In many states, retailers of alcoholic beverages have been held responsible for damages caused by intoxicated individuals who purchased alcoholic beverages from them. While the potential exposure for damage claims as a seller of alcoholic beverages and cigarettes is substantial, we have adopted procedures intended to minimize such exposure. In addition, we maintain general liability insurance that may mitigate the effect of any liability.
Safety. We are subject to comprehensive federal, state and local safety laws and regulations. These regulations address issues ranging from facility design, equipment specific requirements, training, hazardous materials, record retention, self-inspection, equipment maintenance and other worker safety issues, including workplace violence. These regulatory requirements are fulfilled through health, environmental and safety programs.
Store Operations. Our stores are subject to regulation by federal agencies and to licensing and regulations by state and local health, sanitation, safety, fire and other departments relating to the development and operation of convenience stores, including regulations relating to zoning and building requirements and the preparation and sale of food. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new store in a particular area.
Our operations are also subject to federal and state laws governing such matters as wage rates, overtime, working conditions and citizenship requirements. At the federal level, there are proposals under consideration from time to time to increase minimum wage rates and to introduce a system of mandated health insurance, both of which could affect our results of operations.
As of December 30, 2007, we employed 6,156 persons, of which approximately 68% were full-time employees. Approximately 91% of our employees work in our retail stores, approximately 1% in our wholesale segment and 8% in our corporate or field offices. Our retail stores typically employ an average of 7 to 15 individuals, who are supervised by a single store manager, and one to three assistant store managers. Our retail divisions field management staff consists of 64 area managers, each of whom is responsible for five to eleven stores, and eight division managers, each of whom is responsible for approximately 52 to 100 stores. Our business is seasonal and as a result the number of employees fluctuates from a high in the spring and summer to a low in the fall and winter. Our wholesale segment is headquartered in Houston and employs dealer territory managers, commercial sales representatives and support staff. None of our employees are subject to collective bargaining agreements.
Directors and Executive Officers
The following table sets forth the names and ages (as of March 1, 2008) of each of our directors or executive officers and a brief account of their business experience
Sam L. Susser has served as our President and Chief Executive Officer since 1992. From 1988 to 1992, Mr. Susser served as our General Manager and Vice President of Operations. From 1985 through 1987, Mr. Susser served in the corporate finance division and the mergers and acquisitions group with Salomon Brothers Inc, an investment bank. Mr. Susser currently serves as a director of a number of charitable, educational and civic organizations. Sam L. Susser is the son of Sam J. Susser, who is also a member of Susser Holdings Corporations board of directors.
E.V. Bonner, Jr. has served as our Executive Vice President and General Counsel since March 2000. Prior to joining us, Mr. Bonner was a stockholder in the law firm of Porter, Rogers, Dahlman & Gordon, P.C. from 1986 to 2000. He is board certified in commercial real estate law by the Texas board of legal specialization. Mr. Bonner has been involved in numerous charitable, educational and civic organizations.
Rocky B. Dewbre has served as our Executive Vice President and President/Chief Operating Officer-Wholesale since January 2005. Mr. Dewbre served as our Executive Vice President and Chief Operating Officer-Wholesale from 1999 to 2005, as Vice President from 1995 to 1999 and as Manager of Finance and Administration from 1992 to 1995. Before joining us in 1992, Mr. Dewbre was a corporate internal auditor with Atlantic Richfield Corporation, a petroleum/chemical company, from 1991 to 1992 and an auditor and consultant at Deloitte & Touche LLP from 1988 to 1991.
W. Alvin New has served as our Executive Vice President and President/Chief Executive Officer-Retail Operations since November 2007. Mr. New was previously with TCFS Holdings, Inc., the parent company of Town & Country Food Stores, Inc., since 1984 where he held various positions, the most recent being as President and Chief Executive Officer and a member of the Board of Directors from November 2002. Mr. New has announced his intention to resign, but will continue in his current role until approximately May 31, 2008.
Mary E. Sullivan has served as our Executive Vice President, Chief Financial Officer and Treasurer since November 2005. Ms. Sullivan served as our Vice President of Finance since joining us in February 2000. Ms. Sullivan served as Director of Finance for the City of Corpus Christi from 1999 to 2000. Ms. Sullivans previous experience includes serving as the Controller and member of the board of directors of Elementis Chromium, a producer of chromium chemicals, from 1993 to 1999, and various positions with Central Power and Light Company, culminating in Treasurer, over the 13 year period from 1979 to 1992.
William F. Dawson, Jr. has been a partner at Wellspring, a private equity firm, since 2001 and has served as a member of our board of directors since December 2005. Mr. Dawson previously chaired the middle-market buyout group at J.H. Whitney & Co., a private equity firm, and, from 1986 until 2000, was with Donaldson, Lufkin & Jenrette Securities Corporation, an investment bank, where he most recently served as Managing Director. Mr. Dawson serves on several private company boards controlled by Wellspring.
Bruce W. Krysiak has served as our director and Non-Executive Chairman since 2000. Mr. Krysiak has been Chairman of EDABB, Inc., a personal investment company, since 1999. Prior to 1999, Mr. Krysiak served as the President and Chief Operating Officer of Toys RUs from 1998 to 1999, of Dollar General Corporation from 1996 to 1997 and of Circle K Corporation from 1995 to 1996. Currently, Mr. Krysiak serves as the non-executive chairman of the board of directors of LA Dove, Inc., a hair care products manufacturer, and Quantum Health, an offeror of coordinated health care plans for self-insured employers. In addition, Mr. Krysiak serves as a member of the board of directors of several privately held entities. Mr. Krysiak also served on our board of directors in 1995 and 1996.
David P. Engel has served as a member of our board of directors since September 2007. Mr. Engel has been the principal of Corpus Christi-based Engel and Associates, LLC, since 1991 which provides business management consulting services to public and private companies in the areas of financial performance improvement, acquisitions and divestitures. Prior to joining Engel and Associates, LLC, Mr. Engel was president of Airgas Southwest, Inc. and was CEO, president and owner of Welders Equipment Company. Mr. Engel serves on the board of directors of several privately held companies. Mr. Engel also served on our board of directors from 1999 to 2005.
Armand S. Shapiro has served as our director since 1997 and also chairs the audit committee. Mr. Shapiro serves as a business consultant/mentor to chief executive officers of private companies to develop strategies to improve growth and profitability of the companies. He served from October 2001 through January 2006 on the board of directors of Bindview Development Corporation, then a publicly traded corporation that provided software for proactively managing information technology security compliance operations. Mr. Shapiro was the Chairman and Chief Executive Officer of Garden Ridge Corporation from 1990 until June 1999. During the 1980s, Mr. Shapiro also served as President, a member of the executive management team, and a director of Computer Craft, Inc., then a publicly traded retailer of computer products. He was previously a partner and Chief Operating Officer of Modern Furniture Rentals, Inc., a family-owned and operated business. Mr. Shapiro is a graduate of Renesselaer Polytechnic Institute and has served as an officer in the United States Army.
Sam J. Susser has served as a member of our board of directors since 1988 and was our chairman from 1988-1992. Mr. Susser was also the Chairman and Chief Executive Officer of Plexus Financial Services, a holding company based in Dallas, Texas, from 1987 through 1991. Mr. Sussers experience includes various positions with The Southland Corporation (7-Eleven, Inc.), Plexus Financial Services and CITGO Petroleum
Corporation, where he served as President. Mr. Susser is a director and past chairman of the Audit Committee of Alberto-Culver Company, a manufacturer and marketer of personal care and household brands. Mr. Susser previously has served on the board of directors of Garden Ridge Pottery and Computer Craft, Inc. Sam J. Susser is the father of Sam L. Susser, our President and Chief Executive Officer and a director.
Jerry E. Thompson has served as a member of our board of directors since May 2006. Mr. Thompson is President and Chief Executive Officer of the general partner of TEPPCO Partners, L.P., a publicly traded master limited partnership operating in segments including refined petroleum products, liquified petroleum gases and petrochemical transportation and storage. Mr. Thompson joined TEPPCO in April 2006 after a 35-year career with CITGO Petroleum Corporation. At the time of his retirement from CITGO in March 2006, Mr. Thompson had served as Chief Operating Officer of CITGO since 2003 and had served as Senior Vice President since 1998. Mr. Thompson also serves on the board of Texas Eastern Products Pipeline Company, LLC.
Roger D. Smith, who was our Executive Vice President and Chief Operating OfficerRetail, resigned effective November 13, 2007. Ronald D. Coben, who was our Executive Vice President and Chief Marketing Officer, resigned effective February 1, 2008. W. Alvin New, our current Executive Vice President and President and Chief Executive Officer of Retail Operations, has announced his intention to resign, but will continue in his current role until approximately May 31, 2008.
The convenience store industry is highly competitive and impacted by new entrants and our failure to effectively compete could result in lower sales and lower margins.
The geographic areas in which we operate are highly competitive and marked by ease of entry and constant change in the number and type of retailers offering products and services of the type we sell in our stores. We compete with other convenience store chains, independently owned convenience stores, motor fuel stations, supermarkets, drugstores, discount stores, dollar stores, club stores and mass merchants. In recent years, several non-traditional retailers, such as supermarkets, club stores and mass merchants, have impacted the convenience store industry, particularly in the geographic areas in which we operate, by entering the motor fuel retail business. These non-traditional motor fuel retailers have captured a significant share of the motor fuels market, and we expect their market share will continue to grow. In some of our markets, our competitors have been in existence longer and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry. To remain competitive, we must constantly analyze consumer preferences and competitors offerings and prices to ensure that we offer a selection of convenience products and services at competitive prices to meet consumer demand. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and attract customer traffic to our stores. We may not be able to compete successfully against current and future competitors, and competitive pressures faced by us could have a material adverse effect on our business and results of operations.
Historical prices for motor fuel have been volatile and significant changes in such prices in the future may adversely affect our profitability.
For the fiscal year ended December 30, 2007, our motor fuel revenue accounted for 82.7% of total revenues and our motor fuel gross profit accounted for 35.1% of gross profit. For the fiscal year ended December 30, 2007, motor fuel accounted for 28.9% of our retail divisions gross profit. Crude oil and domestic wholesale petroleum markets are volatile. General political conditions, acts of war or terrorism and instability in oil producing regions, particularly in the Middle East, Russia and South America, could significantly impact crude oil supplies and wholesale petroleum costs. Significant increases and volatility in wholesale petroleum costs could result in significant increases in the retail price of petroleum products and in lower motor fuel gross margin per gallon. Increases in the retail price of petroleum products could impact consumer demand for motor fuel and convenience merchandise. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will
have on our operating results and financial condition. In addition, a sudden shortage in the availability of motor fuel could adversely affect our business because our retail stores typically have a three to four day supply of motor fuel and our motor fuel supply contracts do not guarantee an uninterrupted, unlimited supply of motor fuel. A significant change in any of these factors could materially impact our motor fuel gallon volumes, motor fuel gross profit and overall customer traffic, which in turn could have a material adverse effect on our business and results of operations.
The integration of Town & Country will demand significant resources and there can be no assurance that the historical performance and trends of Town & Country will continue.
In evaluating the terms of the Town & County Food Stores Acquisition, we analyzed the business of Town & Country and made certain assumptions concerning their future operations. A principal assumption was that following the Town & County Food Stores Acquisition, the historical operating results of Town & Country would continue into the future. There can be no assurance, however, that this assumption is correct or that we will successfully complete the integration of our business and the business of Town & Country in a timely manner or that anticipated cost synergies will be realized in the future. The integration of two independent companies is a complex, costly and time-consuming process. The difficulties of combining the operations of the companies include, among others:
The future impact of the change in trademarks and trade names and of other changes on the business and operations of Town & Country cannot be fully predicted, and the lack of an established brand image for the Stripes name in the convenience store markets served by Town & Country may adversely affect our business.
Currently unknown liabilities of Town & Country may harm our financial conditions and operating results.
Because the Town & County Food Stores Acquisition was structured as a merger acquisition, we assumed all of the liabilities of Town & Country, including liabilities that may be unknown. We obtained certain representations and warranties and indemnification provisions from Town & Country concerning contingent liabilities and other obligations in order to reduce the risk of unknown liabilities. However, there may be situations where these indemnification provisions do not provide us with protection from certain obligations and liabilities. These obligations and liabilities could harm our financial condition and operating results.
Wholesale cost increases in tobacco products, including excise tax increases on cigarettes, could adversely impact our revenues and profitability.
For the fiscal year ended December 30, 2007, sales of cigarettes accounted for 3.0% of our total revenue; 5.3 % of our total gross profit; 4.9% of our retail divisions revenues; and 6.0% of our retail divisions gross profit. Significant increases in wholesale cigarette costs and tax increases on cigarettes may have an adverse effect on unit demand for cigarettes. Cigarettes are subject to substantial and increasing excise taxes on both a state and federal level. The Texas legislature increased cigarette taxes by $1 per pack, effective January 1, 2007. We believe that the increase has resulted in a lower volume of carton sales of cigarettes. We cannot predict whether this trend will continue into the future. Further, significant increases in cigarette-related taxes and fees have been proposed and are likely to continue to be proposed or enacted at the federal level. Increased excise taxes may result in declines in overall sales volume as well as reduced gross profit percent, due to lower
consumption levels and to a shift in consumer purchases from the premium to the non-premium or discount segments or to other low-priced or low-taxed tobacco products or to the import of cigarettes from countries with lower, or no, excise taxes on such items.
Currently, major cigarette manufacturers offer rebates to retailers. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are no longer offered, or decreased, our wholesale cigarette costs will increase accordingly. In general, we attempt to pass price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. These factors could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business and results of operations.
Future legislation and campaigns to discourage smoking may have a material adverse effect on our revenues and gross profit.
Future legislation and national, state and local campaigns to discourage smoking could have a substantial impact on our business, as consumers adjust their behaviors in response to such legislation and campaigns. Reduced demand for cigarettes could have a material adverse effect on sales of, and margins for, the cigarettes we sell.
We may incur costs or liabilities as a result of litigation or adverse publicity resulting from concerns over food quality, health or other issues that could cause guests to avoid our restaurants.
We may be the subject of complaints or litigation arising from food-related illness or injury in general which could have a negative impact on our business. Additionally, negative publicity, regardless of whether the allegations are valid, concerning food quality, food safety or other health concerns, restaurant facilities, employee relations or other matters related to our operations may materially adversely affect demand for our food and could result in a decrease in customer traffic to our restaurants.
It is critical to our reputation that we maintain a consistent level of high quality at our restaurants. Health concerns, poor food quality or operating issues stemming from one restaurant or a limited number of restaurants could materially adversely affect the operating results of some or all of our restaurants and harm our Laredo Taco Company and/or Country Cookin brands.
The wholesale motor fuel distribution industry is characterized by intense competition and fragmentation and our failure to effectively compete could result in lower margins.
The market for distribution of wholesale motor fuel is highly competitive and fragmented, which results in narrow margins. We have numerous competitors, some of which may have significantly greater resources and name recognition than us. We rely on our ability to provide value-added reliable services and to control our operating costs in order to maintain our margins and competitive position. If we were to fail to maintain the quality of our services, customers could choose alternative distribution sources and our margins could decrease. Furthermore, there can be no assurance that major oil companies will not decide to distribute their own products in direct competition with us or that large customers will not attempt to buy directly from the major oil companies. The occurrence of any of these events could have a material adverse effect on our business and results of operations.
The operation of our stores in close proximity to our dealers stores may result in direct competition which may affect the relationship with our dealers.
We have some stores that are in close proximity to our dealers stores in which case we are directly competing with our dealers. This may lead to disagreements with our dealers, and if the disagreements are not resolved amicably the dealers may initiate litigation which could result in our paying damages to the dealer or termination of our agreements with the dealer.
Decreases in consumer spending resulting from changes in local economic conditions or travel and tourism in the areas we serve could adversely impact our business.
