ITEM 1. BUSINESS
General Background
FFP Marketing Company, Inc. (the "Company"), was formed as a Texas corporation in connection with the December 1997 restructuring of FFP Partners, L.P. ("FFP Partners"). In that reorganization, all of FFP Partners' assets and businesses were transferred to the Company, except for the real estate used by FFP Partners in its former retail operations. Unless the context requires otherwise, references in this report to "FFP Marketing" or to the "Company" for periods or activities prior to the completion of the December 1997 restructuring include the activities of FFP Partners and their respective subsidiaries. Two members of the Company's senior management hold similar management positions with FFP Partners. As a result of the restructuring of FFP Partners, the holders of its limited partnership interests received one share of common stock of the Company for each limited partnership unit that they owned on December 28, 1997, resulting in each such person owning the same economic interest in the Company as they had held in FFP Partners as of that date.
The Company maintains its principal executive offices at 2801 Glenda Avenue, Fort Worth, Texas 76117-4391. Its telephone number is (817) 838-4700, and its Internet web site is http://www.ffpmarketing.com.
Operating Segments
The Company and its subsidiaries are principally engaged in two operating segments: (1) the retail and wholesale sale of motor fuel, merchandise and other ancillary products and services at approximately 428 convenience stores, truck stops, and other gasoline outlets ("Retail and Wholesale"), and (2) the operation of a motor fuel terminal and processing facility ("Terminal Operations"). {See "Management's Discussion and Analysis of Financial Condition and Results of Operation" in Part II, Item 7 for financial information for each of these segments.}
Retail and Wholesale Segment
Description of Operations. The Company commenced operations in May 1987 upon the purchase of its initial base of retail outlets from companies owned by members of its senior management and conducts its operations through its 100%-owned subsidiaries, FFP Operating Partners, L.P.; Direct Fuels, L.P.; FFP Financial Services, L.P.; FFP Money Order Company, Inc.; Practical Tank Management, Inc.; and FFP Transportation, L.L.C.
Convenience Stores. The Company operated an average of 213 convenience stores during 1999, an increase of 10 stores, or 5%, over the average of 203 convenience stores operated during 1998. The Company's convenience stores operate under several different trade names. The principal trade names are "Kwik Pantry," "Nu-Way," "Economy Drive-Ins," and "Taylor Food Mart."
The Company's convenience stores are open seven days a week, offer extended hours (53 of the stores are open 24 hours a day, the remainder generally are open from 6:00 am to midnight), and emphasize convenience to the customer through location, merchandise selection, and service. The convenience stores sell groceries, tobacco products, take-out foods and beverages (including alcoholic beverages where local laws permit), dairy products, and non-food merchandise such as money orders, telephone calling cards, lottery tickets, health and beauty aids, and magazines and, at all but two of the stores, motor fuel. Food service in the convenience stores varies from pre-packaged sandwiches and fountain drinks to full food-service delicatessens (at 62 stores), some with limited in-store seating.
Since 1993, the Company has owned branded fast food outlets in selected convenience stores and truck stops. Ten of its convenience stores had branded food outlets at the end of 1999, including small "express" franchises of Kentucky Fried Chicken, Subway Sandwiches, Baskin Robbins, and Blimpie's. {See Store Development; Products, Store Design and Operation.}
At year end 1999, the Company operated 216 convenience stores. The number of stores operated at the end of 1999 represented a net increase of 18 stores from the number operated at the prior year end. This net increase resulted from the acquisition of 23 additional convenience stores during the year, the opening of 1 convenience store, the sale of merchandise operations at 3 convenience stores to independent operators and conversion to gasoline outlets of the Company {see Store Development}, and the temporary or permanent closing of 3 convenience stores.
The convenience stores accounted for 50% (48% in 1998) of the Company's consolidated revenues in 1999. The percentage of revenues from convenience stores increased primarily because of the increase in the sales price of motor fuel during the year and the acquisition of 23 convenience stores in February 1999. The Company's convenience stores had average weekly merchandise sales of $10,821 per store and average weekly motor fuel sales of 10,660 gallons per store. In 1998, the average weekly per store sales were $9,095 of merchandise and 10,281 gallons of fuel.
The average gross margin on motor fuel sales at convenience stores was 10.83 cents per gallon in 1999, compared to 11.67 cents per gallon in 1998, a 7.2% decrease. The average gross margin on merchandise sales was 26.99% in 1999, compared to 28.37% in 1998, a 4.9% decrease.
Truck Stops. At the end of 1999, the Company operated 13 truck stops, two more than at 1998 year end. The Company acquired two truck stops in its February 1999 acquisition, both in Texas. The truck stops, which operate principally under the trade name of "Drivers," are located on interstate and other highways and are similar in their operations to the convenience stores, although the merchandise mix is directed toward truck drivers and the traveling public. Five of the truck stops have full service restaurants. The Company operates two of the restaurants and leases the other three to independent operators. Three of the other truck stops offer prepared-to-order food service, including two outlets which have a combination Kentucky Fried Chicken/Taco Bell "express" franchise and one which has a Pizza Hut franchise within the store. Three of the truck stops do not provide food service. In 1999, the truck stops (including their associated restaurants and food service facilities) accounted for 10% (11% in 1998) of the Company's consolidated revenues, with average weekly per outlet merchandise and food sales (including restaurants) of $16,840 ($17,210 in 1998) and fuel sales of 59,085 gallons (59,858 gallons in 1998).
The average gross margin on motor fuel sales at truck stops was 8.84 cents per gallon in 1999, compared to 10.16 cents per gallon in 1998, a 13.0% decrease. The average gross margin on merchandise sales and food sales (including restaurants) was 40.0% in 1999, compared to 43.7% in 1998, a 8.5% decrease.
Motor Fuel Concessions at Independently Operated Outlets. The Company operated the motor fuel concession at 199 independently operated convenience stores at year end 1999, a decrease of 8 outlets from year end 1998. This decrease was the net result of the routine opening and closing of certain outlets and the addition of locations due to the sale of the merchandise operations of convenience stores, referred to above. Although the merchandise sale portion of the convenience store operations were sold, the Company retained the motor fuel concession at these locations. The Company owns the motor fuel inventory, fuel pumps, equipment and underground storage tanks located at these independently operated convenience stores and provides the motor fuel supply for them. The actual sale of the motor fuel to the public is conducted by the operator of the outlet pursuant to contracts that generally obligate the Company to provide the motor fuel inventory, the fuel storage and dispensing equipment, and to maintain the fuel equipment while the store operator agrees to collection and remittance procedures. The convenience store operators are compensated by commissions based on profits and/or the volume of fuel sold. In those instances where the operator owns the real estate underlying his store, the contracts generally grant the Company the right of first refusal to purchase the operator's convenience store if it is offered for sale. Many of the contracts have renewal options. Based on past experience, the Company believes that a significant number of those contracts which do not have renewal options will be renegotiated and renewed upon expiration. In addition to the contractual arrangement between the store operator and the Company, many of these operators either lease or sublease the store building and land from the Company or its affiliates.
During 1999, these gasoline outlets had average weekly per outlet fuel sales of 9,990 gallons as compared to 8,867 gallons in fiscal 1998. In 1998, these gasoline outlets accounted for 22% (22% in 1998 also) of the Company's consolidated revenues.
The average gross margin on motor fuel sales at the gasoline outlets was 8.37 cents per gallon in 1999, compared to 9.30 cents per gallon in 1998, a 10.0% decrease.
Wholesale Fuel Sales. The Company sells motor fuel on a wholesale basis to smaller independent and regional chains of fuel retailers and to end users of fuels, such as contractors, operators of vehicle fleets, and public utilities. The Company has also been designated a "jobber" for Citgo, Chevron, Fina, Conoco, Coastal, Diamond Shamrock, and Phillips 66. This designation enables the Company to qualify independent fuel retailers to operate as a branded outlet for the large oil company. FFP Marketing then supplies motor fuel to such retailers on a wholesale basis under contracts ranging from five to ten years. The Company makes purchases to fill specific orders by its branded wholesale customers.
Management believes the Company's fuel wholesale activities enhance its relationships with its fuel vendors by increasing the volume of purchases from such vendors. In addition, the wholesale activities permit the Company to develop relationships with independent operators of convenience stores that may, at some future time, be interested in entering into an agreement for FFP Marketing to take over the fuel concession at their outlets. {See Motor Fuel Concessions at Independently Operated Outlets.} Exclusive of sales made at its terminal, the Company's wholesale operations contributed 18% of consolidated revenues in 1999 (19% in 1998).
The average gross margin on motor fuel sales on a wholesale basis, exclusive of sales made at its terminal, was 1.97 cents per gallon in 1999, compared to 1.98 cents per gallon in 1998, a 0.5% decrease.
Market Strategy. The Company's market strategy generally emphasizes the operation and development of existing stores and retail outlets in small communities rather than metropolitan markets. In general, the Company believes stores in communities with populations of 50,000 or less experience a more favorable operating environment, primarily due to less competition from larger national or regional chains and access to a higher quality and more stable labor force. In addition, land costs, reflected in both new store development costs and acquisition prices for existing stores and retail outlets, are generally lower in small communities. As a result of these factors, the Company believes this market strategy enables it to achieve a higher average return on investment than would be achieved by operating primarily in metropolitan markets.
Store Development. In 1994 the Company began a new strategy to increase the productivity and operating efficiency of its existing store base by identifying non-core convenience stores that could contribute more to its earnings if operated by independent operators rather than by the Company. Since then, the Company has engaged in a program of selling the merchandise operations at these outlets to independent operators. Through the end of 1999, the Company has sold the merchandise operations at 57 locations. Because of a different overhead structure, independent operators are often able to operate the stores less expensively than the Company can. These sales were structured such that the Company retained the leasehold interest in the property and subleased the land and building to the operator for a five year period with a five year renewal option. The Company also entered into an agreement to operate the fuel concession at these locations. {See Motor Fuel Concessions at Independently Operated Outlets.} Management believes that the sales of these operations and the resulting combination of rents, fuel profits, and other ancillary income enhance the profitability of these outlets to the Company. In 2000, the Company intends to accelerate greatly this strategy of selling the merchandise operation at its lowest performing stores.
In addition to the sales of the merchandise operations at certain convenience stores, discussed above, management continues to seek other ways to increase the productivity of the Company's present base of convenience store and truck stop outlets. As a part of this endeavor, the Company has installed limited-menu "express" outlets of national food franchises in some of the Company's outlets. The Company operates combination Kentucky Fried Chicken/Taco Bell outlets in two truck stops, a Pizza Hut Express outlet in one truck stop, Kentucky Fried Chicken outlet in two convenience stores, a Blimpie's Sandwich franchise in two stores, a Subway Sandwich franchise in one store, a Baskin Robbins ice cream franchise in one convenience store, and regional fast food franchises in four convenience stores. The Company's experience with this type of food service operation indicates that it increases store traffic because it offers the advantage of national and regional name-brand recognition and advertising. In addition, the training and operational programs of these franchisors provide a consistent and high-quality product to customers. Management continues to evaluate its existing operations to determine if it would be appropriate to install additional outlets of this type in other locations. It is also evaluating the relative merits of the various types of franchises.
In addition to working to enhance the performance of its existing outlets, the Company also seeks opportunities to acquire operating outlets at attractive prices. In December 1997, the Company completed the purchase of 94 convenience stores. The stores acquired are all located in states in which the Company had operations and about 80% of them are in Texas. In a similar manner, the Company purchased 25 additional convenience stores and truck stops, plus one non-operating convenience store, in February 1999. All of these new stores are located in Texas. These acquisitions have had a positive impact on its earnings and cash flow by operating the additional stores with minimal additional overhead. Although additional field supervisory personnel have been added, the management, purchasing and accounting for the stores requires minimal additional administrative staff.
Opportunities to acquire and dispose of convenience stores, truck stops and motor fuel concessions are limited by competitive factors, available financing, and competing buyers. The Company continues to pursue these activities principally by the development of relationships through normal industry channels and through its fuel wholesaling operations.
Products, Store Design, and Operation. The number and type of merchandise items stocked in the convenience stores varies from one store to another depending upon the size and location of the store and the type of products desired by the customer base served by the store. However, the stores generally carry national or regional brand name merchandise of the type customarily carried by competing convenience stores. Substantially all the Company's convenience stores and truck stops offer fountain drinks and fast foods such as hot dogs, pre-packaged sandwiches and other foods. Sixty-one of the convenience stores have facilities for daily preparation of fresh food catering to local tastes, including fried chicken and catfish, tacos, french fries, and made-to-order sandwiches. Also, as discussed above 10 convenience stores and three truck stops have small "express" outlets of national or regional fast-food franchises.
Senior executives and other marketing and operations personnel continually review and evaluate products and services for possible inclusion in the Company's retail outlets. Special emphasis is given to those goods or services that carry a higher gross profit margin than the Company's overall average, will increase customer traffic within the stores, or complement other items already carried by the stores. The marketing teams, which include the Company's regional managers, in conjunction with the Company's vendors, develop and implement promotional programs and incentives on selected items, such as fountain drinks and fast food items. In addition, new products and services are reviewed on a periodic basis to ensure a competitive product selection. Due to the geographic distribution of the Company's stores and the variety of trade names under which they are operated, the use of advertising is limited to location signage, point-of-sale promotional materials, local newspaper and billboard advertising, and locally distributed flyers.
Over the last several years, the Company has increased the number of its outlets which are affiliated with a large oil company, referred to as "branded" outlets. At year end 1999, the Company operated 273 branded outlets. By comparison, the Company operated only 65 branded outlets in 1990.
Number of Outlets Gas Truck C-Stores Outlets Stops Total
Citgo 95 81 6 182 Chevron 17 8 1 26 Texaco 19 1 0 20 Conoco 4 14 1 19 Diamond Shamrock 13 1 0 14 Fina 0 10 0 10 Coastal 1 1 0 2
Total 149 116 8 273
Branded locations often have higher fuel sales volumes (in gallons) than non-branded outlets due to the advertising and promotional activities of the respective oil company and the acceptance of such oil company's proprietary credit cards. The increased customer traffic associated with higher fuel sales tends to increase merchandise sales volumes, as well. However, the Company pays a higher cost for fuel at a branded location more than at an unbranded location. The Company continues to evaluate the desirability of branding additional outlets at certain locations. In addition to the Company-operated convenience stores, truck stops, and fuel concessions at independently operated outlets that are branded, the Company also serves as a wholesale distributor to approximately 200 unaffiliated retail outlets that are branded.
Merchandise Supply. Based on competitive bids, the Company has selected a single company, Grocery Supply Company based in Sulphur Springs, Texas, as the primary grocery and merchandise supplier to its convenience stores and truck stops. However, some merchandise items, such as bakery goods, dairy products, soft drinks, beer, and other perishable products, are generally purchased from local vendors and/or wholesale route salespeople. The Company also purchases merchandise directly from well-known vendors such as Coca-Cola and Frito-Lay. The Company believes it could replace any of its merchandise suppliers, including its primary merchandise supplier, with no significant adverse effect on its operations.
Motor Fuel Supply. The Company purchases fuel for its branded retail outlets and branded wholesale customers from the respective oil company which branded the outlet and for its unbranded outlets from large integrated oil companies and independent refineries. Fuel is purchased from approximately 40 vendors. Principal fuel suppliers in 1999 were Citgo Petroleum Corporation, Conoco, Inc., Koch Refining Company, L.P., and Chevron U.S.A., Inc. Although the Company's purchases are concentrated in a few vendors, largely due to the number of branded outlets, management believes that the competition for retail outlets among oil companies is such that the Company could find alternative supply sources if the need to do so arose.
During recent years, the Company has not experienced any difficulties in obtaining sufficient quantities of motor fuel to satisfy retail sales requirements. However, unanticipated national or international events could result in a curtailment of motor fuel supplies to the Company, thereby adversely affecting motor fuel sales. In addition, management believes a significant portion of its merchandise sales are to customers who also purchase motor fuel. Accordingly, reduced availability of motor fuel could negatively impact other facets of the Company's operations, as well.
Trademarks and Trade Names. The Company's convenience stores and truck stops are operated under a variety of trade names, including "Kwik Pantry," "Nu-Way," "Economy," "Dynamic Minute Mart," "Taylor's Food Stores," "Drivers," and "Drivers Diner." New outlets generally use the trade name of the Company's stores predominant in the geographic area where the new store is located. The Company sells money orders in its outlets, and through agents, under the service mark "Financial Express Money Order Company." The money orders are produced using a computer controlled laser printing system developed by the Company. This system is also marketed to third parties under the name of "Lazer Wizard."
Eight of the Company's truck stops operate under the trade name of "Drivers". The three other truck stops use the same trade name as the Company's convenience stores in the area in which they are located.
