==================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------------
FORM 10-Q
----------------------
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 29, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______ to _______.
Commission file number 1-10717
E-Z SERVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2168773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 N. Loop West, Suite 600, Houston, TX 77092
(Address of principal executive offices, including ZIP code)
713/684-4300
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90
days. Yes X No
-- --
Indicate the number of shares outstanding of each of the
issuer's classes of Common Stock, as of the latest practicable
date.
----------------------------
Common Stock $.01 par value: 69,351,530
(Number of shares outstanding as of May 5, 1998
==================================================================
E-Z SERVE CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 29, 1998
INDEX
Item
Number Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
March 29, 1998 and December 28, 1997 1-2
Consolidated Statements of Operations for the
Three Months ended March 29, 1998 and
March 30, 1997 3
Consolidated Statements of Stockholders' Equity for
the Year ended December 28, 1997 and Three Months
ended March 29, 1998 4
Consolidated Statements of Cash Flows for the
Three Months ended March 29, 1998 and
March 30, 1997 5-6
Notes to Consolidated Financial Statements 7-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13-20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Senior Securities 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 21
SIGNATURES 22
1
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited and In Thousands)
March 29, December 28,
1998 1997
-------- -----------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 8,125 $ 8,093
Receivables, net of allowance for
doubtful accounts 5,670 6,195
Inventory - Merchandise 19,543 18,371
- Gasoline 4,932 5,655
Environmental receivables 3,100 3,100
Prepaid expenses and other current assets 2,593 2,026
------- --------
Total Current Assets 43,963 43,440
Property and equipment, net of
accumulated depreciation and
amortization 108,297 108,557
Environmental receivables 16,104 16,280
Other assets 2,969 3,158
-------- --------
$171,333 $171,435
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
2
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited and In Thousands)
March 29, December 28,
1998 1997
-------- -----------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term obligations $ 1,879 $ 1,881
Trade payables 24,092 25,135
Accrued liabilities and other 16,802 17,282
Current portion of environmental
liability 3,412 3,739
-------- ---------
Total Current Liabilities 46,185 48,037
-------- --------
Long-Term Obligations:
Payable to banks, net of current portion 70,608 66,719
Obligations under capital leases 170 175
Environmental liability 16,959 16,959
Other liabilities, net of current portion 4,835 4,956
-------- -------
Total Long-Term Liabilities 92,572 88,809
-------- --------
Stockholders' Equity:
Common Stock, $.01 par value, authorized
100,000,000 shares; 69,351,530 shares
issued and outstanding at March 29,
1998 and December 28, 1997 694 694
Additional paid-in capital 47,031 47,021
Accumulated deficit subsequent to
March 28, 1993, date of quasi-
reorganization (15,149) (13,126)
-------- --------
Total Stockholders' Equity 32,576 34,589
-------- --------
$171,333 $171,435
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
3
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and In Thousands, except per share amounts)
Three Months Ended
------------------------
March 29, March 30,
1998 1997
----------- -----------
Revenues:
Gasoline (Includes excise taxes of
approximately $22,464 and $35,110
for the three month 1998 and 1997
periods, respectively) $ 66,999 $ 124,046
Convenience store 53,973 73,612
Other income, net 2,152 4,102
---------- ----------
123,124 201,760
---------- ----------
Cost and Expenses:
Cost of sales:
Gasoline 59,262 112,636
Convenience store 36,536 51,394
Operating expenses 19,612 28,033
Selling, general and administrative
expenses 4,615 5,739
Depreciation and amortization 3,192 3,341
Interest expense 2,016 2,369
---------- ----------
125,233 203,512
---------- ----------
Loss before income taxes (2,109) (1,752)
Income tax benefit (86) (613)
---------- ----------
Net loss (2,023) (1,139)
Preferred Stock dividends and accretion -- (394)
---------- ----------
Net loss attributable to Common Stock $ (2,023) $ (1,533)
========== ==========
Basic loss per common share $ (.03) $ (.02)
========== ==========
Diluted loss per common share $ (.03) $ (.02)
========== ==========
Weighted average common shares
outstanding:
Basic 69,351,530 69,157,992
========== ==========
Diluted 69,351,530 69,157,992
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
4
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited and In Thousands)
Additional
Preferred Common Paid-In Accumulated
Stock Stock Capital Deficit Total
------------ ---------- ---------- --------- ------
