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Susser Holdings 10-Q 2007

Documents found in this filing:

  1. 10-Q
  2. Ex-10.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2
Form 10-Q
Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


FORM 10-Q

 


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2007

Commission File Number: 001-33084

 


SUSSER HOLDINGS CORPORATION

(Exact name of registrant as specified in its charter)

 


 

Delaware   01-0864257

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

4433 Baldwin Boulevard

Corpus Christi, Texas 78408

(Address of principal executive offices)

Registrant’s telephone number, including area code: (361) 884-2463

 


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is 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  ¨    Non-accelerated filer  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.):    Yes   ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

 

COMMON STOCK, $0.01 PAR VALUE   16,831,662 SHARES
(Class)   (Outstanding at November 14, 2007)

 



Table of Contents

SUSSER HOLDINGS CORPORATION

FORM 10-Q

TABLE OF CONTENTS

 

     Page

PART I – FINANCIAL INFORMATION

  

Item 1. Financial Statements

   1

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   18

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   32

Item 4. Controls and Procedures

   32

PART II – OTHER INFORMATION

  

Item 1. Legal Proceedings

   33

Item 1A. Risk Factors

   33

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   33

Item 3. Defaults Upon Senior Securities

   34

Item 4. Submission of Matters to a Vote of Security Holders

   34

Item 5. Other Information

   34

Item 6. Exhibits

   34

 

i


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

Susser Holdings Corporation

Consolidated Balance Sheets

 

    

December 31,

2006

    September 30,
2007
     audited     unaudited
     (in thousands)

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 32,938     $ 40,182

Accounts receivable, net of allowance for doubtful accounts of $1,179 at December 31, 2006 and $1,066 at September 30, 2007

     44,084       59,325

Inventories, net

     37,296       42,949

Assets held for sale

     518       —  

Other current assets

     1,884       1,452
              

Total current assets

     116,720       143,908

Property and equipment, net

     232,454       238,481

Other assets:

    

Goodwill

     44,762       44,762

Intangible assets, net

     17,492       15,296

Other noncurrent assets

     10,899       14,560
              

Total other assets

     73,153       74,618
              

Total assets

   $ 422,327     $ 457,007
              

Liabilities and shareholders’ equity

    

Current liabilities:

    

Accounts payable

   $ 84,838     $ 99,035

Accrued expenses and other current liabilities

     20,711       27,264
              

Total current liabilities

     105,549       126,299

Long-term debt

     120,000       120,000

Deferred gain, long-term portion

     27,060       26,207

Other noncurrent liabilities

     7,918       11,862
              

Total long-term liabilities

     154,978       158,069

Minority interests in consolidated subsidiaries

     630       674

Commitments and contingencies

    

Shareholders’ equity:

    

Common stock, $.01 par value, 125,000,000 shares authorized, 16,824,162 issued and outstanding as of December 31, 2006, 16,831,662 issued and outstanding as of September 30, 2007

     168       168

Additional paid-in capital

     166,398       168,479

Retained earnings (deficit)

     (5,396 )     3,318
              

Total shareholders’ equity

     161,170       171,965
              

Total liabilities and shareholders’ equity

   $ 422,327     $ 457,007
              

See accompanying notes.

 

1


Table of Contents

Susser Holdings Corporation

Consolidated Statements of Operations

Unaudited

 

     Three Months Ended     Nine Months Ended  
     October 1,
2006
    September 30,
2007
    October 1,
2006
    September 30,
2007
 
     (dollars in thousands, except per share amounts)  

Revenues:

        

Merchandise sales

   $ 96,141     $ 108,227     $ 276,653     $ 307,517  

Motor fuel sales

     503,484       559,665       1,483,537       1,569,360  

Other income

     5,479       6,130       17,383       18,590  
                                

Total revenues

     605,104       674,022       1,777,573       1,895,467  

Cost of sales:

        

Merchandise

     65,163       72,306       186,128       207,593  

Motor fuel

     475,479       534,998       1,418,295       1,503,615  

Other

     138       245       471       828  
                                

Total cost of sales

     540,780       607,549       1,604,894       1,712,036  
                                

Gross profit

     64,324       66,473       172,679       183,431  

Operating expenses:

        

Personnel

     17,388       19,833       51,746       57,736  

General and administrative

     5,120       7,283       14,536       19,531  

Other operating

     17,198       17,175       48,413       48,627  

Rent

     5,567       6,135       16,651       18,255  

Royalties

     996       —         2,847       66  

Gain on disposal of assets and impairment charge

     2       275       (277 )     83  

Depreciation, amortization, and accretion

     6,115       7,987       17,672       21,472  
                                

Total operating expenses

     52,386       58,688       151,588       165,770  
                                

Income from operations

     11,938       7,785       21,091       17,661  

Other income (expense):

        

Interest expense

     (4,670 )     (2,944 )     (14,088 )     (8,730 )

Other miscellaneous

     106       122       217       318  
                                

Total other income (expense)

     (4,564 )     (2,822 )     (13,871 )     (8,412 )

Minority interest in income (loss) of consolidated subsidiaries

     (14 )     1       (47 )     (32 )
                                

Income before income taxes

   $ 7,360     $ 4,964     $ 7,173     $ 9,217  

Income tax expense

     —         (123 )     —         (503 )
                                

Net income

   $ 7,360     $ 4,841     $ 7,173     $ 8,714  
                                

Net income per share:

        

Basic

   $ 0.80     $ 0.29     $ 0.78     $ 0.52  

Diluted

   $ 0.79     $ 0.29     $ 0.77     $ 0.52  

Weighted average shares outstanding:

        

Basic

     9,230,404       16,705,404       9,230,404       16,705,404  

Diluted

     9,298,695       16,776,347       9,294,012       16,771,968  

See accompanying notes.

 

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Table of Contents

Susser Holdings Corporation

Consolidated Statements of Cash Flows

Unaudited

 

     Nine Months Ended  
     October 1,
2006
    September 30,
2007
 
     (in thousands)  

Cash flows from operating activities

    

Net Income (loss)

   $ 7,173     $ 8,714  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation, amortization, and accretion

     17,672       21,472  

Gain on disposal of assets and impairment charge

     (277 )     83  

Noncash stock-based compensation

     340       2,074  

Minority interest

     37       44  

Deferred income taxes

     —         (1,430 )

Fair market value in nonqualifying derivatives

     (106 )     —    

Changes in operating assets and liabilities:

    

Receivables

     (1,511 )     (15,237 )

Inventories

     107       (5,653 )

Prepaid expenses and other current assets

     1,346       950  

Intangible assets

     (420 )     (137 )

Other noncurrent assets

     (493 )     (2,592 )

Accounts payable

     985       14,193  

Accrued liabilities

     3,698       7,318  

Other noncurrent liabilities

     (64 )     2,810  
                

Net cash provided by operating activities

     28,487       32,609  

Cash flows from investing activities

    

Purchases of property and equipment

     (39,462 )     (62,600 )

Proceeds from disposal of property and equipment

     5,135       1,086  

Proceeds from sale/leaseback transactions

       36,152  
                

Net cash used in investing activities

     (34,327 )     (25,362 )

Cash flows from financing activities

    

Change in notes receivable

     (212 )     (3 )

Revolving line of credit, net

     3,880       —    
                

Net cash provided by (used in) financing activities

     3,668       (3 )
                

Net increase (decrease) in cash

     (2,172 )     7,244  

Cash and cash equivalents at beginning of year

     4,116       32,938  
                

Cash and cash equivalents at end of period

   $ 1,944     $ 40,182  
                

See accompanying notes.

 

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Table of Contents

Susser Holdings Corporation

Notes to Consolidated Financial Statements

Unaudited

1. Organization and Principles of Consolidation

The consolidated financial statements are composed of Susser Holdings Corporation (Susser or the Company), a Delaware corporation, and its consolidated subsidiaries, which operate convenience stores and distribute motor fuels in Texas and Oklahoma. The Company was formed in May 2006, and in October 2006 completed an initial public offering (IPO) (see Note 10). 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, comprise all of the Company’s operations. Susser, through its subsidiaries and predecessors, has been acquiring, operating, and supplying motor fuel to convenience stores since 1988.

The consolidated financial statements include the accounts of the Company and all of its subsidiaries. The Company’s primary operations are conducted by the following consolidated subsidiaries:

 

   

Stripes LLC (Stripes), a Texas Limited Liability Company, operates convenience stores located primarily in Texas and Southern Oklahoma. Effective June 30, 2007, SSP Partners, a Texas general partnership, and several other subsidiaries of Susser merged into S Interests Management Company, LLC. S Interests Management Company, L.L.C. survived the merger and changed its name to Stripes LLC. All assets and liabilities of each entity party to the merger were allocated to and vested in Stripes LLC. Stripes is a wholly owned subsidiary of Susser Holdings, L.L.C.

 

   

Susser Petroleum Company LLC (SPC), a Texas Limited Liability Company, distributes motor fuels in Texas and Oklahoma. Effective June 30, 2007, Susser Petroleum Company, LP, a Texas limited partnership, merged into Susser Petroleum Management Company, LLC. Susser Petroleum Management Company, LLC survived the merger and changed its name to Susser Petroleum Company LLC. All assets and liabilities of each entity party to the merger were allocated to and vested in Susser Petroleum Company LLC. SPC is a wholly owned subsidiary of Stripes.

The Company also offers environmental, maintenance and construction management services to the petroleum industry (including its own sites) through its subsidiary, Applied Petroleum Technologies, Ltd. (APT), a Texas limited partnership. Two wholly owned subsidiaries, Susser Holdings, L.L.C. and Susser Finance Corporation, are the issuers of the $120 million of senior notes outstanding at September 30, 2007, but do not conduct any operations (see Note 6). A subsidiary, C&G Investments, LLC, owns a 50% interest in Cash & Go, Ltd. and Cash & Go Management, LLC. Cash & Go, Ltd. currently operates 38 units, located primarily inside Stripes’ retail stores, which provide short-term loans and check cashing services. The Company accounts for this investment under the equity method, and reflects its share of net earnings in other miscellaneous income and its investment in other noncurrent assets.

All significant intercompany accounts and transactions have been eliminated in consolidation. Transactions and balances of other subsidiaries are not material to the consolidated financial statements. The Company’s fiscal year is 52 or 53 weeks and ends on the Sunday closest to December 31. All references to fiscal 2006 refer to the 52-week period ended December 31, 2006. All references to the third quarter of 2006 and 2007 refer to the 13-week periods ended October 1, 2006 and September 30, 2007, respectively. All references to the first nine months of 2006 and 2007 refer to the 39-week periods ended October 1, 2006 and September 30, 2007, respectively. Stripes follows the same accounting calendar as the Company. SPC and APT use calendar month accounting periods, and end their fiscal year on December 31.

The consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The interim consolidated financial statements have been prepared from the accounting records of the Company and its subsidiaries, and all amounts at September 30, 2007 and for the three and nine months ended October 1, 2006 and September 30, 2007 are unaudited. Pursuant to Regulation S-X, certain information and note disclosures normally included in annual financial statements have been condensed or omitted. The information furnished reflects all adjustments which are, in the opinion of management, necessary for a fair statement of the results for the interim

 

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Table of Contents

Susser Holdings Corporation

Notes to Consolidated Financial Statements (continued)

Unaudited

 

periods presented, and which are of a normal, recurring nature.

Our results of operations for the three and nine months ended October 1, 2006 and September 30, 2007 are not necessarily indicative of results to be expected for the full fiscal year. Our business is seasonal and we generally experience higher levels of revenues during the summer months than during the winter months.

The interim consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006.

