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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 29, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 number)
2550 North 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)
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant at March 31, 1997, based upon the closing price of these shares
on the American Stock Exchange, was $7,221,095.
Common Stock 69,319,530
(Number of shares outstanding as of March 31, 1997)
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E-Z SERVE CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED DECEMBER 29, 1996
INDEX
Item
Number Page
Part I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . 11
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 12
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 14
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . 41
Part III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . 42
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . 42
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
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PART I
ITEM 1. BUSINESS
General Background
E-Z Serve Corporation, through its wholly-owned subsidiaries (the "Company"),
operated 692 and franchised 10 convenience stores, mini marts, and gas marts at
December 29, 1996 primarily under the names E-Z Serve, Majik Market and Taylor
Food Mart. The Company also retailed motor fuels at 661 of its convenience
stores and at 174 non-company operated retail outlets ("Marketers") under its
proprietary brand name E-Z Serve and a number of major brands such as Citgo,
Conoco, Texaco and Chevron. In addition to marketing motor fuels, company
operated convenience stores are engaged in retail merchandising of traditional
grocery and non-grocery lines associated with such stores.
The Company was organized in 1971 and until 1986 operated a motor fuels
wholesale business, a motor fuels supply and trading business and approximately
800 Marketers in non-urban locations in about 20 states. In 1986, Harken
Energy Corporation ("Harken") acquired the Company from its former owners, and
during 1988 and 1989 the Company acquired 49 convenience stores. In 1991,
pursuant to a rights offering, the Company became independent from Harken, and,
under new management, developed a strategic business plan intended to refocus
the Company's resources towards becoming a leader in the convenience store
industry. In 1992, the Company acquired Taylor Petroleum, Inc. ("Taylor") and
E-Z Serve Convenience Stores, Inc. ("EZCON"), bringing the company operated
convenience store total to 523 and dramatically increasing the Company's
presence in metropolitan markets. In January 1995, the Company acquired Time
Saver Stores, Inc. ("Time Saver"), a chain of 116 convenience stores (14 of
which were franchised) located primarily in New Orleans, and, in July 1995, the
Company acquired Sunshine Jr. Stores, Inc. ("SJS"), a chain of 205 convenience
stores with a strong concentration in the Florida Panhandle. During 1995 and
1996, the Company disposed of or closed 17 and 45 company operated locations,
respectively, and 40 and 30 Marketer locations, respectively, that did not meet
operating objectives. The following table shows the states in which the
Company conducted business as of December 29, 1996:
Company Non-Company
Operated Operated
State Locations Locations Total
------------ ------------ ------------ --------
Florida 161 - 161
Louisiana 128 71 199
Texas 97 27 124
Georgia 71 - 71
Alabama 68 1 69
South Carolina 46 - 46
Mississippi 43 16 59
Tennessee 25 3 28
North Carolina 21 1 22
Kansas 13 - 13
Missouri 8 - 8
Oklahoma 4 8 12
Kentucky 4 8 12
New Mexico 2 - 2
Arkansas 1 2 3
Ohio - 32 32
Other States (4) - 5 5
--- --- ---
Total 692 174 866
--- --- ---
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E-Z Serve Corporation is incorporated in Delaware and maintains its principal
corporate offices at 2550 North Loop West, Suite 600, Houston, Texas 77092; its
telephone number is (713) 684-4300. Substantially all of the Company's
operations are conducted by its wholly-owned subsidiaries, EZCON (for
convenience stores) and by E-Z Serve Petroleum Marketing Company ("EZPET") (for
Marketers). Unless the context indicates otherwise, the term "the Company" as
used herein should be understood to include subsidiaries of E-Z Serve
Corporation and predecessor corporations.
Business Strategy
Prior to 1992, in excess of 50% of the Company's gross profit was derived from
the sale of motor fuels. In 1992, the Company redefined its strategy to
increase per store profitability and growth through the acquisition of
convenience stores. This strategy was intended to increase the proportion of
gross profit derived from convenience store merchandise versus motor fuels and
was established for two reasons. First, merchandise gross margins are
consistently higher and less volatile than gasoline margins, and second,
merchandise sales are less cyclical and less likely to be influenced by
national and international political and economic vagaries.
Although the Company conducts convenience store operations in 15 states, its
primary market area is the southeastern United States and Texas. A major
component of the Company's business strategy is to increase its presence in
this area as evidenced by the acquisitions of Time Saver and SJS. In addition,
the Company plans to divest certain locations outside of its primary marketing
area. Discussions are currently being held with interested parties regarding
these divestitures. Further, each location, whether part of the primary market
area or not, will continually be evaluated to determine if its economic
contribution meets the Company's objectives. Locations that fall short of
minimum requirements will be disposed of or closed. In this regard, the
Company discontinued operations at 45 convenience stores and 30 Marketer
locations during 1996. Four franchise locations were converted to company
operated locations in 1996.
The Company continues to evaluate acquisition opportunities that fit with its
strategy and are available at costs that provide acceptable rates of return.
In evaluating any acquisition, the Company reviews the operating history and
future potential of each unit on the basis of location, competition, cash flow,
demographic trends, and merchandising capability. Additionally, prior to an
acquisition, the Company reviews the environmental compliance of each location.
Depending on the results of such review, the Company will choose not to acquire
the site, negotiate an acceptable indemnification, or factor into the purchase
price of the location the estimated costs required to bring the location into
compliance with existing environmental laws.
The Company's ability to expand further is dependent upon several factors,
including adequacy of acquisition opportunities and availability of sufficient
capital resources. The Company believes that possible acquisition candidates
will continue to exist as the industry continues to consolidate to reduce costs
and as smaller independent operators have difficulty meeting environmental
deadlines. While cash flow and capital availability are currently sufficient
to fund operations, it will be necessary for the Company to fund any identified
acquisitions with new capital which may not be available on terms acceptable to
the Company.
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Convenience Store Operations
In 1996, convenience store merchandise sales accounted for approximately 37% of
the Company's consolidated operating revenues, and motor fuel sales at company
operated convenience stores comprised approximately 53% of consolidated
operating revenues. Average monthly per store merchandise sales were
approximately $37,400, and average monthly convenience store motor fuel sales
were approximately 48,700 gallons. Merchandise sales and gasoline gallons at
comparable locations increased 4.6% and 3.9%, respectively, in 1996 from 1995
levels.
Configuration and Operations
At December 29, 1996, the Company operated 692 and franchised 10 convenience
stores throughout three zones (Eastern, Central and Southern) in 15 states
under the names E-Z Serve (438 locations), Majik Market (118 locations), Taylor
Food Mart (76 locations), and various other names (70 locations). Of these,
223 are owned in fee and 479 are operated under long-term operating lease
arrangements. Most of the stores are located in the southern United States,
with the largest concentration in Florida, Louisiana, Texas and Georgia. The
stores operate seven days a week; 440 are open 24 hours, and the remainder are
generally open from 6 a.m. to 12 a.m. At December 29, 1996, the Company
operated 567 full-size convenience stores (2000-2800 square feet), 103 mini
marts (1200-2000 square feet) and 22 gas marts (400-1200 square feet).
Convenience to the customer is emphasized through location of the store,
accessible parking, merchandise selection, and service. The majority of the
stores (661) market self-service motor fuel with 63 of the locations featuring
"pay at the pump" credit card readers. The stores do not provide automobile
maintenance service, nor do they sell tires, batteries, or other automotive
accessories other than motor oil, antifreeze, and windshield washer fluid. Of
the 661 stores that retail motor fuels, branding arrangements are as follows:
Citgo (345); Texaco (53); Diamond Shamrock (20); Conoco (8); and unbranded
(235). Retail gasoline purchases are generally concluded inside the store
where the customer is encouraged to make additional purchases. Credit card
sales account for approximately 20% of total motor fuel sales.
Merchandising
Store merchandise offered for sale is selected to provide the best response to
customer preferences. Each full-size convenience store typically stocks a
combination of nationally recognized brands and local product selections. This
product mix normally consists of food and non-food items including dry grocery
items, dairy products, candy, bakery goods, alcoholic and non-alcoholic
beverages, tobacco products, health and beauty aids, general merchandise and
periodicals. Offerings will typically include a combination of takeout
packages and immediately consumable products including coffee, fountain
beverages and snacks. Other services include pay telephones, phone cards and
copiers in stores where these items are economical. In addition, virtually all
stores offer money order services, 481 sell lottery tickets, 247 have ATM's or
scrip machines, 52 have hot food delis, 10 offer branded fast food service and
280 have cappuccino machines. Convenience stores generate higher margins than
grocery stores and many other retail outlets. Monthly promotions in key
categories such as beer and soft drinks are normally linked to supplier price
reductions, thus providing additional value to the customer without a dramatic
reduction in store margins. Advertising is conducted through local media
(television, radio, newspaper) and store level signage. In 1996, the Company
continued its comprehensive media advertising program in the greater New
Orleans and Gulf Coast markets. This program provided for the cost to be
shared between the Company and those vendors whose products were promoted.
Merchandise pricing is based on consumer demand and the competitive environment
within guidelines established on a cost of goods basis. Estimated
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sales percentages by principle categories of products sold at company operated
stores in 1996 were as follows:
1996 1995
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Gasoline 58% 58%
Tobacco Products 11 11
Beer/Wine 9 10
Soft Drinks 5 5
Food Service 3 3
Groceries 3 2
Salty Snacks 2 2
Candy 2 2
Publications 1 2
Health/Beauty Aids 1 1
Dairy 1 1
Other 4 3
---- ----
100% 100%
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New merchandising initiatives for 1997 include a category management approach
to marketing which will utilize consumer data to determine product mix and
inventory levels for items within that mix. Improved technology allows
quicker, more accurate processing of information from the stores (See
Management Information Systems). This information coupled with consumer data
supplied by vendor partners and research firms will be used to improve both
product selection and inventory turns on a store-by-store basis. Budgets for
categories, and eventually, individual items within each category will be used
in 1997 to measure the effectiveness of this approach.