Shrs $ Shrs $
---- ---- ------ ----
Balance,
December 29,
1996 76 $ 1 69,120 $691 $56,527 $ (1,935) $ 55,284
Net loss -- -- -- -- -- (11,191) (11,191)
Exercise of
stock
options -- -- 232 3 91 -- 94
Deferred
compensation-
stock
options -- -- -- -- 65 -- 65
Retirement
of Series
C Preferred
Stock (76) (1) -- -- (7,566) -- (7,567)
Dividends -
Series C
Preferred
Stock -- -- -- -- (792) -- (792)
Common Stock
Purchase
Warrants -- -- -- -- 872 -- 872
Dividends - Series H
Preferred
Stock -- -- -- -- (1,743) -- (1,743)
Accretion of Series H
Preferred
Stock -- -- -- -- (1,431) -- (1,431)
Other -- -- -- -- 998 -- 998
---- ---- ---- --- ------ ------- --------
Balance,
December 28,
1997 -- $ -- 69,352 $694 $47,021 $(13,126) $ 34,589
Net loss -- -- -- -- -- ( 2,023) (2,023)
Deferred
compensation-
stock
options -- -- -- -- 10 -- 10
---- ---- ----- ---- ------- ------- --------
Balance,
March 29,
1998 -- -- 69,352 $694 $47,031 $(15,149) $ 32,576
==== ==== ====== ==== ======= ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
5
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and In Thousands)
Three Months Ended
----------------------
March 29, March 30,
1998 1997
--------- ---------
Cash flows from operating activities:
Net loss $ (2,023) $ (1,139)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization -
fixed assets 3,192 3,341
Amortization - deferred financing costs 105 346
Payments for environmental remediation (151) (470)
Payments for removal of underground
storage tanks (8) (79)
Stock option expense 10 16
Gain on sale of assets -- (380)
Changes in current assets and liabilities:
Decrease in accounts and
notes receivable 525 678
(Increase) decrease in inventory (449) 1,676
Increase in prepaid
expenses and other (142) (312)
Decrease in trade payables
and accruals (1,515) (3,028)
Other - net (37) 260
-------- ---------
Net cash provided by (used in)
operating activities (493) 909
-------- ----------
Cash flows from investing activities:
Net proceeds from sale of assets -- 647
Capital expenditures and other
asset additions (2,932) (938)
-------- ---------
Net cash used in investing activities (2,932) (291)
-------- ---------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
6
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Unaudited and In Thousands)
Three Months Ended
-----------------------
March 29, March 30,
1998 1997
--------- -----------
Cash flows from financing activities:
Net borrowings (payments) under
revolving line of credit $ 4,227 $(1,000)
Payments of long-term debt (345) (3,640)
Payments for deferred financing costs (425) (425)
Issuance of Common Stock -- 80
Proceeds from long term debt -- 10
Retirement of Preferred C Stock -- (7,567)
Dividends on Preferred C Stock -- (792)
Issuance of Preferred H Stock, net -- 13,440
------- -------
Net cash provided by financing
activities 3,457 106
------- -------
Net increase in cash and cash equivalents 32 724
Cash and cash equivalents at beginning
of period 8,093 6,333
------- -------
Cash and cash equivalents at the end
of period $ 8,125 $ 7,057
======= =======
Non-cash effect of:
Series H Preferred Stock Dividends $ -- $ 314
------- -------
Supplemental disclosures of
cash flow information:
Net cash paid during the period for:
Interest $ 1,911 $ 2,454
Income taxes -- --
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
7
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands)
NOTE (1) BASIS OF PRESENTATION
- ------------------------------
The consolidated financial statements include the accounts of E-Z
Serve Corporation and its wholly-owned operating subsidiaries, E-Z
Serve Convenience Stores, Inc. ("EZCON"), and E-Z Serve Petroleum
Marketing Company ("EZPET") until its sale on April 22, 1997.
Unless the context indicates to the contrary, the term of
"Company" as used herein should be understood to include
subsidiaries of E-Z Serve Corporation and predecessor
corporations. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally
accepted accounting principles for interim financial information
and with the instructions for preparing Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted
accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the three month period
ended March 29, 1998 are not necessarily indicative of the results
that may be expected for the year ending December 27, 1998. It is
suggested that these condensed consolidated financial statements
be read in conjunction with the consolidated financial statements
and the notes thereto included in the Company's annual report on
Form 10-K for the year ended December 28, 1997.
Certain items in the 1997 consolidated financial statements have
been reclassified to conform with the presentations in the March
29, 1998 consolidated financial statements.
NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------
Reference is made to the Notes to Consolidated Financial
Statements included in the Company's annual report on Form 10-K
for the year ended December 28, 1997.
In February 1997, the FASB issued Statement of Financial
Accounting Standards No. 128 ("SFAS 128") "Earning Per Share".