Certain prior year balances have been reclassified for comparative purposes. Fuel taxes payable of $13.2 million were included in accrued liabilities at December 31, 2006 and have been reclassified to accounts payable.

2. New Accounting Pronouncements

EITF No. 06-3

In June 2006, the FASB ratified the consensus reached by the EITF on Issue No. 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation).” The consensus requires disclosure of either the gross or net presentation, and any such taxes reported on a gross basis should be disclosed in the interim and annual financial statements. This Issue is effective for financial periods beginning after December 15, 2006. We have not changed our presentation of such taxes, and we are providing the additional required disclosure.

FASB Interpretation No. 48

In July 2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes—an 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 enterprise’s 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 2007 did not have a material effect on our financial statements. (See Note 9)

SFAS No. 157

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 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 as of the beginning of our 2008 fiscal year. We are currently evaluating the impact, if any, 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 are currently evaluating the impact, if any, on our financial statements.

 

5


Table of Contents

Susser Holdings Corporation

Notes to Consolidated Financial Statements (continued)

Unaudited

 

3. Inventories

Inventories consisted of the following:

 

    

December 31,

2006

   

September 30,

2007

 
   (in thousands)  

Merchandise

   $ 22,490     $ 24,970  

Fuel

     11,670       14,992  

Lottery

     1,504       1,153  

Maintenance spare parts and equipment

     2,193       2,208  

Less allowance for inventory shortage and obsolescence

     (561 )     (374 )
                

Total

   $ 37,296     $ 42,949  
                

4. Property, Plant, and Equipment

Property, plant, and equipment consisted of the following:

 

    

December 31,

2006

  

September 30,

2007

   (in thousands)

Land

   $ 92,644    $ 101,993

Buildings and leasehold improvements

     71,933      74,671

Equipment

     72,100      80,184

Construction in progress

     15,533      18,675
             
     252,210      275,523

Less accumulated depreciation

     19,756      37,042
             

Total

   $ 232,454    $ 238,481
             

5. Goodwill and Other Intangible Assets

Goodwill is not being amortized, but is tested annually for impairment, and is tested for impairment more frequently if events and circumstances indicate that the asset might be impaired. The Company has finite-lived intangible assets recorded that are amortized in accordance with SFAS No. 142, Goodwill and Other Intangible Assets. These assets consist of supply agreements, favorable leasehold arrangements, loan origination costs and a trade name, all of which are amortized over the respective lives of the agreements or over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. Supply agreements are being amortized over a weighted average period of approximately nine years. Favorable leasehold arrangements are being amortized over a weighted average period of approximately eight years. The Laredo Taco Company trade name is being amortized over fifteen years. The following table presents the gross carrying amount and accumulated amortization for each major class of finite-lived intangible assets at December 31, 2006 and September 30, 2007:

 

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Table of Contents

Susser Holdings Corporation

Notes to Consolidated Financial Statements (continued)

Unaudited

 

     December 31, 2006    September 30, 2007
   Gross
Carrying
Amount
   Accumulated
Amortization
  

Net

Amount

   Gross
Carrying
Amount
  

Accumulated

Amortization

   Net
Amount
   (in thousands)

Supply agreements

   $ 4,970    $ 779    $ 4,191    $ 4,893    $ 1,356    $ 3,537

Favorable lease arrangements, net

     6,053      1,530      4,523      5,998      2,406      3,592

Loan origination costs

     5,594      816      4,778      5,819      1,426      4,393

Trade name

     4,245      283      3,962      4,245      495      3,750

Other

     200      162      38      200      176      24
                                         

Total

   $ 21,062    $ 3,570    $ 17,492    $ 21,155    $ 5,859    $ 15,296
                                         

6. Long-Term Debt

Long-term debt consisted of the following:

 

    

December 31,

2006

  

September 30,

2007

   (in thousands)

Revolving credit agreement, bearing interest at Prime or LIBOR plus applicable margin

   $ —      $ —  

10  5/8% senior unsecured notes due 2013

     120,000      120,000
             

Total long-term debt

   $ 120,000    $ 120,000
             

Revolving Credit Agreement

In December 2005, Susser Holdings, L.L.C. and SSP Partners (predecessor to Stripes) entered into a five-year revolving credit facility (the Revolver) in an aggregate principal amount of up to $50.0 million with a syndicate of financial institutions. The Company and each of its existing and future domestic subsidiaries, with the exception of one non wholly-owned subsidiary, are guarantors of the Revolver. The loans are secured by a perfected first priority security interest in inventory, accounts receivable, and certain ownership interests.

At September 30, 2007, our borrowing base was sufficient to support the $50.0 million availability under the Revolver, under which no borrowings were outstanding and letters of credit commitments were $6.2 million, leaving approximately $43.8 million of availability. The interest rates under the Revolver are calculated at our option at either a prime rate or a LIBOR rate plus, in each case, a margin. As of September 30, 2007, the interest rate on the Revolver was 8.25%, and the Company was in compliance with all covenants required by the Revolver.

Senior Unsecured Notes

In December 2005, the Company, through its subsidiaries Susser Holdings, L.L.C. and Susser Finance Corporation, issued $170.0 million 10  5/8% senior unsecured notes (the Senior Notes). In November 2006, the Company redeemed $50.0 million of the Senior Notes with proceeds from the IPO, as allowed by the indenture. The Senior Notes pay interest semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2006. The Senior Notes mature on December 15, 2013, and on or after December 15, 2009, the Company may redeem some or all of the $120.0 million remaining Senior Notes at the following redemption prices (expressed as percentages of principal amount) plus accrued and unpaid interest and liquidated damages, if any: in 2009, at 105.313%; in 2010, at 102.656%; and in 2011 and thereafter, at 100.000%.

The Senior Notes are guaranteed by the Company and each existing and future domestic subsidiaries with the exception of one non-wholly-owned subsidiary. The Senior Notes rank equally in right of payment to all existing and future unsecured senior debt and senior in right of payment to existing and future senior subordinated and subordinated

 

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Table of Contents

Susser Holdings Corporation

Notes to Consolidated Financial Statements (continued)

Unaudited

 

debt. The Senior Notes are effectively subordinated to existing and future secured debt, including the revolving credit facility, to the extent of the value of the assets securing such debt. Issuance costs of this debt of $5.1 million related to the outstanding Senior Notes were charged to intangible assets and are being amortized over the life of the Senior Notes.

The Senior Notes contain covenants that, among other things and subject to various exceptions, restrict the Company’s ability and any restricted subsidiary’s ability to incur additional debt, make restricted payments (including paying dividends on, redeeming or repurchasing capital stock), dispose of assets, and other restrictions.

New Senior Credit Facilities

On September 20, 2007, Susser Holdings, L.L.C. (the “Borrower”), an indirect wholly-owned subsidiary of the Company, entered into a Commitment Letter (the “Commitment Letter”) with Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Merrill Lynch Capital Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., Wachovia Bank, National Association, Wachovia Capital Markets, LLC, Wachovia Investment Holdings, LLC, Bank of Montreal and BMO Capital Markets, pursuant to which (a) Bank of America, Merrill Lynch Capital, Wachovia Bank and Bank of Montreal committed to provide up to $195.0 million in senior secured credit facilities to the Borrower, consisting of (1) a revolving credit facility of up to $90.0 million and (2) a term loan facility of $105.0 million, and (b) Banc of America Bridge, Merrill Lynch Capital Corporation, Wachovia Investment Holdings and Bank of Montreal committed to provide a $150.0 million senior unsecured bridge loan (together with the senior secured credit facilities, the “Facilities”). The Company did not draw upon the bridge loan, having consummated a $150.0 million Senior Notes offering on November 13, 2007. These facilities were used to partially fund the acquisition of TCFS Holdings, Inc. (See Note 14, Subsequent Events, regarding the acquisition of TCFS Holdings, Inc.) In addition, the revolving portion of the new senior credit facilities replaced the Company’s existing revolving credit facility and will be used for ongoing working capital and general corporate needs, as well as to partially fund the acquisition of TCFS Holdings, Inc.

Derivative Financial Instruments

From time to time, the Company enters into interest rate swaps to either reduce the impact of changes in interest rates on its floating rate long-term debt or to take advantage of favorable variable interest rates compared to its fixed rate long-term debt. In November 2003, the Company 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 semiannual basis, the Company settled with the bank on the difference between the fixed and floating rates multiplied by the notional principal amount of $25.0 million for that period. Net proceeds received and the change in value of the swap were recorded as a reduction to or increase in interest expense. The swap terminated at maturity and no positions were outstanding at December 31, 2006, or September 30, 2007.

The Company also periodically enters into derivatives, such as futures and options, to manage its fuel price risk. Fuel hedging positions have not been material to our operations. We had no positions outstanding at December 31, 2006, and positions with a market value of $(0.1) million at September 30, 2007. Hedging results for the three and nine months ended September 30, 2007 decreased fuel gross profit by $0.3 million and $0.1 million, respectively.

7. Commitments and Contingencies

Leases

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. In addition to minimum rental payments, certain leases require additional payments based on sales or motor fuel volume. The Company is typically responsible for payment of real estate taxes, maintenance expenses and insurance.

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

The components of net rent expense are as follows:

 

     Three Months Ended     Nine Months Ended  
     October 1,
2006
    September 30,
2007
    October 1,
2006
   

September 30,

2007

 
     (in thousands)  

Cash Rent:

        

Store base rent

   $ 5,450     $ 5,899     $ 16,490     $ 17,797  

Equipment rent

     106       195       326       358  

Contingent rent

     40       36       126       101  
                                

Total cash rent

   $ 5,596     $ 6,130     $ 16,942     $ 18,256  
                                

Non-cash rent:

        

Straight-line rent

     343       382       824       1,128  

Amortization of deferred gain

     (372 )     (377 )     (1,115 )     (1,129 )
                                

Net rent expense

   $ 5,567     $ 6,135     $ 16,651     $ 18,255  
                                

Letters of Credit

The Company was contingently liable for $6.2 million related to irrevocable letters of credit required by various insurers and suppliers at September 30, 2007.

Environmental Remediation

The Company is subject to various federal, state and local environmental laws and makes financial expenditures in order to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. In particular, at the federal level, the Resource Conservation and Recovery Act of 1976, as amended, requires the U.S. Environmental Protection Agency (“EPA”) to establish a comprehensive regulatory program for the detection, prevention and cleanup of leaking underground storage tanks (e.g. overfills, spills and underground storage tank releases).

Federal and state regulations require us to provide and maintain evidence that we are taking financial responsibility for corrective action and compensating third parties in the event of a release from our underground storage tank systems. In order to comply with these requirements, we obtain private insurance from Tank Owner Members Insurance Company and American International Specialty Lines in Oklahoma. These policies provide protection from third party liability claims. For 2007, our coverage in Texas is $1.0 million per occurrence, with a $5.0 million aggregate and $70,000 deductible. Our coverage in Oklahoma is $1.0 million per occurrence, with a $2.0 million aggregate and $250,000 deductible. Additionally, we rely on state trust funds which cover certain claims.

The Company is currently involved in the remediation of gasoline store sites where releases of regulated substances have been detected. The Company accrues for anticipated future costs and the related probable state reimbursement amounts for its remediation activities. Accordingly, the Company has recorded estimated undiscounted liabilities for these sites totaling $1.8 and $2.5 million which is classified as accrued expenses and other current liabilities as of December 31, 2006 and September 30, 2007, respectively. As of September 30, 2007, approximately $1.7 million of the total accrued environmental liability is for the investigation and remediation of contamination at 23 sites which qualify for reimbursement under state funds, as further discussed below. The remaining $0.8 million represents our estimate of deductibles under insurance policies that we anticipate being required to pay with respect to 32 additional sites. There are also 34 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.