In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth in automobile and commercial truck traffic and trends in local economies, travel, tourism and weather. Changes in economic conditions generally or in South Texas, West Texas or Eastern New Mexico specifically could adversely impact consumer spending patterns and travel and tourism in our markets, which could have a material adverse effect on our business and results of operations.
The industries in which we operate are subject to seasonal trends, which may cause our operating costs to fluctuate, affecting our cash flow.
We experience more demand for our merchandise, food and motor fuel during the late spring and summer months than during the fall and winter. Travel, recreation and construction are typically higher in these months in the geographic areas in which we operate, increasing the demand for the products that we sell and distribute. Therefore, our revenues are typically higher in the second and third quarters of our fiscal year. As a result, our results from operations may vary widely from period to period, affecting our cash flow.
Severe storms could adversely affect our business by damaging our facilities, our suppliers or lowering our sales volumes.
Approximately 36% of our stores are located in counties on the Texas gulf coast. Although South Texas is generally known for its mild weather, the region is susceptible to severe storms, including hurricanes. A severe storm could damage our facilities, our suppliers or could have a significant impact on consumer behavior, travel and convenience store traffic patterns, as well as our ability to operate our locations. This could have a material adverse effect on our business and results of operations.
Any devaluation of the Mexican peso, or imposition of restrictions on the access of citizens of Mexico to the United States, could adversely affect our business and financial condition by lowering our sales volumes for our stores located near the U.S.-Mexico border.
A devaluation of the Mexican peso could negatively affect the exchange rate between the peso and the U.S. dollar, which would result in reduced purchasing power on the part of our customers who are citizens of Mexico. Approximately 38% of our convenience stores are located in the Rio Grande Valley, Laredo and Del Rio, which are in close proximity to Mexico. In the event of a devaluation in the Mexican peso, revenues attributable to those stores could be reduced. In addition, some of our stores located in our West Texas and Eastern New Mexico markets could be adversely affected by a devaluation in the Mexican peso due to their relatively close proximity to Mexico and high Hispanic population. Further, due to global uncertainties, it is possible that tighter restrictions may be imposed by the U.S. government on the ability of citizens of Mexico to cross the border into the United States. In that case, revenues attributable to our convenience stores regularly frequented by citizens of Mexico could be reduced, which may have a material adverse effect on our business and results of operations.
Our growth depends in part on our ability to open and profitably operate new retail convenience stores and to successfully integrate acquired sites and businesses in the future.
We may not be able to open all of the convenience stores discussed in our expansion strategy and any new stores we open may be unprofitable. Additionally, acquiring sites and businesses in the future involves risks that could cause our actual growth or operating results to differ adversely compared to expectations. If these events were to occur, each would have a material adverse impact on our financial results. There are several factors that could affect our ability to open and profitably operate new stores or to successfully integrate acquired sites and businesses. These factors include:
Compliance with and liability under state and federal environmental regulations, including those that require investigation and remediation activities, may require significant expenditures or result in liabilities that could have a material adverse effect on our business.
Our business is subject to various federal, state and local environmental laws and regulations, including those relating to underground storage tanks, the release or discharge of regulated materials into the air, water and soil, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, remediation of contaminated soils and groundwater and the health and safety of our employees. A violation of, liability under or compliance with these laws or regulations or any future environmental laws or regulations, could have a material adverse effect on our business and results of operations.
Certain environmental laws, including Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), impose strict, and under certain circumstances, joint and several, liability on the owner and operator as well as former owners and operators of properties for the costs of investigation, removal or remediation of contamination and also impose liability for any related damages to natural resources without regard to fault. In addition, under CERCLA and similar state laws, as persons who arrange for the transportation, treatment or disposal of hazardous substances, we also may be subject to similar liability at sites where such hazardous substances come to be located. We may also be subject to third-party claims alleging property damage and/or personal injury in connection with releases of or exposure to hazardous substances at, from or in the vicinity of our current or former properties or off-site waste disposal sites. The costs associated with the investigation and remediation of contamination, as well as any associated third-party claims, could be substantial, and could have a material adverse effect on our business and results of operations and our ability to service our outstanding indebtedness, including the notes. In addition, the presence or failure to remediate identified or unidentified contamination at our properties could potentially materially adversely affect our ability to sell or rent such property or to borrow money using such property as collateral.
We are required to make financial expenditures to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. Pursuant to the Resource Conservation and Recovery Act of 1976, as amended, the Environmental Protection Agency, or EPA, has established a
comprehensive regulatory program for the detection, prevention, investigation and cleanup of leaking underground storage tanks. Compliance with existing and future environmental laws regulating underground storage tank systems of the kind we use may require significant capital expenditures in the future. These expenditures may include upgrades, modifications, and the replacement of underground storage tanks and related piping to comply with current and future regulatory requirements designed to ensure the detection, prevention, investigation and remediation of leaks and spills.
In addition, the Federal Clean Air Act and similar state laws impose requirements on emissions to the air from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. These laws may require the installation of vapor recovery systems to control emissions of volatile organic compounds to the air during the motor fueling process. While we believe we are in material compliance with all applicable regulatory requirements with respect to underground storage tank systems of the kind we use, the regulatory requirements may become more stringent or apply to an increased number of underground storage tanks in the future, which would require additional, potentially material, expenditures.
We are required to comply with federal and state financial responsibility requirements to demonstrate that we have the ability to pay for cleanups or to compensate third parties for damages incurred as a result of a release of regulated materials from our underground storage tank systems. We seek to comply with these requirements by maintaining insurance which we purchase from private insurers and in certain circumstances, rely on applicable state trust funds, which are funded by underground storage tank registration fees and taxes on wholesale purchase of motor fuels. The coverage afforded by each fund varies and is dependent upon the continued maintenance and solvency of each fund. More specifically, in Texas, we meet our financial responsibility requirements by state trust fund coverage for claims asserted prior to December 1998 (claims reported after that date are ineligible for reimbursement) and meet such requirements for claims asserted after that date through insurance purchased from a private insurance company funded by tank owners in Texas. In Oklahoma, we meet our financial responsibility requirements by state trust fund coverage for cleanup liability and meet the requirements for third-party liability through private insurance. In New Mexico, Town & Country meets its financial responsibility requirements by state trust fund coverage for cleanup liability and meet the requirements for third-party liability through private insurance.
We are currently responsible for investigating and remediating contamination at a number of our current and former properties. We are entitled to reimbursement for certain of these costs under various third-party contractual indemnities, state trust funds and insurances policies, subject to eligibility requirements, deductibles, per incident, annual and aggregate caps. To the extent third parties (including insurers and state trust funds) do not pay for investigation and remediation as we anticipate, and/or insurance is not available, and/or the state trust funds cease to exist or become insolvent, we will be obligated to make these additional payments, which could materially adversely affect our business, liquidity and results of operations.
We believe we are in material compliance with applicable environmental requirements; however, we cannot assure you that violations of these requirements will not occur. Although we have a comprehensive environmental, health and safety program, we may not have identified all of the environmental liabilities at all of our current and former locations; material environmental conditions not known to us may exist; future laws, ordinances or regulations may impose material environmental liability or compliance costs on us; or a material environmental condition may otherwise exist as to any one or more of our locations. In the future, we may incur substantial expenditures for remediation of contamination that has not been discovered at existing locations or locations that we may acquire. Furthermore, new laws, new interpretations of existing laws, increased governmental enforcement of existing laws or other developments including legislative, regulatory and other legal developments in various phases of discussion or implementation that may limit greenhouse gas emissions or increase fuel economy standards could require us to make additional capital expenditures, incur additional liabilities or negatively impact the market for motor fuel. The occurrence of any of these events could have a material adverse effect on our business and results of operations.
We have received notice from the TCEQ that we may be a responsible party at a site referred to as the Industrial Roads/Industrial Metals State Superfund Site in Nueces County, Texas.
We have received notice from the Texas Commission on Environmental Quality (TCEQ) that the TCEQ considers us, in addition to many other entities, to be a responsible party at a site referred to as the Industrial Roads/Industrial Metals State Superfund Site in Nueces County, Texas. Based on currently available information, we do not believe our liability, if any, will be material.
The dangers inherent in the storage and transport of motor fuel could cause disruptions and could expose us to potentially significant losses, costs or liabilities.
We store motor fuel in underground storage tanks at our retail locations and acquired three bulk fuel storage tanks in the TCFS Acquisition. Additionally, we transport a portion of our motor fuel in our own trucks, instead of by third-party carriers. Our operations are subject to significant hazards and risks inherent in transporting and storing motor fuel. These hazards and risks include, but are not limited to, fires, explosions, traffic accidents, spills, discharges and other releases, any of which could result in distribution difficulties and disruptions, environmental pollution, governmentally-imposed fines or clean-up obligations, personal injury or wrongful death claims and other damage to our properties and the properties of others. As a result, any such event could have a material adverse effect on our business, financial condition and results of operations.
Our motor fuel operations are subject to inherent risk, and insurance, if available, may not adequately cover any such exposure. The occurrence of a significant event that is not fully insured could have a material adverse effect on our business.
We operate retail outlets that sell refined petroleum products and distribute motor fuel to our wholesale customers. The presence of flammable and combustible products at our facilities provides the potential for fires and explosions that could destroy both property and human life. These products, almost all of which are liquids, also have the potential to cause environmental damage if improperly handled or released. Insurance is not available against all operational risks, especially environmental risks, and there is no assurance that insurance will be available in the future. In addition, as a result of factors affecting insurance providers, insurance premiums with respect to renewed insurance policies may increase significantly compared to what we currently pay. The occurrence of a significant event that is not fully insured could have a material adverse effect on our business and results of operations.
Pending or future consumer or other litigation could adversely affect our financial condition and results of operations.
Our retail operations are characterized by a high volume of customer traffic and by transactions involving a wide array of product selections. These operations carry a higher exposure to consumer litigation risk when compared to the operations of companies operating in many other industries. Consequently, we are frequently party to individual personal injury, bad fuel, products liability and other legal actions in the ordinary course of our business. While we believe these actions are generally routine in nature, incidental to the operation of our business and immaterial in scope, if our assessment of any action or actions should prove inaccurate, our financial condition and results of operations could be adversely affected. Additionally, we are occasionally exposed to industry-wide or class-action claims arising from the products we carry or industry-specific business practices. For example, various petroleum marketing retailers, distributors and refiners are currently defending class-action claims alleging that the sale of unadjusted volumes of fuel in temperatures in excess of 60 degrees Fahrenheit violates various state consumer protection laws due to the expansion of the fuel with the increase of fuel temperatures. While industry-specific or class action litigation of this type is less frequent in occurrence than individual consumer claims, the cost of defense and ultimate disposition may be material to our financial condition and results of operation.
Failure to comply with state laws regulating the sale of alcohol and cigarettes may result in the loss of necessary licenses and the imposition of fines and penalties on us, which could have a material adverse effect on our business.
State laws regulate the sale of alcohol and cigarettes. A violation or change of these laws could adversely affect our business, financial condition and results of operations because state and local regulatory agencies have the power to approve, revoke, suspend or deny applications for, and renewals of, permits and licenses relating to the sale of these products or to seek other remedies. Such a loss or imposition could have a material adverse effect on our business and results of operations.
Failure to comply with the other state and federal regulations we are subject to may result in penalties or costs that could have a material adverse effect on our business.
Our business is subject to various other state and federal regulations including, but not limited to, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate, income or overtime pay, adoption of mandated health benefits, or changes to immigration laws and citizenship requirements would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could have a material adverse effect on our business and results of operations. State or federal lawmakers or regulators may also enact new laws or regulations applicable to us that may have a material adverse and potentially disparate impact on our business.
We depend on one principal supplier for a substantial portion of our merchandise inventory. A disruption in supply or a change in our relationship could have a material adverse effect on our business.
We purchase more than 40% of our general merchandise, including most cigarettes and grocery items, from a single wholesale grocer, McLane Company, Inc., or McLane. McLane has been a supplier of ours since 1992. We have a contract with McLane until December 2010 which may be terminated by either party upon six months notice. A change of merchandise suppliers, a disruption in supply or a significant change in our relationship with McLane could have a material adverse effect on our business and results of operations.
We currently depend on two principal suppliers for the majority of our motor fuel. A disruption in supply or an unexpected change in our supplier relationships could have a material adverse effect on our business.
On July 28, 2006, we entered into a new supply agreement with Valero Marketing and Supply Company to supply all of our retail stores with motor fuel that were previously supplied by CITGO and selected wholesale locations. In connection with this new supply agreement, we rebranded all of our existing retail fuel islands that were supplied by CITGO to the Valero or Shamrock brand or the Stripes brand. For the fiscal year ended December 30, 2007, Valero supplied approximately 52% of our motor fuel purchases.
For the fiscal year ended December 30, 2007, Chevron supplied approximately 25% of our motor fuel purchases. We have been a distributor for Chevron since 1996. Our current contract with Chevron expires in March 2008, which we expect will be renewed on similar terms.
We depend on one principal transportation provider for the third-party transportation of the majority of motor fuel. Thus, a change of providers or a significant change in our relationship could have a material adverse effect on our business.
The majority of the motor fuel distributed by our wholesale division is transported from refineries to our convenience stores and contracted dealer locations by motor fuel transport trucks. We have a contract with Coastal Transport Co., Inc. for this service which may be terminated by either party upon six months notice. A change of transportation providers, a disruption in service or a significant change in our relationship with Coastal Transport Co., Inc. could have a material adverse effect on our business and results of operations.
Because we depend on our senior managements experience and knowledge of our industry, we could be adversely affected were we to lose key members of our senior management team.
We are dependent on the continued efforts of our senior management team. If, for any reason, our senior executives do not continue to be active in management, our business, financial condition or results of operations could be adversely affected. Alvin New, our President and CEO of Retail Operations has informed us that he does not plan to remain with the Company for the long-term, but that he will stay with the Company until approximately May 31, 2008. Ron Coben resigned from his office as Executive Vice President and Chief Marketing Officer on February 1, 2008. There is no guarantee that we will be able to identify and hire suitable successors for Mssrs. New and Coben or that we will be able to attract and retain additional qualified senior personnel as needed in the future. In addition, other than Sam L. Susser, we do not maintain key man life insurance on our senior executives and other key employees. We also rely on our ability to recruit qualified store managers, regional managers and other store personnel. Failure to continue to attract these individuals at reasonable compensation levels could have a material adverse effect on our business and results of operations.
We compete with other businesses in our market with respect to attracting and retaining qualified employees.
Our continued success depends on our ability to attract and retain qualified personnel in all areas of our business. We compete with other businesses in our market with respect to attracting and retaining qualified employees. A tight labor market, increased overtime and a higher full-time employee ratio may cause labor costs to increase. A shortage of qualified employees may require us to enhance wage and benefits packages in order to compete effectively in the hiring and retention of qualified employees or to hire more expensive temporary employees. No assurance can be given that our labor costs will not increase, or that such increases can be recovered through increased prices charged to customers.
Terrorist attacks and threatened or actual war may adversely affect our business.
Our business is affected by general economic conditions and fluctuations in consumer confidence and spending, which can decline as a result of numerous factors outside of our control. Terrorist attacks or threats, whether within the United States or abroad, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions impacting our suppliers or our customers may adversely impact our operations. As a result, there could be delays or losses in the delivery of supplies to us, decreased sales of our products and extension of time for payment of accounts receivable from our customers. Specifically, strategic targets such as energy related assets (which could include refineries that produce the motor fuel we purchase or ports in which crude oil is delivered) may be at greater risk of future terrorist attacks than other targets in the United States. These occurrences could have an adverse impact on energy prices, including prices for our products, and an adverse impact on the margins from our operations. In addition, disruption or significant increases in energy prices could result in government imposed price controls. Any or a combination of these occurrences could have a material adverse effect on our business and results of operations.