Management and Training
Each store is staffed with a manager who is responsible for, among other
things, recruiting and supervising store employees, store safety, cleanliness,
inventory display, in-store advertising, customer service and reporting to the
territory supervisor. Territory supervisors are generally responsible for
eight to ten stores and ensure that the store managers maintain the Company's
uniform standards for the above items. Further, the territory supervisor
oversees the accuracy of operating results reported from the store level. In
addition to their salaries, the store managers participate in a cash incentive
program based on merchandise sales improvement, control of key expense items,
store profitability, and customer service. The territory supervisor's
incentive program is based on store-level earnings less supervisory expenses.
All newly hired store level employees are given mandatory in-store training by
the store manager. This training includes customer service, safety, alcohol
and tobacco sales awareness, robbery and crime prevention, and on-the-job
operational issues. Employees who demonstrate managerial ability are given
additional training and become qualified for promotion to store manager upon
recommendation by an internal review board.
Marketer Operations
In 1996, Marketer operations accounted for approximately 8% of the Company's
total revenues and average monthly motor fuel sales per location were 27,200
gallons. Motor fuel gallons sold at comparable locations decreased 0.1% in
1996 from 1995.
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At December 29, 1996, the Company had 174 operating Marketer locations. The
following table shows, by state, the operating locations selling motor fuels
under the E-Z Serve brand or under a major brand:
E-Z Serve Major Brand Total
State Locations Locations Locations
---------------- --------- ----------- ---------
Kentucky 7 1 8
Louisiana 24 47 71
Mississippi 9 7 16
Ohio 32 - 32
Oklahoma 7 1 8
Texas 15 12 27
Nine Other States 10 2 12
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Total 104 70 174
=== === ===
Of the 70 major brand locations, 40 are Conoco, 25 are Chevron and 5 are CITGO.
Gasoline Sales Station Agreements
At the majority of its Marketer outlets, the Company entered into gasoline
sales station agreements ("GSSA") with independent operators of convenience
stores and other retail facilities pursuant to which the Company installs
equipment used for the sale of retail gasoline products. Historically, a GSSA
had a term of ten years with two five-year renewals at the option of the
Company. Under a GSSA, the operator of the facility provides all labor
necessary for gasoline sales. A GSSA also provides that the operator of the
facility receive compensation under various terms, normally based on gallons
sold or a percentage of gross profit margin. The Company is responsible for
all maintenance costs to its equipment during the term of the agreement and has
the right to remove its equipment from the premises upon termination of the
GSSA.
Downsizing the Marketer Business
In 1991, the Company evaluated the strategic importance and profit contribution
potential of each of its Marketer locations. As a result of this study, the
Company offered for sale all of its California and Arizona locations, as well
as selected locations in several other states. Between 1992 and 1996, the
Company sold 92 of these locations for a combination of cash and notes totaling
approximately $2,960,000 and closed an additional 194 locations. Closed
locations, if unsalable, are abandoned after completion of any environmental
clean-up obligations. In certain circumstances, the Company retains fuel
supply commitments on sold locations and lease payment commitments on vacated
locations. At December 29, 1996, the Company had two fuel supply commitments.
The Company is currently discussing the sale of the Marketer business with
several potential buyers.
Seasonal Trends
Traditionally, motor fuel sales volumes are higher between April and September
and peak in July and August. Convenience store merchandise sales follow a
similar pattern, but the swings are not as dramatic. This seasonality at the
Company's locations is diminished somewhat compared to national norms since
most of the Company's convenience stores are located in the southern U.S. where
the climate is temperate. As stated previously, the Company's ongoing strategy
of increasing the proportion of gross profit from merchandise sales
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should also help moderate seasonal variations. However, it is likely that the
Company will continue to experience higher revenues and profit margins in the
second and third quarters than in the first and fourth.
Suppliers
During 1996, the Company purchased approximately 49% of its store merchandise
from one large wholesale supplier under a seven-year agreement which expires in
December 2001. This relationship allows the Company to enhance rebate and
purchase discount programs provided by national brand manufacturers.
Additionally, the Company believes that it receives better pricing and greater
flexibility with product quantities and mix. Certain products such as
alcoholic beverages, soft drinks, dairy products, and baked goods are purchased
directly from either local suppliers or from the manufacturers' distribution
networks due to legal and trade restrictions and industry practice concerning
the distribution of these products. These suppliers typically have their own
distribution networks and quality control systems.
Motor fuel supply is obtained from two primary sources. Locations that sell
motor fuels under a major brand are supplied through term agreements with major
oil companies. These agreements provide reliable, but not guaranteed, product
supply, competitive pricing (i.e. posted rack which is related to the spot
market), national advertising support, associated brand recognition, and
customer perception of quality. The major oil companies also provide
continuing support for location upgrades and credit card programs which enhance
fuel sales. Locations that sell motor fuels under the Company's trade names
(primarily E-Z Serve and Majik Market) obtain product on a spot basis based
upon the lowest rack price postings at terminals located near these outlets.
At December 29, 1996, approximately 65% of the Company's motor fuel supply
requirement was under contract with five branded suppliers, but the Company has
available, and utilizes, over 40 suppliers. The Company discontinued the
private transport of motor fuel for its own account in May, 1995. All motor
fuel supply is now transported by contracted common carriers from refineries or
product terminals to the Company's retail locations.
There are alternative wholesale merchandise supply sources available to the
Company and management believes that merchandise supply is stable and that
other sources could be obtained if necessary. Motor fuel suppliers in recent
years have had no difficulty meeting the Company's needs; however national or
international events could cause a supply interruption which, if extended in
duration, could have a material adverse effect on the Company's operations and
earnings.
Competition
The Company's business, particularly motor fuel sales, is highly competitive.
In the convenience store merchandise market, the primary competitors are
locally operated convenience or grocery stores (in rural areas) and national or
regional chain operators (in urban areas). Most convenience stores market
similar classes of products, typically stocking over 3,000 items. Competitive
factors include location, advertising, product mix and presentation,
promotions, pricing, and customer service. The Company has established
policies and procedures which address each of these areas, and, as properly
implemented by its management team, allow the Company to effectively compete in
its markets.
Motor fuel competitors include local dealers and jobbers, independent
retailers, independent and chain convenience stores, and integrated oil
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companies. The principal competitive factors affecting the Company's business
are location, product price and quality, facility appearance, and brand
identification. Product differentiation is problematic except in the case of
specific brand preferences. Since most locations offer similar equipment and
service levels, it is difficult to create a perceived value enhancement for the
Company's products. Accordingly, gasoline marketers tend to compete primarily
on the basis of price. Prices are typically advertised on highly visible
signage, thus offering the customer the opportunity to compare and shop prices
at competing locations while still in his or her car. These factors tend to
make motor fuel prices much less stable than convenience store merchandise
prices.
The Company believes that several additional factors allow it to operate
competitively. First, by operating 692 stores, the Company spreads its
corporate overhead over more locations than smaller chains. Secondly, as the
Company has grown in size, it has reduced its product cost through discounts
and rebates associated with volume purchasing. Lastly, in areas such as New
Orleans and the Florida Panhandle, where the Company is a market share leader,
the Company can effectively employ media advertising campaigns intended to
increase sales.
Employees
At December 29, 1996, the Company employed 4,845 people (including part-time
employees), of which 4,460 were employees in convenience stores, 117 were in
territory supervision, and 268 were in management, administrative, and clerical
positions. The Company is not party to any collective bargaining agreements
and has experienced no work stoppages or strikes as a result of labor disputes.
The Company experiences the high rate of turnover of store employees that is
common in the convenience store industry. The Company provides competitive
wage scales and benefits, and considers relations with employees to be
satisfactory.
Management Information Systems
In 1994, the Company implemented a three-phase plan to upgrade its information
systems. Phase I involved the installation of home office hardware and
software to serve as the foundation for the new system. Phase II, which was
completed in early 1996, included the installation of personal computers at all
store locations. With the personal computers, store managers now input
operating results and transmit daily to the corporate office for processing.
Further, this system allows the Company to control prices electronically at the
zone level rather than manually at the store level and provides for quicker
decimination of information to decision-makers. In addition, all field
operating management have computers that can transmit or retrieve data from the
host system in the corporate office. Phase II also provided the necessary base
hardware and software for future implementation of point-of-sale ("POS") product
management.
Phase III will entail the installation of POS hardware (e.g. cash registers
integrated to the personal computer and additional price look up capability and
possibly scanners) and software. When completed, this phase will provide
enhanced product category sales management, significantly enhance inventory
controls and reduce the store personnel's clerical requirements thereby
allowing each store to direct more attention to sales and profitability.
Initial implementation of Phase III is expected by the end of 1997.
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During 1996 and early 1997, the Company also installed software in the personal
computers to print money orders and payroll checks at the stores. This
eliminates the cost of separate money order dispensers and the need to maintain
money order stock at the stores. The printing of weekly payroll checks at the
stores eliminates the cost of overnight mailing from the corporate office.
Trademarks
The trade names "E-Z Serve," "Majik Market", "Taylor Food Marts", "Time Saver",
and "Jr. Food Stores" are registered with the U.S. Patent and Trademark Office.
The Company believes that these service marks are of significant value in the
promotion of the Company's business.
Government Regulation
Regulation of Underground Storage Tanks
At December 29, 1996, the Company owned approximately 2,600 underground storage
tanks ("USTs") that are used for the storage of refined products at its retail
units. The ownership and/or operation of USTs is subject to federal, state,
and local laws and regulations. Federal regulations issued in 1988 establish
requirements for (i) maintaining leak detection systems, (ii) upgrading tank
systems, (iii) taking corrective action in response to leakage, (iv) closing
tanks to prevent future leakage, (v) keeping appropriate records, and (vi)
maintaining evidence of financial responsibility for taking corrective action
and compensating third parties for bodily injury and property damage resulting
from leakage. These regulations provide that the states may take primary
responsibility for administering and enforcing regulatory programs by adopting
requirements that are at least as stringent as the federal standards. Several
states in which the Company operates or has operated (i.e., California) have
adopted programs that are more stringent than the federal requirements.