Under state reimbursement programs, the Company is eligible to receive reimbursement for certain future remediation costs, as well as the remediation costs previously paid. Accordingly, the Company has recorded a net receivable of $2.6 million and $2.9 million for the estimated probable state reimbursements, which are included in

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

current receivables as of December 31, 2006 and September 30, 2007, respectively. Reimbursement from the Texas Petroleum Storage Tank Remediation fund will depend upon the continued maintenance and solvency of the state fund through its scheduled expiration which House Bill (HB) 3554, passed in June 2007, extended for another four years until August 2012. It postponed the transfer of responsible party lead remediation to State lead remediation to August 31, 2011, previously set to occur on August 31, 2007. This bill also reduced the loading fee tax that generates money for the fund. This move is not expected to create a short-fall in the fund balance since no new cases are being covered and old cases are being closed out.

Self-Insurance

The Company is partially self-insured for its general liability and employee health insurance. The Company maintains insurance coverage at levels that are customary and consistent with industry standards for companies of similar size. The Company is a nonsubscriber under Texas Workers’ Compensation Act and maintains an ERISA-based employee injury plan, which is partially self insured. As of September 30, 2007, there were a number of outstanding claims that are of a routine nature, as well as open claims under previous policies that have not been resolved. The estimated incurred but unpaid liabilities relating to these claims are included in other accrued expenses. While the ultimate outcome of these claims cannot presently be determined, management believes that the accrued liability of $4.5 million and $4.3 million as of December 31, 2006 and September 30, 2007, respectively, will be sufficient to cover the related liability and that the ultimate disposition of these claims will have no material effect on the financial position and results of operations of the Company.

Refiner Rebates

The Company receives refiner rebates and other incentive payments from a number of its fuel suppliers. A portion of the refiner rebates may be passed on to the Company’s wholesale branded dealers under the same terms as required by its fuel suppliers. Many of the agreements require repayment of all or a portion of the amount received if the Company (or its branded dealers) elects to discontinue selling the specified brand of fuel at certain locations. As of September 30, 2007, the estimated amount of fuel rebates that would have to be repaid upon de-branding at these locations was $8.2 million. Of this amount, approximately $5.6 million would be the responsibility of SPC’s branded dealers under reimbursement agreements with the dealers. In the event a dealer were to default on this reimbursement obligation, SPC would be required to make this payment. The Company has $2.9 million recorded on the balance sheet as of September 30, 2007, of which $0.3 million is included in accrued expenses and other current liabilities and $2.6 million is included in other noncurrent liabilities.

8. Interest Expense and Interest Income

The components of net interest expense are as follows:

 

     Three Months Ended     Nine Months Ended  
     October 1,
2006
    September 30,
2007
    October 1,
2006
   

September 30,

2007

 
     (in thousands)  

Interest expense

   $ 4,838     $ 3,276     $ 14,603     $ 9,836  

Fair market value change in derivatives

     (39 )     —         (106 )     —    

Capitalized interest

     (77 )     (134 )     (262 )     (335 )
                                

Total interest expense

   $ 4,722     $ 3,142     $ 14,235     $ 9,501  

Cash interest income

     52       198       147       771  
                                

Interest expense, net

   $ 4,670     $ 2,944     $ 14,088     $ 8,730  
                                

9. Income Tax

We have been subject to federal income tax since October 24, 2006, subsequent to certain corporate formation

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

transactions in connection with our IPO. We are also subject to a new tax in Texas, effective January 1, 2007, that is based on gross margin (“margin tax”) but that has been determined to be appropriately classified as an income tax. We adopted the provisions of FIN 48 on January 1, 2007. (See Note 2) Based on our evaluation for the periods described above in which we are subject to income tax, we have concluded that there are no significant uncertain tax positions requiring recognition in our financial statements. We may from time to time be assessed interest or penalties by major tax jurisdictions, although any such assessments historically (including years in which we were organized as a partnership and any taxable income was attributed to our partners) have been minimal and immaterial to our financial results. In the event we receive an assessment for interest and/or penalties, interest is classified in the financial statements as interest expense and penalties as general and administrative expense.

At the inception of our taxable status as a “C” corporation, we recorded a cumulative net deferred tax asset of less than $0.1 million, which was net of a valuation allowance of $9.7 million. For the nine months ended September 30, 2007, we considered our historical taxable income and our estimates of future taxable income and recorded a decrease in the valuation allowance, resulting in an effective federal tax rate of zero. 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. In the nine months of 2007 we recorded a Texas margin tax liability of $0.5 million. Effective June 30, 2007, we restructured several of our wholly-owned subsidiaries (see Note 1) which results in the margin tax for 2007 being effective for the new companies beginning June 30, 2007.

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate for the quarter and nine months ended September 30, 2007 is as follows:

 

    

Three Months Ended

September 30, 2007

   

Nine Months Ended

September 30, 2007

 
   (in thousands)  

Tax at statutory federal rate

   $ 1,738     $ 3,226  

State and local tax, net of federal benefit

     80       327  

Decrease in valuation allowance

     (1,700 )     (3,078 )

Other

     5       28  
                

Tax expense per financial statement

   $ 123     $ 503  
                

10. Shareholders’ Equity

On October 24, 2006, Susser Holdings Corporation completed an IPO of 7,475,000 shares of its common stock at a price of $16.50 per share for an aggregate offering price of $123.3 million. The Company received $112.8 million in net proceeds from the IPO after payment of fees, expenses and underwriting discounts of approximately $10.5 million. In connection with the Susser corporate formation transactions, units of Stripes Holdings LLC were converted into equivalent shares of Susser Holdings Corporation common stock. All outstanding options to purchase units of Stripes Holdings LLC were also converted into options to purchase shares of Susser common stock on an equivalent basis and exercise price.

A total of 125,000,000 shares of common stock have been authorized, $0.01 par value, of which 16,824,162 and 16,831,662 were issued and outstanding as of December 31, 2006, and September 30, 2007, respectively, including unvested shares of 118,758 and 126,258, respectively. A total of 25,000,000 preferred shares have also been authorized, par value $0.01 per share, although none have been issued. In addition to the converted options described above, concurrent with the IPO, the Company granted options under the Susser Holdings Corporation 2006 Equity Incentive Plan to purchase 1,023,006 shares of common stock at an exercise price of $l6.50 per share. At September 30, 2007, 1,232,637 options were outstanding, none of which were exercisable. (see Note 11)

Immediately prior to the corporate formation transactions, the Board of Managers of Stripes Holdings LLC declared a $3.0 million dividend to its members to enable them to meet their estimated income tax obligations for the period prior to the merger, and authorized any additional amounts to be distributed to the members upon final

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

determination of the tax liability. It was subsequently determined that an additional $1.1 million was required to be distributed in accordance with the Stripes Holdings LLC Agreement related to taxable income allocable to members related to the 2006 final tax return through October 23, 2006. This amount was reflected as a liability and a reduction of additional paid-in capital in the balance sheet as of December 31, 2006, and was distributed in April 2007.

11. Share-Based Compensation

The Company has granted options and restricted, unvested stock under its 2006 Equity Incentive Plan. Vesting of each grant is generally over five years, with 33.3% of such units vesting on the third, fourth, and fifth anniversary of grant date. None of the units are currently exercisable. Following is a summary of options and stock which have been granted under the Company’s plans:

 

Option or Stock Grant

   Units
Outstanding at
July 1, 2007
   Changes during
Third Quarter
2007
   

Units
Outstanding
at September 30,

2007

   Option
Exercise
Price
  

Earliest Date
of Vesting

Options granted Dec. 26, 2005

   182,586    (9,132 ) (a)   173,454    $ 13.92    Dec. 26, 2008

Options granted Oct. 18, 2006

   884,221    —       884,221    $ 16.50    Dec. 21, 2008

Options granted Oct. 18, 2006

   126,014    (18,264 ) (a)   107,750    $ 16.50    Oct. 18, 2009

Options granted July 18, 2007

   —      67,212   (b)   67,212    $ 16.36    July 18, 2010

Unvested stock granted Dec. 21, 2005

   118,758    —       118,758      —      Dec. 21, 2008

Unvested stock granted Mar. 27, 2007

   7,500    —       7,500      —      Mar. 27, 2010

(a) Forfeitures of unexercised options
(b) Unvested stock option granted on July 18, 2007, at a fair value per share of $7.71, with an exercise price equal to the closing stock price on the grant date.

The Company adopted SFAS No. 123(R) at the beginning of fiscal 2006. Because we used the minimum value method for pro forma disclosures under SFAS No. 123, we are applying SFAS No. 123(R) prospectively to newly issued stock options. Existing stock options will continue to be accounted for in accordance with APB Opinion No. 25 unless such options are modified, repurchased or cancelled after the effective date. Information regarding non-cash compensation expense is as follows:

 

     Three Months Ended    Nine Months Ended
     (in thousands)
     October 1,
2006
   September 30,
2007
   October 1,
2006
   September 30,
2007

Compensation expense recognized (a)

   $ 113    $  715    $ 339    $  2,074

(a) Because the Company accounts for options granted during 2005 as a private company using the prospective approach, related compensation cost has not been recognized in the statements of operations as all options granted had an exercise price equal to or greater than the fair value of the underlying units on the date of grant. Had compensation cost for the options been determined based on the grant-date fair value of awards consistent with the method set forth in SFAS No. 123(R), the Company’s net profits and losses for the periods presented would have been affected as follows:

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

     Three Months Ended     Nine Months Ended  
     October 1,
2006
    September 30,
2007
    October 1,
2006
    September 30,
2007
 
     (in thousands)  

Net income, as reported

   $ 7,360     $ 4,841     $ 7,173     $ 8,714  

Deduct:

        

Compensation expense on options determined under fair value based method for all awards, net of tax

     (16 )     (14 )     (70 )     (45 )
                                

Pro forma net income

   $ 7,344     $ 4,827     $ 7,103     $ 8,669  
                                

12. Segment Reporting

The Company operates its business in two primary segments. The retail segment, Stripes, operates retail convenience stores in Texas and Oklahoma that sell merchandise, prepared food and motor fuel, and also offer a variety of services including car washes, lottery, ATM, money orders, check cashing, and pay phones. The wholesale segment, SPC (a subsidiary of Stripes), purchases fuel from a number of refiners and supplies it to the Company’s retail stores, to independently-owned dealer stations under long-term supply agreements and to other commercial consumers of motor fuel. Sales of fuel from the wholesale to retail segment are at delivered cost, including tax and freight. This amount is reflected in intercompany eliminations of fuel revenue. There are no customers who are individually material. Amounts in the “All Other” column include APT, corporate overhead and other costs not allocated to the two primary segments.