Our substantial indebtedness may impair our financial condition.
On December 30, 2007, we had $413.3 million in outstanding indebtedness. Our substantial indebtedness could have important consequences to you, including:
In addition, we may not be able to generate sufficient cash flow from our operations to repay our indebtedness when it becomes due and to meet our other cash needs. If we are not able to pay our debts as they become due, we will be required to pursue one or more alternative strategies, such as selling assets, refinancing or restructuring our indebtedness or selling additional debt or equity securities. We may not be able to refinance our debt or sell additional debt or equity securities or our assets on favorable terms, if at all, and if we must sell our assets, it may negatively affect our ability to generate revenues.
Despite current indebtedness levels, we may still incur more debt. This could further exacerbate the risks associated with our substantial indebtedness.
Subject to specified limitations, the indenture governing our 10 5/8% senior notes and the credit agreements governing our revolving credit and term loan facilities will permit us and our existing or future subsidiaries, if any, to incur substantial additional debt. If new debt is added to our or any such subsidiarys current debt levels, the risks described above in the previous risk factor could intensify. See Managements Discussion of Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources for additional information.
We depend on cash flow generated by our subsidiaries.
We are a holding company with no material assets other than the equity interests of our subsidiaries. Our subsidiaries conduct substantially all of our operations and own substantially all of our assets. Repayment of our indebtedness is dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Each of our subsidiaries is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries and our subsidiaries may not be able to, or be permitted to, make distributions to us. In the event that we do not receive distributions from our subsidiaries, we may be unable to meet our financial obligations.
The restrictive covenants in our revolving credit and term loan facilities and the indenture governing our 10 5/8% senior notes may affect our ability to operate our business successfully.
The indenture governing our 10 5/8% senior notes and the terms of our revolving credit and term loan facilities will, and our future debt instruments may, contain various provisions that limit our ability to, among other things:
These covenants could adversely affect our ability to finance our future operations or capital needs and pursue available business opportunities.
In addition, our revolving credit and term loan facilities require us to maintain specified financial ratios and satisfy certain financial condition tests. Events beyond our control, including changes in general economic and business conditions, may affect our ability to meet those financial ratios and financial condition tests. We cannot assure you that we will meet those tests or that our lenders will waive any failure to meet those tests. A breach of any of these covenants or any other restrictive covenants contained in our revolving credit and term loan facilities or the indenture governing our 10 5/8% senior notes would result in an event of default. If an event of default under our revolving credit and term loan facilities or the indenture occurs, the holders of the affected indebtedness could declare all amounts outstanding, together with accrued interest, to be immediately due and payable, which, in turn, could cause the default and acceleration of the maturity of our other indebtedness. If we were unable to pay such amounts, the lenders under our revolving credit and term loan facilities could proceed against the collateral pledged to them. We have pledged substantially all of our assets to the lenders under our revolving credit and term loan facilities. See Managements Discussion of Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources for additional information.
At December 30, 2007, we owned 250 of our operating retail stores and leased the real property of 254 of our stores. We also own 21 sites for future stores and 47 properties we consider surplus properties. In addition, our wholesale segment owns 44 dealer locations and leases the property at 10 locations, which we lease or sublease to independent operators. Most of our leases are net leases requiring us to pay taxes, insurance and maintenance costs. We believe that no individual site is material to us. The following table provides summary information of our owned and leased real property as of December 30, 2007, inclusive of renewal options:
We believe that we will be able to negotiate acceptable extensions of the leases for those locations that we intend to continue operating.
We own the headquarters facility of our retail segment, which consists of approximately 27,000 square feet of office space located in Corpus Christi. We also own the headquarters of our wholesale segment, which consists of approximately 43,000 square feet of office and warehouse space in Houston and the headquarters of APT, which consists of approximately 25,000 square feet of office and warehouse space in Corpus Christi. We have entered into a lease agreement for an approximately 83,000 square foot building that we are remodeling to consolidate our four Corpus Christi facilities into one location and to alleviate current overcrowding. The annual lease expense is approximately $144,000, net of taxes, insurance and maintenance. We plan to move during mid-2008, and to sell or lease the existing office locations.
As of December 30, 2007, the book value of our net property, plant and equipment was $410.7 million. We used the purchase method of accounting to record assets and liabilities acquired from Susser Holdings, L.L.C. by Stripes Holdings LLC in December 2005, which required a partial step up in basis based on fair values. The purchase price allocation for the TCFS Acquisition reflected on the balance sheet as of December 30, 2007 is a preliminary estimate based on third-party valuations and managements assessment.
We expect to finalize these estimates prior to the issuance of our 2008 financial statements, due March 13, 2009. We will be evaluating potential additional adjustments related to other intangible assets as well as consistency in application of accounting policies by TCFS, and such adjustments could be significant.
We are party to various legal actions in the ordinary course of our business. We believe these actions are routine in nature and incidental to the operation of our business. While the outcome of these actions cannot be predicted with certainty, we believe that the ultimate resolutions of these matters will not have a material adverse effect on our business, financial condition or prospects.
We make routine applications to state trust funds for the sharing, recovering and reimbursement of certain cleanup costs and liabilities as a result of releases of motor fuels from storage systems. For more information about these cleanup costs and liabilities, see Government Regulation and Environmental Matters.
Our common stock, $.01 par value, represents our only voting securities, and has been listed on the Nasdaq Global Market under the symbol SUSS since trading of our stock began on October 19, 2006 in connection with our IPO. Prior to that time, there was no established trading market for our securities. There were 17,006,662 shares of common stock issued and 16,995,338 shares outstanding as of December 30, 2007. The high and low closing price of our common stock for each quarterly period since our IPO were as follows:
As of March 1, 2008, there were 25 holders of record of our common stock. This number does not include beneficial owners of our common stock whose stock is held in nominee or street name accounts through brokers.
We have never declared or paid cash dividends on our common stock, and we do not expect to pay cash dividends on our common stock for the foreseeable future. We intend to retain earnings to support operations, to reduce debt and to finance expansion. The payment of cash dividends in the future is at the discretion of our Board of Directors, and any decision to declare a dividend will be based on a number of factors, including, but not limited to, earnings, financial condition, applicable covenants under our credit facility and other contractual restrictions, and other factors deemed relevant by our Board of Directors. See Item 7. Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources and Item 8. Consolidated Financial Statements and Supplementary DataNotes to Consolidated Financial StatementsNote 11. Long-Term Debt.
For a table showing securities authorized for issuance under equity compensation plans, see Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters-Equity Compensation Plan Information.
The following table sets forth selected consolidated financial data and store operating data for the periods indicated for Susser Holdings Corporation and its subsidiaries, and its predecessors. The selected consolidated financial data for each of the fiscal years ended on and as of the Sunday nearest to December 31, 2003, 2004, 2005, 2006 and 2007, respectively, are derived from, and are qualified in their entirety by, our audited consolidated financial statements. The statement of operations for fiscal 2005 reflects the combined results of 352 days of Susser Holdings, L.L.C. (Predecessor) and 12 days of Stripes Holdings LLC. On October 24, 2006, Susser Holdings Corporation became the parent company of Stripes Holdings LLC and completed an initial public offering of its common stock. Historical results are not necessarily indicative of the results to be expected in the future. Our results presented for fiscal 2007 include 48 days of operations of Town & Country, subsequent to the November 13, 2007 acquisition. You should read the following summary consolidated financial information together with Business, Managements Discussion and Analysis of Financial Condition and Results of Operations, and our consolidated financial statements and related notes appearing elsewhere in this report.
We believe that EBITDA and Adjusted EBITDA are useful to investors in evaluating our operating performance because:
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as measures of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations include:
The following table presents a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:
The following table presents a reconciliation of net cash provided by (used in) operating activities to EBITDA and Adjusted EBITDA:
This discussion and analysis of our financial condition and results of operations should be read in conjunction with Item 6. Selected Financial Data and our consolidated financial statements and the related notes referenced in Item 8. Consolidated Financial Statements and Supplementary Data. The fiscal years presented herein each included 52 weeks.
Safe Harbor Discussion
This report, including without limitation, our discussion and analysis of our financial condition and results of operations, contains statements that we believe are forward-looking statements under the Private Securities Litigation Reform Act of 1995 and are intended to enjoy protection of the safe harbor for forward-looking statements provided by that Act. These forward-looking statements generally can be identified by use of phrases such as believe, plan, expect, anticipate, intend, forecast or other similar words or phrases. Descriptions of our objectives, goals, targets, plans, strategies, costs, anticipated capital expenditures, expected cost savings and benefits are also forward-looking statements. These forward-looking statements are based on our current plans and expectations and involve a number of risks and uncertainties that could cause actual results and events to vary materially from the results and events anticipated or implied by such forward-looking statements, including:
For a discussion of these and other risks and uncertainties, please refer to Part 1. Item 1A. Risk Factors. The list of factors that could affect future performance and the accuracy of forward-looking statements is illustrative but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of March 14, 2008. We anticipate that subsequent events and market developments will cause our estimates to change. However, while we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if new information becomes available in the future.
We are the largest non-refining operator in Texas of convenience stores based on store count and we believe we are the largest non-refining motor fuel distributor by gallons in Texas. Our operations include retail convenience stores and wholesale motor fuel distribution. We constructed or acquired 16 and 18 new retail stores in 2006 and 2007, respectively. Additionally, we acquired 168 retail stores from Town & Country on November 13, 2007. As of December 30, 2007, after giving effect to Town & Country, our retail segment operated 504 convenience stores in Texas, New Mexico and Oklahoma, offering merchandise, foodservice, motor fuel and other services.
For the fiscal year ended December 30, 2007, we sold 921.7 million gallons of branded and unbranded motor fuel. We purchase fuel directly from refiners and distribute it to our retail convenience stores, contracted independent operators of convenience stores (dealers), unbranded convenience stores and other commercial users. We added 30 new dealer sites in each of 2006 and 2007, and as of December 30, 2007, we supplied 387 dealer locations. We believe our retail/wholesale business model, scale, market share, and foodservice and merchandising offerings, combined with our highly productive new store model and selected acquisition opportunities, position us for ongoing growth in sales and profitability. Our total revenues, net income (loss) and Adjusted EBITDA were $2,265.2 million, ($3.7) million and $45.2 million, respectively, for fiscal 2006 and $2,717.4 million, $16.3 million and $58.3 million, respectively, for fiscal 2007.
We substantially changed our capital structure in December 2005 through a series of recapitalization and financial transactions in which Stripes Acquisition LLC, an affiliate of Wellspring Capital Partners III, L.P., merged with and into Susser Holdings, L.L.C., with Susser Holdings, L.L.C. surviving the merger, and Susser Holdings, L.L.C. became a wholly-owned subsidiary of Stripes Holdings LLC. Wellspring becoming a significant stockholder along with Sam L. Susser and members of our senior management, investing a total of $128.5 million. Concurrent with this transaction, we also issued $170 million aggregate principal amount of 10 5/8% senior notes due 2013, sold 74 of our retail stores for $170 million and entered into leaseback agreements for each of the stores, entered into a new $50 million revolving credit facility and repaid all existing indebtedness. This recapitalization allowed us to provide liquidity to our three existing private equity firms, who had invested in Susser Holdings, L.L.C. in 2000, and other equity holders. It also provided us with an appropriate capital structure to continue our strategy of growing through new store construction, new dealer openings, and strategic acquisitions. However, it did not change the core operations of our business, which is retail convenience store operations and wholesale fuel distribution.
On October 24, 2006, Susser Holdings Corporation completed an IPO of 7,475,000 shares of common stock at a price of $16.50 per share for an aggregate offering price of $123.3 million, and approximately $112.8 million in net proceeds after payment of fees, expenses and underwriting discounts of approximately $10.5 million. The net proceeds were used to redeem $50 million of our 10 5/8% senior notes, plus accrued interest and premium
thereon, to repay outstanding borrowings under our existing revolving credit facility, and for general corporate purposes, including growth capital. Susser Holdings Corporation became, immediately prior to the IPO, the holding company of Stripes Holdings LLC, which together with each of its direct and indirect subsidiaries, comprises all of our operations.
Our agreement for the rights to use the Circle K brand name on our convenience stores in certain geographic locations expired in November 2006. We elected to not renew this agreement and have rebranded all of our retail convenience stores to our proprietary Stripes brand name. On July 28, 2006, we entered into a new long-term supply agreement, expiring July 13, 2018, with Valero Marketing and Supply Company to supply motor fuel to our Stripes retail stores that were then supplied by CITGO, as well as to supply selected wholesale locations. In connection with this new supply agreement, we have rebranded all of our existing stores that were previously supplied by CITGO to the Valero or Shamrock brand or the Stripes brand.
On November 13, 2007, we acquired TCFS, which included 168 convenience stores in West Texas and Eastern New Mexico, in a transaction valued at approximately $356 million. Financing for this acquisition consisted of $150 million additional 10 5/8% senior notes, $105 million term debt, $51.2 million sale and leaseback of 13 Town & Country retail properties, $11.3 million borrowings on our new $90 million revolving credit facility and cash on our balance sheet. See Note 4 of the accompany Notes to Consolidated Financial Statements in our audited consolidated financial statements for further discussion of the TCFS Acquisition. The results of operations of Town & Country for the 48 days subsequent to acquisition are included in our results of operations for the twelve months ended December 30, 2007.
Market and Industry Trends
During the past thirty-six months domestic crude oil and wholesale motor fuel costs have risen dramatically and have continued to be extremely volatile due to global increased demand and general instability in oil producing regions, especially the Middle East, Russia, Africa and South America, as well as severe weather conditions affecting the U.S. domestic oil production and refining operations. If the increase in crude oil prices and volatility continues and we are not able to pass on the cost increases to retail motor fuel customers, our fuel margins may decline. Nevertheless, when prices increase quickly and then subsequently fall our margins tend to be higher. Higher motor fuel costs result in an increase in our credit card expenses, since these fees are calculated as a percentage of the sales amount rather than a percentage of gallons sold. In addition, higher natural gas prices result in significantly higher electricity costs.
The other significant trends in the retail convenience store industry continue to be the expansion of foodservice categories as an increased percentage of merchandise sales and the continued increased motor fuel competition from hypermarkets. We believe that our larger format stores, more efficient motor fueling facilities and Laredo Taco Company and Country Cookin offerings position us strongly to competitively address these industry trends in our retail segment.
Description of Revenues and Expenses
Revenues and Cost of Sales. Our revenues and cost of sales consist primarily of the following:
We also offer a number of ancillary products and services to our customers including lottery tickets, ATM services, proprietary money orders, prepaid phone cards and wireless services and pay phones.
The income for these ancillary products and services is recorded in other revenues in our consolidated statements of operations. There is minimal cost of sales associated with other revenue.
The wholesale business also receives rental income from convenience store properties it leases to third parties, and nominal commission income on various programs we offer to our branded dealers. These programs allow dealers to take advantage of products and services that they would not likely be able to obtain on their own, or at discounted rates. The income for rents and program income is recorded in other revenues in our consolidated statements of operations. There is minimal cost of sales associated with other revenue.
Operating expenses. Our operating expenses consist primarily of the following:
Key Measures Used to Evaluate and Assess Business
Key measures we use to evaluate and assess our business include the following:
We define EBITDA as net income before net interest expense, income taxes and depreciation, amortization and accretion. Adjusted EBITDA further adjusts EBITDA by excluding cumulative effect of changes in accounting principles, discontinued operations, non-cash stock based compensation expense, and certain other operating expenses that are reflected in our net income that we do not believe are indicative of our ongoing core operations, such as significant transaction expenses associated with the 2005 recapitalization and the gain or loss on disposal of assets and impairment charges. In addition, those expenses that we have excluded from our presentation of Adjusted EBITDA (along with our royalty expenses and other items) are also excluded in measuring our covenants under our existing revolving credit facility and the indenture governing the existing notes.