Violations of the federal regulations may be subject to enforcement orders by
the Environmental Protection Agency ("EPA") or the applicable state agency, as
the case may be, and owners and operators of USTs who fail to comply with an
EPA order alleging a violation of the regulations may be subject to a $25,000
per day civil penalty. A civil penalty of $10,000 per tank per day may also be
imposed by the EPA upon any UST owner who knowingly fails to file any required
notification forms or submits false information with respect thereto or who
fails to comply with any requirement or standard promulgated by the EPA under
these federal regulations. In some situations, the Company can be liable for
cleanup costs, even if the contamination resulted from previous conduct of the
Company that was lawful at the time, or from improper conduct of, or conditions
caused by, previous property owners, lessees or other persons not associated
with the Company. From time to time, claims are made and litigation is brought
against the Company under these and other laws.
Each UST is governed by different sections of the regulations which allow for
implementation of these requirements during varying periods of up to ten years
based on type and age of the individual UST. All new tanks must be corrosion
protected, overfill/spill protected, and have leak detection when installed.
All existing USTs must be upgraded to provide corrosion and overfill/spill
protection by December 22, 1998. The existing USTs can meet corrosion
standards by complying with the standards applicable to new tanks or by being
protected on the interior with an approved coating or a cathodic protection
system. Additionally, all USTs had to meet leak detection standards by
December 22, 1993. The Company has chosen, in most cases, to meet the leak
detection requirements by utilizing Statistical Inventory Reconciliation with
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daily inventory reconciliations. At December 29, 1996, the Company was in
complete compliance with leak detection standards and 50% completed with the
tank upgrade requirements. The Company estimates that it will make capital
expenditures of $3,183,000 and $2,641,000 in 1997 and 1998, respectively, to be
in full compliance with the regulations by the 1998 deadline.
Additionally, the Company estimates that the total future cost of performing
remediation on contaminated sites will be approximately $41,588,000, of which
approximately $34,180,000 is expected to be reimbursed by state trust funds.
Also, the Company anticipates incurring approximately $2,331,000 for the costs
of removing USTs at abandoned locations. During 1995, the Company entered into
an agreement with an environmental consulting firm whereby the consulting firm
assumes responsibility for the cleanup of contaminated sites at approximately
80% of the Company's locations. Under this agreement ("Direct Bill
Agreement"), the consulting firm remediates the sites at its cost and files for
reimbursement from the state. The Company experiences no cash cost for these
sites, other than the cost of the deductible, unless the state does not
reimburse the consulting firm within a period of twenty-four months in which
case the Company is obligated to reimburse the consulting firm. With the
Direct Bill Agreement, assuming full reimbursement by the states to the
consulting firm, the future cash cost to the Company for remediating
contaminated sites decreases to approximately $9,446,000, of which,
approximately $5,396,000 is expected to be reimbursed by state funds. At
December 29, 1996, for work largely completed prior to the Direct Bill
Agreement, the Company had completed the necessary remediation and has
reimbursement claims totaling approximately $7,371,000 with the various states
in which it operates.
The assumptions related to the cost estimates and viability of state trust
funds may not prove accurate, and, unanticipated events and circumstances may
occur. Therefore, the actual cost of complying with these requirements may be
substantially lower or higher than the estimated costs.
The Company is required under EPA regulations to maintain evidence of financial
responsibility for taking corrective action and compensating third parties for
bodily injury and property damage resulting from leakage from USTs. The
Company has elected to satisfy this requirement by the authorized alternative
of self-insuring. In addition, the Company must comply with the necessary
Occupational Safety and Health Administration regulations and the regulations
of various state agencies, including air quality control boards. The Company
has an environmental department that is responsible for management and
adherence to local, state, and federal environmental regulations.
Other Regulations
The sale of alcoholic beverages by the Company is subject to the approval of
state and local regulatory agencies, which approval can be revoked if
substantial or persistent noncompliance with regulations governing the sale of
alcoholic beverages occurs. In addition, retailers of alcoholic beverages may
be held liable for damages caused by individuals that become intoxicated from
consuming beverages purchased from the retailer. Although the Company has
experienced no material liability to date, and has installed policies and
procedures to lessen the potential exposure, there can be no assurance that any
future liability that may arise will not have a material adverse effect on the
Company's operations and earnings.
The U.S. Food and Drug Administration, along with state and local governments,
has undertaken a high degree of enforcement activity with regard to the sale of
certain tobacco products to underage persons. Although the Company has
experienced no material liability to date, substantial or persistent
noncompliance with regulations concerning such sales could lead to revocation
of tobacco sales licenses.
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Executive Officers
The following named persons serve as executive officers of the Company as of
March 31, 1997:
Name Age Position
- ---------------------- --- ------------------------------------
Neil H. McLaurin 52 Chairman of the Board and
Chief Executive Officer
Kathleen Callahan-Guion 45 President and
Chief Operating Officer
John T. Miller 50 Senior Vice President, Chief
Financial Officer, and Secretary
Harold E. Lambert 58 Vice President - Legal and
Assistant Secretary
A brief description of each executive officer is provided below:
Neil H. McLaurin has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since October 1990. He also served as
President of the Company from October 1990 until March 1997. From 1988 to
1990, Mr. McLaurin served as a consultant for L. B. Consulting Co., an
investment company in Houston, Texas. From 1966 to 1988, Mr. McLaurin was
employed by Tenneco, Inc., an integrated oil and gas company, in various
positions, including Vice President of Wholesale Marketing from 1987 to 1988,
and Vice President of Retail Marketing from 1983 to 1987.
Kathleen Callahan-Guion has been President and Chief Operating Officer of the
Company since March 1997. From 1979 to 1997 Ms. Callahan-Guion was employed by
The Southland Corporation, a convenience store chain, in various operating
positions of increasing responsibility including the most recent position of
Vice President, Chesapeake Division. From 1969 to 1979 Ms. Callahan-Guion was
employed by Jewel Food Stores in various positions including Service Manager.
John T. Miller has been Senior Vice President, Chief Financial Officer, and
Secretary of the Company since May, 1989. Mr. Miller's previous experience was
as Controller for GOTCO Ltd., a worldwide manufacturer and marketer of
lubricants, from 1984 to 1989; in various positions including Assistant
Controller for exploration and production of Gulf Oil Corporation from 1974 to
1984; and as a senior auditor with Ernst & Young LLP from 1971 to 1974.
Harold E. Lambert has been Vice President - Legal, and Assistant Secretary of
the Company since August, 1992. Mr. Lambert's prior experience includes
serving as Vice President and Corporate Counsel of EZCON prior to EZCON's
acquisition by the Company, ten years as General Counsel for Munford, Inc., a
New York Stock Exchange listed company which owned and operated 800 convenience
stores, and positions with Service Merchandise Company, Top Value Enterprises,
and the National Soft Drink Association.
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ITEM 2. PROPERTIES
Substantially all property and equipment owned by the Company is subject to
liens under various collateral agreements with its lenders.
Convenience Stores
The Company leases the real property and owns the equipment at 479 of its
convenience store locations and owns in fee simple the real property,
improvements and equipment at 223 of its locations. The leases generally have
initial terms of 10 years with two five-year renewals at the option of the
Company. At December 29, 1996, the Company estimates the average remaining
term of its convenience store leases, including option periods, to be
approximately eleven years.
Marketer Locations
The Company owns and maintains substantially all of the equipment (including
storage tanks, piping, pumps, meters, canopies, signs, lighting, wiring, and
remote control consoles) used to sell refined motor fuels at its Marketer
locations. The Company is granted certain rights to operate and maintain
access to this equipment under marketing agreements with the owners or
operators of the individual locations. At December 29, 1996, the Company
estimates the average remaining term of its Marketer leases to be less than
three years.
Corporate Offices
The Company's corporate offices are located in northwest Houston, Texas where
it leases approximately 39,000 square feet of office space through November
2002. All of the principal executive, accounting and administrative functions
are conducted at the Houston location.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various lawsuits incidental to
its businesses. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 29, 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information for Common Stock
The Company's common stock, par value $0.01 per share ("Common Stock"), is
traded on the American Stock Exchange (Symbol: EZS). The following table
reflects the range of high and low sales prices by quarter as reported by the
American Stock Exchange from December 26, 1994 through December 29, 1996.
1996
---------------------------
High Low
---------- ---------
First Quarter . . . . . . . . . . . . . . . . . . $1 7/16 $1 3/16
Second Quarter . . . . . . . . . . . . . . . . . 2 3/8 1 1/4
Third Quarter . . . . . . . . . . . . . . . . . . 2 11/16 1 11/16
Fourth Quarter . . . . . . . . . . . . . . . . . 1 7/8 1 1/16
1995
--------------------------
High Low
--------- ---------
First Quarter . . . . . . . . . . . . . . . . . . $1 1/2 $15/16
Second Quarter . . . . . . . . . . . . . . . . . 1 7/16 15/16
Third Quarter . . . . . . . . . . . . . . . . . . 1 3/4 15/16
Fourth Quarter . . . . . . . . . . . . . . . . . 1 7/16 1 1/4
Holders of Record
At February 28, 1997, there were approximately 195 holders of record of the
Common Stock.