Segment Financial Data for the Three Months Ended October 1, 2006

(dollars and gallons in thousands)

 

     Retail
Segment
   Wholesale
Segment
    Intercompany
Eliminations
    All
Other
    Totals

Revenue:

           

Merchandise

   $ 96,141    $ —       $ —       $ —       $ 96,141

Fuel

     253,300      452,292       (202,108 )     —         503,484

Other

     4,436      988       (111 )     166       5,479
                                     

Total revenue

     353,877      453,280       (202,219 )     166       605,104

Gross profit:

           

Merchandise

     30,978      —         —         —         30,978

Fuel

     20,225      7,780       —         —         28,005

Other

     4,435      988       (111 )     29       5,341
                                     

Total gross profit

     55,638      8,768       (111 )     29       64,324
                                     

Selling, general, and administrative

     42,592      2,836       (111 )     952       46,269

Depreciation, amortization, and accretion

     4,647      1,181       —         287       6,115

Other operating expenses (income)

     20      (21 )     —         3       2
                                     

Operating income (loss)

   $ 8,379    $ 4,772     $ —       $ (1,213 )   $ 11,938
                                     

Gallons

     96,249      208,738       (95,794 )     —         209,193

Total assets

   $ 274,362    $ 93,517     $ (2,809 )   $ 12,636     $ 377,706

Capital expenditures

   $ 17,724    $ 831     $ —       $ 26     $ 18,581

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

Segment Financial Data for the Three Months Ended September 30, 2007

(dollars and gallons in thousands)

 

     Retail
Segment
   Wholesale
Segment
   Intercompany
Eliminations
    All
Other
    Totals

Revenue:

            

Merchandise

   $ 108,227    $ —      $ —       $ —       $ 108,227

Fuel

     291,413      504,202      (235,950 )     —         559,665

Other

     4,900      1,047      (15 )     198       6,130
                                    

Total revenue

     404,540      505,249      (235,965 )     198       674,022

Gross profit:

            

Merchandise

     35,921      —        —         —         35,921

Fuel

     17,247      7,420      —         —         24,667

Other

     4,900      1,046      (15 )     (46 )     5,885
                                    

Total gross profit

     58,068      8,466      (15 )     (46 )     66,473
                                    

Selling, general, and administrative

     45,618      2,363      (15 )     2,460       50,426

Depreciation, amortization, and accretion

     6,642      1,076      —         269       7,987

Other operating expenses (income)

     269      4      —         2       275
                                    

Operating income (loss)

   $ 5,539    $ 5,023    $ —       $ (2,777 )   $ 7,785
                                    

Gallons

     108,874      227,847      (109,079 )     —         227,642

Total assets

   $ 345,662    $ 88,489    $ (283 )   $ 23,139     $ 457,007

Goodwill

   $ 31,442    $ 13,320    $ —       $ —       $ 44,762

Capital expenditures

   $ 25,420    $ 1,352    $ —       $ 63     $ 26,835

Segment Financial Data for the Nine Months Ended October 1, 2006

(dollars and gallons in thousands)

 

     Retail
Segment
    Wholesale
Segment
    Intercompany
Eliminations
    All
Other
    Totals  

Revenue:

          

Merchandise

   $ 276,653     $ —       $ —       $ —       $ 276,653  

Fuel

     752,619       1,333,307       (602,389 )     —         1,483,537  

Other

     14,166       2,939       (332 )     610       17,383  
                                        

Total revenue

     1,043,438       1,336,246       (602,721 )     610       1,777,573  

Gross profit

          

Merchandise

     90,523       —         —         —         90,523  

Fuel

     45,233       20,010       —         —         65,243  

Other

     14,166       2,939       (332 )     139       16,912  
                                        

Total gross profit

     149,922       22,949       (332 )     139       172,678  
                                        

Selling, general, and administrative

     124,159       7,732       (332 )     2,633       134,192  

Depreciation, amortization, and accretion

     12,932       3,897       —         843       17,672  

Other operating expenses (income)

     (247 )     (30 )     —         —         (277 )
                                        

Operating income (loss)

   $ 13,078     $ 11,350     $ —       $ (3,337 )   $ 21,091  
                                        

Gallons

     300,568       637,670       (297,052 )     —         641,186  

Total assets

   $ 274,362     $ 93,517     $ (2,809 )   $ 12,636     $ 377,706  

Capital expenditures

   $ 37,256     $ 2,135     $ —       $ 71     $ 39,462  

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

Segment Financial Data for the Nine Months Ended September 30, 2007

(dollars and gallons in thousands)

 

     Retail
Segment
   Wholesale
Segment
   Intercompany
Eliminations
    All
Other
    Totals

Revenue:

            

Merchandise

   $ 307,517    $ —      $ —       $ —       $ 307,517

Fuel

     813,849      1,406,881      (651,370 )     —         1,569,360

Other

     14,934      2,941      (45 )     760       18,590
                                    

Total revenue

     1,136,300      1,409,822      (651,415 )     760       1,895,467

Gross profit

            

Merchandise

     99,924      —        —         —         99,924

Fuel

     47,705      18,040      —         —         65,745

Other

     14,934      2,941      (45 )     (68 )     17,762
                                    

Total gross profit

     162,563      20,981      (45 )     (68 )     183,431
                                    

Selling, general, and administrative

     130,770      6,595      (45 )     6,895       144,215

Depreciation, amortization, and accretion

     17,603      3,113      —         756       21,472

Other operating expenses (income)

     65      4      —         14       83
                                    

Operating income (loss)

   $ 14,125    $ 11,269    $ —       $ (7,733 )   $ 17,661
                                    

Gallons

     317,291      664,491      (315,456 )     —         666,326

Total assets

   $ 345,662    $ 88,489    $ (283 )   $ 23,139     $ 457,007

Goodwill

   $ 31,442    $ 13,320    $ —       $ —       $ 44,762

Capital expenditures

   $ 56,441    $ 5,389    $ —       $ 770     $ 62,600

13. Earnings Per Share

The Company is presenting earnings per share for the historical periods using the guidance provided in SFAS No. 128, Earnings per Share (EPS). Under SFAS No. 128, basic EPS, which excludes dilution, is computed by dividing income or loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common units. Dilutive EPS includes in-the-money stock options and unvested stock using the treasury stock method. During a net loss period, the assumed exercise of in-the-money stock options and unvested stock has an anti-dilutive effect, and therefore such options are excluded from the diluted EPS computation.

Per unit information is based on the weighted average number of common shares outstanding during each period for the basic computation and, if dilutive, the weighted average number of potential common shares resulting from the assumed conversion of outstanding stock options for the diluted computation.

Since the Company was organized as a partnership prior to its IPO in October 2006, historical EPS for the three and nine months ended October 1, 2006 is calculated based on a denominator equal to the number of Stripes Holdings LLC Class A common units outstanding, converted to the equivalent number of shares of Company common stock using the IPO exchange ratio.

Units not included in the denominator for basic EPS, but evaluated for inclusion in the denominator for diluted EPS, included options granted under the Stripes Option Plan and the Class B unvested units, both of which were converted to their post-IPO equivalent, and the new options and restricted shares granted under the 2006 Equity Incentive Plan. (see Note 11)

 

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Notes to Consolidated Financial Statements (continued)

Unaudited

 

A reconciliation of the numerators and denominators of the basic and diluted per share computations is as follows (in thousands, except share and per share data):

 

     Three Months Ended    Nine Months Ended
    

October 1,

2006

   September 30,
2007
   October 1,
2006
   September 30,
2007
     (dollars in thousands)

Net income available to common shareholders

   $ 7,360    $ 4,841    $ 7,173    $ 8,714
                           

Denominator for basic earnings per share - weighted average number of common shares outstanding during the period

     9,230,404      16,705,404      9,230,404      16,705,404

Incremental common shares attributable to exercise of outstanding dilutive options and restricted shares

     68,291      70,943      63,608      66,564
                           

Denominator for diluted earnings per common share

     9,298,695      16,776,347      9,294,012      16,771,968
                           

Net income per share

           

Per common share – basic

   $ 0.80    $ 0.29    $ 0.78    $ 0.52
                           

Per common share – diluted

   $ 0.79    $ 0.29    $ 0.77    $ 0.52
                           

Options and non-vested restricted shares not included in diluted net income available to common shareholders because the effect would be anti-dilutive

     —        1,062,227      —        1,033,242

14. Subsequent Event

Acquisition of TCFS Holdings, Inc.

On September 20, 2007, the Company and TCFS Acquisition Corporation, a Texas corporation and a wholly-owned indirect subsidiary of the Company (“Merger Sub”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TCFS Holdings, Inc., a Texas corporation and the parent of the Town & Country Food Stores chain of convenience stores (“TCFS”), and each of Devin Lee Bates, James Randal Brooks, Wylie Alvin New and David Lloyd Norris, as individual shareholders and, in the case of Mr. Norris, in his additional capacity as Shareholder Representative (collectively with TCFS, the “TCFS Parties”), providing for the merger of Merger Sub with and into TCFS (the “Merger”) with TCFS surviving the Merger as an indirect wholly-owned subsidiary of the Company.

On November 13, 2007, the Company completed the merger pursuant to the Merger Agreement and acquired 100% of the issued and outstanding capital stock of TCFS Holdings, Inc. for total merger consideration (after adjustments) of approximately $359.2 million, which included the repayment or defeasance of approximately $118.5 million of net debt of TCFS and its subsidiaries and the posting of two $10 million letters of credit that will be held in escrow and will be eligible to be drawn upon on each of the first and second anniversaries of closing, respectively, in either case, net of any settled or pending indemnity claims, but excludes a tax benefit payment of approximately $6.2 million made at closing, which the Company expects to realize through a future tax savings of a greater amount. The Company will account for the TCFS Holdings, Inc. acquisition as a business combination and will complete the initial accounting during the fourth quarter of fiscal 2007.

The cash needed to fund the Aggregate Merger Consideration and the tax benefit payment and pay related fees and expenses of approximately $18.1 million was provided for by (1) $153.8 million in proceeds, including a premium of $3.8 million, from a $150 million aggregate principal amount of 10- 5/8% Senior Notes due 2013 issued by Susser Holdings, L.L.C. and Susser Finance Corporation, both indirect subsidiaries of the Company, (2) a $105 million senior secured term loan facility of Susser Holdings L.L.C, (3) $51.2 million net proceeds from a concurrent sale/leaseback transaction, (4) $11.3

 

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million from the senior secured revolving credit facility of Susser Holdings, L.L.C. and (5) $42.2 million in cash on hand. (See Note 6 regarding the new senior credit facility.)

The Company had $50.3 million of remaining borrowing capacity under the new senior secured revolving credit facility as of November 13, 2007, after giving effect to $28.4 million in outstanding standby letters of credit.

On October 26, 2007, Stripes LLC, an indirect subsidiary of the Company, entered into a purchase agreement (the “Sale/Leaseback Agreement”) with National Retail Properties, LP (“NNN”) for the sale of 13 properties to be acquired by the Company in the Merger. The transaction was completed on November 13, 2007, concurrent with the Merger, and the purchase price for the 13 properties was $51.5 million. The properties acquired pursuant to the Sale/Leaseback Agreement will be leased back from NNN pursuant to triple-net leases for initial 20-year terms with five 5-year renewal options and customary representations, warranties and escalation features.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes to consolidated financial statements included elsewhere in this report. Additional discussion and analysis related to our company is contained in our Annual Report on Form 10-K, including the audited consolidated financial statements for the fiscal year ended December 31, 2006. Our fiscal year contains either 52 or 53 weeks and ends on the Sunday closest to December 31. All references to the third quarter of 2006 and 2007 refer to the 13-week periods ended October 1, 2006 and September 30, 2007, respectively. All references to the first nine months of 2006 and 2007 refer to the 39-week periods ended October 1, 2006 and September 30, 2007, respectively. EBITDA and Adjusted EBITDA are non-GAAP financial measures of performance and liquidity that have limitations and should not be considered as a substitute for net income or cash provided by (used in) operating activities – please see footnote 1 under “Key Operating Metrics” below for a discussion of our use of EBITDA and Adjusted EBITDA in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and a reconciliation to net income and cash provided by (used in) operating activities for the periods presented.