EBITDA and Adjusted EBITDA are important measures used by management in evaluating our business because:
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be alternatives to net income as measures of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results as reported under GAAP. Some of these limitations include:
Results of Operations
The following table sets forth our revenues, cost of sales, gross profit, operating expenses and operating income as a percentage of total revenues for the period indicated:
Key Operating Metrics
The following table sets forth, for the periods indicated, information concerning key measures we rely on to gauge our operating performance:
The following tables present a reconciliation of our segment operating income (loss) to EBITDA and Adjusted EBITDA:
Fiscal 2007 Compared to Fiscal 2006
The following comparative discussion of results for fiscal year 2007 compared to fiscal year 2006 compares the 52-week periods of operations ended December 30, 2007 and December 31, 2006 of Susser Holdings Corporation. Included in our 2007 results are 48 days of operations of Town & Country, subsequent to their acquisition on November 13, 2007. The addition of Town & Countrys convenience stores increased our retail store count by approximately 50%. We also constructed or acquired 16 new stores during 2006 which contributed a full year of results for 2007, and 18 new stores during 2007 which contributed a partial years results.
Total Revenue. Total revenue for 2007 was $2,717.4 million, an increase of $452.2 million, or 20.0%, over 2006. The increase in total revenue was driven by a 21.6% increase in merchandise sales, a 27.2% increase in retail motor fuel sales and a 12.1% increase in wholesale motor fuel sales, as further discussed below. Included in these increases are 48 days of Town & Country revenue of approximately $131.6 million.
Total Gross Profit. Total gross profit for 2007 was $261.1 million, an increase of $40.4 million, or 18.3%, over 2006. Contributing to the increase were the impact of Town & Country ($17.0 million), the other new stores constructed or acquired during 2006 and 2007 ($14.7 million) and other reasons as further described below.
Merchandise Sales and Gross Profit. Merchandise sales were $444.2 million for 2007, an increase of $78.9 million, or 21.6%, over 2006. Our performance was due to a 7.7% merchandise same store sales increase, accounting for $27.5 million of the increase, with the balance due to new stores built or acquired in 2006 and 2007. Key categories contributing to the same store sales increase were cigarettes ($ 12.1 million), food service ($6.3 million), packaged drinks ($3.5 million), beer ($2.8 million) and snacks ($2.0 million). Food service includes sales from restaurant operations, hot dogs, fountain beverages, coffee and other prepared foods. The increase in cigarettes was primarily due to a $1 per pack excise tax increase in Texas effective January 2007. Merchandise gross profit was $144.6 million for 2007, a $25.5 million, or 21.4%, increase over 2006, which was driven by the increase in merchandise sales. Merchandise margins after shrink were 32.5%, down slightly from 32.6% in 2006. Cigarette margins declined by 320 basis points from 2006, resulting from the excise tax increase. However, this margin decrease was largely offset by the continued expansion of Laredo Taco Company and other high-margin categories. Our reported merchandise margins do not include other income from services such as ATMs, lottery, prepaid phone cards and car washes.
Retail Motor Fuel Sales, Gallons and Gross Profit. Retail sales of motor fuel for 2007 were $1,211.8 million, an increase of $258.8 million, or 27.2%, over 2006, driven by a 10.1% increase in the average retail price of motor fuel and a 15.5% increase in retail gallons sold. Town & Country contributed approximately half of this gallon increase. Excluding Town & Country, we sold an average of 1.3 million gallons per retail store, a 5.0% increase over 2006. Retail motor fuel gross profit increased by 24.9% over 2006 due to the additional gallons sold and a 1.1 cent, or 8.1%, increase in the gross profit per gallon to 14.7 cents per gallon.
Wholesale Motor Fuel Sales, Gallons and Gross Profit. Wholesale motor fuel revenues to third parties for 2007 were $1,035.5 million, a 12.1% increase over 2006. The increase was driven by a 3.2% increase in gallons sold and an 8.7% increase in the wholesale selling price per gallon. Wholesale motor fuel gross profit of $24.5 million decreased 2.3% from 2006, largely related to the sale of 25 unattended fueling sites in second quarter 2006. Gross profit cents per gallon decreased to 5.3 cents for 2007 compared to 5.6 cents for 2006, partly reflecting a change in mix from the sale of the unattended fueling sites.
Other Revenue and Other Gross Profit. Other revenue of $25.9 million for 2007 increased by $2.7 million, or 11.9%, over 2006. Gross profit associated with other revenue was $24.8 million, an increase of 9.0% over 2006. The retail segment reported other revenue of $20.8 million in 2007 compared to $18.9 million in 2006. Retail segment other gross profit was also $20.8 million and $18.9 million, respectively, as we record these service revenues on a net basis. The increase over last year was primarily driven by an increase in ATM income due to a new program that began in late 2006. Other revenues and related gross profit for the wholesale segment were approximately $3.9 million and $3.9 million in 2006, respectively. Other revenues and related gross profit for the wholesale segment in 2007 was $4.2 million and $4.1 million, respectively.
Personnel Expense. The largest component of our operating expenses is retail store personnel expense. For 2007, personnel expense was $82.5 million, an increase of $13.2 million, or 19.0%, over 2006. The increase in personnel expense was primarily attributable to the Town & Country acquisition and our new store openings, which have restaurants requiring incremental labor. Additionally, our restaurant sales, which require proportionately more labor, are growing at a much higher rate than our other merchandise sales and therefore are contributing to the increase in personnel expense.
General and Administrative Expense. For 2007, general and administrative expenses increased by $8.6 million, or 44.2%, over 2006. The increase was primarily due to additional public company expenses of $2.7 million, which included consulting costs for Sarbanes-Oxley compliance of $1.3 million, increased legal and accounting fees and increased directors and officers liability insurance premiums. Other increases consisted of incremental bonus expense of $1.4 million, increased personnel costs of $1.8 million, and a $1.6 million increase in non-cash stock based compensation expense over 2006, primarily related to options granted in October 2006 and fiscal 2007. Town & Country also contributed approximately $1.1 million to the increase in G&A.
Operating Expenses. Operating expenses increased by $7.0 million, or 11.3% over 2006. The increase was primarily due to the additional retail stores constructed and acquired during 2006 and 2007. Decreases in credit card fees of $1.1 million offset the increased operating costs.
Rent Expense. Rent expense for 2007 of $25.8 million was $3.1 million, or 13.8%, higher than 2006, due primarily to rent expense on additional leased stores.
Royalty Expense. Royalty expense for 2007 was less than $0.1 million as the conversion from the Circle K brand to our proprietary Stripes brand was completed during the first quarter of 2007. Royalty expense for 2006 was $3.6 million.
Loss (Gain) on Disposal of Assets and Impairment Charges. During 2007, excluding sale/leaseback transactions, we sold assets with a net book value of $0.4 million and recognized a loss on disposal of assets of $0.2 million.
Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expense for 2007 of $29.5 million was up $6.7 million, or 29.4%, from 2006 due to $1.7 million for new stores constructed or acquired in 2006 and 2007, $1.8 million for Town & Country stores and additional depreciation due to finalization of purchase accounting for the 2005 recapitalization recorded in the fourth quarter of 2006 which required a partial step up of assets.
Income from Operations. Income from operations for 2007 was $26.3 million, compared to $21.1 million for 2006. The increase is attributed to the increases in gross profit, partially offset by the increases in operating expenses, as described above.
Interest Expense, Net. Net interest expense for 2007 was $16.2 million, a decrease of $6.5 million from 2006, primarily due to the redemption of $50 million of senior notes in November 2006. This redemption resulted in the elimination of $5.3 million of annual interest expense for 2007 and resulted in a charge to interest expense in 2006 of $5.3 million in prepayment penalties and $1.8 million write off of unamortized loan costs. Partly offsetting this decrease was additional interest expense, including the amortization of loan fees, related to the additional debt issued in November 2007 in conjunction with the TCFS Acquisition as follows:
Other Miscellaneous Income and Expense. Other miscellaneous includes income from a non-consolidated joint venture and other non-operating income.
Income Taxes. We became a taxable entity on October 24, 2006. Additionally, effective January 1, 2007, the state of Texas implemented a tax based on gross margin to replace the previous franchise tax system, and this tax has been determined to be an income tax for financial statement presentation. Income tax benefit for 2007 was $5.7 million. There was minimal tax expense in 2006. The 2007 income tax benefit consisted of $3.2 million of federal and state income tax expense, $0.7 million attributable to Texas state margin tax, and a $9.7 million benefit related to the release of income tax valuation allowance. During the year ended December 30, 2007, the Company generated pre-tax book income as well as taxable income which resulted in the utilization of all net operating loss carryforwards. In addition, as a result of the acquisition of TCFS, the Company has recorded an additional $39.4 million of deferred tax liability. Therefore, in evaluating the need for valuation allowance at December 30, 2007, the Company has determined that it is more likely than not that the full deferred tax assets will be realized and has released the entire previously established valuation allowance. See Note 9 of the accompanying Notes to Consolidated Financial Statements in our audited consolidated financial statements for further discussion of our income tax provision.
Adjusted EBITDA. Adjusted EBITDA for 2007 was $58.3 million, an increase of $13.1 million, or 28.9%, compared to 2006. The increase is primarily due to the increase in gross profit offset by the additional general and administrative expenses and increased personnel expenses, as discussed above. Retail segment Adjusted EBITDA of $44.3 million increased by $18.5 million, or 71.9% compared to 2006, primarily due to the TCFS Acquisition and the 34 other new stores constructed or acquired during 2006 and 2007, and an increase in same store profitability. Wholesale segment Adjusted EBITDA of $20.3 million increased by $0.8 million, or 3.9%, from 2006 primarily due to the reduction in gross profit described above being offset by a reduction in selling, general and administrative expenses. All other adjusted EBITDA decreased by $6.2 million, primarily due to increased corporate general and administrative expense.
Fiscal 2006 Compared to Fiscal 2005
The following comparative discussion of results for fiscal 2005 includes both the 352-day period of operations by Susser Holdings, L.L.C. as predecessor company, and the 12-day period of operations by Stripes Holdings LLC, following the 2005 Transactions and holding company reorganization of Susser Holdings, L.L.C. The 2005 Transactions did not impact our core retail or wholesale operations, and therefore our 2006 operating results are comparable to 2005, unless otherwise noted.
Total Revenue. Total revenue for fiscal 2006 was $2,265.2 million, an increase of $368.9 million, or 19.5%, over 2005. The increase in total revenue was driven by a 16.2% increase in the average sales price of motor fuel, a 10.9% increase in merchandise sales and a 4.5% increase in motor fuel gallons sold.
Total Gross Profit. Total gross profit for 2006 was $220.8 million, an increase of $19.2 million, or 9.5%, over 2005. The increase was primarily attributable to increases in merchandise sales, motor fuel volumes and motor fuel margins.
Merchandise Sales and Gross Profit. Merchandise sales were $365.3 million for 2006, a $35.8 million, or 10.9%, increase over 2005. Our performance was due to a 6.1% merchandise same store sales increase, including our strong Laredo Taco Company restaurant sales, and the addition of 16 new retail stores. Key categories contributing to the same store sales increase were food service ($7.9 million), packaged beverages ($5.2 million) and beer ($4.3 million). Merchandise gross profit was $119.1 million for 2006, a $12.6 million, or 11.9%, increase over 2005, which was driven primarily by the increase in merchandise sales. Merchandise margins were 32.6%, up slightly from 32.3% in 2005. Merchandise margin improvements due to a more favorable product mix emphasizing Laredo Taco Company and dispensed and packaged beverages were partially offset by declines in cigarette margins.
Retail Motor Fuel Sales, Gallons and Gross Profit. Retail sales of motor fuel for 2006 were $953.0 million, an increase of 22.1% over 2005, driven by a 13.6% increase in the average retail price of motor fuel and a 7.4% increase in retail gallons sold. The increase in gallons is attributable to a 4.8% increase in average gallons per site and the opening of 16 new retail stores. Retail motor fuel gross profit increased by 8.0% over 2005, due to the increased gallons and a slight increase in the gross profit per gallon. Gross profit cents per gallon of 13.6 cents was 0.5% higher than in 2005.
Wholesale Motor Fuel Sales, Gallons and Gross Profit. Wholesale motor fuel revenues for 2006 were $923.6 million, a 20.8% increase over 2005. This increase is attributable to an 18.2% increase in average wholesale motor fuel prices and a 2.1% increase in gallons sold. As previously discussed, we sold our unattended fueling sites in June, 2006, however we continued to supply unbranded fuel to some of those sites. Wholesale motor fuel gross profit of $25.0 million increased 3.0% over 2005 as gross profit cents per gallon increased to 5.6 cents for 2006 compared to 5.5 cents for 2005. The slight increase in gross profit cents per gallon was related to our supply sites and unbranded motor fuel sales.
Service and Other Revenue and Other Gross Profit. Other revenue of $23.2 million for 2006 was up 7.6% over 2005. Gross profit associated with other revenue was $22.8 million, up 8.8% over 2005. The increase over last year was partially driven by an increase in income from our ATM services, prepaid products and from our 16 new retail stores.
Personnel Expense. The largest component of our operating expenses is retail store personnel expense. For 2006, personnel expense was $69.3 million, an increase of $7.1 million, or 11.3%, over 2005. The increase is primarily attributable to stores opened in 2005 and 2006 ($4.7 million), which all have restaurants requiring incremental labor. Additionally, our restaurant sales in all stores, which require more labor, are growing much faster than our other merchandise sales and therefore are contributing to the increase in personnel expense ($1.1 million). We also had an increase in division support ($0.5 million), store staff training ($0.4 million) and benefits ($0.4 million).
General and Administrative Expense. General and administrative expense was $19.4 million in 2006, a decrease of $17.2 million, or 47.1%, from 2005. Included in G&A expense are non-cash stock compensation charges of $0.8 million for 2006 and $1.2 million for 2005. Additionally, a $17.3 million compensation charge was recognized in 2005 for the redemption of management options in connection with the 2005 Transactions. In 2006, expenses relating to compliance with the Sarbanes Oxley Act of 2002 and other expenses as a result of becoming a public company, were approximately $0.5 million.
Operating Expenses. Operating expenses were $62.0 million in 2006, an increase of $8.4 million, or 15.6%, over 2005. The increase was largely driven by increased credit card fees ($3.2 million) from the increase in the average retail price of motor fuel and utility expense from higher energy costs ($1.5 million). The remaining increase is primarily related to our new stores.
Rent Expense. Rent expense of $22.7 million increased by $13.0 million, or 133.0%, over 2005, due to the sale/leaseback of $170.0 million of properties in December 2005. Included in rent expense is a non-cash charge for straight-line rent of $1.6 million and a credit of $1.5 million for amortization of deferred gains from the 2005 sale leaseback, with cash rent expense at $22.6 million.
Royalty Expense. Royalty expense for the use of the Circle K trade name was $3.6 million in 2006, an increase of $0.2 million, or 5.2%, over 2005. We completed the rebranding of our stores to the Stripes brand during the first quarter of 2007, thus eliminating this royalty in future periods. To support our proprietary Stripes brand, we increased our annual marketing expense by approximately $0.8 million during 2006.
Loss (Gain) on Disposal of Assets and Impairment Charges. During 2006 we sold assets with a net book value of $4.8 million and recognized no gain or loss on disposition of these assets since this was within the one
year look-back period from the valuation related to the 2005 Transactions. In accordance with purchase accounting, the book value of assets disposed of within one year of the event were adjusted so no gain or loss was recognized on the sale.
Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expense of $22.8 million decreased by $3.8 million, or 14.4%, from 2005 primarily due to the elimination of depreciation expense on the assets sold in the December 2005 sale leaseback transaction. Partially offsetting this decrease is depreciation and amortization related to the step-up in basis attributable to the purchase accounting treatment of the 2005 Transactions. Amortization expense related to loan fees including $1.8 million and $3.3 million write-offs of unamortized loan costs related to debt repayments in 2006 and 2005, respectively, have been reclassified to interest expense.