SFAS 128 specifies new measurement, presentation and disclosure
requirements for earnings per share and is required to be applied
retroactively upon initial adoption. The Company has adopted SFAS
No. 128 effective with the release of December 28, 1997 earnings
data, and accordingly, has restated herein all previously reported
earnings per share data. Basic earnings (loss) per share is based
on the weighted average shares outstanding without any dilutive
effects considered. Diluted earnings per share reflects dilution
from all contingently issuable shares, including options, warrants
and convertible Preferred Stock. Income (loss) attributable to
8
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
Common Stock is the numerator for the basic earnings (loss) per
share computation, and income (loss) attributable to Common Stock,
adjusted for assumed conversions of Preferred Stock and reduction
of preferred dividends, is the numerator for the diluted earnings
per share computation. A reconciliation of the weighted average
common shares outstanding on a basic and diluted basis as of March
29, 1998 and March 30, 1997 is as follows:
March 29, March 30,
1998 1997
---------------- ---------------
Common Per Common Per
Shares Share Shares Share
------ ----- ------ -----
[S] [C] [C] [C] [C]
Weighted average common
shares outstanding - Basic 69,351,530 (.03) 69,157,992 (.02)
Effect of dilutive securities:
Options and warrants -- --
---------- ----------
Weighted average common shares
outstanding - Diluted 69,351,530 (.03) 69,157,992 (.02)
========== ==========
Securities that could potentially dilute basic earnings per share
in the future that were not included in the computation of diluted
earnings per share because to do so would have been antidilutive
are as follows:
March 29, March 30,
1998 1997
---------- ---------
Options and warrants 11,633,000 9,390,000
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("SFAS 130"),
which establishes standards for reporting and display of
comprehensive income and its components. The components of
comprehensive income refer to revenues, expenses, gains and losses
that are excluded from net income under current accounting
standards, including foreign currency translation items, minimum
pension liability adjustments and unrealized gains and losses on
certain investments in debt and equity securities. SFAS 130
requires that all items that are recognized under accounting
standards as components of comprehensive income be reported in a
financial statement displayed in equal prominence with other
financial statements; and the total of other comprehensive income
for a period is required to be transferred to a component of
equity that is separately displayed in a statement of financial
position at the end of an accounting period. SFAS 130 is
effective for both interim and annual periods beginning after
December 15, 1997. The adoption of SFAS 130 in 1998 had no impact
on the Company's consolidated financial statements.
9
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (3) QUASI-REORGANIZATION
- -----------------------------
With the acquisitions of Taylor Petroleum, Inc. and EZCON in 1992,
and with the April 21, 1993 debt restructuring, the Company was
recapitalized and its primary business changed from that of a
gasoline marketer to a convenience store operator. Accordingly,
effective March 28, 1993, the Company's Board of Directors
authorized management to effect a quasi-reorganization. As part
of the quasi-reorganization, the deficit in retained earnings was
eliminated against additional paid-in capital. Retained earnings
in the future will be dated to reflect only the results of
operations subsequent to March 28, 1993. Any future tax benefits
of operating loss and tax credit carryforward items which arose
prior to the quasi-reorganization will be reported as a direct
credit to paid-in capital.
NOTE (4) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
- ------------------------------------------------------
Long-term obligations consist of the following:
March 29, December 28,
1998 1997
---------- ------------
Revolving lines of credit payable to banks $12,727 $ 8,500
Notes payable to banks 59,690 60,000
Current portion (1,809) (1,781)
-------- --------
70,608 66,719
------- -------
Capital lease obligations 240 275
Current portion (70) (100)
------- -------
170 175
------- -------
Total long-term obligations $70,778 $66,894
======= =======
On December 24, 1997, the Company entered into a term credit
facility with FFCA Acquisition Corporation ("FFCA"). The FFCA
credit facility provided for a $51,912 mortgage loan (the
"Mortgage Loan") and an $8,088 equipment loan (the "Equipment
Loan"). The Mortgage Loan is comprised of individual floating
interest rate mortgages on 100 fee properties and fixed rate
mortgages on 48 fee properties. The floating interest rate, which
was set at 9.46% at closing, is adjusted monthly and is equal to
LIBOR plus 3.5%. The floating interest rate at March 29, 1998 was
9.1%. The fixed rate is 9.27%. The Mortgage Loan is amortized
10
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
over 20 years. The Equipment Loan is secured by equipment located
at 104 leasehold sites and mortgages on 49 fee properties. The
Equipment Loan also has a floating interest rate with the same
terms as the Mortgage Loan and is amortized over 7 years. The FFCA
credit facility requires monthly payments on the first day of each
month. These monthly payments, including interest, currently
total approximately $613. A commitment fee of 1% of the total
amount financed was paid at closing. The fee was treated as
deferred financing costs and is being amortized proportionately
over the terms of the loans.
Also, on December 24, 1997 the Company entered into a credit
facility with Congress Financial Corporation and Madeleine L.L.C.