Forward-Looking Statements

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.” 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, expansion of our foodservice offerings, potential acquisitions, and potential new store openings and dealer locations, 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:

 

   

Competitive pressures from convenience stores, gasoline stations, other non-traditional retailers located in our markets, and other wholesale fuel distributors;

 

   

Changes in economic conditions generally and in the markets we serve, consumer behavior, and travel and tourism trends;

 

   

Volatility in crude oil and wholesale motor fuel costs;

 

   

Political conditions in crude oil producing regions, including South America and the Middle East;

 

   

Wholesale cost increases of tobacco products, or future legislation or campaigns to discourage smoking;

 

   

Litigation or adverse publicity concerning food quality, food safety or other health concerns related to our restaurant facilities;

 

   

Devaluation of the Mexican peso or imposition of restrictions on access of Mexican citizens to the United States;

 

   

Unfavorable weather conditions;

 

   

Changes in state and federal environmental and other regulations;

 

   

Dependence on one principal supplier for merchandise, two principal suppliers for gasoline and one principal provider for third-party transportation of substantially all of our motor fuel;

 

   

Financial leverage and debt covenants;

 

   

Changes in the credit ratings assigned to our debt securities, credit facilities and trade credit;

 

   

Inability to identify, acquire and integrate new stores;

 

   

Dependence on senior management and the ability to attract qualified employees;

 

   

Acts of war and terrorism; and

 

   

Other unforeseen factors.

For a discussion of these and other risks and uncertainties, please refer to “Item 1A. Risk Factors” in Part II of this document, and those contained in our Annual Report on Form 10-K for the year ended December 31, 2006. 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

 

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inherent uncertainty. The forward-looking statements included in this report are based on, and include, our estimates as of the date hereof. 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.

Overview

We are the largest non-refining operator of convenience stores in Texas 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 September 30, 2007, our retail segment operated 331 convenience stores in Texas and Oklahoma, offering merchandise, foodservice, motor fuel and other services. During the three and nine months ended September 30, 2007, we purchased 227.6 million and 666.3 gallons of branded and unbranded motor fuel from refiners and distributed it to our retail convenience stores, contracted independent operators of convenience stores, unbranded convenience stores and commercial users. Our total revenues, net income and Adjusted EBITDA for the third quarter 2007 were $674.0 million, $4.8 million and $16.8 million, respectively, compared to $605.1 million, $7.4 million and $18.3 million, respectively, for the third quarter 2006. Our total revenues, net income and Adjusted EBITDA for the first nine months of 2007 were $1,895.5 million, $8.7 million and $41.3 million, respectively, compared to $1,777.6 million, $7.2 million and $39.3 million, respectively, for the first nine months of 2006. Our business is seasonal, and we generally experience higher sales and profitability in the second and third quarters during the summer activity months, and lowest during the winter months. For a description of our results of operations on a quarterly basis see “Quarterly Results of Operations and Seasonality” of this Item 2.

On July 28, 2006, we entered into a new fuel supply agreement with Valero Marketing and Supply Company to supply all of our retail stores and certain wholesale locations that were supplied by CITGO. The agreement expires July 31, 2018, but subsequently provides for automatic one-year renewals unless cancelled by either party upon 365 days notice. In connection with this new supply agreement, during the first quarter of 2007 we completed the rebranding of all of our existing retail stores supplied by CITGO to the Valero or Shamrock brand, or to the Stripes brand. Shamrock and Stripes branded retail locations are also being supplied by Valero under this agreement.

In addition to the fuel rebranding initiative, we also completed the retail store rebranding from Circle K to Stripes during the first quarter of 2007, and are pleased with the results. We paid royalty expense of $3.6 million in fiscal 2006, which is eliminated beginning in the second quarter of 2007.

Key factors influencing operations during the first nine months of 2007 included:

 

   

The conversion of nearly 100 sites from CITGO to Valero

 

   

Finalizing the conversion from Circle K to Stripes

 

   

Unseasonably cool, wet weather during the early part of the year

 

   

Continued success with respect to new store development

 

   

A $10 per carton cigarette tax increase in Texas which occurred on January 1, 2007 and a $1.00 increase in manufacturer’s cost which occurred in December 2006

 

   

A significant increase in the price of motor fuel during the period

 

   

Costs incurred in connection with being a public company including first-year compliance under Section 404 of the Sarbanes-Oxley Act of 2007 and an increase in non-cash stock based compensation expense.

The impact of these factors are explained in more detail throughout this document.

During the third quarter of 2007, we opened two new large-format convenience stores bringing the total store count at September 30, 2007 to 331. We have opened a total of eleven new stores this year, including two in October, and currently have another nine under construction or under contract. An estimated 18 to 20 new retail stores are planned for all of 2007, excluding the acquisitions of Town & Country’s 168 retail stores, and substantially all of these stores are expected to include a Laredo Taco Company restaurant. In our wholesale operations, we added five new dealer sites and discontinued two during the third quarter, for a total of 377 dealer sites in operation at the end of the third quarter. We expect to add 25 to 30 new dealer sites for all of 2007.

 

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On September 20, 2007, we reached a definitive agreement to acquire and on November 13, 2007, acquired San Angelo, Texas-based TCFS Holdings, Inc., the parent company of Town & Country Food Stores (Town & Country). Town & Country is a privately owned convenience store operator with a leadership position in the markets of West Texas and Eastern New Mexico. Town & Country currently operates 168 locations, comprised of 140 locations serving West Texas and 28 locations serving Eastern New Mexico. After giving effect to the Transactions, Town & Country owns approximately 74% of its stores, along with a land bank of 13 locations for future development.

Town & Country stores offer a broad selection of merchandise, motor fuel and ancillary products and services designed to appeal to the convenience needs of their customers. Like our business, Town & Country derives a significant amount of non-fuel sales revenue from foodservice, operating restaurants in 114 of its stores, primarily under the proprietary Country Cookin’ brand. Town & Country has generated positive merchandise same store sales growth in each of its last five fiscal years, averaging 4.8% per year. For the twelve month period ended August 4, 2007, Town & Country generated revenues and Adjusted EBITDA of $840.1 million and $48.5 million, respectively.

Results of Operations

The following table presents, for the periods indicated, selected items in the consolidated statements of operations as a percentage of our total revenue:

 

     Three Months Ended     Nine Months Ended  
     October 1,
2006
    September 30,
2007
    October 1,
2006
    September 30,
2007
 

Revenues:

        

Merchandise sales

   15.9 %   16.1 %   15.5 %   16.2 %

Motor fuel sales

   83.2     83.0     83.5     82.8  

Service and other revenue

   0.9     0.9     1.0     1.0  
                        

Total revenues

   100.0     100.0     100.0     100.0  

Cost of sales

   89.4     90.1     90.3     90.3  

Gross profit:

        

Merchandise

   5.1     5.3     5.1     5.3  

Motor fuel

   4.6     3.7     3.7     3.5  

Service and other gross profit

   0.9     0.9     0.9     0.9  
                        

Total gross profit

   10.6     9.9     9.7     9.7  
                        

Selling, general and administrative expenses

   7.7     7.5     7.5     7.6  

Depreciation, amortization and accretion

   1.0     1.2     1.0     1.1  

Other operating expenses

   (0.1 )   0.0     0.0     0.0  
                        

Income from operations

   2.0     1.2     1.2     1.0  

Interest and other

   0.8     0.4     0.8     0.5  
                        

Net income (loss) before tax

   1.2     0.8     0.4     0.5  

Income tax

   0.0     0.0     0.0     0.0  
                        

Net income (loss)

   1.2 %   0.8 %   0.4 %   0.5 %
                        

 

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Key Operating Metrics

The following table sets forth, for the periods indicated, information concerning key measures we rely on to gauge our operating performance:

 

     Three Months Ended     Nine Months Ended  
     October 1,
2006
    September 30,
2007
    October 1,
2006
    September 30,
2007
 
     (dollars and gallons in thousands)  

Revenue:

        

Merchandise sales

   $ 96,141     $ 108,227     $ 276,653     $ 307,517  

Motor fuel—retail

     253,300       291,413       752,619       813,849  

Motor fuel—wholesale

     250,184       268,252       730,918       755,511  

Other

     5,479       6,130       17,383       18,590  
                                

Total revenue

   $ 605,104     $ 674,022     $ 1,777,573     $ 1,895,467  

Gross profit:

        

Merchandise

   $ 30,978     $ 35,921     $ 90,525     $ 99,924  

Motor fuel—retail

     20,225       17,247       45,232       47,705  

Motor fuel—wholesale

     7,780       7,420       20,010       18,040  

Other

     5,341       5,885       16,912       17,762  
                                

Total gross profit

   $ 64,324     $ 66,473     $ 172,679     $ 183,431  

Adjusted EBITDA (1):

        

Retail

   $ 13,046     $ 12,450     $ 25,763     $ 31,793  

Wholesale

     5,936       6,103       15,217       14,386  

Other

     (653 )     (1,790 )     (1,654 )     (4,921 )
                                

Total Adjusted EBITDA

   $ 18,329     $ 16,763     $ 39,326     $ 41,258  

Retail merchandise margin

     32.2 %     33.2 %     32.7 %     32.5 %

Merchandise same store sales growth

     8.0 %     7.9 %     6.0 %     6.5 %

Average per retail store:

        

Merchandise sales

   $ 299.2     $ 328.6     $ 866.0     $ 943.0  

Motor fuel gallons

     301.4       333.6       946.8       982.0  

Motor fuel gallons sold:

        

Retail

     96,249       108,874       300,568       317,291  

Wholesale

     112,944       118,767       340,618       349,034  

Average retail price of motor fuel

   $ 2.63     $ 2.68     $ 2.50     $ 2.56  

Motor fuel gross profit cents per gallon:

        

Retail

     21.01 ¢     15.84 ¢     15.05 ¢     15.04 ¢

Wholesale

     6.89 ¢     6.25 ¢     5.87 ¢     5.17 ¢

(1) 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 non-recurring transaction expenses 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, marketing expenses, management fees and other items) are also excluded in measuring our covenants under our revolving credit facility and the indenture governing our senior notes.

 

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We believe that Adjusted EBITDA is useful to investors in evaluating our operating performance because:

 

   

it is used as a performance and liquidity measure under our subsidiaries’ revolving credit facility and the indenture governing our senior notes, including for purposes of determining whether they have satisfied certain financial performance maintenance covenants and our ability to borrow additional indebtedness and pay dividends;

 

   

securities analysts and other interested parties use it as a measure of financial performance and debt service capabilities;

 

   

it facilitates management’s ability to measure operating performance of our business because it assists us in comparing our operating performance on a consistent basis since it removes the impact of items not directly resulting from our retail convenience stores and wholesale motor fuel distribution operations;

 

   

it is used by our management for internal planning purposes, including aspects of our consolidated operating budget, capital expenditures, as well as for segment and individual site operating targets; and

 

   

it is used by our board of directors and management for determining certain management compensation targets and thresholds.