Income from Operations. Income from operations for 2006 was $18.5 million, compared to $6.4 million for 2005. The $12.1 million, or 188.2%, increase was primarily attributable to the $17.3 million compensation expense recognized for redemption of management options during 2005. Other changes impacting income from operations are described above.
Interest Expense, Net. Net interest expense for 2006 was $25.2 million, an increase of $3.5 million from 2005. Included in interest expense was $5.3 million in debt prepayment penalties in 2006, compared to $2.9 million in 2005. We paid off $50.0 million of our existing notes in November 2006 with proceeds from the IPO. Also included is the amortization of loan fees of $2.6 million and $3.6 million in 2006 and 2005, respectively.
Other Miscellaneous Income and Expense. Other miscellaneous includes income from a non-consolidated joint venture and other non-operating income. We recorded $9.8 million in non-recurring charges in 2005 in connection with the 2005 Transactions, net of $1.4 million in miscellaneous income related to the exercise of warrants that we had received in connection with the 2002 sale of our Fleet Card operations.
Income Taxes. In connection with the closing of the reorganization and IPO, we converted from a limited liability company to a C corporation and established beginning balances in its deferred tax assets and liabilities in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (SFAS No. 109). Accordingly, we recorded a cumulative net deferred tax asset of less than $0.1 million on that date, which consists of a $7.4 million tax benefit recognized upon change of entity status and $2.3 million tax benefit related to operations after the IPO, net of a valuation allowance of $9.7 million. We considered our historical taxable income and estimates of future taxable income in making a determination of a reasonable valuation allowance. We will evaluate this allowance in the future if new circumstances indicate that the realization of a greater portion or the full deferred tax assets is more likely than not.
Net Income or Loss. We recorded a net loss for 2006 of $3.7 million, compared to a net loss of $20.6 million for 2005. The loss in 2005 is primarily due to $33.4 million of one-time charges related to the 2005 Transactions, and the 2006 loss is primarily due to the $7.1 million of 2006 debt repayment charges and the other income and expense items discussed above.
Adjusted EBITDA. Adjusted EBITDA for 2006 was $45.2 million, a decrease of $9.2 million, or 16.9%, compared to 2005. Retail segment Adjusted EBITDA of $25.8 million decreased by $14.5 million, or 36.0%, over 2005 due to the differences in gross profit, SG&A, and rent expense as described above. Wholesale segment Adjusted EBITDA of $19.6 million increased by $2.4 million, or 13.7%, over 2005 primarily due to the increased motor fuel gross profit.
Liquidity and Capital Resources
Cash Flows from Operations. Cash flows from operations are our main source of liquidity. We rely primarily on cash provided by operating activities, supplemented as necessary from time to time by borrowings
under our revolving credit facility and other financing transactions, to finance our operations, to service our debt obligations, and to fund our capital expenditures. Due to the seasonal nature of our business, our operating cash flow is typically the lowest during the first quarter of the year since (i) sales tend to be lower during the winter months; (ii) we are building inventory in preparation for spring break; and (iii) we pay certain annual operating expenses during the first quarter. The summer months are our peak sales months, and therefore our operating cash flow tends to be the highest during the third quarter.
Cash flows from operations were $29.1 million, $25.6 million and $27.7 million for 2005, 2006 and 2007, respectively. The change in our cash provided from operating activities for the respective periods was primarily attributable to changes in earnings and working capital. Our daily working capital requirements fluctuate within each month, primarily related to the timing of motor fuel, sales tax, and rent payments. During 2006, our maximum borrowing under our revolving credit facility was $23.8 million, with our average daily net cash position invested by $6.7 million. Prior to the TCFS Acquisition on November 13, 2007, our maximum revolver borrowing during 2007 was $4.1 million, maximum overnight cash invested was $47.9 million, and our average daily net cash position was invested by $18.1 million. As of December 30, 2007, we had $34.6 million outstanding on the revolver.
Capital Expenditures. Capital expenditures, before sale/leasebacks and asset dispositions, were approximately $51.1 million, $70.2 million and $89.8 million in 2005, 2006 and 2007, respectively. The majority of these expenditures related to increasing the number of our retail stores by 16, 16 and 18 in 2005, 2006 and 2007, respectively. Additionally, we acquired TCFS in November 2007 for a total purchase price of $366.5 million, including transaction fees and a $6.2 million tax benefit. $20 million of the purchase price will be paid to the TCFS shareholders half each on the first and second anniversary of the transaction, less any indemnified claims. We have posted two $10 million letters of credit as security for the deferred purchase price. In June 2006, we sold our 25 unattended fueling sites for proceeds of $3.0 million. We completed several sale/leaseback transactions, totaling $170.0 million, $14.2 million and $97.3 million, for 2005, 2006 and 2007, respectively, including $51.2 million of Town & Country properties concurrent with the acquisition. We plan to continue funding a portion of our new store spending through lease transactions. We opened eighteen new retail stores and closed seven retail stores during fiscal 2007. Our total retail store count as of December 30, 2007 is 504 stores.
We completed our rebranding initiative, under which we converted our stores from the Circle K brand to the Stripes brand, during the first quarter of 2007. We spent approximately $8.6 million on this initiative during 2006 and 2007. To support our Stripes brand, we increased our annual marketing expense by $0.8 million beginning in 2006. We paid $3.6 million for the use of the Circle K brand during fiscal 2006.
We entered into a long-term fuel supply arrangement with Valero Marketing and Supply Company in July 2006 that expires July 13, 2018, and replaced our CITGO supply of motor fuel to approximately 305 retail stores, in addition to some of our wholesale supply sites. We were responsible for the capital cost of rebranding each location, in which we spent approximately $15.1 million during 2006 and 2007.
We typically spend approximately $30,000 to $40,000 per store per year in maintenance, technology and discretionary revenue enhancing capital expenditures. We estimate that we need to spend approximately half of this amount to maintain our existing stores. In fiscal 2008, we plan to invest approximately $80 to $110 million in 16 to 22 new retail stores, new dealer projects and maintenance and upgrades of our existing facilities. Also included in our capital spending plans for 2008 are $6 to $8 million in leasehold improvements, furniture and equipment for our new headquarters facility which will allow us to consolidate four offices and warehouse into a single facility. We expect to spend $9 to $14 million in the rebranding of the Town and Country stores to our Stripes brand, with $4 to $6 million expected to be spent in 2008. The rebranding effort is expected to continue into 2009. The final cost of rebranding will depend partly on our fuel branding decisions which are still pending. We plan to finance most of our new store spending plan with lease financing, and expect net capital spending of approximately $35 to $45 million to be financed with cash flow from operations, cash balances, and borrowings under our revolving credit facility.
Cash Flows from Financing Activities. At December 30, 2007, our outstanding long-term debt was $409.4 million, excluding net amortized issuance premium of $3.7 million. In December 2005, we issued $170.0 million aggregate principal amount of 10 5/8% senior notes due 2013, which are further described below. We also executed sale/leaseback transactions for 74 of our retail convenience store properties for proceeds of $170.0 million. The properties are being leased back pursuant to triple-net leases for an initial 20-year term with five 5-year options. The first year cash rent for these properties was $13.6 million and escalates annually based on either a stated escalation rate or on the increase in the Consumer Price Index. The proceeds of the debt and the concurrent sale/leaseback transaction, cash on hand and new equity contributions were used to fund the aggregate merger consideration related to the 2005 recapitalization, refinance our existing debt and pay related fees and expenses.
On October 24, 2006, we completed an initial public offering of Susser Holdings Corporations common stock. We used the net proceeds of the IPO to redeem $50.0 million of our existing notes, plus accrued interest and prepayment penalties thereon, repay the outstanding borrowing under our existing revolving credit facility and pay fees and expenses related to the offering. The balance was used for general corporate purposes, including growth capital.
On November 13, 2007, we financed the acquisition of TCFS with the issuance of an additional $150 million 10 5/8% senior unsecured notes, a $105 million term loan facility, an $11.3 million draw on our revolving credit facility, a $51.2 million sale/leaseback transaction, and cash on the balance sheet. The notes, term loan and revolving credit facility are further discussed in Credit Facilities and Senior Notes below.
Credit Facilities. On December 21, 2005, our subsidiaries Susser Holdings, L.L.C. and SSP Partners (now Stripes LLC), entered into a five-year revolving credit facility in an aggregate principal amount of up to $50.0 million with a syndicate of financial institutions. We and each of our domestic subsidiaries (other than one less-than-wholly owned subsidiary) were guarantors under the facility. The proceeds from this revolving credit facility were available to finance working capital and other general corporate purposes. This revolving credit facility was terminated in connection with the TCFS Acquisition and our entry into the new credit agreement described below.
On November 13, 2007, as part of the TCFS Acquisition, we, as parent guarantor, and our indirect wholly-owned subsidiary Susser Holdings, L.L.C., as borrower (the Borrower), entered into a new credit agreement with a syndicate of financial institutions providing for a five year revolving credit facility in an aggregate principal amount of up to $90 million, referred to as the revolving credit facility, and a five year term loan facility in the aggregate principal amount of $105 million, referred to as the term loan facility. We and each of our existing and future direct and indirect subsidiaries (other than (i) any subsidiary that is a controlled foreign corporation under the Internal Revenue Code or a subsidiary that is held directly or indirectly by a controlled foreign corporation and (ii) Susser Company, Ltd.) are, and will be, guarantors under each of the facilities.
The term loan was funded in full at the closing of the credit agreement, and net term loan proceeds, as well as borrowings of approximately $11.3 million under the revolving credit facility, were used to finance part of the merger consideration and related fees and expenses paid in connection with the TCFS Acquisition as well as to refinance, in part, certain existing indebtedness. Borrowings under the revolving credit facility were repaid in full by the day following the closing of the TCFS Acquisition. Future borrowings under the revolving credit facility may be made to fund ongoing working capital and other general corporate purposes. $60 million of the revolving credit facility is also available for the issuance of standby and commercial letters of credit and a portion of the revolving credit facility is available for swing line loans.
Availability under the revolving credit facility is subject to a borrowing base equal to the lesser of (x) (a) 85% of eligible accounts receivable plus (b) 55% of eligible inventory plus (c) 60% of the fair market value of certain designated eligible real property which shall not exceed 35% of the aggregate borrowing base amount, minus (d) such reserves as the administrative agent of the revolving credit facility may establish in its reasonable credit judgment acting in good faith (including, without limitation, reserves for exposure under swap contracts and obligations relating to treasury management products)) and (y) 85% of gross accounts receivable plus 60% of gross inventory.
As of December 30, 2007, we had $34.6 million outstanding under the revolving credit facility and $28.4 million in standby letters of credit, which include two $10.0 million letters of credit held in escrow related to the TCFS Acquisition that will be eligible to be drawn upon on each of the first and second anniversaries of closing, respectively, net of any settled or pending indemnity claims. We had sufficient borrowing base to support our use of the entire $90.0 million revolving credit facility.
The loans under the revolving credit facility are secured by a first priority security interest in (a) 100% of the Borrowers outstanding ownership interests, 100% of the outstanding ownership interests of each of our existing and future direct and indirect subsidiaries (subject to certain exclusions and limited, in the case of each foreign subsidiary (i) to first-tier foreign subsidiaries and (ii) with respect to any controlled foreign corporation, to 65% of the outstanding voting stock of each such foreign subsidiary); (b) all present and future intercompany debt of Borrower, the Company and Stripes Holdings LLC and each subsidiary guarantor; (c) substantially all of the present and future property and assets, real (other than real property excluded from the borrowing base) and personal, of Borrower, the Company and Stripes Holdings LLC and each subsidiary guarantor, including, but not limited to, equipment, inventory, accounts receivable, certain owned real estate included in the borrowing base (but in any event excluding owned real estate, leaseholds and fixtures of TCFS), investment property, license rights, patents, trademarks, trade names, copyrights, other intellectual property and other general intangibles, insurance proceeds and instruments; and (d) all proceeds and products of all of the foregoing. Additionally, the loans under the revolving credit facility are secured by a second priority security interest in the Term Loan Collateral (as defined below).
The term loan facility is secured by a first priority security interest in certain real property and related assets owned on the closing date of the TCFS Acquisition by TCFS and its subsidiaries (the Term Loan Collateral) and is subject to quarterly amortization of principal, in equal quarterly installments (except in year five) in the following annual amounts: 5% in year 1; 7.5% in year 2; 10% in year 3; 10% in year 4; 2.5% in each of the first three quarters of year five and the balance on the maturity date.
The interest rates under each of the revolving credit facility and the term loan facility are calculated, at the Borrowers option, at either a base rate or a LIBOR rate plus, in each case, a margin. With respect to LIBOR rate loans, interest will be payable at the end of each selected interest period, but no less frequently than quarterly. With respect to base rate loans, interest will be payable quarterly in arrears.
The following amounts are required to be applied to prepay the revolving credit facility and the term loan facility (subject to certain reinvestment rights and exceptions):
The term loan facility and the revolving credit facility may be prepaid at any time in whole or in part without premium or penalty, other than breakage costs if applicable, and require the maintenance of a maximum senior secured leverage ratio and a minimum fixed charge coverage ratio. We were in compliance with the required leverage and fixed charge coverage ratios as of December 30, 2007.
The term loan facility and the revolving credit facility contain customary representations and warranties (subject to customary exceptions, baskets and qualifications) as well as certain customary covenants (subject to
customary exceptions, baskets and qualifications) that impose certain affirmative obligations upon and restrict our ability and that of our subsidiaries to, among other things: incur liens; incur additional indebtedness, guarantees or other contingent obligations; engage in mergers and consolidations; make sales, transfers and other dispositions of property and assets; make loans, acquisitions, joint ventures and other investments; declare dividends; redeem and repurchase shares of equity holders; create new subsidiaries; become a general partner in any partnership; prepay, redeem or repurchase debt; make capital expenditures; grant negative pledges; change the nature of business; amend organizational documents and other material agreements; change accounting policies or reporting practices; and create a passive holding company.
The term loan facility and the revolving credit facility also include certain customary events of default (subject to customary exceptions, baskets and qualifications) including, but not limited to: failure to pay principal, interest, fees or other amounts when due; any representation or warranty proving to have been materially incorrect when made or confirmed; failure to perform or observe covenants set forth in the loan documentation; default on certain other indebtedness; certain monetary judgment defaults and material non-monetary judgment defaults; bankruptcy and insolvency defaults; actual or asserted impairment of loan documentation or security; a change of control; and customary ERISA defaults.
Senior Notes. On December 21, 2005, Susser Holdings, L.L.C. and a subsidiary, Susser Finance Corporation (which we refer to, collectively, as the issuers), sold $170 million of 10 5/8% senior unsecured notes due, 2013 (referred to as the original notes). Proceeds from the sale of the original notes were used to fund the 2005 recapitalization, repay existing indebtedness and pay related fees and expenses. We incurred approximately $7.6 million in costs associated with the original notes, which were deferred and are being amortized over the life of the existing notes. A portion of the proceeds from the IPO were used to redeem $50 million of the original notes, plus accrued interest and premium thereon on November 24, 2006.
On November 13, 2007, as part of the TCFS Acquisition, the issuers issued and sold an additional $150 million in aggregate principal amount of 10 5/8% senior notes, due 2013 (which we refer to, alone, as the additional notes and together with the original notes, as the senior notes). The additional notes were issued under, and are governed by the terms of, the indenture, dated as of December 21, 2005, governing the original notes (referred to as the indenture). Under the indenture, the original notes and the additional notes are subject to the same interest payment, ranking, redemption and change of control provisions, covenants and transfer restrictions and pay interest semiannually in arrears on June 15 and December 15 of each year. The senior notes mature on December 15, 2013 and are guaranteed by us and each existing and future domestic subsidiary of the issuers with the exception of one non-wholly-owned subsidiary. We incurred approximately $7.0 million in costs associated with the additional notes, which were deferred and are being amortized to interest expense over the remaining life of the senior notes. We are also amortizing a $3.8 million issuance premium as a credit to interest expense over the remaining life of the senior notes.