The Company has registered the names "Kwik Pantry," "Drivers," "Drivers Diner," "Financial Express Money Order Company," and "Lazer Wizard" as service marks or trademarks under federal law.
Terminal Operations Segment
Terminal Operations. The Company's Terminal Operations increased significantly in 1999, especially in the fourth quarter of 1999. Gross revenues from Terminal Operations in 1999 were $34,473,000, before consolidating eliminations, compared to only $4,504,000 in 1998, a 665% increase. Terminal Operations accounted for 7% of the Company's consolidated revenues in 1999, compared to only 1% in 1998. Operating income at the terminal improved from a $1,295,000 loss in 1998 to an income of $234,000 in 1999. The average gross margin on motor fuel sales at the terminal, before consolidating eliminations, was 4.2 cents per gallon in 1999, compared to no margin in 1998.
The Terminal Operations are relatively new in comparison to its Retail and Wholesale segment. In June 1997, the Company completed the renovation of a bulk storage terminal and fuel processing facility located in Euless, Texas, that it had purchased in 1996. Until fall 1999, the Company engaged in two activities at its terminal facility: providing motor fuel terminal services (storage and delivery services) for other wholesalers, and processing transmix, a commingled product of refined gasoline and diesel, into their component parts for sale. Those sales are made to retailers (including third parties and intercompany sales to the Company's Retail and Wholesale segment) and end users.
In fall 1999, the Terminal Operations were greatly expanded to include a fuel blending operation at the terminal. For this processing, the Company purchases refined fuel products in much greater quantities and takes delivery via a pipeline from the Texas Gulf Coast having a portal at the Company's terminal. The Company then adds blend stock to the fuel, creating more volume, and resells the resulting products on a wholesale basis to its own retail stores and to third parties.
The terminal facility has gasoline storage capacity for 9,879,000 gallons of motor fuel. The facility's capacity for processing commingled fuel product is approximately 63,000 gallons per day. Until fall 1999, the Company operated neither of these activities at near their respective capacity of operation. The motor fuel obtained by separating commingled products is used by the Company to satisfy a portion of the fuel supply needs for its own retail outlets and its wholesale customers. Until fall 1999, the majority of the Company's revenues derived from the terminal have been intercompany sales to its Retail and Wholesale segment.
The Company also owns approximately 20 acres of land at this industrial, metropolitan location, which is available for possible expansion.
Competition
The businesses in which the Company operates are highly competitive. Most convenience stores and an increasing number of traditional grocery stores and large discount stores in the Company's market areas sell motor fuel. In addition, merchandise similar or identical to that sold by the Company's stores is generally available to competitors. In addition to independently operated and national and regional chains of convenience stores, the Company also competes with local and national chains of supermarkets, drug stores, fast-food operations, and motor fuel retailers. Major oil companies are also becoming a significant factor in the convenience store industry as they remodel and expand older convenience stores, as well as convert outlets that previously sold only motor fuel to convenience stores. Major oil company stores sometimes carry a more limited selection of merchandise than that carried by the Company's outlets and operate principally in metropolitan areas, where the Company has few outlets. Some of the Company's competitors have large sales volumes, benefit from national or regional advertising, and have greater financial resources than the Company.
The Company believes that each of its retail outlets generally competes with other retailers that are within a radius of one to two miles of its locations and that such competition is based on accessibility, the variety of products and services offered, extended hours of operation, price, and prompt check-out service.
The Company's truck stops experienced increased competition in 1999 as competing truck stops were opened in many of the areas in which the Company's truck stops are located. Such increased competition often causes a reduction in fuel and merchandise sales, as well as reduced margins.
The Company's wholesale fuel operation is also very competitive. Management believes this business is highly price sensitive, although the ability to compete is also dependent upon providing quality products and reliable delivery schedules. The Company's wholesale fuel operation competes for customers with large integrated oil companies and smaller, independent refiners, and fuel jobbers, some of which have greater financial resources than the Company. Management believes it can compete effectively in this business because of the Company's purchasing economies, numerous supply sources, including its terminal facility, and the reluctance of many larger suppliers to sell to smaller customers.
Employees
At year end 1999, the Company employed 1,865 people (including part-time employees). There are no collective bargaining agreements between the Company and any of its employees, and management believes the relationship with employees of the Company is good.
Insurance
The Company carries workers' compensation insurance in all states in which it operates but considers less costly alternatives on a state-by-state basis from time to time.
The Company maintains liability coverage for its vehicles which meet or exceed state requirements but it does not carry automobile physical damage insurance. Insurance covering physical damage of properties owned by the Company is generally carried only for selected properties. The Company maintains property damage coverage on leased properties as required by the terms of the leases thereon and maintains property damage coverage on other properties as it deems appropriate.
The Company maintains general liability insurance with limits and deductibles management believes prudent in light of the exposure of the Company to loss and the cost of the insurance. The Company does not maintain any insurance covering losses due to environmental contamination. {See Government Regulation - Environmental Regulation.}
The Company monitors the insurance markets and modifies its insurance coverage from time-to-time, both adding and eliminating coverage, as it believes appropriate at such time in light of changes in the Company's exposure to loss and the cost of insurance against such losses.
Government Regulation
Alcoholic Beverage Licenses. The Company's retail outlets sell alcoholic beverages in areas where such sales are legally permitted. The sale of alcoholic beverages is generally regulated by state and local laws which grant to various agencies the authority to approve, revoke, or suspend permits and licenses relating to the sale of such beverages. In most states, the regulatory agencies have wide-ranging discretion to determine if a licensee or applicant is qualified to be licensed. The State of Texas requires that licenses for the sale of alcoholic beverages be held, directly or indirectly, only by individual residents of Texas or by companies controlled by such persons. Therefore, the Company has an agreement with a corporation controlled by John H. Harvison, its Chairman and Chief Executive Officer, which permits that corporation to sell alcoholic beverages in the Company's Texas outlets where such sales are legal.
In many states, sellers of alcoholic beverages have been held responsible for damages caused by persons who purchased alcoholic beverages from them and who were at the time of the purchase, or subsequently became, intoxicated. Although the Company's retail operations have adopted procedures which are designed to minimize such liability, the potential exposure to the Company as a seller of alcoholic beverages is substantial. The Company's present liability insurance provides coverage, within its limits and subject to its deductibles, for this type of liability.
Environmental Regulation. The Company is subject to various federal, state, and local environmental, health, and safety laws and regulations. Such laws and regulation affect both of the Company's operating segments. In particular, federal regulations issued in 1988 regarding underground storage tanks established requirements for, among other things, underground storage tank leak detection systems, upgrading of underground tanks with respect to corrosion resistance, corrective actions in the event of leaks, and the demonstration of financial responsibility to undertake corrective actions and compensate third parties for damages in the event of leaks. Certain of these requirements were effective immediately, and others were phased in over a 10-year period. However, all underground storage tanks were required to comply with all requirements by December 22, 1998. The Company implemented a plan several years ago to bring all of its existing underground storage tanks and related equipment into compliance with these laws and regulations and believes that it successfully met that deadline.
All states in which the Company has underground storage tanks established trust funds in prior years for the sharing, recovering, and reimbursing of certain cleanup costs and liabilities incurred as a result of leaks in such tanks. Trust fund programs in certain state have since been discontinued. The ongoing trust funds, which essentially provide insurance coverage for the cleanup of environmental damages caused by an underground storage tank leak, are funded by a tax on underground storage tanks or the levy of a "loading fee" or other tax on the wholesale purchase of motor fuels within each respective state. The coverage afforded by each state vary but generally provide up to $1,000,000 for the cleanup of environmental contamination, and most provide coverage for third-party liability, as well. Some of the funds require the Company to pay deductibles up to $25,000 per occurrence. The Company believes that its past taxes to fund those trust funds have exceeded the Company's cost of any environmental cleanup.
Although the benefits afforded the Company as a result of the trust funds are substantial, the Company may not be able to recover through higher retail prices the costs associated with the fees and taxes which fund the trusts. In general, this trust arrangement terminated in 1998 with respect to future, but not past, environmental costs. Accordingly, the Company's environmental liabilities could increase in the future, although its contributions to such state funds are expected to decline by a greater amount.
Management believes the Company complies in all material respects with existing environmental laws and regulations and is not currently aware of any material capital expenditures, other than as discussed above, that will be required to further comply with such existing laws and regulations. However, new laws and regulations could be adopted which could require the Company to incur significant additional costs.
Forward-Looking Statements
This Annual Report on Form 10-K and the Proxy Statement, incorporated herein by reference, contain certain "forward looking" statements as such term is defined in the U.S. Private Securities Litigation Reform Act of 1995, and information relating to the Company and its subsidiaries that are based on the beliefs of management and assumptions made by and information currently available to management. The Company is relying upon the "safe harbor" contained in Section 27A of such act in making such forward looking statements. Statements that should generally be considered forward - looking include, but are not limited to, those that contain the words "estimate," "anticipate," "in the opinion of management,", "expects", "believes," and similar phrases. Among the factors that could cause actual results to differ materially from the statements made are the following: general business conditions in the local markets served by the Company's convenience stores, truck stops, and other retail outlets, and its wholesale fuel markets; the weather in the local markets served by the Company; competitive factors such as changes in the locations, merchandise offered, pricing, and other aspects of competitors' operations; increases in cost of fuel and merchandise sold or reductions in the gross profit realized from such sales; available product for processing and processing efficiencies at the Company's fuel terminal; expense pressures relating to operating costs, including labor, repair and maintenance, and supplies; unexpected outcome of litigation; adverse liquidity situations; unanticipated general and administrative expenses, including employee, taxes, insurance, expansion and financing costs; and unexpected liabilities.
Should one or more of these risks or uncertainties materialize, or should any underlying assumptions prove incorrect, actual results or outcomes may vary materially from those described herein as anticipated, believed, estimated, expected, or intended.
ITEM 2.
ITEM 2. PROPERTIES
Retail Properties. The Company currently leases all but one of the real estate properties used in its retail operations. The following table summarizes the ownership status of individual properties as of year end 1999:
Leased from Affiliates Leased from Leased from of Harvison Unrelated FFP Partners Family Parties Total
Number of Locations Convenience stores - Land 55 51 110 216 Buildings 105 3 108 216
Truck Stops - Land 4 8 1 13 Buildings 9 3 1 13
Third party gasoline outlets - Land 19 97 83 199 Buildings 69 47 83 199
Totals - Land 78 156 194 428 Buildings 183 53 192 428
Geographical Location of Retail Stores. The table below sets forth the states in which the Company's convenience store, third party gasoline outlets, and truck stops are located at year end 1999.
Convenience Gas Truck Stores Outlets Stops Total Percent
Texas 161 155 9 325 76% Oklahoma 1 24 1 26 6% Louisiana 18 3 0 21 5% Missouri 17 2 0 19 4% Kansas 6 6 0 12 3% Mississippi 5 2 0 7 2% Kentucky 3 1 1 5 1% New Mexico 1 1 2 4 1% Arkansas 1 3 0 4 1% Tennessee 3 1 0 4 1% Nebraska 0 1 0 1 0%
Totals 216 199 13 428 100%
Leases of Land and Buildings. On 66 retail sites at year end 1999, the Company leases land and buildings for certain retail sites from FFP Partners pursuant to lease agreements whose terms are currently scheduled to end in December 2002, plus two five-year renewal options at the sole election of the Company. Upon each renewal, the rent will be adjusted by the increase in the consumer price index since the date the leases became effective (January 1, 1998). The leases on these properties were entered into in conjunction with the restructuring of FFP Partners that was completed in December 1997 in which the non-real estate assets and businesses of FFP Partners were transferred to the Company while the real estate used in the retail operations was retained by FFP Partners. The lease rates for the locations were established based on knowledge of the properties by the management of FFP Partners and the Company and their general experience in acting as lessor and lessee for similar properties. The Company's management believes that the lease rates are comparable to leases that could be entered into with unrelated third parties. The Company and FFP Partners did not engage any third party advisors or refer to any third party surveys or analyses of rental rates in making this determination.
Leases of Buildings Only. On 102 other retail sites at the end of 1999, the Company leases only the buildings from FFP Partners which are located on lands leased from affiliates of the Harvison Family, or from unrelated parties, pursuant to lease agreements whose terms are currently scheduled to end concurrently with underlying ground leases now scheduled to terminate on May 2002, plus one five-year option at the sole election of the Company until May 2007. The monthly rent upon each renewal will be adjusted by the increase in the consumer price index since the original date of the leases. The building leases on these properties were entered into in conjunction with the restructuring of FFP Partners discussed above, and the lease rates on these locations were established in the same manner as described above for the real estate leased from FFP Partners. The affiliates of the Harvison Family have indicated their intention not to extend the ground leases beyond May 2007 but instead will lease the land and building for those sites directly to the Company under new leases beginning May 2007 at increased rates considered equal to market rates. The Company and the affiliates of the Harvison Family do not intend to engage any third party advisors or refer to any third party surveys or analyses of rental rates in negotiating the new lease. The new lease rates starting in May 2007 will be established based on knowledge of the properties by the management of the Company and the affiliates of the Harvison Family based on their general experience in acting as lessor and lessee for similar properties.
The Company's leases from affiliates of the Harvison Family generally expire in May 2002 and provide for one or two five-year renewal periods at the sole option of the Company. The monthly rent upon each renewal will be adjusted by the increase in the consumer price index since the original date of the leases. Management believes the terms and conditions of these leases are more favorable to the Company than could have been obtained from unrelated third parties. The Company did not engage any third party advisors or refer to any third party surveys or analyses of rental rates in making this determination.
Terminal and Other Properties. The Company also owns a 33 acre tract of land in Euless, Texas. Approximately 13 acres of that property is currently used as a fuel terminal and fuel processing plant and 20 acres is currently vacant and available for expansion.
The executive offices of the Company are located at 2801 Glenda Avenue, Fort Worth, Texas, where it occupies approximately 15,000 square feet of office space leased from three affiliates of the Harvison Family.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is often involved in routine litigation arising in the ordinary course of its businesses, particularly personal injury and employment related claims. Management believes that the Company, its subsidiaries and their properties are not subject to any material pending legal proceedings, other than ordinary routine litigation incidental to their businesses.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its 1999 shareholder meeting in Fort Worth, Texas, on December 22, 1999. J.D. St. Clair and John D. Harvison were re-elected to the Company's Board of Directors at that meeting. The voting results were as follows:
Nominees
J. D. St. Clair John D. Harvison ------------------- -------------------- Votes Percent Votes Percent
For 1,941,503 98.8% 1,941,503 98.8% Against 7,980 0.4% 7,980 0.4% Withheld 15,000 0.8% 15,000 0.8%
Totals 1,964,483 100.0% 1,964,483 100.0%
The other directors whose terms of office as a director continued after that meeting were John H. Harvison, Robert J. Byrnes, Michael Triantafellou, John W. Hughes, Garland McDonald, and E. Michael Gregory.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is listed for trading on the American Stock Exchange ("AMEX") under the trading symbol "FMM". The shares began trading on the AMEX on a "when issued" basis on December 29, 1997, the day following the completion of the restructuring of FFP Partners {see Item 1. Business - General Background} and commenced trading separately on January 14, 1998. The following table sets forth the high and low sales prices per share for the Company's common stock, as reported by AMEX for each quarter that the Company's common stock has traded:
High Low First Quarter $6.938 $4.750 Second Quarter $4.750 $3.125 Third Quarter $3.250 $2.188 Fourth Quarter $2.750 $1.250
First Quarter $4.750 $2.500 Second Quarter $9.250 $4.688 Third Quarter $8.625 $3.875 Fourth Quarter $6.500 $3.438
On March 15, 2000, the last reported sales price of the Company's common stock was $2.625 per share. On such date, there were 210 stockholders of record and approximately 813 beneficial shareholders. {See Item 12. Security Ownership of Certain Beneficial Owners and Management.}
The Company may also issue preferred shares from time to time in one or more series as authorized by its Board of Directors. There are currently no preferred shares issued.
The Board of Directors has not established a dividend policy, but management does not anticipate that dividends will be paid on the Company's common shares in the foreseeable future. The amount of any dividends that the Company may pay is subject to limitations in its loan agreements with various lenders, which generally restrict the payment of dividends to an amount which would not cause the Company to be unable to meet its financial covenants to such lenders.