EBITDA and Adjusted EBITDA are not recognized terms under GAAP and do not purport to be an alternative to net income as a measure 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 a substitute for analysis of our results as reported under GAAP. Some of these limitations include:

 

   

they do not reflect our cash expenditures, or future requirements, for capital expenditures or contractual commitments;

 

   

they do not reflect changes in, or cash requirements for, working capital;

 

   

they do not reflect significant interest expense, or the cash requirements necessary to service interest or principal payments on our revolving credit facility or senior notes;

 

   

they do not reflect payments made or future requirements for income taxes;

 

   

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect cash requirements for such replacements; and

 

   

because not all companies use identical calculations, our presentation of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

 

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The following table presents a reconciliation of net income to EBITDA and Adjusted EBITDA:

 

     Three Months Ended     Nine Months Ended  
     October 1,
2006
   

September 30,

2007

    October 1,
2006
    September 30,
2007
 
     (in thousands)  

Net income

   $ 7,360     $ 4,841     $ 7,173     $ 8,714  

Depreciation, amortization, and accretion

     6,115       7,987       17,672       21,472  

Interest expense, net

     4,670       2,944       14,088       8,730  

Income tax expense

     —         123       —         503  
                                

EBITDA

   $ 18,145     $ 15,895     $ 38,933     $ 39,419  

Non-cash stock based compensation

     113       715       339       2,074  

Management fee

     175       —         547       —    

Gain on disposal of assets

     2       275       (277 )     83  

Other miscellaneous

     (106 )     (122 )     (216 )     (318 )
                                

Adjusted EBITDA

   $ 18,329     $ 16,763     $ 39,326     $ 41,258  
                                

The following table presents a reconciliation of net cash provided by operating activities to EBITDA and Adjusted EBITDA:

 

     Nine Months Ended  
     October 1,
2006
    September 30,
2007
 
     (in thousands)  

Net cash provided by operating activities

   $ 28,487     $ 32,609  

Changes in operating assets & liabilities

     (3,649 )     (222 )

Gain on disposal of assets

     277       (83 )

Non-cash stock based compensation expense

     (339 )     (2,074 )

Minority interest

     (37 )     (44 )

Fair market value in nonqualifying derivatives

     106       —    

Income taxes

     —         503  

Interest expense, net

     14,088       8,730  
                

EBITDA

   $ 38,933     $ 39,419  

Non-cash stock based compensation

     339       2,074  

Management fee

     547       —    

Gain on disposal of assets

     (277 )     83  

Other miscellaneous

     (216 )     (318 )
                

Adjusted EBITDA

   $ 39,326     $ 41,258  
                

 

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Refer to Note 12 of the accompanying Notes to Consolidated Financial Statements for a description of our segment reporting. The following tables present a reconciliation of our segment operating income to EBITDA and Adjusted EBITDA:

 

    

Retail Segment

Three Months Ended

   Wholesale Segment
Three Months Ended
  

All Other

Three Months Ended

   

Total

Three Months Ended

 
    

Oct 1,

2006

    Sept 30,
2007
   Oct 1,
2006
    Sept 30,
2007
  

Oct 1,

2006

    Sept 30,
2007
    Oct 1,
2006
    Sept 30,
2007
 
     (in thousands)  

Operating income (loss)

   $ 8,379     $ 5,539    $ 4,772     $ 5,023    $ (1,213 )   $ (2,777 )   $ 11,938     $ 7,785  

Depreciation, amortization, and accretion

     4,647       6,642      1,181       1,076      287       269       6,115       7,987  

Other miscellaneous

     20       —        (21 )     —        107       122       106       122  

Minority interest

     —         —        —         —        (14 )     1       (14 )     1  
                                                              

EBITDA

     13,046       12,181      5,932       6,099      (833 )     (2,385 )     18,145       15,895  

Non-cash stock based compensation

     —         —        —         —        113       715       113       715  

Management fee

     —         —        —         —        175       —         175       —    

Loss (gain) on disposal of assets and impairment charge

     —         269      4       4      (2 )     2       2       275  

Other operating expenses

     —         —        —         —        (106 )     (122 )     (106 )     (122 )
                                                              

Adjusted EBITDA

   $ 13,046     $ 12,450    $ 5,936     $ 6,103    $ (653 )   $ (1,790 )   $ 18,329     $ 16,763  
                                                              
    

Retail Segment

Nine Months Ended

   Wholesale Segment
Nine Months Ended
  

All Other

Nine Months Ended

   

Total

Nine Months Ended

 
    

Oct 1,

2006

    Sept 30,
2007
   Oct 1,
2006
    Sept 30,
2007
   Oct 1,
2006
    Sept 30,
2007
    Oct 1,
2006
    Sept 30,
2007
 
     (in thousands)  

Operating income (loss)

   $ 13,078     $ 14,125    $ 11,350     $ 11,269    $ (3,337 )   $ (7,733 )   $ 21,091     $ 17,661  

Depreciation, amortization, and accretion

     12,932       17,603      3,898       3,113      843       756       17,673       21,472  

Other miscellaneous

     —         —        —         —        216       318       216       318  

Minority interest

     —         —        —         —        (47 )     (32 )     (47 )     (32 )
                                                              

EBITDA

     26,010       31,728      15,248       14,382      (2,325 )     (6,691 )     38,933       39,419  

Non-cash stock based compensation

     —         —        —         —        339       2,074       339       2,074  

Management fee

     —         —        —         —        547       —         547       —    

Loss (gain) on disposal of assets and impairment charge

     (247 )     65      (31 )     4      1       14       (277 )     83  

Other operating expenses

     —         —        —         —        (216 )     (318 )     (216 )     (318 )
                                                              

Adjusted EBITDA

   $ 25,763     $ 31,793    $ 15,217     $ 14,386    $ (1,654 )   $ (4,921 )   $ 39,326     $ 41,258  
                                                              

 

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Third Quarter 2007 Compared to Third Quarter 2006

The following discussion of results for third quarter 2007 compared to third quarter 2006 compares the 13-week period of operations ended September 30, 2007, of Susser Holdings Corporation, to the 13-week period of operations ended October 1, 2006, of Stripes Holdings LLC. Susser Holdings Corporation became the parent company of Stripes Holdings LLC in October 2006, concurrent with the completion of our initial public offering. There was no impact on our core retail and wholesale operations, and therefore the results of operations for these two periods are comparable.

Total Revenue. Total revenue for third quarter 2007 was $674.0 million, an increase of $68.9 million, or 11.4%, over 2006. The increase in total revenue was driven by an 12.6% increase in merchandise sales, a 15.0% increase in retail fuel revenue and a 7.2% increase in wholesale fuel revenue as further discussed below.

Total Gross Profit. Total gross profit for third quarter 2007 was $66.5 million, an increase of $2.1 million, or 3.3%, over 2006. The increase was primarily attributable to increases in merchandise sales and margins, partly offset by decreased retail fuel gross profit.

Merchandise Sales and Gross Profit. Merchandise sales were $108.2 million for 2007, a $12.1 million, or 12.6%, increase over 2006. Our performance was due to a 7.9% merchandise same store sales increase, accounting for $7.4 million of the increase, with the balance due primarily to the addition of 17 new retail stores during the 12 months ended September 2007. Key categories contributing to the same store sales increase were cigarettes, Laredo Taco Company (LTC), packaged drinks and snacks. The increase in cigarette sales dollars was primarily due to a $1 per pack increase in cigarette tax in Texas effective January 1, 2007, which we were generally able to pass through to customers, which results in similar gross profit cents per pack, but reduces the gross margin percentage. LTC sales have increased due to the net increase of 20 new kitchens and mini-kitchens since September 2006 and growth at existing units. Merchandise gross profit was $35.9 million for the third quarter of 2007, a $4.9 million, or 16.0%, increase over 2006, which was driven by the increase in merchandise sales and an increase in gross profit margin from 32.2% to 33.2%. This strength was due to favorable mix changes and selected price increases across numerous categories. Our merchandise margins do not include other income.

Retail Motor Fuel Sales, Gallons and Gross Profit. Retail sales of motor fuel for 2007 were $291.4 million, an increase of 15.0% from 2006, driven by a 13.1% increase in retail gallons sold. Average gallons per retail site increased by 10.7%. Retail motor fuel gross profit decreased by 14.7% from 2006, as gross profit per gallon was 15.8 cents in 2007 compared to a record 21.0 cents in 2006.

Wholesale Motor Fuel Sales, Gallons and Gross Profit. Wholesale motor fuel revenues to third parties for the third quarter of 2007 were $268.3 million, a 7.2% increase over 2006. The increase was attributable to a 5.2% increase in gallons sold and an increase of 2.0% in average wholesale motor fuel prices. Wholesale motor fuel gross profit of $7.4 million decreased 4.6% from 2006 as gross profit cents per gallon decreased 9.3% to 6.3 cents per gallon.

Other Revenue and Gross Profit. Other revenue of $6.1 million for third quarter 2007 increased by 11.9% over 2006. Gross profit associated with other revenue was $5.9 million, an increase of 10.2% over 2006. The retail segment had other revenue of $4.9 million in 2007 compared to $4.4 million in 2006. Retail segment other gross profit was $4.9 million and $4.4 million in 2007 and 2006, respectively, as we record these service revenues on a net basis. The increase over last year was partially driven by an increase in income from ATM (due to new contract and pricing adjustments which began late in 2006) and prepaid services. The ATM and prepaid services increases were partly offset by declines in payphone and money order income. Other revenues and related gross profit for the wholesale segment were $1.0 million in both 2007 and 2006.

Personnel Expense. The largest component of our operating expense is retail store personnel expense. For the third quarter 2007, personnel expense was $19.8 million, an increase of $2.4 million, or 14.1%, over 2006. The increase in personnel expense was primarily attributable to our new store openings, which all have restaurants requiring incremental labor. Additionally, our restaurant sales, which require proportionally more labor, are growing at a higher rate than our other merchandise sales categories and therefore are contributing to the increase in personnel expense.

 

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General and Administrative Expenses. For third quarter 2007, general and administrative expenses increased by $2.2 million, or 42.3%, from 2006. The increase was primarily due to additional public company expenses of approximately $0.6 million, which includes consulting costs for implementation of Sarbanes-Oxley compliance and additional legal and accounting fees, and a $0.6 million increase in non-cash stock based compensation expense related to options granted in October 2006.

Other Operating Expenses. Other operating expenses were flat from 2006, as a $0.7 million reduction in credit card fees offset the additional operating costs of the new stores.

Rent Expense. Rent expense for third quarter 2007 of $6.1 million was $0.6 million or 10.2% higher than 2006 due primarily to rent expense on additional leased stores.

Royalty Expense. Royalty expense was completely eliminated beginning in second quarter 2007, following completion of the conversion from the Circle K brand to our proprietary Stripes brand. Royalty expense for third quarter 2006 was $1.0 million.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expense for third quarter 2007 of $8.0 million was up $1.9 million or 30.6% from 2006 due to the new stores opened in 2006, and the related effects of finalizing purchase accounting in late 2006 for the December 2005 recapitalization transactions.

Income from Operations. Income from operations for third quarter 2007 was $7.8 million, compared to $11.9 million for 2006. The decrease is attributed to the decreases in fuel gross margin and the increases in personnel, general and administrative and rent expenses described above, which are partly offset by increases in merchandise gross profit and elimination of royalty expense.

Interest Expense, Net. Net interest expense for third quarter 2007 was $2.9 million, a decrease of $1.7 million from 2006 due to the redemption of $50.0 million of the 10  5/8% senior notes in November 2006.

Income Tax. 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 accrued for third quarter 2007 was $0.1 million, which was attributed to the state margin tax. There was no tax expense in third quarter 2006. See Note 9 of the accompanying Notes to Consolidated Financial Statements for further discussion of our income tax provision.

Net Income. We recorded net income for the third quarter 2007 of $4.8 million, compared to net income of $7.4 million for 2006. The decrease is primarily due to the same factors impacting operating income, as described above, and the reduction in interest expense.

Adjusted EBITDA. Adjusted EBITDA for third quarter 2007 was $16.8 million, a decrease of $1.6 million, or 8.5%, compared to 2006. The decrease is primarily due to the decrease in fuel gross margin and the increases in personnel, public company and rent expenses, partly offset by higher merchandise gross profit and elimination of royalty expense, as described above. Retail segment Adjusted EBITDA of $12.5 million decreased by $0.6 million, or 4.5% compared to 2006, primarily due to the lower fuel margins and increased selling, general and administrative expenses. Wholesale segment Adjusted EBITDA of $6.1 million increased by $0.2 million, or 2.8%, from 2006. Other segment Adjusted EBITDA reflects net expenses of $1.8 million for the quarter, compared to $0.7 million for the same period in 2006. The $1.1 million increase was primarily due to increased corporate general and administrative expenses, primarily those related to our first year of being a public company, and additional staffing costs.