The senior notes are senior unsecured obligations of the issuers that rank equally in right of payment with existing and future senior indebtedness of the issuers. The senior notes are effectively subordinated to (i) all of the issuers existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness, and (ii) all liabilities of Susser Company, Ltd. The senior notes, however, rank senior in right of payment to any existing and future subordinated indebtedness of the issuers. The senior notes are jointly and severally guaranteed by Susser Holdings Corporation, Stripes Holdings LLC and each of our existing and future domestic subsidiaries other than Susser Company, Ltd.
The senior notes contain covenants that, among other things and subject to various exceptions, restrict the issuers ability and any restricted subsidiarys ability to: incur additional debt; make restricted payments (including paying dividends on, redeeming or repurchasing the issuers capital stock); dispose of our assets; grant liens on our assets; engage in transactions with affiliates; merge or consolidate or transfer substantially all of our assets; issue guarantees of other debt; enter into material new businesses; enter into agreements that limit the ability of the issuers subsidiaries to loan money, make distributions or transfer assets to the Issuer; and enter into sale/leaseback transactions.
On or after December 15, 2009, the issuers may redeem some or all of the senior notes at any time at the following redemption prices (expressed as percentages of principal amount) plus accrued and unpaid interest and liquidated damages, if any: after December 15, 2009, at 105.313%; after December 15, 2010, at 102.656%; and after December 15, 2011 and thereafter, at 100.000%. In addition, the issuers may redeem up to 35% of the aggregate principal amount of the senior notes before December 15, 2008, with the net proceeds of certain equity offerings by us; provided that (1) at least 65% of the aggregate principal amount of the senior notes originally issued remain outstanding and (2) the redemption occurs within 90 days of the closing of the relevant equity offering. We utilized this redemption provision to redeem $50.0 million of the original notes with a portion of the proceeds of the IPO.
Additionally, if Susser Holdings, L.L.C. experiences certain kinds of changes of control, the issuers must offer to purchase the senior notes at 101% of their principal amount, plus accrued and unpaid interest. Change of control is defined to include the occurrence of any of the following: (1) the direct or indirect sale, lease, transfer, conveyance or other disposition (other than by way of merger or consolidation), of all or substantially all of the properties or assets of Susser Holdings, L.L.C. and its subsidiaries; (2) the adoption of a plan relating to the liquidation or dissolution of Susser Holdings, L.L.C.; (3) the consummation of any transaction, the result of which is that any person or group, other than one or more of the principals (Wellspring and Sam L. Susser and his descendants), becomes the beneficial owner, directly or indirectly, of more than 50% of the voting stock of Susser Holdings, L.L.C.; or (4) the first day on which a majority of the Board of Managers of Susser Holdings, L.L.C. are comprised of members who were not members of the board on the date of the indenture or by members who were not subsequently appointed by members of the board that were members on the date of the indenture. In addition, in some cases the issuers may be required to make an offer to purchase the senior notes with the proceeds of certain asset sales. Our IPO of common stock did not constitute a change of control for purposes of the senior notes indenture.
Events of default, which are subject to customary grace periods, thresholds and exceptions, where appropriate, as defined under the terms of the indenture governing the senior notes include: failure to pay when due interest on, or liquidated damages, if any, with respect to, the senior notes; failure to pay when due the principal of, or premium, if any, on the senior notes; failure to comply with the asset sale, change of control or merger covenants contained in the indenture; failure to comply with any of the other agreements in the indenture; default on certain other debt; failure to pay certain final and non-appealable judgments; any note guarantee is held in any judicial proceeding to be unenforceable or invalid or any guarantor denies or disaffirms its obligations under its note guarantee; and certain events of bankruptcy.
In the case of an event of default arising from certain events of bankruptcy or insolvency, with respect to the issuers, all outstanding senior notes will become due and payable immediately without further action or notice. If any other event of default occurs and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the then outstanding senior notes may declare all the senior notes to be due and payable immediately.
Pursuant to a registration rights agreement that the issuers entered into at the time that the issuers issued the original notes, the issuers agreed to file a registration statement with the SEC with respect to an offer to exchange each of the original notes for a new issue of debt securities registered under the Securities Act, with terms identical to those of the original notes (except for provisions relating to transfer restrictions and payment of additional interest). In accordance with this requirement, the issuers filed a registration statement on September 18, 2006, which was declared effective on December 21, 2006 and completed the exchange offer on January 24, 2007.
Similarly, pursuant to a registration rights agreement that the issuers entered into at the time that the issuers issued the additional notes, the issuers agreed to file a registration statement with the SEC within 180 days, and to use reasonable best efforts to cause it to become effective as soon as possible after filingbut in any event no later than 90 days after the date of the initial filing with the SEC, with respect to an offer to exchange each of the
additional notes for a new issue of debt securities registered under the Securities Act, with terms identical to those of the additional notes (except for provisions relating to transfer restrictions and payment of additional interest). The issuers plan to file a registration statement of Form S-4 with the SEC in respect of such additional notes.
Long Term Liquidity. We expect that our cash flows from operations, cash on hand, lease financing and our new revolving credit facility will be adequate to provide for our short-term and long-term liquidity needs. Our ability to meet our debt service obligations and other capital requirements, including capital expenditures, as well as the cost of potential acquisitions and new store openings, will depend on our future performance which, in turn, will be subject to general economic, financial, business, competitive, legislative, regulatory and other conditions, many of which are beyond our control. As a normal part of our business, depending on market conditions, we from time to time consider opportunities to refinance our existing indebtedness, and although we may refinance all or part of our indebtedness in the future, including our existing notes, the notes offered hereby and our new revolving credit and term loan facilities, there can be no assurances that we will do so. Changes in our operating plans, lower than anticipated sales, increased expenses, acquisitions or other events may cause us to need to seek additional debt or equity financing in future periods. There can be no guarantee that financing will be available on acceptable terms or at all. Debt financing, if available, could impose additional cash payment obligations and additional covenants and operating restrictions. In addition, any of the items discussed in detail under Risk Factors may also significantly impact our liquidity.
Contractual Obligations and Commitments
Contractual Obligations. The following table summarizes by fiscal year our expected payments on our long-term debt and future operating lease commitments as of December 30, 2007:
Letter of Credit Commitments. The following table summarizes by fiscal year the expiration dates of our standby letters of credit issued under our revolving credit facility as of December 30, 2007:
At maturity, we expect to renew a significant number of our standby letters of credit, with the exception of the two $10 million letters of credit related to TCFS Acquisition.
Other Commitments. From time to time, we enter into forward purchase contracts for our energy consumption needs at our operating and office locations. In these transactions, we enter into agreements for certain amounts of our electricity requirements through a future date at a fixed price. As of December 30, 2007, we had outstanding commitments of approximately $1.0 million for a portion of our estimated electricity requirements through the first half of 2008. We also make various other commitments and become subject to various other contractual obligations that we believe to be routine in nature and incidental to the operation of our business. We believe that such routine commitments and contractual obligations do not have a material impact on our business, financial condition or results of operations.
We also periodically enter into derivatives, such as futures and options, to manage our fuel price risk. Fuel hedging positions have not been material to our operations and 33 positions were outstanding at December 30, 2007 with a fair value of $72,000 liability.
Quarterly Results of Operations and Seasonality
Our business exhibits substantial seasonality due to the geographic area our stores are concentrated in, as well as customer activity behaviors during different seasons. In general, sales and operating income are highest in the second and third quarters during the summer activity months, and lowest during the winter months.
See Item 8. Consolidated Financial Statements and Supplementary DataNotes to Financial Statements Note 23. Quarterly Results of Operations for financial and operating quarterly data for each quarter of 2005, 2006 and 2007.
Impact of Inflation
The impact of inflation on our costs, and the ability to pass cost increases in the form of increased sale prices, is dependent upon market conditions. During 2005, 2006 and 2007, motor fuel prices remained volatile. Although we believe we have historically been able to pass on increased costs through price increases, there can be no assurance that we will be able to do so in the future. In 2005, we experienced meaningful inflation in the price of natural gas, a key component of our utility expense and in the retail price of motor fuel, a key component of credit card costs. This inflation carried forward into 2006, but stabilized during 2007.
Off-Balance Sheet Arrangements
We periodically enter into derivatives, such as futures and options, to manage our fuel price risk. Fuel hedging positions have not been material to our operations. We had no positions outstanding at December 31, 2006 and 33 positions outstanding as of December 30, 2007. Hedging results decreased fuel gross profit by zero and $0.4 million, respectively, in fiscal 2006 and 2007. These fuel hedging positions are being held to fully hedge fuel in the pipeline which we have purchased but not taken delivery for.
We are not currently engaged in the use of off-balance sheet derivative financial instruments to hedge or partially hedge interest rate exposure nor do we maintain any other off-balance sheet arrangements for the purpose of credit enhancement, hedging transactions or other financial or investment purposes.
Application of Critical Accounting Policies
We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities as of the date of the financial statements, and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Critical accounting policies are those we believe are both most important to the portrayal of our financial condition and results, and require our most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumption. Our significant accounting policies are described in Note 2 to our Audited Consolidated Financial Statements. We believe the following policies to be the most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Acquisition Accounting. Acquisitions are accounted for under the purchase method of accounting whereby purchase price is allocated to assets acquired and liabilities assumed based on fair value. Excess of purchase price over fair value of net assets acquired is recorded as goodwill. The Consolidated Statements of Operations for the fiscal years presented include the results of operations for each of the acquisitions from the date of acquisition.
Segment Reporting. We provide segment reporting in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, (SFAS No. 131) which establishes annual and interim reporting standards for an enterprises business segments and related disclosures about its products, services, geographic areas and major customers. We operate our business in two primary segments: our retail segment, which operates convenience stores selling a variety of merchandise, food items, services and motor fuel; and our wholesale segment, which sells motor fuel to our retail segment and to external customers. These are the two segments reviewed on a regular basis by our chief operating decision maker. Other operations within our consolidated entity are not material, and are aggregated as other in our segment reporting information. All of our operations are in the U.S. and no customers are individually material to our operations.
Property and Equipment. Property and equipment are recorded at cost. Depreciation is computed on a straight-line basis over the useful lives of the assets, estimated to be twenty to forty years for buildings and three to fifteen years for equipment. Amortization of leasehold improvements is based upon the shorter of the remaining terms of the leases including renewal periods that are reasonably assured at the inception of the lease, or the estimated useful lives, which approximate twenty years. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized. Maintenance and repairs are charged to operations as incurred. Gains or losses on the disposition of property and equipment are recorded in the period incurred.
Assets Held for Sale. Properties are classified as other noncurrent assets when management determines that they are excess and intends to offer them for sale, and are recorded at the lower of cost or fair value less cost to sell. Excess properties are classified as assets held for sale in current assets when they are under contract for sale, or otherwise probable that they will be sold within the ensuing fiscal year. These assets primarily consist of land and some buildings.
Long-Lived Assets. We test for possible impairment of long-lived assets (including intangible assets) whenever events or changes in circumstances indicate the carrying amount of the asset may not be recoverable. If indicators exist, we compare the estimated undiscounted future cash flows related to the asset to the carrying value of the asset. If the carrying value is greater than the estimated undiscounted future cash flow amount, an impairment charge is recorded in depreciation and amortization expense in the statement of operations for amounts necessary to reduce the carrying value of the asset to fair value. The impairment loss calculations require management to apply judgment in estimating future cash flows and the discount rates that reflect the risk inherent in future cash flows.
Goodwill. Goodwill represents the excess of cost over fair value of assets of businesses acquired. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful
life are not amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets (SFAS No. 142). Goodwill is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. An impairment loss is recognized to the extent that the carrying amount exceeds the assets fair value. This determination is made at the reporting unit level and consists of two steps. First, the Company determines the fair value of a reporting units and compares it to its carrying amount. Second, if the carrying amount of a reporting unit exceeds its fair value, additional valuations would be performed to determine in any goodwill impairment exists.
Other Intangible Assets. Other intangible assets consist of debt issuance costs, supply agreements with customers, favorable/unfavorable lease arrangements and the fair value attributable to a trade name. We account for other intangible assets acquired through business combinations in accordance with SFAS No. 141, Business Combinations (SFAS No. 141), and SFAS No. 142. SFAS No. 141 clarifies the criteria in recognizing other intangible assets separately from goodwill in a business combination. Separable intangible assets that are not determined to have an indefinite life will continue to be amortized over their useful lives and assessed for impairment under the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets.
Debt issuance costs are being amortized using the effective interest method over the term of the debt. Supply agreements are being amortized on a straight-line basis over the remaining terms of the agreements, which generally range from five to fifteen years. Favorable/unfavorable lease arrangements are amortized on a straight-line basis over the remaining lease terms. The fair value of the Laredo Taco Company trade name is being amortized on a straight-line basis over fifteen years.
Insurance Liabilities. We use a combination of self-insurance and third-party insurance with predetermined deductibles that cover certain insurable risks. Our share of employee injury plan and general liability losses are recorded for the aggregate liabilities for claims reported, and an estimate of the cost of claims incurred but not reported, based on independent actuarial estimates and historical experience. We also estimate the cost of health care claims that have been incurred but not reported, based on historical experience.
Asset Retirement Obligation. We recognize the estimated future cost to remove an underground storage tank over the estimated useful life of the storage tank in accordance with the provisions of SFAS No. 143, Accounting for Asset Retirement Obligations. We record a discounted liability for the fair value of an asset retirement obligation with a corresponding increase to the carrying value of the related long-lived asset at the time an underground storage tank is installed. We amortize the amount added to property and equipment and recognize accretion expense in connection with the discounted liability over the remaining life of the tank. We base our estimates of the anticipated future costs for removal of an underground storage tank on our prior experience with removal.
Environmental Liabilities and Related Receivables. Environmental expenditures related to existing conditions resulting from past or current operations and from which no current or future benefit is discernible are expensed by us. Expenditures that extend the life of the related property or prevent future environmental contamination are capitalized. We determine our liability on a site-by-site basis and record a liability when it is probable and can be reasonably estimated. The estimated liability is not discounted. Certain environmental expenditures incurred for investigation and remediation of motor fuel sites are eligible for refund under the reimbursement programs administered by TCEQ. A related receivable is recorded for estimated probable reimbursements. Environmental expenditures not eligible for refund from the TCEQ may be recoverable in whole or part from a third party or from our insurance coverage provided by a mutual insurance company funded by tank owners in Texas, in which case we have recorded a liability for our net estimated exposure.
Revenue Recognition. Revenues from our two primary product categories, merchandise and motor fuel, are recognized at the point of sale on a gross basis. We charge our dealers for third-party transportation costs, which
are included in revenues and cost of sales. A portion of our motor fuel sales to wholesale customers are on a consignment basis, in which we retain title to inventory and recognize revenue at the time the fuel is sold to the ultimate customer. We derive service revenue from lottery ticket sales, money orders, prepaid phone cards and wireless services, ATM transactions, car washes, payphones and other ancillary product and service offerings. We record service revenue on a net basis at the time the services are rendered.
Vendor Allowances and Rebates. We receive payments for vendor allowances, volume rebates, and other supply arrangements in connection with various programs. Earned payments are recorded as a reduction to cost of sales or expenses to which the particular payment relates. Unearned payments are deferred and amortized as earned over the term of the respective agreement.