ITEM 6.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
1999 1998 1997 1996 1995
Financial Data (in thousands, except per unit data):
Revenues and Margins -
Motor fuel sales $378,871 $311,52 $311,495 $321,814 $296,887 Motor fuel margin 28,638 26,916 21,702 20,672 22,813 Merchandise sales 114,422 94,629 61,652 60,579 65,512 Merchandise margin 33,737 29,447 18,739 17,821 19,187 Miscellaneous revenues 11,086 9,719 6,267 7,759 7,646 Total revenues 504,379 415,874 379,414 390,152 370,045 Total margin 73,461 66,082 46,708 46,252 49,646
Direct store expenses 50,524 44,154 28,241 27,062 28,496 General and administrative expenses 14,389 15,831 12,113 11,506 11,795 Depreciation and amortization 6,724 5,636 5,488 3,951 3,769 Total operating expenses 71,637 65,621 45,842 42,519 44,060 Operating income 1,824 461 866 3,733 5,586 Interest expense, net 2,613 1,168 1,642 1,246 1,176 Income (loss) before taxes and other items (789) (707) (776) 2,487 4,410 Income tax expense (benefit) (223) (244) (892) 2,646 500 Extraordinary loss, net of tax effect 241 0 0 0 0 Net income (loss) $(807) $(463) $116 $(159) $3,910 Net income (loss) per share - Basic (0.21) (0.12) 0.03 (0.04) 1.06 Diluted (0.21) (0.12) 0.03 (0.04) 1.02 Dividends/distributions declared per Unit $0.000 $0.000 $0.000 $0.415 $0.870 Total assets $118,406 $97,040 $75,330 $78,599 $69,332 Long-term obligations, with capital leases 36,832 20,380 24,575 9,418 7,100
Operating Data:
Gallons of motor fuel sold (in thousands) - Retail 261,092 237,629 199,310 197,687 193,233 Wholesale 111,621 96,710 83,296 90,704 95,473 Fuel margin per gallon (in cents) - Retail 9.6 10.6 9.8 9.3 10.9 Wholesale 2.0 2.0 2.5 1.9 1.7 Average weekly merchandise sales (per store) Convenience stores $10,821 $9,095 $9,482 $9,454 $9,560 Truck stops 16,840 17,210 17,704 17,192 17,506 Merchandise margin 29.5% 31.1% 30.4% 29.4% 29.3% Number of fuel locations at year end - Convenience stores 216 198 207 117 127 Truck stops 13 11 11 10 10 Fuel concessions at independent outlets 199 207 205 206 194
- ------------------------------------------------ Note: 1999 and 1998 results are not comparable to pre-1998 results as a consequence of the Company's December 1997 restructuring.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
This discussion should be read in conjunction with the selected financial and operating data, the description of the Company's business operations, and the financial statements and related notes included elsewhere in this annual report. Some of the matters discussed in this annual report contain forward-looking statements regarding the Company's future business which are subject to certain risks and uncertainties, including competitive pressures, adverse economic conditions and government regulations. These issues, and other factors, which may be identified from time to time in the Company's reports filed with the SEC, could cause actual results to differ materially from those indicated in the forward-looking statements.
In a restructuring completed on December 28, 1997, the Company acquired all of the assets and businesses formerly held by FFP Partners, except that the real estate used in its retail operations was retained by FFP Partners. FFP Partners also retained certain liabilities, principally bank debt and debt secured by the retained real estate. All other liabilities (including trade accounts payable, money orders payable, accrued expenses, deferred income taxes, obligations under capital leases and other debt secured by various equipment) were transferred to the Company.
The businesses transferred to the Company include the operation of convenience stores, truck stops, and self-service motor fuel concessions at independently operated convenience stores, motor fuel wholesaling activities, the sale of money orders through the outlets operated by the Company and third party agents, and the operation of a motor fuel terminal and processing facility. The real estate retained by FFP Partners is leased to the Company for use in the conduct of its retail convenience store and motor fuel operations.
The selected financial data that accompanies this discussion reflects the historical operations of FFP Partners to which the Company succeeded in connection with the aforementioned restructuring. However, the financial data for years prior to 1998 is not considered comparable to prior years in the following respects: rental expense is included in 1999 and 1998, but not in prior years, for the leasing of the real properties retained by FFP Partners in the December restructuring; depreciation expense related to such real properties is not included for 1999 and 1998 (nor will it be incurred in future years), but is included for prior years; and interest income received by the Company from its note receivable from FFP Partners is included in 1999 and 1998 but not in years prior to 1998. This note was repaid in full in October 1999.
Also in December 1997, the Company initially acquired 107 additional convenience stores. Fourteen of the stores were sold to unrelated parties shortly thereafter, resulting in a net increase from these transactions of 94 stores. The purchase of the stores was completed in December and had little impact on 1997 results. The results from operations from these 94 stores had a positive impact on results in 1999 and 1998 and are expected to continue to have a similar impact in future years.
Similarly, the Company acquired 25 additional convenience stores and truck stops in February 1999. The results from operations from these 25 stores have also had a positive impact on results in 1999 and are expected to continue to have a similar impact in future years.
The Company reports its results of operations using a fiscal year which ends on the last Sunday in December. Most fiscal years have 52 weeks, but some consist of 53 weeks. Fiscal years 1999, 1998, 1997, and 1996 were 52-week years, while fiscal year 1995 was a 53-week year. This variation in time periods most affects revenues (and related costs of sales) and salary costs, as other expenses (such as rent and utilities) are usually recorded on a "monthly" basis. However, differences in the number of weeks in a fiscal year should be considered in reviewing the financial data.
Business Segments
The Company and its subsidiaries conduct business in two primary business segments: (i) the operation of retail convenience stores, truck stops, and motor fuel concessions at independently operated convenience stores, money orders sales through Company stores and third party agents, underground tank monitoring and testing, and motor fuel wholesaling activities (the "Retail and Wholesale Operations"), and (ii) the operation of a motor fuel terminal and processing facility (the "Terminal Operations"). Each of these business segments is subject to differing opportunities and challenges. The following table sets forth certain information about each segment's financial information in 1999, 1998, and 1997:
Retail and Terminal Wholesale Operations Eliminations Consolidated (In thousands)
Revenues from external sources $494,470 $9,909 $0 $504,379 Revenues from other segment 0 24,564 (24,564) 0 Depreciation and amortization 6,160 564 0 6,724 Interest income 1,376 0 0 1,376 Interest expense 3,989 843 (843) 3,989 (Loss) before income taxes and extraordinary item (180) (609) 0 (789) Extraordinary (loss) before tax effect (375) 0 0 (375) Total assets 109,408 8,998 0 118,406 Capital expenditures 12,626 406 0 13,032
Revenues from external sources $414,625 $1,249 $0 $415,874 Revenues from other segment 0 3,602 (3,602) 0 Depreciation and amortization 5,125 511 0 5,636 Interest income 1,406 0 (713) 693 Interest expense 1,861 713 (713) 1,861 Income (loss) before income taxes 1,301 (2,008) 0 (707) Total assets 89,739 7,301 0 97,040 Capital expenditures 6,605 182 0 6,787
Revenues from external sources $379,064 $350 $0 $379,414 Revenues from other segment 0 2,174 (2,174) 0 Depreciation and amortization 5,194 294 0 5,488 Interest income 427 0 (391) 36 Interest expense 1,678 391 (391) 1,678 Income (loss) before income taxes 42 (818) 0 (776) Total assets 67,844 7,486 0 75,330 Capital expenditures 14,247 3,163 0 17,410
In 2000 the Company will continue to analyze available opportunities to expand its Retail and Wholesale Operations by acquiring additional convenience stores. The acquisition of any additional stores will be dependent upon whether acceptable purchase prices, terms and properties can be found.
In February 1999, the Company acquired the operations of 23 additional convenience stores and two additional truck stops, all in Texas. Eleven of the 25 stores are third party leasehold locations where the Company purchased the existing leasehold interest. The Company's purchase of those leasehold interests was financed with a third party lender consisting of four fully amortizing loans in the aggregate original principal amount of $1,012,000, maturity dates ranging from 86 to 180 months, interest accruing at 9.275% per annum, and aggregate payments of principal and interest of $13,000 per month. Real estate at 14 stores was purchased by FFP Partners and immediately leased to the Company under 15-year leases. The Company's rental payments under those leases equal $99,000 per month. The Company guaranteed the acquisition indebtedness of FFP Partners of $9,550,000, which amount is no greater than the Company's aggregate rental payments to FFP Partners over the initial 15-year period of the leases.
In the fourth quarter of 1999, the Company expanded its Terminal Operations substantially with the commencement of a gasoline blending process at the terminal and an increase in its transmix business. Although management believes that this new blending process will become profitable in the future, it is a new processing procedure at the terminal and therefore subject to economic risks.
The Company's Terminal Operations improved significantly in 1999. Revenues from the terminal improved by $8,660,000 (693.4%), increasing from $1,249,000 in 1998 to $9,909,000 in 1999. Most of that increase came in the fourth quarter of 1999, and management believes that Terminal Operations will continue to show improvement in 2000. In September 1999, the terminal began to purchase motor fuel at the terminal with deliveries made through a pipeline having an exit at the terminal, which allowed for substantially increased volumes at the terminal. Also in September, the volume of transmix fluid processed at the terminal was substantially increased. In November 1999, purchases of motor fuel through the pipeline were increased to 6,300,000 gallons of motor fuel per month. In April 2000, the Company expects to increase that purchase volume to approximately 9,450,000 gallons per month via a second pipeline with an exit at the terminal.
As a result of the increased activity at the terminal in the fourth quarter of 1999, the 1999 loss before income taxes from Terminal Operations improved to $609,000, reflecting a 69.7% improvement compared to the loss before taxes from the terminal of $2,008,000 in 1998.
1999 Compared with 1998
The Company incurred a net loss before extraordinary items of $566,000 in 1999, and a net loss of $807,000 in 1999, compared to net loss of $463,000 in 1998. Major reasons for the increased 1999 loss were the following: gross margins from motor fuel retail sales decreased by 1.0 cents per gallon (9.4%) in 1999, interest expense increased by $2,128,000 in 1999, and an extraordinary loss of $375,000 ($241,000 after taxes) was incurred in connection with the 1999 refinancing as a result of writing off loan costs and paying prepayments penalties on the loans that were repaid. In order to quantify the scope of the 9.4% decrease in retail fuel margins, the Company would have earned an additional $2,610,000 in motor fuel revenues in 1999 if the Company's retail margins per gallon had remained constant during the year, although no assurance can be given that such hypothetical results were achieveable or that net earnings would have increased by the same amount.
The Company's total revenues topped the half-billion dollars for the first time in 1999, as total revenues increased to $504,379,000, a 21.3% increase over 1998 total revenues of $415,874,000. Total revenues increased as a result of higher pricing of motor fuel and cigarettes and increased sales resulting from the additional 25 stores acquired in February 1999. This $88,505,000 increase in total revenues is broken down as follows:
Increase 1999 1998 Amount Percentage (In thousands, except percentages)
Motor fuel sales $378,871 $311,526 $67,345 21.6% Merchandise sales 114,422 94,629 19,793 20.9% Miscellaneous 11,086 9,719 1,367 14.1%
Total revenues $504,379 $415,874 $88,505 21.3%
Retail motor fuel sales increased by 23,463,000 gallons (9.9%) in 1999 over 1998 due to sales from the additional 25 convenience stores acquired in February 1999. In addition, wholesale fuel sales increased by 14,911,000 gallons (15.4%) over the prior year.
Total motor fuel sales, in dollars, increased by $67,345,000 in 1999 to $378,871,000, a 21.6% improvement compared to $311,526,000 in 1998. The gross margin from motor fuel sales also increased in 1999 to $28,638,000, but only by 6.4% increase compared to the 1998 gross margin of $26,916,000. Gross margins also increased in 1999 as a result of the additional stores acquired in February 1999 and higher fuel prices in 1999. The Company sold more motor fuel volume in 1999, which offset a gross margin per gallon decline. Retail margins showed a 1.0 cent per gallon (9.4%) decrease in 1999 compared to 1998 and was principally attributable to lower margins in the areas served by competing stores and truck stops. Wholesale per gallon margins were the same in 1999 when compared to 1998, while the total whole gallons sold increased by 15.4%. For the first time, the Company earned a margin on fuel sold from the terminal, 4.2 cents per gallon margin on 34,473,000 gallons, calculated before reduction for intercompany sales. In addition, the motor fuel mix between retail sales and wholesale sales influenced the decline in per gallon margins. Retail motor fuel sales, which have higher per gallon margins than wholesale, declined from 71.1% of total motor fuel sales in 1998 to 70.1% in 1999.
A breakdown showing the Company's $64,345,000 increase in fuel sales is shown in the table below:
Increase 1999 1998 Amount Percentage (In thousands, except percentages)
Retail motor fuel sales - Convenience stores $126,207 $107,486 $18,721 17.4% Gas-only outlets 108,910 91,681 17,229 18.8% Truck stops 40,742 33,793 6,949 20.1% Total retail 275,859 232,960 42,899 18.4% Wholesales motor fuel sales 91,831 77,317 14,514 18.8% Terminal motor fuel sales 9,909 1,249 8,660 693.4% Other motor fuel sales 1,272 0 1,272 n/a
Total motor fuel sales $378,871 $311,526 $67,345 21.6%
Merchandise sales improved to $114,442,000 in 1999, a 20.9% increase compared to $94,629,00 in 1998. This $19,793,000 increase resulted principally from a 10 store increase in the average number of convenience stores operated in 1999 (4.8%) and higher cigarettes prices. Average weekly merchandise sales per convenience store increased by 19.0% in 1999 to $10,821 per convenience store. Major categories of merchandise sales in 1999 and 1998 were as follows:
Increase 1999 1998 Amount Percentage (In thousands, except percentages)
Grocery sales $46,420 $49,022 $(2,602) (5.3%) Deli, fast food, and restaurant sales 12,377 9,413 2,964 31.5% Soft drinks sales 10,209 6,443 3,766 58.5% Beer and wine sales 6,971 8,305 (1,334) 16.1% Cigarette sales 38,239 21,175 17,064 80.6% Money order supplies and equipment sales 125 271 (146) (53.9%) Tank monitoring equipment sales 81 0 81 n/a
Total merchandise sales $114,422 $94,629 $19,793 20.9%
The Company's gross profit on merchandise sales increased to $33,737,000 in 1999, a $4,290,000 improvement (14.9) over 1998 merchandise gross profit of $29,447,000. This decrease primarily came from additional merchandise gross profit realized from the 25 stores acquired in February 1999, offset in part by a decrease in gross margin percentage on merchandise sales to 29.5% in 1999, compared to 31.1% in 1998. This lower merchandise margin percentage is largely attributable to the 80.6% increase in cigarette sales, which provides a lower margin that the other categories in the merchandising mix. The 1999 merchandise margin follows a five-year trend of increasing merchandise margins. For example, merchandise margins have increased from 27.7% in 1994 to 31.1% in 1998, representing a 12.3% overall increase during that five-year period.
Miscellaneous revenues increased by 14.1% in 1999 to $11,086,000, representing a $1,367,000 increase as compared to 1998, primarily due to the greater number of stores in operation for the full year. Miscellaneous revenues is one area of operations that the Company emphasizes in its efforts to improve profitability. A breakdown of the Company's miscellaneous income is set forth in the table below:
Increase 1999 1998 Amount Percentage (In thousands, except percentages)
Money order fees $1,272 $1,352 $(80) (5.9%) Lottery ticket revenue, net 1,926 1,728 198 11.5% Telephone income 377 396 (19) 4.8% ATM, video, and game income 552 390 162 4.5% Gasoline excise tax handing fees 1,161 1,048 113 10.8% Check cashing fees 465 372 93 25.0% Commission income 731 571 160 28.0% Gain on asset disposition 0 415 (415) n/a Income from beverage agreement 2,993 2,081 912 43.8% Realized, unrealized and discount income from trading securities 232 0 232 n/a Management fee from affiliate 200 200 0 0.0% Scale and copying charges 123 118 5 4.2% Income from aircraft jet fuel joint venture 322 0 322 n/a Terminal fee 227 334 (107) (32.0%) Other 505 714 (209) (29.3%)
Total miscellaneous income $11,086 $9,719 $1,367 14.1%
Direct store expenses (those costs directly attributable to the operation of retail outlets, such as salaries and other personnel costs, supplies, utilities, rent, property taxes, repairs and maintenance, and commissions paid to the operators of the self-service motor fuel outlets) increased by $6,370,000 (144.4%) in 1999, compared to direct store expenses in 1998. This increase was primarily attributable to the 25 stores acquired in February 1999.
General and administrative expenses decreased by $1,442,000 (9.1%) in 1999 compared to 1998. The primary reason for the decrease was a reduction in bad debt expense because the Company had in 1998 incurred bad debts of $1,500,000 arising out its money order operations. The Company has initiated litigation to recover those bad debts and is optimistic that it will be able to recover substantial portion.