First Nine Months of 2007 Compared to First Nine Months of 2006

The following discussion of results for first nine months 2007 compared to first nine months 2006 compares the 39-week period of operations ended September 30, 2007, of Susser Holdings Corporation, to the 39-week period of operations ended October 1, 2006, of Stripes Holdings LLC.

Total Revenue. Total revenue for first nine months 2007 was $1,895.5 million, an increase of $117.9 million, or 6.6%, over 2006. The increase in total revenue was driven by a 11.2% increase in merchandise sales, an 8.1%

 

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increase in retail motor fuel sales and a 3.4% increase in wholesale motor fuel sales.

Total Gross Profit. Total gross profit for first nine months 2007 was $183.4 million, an increase of $10.8 million, or 6.2%, over 2006. The increase was primarily attributable to increases in merchandise sales and retail motor fuel gallons as further discussed below.

Merchandise Sales and Gross Profit. Merchandise sales were $307.5 million for 2007, a $30.9 million, or 11.2%, increase over 2006. Our performance was due to a 6.5% merchandise same store sales increase, accounting for $17.3 million of the increase, with the balance due to the addition of 16 new retail stores during 2006 and nine in the first nine months of 2007. Key categories contributing to the same store sales increase were cigarettes, Laredo Taco Company, beer, snacks and packaged beverages. Merchandise gross profit was $99.9 million for 2007, a $9.4 million, or 10.4%, increase over 2006, which was driven by the increase in merchandise sales. Merchandise margins were 32.5%, down slightly from 32.7% in 2006. The decline in gross profit margin was largely driven by a 320 basis point decline in cigarette margins, from 20.8% in 2006 to 17.6% in 2007, due to the effect of the excise tax increase. Our merchandise margins do not include other income.

Retail Motor Fuel Sales, Gallons and Gross Profit. Retail sales of motor fuel for 2007 were $813.8 million, an increase of 8.1% over 2006, driven by a 2.4% increase in the average retail price of motor fuel and a 5.6% increase in retail gallons sold. The increase in gallons was attributable to a 3.7% increase in average gallons per site and the opening of 16 new retail stores in 2006 and nine to date in 2007. Retail motor fuel gross profit increased by 5.5% over 2006 due to the additional gallons. Gross profit cents per gallon of 15.0 cents was approximately even with 2006.

Wholesale Motor Fuel Sales, Gallons and Gross Profit. Wholesale motor fuel revenues to third parties for 2007 were $755.5 million, a 3.4% increase over 2006. Wholesale motor fuel gross profit of $18.0 million decreased 9.8% from 2006 as gross profit cents per gallon decreased to 5.2 cents for 2007 compared to 5.9 cents for 2006. The decrease was also partly due to a change in mix reflecting the sale of 25 unattended fueling sites in third quarter 2006.

Other Revenue and Gross Profit. Other revenue of $18.6 million for first nine months 2007 increased by 6.9% over 2006. Gross profit associated with other revenue was $17.8 million, an increase of 5.0% over 2006. The retail segment reported other revenue of $14.9 million in 2007 compared to $14.2 million in 2006. Retail segment other gross profit was $14.9 million and $14.2 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 contract and pricing adjustments that began in late 2006. Other revenues and related gross profit for the wholesale segment were approximately $2.9 million in both 2006 and 2007.

Personnel Expense. The largest component of our operating expense is retail store personnel expense. For first nine months 2007, personnel expense was $57.7 million, an increase of $6.0 million, or 11.6%, over 2006. The increase in personnel expense was primarily attributable to our new store openings, which all 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 Expenses. For first nine months 2007, general and administrative expenses increased by $5.0 million, or 34.4%, over 2006. The increase was primarily due to additional public company expenses of approximately $1.8 million, which includes consulting costs for Sarbanes-Oxley compliance and additional accounting and legal fees, a $1.7 million increase in non-cash stock based compensation expense over 2006 related to options granted in October 2006, and incremental corporate staffing costs, including additional financial and internal audit staff.

Other Operating Expenses. Other operating expenses increased by $0.2 million, or 0.5% over 2006. Decreases in credit card fees of $2.0 million and utilities of $0.3 million offset the increased operating costs of the new stores.

Rent Expense. Rent expense for first nine months 2007 of $18.3 million was $1.6 million, or 9.6%, higher than 2006, due primarily to rent expense on additional leased stores.

Royalty Expense. Royalty expense for first nine months 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. Royalty expense for

 

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first nine months 2006 was $2.8 million.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expense for first nine months of 2007 of $21.5 million was up $3.8 million, or 21.5%, from 2006 due to the new stores opened in 2006, and the related effects of finalizing purchase accounting in late 2006 for the December 2005 recapitalization transactions.

Income from Operations. Income from operations for first nine months 2007 was $17.7 million, compared to $21.1 million for 2006. The increases in gross profit were offset by increased personnel, general and administrative, rent and depreciation expenses, as described above.

Interest Expense, Net. Net interest expense for first nine months 2007 was $8.7 million, a decrease of $5.4 million from 2006 due to the redemption of $50.0 million of the 10 5/8% senior notes in November 2006.

Income Tax. 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 for first nine months 2007 was $0.5 million, which was attributed to the state margin tax. There was no tax expense in first nine months 2006. See Note 9 of the accompanying Notes to Consolidated Financial Statements for further discussion of our income tax provision.

Net Income or Loss. We recorded net income for first nine months 2007 of $8.7 million, compared to $7.2 million for 2006. The increase is primarily due to the increases contributing to income from operations and the decrease in interest expense as described above.

Adjusted EBITDA. Adjusted EBITDA for first nine months 2007 was $41.3 million, an increase of $1.9 million, or 4.9%, compared to 2006. The increase is primarily due to the increase in gross profit and elimination of royalty expense, offset by the additional personnel, public company and rent expenses described above. Retail segment Adjusted EBITDA of $31.8 million increased by $6.0 million, or 23.4% compared to 2006, primarily due to increases in same store merchandise sales and the contribution from new stores. Wholesale segment Adjusted EBITDA of $14.4 million decreased by $0.8 million, or 5.5% from 2006 primarily due to the decrease in motor fuel gross profit, a portion of which is attributable to the sale of the unattended sites in June 2006. Other segment Adjusted EBITDA reflects net expenses of $4.9 million compared to $1.7 million for the same period in 2006. The increase of $3.3 million is primarily due to increased corporate general and administrative expenses, primarily those related to our first year of being a public company, and additional staffing costs.

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, sale leaseback transactions 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 summer; 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 $28.5 million and $32.6 million for the first nine months of 2006 and 2007, respectively. The change in our cash provided from operating activities for the respective periods was primarily attributable to changes in working capital, along with the same factors resulting in improved Adjusted EBITDA. Our daily capital requirements fluctuate within each month, primarily in response to the timing of motor fuel tax, sales tax and rent payments. We had $40.2 million of cash and cash equivalents on hand at September 30, 2007 compared to $1.9 million at October 1, 2006, and $32.9 million at December 31, 2006.

Capital Expenditures. Capital expenditures, before any sale/leasebacks and asset dispositions, were $18.6 million and $26.8 million during the third quarter of 2006 and 2007, respectively, and $39.5 million and $62.6 million during the first nine months of 2006 and 2007, respectively. During third quarter 2007 we completed a $30.5 million

 

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sale leaseback transaction of eleven retail stores, and we completed an additional sale leaseback of seven retail stores in November 2007 for net proceeds of $9.9 million. We opened two new retail stores during the third quarter 2007, bringing our store count to 331 as of September 30, 2007. We opened two more retail stores during October 2007, and currently have another nine stores under construction or under contract. We expect to open a total of 18 to 20 new retail stores during 2007. During fiscal 2007, we plan to invest approximately $35 to $45 million (net of approximately $45 million of lease financing) in new retail stores, new dealer projects and maintenance and upgrade of our existing facilities, including the rebranding to Stripes and Valero. We plan to finance our capital spending plan with cash flow from operations, cash balances, borrowings under the revolving credit facility and additional lease financing.

Following is a summary of our recent operating site additions and closures by segment:

 

     Fiscal Year
Ended
December 31,
2006
    Three Months
Ended
September 30,
2007
    Nine Months
Ended
September 30,
2007
 

Retail stores:

      

Number at beginning of period

   319     329     325  

New stores

   16     2     9  

Closed stores

   (10 )   —       (3 )
                  

Number at end of period

   325     331     331  
                  

Wholesale dealer locations:

      

Number at beginning of period

   346     374     367  

New locations

   30     5     17  

Closed locations

   (9 )   (2 )   (7 )
                  

Number at end of period

   367     377     377  
                  

We completed our rebranding initiative, in which we converted our stores from the Circle K brand to the Stripes brand, during the first quarter of 2007. We spent approximately $8.9 million on this initiative, of which $4.5 million was spent in 2006 and the balance in 2007. We paid $3.6 million in royalty expense for the use of the Circle K brand for the twelve months ended December 31, 2006. Royalty expense for the first quarter of 2007 was $66 thousand as we completed the rebranding, and was eliminated beginning the second quarter of 2007.

We also completed our fuel island rebranding project during the first quarter of 2007, in which we replaced CITGO supply of motor fuel with Valero at approximately 305 retail stores, in addition to some of our wholesale supply sites. We were responsible for the capital cost of rebranding each location, which totaled approximately $13.4 million. We spent $8.1 million during 2006 and the balance during 2007.

On November 13, 2007, we completed the acquisition of TCFS Holdings, Inc. for total merger consideration of approximately $359.2 million, of which $20.0 million will be held in escrow as two $10 million letters of credit and will be eligible to be drawn upon on each of the first and second anniversaries of closing, respectively, in either case, net of any settled or pending indemnity claims. See Note 14 of the Notes to Consolidated Financial Statements for further discussion of this acquisition, and to “New Senior Credit Facilities” below.

Cash Flows from Financing Activities. At September 30, 2007, our outstanding long-term debt was $120.0 million.

Revolving Credit Facility. At December 31, 2006 and September 30, 2007, we had no outstanding draws under our $50.0 million revolving credit facility. Letters of credit amounted to $6.2 million, resulting in approximately $43.8 million of available borrowing capacity as of September 30, 2007. We are currently in compliance with all of the covenants related to this facility.

 

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Senior Notes. On December 21, 2005, Susser Holdings, L.L.C. and a subsidiary, Susser Finance Corporation sold $170.0 million of 10  5/8% senior unsecured notes due December 15, 2013. Interest on the senior notes is due on June 15 and December 15 of each year.

We used a portion of the proceeds from our October 24, 2006 initial public offering to redeem $50.0 million of the Senior Notes, plus accrued and unpaid interest of $2.3 million and premium of $5.3 million. The redemption was completed on November 24, 2006. In January 2007, we completed an exchange of each of the Senior Notes for a new issue of debt securities registered under the Securities Act, with terms identical to those of the Senior Notes (except for provisions relating to transfer restrictions and payment of additional interest). We are currently in compliance with all of the covenants in the indenture.