Lease Accounting. The Company leases a portion of its convenience store properties under noncancelable operating leases, whose initial terms are typically 10 to 20 years, along with options that permit renewals for additional periods. Minimum rent is expensed on a straight-line basis over the term of the lease including renewal periods that are reasonably assured at the inception of the lease. In addition to minimum rental payments, certain leases require additional payments based on sales volume. The Company is typically responsible for payment of real estate taxes, maintenance expenses and insurance.
Stock-Based Compensation. The Company has granted incentive options for a fixed number of units to certain employees. Prior to January 2, 2006, the Company accounted for options in accordance with Financial Accounting Standards Board (FASB) Interpretation No. 44, Accounting for Certain Transactions Involving Stock Compensation, an Interpretation of APB Opinion No. 25. The Company adopted SFAS 123(R), Share-Based Payment, at the beginning of fiscal 2006 as a private company, and as such is applying SFAS No. 123(R) prospectively to newly issued stock options.
Income Taxes. Prior to October 24, 2006, the Company and its predecessors were organized as a partnership, and therefore income or loss was reported in the tax returns of its members, and no recognition was given to income taxes in the consolidated financial statements of the Company. Beginning October 24, 2006, all of our operations, including subsidiaries, are included in a consolidated Federal income tax return. Pursuant to SFAS No. 109, we recognize deferred income tax liabilities and assets for the expected future income tax consequences of temporary differences between financial statement carrying amounts and the related income tax basis.
Recent Accounting Pronouncements
FASB Interpretation No. 48. In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxesan Interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies the application of FASB Statement No. 109 by providing guidance on the recognition and measurement of an enterprises tax positions taken in a tax return. FIN 48 additionally clarifies how an enterprise should account for a tax position depending on whether the position is more likely than not to pass a tax examination. The interpretation provides guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. The adoption of FIN 48 in the first quarter of fiscal 2007 did not have a material impact on our financial statements.
SFAS No. 157. In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This Statement defines fair value, establishes a framework for its measurement and expands disclosures about fair value measurements. We use fair value measurements to measure, among other items, purchased assets and investments, leases and derivative contracts. We also use them to assess impairment of properties, plants and equipment, intangible assets and goodwill. The Statement does not apply to share-based payment transactions and inventory pricing. This Statement is effective January 1, 2008. We do not anticipate the adoption of SFAS No. 157 will have a material impact on our financial statements.
SFAS No. 159. In February 2007, the FASB issued SFAS No. 159, The Fair Value Option For Financial Assets and Financial Liabilities. This statement allows entities to voluntarily choose, at specified election dates, to measure many financial assets and liabilities at fair value. SFAS No. 159 is effective as of the beginning of our 2008 fiscal year. We do not anticipate the adoption of SFAS No. 159 will have a material impact on our financial statements.
SFAS 141R. In December 2007, the FASB issued SFAS No. 141R, Business Combinations. SFAS No. 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS No. 141R is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations the we engage in will be recorded and disclosed following existing GAAP until December 28, 2008. The Company expects SFAS No. 141R will have an impact on its consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions it consummates after the effective date. We are currently evaluating the potential impact of this standard on our future consolidated financial statements.
SFAS 160. In December 2007 the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB 51. SFAS No. 160 changes the accounting and reporting for minority interests. Minority interests will be recharacterized as noncontrolling interests and will be reported as a component of equity separate from the parents equity, and purchases or sales of equity interests that do not result in a change in control will be accounted for as equity transactions. In addition, net income attributable to the noncontrolling interest will be included in consolidated net income on the face of the income statement and upon a loss of control, the interest sold, as well as any interest retained, will be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, except for the presentation and disclosure requirements, which will apply retrospectively. We are currently evaluating the potential impact that the adoption of this statement will have on our future consolidated financial statements.
We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. We currently have a $90.0 million revolving credit facility which bears interest at variable rates. At December 30, 2007, we had $34.6 million outstanding on the credit facility. Our $105 million term loan facility also bears interest at variable rates. The annualized effect of a one percentage point change in floating interest rates on our variable rate debt obligations at December 30, 2007 would be to change interest expense by approximately $1.4 million.
From time to time, we enter into interest rate swaps to either reduce the impact of changes in interest rates on our floating rate long-term debt or to take advantage of favorable variable interest rates compared to our fixed rate long-term debt. In November 2003, we entered into an interest rate swap, which exchanged a 3.48% fixed rate for a variable LIBOR rate on a notional principal amount of $25.0 million, with a maturity date of December 29, 2006. On a semi-annual basis, we settled with the bank on the difference between the fixed and floating rates multiplied by the notional principal amount for that period. The swap terminated at maturity.
Our primary exposure relates to:
We manage interest rate risk on our outstanding long-term and short-term debt through the use of fixed and variable rate debt. While we cannot predict or manage our ability to refinance existing debt or the impact interest rate movements will have on our existing debt, management evaluates our financial position on an ongoing basis.
We also have recently started purchasing motor fuel on the Gulf Coast and are transporting it to West Texas via pipeline. We hedge this inventory risk through the use of fuel futures contracts which are matched in quantity and timing to the anticipated usage of the pipeline inventory.
See Index to Consolidated Financial Statements at Item 15.
Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), that are designed to provide reasonable assurance that the information that we are required to disclose in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. It should be noted that, because of inherent limitations, our disclosure controls and procedures, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the disclosure controls and procedures are met.
As required by paragraph (b) of Rule 13a-15 under the Exchange Act, our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded, as of the end of the period covered by this report, that our disclosure controls and procedures were effective to ensure that the information required to be disclosed by the Company in the reports we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Managements Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our internal control over financial reporting is a process that is designed under the supervision of our Chief Executive Officer and Chief Financial Officer, 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 accounting principles generally accepted in the United States of America. Our internal control over financial reporting includes those policies and procedures that:
Management has conducted its evaluation of the effectiveness of internal control over financial reporting as of December 30, 2007 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Managements assessment included an evaluation of the design of our internal control over financial reporting and testing the operational effectiveness of our internal control over financial reporting. Management reviewed the results of the assessment with the Audit Committee of the Board of Directors. Based on its assessment, management determined that, as of December 30, 2007, we maintained effective internal control over financial reporting.
The US Securities and Exchange Commission provides an exemption, whereby companies undergoing acquisitions in the year of Section 404 internal control certification, can leave the acquired business out of the scope of testing and assessment, and as a result we have excluded from the scope of our assessment of internal control over financial reporting the operations and related assets of TCFS Holdings, Inc., which we acquired on November 13, 2007. At December 30, 2007 and for the period from November 13, 2007 through December 30, 2007, total assets and total revenues of TCFS Holdings, Inc. represented 50% and 5% of Susser Holdings Corporations consolidated total assets and total revenues as of and for the year ended December 30, 2007. TCFS Holdings, Inc. will be included in the evaluation of internal controls beginning in fiscal 2008.
Ernst & Young LLP, the independent registered public accounting firm that audited the consolidated financial statements of the Company included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of the Companys internal control over financial reporting as of December 30, 2007. The report, which expresses an unqualified opinion on the effectiveness of the Companys internal control over financial reporting as of December 30, 2007, is included in this Item under the heading Report of Independent Registered Public Accounting Firm.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the 4th quarter of fiscal 2007 that have been materially affected, or are reasonably likely to materially affect, our internal control over financial reporting .
From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness and which do not have a material effect on our overall internal control over financial reporting. We will continue to evaluate the effectiveness of our disclosure controls and procedures and internal control over financial reporting on an ongoing basis and will take action as appropriate.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Susser Holdings Corporation
We have audited Susser Holdings Corporations internal control over financial reporting as of December 30, 2007, based on criteria established in Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Susser Holdings Corporations management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the companys internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed 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. A companys internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
As indicated in the accompanying Managements Report on Internal Control over Financial Reporting, managements assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of TFCS Holdings, Inc. which is included in the December 30, 2007 consolidated financial statements of Susser Holdings Corporation and constituted 38% and 41% of total and net assets, respectively, as of December 30, 2007 and 5% and 15% revenues and net income, respectively, for the year then ended. Our audit of internal control over financial reporting of Susser Holdings Corporation also did not include an evaluation of the internal control over financial reporting of TCFS Holdings, Inc.
In our opinion, Susser Holdings Corporation maintained, in all material respects, effective internal control over financial reporting as of December 30, 2007, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Susser Holdings Corporation as of December 31, 2007 and 2006, and the related consolidated statements of operations, shareholders equity, and cash flows for the years ended December 30, 2007 and December 31, 2006, and the consolidated statement of operations, members interests and cash flows for the period from December 21, 2005 to January 1, 2006, and the Stripes Holdings LLC (Predecessor) related consolidated statements of operations, members interests, and cash flows for the period from January 3, 2005 to December 20, 2005, and our report dated March 14, 2008, expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
San Antonio, Texas
March 14, 2008
Certain information called for by this item is set forth under the caption Directors and Executive Officers in Part I of this report.
Section 16(a) Beneficial Ownership Reporting Compliance
Each director, executive officer (and, for a specified period, certain former directors and executive officers) and each holder of more than ten percent of a class of our equity securities is required to report to the SEC his or her pertinent position or relationship, as well as transactions in those securities, by specified dates. Based solely upon a review of reports on Forms 3 and 4 (including any amendments) furnished to us during our most recent fiscal year and reports on Form 5 (including any amendments) furnished to us with respect to our most recent fiscal year, and written representations from officers and directors that no Form 5 was required, we believe that all filings applicable to our officers, directors and beneficial owners required by Section 16(a) of the Exchange Act were filed on a timely basis during 2007.
Code of Ethics
Our Board has approved Sussers Code of Business Conduct and Ethics, which is applicable to all directors, officers and employees of the company, including the principal executive officer and the principal financial officer. The Code of Business Conduct and Ethics is available on our website at http://investor.susser.com/governance.cfm and in print without charge to any shareholder who sends a written request to the Companys Secretary at our principal executive offices. The Company intends to post any amendments to or waivers of this code for its directors and executive officers, including its principal executive officer and principal financial officer, at this location on its website.
Our board of directors has formed an audit committee currently chaired by Mr. Shapiro, who has been determined to be an independent board member, and qualifies as the audit committee financial expert. Mr. Thompson and Mr. Engel also serve on the audit committee. The audit committee reviews and monitors our internal controls, financial reports and accounting practices, as well as the scope and extent of the audits performed by both the independent and internal auditors, reviews the nature and scope of our internal audit program and the results of internal audits, and meets with the independent auditors. The audit committee operates under a written charter adopted by the Board, a current copy of which is available on our website at http://investor.susser.com/governance.cfm. The audit committee held five meetings during the 2007 fiscal year to discuss matters relating to the engagement of the Companys independent auditors, to review Company financial statements and periodic filings and to address standing agenda items and met an additional six times with members of company management, the Companys internal audit department and the Companys independent auditors to discuss compliance initiatives relating to the Sarbanes Oxley Act of 2002.
Compensation Discussion and Analysis
Our compensation setting process consists of establishing targeted compensation levels for each member of senior management and then allocating that compensation among base salary and incentive compensation. Our incentive compensation program is designed to reward company-wide performance by tying short-term and
long-term awards to (i) the achievement of targeted company financial objectives, (ii) the achievement of specific operational goals within the purview of an individuals scope of responsibilities, as applicable and (iii) growth in shareholder value. Our executive officers are also eligible to participate in benefit plans generally available to our other employees. We believe our approach to compensation will enable us to achieve several key objectives necessary to promote growth in shareholder value, while practicing good corporate governance, including the following:
Process and Timing of Compensation Decisions. The compensation committee reviews and approves all compensation targets and payments for senior management, including the named executive officers. The Chief Executive Officer evaluates the performance of other officers and develops individual recommendations for the committees assessment. Both the Chief Executive Officer and the compensation committee may make adjustments to the recommended compensation based upon an assessment of an individuals performance and contributions to the Company. The compensation for the Chief Executive Officer is reviewed and approved by the compensation committee and by the Board, based upon their independent evaluation of the Chief Executive Officers performance and contributions.
The compensation committee meets annually in the first quarter of each fiscal year to establish the target bonus levels for that fiscal year, approve salaries to become effective approximately two weeks thereafter and consider bonuses for the prior fiscal year and long-term incentive awards. The compensation committee may, however, review salary and bonus levels at other times in the event of mid-year appointments, changes in responsibility or promotions. The compensation committee may also consider recommendations and grant long-term incentive awards from time to time as deemed appropriate during the year.
Since it was formed prior to the Companys initial public offering, the compensation committees practice has been to hold this meeting during the first week of February. Consequently, any long-term incentive awards approved at this meeting are generally made at a grant date preceding the Companys release of fourth quarter earnings. The Company does not, however, coordinate awards with the release of earnings for the purpose of affecting executive compensation and generally makes any mid-year grants during approved trading windows under the Companys insider trading policy following the release of earnings information.
The following table summarizes the approximate timing of some of our more significant compensation events:
Components of Executive Compensation. The following is a summary description of the key components of our executive compensation program:
Relative Size of Major Compensation Elements. In setting executive compensation, the compensation committee considers the aggregate amount of compensation payable to an executive officer and the form of the compensation. The compensation committee seeks to achieve an appropriate continuing balance between immediate cash compensation and long-term incentives designed to retain key personnel and align their interests with those of long-term shareholders. The level of incentive compensation typically corresponds to an executive officers responsibilities within the Company, with the level of incentive compensation for more senior executive officers being a greater percentage of total compensation than for less senior executive officers.
Although we typically consider long-term incentive grants when we recruit new management personnel, or upon hiring or promoting senior employees, we have not historically perceived a need to make long-term incentive awards a significant component of annual compensation. However, the compensation committee does, from time to time, consider paying portions of annual compensation in the form of long-term incentive awards and our president and chief executive officer, in lieu of a cash award and in consultation with the compensation committee, elected to receive his 2006 bonus in the form of 7,500 shares of restricted common stock, and received 5,000 shares of restricted stock for 2007 performance in addition to a cash bonus.
Because we have generally paid annual compensation primarily in cashand because our named executive officers are eligible to participate in our 401(k) and non-qualified deferred compensation plans that permit them to defer tax recognition of a portion of that cash compensationour compensation committee has not historically based compensation decisions upon tax or accounting considerations. Similarly, the compensation committee has not historically considered gains recognized from prior stock option or restricted stock awards because no outstanding stock options or shares of restricted stock have yet vested. However, the compensation committee may take these, or other, issues into consideration when making future compensation decisions.
Determination of Executive Compensation Levels.
In making any compensation decision, the compensation committee generally considers external, objective criteriasuch as market trends in executive compensation practicesas well as each individuals attributes, performance objectives, responsibilities and contributions. Compensation for our Chief Executive Officer is reviewed and approved by the compensation committee and, ultimately, by the Board. For officers other than the Chief Executive Officer, individual performance is evaluated and compensation decisions are made with the recommendations of the Chief Executive Officer.
Individual Performance and Contributions. Individual performance objectives are specific to each officer position and may relate to the following matters, among others:
These subjective evaluative criteria are used to supplement objective financial performance metrics for purposes of assisting the compensation committee in considering increases in annual base salary above the level specified in an individuals employment agreement and/or increases or decreases in an individuals annual performance bonus above or below the level called for by reference to achievement of specific financial targets.
Comparison Analysis. In 2007, the compensation committee, with the assistance of Company personnel and in consultation with the Companys financial advisors, began compiling a comparison study of compensation practices at other companies for purposes of guiding 2008 compensation decisions. Due to the Companys unique retail convenience store, wholesale fuel distribution and restaurant business structure and its relative size, the Company has no pure peer companies against which to benchmark. Accordingly, after considering an initial field of approximately thirty reporting companies, the compensation committee selected a comparison group comprised of the following 14 companies operating in the convenience store, discount store, retail grocery and foodservice industries:
The compensation committee considered the mean, median and 25th and 75th percentile compensation levels by executive office, in total and by individual compensation component, across this comparison group, while giving proper deference to differences in size and profitability by comparing group distribution of enterprise value, trailing twelve month revenue, trailing twelve month EBITDA and number of employees. On a pro-forma basis for the acquisition of the parent company of Town & Country Food Stores in November of 2007, the Companys size and financial results placed it above median but below mean levels of enterprise value, trailing twelve month EBITDA and employee count and significantly above both median and mean levels of trailing twelve month revenue. The Compensation Committee also evaluated the Companys same store and total growth rates as well as other quantitative and qualitative factors in evaluating compensation. After considering this analysis of peer group compensation levels, the Compensation Committee determined that adjustments to named executive officer compensation reflected below were warranted both by external market conditions, as well as by the quantitative and qualitative performance criteria discussed in greater detail below.