Depreciation and amortization expenses increased by $1,088,000 (19.3%) in 1999 reflecting the significant capital expenditures incurred by the Company in the last few years, primarily related to the upgrading of the Company's underground storage tanks to meet 1998 environmental regulatory requirements, the start of operations at the Company's fuel terminal in mid-1997, depreciation of equipment acquired in the acquisitions of convenience stores made in December 1997 and in February 1999, and depreciation of buildings obtained under transactions accounted for as capital leases in February 1999.
A $2,128,000 (114.3%) increase in interest expense in 1999, as compared to 1998, resulted primarily from additional long-term debt incurred in 1999 and partially from higher interest rates in 1999. As a result of increasing interest rates in the past year, the Company pursued long-term fixed rate financing for a larger component in its capital structure. Most of the new debt was incurred in connection with the acquisition of 94 convenience stores in 1997 and 25 convenience stores and truck stops in February 1999. The Company's liquidity improved considerably in 1999 and is expected to allow the Company to expand its retail, wholesale and terminal operations. Interest income rose significantly in 1999 by $683,000 (98.6%), compared to 1998, primarily as a result of interest income earned on increasing investments in money market funds and other liquid investments during 1999.
1998 Compared with 1997
The Company incurred a net loss of $463,000 in 1998, compared to net income of $116,000 in 1997. The major reasons for this decline are the following: additional bad debt losses of $1,500,000 were incurred in 1998 in money order operations (a substantial portion of which the Company is currently seeking to recover); rent expense of $2,628,000 was paid in 1998 to FFP Partners in the leasing of real property for certain of the Company's retail sites, compared to none in 1997, which was partially offset by an increase in interest income of $693,000 and a decrease in depreciation of $1,203,000; the Company's Terminal Operations segment incurred a loss before income taxes of $2,008,000 in 1998, compared to a 1997 segment loss of $818,000; and an income tax benefit of only $244,000 was recorded in 1998 compared to an $892,000 income tax benefit in 1997.
The Company's 1998 total revenues increased to $415,874,000, a 9.6% increase over 1997 total revenues of $379,414,000. This increase resulted primarily from a $32,977,000 (53.5%) increase in merchandise sales, which was primarily attributable to merchandise sales at the additional 94 stores acquired in December 1997.
Retail motor fuel sales increased by 38,319,000 gallons (19.2%) in 1998 over 1997 due to sales from the additional 94 convenience stores acquired in December 1997. In addition, wholesale fuel sales increased by 13,414,000 gallons (16.1%) over the prior year. Total motor fuel sales, in dollars, were flat in 1998, when compared to 1997, because motor fuel sales prices were lower in 1998 as compared to 1997. The Company sold more motor fuel volume in 1998, which offset the price decline. In addition, the Company's margin on such sales increased by $5,214,000 (24.0%) over 1997 levels. Retail fuel gross profit increased in absolute and per gallon terms. Retail margins showed a 0.8 cent per gallon (8.2%) increase in 1998 over 1997 and was principally attributable to higher margins in the areas served by the additional 94 stores acquired by the Company in December 1997. A 0.5 cent per gallon (20.0%) decline in wholesale margins resulted primarily from competitive pricing pressure from other wholesalers in the Texas wholesale markets served by the Company.
Merchandise sales improved from $61,652,000 in 1997 to $94,629,000 in 1998. This large increase resulted principally from an increase of 81 stores in the average number of convenience stores in 1998, a 66.0% increase over 1997, which was partially offset by a 4.0% decline in the average weekly merchandise sales to $9,095 per convenience store. Major categories of merchandise sales in 1998 were grocery sales ($49,022,000), deli and restaurant sales ($7,445,000), soft drink sales ($6,443,000), beer and wine sales ($8,305,000), cigarette sales ($21,175,000), fast food sales ($1,968,000), and money order equipment and supplies ($271,000).
The Company's gross profit on merchandise sales increased by $10,708,000 (57.1%) in 1998. This increase came from two sources: the additional merchandise gross profit realized from the stores acquired in December 1997, and an increase in gross margin on merchandise sales to 31.1% in 1998, compared to 30.4% in 1997. This increase in merchandise margins follows a five-year trend of increasing merchandise margins. For example, merchandise margins have increased from 27.7% in 1994 to 31.1% in 1998, representing a 12.3% overall increase during that five-year period.
Miscellaneous revenues increased significantly to $9,719,000 in 1998, representing a $3,452,000 (55.1%) increase in 1998 as compared to 1997, primarily due to the greater number of stores in operation for the full year. Miscellaneous revenues is one area of operations that the Company emphasizes in its efforts to improve profitability. Categories of miscellaneous income include money order fees, lottery ticket revenue, pay phone and calling card income, automated teller machine income, gasoline excise tax handling fees, check cashing fees, game machine income, gain or loss on property sales, interest income, scale charges and copier income.
Direct store expenses (those costs directly attributable to the operation of retail outlets, such as salaries and other personnel costs, supplies, utilities, rent, property taxes, repairs and maintenance, and commissions paid to the operators of the self-service motor fuel outlets) increased by $15,913,000 (56.3%) in 1998, compared to direct store expenses in 1997. This increase was primarily attributable to the 94 stores acquired during December 1997. The remaining increase in these expenses was primarily attributable to increased wage costs, related to the federally mandated minimum wage increase which took effect on September 1, 1997. Since the December 1997 restructuring of FFP Partners, all of the real estate used in the Company's retail operations was retained by FFP Partners and is now leased to the Company. As a result, rent expense increased by $2,628,000 in 1998.
General and administrative expenses increased $3,718,000 (30.7%) in 1998 over 1997. Of this amount, $1,500,000 resulted from increased bad debt expense arising out of the money order operations, a substantial portion of which the Company is currently seeking to recover. In addition, a full year of costs were incurred in 1998 for wages and initial operating costs at the Company's fuel terminal and processing facility opened in mid-1997, and for field supervisory personnel added in December 1997 to manage the 94 additional stores acquired in late 1997.
Depreciation and amortization expenses increased by $148,000 (2.7%) in 1998 reflecting the impact of increased charges related to the Company's significant capital expenditures in the last three years, primarily related to the upgrading of the Company's underground storage tanks to meet 1998 environmental regulatory requirements, the start of operations at the Company's fuel terminal in mid-1997, and depreciation of equipment acquired in the late-1997 acquisition of 94 convenience stores. Offsetting the foregoing was a decline in depreciation expense of $1,203,000 attributable to buildings that were retained by FFP Partners in the December 1997 restructuring.
A $474,000 (28.9%) decrease in net interest expense in 1998, as compared to 1997, was the result of lower interest rates during 1998 and the receipt of interest income of $693,000 from FFP Partners in the second half of 1998. Partially offsetting that reduction in interest expense was additional interest incurred as a result of increased borrowings to fund the Company's financing of its December 1997 purchase of 94 convenience stores, investment in its fuel terminal and processing facility, and purchase of equipment to upgrade its underground storage tanks to meet environmental standards that became effective in December 1998.
As a partnership, the Company paid no federal or state income tax prior to the December 1997 restructuring of FFP Partners. Rather, the income or loss of the Company was allocated to its partners to be included in their respective income tax returns. Because the Company expected to become taxable as a corporation beginning in 1998, applicable accounting pronouncements required it to record a tax liability for those taxes it would have to pay on items of income and expense recognized for financial reporting purposes before 1998 but which would be recognized for tax reporting purposes in 1998 or later years. Accordingly, the Company provided for these deferred tax expenses in its consolidated statements of operations, while the current tax benefit of the deferral of the recognition of income, or the acceleration of expenses, for tax purposes was allocated the Company's partners. The primary items giving rise to differences between financial and tax reporting were differences in the tax bases and depreciation methods of the Company's fixed assets.
In 1996, the Company was able to substantially shorten the lives over which certain buildings used in its retail operations were depreciated for tax purposes. The benefit of this additional tax depreciation was allocated to the Company's partners while the Company was required to record a deferred tax expense related to it. In connection with the December 1997 restructuring of FFP Partners, the ownership of the depreciable real property that gave rise to the large deferred tax provision in 1996 was retained by FFP Partners, which continues as a publicly-traded limited partnership, and not distributed to the Company. Accordingly, the deferred taxes attributable to these buildings were reversed in 1997.
As a corporation, the Company provides for both current and deferred federal and state income tax expense on its earnings or benefit on its loss. For 1998 the Company recorded an income tax benefit of $244,000.
Liquidity and Capital Resources
The majority of the Company's working capital is provided from three sources: (i) liquid, short-term investments since receiving the proceeds of the pay off of a note receivable from FFP Partners in October 1999, (ii) cash flows generated from its operating activities, and (ii) borrowings under its new revolving line of credit facility. The Company believes that these investments, operating activities, and short-term working capital facilities, will provide sufficient liquidity to fund current commitments for operating and capital expenditure programs, as well as to service debt requirements. Actual capital expenditure funding will be dependent on the level of cash flow generated from operating activities and the funds available from financings.
The Company's notes payable at year end 1999 and 1998 were $33,436,000 and $20,380,000, as summarized in the table below:
1999 1998 Type of Loan Purpose of Loan (In thousands)
Bank revolver Operations $0 $2,407 Bank term note Operations 0 6,762 Equipment note Store computers and equipment 0 1,850 Store note Financing of gas only conversion 40 0 Sewer financing Truck stop improvements 85 108 15-year financing 1997 purchase of 94 stores 8,826 9,253 15-year financing 1999 purchase of 11 stores 970 0 15-year financing Refinancing of bank debt 23,515 0 New line of credit Operations 0 0
$33,436 $20,380
Of the total notes payable shown in the table above for 1999, $1,231,000 is classified as short term, and $32,205,000 is long term debt. For 1998, $1,959,000 is classified as short term, and $18,451,000 is long term debt.
In June 1998, the Company refinanced its December 1997 purchase of 94 convenience stores. That financing consists of 44 fully-amortizing loans in the aggregate original principal amount of $9,420,000, an interest rate fixed at 8.66% per annum, maturity dates ranging from 112 to 180 months, and aggregate payments of principal and interest of $101,000 per month.
In June 1999, the Company refinanced all of its prior bank revolving credit facility and term loan and an equipment financing note. That financing consists of 49 fully-amortizing loans in the aggregate original principal amount of $23,800,000, an interest rate fixed at 9.9% per annum, maturity date in 180 months, and aggregate payments of principal and interest of $256,000 per month. The Company has utilized the loan proceeds to repay the above described loans and for general corporate purposes.
In October 1999, FFP Partners repaid all of its indebtedness of $13,249,000 owed to the Company and the Company, in turn, repaid all of its debt of $2,550,000 to FFP Partners. The Company had incurred that debt in February 1999 to purchase inventory and equipment at 14 stores purchased by FFP Partners and leased to the Company at that time.
Since October 1999, those net funds of approximately $10,000,000 provided the Company by the pay off by FFP Partners have been invested in short-term, liquid investments. These funds earned approximately $232,000 (plus interest) in the last two months of 1999 and provide a new source of liquidity for future operations.
In December 1999, the Company obtained a new revolving line of credit providing for borrowings of up to $10,000,000, with the amount available at any time limited to a borrowing base equal to 80% of certain of its trade receivables plus 60% of its inventory at the terminal; provided, however, that any amounts which would cause outstanding borrowings under the facility to exceed $5,000,000 are limited to 140% of the net value of debt and equity securities in the Company's trading account at a brokerage firm. At year end 1999, the borrowing base was $9,800,000, but the Company had not made any draws on such facility, and the net value at the brokerage firm was approximately $5,181,000. The revolving credit facility bears interest at the lender's prime rate plus one percentage point, payable monthly on amounts borrowed, and matures in December 2002. The loans are subject to a Loan Agreement and a Security Agreement between the lender, the Company and two subsidiaries of the Company. The agreement contains numerous, but typical, restrictive covenants including a financial covenant relating to the maintenance of a specified fixed charge coverage ratio of 1.25 to 1, all as defined in the agreement. The loan is secured by all of the Company's trade accounts receivables and inventory at the terminal.
When the Company operated as a publicly-traded limited partnership, it made cash distributions to its partners from time to time to provide funds for them to pay income taxes on the Company's income that was allocated to them. With the change in the Company's tax status to a corporation, management does not currently anticipate that any dividends will be paid on the Company's common stock in the foreseeable future.
The Company's operating activities used $6,521,000 in net cash, compared to providing net cash of $10,389,000 in 1998. Additional cash was required to fund increased inventory at the terminal and receivables on wholesale sales, which resulted from substantially increasing fuel purchases for the Company's terminal and much higher fuel prices at the end of 1999 than at the end of 1998. This increase was offset in part by additional cash flows as a result of operating a greater number of convenience stores in 1999 than in 1998. The Company's investment in property and equipment during 1999 rose to $13,032,000, an increase of $6,245,000 (92.0%) compared to 1998. The Company's 1999 capital expenditures were principally utilized in acquiring new convenience stores and refurbishing Company's stores. In addition, the Company received $14,103,000 from affiliated entities during 1999 in repayment of notes receivable from such entities. Net cash of $16,577,000 was provided by financing activities in 1999, primarily as a result of additional long-term borrowings with fixed interest rates.
Subject to obtaining satisfactory deal terms, the Company in 2000 intends to increase significantly the outright sales of convenience stores and/or the sales of its convenience store to independent operators while retaining a motor fuel concession at those locations. It has identified more than 80 such convenience stores that it would consider converting to gas-only stores in such a manner. The Company may or may not purchase additional convenience stores in 2000 and beyond as the convenience store industry goes through as period of greater competition and consolidation. Any such dispositions or acquisitions will impact the Company's financial results and liquidity.
The Company is party to commodity futures contracts and forward contracts to buy and sell fuel, both of which are used principally to satisfy balances owed on exchange agreements. Both of these types of contracts have off-balance sheet risk as they involve the risk of dealing with others and their ability to meet the terms of the contracts and the risk associated with unmatched positions and market fluctuations. The open positions under these contracts were not significant at year end 1999. {See Note 11 to the Consolidated Financial Statements.}
Over the last few years, the Company's money order sales have increased significantly. For example, money order payables at the end of fiscal year 1996 were $7,809,000, compared to money order payables of $12,749,000 at year end 1999. Money order payables represent those sales of money orders for which the payee of the money order has not yet requested payment. Although the Company collects money order receipts on a daily basis on sales of money orders made by its own stores, the Company relies on receiving timely payment from its third party money order sales agents. In 1998 the Company incurred an additional bad debt loss from its money order operations. The Company is attempting to recover a substantial portion of these losses that were attributable to two reasons: bank encoding errors and fraudulent actions by a third party money order agent. The Company's failure to receive money order payments on a timely basis from its money order agents could negatively impact the Company's liquidity.
The Company had positive working capital of $14,397,000 at the end of 1999, compared to a negative $4,557,000 at year end 1998, an improvement of $18,954,000. In past years, the Company has been able to operate its business with minimal or negative working capital, principally because most of its sales are cash sales and it has received payment terms from vendors. The improvement over 1998 working capital resulted primarily from the following:
(In thousands)
Additional cash and cash equivalents $11,331 Additional trade receivables 6,529 Additional inventories 8,386 Additional short-term investments 3,355 Reduced money order payables 2,441 Reduced notes receivable from affiliates (1,923) Increased accounts payable (6,967) Increased accrued expenses (4,396) Other items 198
$18,954
The Company believes that the availability of funds from its short-term investments, store operations, its new revolving line of credit (as discussed above), and its traditional use of trade credit will permit operations to be conducted in a customary manner.
"Year 2000" Issues
Over the past several years, the Company has prepared for the possible disruptions that might have resulted from the date change to year 2000. No significant year 2000 problems were experienced, and the Company believes that no material exposure to year 2000 issues exist. Total expenditures related to modifications of existing software and conversions to new software for the year 2000 issue were approximately $700,000, of which approximately $350,000 was capitalized.
Inflation and Seasonality
The Company believes inflation can have a material effect on operating results. One example is the upward pressure placed on wages caused by a low unemployment and a robust economy and, for store wages, by the federal minimum wage increases which took effect in 1997 and 1996. Increased costs of in-store merchandise can often be quickly reflected in higher prices to customers, but higher prices tend to reduce the demand for products. The Company's cost and prices for motor fuel and cigarettes increased significantly in 1999. Significant increases in cigarette prices has been caused by a pass through of litigation costs in the tobacco industry. Motor fuel prices rose as a result of a significant increase in the prices charged for refined fuel products, which in turn was caused by a significant increase in crude oil prices. Management cannot make accurate predictions as to future increases in tobacco or fuel prices or in consumer demand for those products. Significant increases in the retail price of motor fuels tend to reduce fuel demand and the Company's gross profit on fuel sales, reduce merchandise sales as fewer customers stop to purchase motor fuel, result in larger write offs of any bad debts on wholesale motor fuel sales that are considered uncollectible, raise the possibility that third party operators of convenience stores and money order sales agents will become more likely to default in paying their obligations to the Company, and raise financing costs to carry accounts receivable and inventories.