New Senior Credit Facilities. On September 20, 2007, Susser Holdings, L.L.C. (the “Borrower”), an indirect wholly-owned subsidiary of the Company, entered into a Commitment Letter (the “Commitment Letter”) with Bank of America, N.A., Banc of America Bridge LLC, Banc of America Securities LLC, Merrill Lynch Capital Corporation, Merrill Lynch, Pierce, Fenner & Smith Incorporated, Merrill Lynch Capital, a division of Merrill Lynch Business Financial Services Inc., Wachovia Bank, National Association, Wachovia Capital Markets, LLC, Wachovia Investment Holdings, LLC, Bank of Montreal and BMO Capital Markets, pursuant to which (a) Bank of America, Merrill Lynch Capital, Wachovia Bank and Bank of Montreal committed to provide up to $195.0 million in senior secured credit facilities to the Borrower, consisting of (1) a revolving credit facility of up to $90.0 million and (2) a term loan facility of $105.0 million, and (b) Banc of America Bridge, Merrill Lynch Capital Corporation, Wachovia Investment Holdings and Bank of Montreal committed to provide a $150.0 million senior unsecured bridge loan (together with the senior secured credit facilities, the “Facilities”). The Company did not draw upon the bridge loan, having consummated a $150.0 million new Senior Notes offering on November 13, 2007. These facilities were used to partially fund the acquisition of TCFS Holdings, Inc. (See Note 14, Subsequent Events, regarding the acquisition of TCFS Holdings, Inc.) In addition, the revolving portion of the new senior credit facilities replaced the Company’s existing revolving credit facility and will be used for ongoing working capital and general corporate needs, as well as to partially fund the acquisition of TCFS Holdings, Inc.

Properties. We completed a sale/leaseback of 74 properties in December 2005, five properties in December 2006, two properties in May 2007 and eleven properties in September 2007. 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 summarizes the number of owned and leased properties:

 

     As of
     December 31,
2006
   September 30,
2007

Operating sites – fee owned:

     

Retail

   119    127

Wholesale

   41    44
         

Total fee owned

   160    171

Operating sites – leased:

     

Retail

   206    204

Wholesale

   14    17
         

Total leased

   220    221

Office locations – fee owned

   6    6

Properties currently being developed

   5    9

Properties held for future development

   4    4

Surplus properties for sale

   27    37

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 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,

 

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insurance and maintenance. We plan to move during the summer of 2008, and to sell or lease the existing office locations.

Long Term Liquidity. In addition to the financing completed in the December 2005 transactions, our initial public offering and the new credit facilities described above, we expect that our cash flows from operations, lease financings and 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 existing indebtedness in the future, there can be no assurances that we will do so. Changes in our operating plans, lower than anticipated sales, increased expenses, additional 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. In addition, any of the items discussed in detail (or referred to) under “Item 1A. Risk Factors” of Part II of this document may also significantly impact our liquidity.

Quarterly Results of Operations and Seasonality

The following table sets forth certain unaudited financial and operating data for each of the last eleven quarters. Each quarter consists of 13 weeks, unless noted otherwise. Our business is seasonal and we generally experience higher levels of revenues during the summer months than during the winter months.

 

    2005     2006     2007  
   

First

Quarter

   

Second

Quarter

   

Third

Quarter

   

Fourth

Quarter
(a)

   

First

Quarter

   

Second

Quarter

    Third
Quarter
    Fourth
Quarter
   

First

Quarter

    Second
Quarter
    Third
Quarter
 
    (dollars and gallons in thousands)  

Merchandise sales

  $ 76,206     $ 85,918     $ 86,686     $ 80,720     $ 85,799     $ 94,713     $ 96,141     $ 88,690     $ 93,365     $ 105,925     $ 108,227  

Motor fuel sales:

                     

Retail

    165,983       191,012       215,257       208,189       228,295       271,024       253,300       200,385       224,685       297,751       291,413  

Wholesale

    149,662       179,274       221,155       214,668       203,281       277,453       250,184       192,719       204,430       282,829       268,252  

Other income

    5,498       5,495       5,033       5,508       5,936       5,968       5,479       5,792       6,170       6,290       6,130  
                                                                                       

Total revenue

    397,349       461,699       528,131       509,085       523,311       649,158       605,104       487,586       528,650       692,795       674,022  

Merchandise gross profit

    24,190       28,659       27,934       25,667       28,130       31,417       30,978       28,567       29,960       34,043       35,921  

Merchandise gross profit percentage

    31.7 %     33.4 %     32.2 %     31.8 %     32.8 %     33.2 %     32.2 %     32.2 %     32.1 %     32.1 %     33.2 %

Motor fuel gross profit:

                     

Retail

  $ 7,897     $ 12,330     $ 15,781     $ 13,915     $ 9,487     $ 15,520     $ 20,225     $ 8,686     $ 12,106       18,352       17,247  

Wholesale

    3,877       5,301       6,804       8,303       5,242       6,988       7,780       5,004       4,283       6,337       7,420  

Other gross profit

    5,365       5,362       4,917       5,273       5,815       5,756       5,341       5,842       6,046       5,831       5,885  

Total gross profit

    41,329       51,652       55,436       53,158       48,674       59,681       64,324       48,099       52,395       64,563       66,473  

Income from operations

    1,648       9,532       9,035       (13,788 )     638       8,515       11,938       (2,570 )     629       9,247       7,785  

Income before tax

    (1,801 )     5,788       6,520       (31,149 )     (3,947 )     3,760       7,360       (10,871 )     (2,141 )     6,394       4,964  

Income tax expense

    —         —         —         —         —         —         —         (48 )     (260 )     (120 )     (123 )
                                                                                       

Net income

  $ (1,801 )   $ 5,788     $ 6,520     $ (31,149 )   $ (3,947 )   $ 3,760     $ 7,360     $ (10,919 )   $ (2,401 )   $ 6,274     $ 4,841  
                                                                                       

Fuel gallons:

                     

Retail

    90,680       94,304       88,728       94,229       103,210       101,109       96,249       94,770       101,793       106,624       108,874  

Wholesale

    105,561       110,018       110,934       115,030       109,811       117,863       112,944       110,355       111,585       118,682       118,767  

Motor fuel margin (cents per gallon):

                     

Retail (b)

    8.71 ¢     13.08 ¢     17.81 ¢     14.77 ¢     9.19 ¢     15.35 ¢     21.01 ¢     9.16 ¢     11.89 ¢     17.21 ¢     15.84 ¢

Wholesale

    3.67 ¢     4.82 ¢     6.12 ¢     7.22 ¢     4.77 ¢     5.93 ¢     6.89 ¢     4.54 ¢     3.84 ¢     5.34 ¢     6.25 ¢

(a) 2005 fourth quarter included $33.4 million of expenses related to the December 2005 transactions.
(b) Before deducting credit card, fuel maintenance and other fuel related expenses.

Summary of Significant 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

 

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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 assumptions. Our significant accounting policies are described in our Annual Report on Form 10-K for the year ended December 31, 2006. As discussed in Note 2 to our Consolidated Financial Statements included elsewhere in this report, certain new financial accounting pronouncements have been issued which either have already been reflected in the accompanying consolidated financial statements, or will become effective for our financial statements at various dates in the future.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are subject to market risk from exposure to changes in interest rates based on our financing, investing, and cash management activities. At September 30, 2007, we had a $50.0 million revolving credit facility bearing interest at variable rates, although there were no outstanding draws on the revolver as of that date.

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. We had no interest rate swaps in place at December 31, 2006, or September 30, 2007.

Our primary exposure relates to:

 

   

Interest rate risk on short-term borrowings;

 

   

Our ability to pay or refinance long-term borrowings at maturity at market rates; and

 

   

The impact of interest rate movements on our ability to obtain adequate financing to fund future acquisitions.

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, other than described above, management evaluates our financial position on an ongoing basis.

 

Item 4. Controls and Procedures

Our management has evaluated, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2007, our disclosure controls and procedures are effective. There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended September 30, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002 by the end of our 2007 fiscal year. The evidence of such compliance is due no later than the time we file our annual report on Form 10-K for 2007. We believe adequate resources and expertise, both internal and external, have been put in place to meet this requirement. We will be required to comply with Section 404 no later than one year from the date of closing the acquisition of TCFS Holdings, November 13, 2007 (See Note 14 in Notes to Consolidated Financial Statements), with regard to TCFS Holdings and subsidiaries. We believe adequate resources and expertise are also in place to meet this requirement.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

We are parties 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.

 

Item 1A. Risk Factors

You should carefully consider the risks described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2006, and the additional risk factors below, as well as the section within this report entitled “Forward-Looking Statements” under Part I. Financial Information—Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations, before making any investment decision with respect to our securities. The risks and uncertainties described in our annual report and below are not the only ones facing us. Additional risks and uncertainties not presently known to us, or that we currently deem immaterial, could negatively impact our results of operations or financial condition in the future. If any of such risks actually occur, our business, financial condition or results of operations could be materially adversely affected.

The integration of Town & Country will demand significant resources and there can be no assurance that the performance and trends of Town & Country will continue following the Acquisition.

In evaluating the terms of the acquisition of Town & Country, we analyzed the business of Town & Country and made certain assumptions concerning their future operations. A principal assumption was that following the acquisition, the historical operating results of Town & Country will continue into the future. There can be no assurance, however, that this assumption is correct or that our business and the business of Town & Country will be successfully integrated 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:

 

   

Integrating corporate and administrative infrastructures;

 

   

Coordinating operating and marketing functions;

 

   

Minimizing the diversion of management’s attention from ongoing business concerns;

 

   

Coordinating geographically separate organizations;

 

   

Successfully rebranding the acquired stores; and

 

   

Retaining key employees

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 acquisition of Town & Country is structured as a merger acquisition, we will assume all of the liabilities of Town & Country, including liabilities that may be unknown. We have obtained certain representations and warranties and indemnification provisions from Town & Country concerning contingent liabilities and other obligations that will reduce the risk we will bear for 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.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

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Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Submission of Matters to a Vote of Security Holders

None.

 

Item 5. Other Information

None.

 

Item 6. Exhibits

The following is a list of exhibits filed as part of this Quarterly Report on Form 10-Q, which information is incorporated herein by reference.

 

Exhibit No.

  

Description

  3.1

   First Amendment to the Amended and Restated By-Laws of Susser Holdings Corporation. *

10.1

   Agreement and Plan of Merger, dated as of September 20, 2007, among Susser Holdings Corporation, TCFS Acquisition Corporation, TCFS Holdings, Inc., David Lloyd Norris (individually and in his capacity as Shareholder Representative), Devin Lee Bates, James Randal Brooks and Wylie Alvin New. †

31.1

   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. †

31.2

   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. †

32.1

   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act†

32.2

   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act†

Filed herewith.
* Incorporated by reference to Exhibit 3.1 to the Registrant’s amended current report on Form 8-K/A filed September 21, 2007.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    SUSSER HOLDINGS CORPORATION
Date: November 14, 2007    
  By  

/s/ Mary E. Sullivan

    Mary E. Sullivan
Executive Vice President and Chief Financial Officer

 

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EXHIBIT INDEX

 

Exhibit No.

  

Description

  3.1

   First Amendment to the Amended and Restated By-Laws of Susser Holdings Corporation. *

10.1

   Agreement and Plan of Merger, dated as of September 20, 2007, among Susser Holdings Corporation, TCFS Acquisition Corporation, TCFS Holdings, Inc., David Lloyd Norris (individually and in his capacity as Shareholder Representative), Devin Lee Bates, James Randal Brooks and Wylie Alvin New. †

31.1

   Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. †

31.2

   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act. †

32.1

   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act†

32.2

   Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act†

Filed herewith.
* Incorporated by reference to Exhibit 3.1 to the Registrant’s amended current report on Form 8-K/A filed September 21, 2007.

 

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