The facility provides a $25,000 Revolving Line of Credit
("Revolver") for working capital and letters of credit subject to
a borrowing base limitation. A commitment fee of 1.25% was paid
at closing. The fee was treated as deferred financing costs and
is being amortized over the term of the loan. The Revolver is
secured by substantially all of the Company's inventories and
receivables and some store equipment. The Revolver matures on
December 23, 1999. The Revolver bears interest on outstanding
cash draws at 2.5% plus the greater of the prime lending rate
(8.5% at March 29, 1998) or 8.5%. At March 29, 1998, there were
$12,727 outstanding borrowings under the Revolver and there were
$6,960 outstanding letters of credit issued primarily for workers
compensation claims. Also, at March 29, 1998 the Company had
$2,901 available on its Revolver. The credit facilities contain
various debt covenants, including a restriction from paying
dividends.
Proceeds from the credit facilities were used (i) to retire the
$45,600 balance outstanding under the Company's prior term loan,
(ii) to retire the $3,500 outstanding under the Company's
revolving line of credit in place at that time, (iii) to redeem
for approximately $15,700, all of the outstanding shares of the
Company's Series H Preferred Stock and (iv) to pay costs
associated with the financing transactions.
On March 11, 1998, as a result of financial covenant violations by
the Company at December 28, 1997, the credit facility with
Congress Financial Corporation and Madeleine L.L.C. was amended
("Amendment No. 1 to Loan and Security Agreement"). The amendment
was deemed effective as of December 24, 1997, and as such, the
Company was in compliance at December 28, 1997 and at March 29,
1998.
NOTE (5) COMMITMENTS AND CONTINGENCIES
The Environmental Protection Agency issued regulations in 1988
that established certain requirements for underground storage
tanks ("USTs") that affect various aspects of the Company's retail
gasoline operations. The regulations require assurances of
insurance or financial responsibility and will require the Company
11
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
to replace or upgrade a certain number of its USTs with systems to
protect against corrosion and overfill/spills and to detect leaks.
The Company has elected to self-insure to meet the financial
responsibility aspects of these regulations.
By December 22, 1998, all USTs must be corrosion protected and
overfill/spill protected. As of March 29, 1998, the Company was
in complete compliance with leak detection standards and 80%
completed with the corrosion and overfill/spill requirements. The
Company estimates that it will make additional capital
expenditures of $1,500 in 1998 to be in full compliance with the
regulations by the December 22, 1998 deadline.
Additionally, the Company estimates that the total future cost of
performing remediation on contaminated sites will be approximately
$20,371, of which approximately $18,752 are probable of
reimbursement by state trust funds.
On April 22, 1997, the Company entered into an agreement with
Environmental Corporation of America ("ECA") whereby ECA replaced
the previous environmental consulting firm at all existing
contaminated sites with the exception of approximately 25 sites in
Florida. Under this agreement ("Direct Bill Agreement"), ECA
remediates the sites and files for reimbursement from the
applicable state. The Company experiences no cash flows for these
sites, other than the cost of the deductible and the cost to
remediate any sites deemed non-qualified for reimbursement by the
state. The agreement poses no exposure to the Company in the
event that payments from the state trust funds are delayed or
denied. With the Direct Bill Agreement, the future cash flows to
the Company for remediating contaminated sites is approximately
$1,619. However, the Company is ultimately responsible for the
remediation liability, and accordingly, such liabilities remain
recorded on the consolidated balance sheet.
The above estimates are based on current regulations, historical
results, assumptions as to the number of tanks to be replaced and
certain other factors. The actual cost of remediating
contaminated sites and removing tanks may be substantially lower
or higher than the amount reserved due to the difficulty in
estimating such costs and due to potential changes in regulations
or state reimbursement programs.
The Company and its subsidiaries are involved in various lawsuits
incidental to its business. The Company's internal counsel
monitors all such claims and the Company has made accruals for
those which it believes are probable of payment. In management's
opinion, an adverse determination would not have a material effect
on the Company and its subsidiaries, individually or taken as a
whole. In the case of administrative proceedings regarding
environmental matters involving governmental authorities,
management does not believe that an imposition of monetary
sanctions would exceed $100.
12
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (6) REDEEMABLE PREFERRED STOCK
On January 27, 1997, the Company sold 140,000 shares of its newly
issued Series H Preferred Stock, ("Series H Preferred Stock") to
the same major stockholders that held substantially all of the
Company's Series C Preferred Stock. The Series H Preferred Stock
was entitled to receive semi-annual dividends at the rate of 13%
per annum paid in additional shares of Series H Preferred Stock
on January 20 and July 20 of each year beginning July 20, 1997.
As such, on July 20, 1997, the Company issued to the existing
Series H Preferred Stock stockholders, 9,100 shares as dividends.