The Company's businesses are normally subject to seasonal influences, with higher sales being experienced in the second and third quarters of the year as customers tend to purchase more motor fuel and convenience items, such as soft drinks, other beverages, and snack items, during the warmer months.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is subject to market risks related to variable interest rates and commodity prices. The interest rate calculated under the Company's new line of credit facility is based on the prime rate of interest, which is subject to change and exposes the Company to the possibility of increasing interest rates. However, the Company had not borrowed under that facility at year end 1999. As a result, all of the Company's obligations at year end 1999 were not subject to interest rate risk because it had refinanced such indebtedness with fixed rate financing.
The Company is also subject to the market risk of increasing commodity prices and sometimes attempts to hedge that risk by purchasing commodity futures and forward contracts. An attempt to hedge that risk is subject to risk because the commodities subject to the hedging contract are not the same commodities as those owned by the Company in its business. Open positions under these futures and forward contracts were not significant at year end 1999 or 1998. {See Note 11 to the Consolidated Financial Statements.}
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements filed herewith begin on page.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Reference is made to the Company's Current Report on Form 8-K dated December 29, 1999, which report is hereby incorporated herein by reference.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain portions of the information required to be set forth in this item will be included in the Proxy to be filed by the Company within 120 days of its 1999 fiscal year end regarding its 2000 shareholder meeting. Such information is incorporated herein by this reference.
The following table sets forth the names, ages, positions, and business experience of the Company's executive officers and directors at year end 1999: Name Age Position
John H. Harvison [1] 66 Chairman of the Board and Chief Executive Officer Robert J. Byrnes [1] 59 President, Chief Operating Officer, and Director Craig T. Scott 53 Vice President - Finance, General Counsel, Secretary, Treasurer, and Chief Financial Officer J. D. St. Clair 65 Vice President - Fuel Supply and Distribution and Director Michael Triantafellou 46 Vice President - Retail Operations and Director John W. Hughes [1,2] 58 Director Garland R. McDonald 62 Director John D. Harvison 43 Director E. Michael Gregory 48 Director
------------------------------------- [1] Member of Compensation Committee [2] Member of Audit Committee
John H. Harvison has been Chairman of the Board of the Company and its predecessor since the commencement of the Company's operations in May 1987. Mr. Harvison is a founder and an executive officer of each of the companies from which the Company's initial base of retail outlets was acquired, and has been active in the retail gasoline business since 1958 and in the convenience store business since 1973. In addition, he has been involved in oil and gas exploration and production, the ownership and management of an oil refinery and other personal investments. In January 1995, Mr. Harvison consented to the entry of a cease and desist order by the United States Office of Thrift Supervision that, among other things, prohibits him from participating in any manner in the conduct of the affairs of federally insured depository institutions. This Order was issued in connection with Mr. Harvison's ownership in a federal savings bank and transactions between him (and companies in which he had an ownership interest) and that institution. In consenting to the issuance of the Order, Mr. Harvison did not admit any of the allegations against him and consented to the issuance of the Order solely to avoid the cost and distraction that would be caused by prolonged litigation to contest the positions taken by the Office of Thrift Supervision. Mr. Harvison is the father of John D. Harvison, who is also a director of the Company.
Robert J. Byrnes has been the President of the Company and its predecessor since April 1989 and has been a Director since May 1987. From May 1987 to April 1989, Mr. Byrnes served as Vice President - Truck Stop Operations for the Company. Mr. Byrnes has been, since 1985, the President of Swifty Distributors, Inc., one of the companies from which the Company acquired its initial retail outlets. From 1975 through 1984, Mr. Byrnes was President of Independent Enterprises, Inc., which owned and operated convenience stores and a truck stop. During that period, he was also President of Enterprise Distributing, Inc., a wholesaler of motor fuels. Prior to 1975, Mr. Byrnes was President of Foremost Petroleum Corporation (which is now a subsidiary of Citgo Petroleum Corporation) and was a distribution manager for ARCO Oil & Gas Company. He is currently a director of Plaid Pantries, Inc., an operator of convenience stores headquartered in Beaverton, Oregon.
Craig T. Scott has served as Vice President - Finance, General Counsel, Secretary, and Treasurer of the Company since October 1998. From October 1996 until September 1998, Mr. Scott was engaged in the private practice of law in Dallas and McKinney, Texas. From December 1991 until October 1996, he was employed by Box Energy Corporation as an attorney and as its Executive Vice President. Mr. Scott previously engaged in the practice of law for seven years with large law firms in Dallas, Texas; practiced law in McKinney, Texas for four years; and was the president and co-owner of an oil and gas exploration company for two years. He was previously employed for six years by Arthur Andersen & Co., an international public accounting firm. Mr. Scott obtained a BBA degree from the University of Texas in 1968, a JD degree from the University of Texas School of Law in 1972, and a LLM degree from Southern Methodist University School of Law in 1980. He is a member of the American Institute of Certified Public Accountants, the Texas Society of CPAs, and the State Bar of Texas.
J. D. St. Clair has been Vice President - Fuel Supply and Distribution and a Director of the Company and its predecessor since May 1987. Mr. St. Clair is a founder and an executive officer of several of the companies from which the Company acquired its initial retail outlets. He has been involved in the retail gasoline marketing and convenience store business since 1971. Prior to 1971, Mr. St. Clair performed operations research and system analysis for Bell Helicopter, Inc., from 1967 to 1971; for the National Aeronautics and Space Administration from 1962 to 1967; and Western Electric Company from 1957 to 1962.
Michael Triantafellou was elected Vice President - Retail Operations and a Director of the Company's predecessor in February 1997. He had served as Director of Truck Stops and Food Service Operations for the Company since January 1994. Mr. Triantafellou has been engaged in the truck stop and food service industries since 1976, having held various middle and upper management positions in the truck stop businesses of Truckstops of America (from 1975 to 1980), Bar-B Management (from 1980 to 1985) Greyhound-Dial Corp. (from 1985 to 1993), and Knox Oil of Texas (from 1993 to 1994). Mr. Triantafellou is a 1975 graduate of the Wharton School of the University of Pennsylvania.
John W. Hughes has been a Director of the Company and its predecessor since May 1987. Mr. Hughes is an attorney with the law firm of Garrison & Hughes, L.L.P., in Fort Worth, Texas. From 1991 to 1995 he was an attorney with the firm of Simon, Anisman, Doby & Wilson, P.C., in Fort Worth, Texas. Since 1963, Mr. Hughes has been a partner of Hughes Enterprises, which invests in venture capital opportunities, real estate, and oil and gas.
Garland R. McDonald is employed by the Company to oversee and direct a variety of special projects. He was elected to the Board of the Company's predecessor in January 1990 and had previously served as a Director of the predecessor company from May 1987 through May 1989. He also served as a Vice President of the Company's predecessor from May 1987 to October 1987. Mr. McDonald is a founder and the Chief Executive Officer of Hi-Lo Distributors, Inc., and Gas-Go, Inc., two of companies from which the Company initially acquired its retail outlets. He has been actively involved in the convenience store and retail gasoline businesses since 1967.
John D. Harvison was elected a Director of the Company's predecessor in April 1995. Mr. Harvison has been Vice President of Dynamic Production, Inc., an independent oil and gas exploration and production company since 1977. He previously served as Operations Manager for Dynamic from 1977 to 1987. He also serves as an officer of various other companies that are affiliated with Dynamic that are involved in real estate management and various other investment activities. Mr. Harvison is the son of John H. Harvison, the Chairman of the Board of the Company.
E. Michael Gregory was elected to the Board of the Company's predecessor in September 1995. Mr. Gregory is the founder and President of Gregory Consulting, Inc., an engineering and consulting firm that is involved in the development of products related to the distribution and storage of petroleum products and computer software for a variety of purposes including work on such products and software for the Company. Prior to founding Gregory Consulting in 1988, Mr. Gregory was the Chief Electronic Engineer for Tidel Systems (a division of The Southland Corporation, now known as 7-Eleven, Inc.) where he was responsible for new product concept development and was involved in projects involving the monitoring of fuel levels in underground storage tanks. He is a Registered Professional Engineer in Texas.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required to be set forth in this item will be included in the Proxy to be filed by the Company within 120 days of its 1999 year end regarding its 2000 shareholder meeting. Such information is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required to be set forth in this item will be included in the Proxy to be filed by the Company within 120 days of its 1999 year end regarding its 2000 shareholder meeting. Such information is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required to be set forth in this item will be included in the Proxy to be filed by the Company within 120 days of its 1999 year end regarding its 2000 shareholder meeting. Such information is incorporated herein by this reference.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORT ON FORM 8-K
a) The following documents are filed as part of this Annual Report on Form 10-K:
(1) Financial Statements. The Financial Statements as described in Index to Financial Statements on page hereof.
(2) Financial Statement Schedules. No Financial Statement Schedules are included because they are either not required, not applicable, or the required information is included in the consolidated financial statements or notes thereto.
(3) Exhibits.
3.1 Articles of Incorporation of FFP Marketing Company, Inc. {1} 3.2 Bylaws of FFP Marketing Company, Inc. {1} 10.1 Nonqualified Unit Option Plan of FFP Partners, L.P. {1} 10.2 Form of Ground Lease with affiliated companies. {1} 10.3 Form of Building Lease with affiliated companies. {1} 10.4 Form of Agreement with Product Supply Services, Inc. {1} 10.5 FFP Marketing Company. Inc. Stock Option Plan. {2} 10.6 Form of Secured Promissory Notes executed by FFP Operating Partners, L.P. payable to Franchise Mortgage Acceptance Company, dated February 26, 1999, related to refinancing of convenience stores. {2} 10.7 Form of Secured Promissory Notes executed by FFP Operating Partners, L.P. payable to Franchise Mortgage Acceptance Company, dated June 24, 1999, related to refinancing of 44 convenience stores. {2} 21.1 Subsidiaries of the Registrant. {2} 23.1 Consent of Independent Auditor. {2} 27 Financial Data Schedule. {2} 99.1 Current Report on Form 8-K regarding a change in the Company's certifying accountant, dated December 29, 1999, which report is hereby incorporated herein by reference.
--------------------------------------------------------------
Notes {1} Incorporated by reference to the Company's Form 10-K (file number 1-13727) filed with Commission and effective on or about April 13, 1998. {2} Included herewith.
(b) Current Report on Form 8-K regarding a change in the Company's certifying accountant, dated December 29, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 11, 2000 FFP Marketing Company, Inc. (Registrant)
By: /s/ John H. Harvison John H. Harvison Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this Annual Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated as of April 11, 2000.
/s/ John H. Harvison Chairman of the Board of Directors John H. Harvison and Chief Executive Officer (Principal executive officer)
/s/ Robert J. Byrnes President, Chief Operating Officer, Robert J. Byrnes and Director (Principal operating officer)
/s/ Craig T. Scott Vice President-Finance, Secretary, Craig T. Scott Treasurer, and General Counsel (Principal financial and accounting officer)
/s/ J.D. St. Clair Director J. D. St. Clair
/s/ Michael Triantafellou Director Michael Triantafellou
John W. Hughes Director
Garland R. McDonald Director
/s/ John D. Harvison Director John D. Harvison
E. Michael Gregory Director
Item 8. Index to Financial Statements.
Page Number
Reports of Independent Certified Public Accountants and Independent Auditors' Report Consolidated Balance Sheets as of December 26, 1999, and December 27, 1998 Consolidated Statements of Operations for the Years Ended December 26, 1999, December 27, 1998, and December 28, 1997 Consolidated Statements of Stockholders' Equity/Partners' Capital for the Years Ended December 26, 1999, December 27, 1998, and December 28, 1997 Consolidated Statements of Cash Flows for the Years Ended December 26, 1999, December 27, 1998, and December 28, 1997 Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
The Stockholders of FFP Marketing Company, Inc.:
We have audited the accompanying consolidated balance sheet of FFP Marketing Company, Inc. (successor in interest to FFP Partners, L.P., a Delaware limited partnership) and its subsidiaries as of December 26, 1999, and the related statements of operations, stockholders' equity/partners' capital, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FFP Marketing Company, Inc. and its subsidiaries as of December 26, 1999, and the consolidated results of their operations and their consolidated cash flows for the year ended December 26, 1999, in conformity with accounting principles generally accepted in the United States.
GRANT THORNTON LLP
Dallas, Texas March 31, 2000
Independent Auditors' Report
The Stockholders of FFP Marketing Company, Inc.:
We have audited the accompanying consolidated balance sheet of FFP Marketing Company, Inc. (successor in interest to FFP Partners, L.P., a Delaware limited partnership) and its subsidiaries as of December 27, 1998, and the related consolidated statements of operations, stockholders' equity/partners' capital, and cash flows for each of the years in the two-year period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of FFP Marketing Company, Inc. and its subsidiaries as of December 27, 1998, and the results of their operations and their consolidated cash flows for each of the years in the two-year period then the year ended in conformity with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas March 30, 1999, except as to the final paragraph of Note 6, which is as of April 12, 1999
FFP Marketing Company, Inc. and Subsidiaries Consolidated Balance Sheets December 26, 1999, and December 27, 1998 (In thousands, except share information)
1999 1998 Assets
Current assets - Cash and cash equivalents $20,868 $9,537 Trade receivables, less allowance for doubtful accounts of $976 and $758 in 1999 and 1998, respectively 18,430 11,901 Notes receivable, current portion 1,003 1,078 Notes receivable from affiliates, current portion 878 1,923 Inventories 23,825 15,439 Investments in debt securities and certain equity securities 3,355 0 Deferred tax asset 143 2,334 Prepaid expenses and other current assets 2,093 1,386 Total current assets 70,595 43,598 Property and equipment, net 40,072 33,602 Notes receivable from affiliates, excluding current portion 0 13,058 Other assets, net 7,739 6,782 Total assets $118,406 $97,040
Liabilities and Stockholders' Equity
Current liabilities - Current installments of long-term debt $1,231 $1,959 Current installments of obligations under capital leases 250 401 Accounts payable 23,221 16,254 Money orders payable 12,749 15,190 Accrued expenses 18,747 14,351 Total current liabilities 56,198 48,155 Long-term debt, excluding current installments 32,205 18,421 Obligations under capital leases, excluding current installments 4,627 955 Deferred income taxes 2,365 4,913 Other liabilities 2,046 2,824 Total liabilities 97,441 75,268 Commitments and contingencies Stockholders' equity - Preferred stock ($0.01 par value; 1,000,000 shares authorized; no shares issued and outstanding) 0 0 Common stock ($0.01 par value; 9,000,000 shares authorized; 3,818,747 shares issued and outstanding in 1999 and 1998) 22,235 22,235 Accumulated deficit (1,270) (463) Total stockholders' equity 20,965 21,772 Total liabilities and stockholders' equity $118,406 $97,040
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries Consolidated Statements of Operations Years Ended December 26, 1999, December 27, 1998, and December 28, 1997 (In thousands, except per share information)
1999 1998 1997 Revenues - Motor fuel $378,871 $311,526 $311,495 Merchandise 114,422 94,629 61,652 Miscellaneous 11,086 9,719 6,267 Total revenues 504,379 415,874 379,414 Costs and expenses - Cost of motor fuel 350,233 284,610 289,793 Cost of merchandise 80,685 65,182 42,913 Direct store expenses 50,524 44,154 28,241 General and administrative expenses 14,389 15,831 12,113 Depreciation and amortization 6,724 5,636 5,488 Total costs and expenses 502,555 415,413 378,548 Operating income 1,824 461 866 Interest income 1,376 693 36 Interest expense 3,989 1,861 1,678 Loss before income taxes and extraordinary items (789) (707) (776) Income tax benefit (223) (244) (892) Income (loss) before extraordinary items (566) (463) 116 Extraordinary loss (net of applicable income tax benefit of $134) 241 0 0 Net income (loss) $(807) $(463) $116
Income (loss) before extraordinary items, per share - Basic $(0.15) $(0.12) $0.03 Diluted (0.15) (0.12) 0.03
Net income (loss) per share - Basic (0.21) (0.12) 0.03 Diluted (0.21) (0.12) 0.03
Weighted average number of common shares outstanding - Basic 3,819 3,784 3,779 Diluted 3,819 3,784 3,802
Pro forma information (unaudited) (Note 11) - Historical loss before income taxes - - $(776) Pro forma income tax benefit - - (287) Pro forma net loss - - $(489)
Pro forma net loss per share - Basic - - $(0.13) Diluted - - (0.13)
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity/Partners' Capital Years Ended December 26, 1999, December 27, 1998, and December 28, 1997 (In thousands)
Joint Common Accum. Debt Limited General Treasury Stock Deficit Obligations Partners Partner Units Total
Balance, December 29, 1996 $0 $0 $0 $24,165 $242 $(269) $24,138
Net income 0 0 0 115 1 0 116
Net assets distributed in restructuring transaction 22,202 0 0 (24,280) (243) 269 (2,052)
Reduction of equity resulting from reporting of joint debt obligations in restructuring 0 0 (15,938) 0 0 0 (15,938)
Balance, December 28, 1997 22,202 0 (15,938) 0 0 0 6,264
Net loss 0 (463) 0 0 0 0 (463)
Distribution of amount owed for prior year (70) 0 0 0 0 0 (70)
Increase in equity resulting from restructuring joint debt obligations 0 0 15,938 0 0 0 15,938
Exercise of stock options 103 0 0 0 0 0 103
Balance, December 27, 1998 22,235 (463) 0 0 0 0 21,772
Net loss 0 (807) 0 0 0 0 (807)
Balance, December 26, 1999 $22,235 $(1,270) $0 $0 $0 $0 $20,965
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries Consolidated Statements of Cash Flows Years Ended December 26, 1999, December 27, 1998, and December 28, 1997 (In thousands, except supplemental information)
1999 1998 1997 Cash Flows from Operating Activities - Net income (loss) $(807) $(463) $116 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Depreciation and amortization 6,724 5,636 5,488 Provision for doubtful accounts 651 1,916 199 (Benefit) for deferred income taxes (357) (310) (892) (Gain)loss on sales of property and equipment 307 96 (254) Gain on sales of convenience store operations (38) (445) (30) (Increase) in trading securities (3,355) 0 0 Changes in operating assets and liabilities - (Increase) in trade receivables (7,180) (5,255) (54) (Increase)decrease in inventories (8,386) 381 (3,331) (Increase) in prepaid expenses and other current assets (2,224) (679) (298) Increase in accounts payable 6,967 935 1,169 Increase (decrease) in money orders payable (2,441) 3,891 3,490 Increase in accrued expenses and other liabilities 3,618 4,686 3,067 Net cash provided by (used in) operating activities (6,521) 10,389 8,670
Cash Flows from Investing Activities - Purchases of property and equipment (13,032) (6,787) (17,410) Proceeds from sales of property and equipment 129 82 1,289 Decrease (increase) in notes receivable from affiliates 14,103 (14,555) 0 Decrease in notes receivable 75 12 846 Net cash provided by (used in) investing activities 1,275 (21,248) (15,275)
Cash Flows from Financing Activities - Borrowings (payments) on revolving credit line, net 0 0 (6,823) Proceeds from long-term debt 490,771 589,841 122,884 Payments on long-term debt (477,715) (576,196) (109,563) Borrowings under capital lease obligations 3,985 311 2,522 Payments on capital lease obligations (464) (2,982) (1,270) Proceeds from exercise of stock or unit options 0 103 0 Distributions 0 (70) 0 Net cash provided by financing activities 16,577 11,007 7,750
Net increase in cash and cash equivalents 11,331 148 1,145 Cash and cash equivalents at beginning of year 9,537 9,389 8,244 Cash and cash equivalents at end of year $20,868 $9,537 $9,389
Supplemental Disclosure of Cash Flow Information -
Cash paid for interest $3,884 $1,862 $1,917 Cash paid for estimated Federal income taxes $0 $125 $0 Capitalized interest on purchases of property and equipment $0 $0 $148
Supplemental Schedule of Noncash Investing and Financing Activities -
In conjunction with the December 1997 organizational restructuring of FFP Partners, L.P. that included the formation of the Company (see Note 1), FFP Partners retained prepaid expenses of $196,000 and land and buildings of $18,143,000, and distributed common stock of the Company in the amount of $349,000 to the general partner of FFP Partners. Also in connection with that 1997 restructuring, the Company recorded a reduction in stockholders' equity of $15,938,000 related to debt for which the Company and FFP Partners were jointly liable. The Company restructured that debt in June 1998 and at that time reversed the 1997 stockholders' equity reduction of $15,938,000 (see Note 6).