Dividends
The Company has never declared dividends on its Common Stock. The Company is
restricted from paying dividends by certain of its bank debt covenants (see
Note 6 - Long-Term Obligations and Credit Arrangements in the Notes to
Consolidated Financial Statements). The Company intends to retain any earnings
for internal investment and debt reduction, and does not intend to declare
dividends on its Common Stock in the foreseeable future.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from the
audited Consolidated Financial Statements of the Company, and should be read in
conjunction with the Company's Consolidated Financial Statements and notes
thereto (Item 8 herein) and Management's Discussion and Analysis of Financial
Condition and Results of Operations (Item 7 herein):
Year Ended (a)
--------------------------------------------------------------------------------
December 29, December 31, December 25, December 26, December 27,
1996 1995 1994 1993 1992
------------- ------------ ------------ ------------ ------------
(In thousands, except per share data)
OPERATIONS: (b)(c)
Revenues $861,642 $748,152 $563,191 $605,695 $ 434,314
Income (loss) from operations $(15,075) (d) $ 5,264 $ 5,087 $ 3,329 $ (25,664)(d)
Fully diluted earnings (loss)
per common and common
equivalent share $ (.23) $ .07 $ .07 $ .05 $ (2.62)
ASSETS: (b)(c)
Current assets $ 64,887 $ 81,355 $ 55,712 $ 44,112 $ 51,075
Current liabilities $ 73,606 $ 79,707 $ 48,138 $ 44,655 $ 46,030
-------- -------- -------- --------- --------
Working capital (deficit) $ (8,719) (g) $ 1,648 (f) $ 7,574 (e) $ (543) $ 5,045
======== ======== ======== ========= ========
Total assets $240,405 $263,346 $150,554 $126,645 $140,979
======== ======== ======== ========= ========
LONG-TERM OBLIGATIONS AND EQUITY: (b)(c)
Long-term obligations:
Long-term debt $ 72,395 $ 76,157 (h) $ 14,627 $ 15,867 (h) $ 44,639
Indebtedness to related parties - 25 25 25 4,541
Other long-term obligations $ 39,120 $ 37,297 (i) $ 25,189 (i) $ 11,541 (i) $ 15,134
-------- -------- -------- ---------- --------
Total long-term obligations $111,515 $113,479 $ 39,841 $ 27,433 $ 64,314
======== ======== ======== ========= ========
Stockholders' equity $ 55,284 $ 70,160 $ 62,575 $ 54,557 (j) $ 30,635
======== ======== ======== ========= ========
(a) The Company's fiscal year ends on the last Sunday on or before
December 31. This normally provides a 52-week fiscal year, but
occasionally (e.g. 1995) provides a 53-week fiscal year.
(b) The increases in 1993 operations reflect the Taylor (March, 1992) and
EZCON (July, 1992) acquisitions. The increases in 1995 and 1996
operations and 1995 assets and liabilities reflect the Time Saver
(January, 1995) and SJS (July, 1995) acquisitions. The 1996 assets
include an SFAS 121 impairment provision related to the write-down of
EZPET to fair value.
(c) Certain amounts in prior years have been reclassified to conform to
the presentation used in 1996.
(d) The operating loss in 1992 includes non-recurring charges against
operations of $19,007,000. The 1996 operating loss includes
non-recurring charges against operations of $10,272,000.
(e) The increase in working capital reflects a decrease in current portion
of long-term debt due to the January, 1995 refinancing, and an
increase in receivables from settlements reached with certain of the
Company's insurance carriers regarding California environmental
claims.
(f) The decrease in working capital in 1995 reflects the increase in
current maturities from the new debt related to the Time Saver and SJS
acquisitions and the collection of receivables discussed in (e).
(g) The decrease in working capital in 1996 primarily reflects principal
payments on the Term Loan and an increase in the current portion of
long term debt.
(h) The decrease in 1993 reflects the April 1993 debt restructuring and
the increase in 1995 reflects the new debt related to the Time Saver
and SJS acquisitions.
(i) The decrease in 1993 is due to conversion of EZCON redeemable
preferred stock into the Company's Common Stock. Prior to 1994, the
Company accounted for environmental liabilities net of state trust
fund reimbursement; the increase in 1994 is due to reporting gross
environmental liabilities and receivables, and the increase in 1995 is
due to the Time Saver and SJS acquisitions.
(j) The increase in 1993 reflects issuance of Common Stock and Preferred
Stock of the Company to effect the Taylor and EZCON acquisitions.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 periods included in the accompanying consolidated financial
statements:
Results of Operations
(In thousands except store counts, per gallon prices and margins)
Year Ended
------------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------ ----------- ------------
CONVENIENCE STORE OPERATIONS (1)
- ---------------------------------
Merchandise:
Average number of merchandise
stores during the period 704 618 463
Merchandise sales $316,318 $267,045 $181,129
Merchandise sales per location
per month $ 37.4 $ 36.0 $ 32.6
Gross profit $ 92,704 $ 82,833 $ 54,925
Gross profit per location
per month $ 11.0 $ 11.2 $ 9.9
Gross profit percentage 29.31% 31.02% 30.32%
Motor Fuels:
Average number of motor fuel
stores during the period 678 574 415
Gallons sold 396,568 353,430 274,238
Gallons sold per location
per month 48.7 51.3 55.1
Revenues $459,705 $382,038 $282,530
Price per gallon $ 1.159 $ 1.081 $ 1.030
Gross profit $ 46,302 $ 46,183 $ 32,839
Gross profit per gallon $ 0.1168 $ 0.1307 $ 0.1197
Gross profit per location
per month $ 5.7 $ 6.7 $ 6.6
MARKETER OPERATIONS (2)
- -----------------------
Average number of operating
locations during the period 189 228 258
Gallons sold 61,748 73,333 83,418
Gallons sold per location
per month 27.2 26.8 26.9
Revenues $ 73,174 $ 82,006 $ 90,926
Price per gallon $ 1.185 $ 1.118 $ 1.090
Gross profit (3) $ 7,329 $ 9,853 $ 11,629
Gross profit per gallon $ 0.119 $ 0.1343 $ 0.1394
Gross profit per location
per month $ 3.2 $ 3.6 $ 3.8
- --------------------------------------------------------------------------------
(1) At December 29, 1996, there were 692 company operated convenience
stores (661 of which sold motor fuels) and 10 franchised convenience
stores.
(2) Represents non-company operated motor fuel retail outlets.
(3) Gross profit is shown before deducting compensation paid to operators
of locations not operated by the Company of $3,336, $4,579 and $4,503
for the years 1996, 1995 and 1994, respectively.
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The following table sets forth the percentage to total revenue of certain items
in the Consolidated Statements of Operations:
Percentage of Total Revenue
Year Ended
--------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ -----------
Revenues:
Motor fuels 61.8% 62.0% 66.3%
Convenience store 36.7 35.7 32.2
Other income 1.5 2.3 1.5
----- ----- ----
100.0 100.0 100.0
----- ----- ----
Costs and Expenses:
Cost of sales:
Motor fuels 55.6 54.6 58.5
Convenience store 26.0 24.6 22.4
Operating expenses 13.6 13.5 12.8
Selling, general, and administrative
expenses 3.1 3.5 3.6
Depreciation, amortization and asset
impairment 2.5 1.9 1.0
Interest expense 1.0 0.8 0.3
----- ----- -----
101.8 98.9 98.6
----- ----- -----
Income (loss) before income taxes (1.8) 1.1 1.4
Income tax expense - 0.1 -
Provision in lieu of taxes - 0.3 0.5
----- ----- -----
Net Income (loss) (1.8) 0.7 0.9
===== ===== =====
Overview
The Company reported a net loss of $15,075,000 and net income of $5,264,000 and
$5,087,000 for the years ended December 29, 1996, December 31, 1995, and
December 25, 1994, respectively. Included in the net loss for fiscal year 1996,
is $10,272,000 of non-recurring expense items, $8,870,000 of which were
non-cash. These items include an additional asset impairment provision
pursuant to Statement of Financial Accounting Standards No. 121 ("SFAS 121")
and other costs of $7,393,000 related to the write-down of EZPET to fair value
and the accrual of $2,879,000 for severance and other restructuring costs.
Fiscal 1995 included a non-recurring gain of $3,614,000 (net of tax effect)
related to insurance settlements in the Company's favor. In addition, in the
fourth quarter of 1995, the Company adopted SFAS 121; as a result, 1995
included an asset impairment provision of $2,706,000 (net of tax effect)
related to certain of the Company's fixed asset groups. Fiscal 1994 included
$700,000 (net of tax effect) for a non-recurring gain from insurance
settlements. Without these non-recurring items, net income (loss) in 1996,
1995, and 1994 would have been $(4,803,000), $4,356,000, and $4,387,000,
respectively. Revenues, operating expenses and depreciation expenses increased
in 1996 reflecting a full year of operations from the SJS acquisition.
Interest expense also increased in 1996 resulting from the additional debt
associated with the Time Saver and SJS acquisitions. Revenues and operating
expenses increased in 1995 from the 1994 levels due to the acquisition of Time
Saver and SJS.
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Operating Gross Profit
Convenience store merchandise sales increased 18.5% in 1996 compared to 1995
primarily due to the acquisition in July 1995 of SJS. Merchandise sales per
location increased 3.9% over 1995, principally due to the acquisition of SJS
stores which have higher per store average merchandise sales, and partially due
to the Company's on-going program of closing or selling under-performing
locations. In 1995, total merchandise sales increased 47.4% from 1994 due to
the acquisitions of Time Saver and SJS. Management's goal has been, since
1992, to increase the revenue contribution from convenience store merchandise
which has higher and less volatile profit margins than motor fuel. For 1996,
merchandise revenue comprised 36.7% of the Company's total revenue as compared
to 35.7% for 1995 and 32.2% for 1994.
The merchandise gross profit margin decreased to 29.31% in 1996 from 31.02% in
1995, reflecting a shift by the Company to a more aggressive pricing strategy
designed to increase customer traffic count. The 1995 margin increase to
31.02% was principally due to the addition of Time Saver and SJS which
increased the Company's purchasing power, thereby increasing the amount of
volume discounts and rebates. Merchandise sales at comparable stores increased
4.6% and 0.2% in 1996 and 1995, respectively.
In 1996, gross profit per gallon of motor fuel sold at convenience stores
decreased 10.6% to 11.68 cents per gallon from 13.07 cents per gallon in 1995,
and total gross profit per location from motor fuel sales decreased 14.9%.