The Series H Preferred Stock had no voting rights, but ranked
senior to any capital stock or other equity securities of the
Company. The Series H Preferred Stock had a liquidation value of
$14,000 and was recorded at a net amount of $12,568 after
deducting issuance fees of $560 and the value of the 960,000
warrants of $872. The excess of the liquidation value over the
carrying value was to be accreted monthly over the three-year
mandatory redemption period. Net proceeds of $13,440 from the
sale of the Series H Preferred Stock were used by the Company in
the following manner: $8,359 to redeem all of the 75,656
outstanding shares, plus all accrued but unpaid dividends of the
Company's Series C Preferred Stock; and $5,081 for general
corporate purposes, including paying down a portion of amounts
outstanding under the revolving line of credit in place at that
time.
On December 24, 1997, the Company refinanced its term loan with
Societe Generale, and a portion of the proceeds were used to
redeem all of the outstanding shares of Series H Preferred Stock.
The remaining $995 of liquidation value over the carrying value of
the Preferred Stock was charged to additional paid-in capital at
such time. Accrued dividends on the Series H Preferred Stock of
$834 were also paid to the stockholders at the time of redemption.
13
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
The following is Management's discussion and analysis of certain
significant factors which have affected the Company's results of
operations and balance sheet during the period included in the
accompanying consolidated financial statements. Operating data for
the three months ended March 29, 1998 and March 30, 1997 is presented
below:
Results of Operations
-----------------------------
(In thousands except store counts, per gallon prices and margins)
Actual Stores Comparable Stores
------------------ ------------------
March 29, March 30, March 29, March 30,
1998 1997 1998 1997
-------- -------- -------- --------
CONVENIENCE STORE OPERATIONS (1)
- --------------------------------
Merchandise:
Average number of merchandise stores
during the period 488 690 488 488
Merchandise sales $53,973 $ 73,612 $53,973 $53,980
Merchandise sales per
store per month $ 36.9 $ 35.6 $ 36.9 $ 36.9
Gross profit $17,437 $ 22,218 $17,437 $16,558
Gross profit per
store per month $ 11.9 $ 10.7 $ 11.9 $ 11.3
Gross profit percentage 32.31 30.18 32.31 30.67
Gasoline:
Average number of gasoline stores
during the period 468 657 468 468
Gallons sold 66,070 90,397 66,070 65,370
Gallons sold per store per month 47.1 45.9 47.1 46.6
Revenues $66,999 $108,420 $66,999 $77,463
Price per gallon $ 1.01 $ 1.20 $ 1.01 $ 1.18
Gross profit $ 7,737 $ 9,959 $ 7,737 $ 7,024
Gross profit per store per month$ 5.5 $ 5.1 $ 5.5 $ 5.0
Gross profit per gallon $0.1171 $ 0.1102 $0.1171 $0.1074
MARKETER OPERATIONS (2)
- -----------------------
Average number of operating locations
during the period -- 171 -- --
Gallons sold -- 12,772 -- --
Gallons sold per location per month -- 24.9 -- --
Revenues $ -- $ 15,626 -- --
Price per gallon $ -- $ 1.22 -- --
Gross profit (3) $ -- $ 1,451 -- --
Gross profit per location
per month $ -- $ 2.8 -- --
Gross profit per gallon $ -- $ 0.1136 -- --
(1) At March 29, 1998, there were 487 Company operated
convenience stores
(461 of which sold gasoline) and 6 franchised
convenience stores.
However operating results include 488 company operated
convenience
stores, one of which closed on March 29, 1998.
(2) Represents non-company operated gasoline retail outlets
("Marketers")
which were sold on April 22, 1997.
(3) Gross profit is shown before deducting compensation
paid to operators
of locations not operated by the Company of $616,000
for the three
months ended March 30, 1997.
14
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
The Company reported net losses of $2,023,000 and $1,139,000 for
the three month periods ended March 29, 1998 and March 30, 1997,
respectively. The first quarter 1997 loss included a non-
recurring gain of $610,000 related to an insurance settlement in
the Company's favor.
In the first quarter of 1997, the Company implemented a plan to
divest itself of its Marketer operations and of various
convenience stores that did not fit its strategic plan, or were
outside of its primary market area. As a result of the plan,
during 1997 the Company sold its wholly owned subsidiary, EZPET,
20 convenience stores located in the Nashville, Tennessee area, 31
stores in Central Florida and 150 convenience stores located
primarily in Texas, Florida, Kansas and Missouri. These sales
began closing in April 1997 and were completed in January 1998.
Net proceeds from these sales were mandatorily applied to the
Company's term loan in place at that time. The completion of the
divestiture program enabled the Company to reduce the principal
balance during the year to required levels and to refinance the
Company's prior term loan and revolving line of credit by December
28, 1997.