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 26, 1999, December 27, 1998, and December 28, 1997
1. Basis of Presentation
(a) Organization of Company
FFP Marketing Company, Inc., a Texas corporation (the "Company"), was formed immediately prior to the December 1997 restructuring of FFP Partners, L.P. ("FFP Partners"). In that restructuring, all of the assets and businesses of FFP Partners was transferred to the Company, except that FFP Partners retained the real estate previously used in its retail operations. Unless the context requires otherwise, references in these consolidated financial statements to the "Company" for periods or activities prior to the December 1997 restructuring include the activities of FFP Partners. The net book value of the assets and liabilities retained by FFP Partners has been reflected as a distribution to FFP Partners in the accompanying consolidated statements of stockholders' equity/partners' capital. Accordingly, no gain or loss was recognized as a result of the restructuring.
In the 1997 restructuring of FFP Partners, the holders of its limited partnership interests received one share of common stock of the Company for each limited partnership unit that they owned on December 28, 1997, resulting in each such person owning the same economic interest in the Company as they had held in FFP Partners.
The Company and its subsidiaries are principally engaged in two operating segments: (i) the retail and wholesale sale of motor fuel, merchandise and other products and services at approximately 428 convenience stores, truck stops, and other gasoline outlets ("Retail and Wholesale"), and (ii) the operation of a motor fuel terminal and processing facility ("Terminal Operations") (see Note 17).
The Company conducts its operations through the following subsidiaries:
Entity Date Formed Principal Activity
FFP Operating Partners, December 1986 Operation of convenience L.P., a Delaware stores and other retail limited partnership outlets
Direct Fuels, L.P., a December 1988 Operation of fuel terminal and Texas limited wholesale fuel sales partnership
FFP Financial Services, September Sale of money order services L.P., a Delaware 1990 and supplies limited partnership
Practical Tank September Underground storage tank Management, Inc., a 1993 monitoring Texas corporation
FFP Transportation, September Ownership of tank trailers and L.L.C., a Texas limited 1994 other transportation liability company equipment
FFP Money Order Company, December 1996 Sale of money orders through Inc., a Nevada agents corporation
(b) Consolidation
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
(c) Reclassifications
Certain 1998 and 1997 amounts have been reclassified to conform to 1999 presentation.
2. Significant Accounting Policies
(a) Fiscal Years
The Company prepares its financial statements and reports its results of operations on the basis of a fiscal year which ends on the last Sunday of December. Accordingly, each of the fiscal years ended December 26, 1999, December 27, 1998, and December 28, 1997, consisted of 52 weeks. Year end data in these notes is as of the respective dates above.
(b) Cash Equivalents
The Company considers all highly liquid investments with maturity dates at date of purchase of three months or less to be cash equivalents.
(c) Notes Receivable
The Company evaluates the collectibility of notes receivable in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by Creditors for Impairment of Loans," as amended by SFAS No. 118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and Disclosures." At year end 1999 and 1998, no notes receivable were determined to be impaired.
(d) Inventories
Inventories consist of retail convenience store merchandise and motor fuel products. Merchandise inventories are stated at the lower of cost or market as determined by the retail method. Motor fuel inventories are stated at the lower of cost or market using the first-in, first-out ("FIFO") inventory method.
The Company has selected a single company as the primary grocery and merchandise supplier to its convenience stores and truck stops although certain items, such as bakery goods, dairy products, soft drinks, beer, and other perishable products, are generally purchased from local vendors and/or wholesale route salespeople. The Company believes it could replace any of its merchandise suppliers, including its primary grocery and merchandise supplier, with no significant adverse effect on its operations.
The Company does not have long-term contracts with any suppliers of petroleum products covering more than 10% of its motor fuel supply. Unanticipated national or international events could result in a curtailment of motor fuel supplies to the Company, thereby adversely affecting motor fuel sales. In addition, management believes a significant portion of its merchandise sales are to customers who also purchase motor fuel. Accordingly, reduced availability of motor fuel could negatively impact other facets of the Company's operations.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment acquired under capital leases is stated at the present value of the initial minimum lease payments, which is not in excess of the fair value of the equipment. Depreciation and amortization of property and equipment are provided on the straight-line method over the estimated useful lives of the respective assets, which range from three to 20 years. Leasehold improvements are amortized on the straight-line method over the shorter of the lease term, including option periods, or the estimated useful lives of the respective assets.
(f) Investments in Joint Ventures and Other Entities
Investments in joint ventures and other entities that are 50% or less owned are accounted for by the equity method and are included in other assets, on a net basis, in the accompanying consolidated balance sheets.
(g) Intangible Assets
In connection with the allocation of the purchase price of the assets acquired in 1987 upon the commencement of the Company's operations, $1,093,000 was allocated as the future benefit of real estate leased from affiliates of its former general partner. The future benefit of these leases is being amortized using the straight-line method over 20 years, the term including option periods of such leases.
Goodwill at year end 1999 and 1998 of $1,445,000 and $1,524,000, respectively, is being amortized using the straight-line method over 20 years. The Company assesses the recoverability of goodwill by determining whether the amortization of the balance over the remaining amortization period can be recovered through undiscounted future operating cash flows of the acquired operations. The amount of goodwill impairment, if any, is measured based on projected discounted future operating cash flows using a discount rate reflecting the Company's average cost of funds. The assessment of the recoverability of goodwill would be impacted if anticipated future operating cash flows are not achieved.
(h) Sales of Convenience Store Operations
In 1999 and in past years the Company sold the merchandise operations and related inventories of certain convenience store locations to various third parties in exchange for cash and notes receivable. The notes receivable generally are for terms of five years, require monthly payments of principal and interest, and bear interest at rates ranging from 8% to 11%. Summary information about these sales is as follows:
Gains ------------------------ Number Notes Total Deferred Sold Cash Receivable Proceeds Recognized (at year-end) (In thousands, except number sold)
1999 3 $31 $110 $141 $38 $42 1998 9 312 683 995 445 265 1997 2 66 201 267 30 50
Gains on sales which meet specified criteria, including receipt of a significant cash down payment and projected cash flow from store operations sufficient to adequately service the debt, are recognized upon closing of the sale. Gains on sales which do not meet the specified criteria are recognized under the installment method as cash payments are received. Gains being recognized under the installment method are evaluated periodically to determine if full recognition of the gain is appropriate.
Under these sales, the Company generally retains the real estate or leasehold interests and leases or subleases the store facilities (including the store equipment) to the purchaser under five-year renewable operating lease agreements. The Company usually retains ownership of the motor fuel operations and pays the purchaser of the store commissions based on motor fuel sales. In addition, the new store operators may purchase merchandise under the Company's established buying arrangements.
(i) Environmental Costs
Environmental remediation costs are expensed; related environmental expenditures that extend the life, increase the capacity, or improve the safety or efficiency of existing assets are capitalized. Liabilities for environmental remediation costs are recorded when environmental assessment and/or remediation is probable and the amounts can be reasonably estimated. Environmental liabilities are evaluated independently from potential claims for recovery. Accordingly, the gross estimated liabilities and estimated claims for reimbursement have been presented separately in the accompanying consolidated balance sheets (see Note 14b).
In October 1996, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") 96-1, Environmental Remediation Liabilities. SOP 96-1, was adopted by the Company on December 29, 1997, and requires, among other things, environmental remediation liabilities to be accrued when the criteria of SFAS No. 5, "Accounting for Contingencies," have been met. The SOP also provides guidance with respect to the measurement of remediation liabilities. Such accounting was consistent with the Company's prior method of accounting for environmental remediation costs; therefore, adoption of SOP 96-1 in 1997 did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity.
(j) Motor Fuel Taxes
Motor fuel revenues and related costs of motor fuel in 1999, 1998, and 1997 include federal and state excise taxes of $139,711,000, $116,880,000, and $99,911,000, respectively.
(k) Exchanges
The Company uses the exchange method of accounting for motor fuel exchange transactions. Under this method, such transactions are considered as exchanges of assets with deliveries being offset against receipts, or vice versa. Exchange balances due from others are valued at current replacement costs. Exchange balances due to others are valued at the cost of forward contracts (see Note 12) to the extent they have been entered into, with any remaining balance valued at current replacement cost. Exchange balances due to others at year end 1999 and 1998 were $311,000 and $375,000, respectively.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to existing differences between financial statement carrying amounts of assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such amounts are realized or settled. The effect of a change in tax rates is recognized in income in the period that includes the enactment date.
Under the Revenue Act of 1987, the Company qualified as a publicly-traded partnership until the end of its 1997 fiscal year. Accordingly, the taxable income or loss of the Company was allocated in the income tax returns of the individual partners, and no provision for income taxes was made in the accompanying consolidated financial statements, except for applying the provisions of SFAS No. 109 "Accounting for Income Taxes."
The businesses and activities retained by FFP Partners in connection with its December 1997 restructuring permit it to continue to be treated as a partnership for income tax purposes. However, in connection with the restructuring, FFP Marketing Company, Inc. was organized as a corporation. Accordingly, income tax expense or benefit is recorded in its consolidated financial statements for 1999 or 1998.
(m) Fair Value of Financial Instruments
The carrying amounts of cash, receivables, investments in debt securities and certain equity securities, amounts due under the revolving credit line, and money orders payable approximate fair value because of the short maturity of those instruments. The carrying amount of notes receivable and notes receivable from affiliates approximates fair value, which is determined by discounting expected future cash flows at current rates.
The carrying amount of long-term debt at year end 1999 was $33,436,000. The fair value of such debt at year end 1999 was approximately $32,808,000, based on the Company's current borrowing rate for debt with similar maturities. At year end 1998, the carrying amount of long-term debt was $20,380,000, which approximated fair value because (1) the interest rate on $9,169,000 of such obligations varied with the prime rate, and (2) the fixed rate on the remainder of the long-term obligations at that time, all of which had been incurred in 1998, was not materially different from the year end 1998 borrowing rate available to the Company.
(n) Common Stock
Prior to the December 1997 restructuring of FFP Partners, the capital of the Company consisted of partnership interests. These interests were converted into common stock in connection with the restructuring. The average number of shares shown as outstanding on the statement of operations has been adjusted to reflect the number of common shares that would have been outstanding had the restructuring occurred at the beginning of 1997 and giving effect to the shares that would have been issued to the general partner. Treasury units previously held by the Company (64,778 units, at cost) were retired in 1997 in conjunction with the restructuring.
(o) Income (Loss) per Share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year. Diluted net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the year plus potentially dilutive common shares. At each of year end 1999 and 1998, outstanding options to acquire 231,667 common shares have been excluded from the diluted computation because the effect would have been anti-dilutive. (See Note 10.) A reconciliation of the denominators of the basic and diluted net income (loss) per share computations for 1999, 1998, and 1997 follows:
1999 1998 1997 (In thousands)
Weighted average number of common shares outstanding 3,819 3,784 3,779 Effect of dilutive options 0 0 23 Weighted average number of common shares outstanding, assuming dilution 3,819 3,784 3,802
(p) Dividends to Stockholders/Distributions to Partners
Prior to the December 1997 restructuring of the Company, the Company's distributions to its partners represented a return of capital and were allocated pro rata to the general partner and holders of its limited partnership interests. Because the Company is now a corporation, distributions to its shareholders, if any, would usually be dividends.
(q) Employee Benefit Plan
The Company has a 401(k) profit sharing plan covering all employees who meet age and tenure requirements. Participants may contribute to the plan a portion, within specified limits, of their compensation under a salary reduction arrangement. The Company may make discretionary matching or additional contributions to the plan. The Company did not make any contributions to the plan in 1999, 1998, or 1997.
(r) Use of Estimates
The use of estimates is required to prepare the Company's consolidated financial statements in conformity with generally accepted accounting principles. Although management believes that such estimates are reasonable, actual results could differ from the estimates.
(s) Stock Option Plans
The Company accounts for its outstanding stock options in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. As such, compensation expense is recorded only if the current market price of the underlying stock on the date of grant of the option exceeds the exercise price of the option. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-Based Compensation," which permits entities either to (i) recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant or (ii) continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and earnings per share disclosures for employee option grants made in 1995 and future years as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company elected the second alternative (see Note 10).
(t) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of," requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of such assets to future net cash flows expected to be generated by the assets. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell.
(u) Revenue Recognition
The Company recognizes revenue related to motor fuel and merchandise sales at the time of the sale.
(v) New Accounting Pronouncement
FASB No. 133, "Accounting for Derivative Instruments and Hedging Activities" was issued in June 1998. As amended, this statement is effective for fiscal quarters beginning after January 1, 2001. This statement establishes standards of accounting for and disclosures of derivative instruments and hedging activities. The Company has not yet determined the impact of this statement on its financial condition or results of operation.