These reductions were due to lower industry margins resulting from increased
wholesale prices caused by higher crude costs and lower than normal gasoline
inventories. Due to competitive pressures, the Company was not able to fully
reflect these increased costs in its selling prices. During 1995, motor fuel
gross profit per gallon increased 9.2% to 13.07 cents per gallon, primarily due
to more favorable market conditions. The average number of gallons sold per
location decreased 5.1% in 1996 and 6.9% in 1995, primarily due to the
acquisition of Time Saver and SJS which sell lower volumes per store. However,
motor fuel gallons sold at comparable stores increased 3.9% and 0.2% in 1996
and 1995, respectively.
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 27.1% as compared to 1995,
primarily due to reduced franchise fee income and a 1995 non-recurring gain of
$5,475,000 ($3,614,000 net of tax effect) from favorable insurance settlements
related to the Company's California locations.
Expenses
In 1996, operating expenses increased 16.2% from 1995, due primarily to the
increased number of average operating locations. Operating expenses, as a
percentage of total revenues, were 13.6% in 1996 as compared to 13.5% in 1995
and 12.8% in 1994. These increases were principally attributable to the Time
Saver and SJS acquisitions because those stores, on average, have a higher
percentage of revenue derived from merchandise sales and therefore, are more
labor intensive than the average of the Company's stores prior to the
acquisitions.
Selling, general and administrative expenses increased $100,000, or 0.4%, in
1996 over 1995 and $6,019,000 or 29.6%, in 1995 over 1994. The increase in
1996 is primarily due to $2,029,000 of severance and other restructuring costs.
Without these non-recurring expenses, S G & A expenses would have decreased by
7.3% in 1996 primarily due to cost reductions associated with the new corporate
system and lower
16
19
incentive bonuses. The increase in 1995 over 1994 reflects the Time Saver and
SJS acquisitions.
Depreciation, amortization and asset impairment expense increased $7,101,000 or
48.8% in 1996 from 1995 primarily due to an additional SFAS 121 impairment
provision of $7,146,000 resulting from the write-down of EZPET to fair value.
Depreciation and amortization expense increased $4,694,000, or 81.4%, in 1995
from 1994 primarily due to the Time Saver and SJS acquisitions. The 1995
amount also includes a $4,100,000 asset impairment resulting from the adoption
of SFAS 121.
Interest expense in 1996 increased $2,677,000 or 45% as compared to 1995; and
increased $4,324,000 or 265% in 1995 as compared to 1994, due to the increased
level of outstanding debt as a result of the Time Saver and SJS acquisitions.
Inflation
The Company believes inflation has not had a material effect on its results of
operations for the past three years. The Company does, however, experience
short term fluctuations in its motor fuel gross profit margins as a result of
changing market conditions for the supply and demand of gasoline.
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:
December 29, December 31,
1996 1995
------------ ------------
Current assets . . . . . . . . . . . . . . . . . $64,887,000 $81,355,000
Current liabilities . . . . . . . . . . . . . . . $73,606,000 $79,707,000
Current ratio . . . . . . . . . . . . . . . . . . 0.88:1 1.02:1
Long-term obligations (including
related parties and other) . . . . . . . . . . . 72,395,000 $76,182,000
Stockholders' equity . . . . . . . . . . . . . . 55,284,000 $70,160,000
Debt to equity ratio . . . . . . . . . . . . . . 1.31:1 1.09:1
Common shares outstanding . . . . . . . . . . . . 69,119,530 67,854,159
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 undeposited sales by Marketers, 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 $8,719,000 at December 29, 1996, as compared to $1,648,000 of
positive working capital at year end 1995. The change is primarily due to
$6,011,000 in principal payments on the Term Loan and an increase in the
current portion of long term debt. As of December 29, 1996, EZCON had
$8,971,000 available on its bank line of credit.
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20
During 1996, the Company received the following major non-recurring cash
proceeds: sale of fixed assets of $1,146,000 and proceeds from legal
settlements of $784,000. Major non-recurring expenditures included:
$12,083,000 for capital and environmental equipment; $2,512,000 for
environmental remediation; and $808,000 for removal of underground storage
tanks.
Approximately 62% of the Company's revenues are derived from motor fuel sales
and, because the Company acquires 100% of its product on a virtual spot basis,
gross margins are subject to sudden changes whenever a disproportionate
movement between purchase costs and retail selling prices occurs. Frequently
these movements are not in line with each other, which leads to unusually wide
or narrow margins. In addition, attempts by the major oil companies to gain
market share have placed added pressure on the margins and volumes of
independent marketers. Without stability in the marketplace, the Company may
temporarily experience operating results that are unprofitable before
considering depreciation and debt service.
The Company believes that cash flow from operations and available working
capital will provide the Company with sufficient liquidity to conduct its
business in an ordinary manner. However, unanticipated events or a prolonged
motor fuel 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. In addition, in
accordance with the terms of the C & G Agreement - Amendment No. 2 (see Capital
Resources), the Company has the option to apply a portion of the proceeds
received from sales of assets to the July 1997 and January 1998 scheduled
principal payments.
Capital Resources
As discussed in Note 6 - Long-Term Obligations and Credit Arrangements in the
Notes to Consolidated Financial Statements, on January 17, 1995, EZCON entered
into a Credit and Guaranty Agreement ("C & G Agreement") with a group of banks
(the "Lenders") including Societe Generale as the agent (the "Agent"). The C &
G Agreement provided for a term loan of $45,000,000 ("Term Loan") and a
$15,000,000 revolving line of credit ("Revolver"). At closing, the Term Loan
was fully drawn and the proceeds were used (a) to repay in full the
outstanding amounts owed under the Company's previous credit agreement, (b) to
finance the initial payment for the Time Saver acquisition, and (c) for working
capital purposes. On July 21, 1995, the C & G Agreement was amended whereby
the Lenders increased the Term Loan available to the Company to $60,400,000.
The Company fully drew the additional $15,400,000 and the proceeds were used
for the acquisition of SJS. With the acquisition, the Company assumed the
indebtedness of SJS. On October 2, 1995, the C & G Agreement was amended and
restated ("Amended C & G Agreement") wherein the Term Loan was increased to
$80,000,000 and the Revolver was increased to $25,000,000. The Company drew
the additional $19,600,000 available on the Term Loan and used the proceeds to
retire the outstanding debt of SJS.
As a result of financial covenant violations incurred by the Company in 1996,
an amendment to the Amended C & G Agreement ("C & G Agreement - Amendment No.
2") was entered into on March 27, 1997. Under the terms of the C & G
Agreement - Amendment No. 2, the Term Loan and the Revolver mature on October 1,
1998. Both loans bear interest at the prime rate plus 1.75%, and, with proper
notice to the Agent, both can be converted to LIBOR loans at LIBOR plus 3.0%.
The Company made principal payments of $2,000,000, $3,550,000 and $3,550,000 in
January 1996, July 1996, and January 1997, respectively. In addition, in
accordance with the terms of the Amended C & G Agreement, proceeds from the
sale of assets provided additional principal payments of $461,000 in 1996 and
$70,000 in 1997. The outstanding Term Loan balance as of March 31, 1997 was
$70,369,000. The Term Loan
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21
requires additional semi-annual principal payments of $4,820,000 on July 24,
1997, $5,780,000 on January 24, 1998 and $6,280,000 on July 24, 1998. Also,
the C & G Agreement - Amendment No. 2 requires that 100% of certain transaction
proceeds, as defined, be immediately applied as a mandatory prepayment of the
Term Loan in the inverse order of maturity. However, 50% of the first
$10,600,000 of any asset sales can be applied pro rata to the scheduled Term
Loan principal payments due July 1997 and January 1998. Further, in accordance
with the C & G Agreement - Amendment No. 2, the aggregate outstanding principal
amount of the Term Loan must be reduced to $60,000,000 by September 30, 1997,
$55,000,000 by December 31, 1997 and $45,000,000 by February 28, 1998. In
order to facilitate these reductions, the Company plans to divest certain
locations outside of its primary market area. Discussions are currently being
held with interested parties regarding these divestitures.
The Revolver can be used for working capital purposes and for issuance of a
maximum of $15,000,000 of letters of credit. The Revolver has a "clean-down"
provision whereby, under the C & G Agreement - Amendment No. 2, during a five
consecutive calendar day period of each calendar month, the aggregate
outstanding borrowing cannot exceed certain defined levels. At December 29,
1996, there were $5,200,000 of the outstanding borrowings under the Revolver
and there were $9,845,000 of outstanding letters of credit issued primarily for
workers compensation claims. The Term Loan and Revolver are secured by the
Company's pledge of all of the capital stock of its subsidiaries. Further, the
C & G Agreement - Amendment No. 2 grants the Lenders, among other things, a
security interest in substantially all of the Company's real property,
buildings and improvements, fixtures, equipment, inventories and receivables.
Provisions of the C & G Agreement - Amendment No. 2 require the Company to
remain within the limits of certain defined financial covenants, and impose
various restrictions on distributions, business transactions, contractual
obligations, capital expenditures and lease obligations.
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 one 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 Revolver.
Due to capital constraints brought about largely by operating losses and by the
environmental expenditure requirements discussed above, 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, $10,936,000, and $4,682,000 in 1996, 1995, and 1994,
respectively. However, according to the terms of the Amended C & G Agreement,
if projected levels of profitability are not maintained, the Company's capital
expenditures can be constrained. In this regard, based on reduced cash flow in
1996, discretionary capital expenditures were essentially halted in mid-year
and remain constrained. Although this curtailment will reduce the intended
level of high return discretionary expenditures into 1997, the Company believes
that it will be able to generate sufficient cash flow to meet its obligations.
However, the Company must seek alternate sources of capital if it is to remain
competitive in the marketplace in the future.
As discussed in Item 1, the Company's business strategy is to grow through
acquisitions. The Company's ability to expand further is dependent upon
several factors, including adequacy of acquisition opportunities and sufficient
capital resources. The Company believes that possible acquisition candidates
will continue to exist as the industry continues to consolidate to reduce
costs, and as small independent operators have difficulty meeting environmental
deadlines. While cash flow and capital availability are currently sufficient
to fund operations, it will be necessary for the Company to fund any identified
acquisitions with new capital which may not be available on terms acceptable to
the Company.