Sales and Gross Profit
- ----------------------
Convenience store merchandise sales decreased 26.7% in the first
quarter of 1998 compared to the first quarter of 1997. Merchandise
sales at comparable stores remained constant in the first quarter
of 1998 as compared to the same 1997 period. For the first
quarter of 1998, merchandise revenue comprised 43.8% of the
Company's total revenue as compared to 36.5% for the first quarter
of 1997.
The average merchandise gross profit margin of 32.31% for the
first quarter of 1998 is up by 2.13 percentage points over the
30.18% reported for the same period of 1997. This margin increase
reflects higher product margins and increased rebates and
allowances. Merchandise gross profit at comparable stores
increased 5.3% in the first quarter of 1998 as compared to the
first quarter of 1997.
Average gross profit per gallon increased 0.69 cents to 11.71
cents per gallon in the first quarter of 1998 as compared to the
first quarter of 1997 reflecting improved market conditions.
Sales volumes at comparable stores increased 1.1% in the first
quarter of 1998 as compared to the first quarter of 1997.
Gasoline gross profit at comparable stores increased 10.2% in the
first quarter of 1998 as compared to the first quarter of 1997.
15
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other Income
- ------------
Other income (which includes money order sales income, gross
profit from the sale of lottery tickets, telephone commissions,
rental income, interest income, franchise fee income, and other)
decreased 47.5% in the three months ended March 29, 1998 as
compared to the first three months of 1997. Other income for the
first three months of 1997 included $610,000 of non-recurring
insurance settlements in the Company's favor. Exclusive of this
non-recurring item, the 1998 decrease in other income over the
comparable period of 1997 would have been 38.4% and is primarily
due to the decline in the number of operating stores in 1998.
Expenses
- --------
Total operating expenses at comparable company operated stores
increased 2.5% for the first quarter of 1998 as compared to the
same period in 1997 as a result of extended operating hours to 24
hours at 85 stores and a minimum wage increase in September 1997.
Operating expenses as a percentage of total revenues on a
comparable store basis were 15.6% for the first quarter of 1998 as
compared to 14.1% for the same period in 1997. Operating expenses
on a comparable store basis, as a percentage of merchandise
revenue, were 35.3% and 34.4% for the first quarters of 1998 and
1997, respectively.
Selling, general and administrative ("SG&A") expenses for the
first quarter of 1998 decreased 19.6% as compared to the first
quarter of 1997. This decrease is primarily due to cost reductions
associated with the Company's divestiture program. On a
comparable store basis, SG&A expenses, as a percent of total
revenue, increased to 3.8% in the first quarter of 1998 from 3.2%
in the first quarter of 1997.
Depreciation and amortization expense decreased 4.5% in the three
months ended March 29, 1998 as compared to the same period in 1997
due to the lower number of operating stores.
Interest expense decreased $353,000 for the three month period
ended March 29, 1998 as compared to the same period in 1997 due to
decreased debt financing costs as a result of the December 1997
debt refinancing.
Inflation
- ---------
The Company believes inflation has not had a material effect on
its results of operations. The Company does, however, experience
short-term fluctuations in its gasoline gross profit margins as a
result of changing market conditions for the supply and demand of
gasoline.
16
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
The following table sets forth key balance sheet amounts and
corresponding ratios for periods included in the accompanying
consolidated financial statements:
March 29, December 28,
1998 1997
---------- ------------
Current assets $43,963,000 $43,440,000
Current liabilities $46,185,000 $48,037,000
Current ratio 0.95:1 0.90:1
Long-term debt (including related
parties, capital leases and other) $70,778,000 $66,894,000
Stockholders' equity $32,576,000 $34,589,000
Long-term debt to equity ratio 2.17:1 1.93:1
Common shares outstanding 69,351,530 69,351,530
Liquidity
- ---------
Due to the nature of the Company's business, most sales are for
cash, and cash provided by operations is the Company's primary
source of liquidity. Receivables relate to credit card sales,
lottery and lotto redemptions, manufacturer rebates, and other
receivables. In addition, the Company finances its inventory
requirements primarily through normal trade credit terms. This
condition allows the Company to operate with a low level of cash
and working capital. The Company had a working capital deficit of
$2,222,000 at March 29, 1998, as compared to a $4,597,000 deficit
at year end 1997. The change is primarily due to a reduction in
trade payables and accruals financed by increased revolver
borrowings. As of March 29,1998, EZCON had $2,901,000 available
on its revolving line of credit with Congress Financial
Corporation and Madeleine L.L.C.
Approximately 54% of the Company's revenues in the first quarter
of 1998 were derived from gasoline sales and, because the
Company acquires 100% of its product on a virtual spot basis,
gross margins are subject to sudden changes as a result of
commodity purchase price variations and retail selling pricing
pressures. Frequently these movements are not in line with each
other which leads to unusually high or low margins. In
addition, attempts by major oil companies and others, including
the Company, to gain market share may place added pressure on
margins and volumes. Instability in the marketplace can lead to
operating results that are unprofitable.