3. Investments in Debt Securities and Certain Equity Securities
The Company classified at acquisition all of its investments in debt securities and all of its investments in equity securities that have a readily determinable fair value, other than investments accounted for under the equity method or its investments in consolidated subsidiaries, as trading securities. Trading securities are securities that are bought and held principally for the purpose of a resale in the near term. FASB No. 115, "Accounting for Certain Investments in Debt and Equity Securities", provides that unrealized and realized gains and losses from trading securities are included in earnings. Dividend and interest income from trading securities, including the amortization of premium and discount arising at acquisition, are also included in earnings. In addition to dividend and interest income, the Company's earnings in 1999 included $133,000 from net unrealized holding gains from trading securities and $79,000 from realized gains from trading securities.
4. Property and Equipment
Property and equipment consists of the following:
1999 1998 (In thousands)
Land $1,655 $1,376 Buildings and leasehold improvements 15,013 9,462 Machinery and equipment 62,515 56,051 Construction in progress 123 292 79,306 67,181 Accumulated depreciation and (39,234) (33,579) amortization Total $40,072 $33,602
5. Other Assets
Other assets consist of the following:
1999 1998 (In thousands) Intangible Assets (Note 2g)- Ground leases $1,093 $1,093 Goodwill 1,445 1,524 Other 3,848 3,558 6,386 6,175 Accumulated amortization (3,857) (3,341) 2,529 2,834 Notes receivable 1,059 1,386 Environmental remediation reimbursement 1,283 1,297 claims Investments in joint ventures and other 990 210 entities Other 1,878 1,055
Total $7,739 $6,782
6. Notes Payable and Long-Term Debt
In June 1998 the Company refinanced a loan with an original principal amount of $6,735,000 incurred in connection with its December 1997 acquisition of 94 convenience stores. The refinancing is comprised of 44 loans in the original principal amount of $9,420,000 and bears interest at 8.66% per annum. The loans will be fully amortized at various maturity dates ranging from October 2007 to July 2013 by making principal and interest payments in equal monthly installments over their respective terms. The loans are secured by the Company's assets at 44 of the 94 convenience stores acquired in 1997. At year end 1999 and 1998, $8,825,000 and $9,253,000, respectively, remained outstanding on these loans.
In February 1999 the Company acquired 23 convenience stores and two truck stops. Eleven of the 25 stores are third party leasehold locations where the Company purchased the existing leasehold interest, equipment, and inventory. The Company financed its purchase of those properties with fully-amortizing mortgage loans in the aggregate original principal amount of $1,012,000, with maturity dates ranging from 86 to 180 months, interest payable at a fixed rate of 9.275% per annum, a minimum fixed charge coverage ratio of 1.25 to 1, and aggregate monthly payments of principal and interest of $13,000. At year end 1999, $970,000 remained outstanding on these loans.
The land and building at the remaining 14 of those 25 stores were purchased on the same date by FFP Partners and immediately leased to the Company under real estate leases with a 15-year term. The real estate leases negotiated between FFP Partners and the Company require a total monthly rent payment of $99,000 with a rate of return of approximately 14%. Under generally accepted accounting principles, each real estate lease is treated as two leases: a land lease and a building lease. Each land lease is classified as an operating lease, with monthly payments for all such land leases aggregating $28,000. Each building lease is classified as a capital lease, with monthly payments for all such building leases aggregating $71,000. The amount of rent allocated to the capital lease obligation for the buildings in the original amount of $3,932,000 results in an implicit rate of approximately 20%. As a condition to the Company's acquisition of store operations at those 14 fee locations, the Company was required to guarantee the acquisition indebtedness of $9,550,000 incurred by FFP Partners in its purchase of those stores, including land, building, equipment and inventory. At year end 1999, $9,327,000 remained outstanding on those loans of FFP Partners that were guaranteed by the Company. The Company's scheduled real estate lease payments to FFP Partners will equal or exceed the debt service costs of FFP Partners during the term of the leases.
In February 1999 the Company also purchased inventory and equipment from FFP Partners at those 14 fee locations at a price of $2,692,000 and executed a note payable to FFP Partners for such amount. This note, which was payable in monthly installments with interest at the prime rate, was repaid in full by the Company in October 1999.
In June 1999 the Company refinanced its previous long-term revolving credit facility and term loan with the proceeds of fixed rate financing from a third party lender in the original principal amount of $23,800,000. With the net loan proceeds the Company repaid debts aggregating $19,988,000 and incurred an extraordinary loss of $375,000 ($0.10 per share), before applicable income tax benefit, as a result of prepayment penalties and the write off of previously unamortized loan fees. This new long-term debt is payable in 180 equal, monthly installments with interest at a fixed rate of 9.9% per annum, a minimum fixed charge coverage ratio of 1.25 to 1, and aggregate monthly payments of principal and interest of $256,000. This loan is secured by a lien against the Company's leasehold, equipment, and inventory at 49 specific convenience stores, truck stops and gas-only outlets. At year end 1999, $23,515,000 remained outstanding on these loans.
In December 1999 the Company closed a new revolving credit facility with a third party lender providing for borrowings up to $10,000,000. The amount available at any time under the loan is equal to a borrowing base of 80% of certain trade receivables plus 60% of the Company's inventory at its terminal facility; provided, however, that any draw which would cause outstanding borrowings under the facility to exceed $5,000,000 is limited to 140% of net value of debt and equity securities in the Company's trading account at a brokerage firm. At year end 1999, the Company's borrowing base was approximately $9,800,000, and the net value at the brokerage firm was approximately $5,181,000. The revolving credit facility bears interest at the lender's prime rate plus one percentage point, payable monthly, and matures in December 2002. At year end 1999, no amount was outstanding under the revolving line of credit. The loan is subject to a Loan Agreement and a Security Agreement dated in December 1999 between the lender, the Company and two subsidiaries of the Company. The agreement contains numerous restrictive covenants including, but not limited to, a financial covenant requiring the Company to maintain a minimum fixed charge coverage ratio of 1.25 to 1. Loans under the agreement are secured by all of the Company's trade accounts receivable, its inventories at the terminal, not otherwise encumbered, a negative pledge of its other assets, and a collateral assignment of the Company's note receivable and deed of trust lien against the real properties of FFP Partners.
The amount of long-term debt payments for the next five years is as follows:
(In thousands)
2000 $1,231 2001 1,506 2002 1,580 2003 1,709 2004 1,868 Thereafter 25,542 Total $33,436
At year end 1998, $1,850,000 was outstanding on an equipment loan that the Company had incurred in the original principal amount of $2,076,000. The note had refinanced a prior capital lease obligation, bore interest at 8.93% per annum, and matured in April 2003. The debt required monthly principal and interest payments of $43,000 and was secured by various equipment. In June 1999 the Company repaid this loan in full.
The Company's bank revolving credit line that was paid off in July 1999 provided for borrowings up to $15,000,000, with the amount available at any time limited to a borrowing base equal to 85% of the Company's trade receivables plus 50% of the Company's inventories. On December 27, 1998, the Company's borrowing base was $12,383,000. The revolving credit facility and a term loan in the original principal amount of $8,000,000 executed in October 1997 both bore interest at the lender's prime rate (7.75% at the end of 1998), payable monthly. The term loan required monthly principal payments of $95,000; and both loans were scheduled to mature in November 2000. At December 27, 1998, the total amount outstanding under the revolving line was $2,407,000, and the term loan had an outstanding balance of $6,762,000. The loans were subject to a Loan and Security Agreement dated in October 1997, and amended as of June 1998, between the lender, the Company and two subsidiaries of the Company. The agreement contained numerous restrictive covenants, including financial covenants relating to the maintenance of a specified minimum tangible net worth, a maximum debt to tangible net worth ratio, and a minimum cash flow coverage ratio. At year end 1998, the Company was not in compliance with certain requirements under the loan agreement for the principal reason that the assets and operations of FFP Partners are no longer included in the financial covenant calculations. The lender waived declaring a default due to such noncompliance, and the lender and the Company amended the applicable restrictive covenants so that the Company was in compliance subsequent to December 27, 1998. The loans under the agreement were secured by the Company's trade accounts receivable, inventories and equipment not otherwise encumbered, a negative pledge of its other assets, and a collateral assignment of the Company's note receivable and deed of trust lien against the real properties of FFP Partners. The Company repaid this loan in full in July 1999.
7. Capital Leases
The Company is obligated under noncancelable capital leases for computers and convenience store equipment that begin to expire in 2000. Beginning February 1999, the Company also leases buildings at 14 convenience stores that are classified for accounting purposes as capitalized leases. The building capital lease obligations had an initial obligation of $3,932,000 in February 1999, which had been reduced to $3,897,000 at year end 1999. The gross amount of the assets covered by capital leases and included in property and equipment in the accompanying consolidated balance sheets is as follows:
1999 1998 (In thousands)
Buildings $3,932 $0 Fixtures and equipment 1,980 2,001 Accumulated depreciation and amortization (815) (363)
Totals $5,097 $1,638
The amortization of assets held under capital leases is included in depreciation and amortization expense in the accompanying consolidated statements of operations. Future minimum lease payments under the noncancelable capital leases for years subsequent to 1999 are shown in the following table:
(In thousands)
2000 $1,244 2001 1,225 2002 1,083 2003 885 2004 853 Thereafter 7,819 Total minimum lease payments 13,109 Amount representing interest (8,232) Present value of future minimum lease payments 4,877 Current installments (250)
Obligations under capital leases, excluding current installments $4,627
8. Operating Leases
The Company operates all of its convenience stores and truck stops under long-term operating leases, except for the buildings at the 14 convenience stores classified as capital leases (see Note 7). A significant portion of the leases are with related parties. Certain of the leases have contingent rentals based on sales levels of the locations and/or have escalation clauses tied to the consumer price index. During 1999 the Company extended the lease term of 63 properties leased from FFP Partners to 20 years. Minimum future rental payments (including bargain renewal periods) and sublease receipts for years after 1999 are as follows:
Future Rental Payments --------------------------- Future Related Sublease Parties Others Total Receipts (In thousands)
2000 $3,689 $3,022 $6,711 $1,160 2001 3,607 2,860 6,467 846 2002 3,091 2,751 5,842 615 2003 2,550 2,532 5,082 425 2004 2,550 2,465 5,015 182 Thereafter 32,729 22,743 55,472 5
Totals $48,216 $36,373 $84,589 $3,233
Total rental expense and sublease income in 1999, 1998, and 1997 were as follows:
Rent Expense ----------------------- Related Sublease Parties Others Total Income (In thousands)
1999 $3,745 $3,247 $6,992 $1,683 1998 3,566 3,231 6,797 1,521 1997 915 922 1,837 1,370
9. Accrued Expenses
Accrued expenses in 1999 and 1998 consist of the following:
1999 1998 (In thousands)
Motor fuel taxes payable $12,502 $9,688 Accrued payroll and related expenses 1,704 1,084 Other 4,541 3,579
Totals $18,747 $14,351
10. Stock Option Plan and Nonqualified Unit Option Plan
The Company's Board of Directors initially adopted a Stock Option Plan in July 1998 to provide an incentive for its employees to remain in the service of the Company and to encourage them to apply their best efforts for the benefit of the Company. The plan became null and void because the Company's shareholders did not meet, and therefore did not approve, the plan within one year of the Board's adoption of the plan. As a result, options granted in 1998 for 30,000 shares automatically expired in July 1999. The Company's Board of Directors adopted a similar Stock Option Plan on August 6, 1999 to provide an incentive for its employees to remain in the service of the Company and to encourage them to apply their best efforts for the benefit of the Company. This Stock Option Plan will become null and void if it is not approved by a majority of the Company's shareholders at a meeting held before August 6, 2000.
The plan provides for the granting of stock options to employees for the purchase of shares of the Company's common stock, but subject to a maximum of 1,000,000 shares under the plan for all employees. The exercise price of options is determined by the Board of Directors but may not be less than the fair market value of the shares, defined as 100% of the last reported sales price of the Company's common stock on the last business day prior to the date of the grant, except for employees owning more than 10% of the common stock, for whom the exercise price may not be less than 110% of the fair market value. The plan provides that a stock option agreement shall be entered into between the Company and any employee granted options, which shall set forth a vesting schedule, time period for exercising options, and other provisions regarding the grant of options under the plan.
Prior to the company reorganization in December 1997, FFP Partners maintained a Nonqualified Unit Option Plan and a Nonqualified Unit Option Plan for Nonexecutive Employees. Those plans authorized the granting of options to purchase up to 450,000 and 100,000 Class A Units of FFP Partners, respectively.
The exercise price of each option granted under the unit option plans was determined by FFP Partners but could not be less than the fair market value of the underlying units on the date of grant. All options to acquire Class A Units of FFP Partners under those unit option plans that were outstanding at the completion of the December 1997 restructuring were divided into separate options to purchase Class A Units of FFP Partners and a like number of the Company's common shares. The exercise price for the then existing FFP Partners unit options was allocated among the two new options in proportion to the closing prices on the American Stock Exchange of FFP Partners Class A Units and the Company's common shares. The original and adjusted exercise prices of the options outstanding at year end 1999 under the Non-Qualified Plans ("NQ") and the 1999 Stock Option Plan ("ISO") are as follows:
Original Adjusted Issue Exercise Exercise Options Options Date Type Price Price Outstanding Exercisable
November 1992 NQ $3.7500 $2.5388 138,333 138,333 April 1995 NQ 4.3130 4.0620 25,000 25,000 September 1995 NQ 6.0000 4.7390 25,000 25,000 February 1997 NQ 7.0000 2.9196 13,334 6,667 August 1999 ISO 2.9380 2.9380 30,000 0
Totals 231,667 195,000
All outstanding options at year end 1999 are exercisable with respect to one-third of the shares covered thereby on each of the anniversary dates of their respective grants and will expire 10 years from the date of grant. Upon a change in control of the Company, any unexercisable options will become immediately exercisable.
A summary of activity under the stock option plan and the unit option plans for 1999, 1998, and 1997 follows:
Weighted Number of Exercise Average Class A Price Exercise Units Range Price
Non-Qualified Plan Before Restructuring -
Options outstanding, December 29, 1996 221,999 $3.75 - $7.00 $4.37 Options granted during year 20,000 $4.31 $4.31 Options expired or terminated during year 0 0 0 Options exercised during year 0 0 0 Options outstanding, December 28, 1997 241,999 $3.75 - $7.00 $4.37
Stock Option Plan and Non-Qualifed Plan After Restructuring -
Options outstanding, December 28, 1997 241,999 $3.75 - $7.00 $4.37 Options granted during year 30,000 $4.50 $4.50 Options expired or terminated during year (1,000) $2.54 $2.54 Options exercised during year (39,332) $2.54 - $2.62 $2.92 Options outstanding, December 27, 1998 231,667 $2.54 - $3.22 4.74 Options granted during year 30,000 $2.94 $2.94 Options expired or terminated during year (30,000) $4.50 $4.50 Options exercised during year 0 0 0 Options outstanding, December 26, 1999 231,667 $2.54 - $3.01 $4.74
Options exercisable, December 26, 1999 195,000 $2.54 - $3.03 $4.74
All outstanding options at year end 1999 were originally issued with a 10-year life and have a weighted-average remaining contractual life of 4.6 years.
The per share weighted-average fair value of options granted in 1999, 1998, and 1997, estimated using the Black Scholes option-pricing model, and the underlying assumptions used are:
Underlying Assumptions -----------------------------------------
Estimated Risk-Free Expected Year Fair Dividend Interest Expected Option Granted Value Yield Rate Volatility Life
1999 $1.84 0.0% 6.47% 53% 7 years 1998 3.82 0.0% 6.00% 68% 7 years 1997 2.81 0.0% 6.40% 58% 7 years
The Company applies APB Opinion No. 25 in accounting for its option plans. Accordingly, no compensation cost related to the plans has been recognized in the consolidated financial statements. Had the Company determined compensation under SFAS No. 123, the Company's net income (loss) would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 (In thousands, except per share or per unit information) Net income (loss) - As reported $(807) $(463) $116 Pro forma (851) (510) 53 Net income (loss) per share - As reported - Basic $(0.21) (0.12) 0.03 Diluted (0.21) (0.12) 0.03 Pro forma - Basic $(0.22) (0.13) 0.01 Diluted (0.22) (0.13) 0.01
Pro forma net income (loss) reflects only options granted subsequent to 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income (loss) amounts presented above because compensation cost for options granted prior to 1995 is not considered.