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22
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 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; additionally, all USTs had to meet leak
detection standards by December 22, 1993. As of December 29, 1996, the Company
was in complete compliance with leak detection standards and 50% completed with
the corrosion and overfill/spill requirements. The Company estimates that
additional expenditures of $5,824,000 will be necessary to meet these upgrade
standards. Additionally, the Company estimates that expenditures of
approximately $4,050,000 (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
$43,000,000 at December 29, 1996. The NOL will expire if not utilized between
2005 and 2011. Approximately $19,000,000 of the NOL was acquired with the
acquisitions of EZCON and SJS and can only be used to offset future income of
EZCON. In addition, the Company has alternative minimum tax NOL carryforwards
of approximately $43,000,000 which are available over an indefinite period and
can be utilized should the Company's alternative minimum tax liability exceed
its regular tax liability.
Disclosure Regarding Forward Looking Statements
Item 7 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 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.
20
23
ITEM 8. FINANCIAL STATEMENTS
Index to Financial Statements
Page
Consolidated Financial Statements of
E-Z Serve Corporation and Subsidiaries
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Consolidated Balance Sheets - December 29, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . 23
Consolidated Statements of Operations -
Years ended December 29, 1996, December 31, 1995, and December 25, 1994 . . . . . . . . . . . . . . . 24
Consolidated Statements of Stockholders' Equity -
Years ended December 29, 1996, December 31, 1995, and December 25, 1994 . . . . . . . . . . . . . . . . 25
Consolidated Statements of Cash Flows -
Years ended December 29, 1996, December 31, 1995, and December 25, 1994 . . . . . . . . . . . . . . . . 26
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
21
24
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
E-Z Serve Corporation
We have audited the consolidated financial statements of E-Z Serve
Corporation and subsidiaries as listed in the accompanying index. 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 audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of E-Z Serve
Corporation and subsidiaries as of December 29, 1996 and December 31, 1995, and
the results of its operations and its cash flows for the fifty-two week period
ended December 29, 1996, the fifty-three week period ended December 31, 1995,
and the fifty-two week period ended December 25, 1994, in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 4 to the consolidated financial
statements, in 1995 the Company adopted the provisions of the Statement of
Financial Accounting Standards No.121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of".
KPMG Peat Marwick LLP
Houston, Texas
March 27, 1997
22
25
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 29, December 31,
1996 1995
------------ ------------
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 6,333 $ 15,759
Receivables, net of allowance for doubtful
accounts of $180 and $185 as of
December 29, 1996 and December 31, 1995,
respectively 8,764 9,136
Inventory 40,070 39,849
Environmental receivables (Note 7) 7,246 13,828
Prepaid expenses and other current assets 2,474 2,783
-------- --------
Total Current Assets 64,887 81,355
Property and equipment, net of accumulated
depreciation and impairment provision (Notes 1 and 4) 137,298 143,144
Environmental receivables (Note 7) 34,305 32,428
Other assets 3,915 6,419
-------- --------
$240,405 $263,346
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Trade payables $ 29,563 $ 31,729
Accrued liabilities and other (Note 5) 26,265 28,127
Current portion of environmental liability (Note 7) 9,017 14,057
Current portion of long-term obligations (Note 6) 8,761 5,794
-------- --------
Total Current Liabilities 73,606 79,707
Long-term Obligations (Note 6):
Payable to banks, net of current portion 70,819 74,450
Payable to related parties, including interest - 25
Obligations under capital leases 1,338 1,389
Other, net of current portion 238 318
Environmental liability (Note 7) 32,571 30,043
Other liabilities, net of current portion 6,549 7,254
Commitments and contingencies (Note 7) - -
-------- --------
Total Long-Term Liabilities 111,515 113,479
Stockholders' Equity: (Notes 2 and 8)
Preferred stock, $0.01 par value; authorized
3,000,000 shares; 75,656 shares Series C
issued and outstanding at December 29, 1996
and December 31, 1995, respectively; 1 1
Common stock, $0.01 par value; authorized
100,000,000 shares; 69,119,530 and 67,854,159
shares issued at December 29, 1996 and
December 31, 1995, respectively 691 679
Additional paid-in capital 56,527 56,340
Retained earnings (accumulated deficit) subsequent
to March 28, 1993, date of quasi-reorganization
(total deficit eliminated $86,034) (1,935) 13,140
-------- --------
Total Stockholders' Equity 55,284 70,160
-------- --------
$240,405 $263,346
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
23
26
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Year Ended
-----------------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ ------------
Revenues:
Motor fuels
(includes excise taxes of approximately
$156,081, $145,551 and $128,800
for years 1996, 1995 and 1994,
respectively) $ 532,879 $ 464,044 $ 373,456
Convenience store 316,318 267,045 181,129
Other income (Note 7) 12,445 17,063 8,606
----------- ----------- -----------
861,642 748,152 563,191
Costs and Expenses:
Cost of sales:
Motor fuels 479,248 408,008 328,988
Convenience store 223,614 184,212 126,204
Operating expenses 117,434 101,087 72,193
Selling, general and administrative
expenses 26,474 26,374 20,355
Depreciation, amortization and
asset impairment (Notes 1 and 4) 21,660 14,559 5,765
Interest expense 8,630 5,953 1,629
----------- ----------- -----------
877,060 740,193 555,134
----------- ----------- -----------
Income (loss) before income taxes (15,418) 7,959 8,057
Income tax expense (benefit) (343) 568 231
Provision in lieu of taxes
(Notes 2 and 11) - 2,127 2,739
----------- ----------- -----------
Net income (loss) $ (15,075) $ 5,264 $ 5,087
=========== =========== ===========
Primary earnings (loss) per common and
common equivalent share (Note 1) $ (.23) $ .07 $ .07
=========== =========== ===========
Fully diluted earnings (loss) per common
and common equivalent share (Note 1) $ (.23) $ .07 $ .07
=========== =========== ===========
Weighted average common and common
equivalent shares outstanding:
Primary 68,684,760 77,489,093 73,752,492
=========== =========== ===========
Fully diluted 68,684,760 78,005,045 73,752,492
=========== =========== ===========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
24
27
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit) Total
--------- ------ ---------- --------- -------
Balance, December 26, 1993 $ 1 $670 $50,004 $ 3,882 $54,557
Net income - - - 5,087 $5,087
Exercise of stock options - - 3 - 3
Deferred compensation - stock options - - 189 - 189
Conversion of Series C Preferred Stock
to Common Stock - 3 (3) - -
Provision in lieu of taxes - - 2,739 - 2,739
--- ---- ------- -------- -------
Balance, December 25, 1994 1 673 52,932 8,969 62,575
Net income - - - 5,264 5,264
Exercise of stock options - 1 5 - 6
Deferred compensation - stock options - - 188 - 188
Conversion of Series C Preferred Stock
to Common Stock - 5 (5) - -
Series C Preferred Stock Dividend - - 1,093 (1,093) -
Provision in lieu of taxes - - 2,127 - 2,127
--- ---- ------- -------- ------
Balance, December 31, 1995 1 679 56,340 13,140 70,160
Net loss - - - (15,075) (15,075)
Exercise of stock options - 1 57 - 58
Exercise of stock warrants - 11 (13) - (2)
Deferred compensation stock options - - 143 - 143
--- ---- ------- ------- -------
Balance, December 29, 1996 $ 1 $691 $56,527 $(1,935) $55,284
=== ==== ======= ======= =======
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
25
28
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended
---------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) $(15,075) $ 5,264 $ 5,087
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization - Fixed Assets 14,513 10,459 5,765
Amortization - Deferred Financial Cost 1,082 317 -
Provision for asset impairment 7,146 4,100 -
Payments for environmental remediation (2,512) (2,716) (1,717)
Payments for removal of underground
storage tanks (808) (463) (755)
Provision for doubtful accounts (5) 50 109
Stock option expense 143 188 189
Provision in lieu of taxes - 2,127 2,739
(Gain) loss on sales of assets 1,022 (99) (147)
Change in current assets and liabilities:
(Increase) decrease in accounts & notes receivable 377 (1,846) (3,431)
(Increase) decrease in inventory (221) (439) 278
(Increase) decrease in prepaid expenses and other 309 (408) (99)
Decrease in trade payables and accruals (4,028) (1,150) (1,839)
Proceeds from environmental settlement - 5,740 1,600
Other - net 728 (1,326) 3,010
-------- -------- -------
Net cash provided by operating activities 2,671 19,798 10,789
Cash flows from investing activities:
Proceeds from sale of assets 1,146 2,309 2,021
Payments for purchase of companies, net of
cash acquired - (46,361) -
Capital expenditures and other asset additions (12,083) (16,124) (8,541)
-------- -------- -------
Net cash used in investing activities (10,937) (60,176) (6,520)
Cash flows from financing activities:
Issuance of common stock 56 6 3
Proceeds from long-term debt 5,563 80,181 -
Payments of long-term debt (6,383) (33,218) (5,679)
Payments of deferred financing costs (396) (3,795) -
-------- -------- -------
Net cash provided by (used in) financing
activities (1,160) 43,174 (5,676)
-------- -------- -------
Net increase (decrease)in cash & cash equivalents (9,426) 2,796 (1,407)
Cash and cash equivalents at beginning of period 15,759 12,963 14,370
-------- -------- -------
Cash and cash equivalents at end of period $ 6,333 $15,759 $12,963
======== ======== =======
The accompanying Notes to Consolidated Financial Statements are an
Integral part of these Statements.
26
29
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
Year Ended
---------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ ------------
Noncash investing and financing activities:
Conversion of Series C Preferred Stock
to Common Stock $ - $ (5) $ (3)
Issuance of Series C Preferred Stock - 1,093 -
Dividends on Series C Preferred Stock - (1,093)
Issuance of Common Stock - 5 3
------ ------ ------
$ - $ - $ -
====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes $ - $ 511 $ 346
Interest 8,821 4,529 1,545
The accompanying Notes to Consolidated Financial Statements are an
integral part of these Statements.