Adjustments to Base Compensation and Target Bonus Levels. Each of our named executive officers is currently party to an employment agreement that sets his or her base annual salary and target bonus level, in either case, subject to annual review and discretionary increase by our compensation committee for reasons such as changes in job responsibility or market trends or to reward individual performance. The table below presents the annual base salary levels and target bonus level (expressed as a percentage of base salary) for each of our named executive officers after giving effect to any increases approved by the compensation committee from the base levels specified in the executives 2006 employment agreements:
In 2007, the compensation committee approved increases to Ms. Sullivans and Mssrs. Dewbres and Smiths base salary levels. Ms. Sullivans and Mr. Smiths base salarys were each increased by 3.5%, reflecting acceptable financial performance, achievement of certain growth objectives and successful execution of the initial public offering. Mr. Dewbres base salary was increased by $36,595 or approximately 19%, in view of strong financial performance in 2005 and 2006. No adjustments were made to the salaries of the other named executive officers.
In 2008, the Company adjusted the base compensation for Ms. Sullivan from $170,775 to $220,775 for outstanding performance as Chief Financial Officer as it relates to accurate, timely financial reporting, transparency and accessibility to shareholders, bondholders and lenders, recruiting highly qualified staff and retaining and developing critical team members in a competitive regional economy. Ms. Sullivan was also instrumental in the due diligence and financing processes necessary to complete our acquisition of the parent company of Town & Country Food Stores in November of 2007.
Mr. Dewbres base salary was adjusted in 2008 from $225,000 to $232,875, reflecting the achievement of targets relating to EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) and new store openings in the wholesale division. Mr. Dewbre was the team leader in a successful renegotiation of pricing under a major supply agreement and was a key member of the due diligence and integration teams working to complete the Town & Country acquisition.
Mr. Bonners compensation was adjusted from $279,537 in 2006 and 2007 to $289,321 in 2008, reflecting his contribution to our successful initial public offering in 2006, and to the due diligence effort, negotiations, and financing and integration processes relating to the Town & Country acquisition. Also, the compensation committee recognized Mr. Bonners success in strengthening the legal and construction groups in 2007 and his continued success in overseeing the execution of our real estate development objectives.
Target bonus levels for 2008 for each of Ms. Sullivan and Mssrs. Dewbre and Bonner were also increased from 33% (the base level specified in their employment agreements) to 40% to reflect market considerations and the challenge associated with meeting internal performance targets.
Mr. Sussers base salary remains unchanged from 2004 to 2008 as he has recommended to the compensation committee and to the Board that, in lieu of increases to base salary, the committee and Board consider equity incentives or one-time bonuses to better align his interests with those of other shareholders. Mr. Sussers 2008 target bonus level was increased from 40% to 50% to reflect market considerations and the challenge associated with meeting internal performance targets.
Annual Bonuses. Annual bonuses are intended to motivate and reward the Companys named executive officers by tying performance awards to both the achievement of Company and segment-specific financial goals for the performance year and individual performance and achievements. Target bonus levels, based on the target percentages specified in each of the named executive officers employment agreementsas they may be increased from time to time in the discretion of the compensation committee, form the benchmark for making annual bonus decisions. These target bonus levels are currently 50% of base salary for our Chief Executive Officer and 40% for each of our other named executive officers, as discussed above. The compensation committee considers company performance for the preceding fiscal year based upon one or more categories of financial or operational metrics to further refine its estimation of target bonus dollars available for the named executive officers. Final bonus awards are determined, however, within the sole discretion of the compensation committee after assessing the subjective performance criteria discussed under the preceding caption, Individual Performance and Contributions. The compensation committee chooses to retain such discretionary authority over bonus decisionswithout relying solely on a formulaic assessment of pre-determined performance metricsdue to the impact that outside variables, such as fuel margins or weather, have historically had on our results of operations, and its observation that Company or segment-specific performance metrics may not reflect the growth or performance of individuals within the Company. Consequently, while the compensation committee considers the objective performance criteria established as part of the management bonus program discussed below to be important components in making award determinations, bonus decisions are nonetheless entirely discretionary in nature.
At the beginning of the 2007 fiscal year, the compensation committee determined that its objective assessment of Mssrs. Smiths and Cobens performance would be based 66.7% on achievement of targeted consolidated EBITDAR (earnings before interest, taxes, depreciation, amortization and rent) with the remaining 33.3% being based on achieving targeted levels of retail segment EBITDAR and retail segment non-fuel gross income, respectively. Similarly, Mr. Dewbres objective performance criteria for fiscal 2007 were weighted 66.7% on achievement of targeted consolidated EBITDAR with the remaining 33.3% being based on achieving targeted levels of wholesale segment EBITDAR. The performance of our other named executive officers was assessed based upon performance of the Company relative to internal target levels of consolidated adjusted EBITDAR. The following table reflects the correlation between (i) achievement of internal target levels of these metrics and (ii) corresponding target bonus dollars available for each of our named executive officers (expressed as a percentage of base salary) for the 2007 fiscal year. For the 2007 fiscal year, without giving effect to the impact of the TCFS acquisition, the company achieved EBITDAR slightly in excess of internal targets. The compensation committee considered this financial performance, together with the management teams successful execution of the TCFS acquisition and the other achievements discussed above under the caption Adjustments to Base Compensation and Target Bonus Levels, in awarding the bonuses reflected in the Summary Compensation Table.
2007 Management Bonus Program
Relationship of Target Bonus Dollars (As Percentage of Annual Salary)
To Achievement of Internal EBITDAR Target
For fiscal 2008, the compensation committee determined that modifications to the management bonus program were necessary to reflect the Companys increased scale following the Town & Country acquisition. The following table reflects the 2008 management bonus program, after giving effect to these modifications.
2008 Management Bonus Program
Relationship of Target Bonus (As Percentage of Annual Salary)
To Achievement of Internal EBITDAR Target
For purposes of assisting its annual bonus determinations, the compensation committee selects internal performance targets that it believes are achievable while also aspirational, insofar as they are indicative of strong company-wide or, as the case may be, segment-specific performance. While the Company believes that target levels are reasonably attainable, they are necessarily based on certain assumptions as to variables beyond the Companys control, including future weather patterns, commodity price levels and the impact of outside competitionall of which have historically had a significant impact on our business. The Compensation Committee also notes the impact to the Companys financial performance of any acquired business that was not contemplated at the time the internal targets were finalized. Consequently, while the compensation committee looks generally to these objective performance measures, it does not take a purely formulaic approach to making bonus decisions retains authority to consider any number of subjective factors in making award determinations.
Long Term Incentive Awards
In connection with our initial public offering, we adopted the Susser Holdings Corporation 2006 Equity Incentive Plan (the Plan) which governs the terms of equity awards granted to our management team prior to our initial public offering as well as any future equity awards granted by us. The Plan is intended to provide incentives that will attract, retain and motivate highly competent persons as directors and employees of, and consultants to, the Company and our subsidiaries, by providing them with opportunities to acquire shares of our common stock or to receive monetary payments. Additionally, the Plan provides us a means of directly tying our executives financial reward opportunities to our shareholders return on investment.
Employees and directors of, and consultants to, us or any of our subsidiaries are eligible to participate in the Plan, which is administered by the compensation committee. The Plan makes available an aggregate of 2,637,277 shares of our common stock, subject to adjustments. The Plan provides for the grant of stock options, including incentive stock options and non-qualified stock options, shares of restricted stock, and other stock-based awards. The committee determines, with regard to each type of award, the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for each award.
Long-term incentive grants have been historically made at, or near, the beginning of the employment relationship and generally vest over a five year term. These initial awards are generally made at levels intended to provide a meaningful incentive for continued employment, and for strong financial performance, over the vesting period. We believe the incentivizing characteristics of these awards continue throughout the full vesting period. Additionally, members of our executive management team have historically made significant personal equity investments in the Company. Consequently, in recent years our compensation committee has not made long-term incentive awards a significant component of annual executive compensation other than where prior awards to existing management personnel are vesting, and incremental awards are desirable to maintain comparable levels of long term performance and retention incentives.
Adjustment of Awards. In the event of any corporate event or transaction such as a merger, consolidation, reorganization, recapitalization, stock split, or other like change in capital structure (other than normal cash dividends) or similar corporate event or transaction, the compensation committee will determine whether and to what extent it should substitute or adjust, as applicable, the number and kind of shares of stock that may be issued under the Plan or under particular form and conditions of such awards.
In the event we are a party to a merger or consolidation or similar transaction (including a change of control), the compensation committee is authorized (but not obligated) to make adjustments in the terms and conditions of outstanding awards, including, without limitation, that at any time prior to such transaction, all then outstanding awards shall become immediately exercisable or vested and any restrictions on any awards shall immediately lapse. In addition, the compensation committee may provide that all awards held by participants who are at the time of the event in our service or the service of any of our subsidiaries or affiliates shall remain exercisable for the remainder of their terms notwithstanding any subsequent termination of a participants service or that all awards will be substituted with awards that will substantially preserve the otherwise applicable terms of affected awards previously granted hereunder, in each case, as determined by the compensation committee in its sole discretion.
Amendment and Termination. The compensation committee has the right to amend, suspend or terminate the Plan at any time, provided that no amendment may adversely affect in any material respect any participants rights under any award grant previously made or granted under the Plan without the participants consent. Also, no amendment of the Plan may be made without approval of our shareholders if the approval is necessary to comply with any tax or regulatory requirement applicable to the Plan.
Compliance with Code Section 409A. In the event that the compensation committee determines that the Plan and/or awards are subject to Code Section 409A, the compensation committee may, in its sole discretion and
without a participants prior consent, amend the Plan and/or awards, adopt policies and procedures, or take any other actions (including amendments, policies, procedures and actions with retroactive effect) as are necessary or appropriate to (i) exempt the Plan and/or any award from the application of Code Section 409A, (ii) preserve the intended tax treatment of any such award, and (iii) comply with the requirements of Code Section 409A, including any regulations or other interpretive guidance that may be issued after the grant of any award. However, neither the Company nor the compensation committee is obligated to ensure that awards comply with Code Section 409A or to take any actions to ensure such compliance.
Termination and Change of Control Benefits
Employment agreements with each of the named executive officers provide for severance payments upon certain events of termination. Generally, if we terminate any of our named executive officers without cause, or the executive elects to terminate employment for good reason, he or she is entitled to two times (three times in the case of Mr. Susser) base salary paid out in five installments over two years, plus any earned and accrued but unpaid bonus and any accrued vacation pay, 24 months of continued health insurance coverage for the executive and his or her family, and the reimbursement of any expenses. For purposes of these employment agreements, good reason includes, (i) a reduction of the executives base salary or target bonus percentage; (ii) the relocation of the executives principal office location to a location outside of Corpus Christi or Houston, Texas; (iii) our failure to provide any employee benefits due to be provided to the executive; (iv) a material breach of the executives employment agreement by us; or (v) the acquisition by a financial or strategic buyer of 51% of the outstanding equity interests of the company, provided, in the latter case, the executive negotiates to provide continued transition services for a reasonable period. Under these employment agreements, our named executive officers are also entitled to various gross-up payments for certain excise taxes they may incur in connection with annual compensation or any severance payments.
We believe the termination and change of control provisions contained in our executive employment agreements play an important role in attracting and recruiting executive talent by partially offsetting the career and relocation risks associated with changing jobs and, frequently, moving from larger cities offering greater opportunities for executive-level employment . Additionally, we believe the employment agreements provide long term protections for the Company through non-competition provisions prohibiting the named executive officers from working (or maintaining anything other than a de minimis ownership interest in a company operating in) the convenience store or wholesale fuel distribution industryin any county in which the Company operates at the date of termination of employmentas well as non-solicitation agreements prohibiting the named executive officers from hiring Company employees, for a period of two years from the date of termination.
Perquisites and Other Benefits
We provide certain perquisites to our executive officers. Executives are eligible to receive annual health examinations and personal administrative and financial services support from corporate staff. In addition, we provide our President and Chief Executive Officer with a company vehicle and reimburse him for the business use of his private aircraft.
We do not provide executive officers with supplemental executive medical benefits or coverage. In addition, we generally do not reimburse executives for aircraft time relating to personal use, such as travel to and from vacation destinations. However, spouses (or other family members) occasionally accompany executives when executives are traveling on private aircraft for business purposes, such as attending an industry business conference at which spouses are invited and expected to attend.
We provide other benefits, including medical, life, dental, and disability insurance in line with competitive market conditions. Our named executive officers are eligible for the same benefit plans provided to our other non-store employees, including insurance plans and supplemental plans chosen and paid for by employees who wish additional coverage.
We have established a 401(k) benefit plan for the benefit of our employees. All full-time employees who are over 21 years of age and have greater than six months tenure are eligible to participate. Under the terms of the 401(k) plan, employees can contribute up to 100% of their wages, subject to IRS limitations, which, for 2007, were generally a maximum contribution amount of $15,500 on maximum compensation of $225,000. We match 20% of the first 6% of salary that the employee contributes as a guaranteed match. Additionally, we may make a discretionary match that we determine in the first quarter of each year, based on the prior years financial performance against internal targets. For fiscal 2005, 2006 and 2007, we made a discretionary match of 30%, 0%, and 10%, respectively, of the first 6% of salary that each employee contributed in addition to the 20% match.
We have also implemented a nonqualified deferred compensation (NQDC) plan for key executives, officers, and certain other employees to allow compensation deferrals in addition to that allowable under the 401(k) plan limitations, in that the contribution limits and compensation limits of the 401(k) plan do not apply to the NQDC plan. Participants in the NQDC plan may defer up to 75% of their salary. We match a portion of the participants contribution each year on the first 6% of salary deferred, using the same percentage of guaranteed and discretionary matches that are used for its 401(k) plan. The investment options available in the NQDC plan are identical to those offered in the 401(k) plan. Plan benefits are paid from our assets upon termination or retirement, and the Plan does not otherwise permit early withdrawals, distributions or loans, except for certain hardship withdrawals in the event of unforeseen emergencies.
Stock Ownership Guidelines
Our Board, the compensation committee and our executives recognize that ownership of our common stock is an effective means by which to align the interests of our directors and executives with those of our shareholders. We have long emphasized the importance of stock ownership among our executives and directors. We believe the existing ownership positions of our named executive officers combined with Plan-based equity awards issued in 2005, 2006 and 2007 create a strong incentive to achieve long-term growth in the price of our common stock. We encourage our management team to continue to invest in our stock and intend to continue to use Plan-based equity awards to promote the further alignment of management and shareholder interests.
Prohibition on Insider Trading
We have established policies prohibiting our officers, directors, and employees from purchasing or selling Susser securities while in possession of material, nonpublic information, or outside of certain window periods following the release of annual and quarterly financial results, or otherwise using such information for their personal benefit or in any manner that would violate applicable laws and regulations.
Summary Compensation Table
The following table provides a summary of total compensation paid for 2006 and 2007 to our named executive officers, and the base salary, bonus and other compensation for 2005. The table shows amounts earned by such persons for services rendered to Susser in all capacities in which they served. The elements of compensation listed in the table are more fully described in the Compensation Discussion and Analysis section of this report and in the footnotes that follow this table.