11. Income Taxes
Congress passed legislation in 1996 clarifying that certain buildings used in connection with the retail sale of motor fuel qualified for a substantially shorter depreciable life for tax purposes than was previously being utilized by the Company. In January 1997, the Internal Revenue Service issued a notice explaining how the tax deduction related to the change in the depreciable lives on these assets should be determined. As a result, the Company deducted in 1996 the difference between the tax depreciation previously recorded and the depreciation available using the shorter life and recognized an additional deferred income tax provision of $2,089,000 in the fourth quarter 1996 related to this temporary difference. The current tax benefit of this deduction was allocated to the Company's unitholders, but the deferred tax expense associated with the acceleration of this deduction for tax purposes was reflected in the Company's 1996 consolidated statement of operations. In connection with the December 1997 restructuring of FFP Partners, the buildings which gave rise to this additional deferred income tax provision were retained by FFP Partners. As a result, ownership of the buildings was continued in a partnership format, and the deferred taxes attributable to the real estate assets were reversed in the fourth quarter 1997.
At year end 1999, the Company has a net operating loss carryforward for income tax purposes of $7,100,000. If not utilized, the tax loss carryforward will expire in 2018 and in 2019.
The Company's income tax expense (benefit) for 1999, 1998, and 1997 consists of the following:
1999 1998 1997 (In thousands)
Current federal income tax expense $0 $0 $0 Current state income tax expense 0 66 0 Total current income tax expense (benefit) 0 66 0 Deferred income tax expense (benefit) (357) (310) (892) Income tax expense (benefit) $(357) $(244) $(892)
The Company's income tax expense (benefit) is different from the amount computed by applying the federal income tax rate of 34% to the Company's loss before income taxes for 1999 and 1998. The reasons for the difference are illustrated in the following table:
1999 1998 (In thousands)
Income tax expense (benefit) at statutory rate $(395) $(240) State income tax, net of federal benefit 0 44 Amortization of goodwill 25 25 Meals and entertainment 8 22 State tax rate change at beginning of year 0 (66) Other, net 5 (29) Total income tax expense (benefit) $(357) $(244)
Effective tax rate 30.7% 34.5%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at year end 1999 and 1998 are presented below.
1999 1998 (In thousands)
Deferred tax assets: Accounts receivable, principally due to allowance for doubtful accounts $332 $280 Accrued expenses, principally due to accruals for financial reporting purposes 208 244 Net operating loss carryforward 2,428 2,016 Other, net 284 82
Total deferred tax assets, net $3,252 $2,622
Deferred tax liabilities: Property and equipment, principally due to basis differences and differences in depreciation $(4,553) $(3,956) Notes receivable, principally due to basis differences (489) (681) Other, net (432) (564)
Total deferred tax liabilities $(5,474) $(5,201)
In assessing the ability to realize a deferred tax asset, management considers whether it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of a deferred tax asset is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based upon the scheduled reversal of deferred tax liabilities over the period in which the deferred tax assets are deductible, management believes that it is more likely than not that the Company will realize the benefits of these deductible differences.
The Company has provided unaudited pro forma information for 1997 in the consolidated statement of operations as if the Company had been a taxable corporation for that period. The unaudited pro forma income tax benefit includes the actual deferred income tax benefit recorded by the Company in 1997 of $892,000. This pro forma information has been prepared for comparative purposes only and does not purport to be indicative of results if the Company had been a taxable entity in prior years or of future results of operation.
12. Futures and Forward Contracts
The Company is party to commodity futures contracts with off-balance sheet risk. Changes in the market value of open futures contracts are recognized as gains or losses in the period of change. These investments involve the risk of dealing with others and their ability to meet the terms of the contracts and the risk associated with unmatched positions and market fluctuations. Contract amounts are often used to express the volume of these transactions, but the amounts potentially subject to risk are much smaller.
From time-to-time the Company enters into forward contracts to buy and sell fuel, principally to satisfy balances owed on exchange agreements (see Note 2k). These transactions, which together with futures contracts are classified as operating activities for purposes of the consolidated statements of cash flows, are included in motor fuel sales and related cost of sales and resulted in net gains as follows:
(In thousands) 1999 $74 1998 169 1997 430
Open positions under futures and forward contracts were not significant at year end 1999 and 1998.
13. Related Party Transactions
Two of the Company's officers, its chief executive officer and its vice president-finance, secretary, treasurer, general counsel and chief financial officer, hold similar positions with the sole general partner of FFP Partners. In addition, entities owned directly or indirectly by the Company's chief executive officer, members of his immediate family, and other members of the senior management of the Company have in the past, and intend to do so in the future, engaged in transactions with the Company.
The Company leases real property for some of its retail outlets from FFP Partners. The Company's management believes that the lease rates are comparable to leases that could be entered into with unrelated third parties. No lease payments were made by the Company to FFP Partners in 1997 or other years prior to the December 1997 reorganization. The Company made lease payments of $2,952,000 and $2,628,000 to FFP Partners for its properties in 1999 and 1998, respectively. In addition, the Company began to lease 14 additional properties from FFP Partners in February 1999 in long-term leasing transactions treated as capital leases. Pursuant to those capital leases, the Company paid FFP Partners $675,000 and $35,000 in 1999 as interest expense and reduction of the capital lease obligation, respectively.
The Company also leases real property for some of its retail outlets and some administrative and executive office facilities from various other entities affiliated with the senior management of the Company. During 1999, 1998, and 1997, the Company paid $944,000, $959,000, and $915,000, respectively, to such entities with respect to these leases.
Prior to the December 1997 restructuring of FFP Partners, the Company reimbursed its general partner and its affiliates for salaries and related costs of executive officers and others and for expenses incurred by them in connection with the management of the Company. The reimbursement for 1997 was $763,000.
The Company is not licensed to sell alcoholic beverages in Texas. In July 1991, the Company entered into an agreement with an affiliated company whereby the affiliated company sells alcoholic beverages at the Company's stores in Texas. The agreement provides that the Company will receive rent and a management fee based on the gross receipts from sales of alcoholic beverages at its stores. In July 1997, the agreement was amended to extend the term for five years commencing on the date of amendment. In 1999, 1998, and 1997, the sales recorded by the affiliated company under this agreement were $17,596,000, $12,143,000, and $8,330,000, respectively. The Company received $3,036,000, $2,117,000, and $1,355,000, in 1999, 1998, and 1997, respectively, in rent, management fees, and interest, and such amounts are included in miscellaneous revenues in the consolidated statements of operations. After deducting cost of sales and other expenses related to these sales, including the amounts paid to the Company, the affiliated company had earnings of $176,000, $121,000, and $83,000 in 1999, 1998, and 1997, respectively, as a result of these alcoholic beverage sales. Under a revolving note executed in connection with this agreement, the Company advances funds to the affiliated company to pay for the purchases of alcoholic beverages. Receipts from the sales of such beverages are credited against the note balance. The revolving note provides for interest at 0.5% above the prime rate charged by a major financial institution and had a balance of $878,000 and $780,000 at year end 1999 and 1998, respectively.
The Company purchases certain goods and services (including company automobiles, office supplies, computer software and consulting services, and fuel supply consulting and procurement services) from related entities. Amounts incurred for these products and services were $224,000, $563,000, and $471,000 in 1999, 1998, and 1997, respectively.
In 1980 and 1982, certain companies from which the Company acquired its initial base of retail outlets granted to a third party the right to sell motor fuel at retail for a period of 10 years at self-serve gasoline stations owned or leased by the affiliated companies or their affiliates. All rights to commissions under these agreements and the right to sell motor fuel at wholesale to the third party at such locations were assigned to the Company in May 1987 in connection with the acquisition of its initial base of retail operations. In December 1990, in connection with the expiration or termination of the agreements with the third party, the Company entered into agreements with a company owned and controlled by an affiliated party and members of his family, which grant to the Company the exclusive right to sell motor fuel at retail at these locations. The terms of these agreements are comparable to agreements that the Company maintains with other unrelated parties. In 1999, 1998, and 1997, the Company paid commissions to this affiliated company related to the sale of motor fuel at these locations of $239,000, $318,000, and $323,000, respectively.
During 1997, the Company reimbursed various related companies in the amount of $386,000 for legal fees that benefited the Company. These legal fees had been charged to expense in 1996.
The Company and FFP Partners are parties to a reimbursement agreement pursuant to which FFP Partners reimburses the Company for all direct costs of FFP Partners (such as costs to prepare its annual partnership tax returns, annual audit fees, et al.) plus $200,000 for indirect overhead costs of FFP Partners. For each of 1999 and 1998, FFP Partners paid $200,000 to the Company as the indirect overhead cost reimbursement.
14. Commitments and Contingencies
(a) Uninsured Liabilities
The Company maintains general liability insurance with limits and deductibles management believes prudent in light of the exposure of the Company to loss and the cost of the insurance.
The Company self-insures medical claims up to $45,000 per year for each individual covered by its employee medical benefit plan for supervisory and administrative employees. Such claims above $45,000 are covered by a stop-loss insurance policy. The Company also self-insures medical claims for its eligible store employees. However, claims under the plan for store employees are subject to a $1,000,000 lifetime limit per employee. The Company does not maintain stop-loss coverage for these claims. The Company and its covered employees contribute to pay the self-insured claims and stop-loss insurance premiums. Accrued liabilities include amounts management believes adequate to cover the estimated claims arising prior to a year-end, including claims incurred but not yet reported. The Company recorded expense related to these plans of $205,000, $284,000, and $295,000 in 1999, 1998, and 1997, respectively.
The Company is insured for worker's compensation claims in all states through incurred loss retrospective policies. Accruals for estimated claims (including claims incurred but not reported) have been recorded at year end 1999 and 1998, including the effects of any retroactive premium adjustments.
(b) Environmental Matters
The operations of the Company are subject to a number of federal, state, and local environmental laws and regulations, which govern the storage and sale of motor fuels, including those regulating underground storage tanks. In September 1988, the Environmental Protection Agency ("EPA") issued regulations that require all newly installed underground storage tanks be protected from corrosion, be equipped with devices to prevent spills and overfills, and have a leak detection method that meets certain minimum requirements. The effective commencement date for newly installed tanks was December 22, 1988. Underground storage tanks in place prior to December 22, 1988, must have conformed to the new standards by December 1998. The Company brought all of its existing underground storage tanks and related equipment into compliance with these laws and regulations. At year end 1999 and 1998, the Company recorded liabilities for future estimated environmental remediation costs related to known leaking underground storage tanks of $918,000 and $918,000, respectively, in other liabilities. Corresponding claims for reimbursement of environmental remediation costs of $918,000 and $918,000 were recorded in 1999 and 1998, respectively, as the Company expects that such costs will be reimbursed by various environmental agencies. Prior to 1999, the Company contracted with a third party to perform site assessments and remediation activities on 78 sites located in Texas that are known or thought to have leaking underground storage tanks. Under the contract, the third party will coordinate with the state regulatory authority the work to be performed and bill the state directly for such work. The Company is liable for the $10,000 per occurrence deductible and for any costs in excess of the $1,000,000 limit provided for by the state environmental trust fund. The Company does not expect that the costs of remediation of any of these 35 sites will exceed the $1,000,000 limit. The assumptions on which the foregoing estimates are based may change and unanticipated events and circumstances may occur which may cause the actual cost of complying with the above requirements to vary significantly from these estimates.
Environmental expenditures incurred to comply with environmental laws and regulations were $3,126,000, $2,849,000, and $1,665,000 in 1999, 1998, and 1997, respectively (including capital expenditures of $2,610,000, $2,418,000, and $1,267,000).
The Company does not maintain insurance covering losses associated with environmental contamination. However, all the states in which the Company owns or operates underground storage tanks have state operated funds which reimburse the Company for certain cleanup costs and liabilities incurred as a result of leaks in underground storage tanks. These funds, which essentially provide insurance coverage for certain environmental liabilities, are funded by taxes on underground storage tanks or on motor fuels purchased within each respective state. The coverage afforded by each state vary but generally provide up to $1,000,000 for the cleanup of environmental contamination and most provide coverage for third-party liability as well. The funds require the Company to pay deductibles ranging from $5,000 to $25,000 per occurrence. The majority of the Company's environmental contamination cleanup activities relate to underground storage tanks located in Texas. Due to an increase in claims throughout the state, the Texas state environmental trust fund has significantly delayed reimbursement payments for certain cleanup costs after September 30, 1992. In 1993, the Texas state fund issued guidelines that, among other things, prioritize the timing of future reimbursements based upon the total number of tanks operated by and the financial net worth of each applicant. The Company has been classified in the category with the lowest priority. Because the state and federal governments have the right, by law, to levy additional fees on fuel purchases, the Company believes these clean up costs will ultimately be reimbursed. However, due to the uncertainty of the timing of the receipt of the reimbursements, the claims for reimbursement of environmental remediation costs, totaling $1,275,000 and $1,297,000 at year end 1999 and 1998, respectively, have been classified as long-term receivables and are included in other assets in the accompanying consolidated balance sheets. Effective December 22, 1998, this trust arrangement was terminated with respect to future, but not past, environmental costs. Therefore, the Company's environmental costs in the future could increase.
(c) Other
The Company is subject to various claims and litigation arising in the ordinary course of business, particularly personal injury and employment related claims. In the opinion of management, the outcome of such matters will not have a material effect on the consolidated financial position or results of operations of the Company.
15. Quarterly Operating Results (Unaudited)
Quarterly results of operations for 1999, 1998, and 1997, adjusted to reflect a restatement of quarterly results for 1998 made in March 2000, were as follows:
First Second Third Fourth Full Quarter Quarter Quarter Quarter Year (In thousands, except per unit data) Total revenues $101,080 $124,982 $134,119 $144,198 $504,379 Total margin 16,914 18,438 18,440 19,669 73,461 Net income (loss) (190) (45) (792) 220 (807) Net income (loss) per share- Basic $(0.05) $(0.01) $(0.21) $0.06 $(0.21) Diluted $(0.05) $(0.01) $(0.21) $0.06 $(0.21)
Total revenues $101,255 $112,562 $104,437 $97,620 $415,874 Total margin 15,789 16,572 17,679 16,042 66,082 Net income (loss) 277 (340) 394 (794) (463) Net income (loss) per share - Basic $0.07 $(0.09) $0.10 $(0.20) $(0.12) Diluted $0.07 $(0.09) $0.10 $(0.20) $(0.12)
Total revenues $92,682 $99,332 $96,059 $91,341 $379,414 Total margin 9,979 11,951 11,734 13,044 46,708 Net income (loss) (1,262) 340 (375) 1,413 116 Net income (loss) per share- Basic $(0.33) $0.09 $(0.10) $0.38 $0.03 Diluted (0.33) 0.09 (0.10) 0.38 0.03
16. Valuation and Qualifying Accounts
The table below sets forth the beginning and ending balances, with additions and deductions, for the Company's allowance for doubtful trade receivables for year end 1999, 1998, and 1997:
Balance at Additions Charge offs, Balance at Beginning Charged net of End of Period Expense recoveries of Period (in thousands)
Allowances for doubtful accounts for trade receivables 1999 $758 $651 $433 $976 1998 809 1,916 1,967 758 1997 883 199 273 809
17. Financial Information by Segment
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," was adopted by the Company in the current year for reporting information about the Company's operating segments. The Company and its subsidiaries are principally engaged in two operating segments: (i) the retail and wholesale sale of motor fuel, merchandise and other products and services at convenience stores, truck stops, and other gasoline outlets ("Retail and Wholesale"), and (ii) the operation of a motor fuel terminal and processing facility ("Terminal Operations"). The Company has identified such segments based on management responsibility. There are no major distinctions in geographical areas served or customer types. The following table sets forth certain information about each segment's financial information in 1999, 1998, and 1997:
Retail and Terminal Wholesale Operations Eliminations Consolidated (In thousands)
Revenues from external sources $494,470 $9,909 $0 $504,379 Revenues from other segment 0 24,564 (24,564) 0 Depreciation and amortization 6,160 564 0 6,724 Interest income 1,376 0 0 1,376 Interest expense 3,989 843 (843) 3,989 (Loss) before income taxes and extraordinary item (180) (609) 0 (789) Extraordinary (loss) before tax effect (375) 0 0 (375) Total assets 109,408 8,998 0 118,406 Capital expenditures 12,626 406 0 13,032
Revenues from external sources $414,625 $1,249 $0 $415,874 Revenues from other segment 0 3,602 (3,602) 0 Depreciation and amortization 5,125 511 0 5,636 Interest income 1,406 0 (713) 693 Interest expense 1,861 713 (713) 1,861 Income (loss) before income taxes 1,301 (2,008) 0 (707) Total assets 89,739 7,301 0 97,040 Capital expenditures 6,605 182 0 6,787
Revenues from external sources $379,064 $350 $0 $379,414 Revenues from other segment 0 2,174 (2,174) 0 Depreciation and amortization 5,194 294 0 5,488 Interest income 427 0 (391) 36 Interest expense 1,678 391 (391) 1,678 Income (loss) before income taxes 42 (818) 0 (776) Total assets 67,844 7,486 0 75,330 Capital expenditures 14,247 3,163 0 17,410