27
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E-Z SERVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of E-Z Serve
Corporation and its wholly-owned operating subsidiaries, E-Z Serve Petroleum
Marketing Company ("EZPET"), and E-Z Serve Convenience Stores, Inc. ("EZCON").
The Statement of Operations for 1995 includes the results of Time Saver Stores,
Inc. ("Time Saver") since January 17, 1995, and Sunshine-Jr. Stores, Inc.
("SJS") since July 20, 1995. Unless the context indicates to the contrary, the
term the "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.
Cash and Cash Equivalents
For purposes of the Consolidated Statements of Cash Flows, all highly liquid
investments with original maturities of less than 90 days are considered to be
cash equivalents.
Off Balance Sheet Risk
The Company has not entered into any contracts or obligations that expose the
Company to off balance sheet risk.
Accounts Receivable
The Company maintains an allowance for potential losses in collection of its
receivables.
Inventory
Refined product and convenience store merchandise inventories are stated
principally at average cost which approximates market value.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, receivables and trade
payables, and accrued liabilities are considered to approximate fair value due
to the short term nature of these instruments. The carrying value of long term
debt is estimated to approximate fair value based on the Company's incremental
borrowing rate for similar types of borrowing arrangements, except for a
notional amount which is required by the lender to be rate protected. (See
Note 6 - Long- Term Obligations and Credit Agreements)
28
31
Property and Equipment
Property and equipment are carried at cost. Retail station equipment,
convenience store buildings and equipment, and other property are depreciated
on the straight-line method over their estimated useful lives, ranging from
five to twenty years.
Asset Impairment
The Company adopted Statement of Financial Accounting Standards No. 121,
"Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of" ("SFAS 121"). This standard requires that long-lived assets held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. As a result of the adoption of SFAS 121, in 1995, the Company
recorded an asset impairment write-down of $4,100 related to the Marketer
business fixed asset groups. Additionally, in 1996, a further impairment
provision of $7,146 ($4,013 for Property and Equipment and $3,133 for
Environmental Receivables) was recorded for certain long-lived assets. (See
Note 4 - Property and Equipment)
Environmental Costs
Costs incurred to comply with federal and state environmental regulations are
accounted for as follows:
- - Annual fees for tank registration and environmental compliance testing
are expensed as incurred.
- - Expenditures for upgrading and corrosion protection for tank systems and
installation of leak detectors and overfill/spill devices are capitalized
and depreciated over the remaining life of the location lease term or the
expected useful life of the equipment, whichever is less.
- - The tank removal costs associated with retail locations which provide no
significant growth potential and that the Company plans to sell or
dispose of in the near future have been estimated and a liability
established through a charge to expense. The costs to remove tanks at
all other retail locations are expensed as incurred.
- - Future remediation costs of contaminated sites related to gasoline
underground storage tanks are estimated and a liability is established.
Amounts reimbursable from the state trust funds are recognized as a
receivable. The adequacy of the liability is evaluated at least annually
and adjustments are made based on updated experience and changes in
government policy.
Income Taxes
The Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109").
Under the asset and liability method of SFAS 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to be applied to
29
32
taxable income in the years in which those temporary differences are expected
to be recovered or settled. Under SFAS 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123") was issued in October 1995. SFAS 123, which is
effective for fiscal years beginning after December 15, 1995, prescribes the
"fair value" method of measuring compensation expense for its stock-based
compensation plans. However, SFAS 123 allows for the continuation of the
measurement method as defined by Accounting Principles Board Opinion No. 25
("APB No. 25") with pro forma disclosures of the effect on net income and
earnings per share as if the fair value-based method had been applied in
measuring compensation expense. The Company has decided to continue under APB
No. 25 and provide pro forma disclosure. (See Note 10 - Stock Option Plans)
Earnings per Share
The computation of earnings per common share is based upon the weighted average
number of common shares outstanding during the period plus (in periods in which
they have a dilutive effect) the effect of common equivalent shares arising
from convertible preferred stock using the if-converted method, and dilutive
stock options and warrants using the treasury stock method. The net loss for
1996 is increased by unpaid, cumulative preferred stock dividends in
calculating net loss attributable to common shareholders.
Use of Estimates
The preparation of financial statements in conformity with Generally Accepted
Accounting Principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Basis of Presentation
Certain reclassifications have been made in the 1995 and 1994 financial
statements to conform with the 1996 presentation.
NOTE (2) QUASI-REORGANIZATION
With the acquisitions of Taylor and EZCON in 1992, the Company's 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. (See Note 11 - Income Taxes)
30
33
NOTE (3) BUSINESS ACQUISITIONS
All acquisitions have been accounted for using the purchase method.
Time Saver
On January 17, 1995, the Company, through it's wholly-owned subsidiary EZCON,
acquired all of the capital stock of Time Saver from Dillon Companies, Inc. At
the date of acquisition, Time Saver operated 102 and franchised 14 convenience
stores in the New Orleans, Louisiana area, and was the dominant independent
convenience store chain in New Orleans.
Under the terms of the agreement with the seller, EZCON made a payment at
closing of $29,960 for the properties and, based on Time Saver's closing
balance sheet, made an additional payment of $7,000 on February 28, 1995 for
the non- property net assets. The Company financed the transaction through a
new Credit and Guaranty Agreement with a group of banks (See Note 6 - Long Term
Obligations and Credit Arrangements). On March 31, 1995, Time Saver was merged
into EZCON.
SJS
On June 15, 1995, the Company, its wholly-owned subsidiary EZS Acquisition
Corporation ("EZS") and SJS entered into an Agreement and Plan of Merger
whereby EZS agreed to make a tender offer for all 1,701,650 outstanding shares
of common stock of SJS at $12.00 per share net to the sellers in cash for an
aggregate purchase price of $20,420. The tender offer expired on July 20,
1995, which was the effective date of the acquisition. Effective July 21,
1995, EZS merged with and into SJS thereby converting all shares of SJS not
tendered into the right to receive $12.00 per share, net in cash. At such
time, SJS became a wholly-owned subsidiary of the Company. At the date of
acquisition, SJS operated 205 convenience stores in five states with 120 of the
stores in Florida, 52 stores in Alabama, 27 stores in Mississippi, 5 stores in
Georgia, and 1 store in Louisiana. EZS obtained the funds necessary for the
acquisition from a capital contribution by the Company. The Company, through
its subsidiary EZCON, obtained $15,400 of the acquisition price pursuant to an
amendment to its Credit and Guaranty Agreement (See Note 6 - Long-Term
Obligations and Credit Arrangements) with the remainder coming from funds
generated internally by the Company and its subsidiaries. On October 2, 1995,
SJS was merged into EZCON.
NOTE (4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
December 29, December 31,
1996 1995
------------ ------------
Land and Buildings $ 62,424 $ 72,528
Assets under capital leases 22,677 22,258
Equipment and Fixtures 64,522 61,908
Other property 15,817 12,572
Less accumulated depreciation and
amortization (28,142) (26,122)
-------- --------
$137,298 $143,144
======== ========
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34
In the fourth quarter of 1995, the Company adopted SFAS 121. In applying the
provisions of SFAS 121, the Company determined that it had 27 convenience store
asset groupings and an additional Marketer group. The future cash flows from
each asset grouping, except the Marketer group, exceeded the carrying value of
the respective asset groupings; consequently, the Company recognized an
impairment provision of $4,100 to reduce the carrying value of the Marketer
group to the amount of its estimated discounted future cash flows. The $4,100
impairment provision was calculated using discounted future cash flow, less
cash out flows necessary to maintain or abandon the assets and is included with
the caption "Depreciation, amortization and asset impairment" on the
Consolidated Statement of Operations.
In December 1996, the Company, in conjunction with its effort to sell EZPET,
recognized an additional SFAS 121 asset impairment of $4,013 for property and
equipment. The impairment decreases the carrying value to estimated fair
value. The fair value was determined by bids received by the Company.
There have been no other circumstances, as defined by SFAS 121, that would
cause the recoverability of the carrying value of any other long-lived assets
to be in question.
NOTE (5) ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
Accrued liabilities and other current liabilities consist of the following:
December 29, December 31,
1996 1995
------------ ------------
Insurance accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,387 $ 7,170
Accrued taxes due to local and federal governments . . . . . . . . . . . 9,543 13,299
Accrued salary and benefits . . . . . . . . . . . . . . . . . . . . . . . 2,638 3,024
Accrued interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,589 1,780
Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . 5,108 2,854
------- -------
$26,265 $28,127
======= =======
NOTE (6) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
Long-term obligations consist of the following:
December 29, December 31,
1996 1995
------------ ------------
Notes payable to bank under revolving
lines of credit . . . . . . . . . . . . . . . . . . . . . $ 5,200 $ -
Term notes payable to banks . . . . . . . . . . . . . . . 73,989 80,000
Current portion . . . . . . . . . . . . . . . (8,370) (5,550)
------- -------
70,819 74,450
------- -------
Notes payable to major stockholders . . . . . . . . . . . 25 25
Current portion . . . . . . . . . . . . . . . (25) -
------- -------
- 25
------- -------
Capital lease obligations . . . . . . . . . . . . . . . . 1,624 1,557
Current portion . . . . . . . . . . . . . . . (286) (168)
------- -------
1,338 1,389
------- -------
Long-term debt - other . . . . . . . . . . . . . . . . . 318 394
Current portion . . . . . . . . . . . . . . . (80) (76)
------- -------
238 318
------- -------
Total long-term debt obligations . . . . . . . . . . . . $72,395 $76,182
======= =======
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35
On January 17, 1995, EZCON entered into a Credit and Guaranty Agreement ("C & G
Agreement") with a group of banks (the "Lenders") including Societe Generale as
Agent. This C & G Agreement replaced the credit facilities utilized by the
Company at December 25, 1994. The C & G Agreement provided for a term loan of
$45,000 ("Term Loan") and a $15,000 revolving line of credit ("Revolver"). At
closing, the Term Loan was fully drawn and the proceeds were used (a) to repay
in full the outstanding amounts owed under the previous credit agreement, (b)
to finance the initial payment for the Time Saver acquisition, and (c) for
working capital purposes. On July 21, 1995 the C & G Agreement was amended
whereby the Lenders increased the Term Loan available to the Company to
$60,400. The Company fully drew the additional $15,400 and the proceeds were
used for the acquisition of SJS. With the acquisition of SJS, the Company
assumed the indebtedness of SJS. On October 2, 1995, the Amended and Restated
Credit and Guaranty Agreement ("Amended C & G Agreement") was entered into and
the Term Loan was increased to $80,000, the Revolver was increased to $25,000
and the letter of credit sub-limit was increased to $15,000. The Company fully
drew the additional $19,600 available on the Term Loan and used the proceeds to
retire all of the outstanding debt of SJS. Concurrently with the signing of
the Amended C & G Agreement, SJS was merged into EZCON.