17
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company believes that cash flow from operations and
available line of credit will provide the Company with
sufficient liquidity to conduct its business in an ordinary
manner. However, unanticipated events or a prolonged gasoline
margin squeeze could occur which may cause cash shortfalls to
exist and require the Company to borrow on its revolving line of
credit to a greater extent than currently anticipated, to seek
additional debt financing or to seek additional equity capital
which may or may not be available.
Capital Resources
- -----------------
On December 24, 1997, the Company entered into a term credit
facility with FFCA Acquisition Corporation ("FFCA"). The FFCA
credit facility provided for a $51,912,000 mortgage loan (the
"Mortgage Loan") and an $8,088,000 equipment loan (the "Equipment
Loan"). The Mortgage Loan is comprised of individual floating
interest rate mortgages on 100 fee properties and fixed rate
mortgages on 48 fee properties. The floating interest rate, which
was set at 9.46% at closing, is adjusted monthly and is equal to
LIBOR plus 3.5%. The floating interest rate at March 29, 1998 was
9.1%. The fixed rate is 9.27%. The Mortgage Loan is amortized
over 20 years. The Equipment Loan is secured by equipment located
at 104 leasehold sites and mortgages on 49 fee properties. The
Equipment Loan also has a floating interest rate with the same
terms as the Mortgage Loan and is amortized over 7 years. The FFCA
credit facility requires monthly payments on the first day of each
month. These monthly payments, including interest, currently
total approximately $613,000. A commitment fee of 1% of the total
amount financed was paid at closing. The fee was treated as
deferred financing costs and is being proportionately amortized
over the terms of the loans.
Also, on December 24, 1997 the Company entered into a credit
facility with Congress Financial Corporation and Madeleine L.L.C.
The facility provides a $25,000,000 Revolving Line of Credit
("Revolver") for working capital and letters of credit subject to
a borrowing base limitation. A commitment fee of 1.25% was paid
at closing. The fee was treated as deferred financing costs and
is being amortized over the term of the loan. The Revolver is
secured by substantially all of the Company's inventories and
receivables and some store equipment. The Revolver matures on
December 23, 1999. The Revolver bears interest on outstanding
cash draws at 2.5% plus the greater of the prime lending rate or
8.5%. At March 29, 1998, there were $12,727,000 borrowings under
the Revolver and there were $6,960,000 outstanding letters of
credit issued primarily for workers compensation claims. Also at
March 29, 1998, the Company had $2,901,000 available on its
Revolver. The credit facilities contain various debt covenants,
including a restriction from paying dividends.
Proceeds from the credit facilities were used (i) to retire the
$45,600,000 balance outstanding under the Company's prior term
18
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
loan, (ii) to retire the $3,500,000 outstanding under the
Company's revolving line of credit in place at that time, (iii) to
redeem for approximately $15,700,000, all of the outstanding
shares of the Company's Series H Preferred Stock (discussed below)
and (iv) to pay costs associated with the financing transactions.
On March 11, 1998, as a result of financial covenant violations by
the Company at December 28, 1997, the credit facility with
Congress Financial Corporation and Madeleine L.L.C. was amended
("Amendment No. 1 to Loan and Security Agreement"). The Amendment
was deemed effective as of December 24, 1997, and as such, the
Company was in compliance at December 28, 1997 and at March 29,
1998.
On January 27, 1997, the Company entered into a Securities
Purchase Agreement, ("Purchase Agreement") whereby the Company
issued and sold 140,000 shares of Series H Preferred Stock to
certain of its major stockholders. Net proceeds of $8,359,000
from the sale were used to redeem all of the Company's 75,656
outstanding shares of Series C Preferred Stock and net proceeds of
$5,081,000 were used for general corporate purposes, including
paying down a portion of amounts outstanding under the Company's
revolving line of credit in place at that time. As discussed
above, on December 24, 1997, $15,700,000, from the Company's new
credit facility, was used to redeem all of the outstanding shares
of the Series H Preferred Stock.
Due to capital constraints brought about largely by operating
losses and by the environmental expenditure requirements discussed
below, the Company was unable to properly upgrade its facilities
prior to 1994. However, as a result of improved operating
results, the Company made discretionary capital expenditures of
$7,768,000, and $10,936,000 in 1996 and 1995, respectively.
However, according to the terms of the Company's credit facility
in place at the time, if projected levels of profitability were
not maintained, the Company's capital expenditures could be
constrained. In this regard, based on reduced cash flow in 1996,
discretionary capital expenditures were essentially halted in mid-
year and remained constrained throughout 1997. Discretionary
capital expenditures were $1,305,000 and $334,000 for 1997 and the
first quarter of 1998, respectively.
Management has developed a plan to enhance gasoline facilities
and/or remodel store interiors at a significant number of existing
stores. These facility improvements are projected to yield
increases in sales and profit, however, implementation of the plan
is dependent on the availability of capital. There can be no
assurance the Company will be able to obtain such capital.
Current federal law mandates that, by December 22, 1998, all USTs
must be corrosion protected, overfill/spill protected, and have a
method of leak detection installed. Each UST is governed by
different sections of the regulations which allow for
implementation of these requirements during varying periods of up
19
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
to ten years based on type and age of the individual UST. All
existing USTs must be upgraded to provide corrosion and
overfill/spill protection by December 22, 1998. As of March 29,
1998, the Company was in complete compliance with leak detection
standards and 80% completed with the corrosion and overfill/spill
requirements. The Company estimates that additional expenditures
of $1,500,000 will be necessary to meet these upgrade standards.
Additionally, the Company estimates that expenditures of
approximately $1,619,000 (net of anticipated reimbursements from
state environmental trust funds) will be necessary to perform
remediation on contaminated sites. This estimate is based upon
assumptions as to the number of tanks to be replaced and certain
other factors. The assumptions on which the cost estimates are
based may not materialize, and unanticipated events and
circumstances may occur. As a result, the actual cost of
complying with these requirements may be substantially lower or
higher than the estimated costs. The Company anticipates that
required expenditures relating to compliance with these
regulations will be funded from cash flow from its current
operations.
Under federal tax law, the amount and availability of net
operating loss carryforwards ("NOL") are subject to a variety of
interpretations and restrictive tests under which the utilization
of such NOL carryforwards could be limited or effectively lost
upon certain changes in ownership. After an ownership change,
utilization of a loss corporation's NOL is limited annually to a
prescribed rate times the value of a loss corporation's stock
immediately before the ownership change. During 1992, the Company
experienced an "ownership change" as defined by the Internal
Revenue Code of 1986. The Company's NOL available under the
ownership change rules was approximately $51,000,000 at December
28, 1997. The NOL will expire if not utilized between 2005 and
2012. In addition, the Company has alternative minimum tax NOL
carryforwards of approximately $44,000,000 which are available
over an indefinite period and can be utilized should the Company's
alternative minimum tax liability exceed its regular tax
liability.
Other
- ------
The Company has considered the impact of year 2000 issues on its
computer systems and applications. Management believes that all
systems that will be in use in the year 2000 and beyond are year
2000 compliant. No material future costs are anticipated to be
incurred for the year 2000 issues.
Disclosure Regarding Forward Looking Statement
- ----------------------------------------------
Item 2 of this document includes forward looking statements within
the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934,
as amended. Although the Company believes that the expectations
reflected in such forward looking statements are based upon
20
E-Z SERVE CORPORATION
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
reasonable assumptions, the Company can give no assurance that
these expectations will be achieved. Important factors that could
cause actual results to differ materially from the Company's
expectations include general economic, business and market
conditions, the volatility of the price of oil, competition,
development and operating costs and the factors that are disclosed
in conjunction with the forward looking statements included herein
(collectively the "Cautionary Disclosures"). Subsequent written
and oral forward looking statements attributable to the Company or
persons acting on its behalf are expressly qualified in their
entirety by the Cautionary Disclosures.
21
E-Z SERVE CORPORATION
PART II - OTHER
- ---------------
Item 1. Legal Proceedings
- --------------------------
The Company and its subsidiaries are involved in various
lawsuits incidental to its business. The Company's internal
legal counsel monitors all such claims and the Company has
accrued for those which it believes are probable of payment. In
management's opinion, an adverse determination against the
Company or any of its subsidiaries relating to these suits would
not have a material adverse effect on the Company and its
subsidiaries, taken as a whole. In the case of administrative
proceedings related to environmental matters involving
governmental authorities, management does not believe that any
imposition of monetary sanctions would exceed $100,000.
Item 2. Changes in Securities
- ------------------------------
None.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 6. Exhibits and Reports on form 8-K
- -----------------------------------------
(a) Exhibits:
27 Financial Data Schedule for the period ended March 29,
1998.
(b) On March 4, 1998, the Company filed a Current Report on
Form 8-K in which it described the refinancing of its long term
bank debt.
22
E-Z SERVE CORPORATION
SIGNATURES
--------------
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
E-Z SERVE CORPORATION
---------------------
(Registrant)
DATE: May 8, 1998 /s/ ELIZABETH L. MARSHALL
--------------- ------------------------
Elizabeth L. Marshall
Controller and
Chief Accounting Officer