As a result of financial covenant violations incurred by the Company in 1996,
an amendment to the Amended C & G Agreement ("C & G Agreement - Amendment No.
2") was entered into on March 27, 1997. Under the terms of the C & G Agreement
- - Amendment No. 2, the Term Loan and the Revolver mature on October 1, 1998.
Both loans bear interest at the prime rate plus 1.75%, and, with proper notice
to the Agent, both can be converted to LIBOR loans at LIBOR plus 3.0%. During
1996 and 1995, the Term Loan was converted to a LIBOR loan at average interest
rates of 8.06% and 8.60%, respectively.
The Amended C & G Agreement requires that a notional amount of at least $20,000
of the Term Loan be rate protected, as defined, through January 17, 1998. In
this regard, the Company entered into a three-year interest rate swap in the
notional amount of $20,000. The swap agreement is a contract to exchange
floating interest rate payments for fixed rate payments without the exchange of
the underlying notional amount. The notional amount is used to measure
interest to be paid or received and does not represent an exposure to credit
loss. The Agreement effectively changes $20,000 of the Company's Term Loan to
a fixed rate of 9.35% through April, 1998.
The Company made principal payments of $2,000, $3,550 and $3,550 in January
1996, July 1996, and January 1997, respectively. In addition, in accordance
with the terms of the Amended C & G Agreement, proceeds from the sale of
33
36
assets provided additional principal payments of $461 in 1996 and $70 in 1997.
The outstanding Term Loan balance as of March 31, 1997 was $70,369. The Term
Loan requires additional semi-annual principal payments of $4,820 on July 24,
1997, $5,780 on January 24, 1998 and $6,280 on July 24, 1998. Also, the C & G
Agreement - Amendment No. 2 requires that 100% of certain transaction proceeds,
as defined, be immediately applied as a mandatory prepayment of the Term Loan
in the inverse order of maturity. However, 50% of the first $10,600 of any
asset sales can be applied pro rata to the scheduled Term Loan principal
payments due July 1997 and January 1998. Further, in accordance with the C & G
Agreement - Amendment No. 2, the aggregate outstanding principal amount of the
Term Loan must be reduced to $60,000 by September 30, 1997, $55,000 by December
31, 1997 and $45,000 by February 28,1998. In order to facilitate these
reductions, the Company plans to divest certain locations outside of its
primary market area. Discussions are currently being held with interested
parties regarding these divestitures.
The Revolver can be used for working capital purposes and for issuance of a
maximum of $15,000 of letters of credit. The Revolver has a "clean-down"
provision whereby, under the C & G Agreement - Amendment No. 2, during a five
consecutive calendar day period of each calendar month, the aggregate
outstanding borrowing cannot exceed certain defined levels. At December 29,
1996, there were $5,200 of the outstanding borrowings under the Revolver and
there were $9,845 of outstanding letters of credit issued primarily for workers
compensation claims. The Term Loan and Revolver are secured by the Company's
pledge of all of the capital stock of its subsidiaries and also by guaranties
from EZPET. Further, the C & G Agreement - Amendment No. 2 grants the Lenders,
among other things, a security interest in substantially all of the Company's
real property, buildings and improvements, fixtures, equipment, inventories and
receivables. Provisions of the C & G Agreement - Amendment No. 2 require the
Company to remain within the limits of certain defined financial covenants, and
impose various restrictions on distributions, business transactions,
contractual obligations, capital expenditures and lease obligations.
NOTE (7) 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 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, overfill/spill
protected. Additionally, by December 1993, all USTs had to have a method of
leak detection installed. As of December 29, 1996, the Company was in complete
compliance with leak detection standards and 50% completed with the corrosion
and overfill/spill requirements. The Company estimates that it will make
additional capital expenditures of $3,183 and $2,641 in 1997 and 1998
respectively, to be in full compliance with the regulations by the 1998
deadline.
Additionally, the Company estimates that the total future cost of performing
remediation on contaminated sites will be approximately $41,588, of which
approximately $34,180 is expected to be reimbursed by state trust funds. Also,
the Company anticipates incurring approximately $2,331 for the costs of
removing USTs at abandoned locations. During 1995, the Company entered into an
agreement with an environmental consulting firm whereby the consulting firm
assumes responsibility for the cleanup of contaminated sites at approximately
80% of the Company's locations. Under this agreement ("Direct Bill
34
37
Agreement"), the consulting firm remediates the sites at its cost and files for
reimbursement from the state. The Company experiences no cash cost for these
sites, other than the cost of the deductible, unless the state does not
reimburse the consulting firm within a period of twenty-four months in which
case the Company is obligated to reimburse the consulting firm. With the
Direct Bill Agreement, assuming full reimbursement by the states to the
consulting firm, the future cash cost to the Company for remediating
contaminated sites drops to approximately $9,446, of which, approximately
$5,396 is expected to be reimbursed by state funds. At December 29, 1996, for
work largely completed prior to the Direct Bill Agreement, the Company had
completed the necessary remediation and has reimbursement claims totaling
approximately $7,371 with the various states in which it operates.
Such 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 reserved due to the difficulty in
estimating such costs and due to potential changes in regulations or state
reimbursement programs.
In connection with environmental conditions at certain of the Company's
California locations, legal proceedings have been brought by third parties
against the Company generally alleging that releases of refined products at
these locations have caused damages to the third parties. The Company's
position has been that its general liability insurance policies cover legal
defense costs and damages related to these claims, but the Company's insurance
carriers have generally argued that the policies do not provide for such
coverage. After several years of legal actions, the Company began settlement
discussions with certain of the insurance carriers and, in 1994, the Company
agreed to accept cash payments totaling $5,050 ($2,525 recognized in earnings
in 1994) in settlement of all outstanding disputes with five of the carriers.
During 1995, the Company accepted $3,650 ($700 recognized in earnings in 1994
and $1,375 recognized in earnings in 1995) in settlement of outstanding
disputes with three additional carriers. The Company had reserved a total of
$4,100 of these receipts to cover any future environmental or other
contingencies related to claims made by the State of California Water Resources
Control Board. During the fourth quarter of 1995, the Company received
notification from the Water Resources Control Board that the Board relinquished
any claim to the settlement funds. Accordingly, in December, 1995, the Company
recognized the $4,100 as other income. In March 1997, the Company received a
cash settlement of $610 for another claim; one unsettled claim remains.
The Company leases office space in various locations and has operating leases
on certain retail outlets and computer equipment. Total operating lease
expense for the Company during 1996, 1995, and 1994 was approximately $13,878,
$12,413, and $9,614, respectively. Future minimum rental payments required
under all leases which have primary or remaining noncancellable terms in excess
of one year as of December 29, 1996 are as follows:
1997 . . . . . . . . . . . . . . . . . . 11,228
1998 . . . . . . . . . . . . . . . . . . 10,077
1999 . . . . . . . . . . . . . . . . . . 8,375
2000 . . . . . . . . . . . . . . . . . . 7,383
2001 . . . . . . . . . . . . . . . . . . 6,285
Thereafter . . . . . . . . . . . . . . . 7,676
-------
Total $51,024
=======
Additionally, the Company is party to certain long-term capital leases with
future minimum payments at December 29, 1996 as follows:
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Year Principal Interest Total
- ----------- --------- -------- -----
1997 $ 286 $ 304 $ 590
1998 266 261 527
1999 278 216 494
2000 293 167 460
2001 239 136 375
Thereafter 262 359 621
------ ------ ------
Total $1,624 $1,443 $3,067
====== ====== ======
The Company and its subsidiaries are involved in various lawsuits incidental to
its businesses. 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
any imposition of monetary sanctions would exceed $100.
NOTE (8) STOCKHOLDERS' EQUITY
On February 28, 1995, Harken Energy Company ("Harken"), the Company's former
parent, entered into an agreement with a major stockholder of the Company
whereby Harken sold 63,937 shares of the Company's $6.00 Convertible Preferred
Stock, Series C ("Series C Preferred Stock"), along with the right to all
accrued but unpaid dividends thereon, to such stockholder. In addition, Harken
sold its remaining 817 shares of the Series C Preferred Stock, along with the
right to all accrued but unpaid dividends thereon, to a director of the
Company. On April 1, 1995, the Company issued an additional 10,902 shares of
its Series C Preferred Stock to the holders of the Series C Preferred Stock in
payment of all cumulative but unpaid dividends through March 31, 1995. (See
Note 13 - Subsequent Events.) The Series C Preferred Stock ranks senior to the
common stock or any other capital stock in right of payment of dividends or
distributions. It is also exempt from anti-dilution provisions from the sale
or conversion of certain previously issued preferred stock or warrants to
purchase common stock or preferred stock. As of December 29, 1996 and December
31, 1995, the Company had cumulative but unpaid dividends on the Series C
Preferred Stock of $757 and $228, respectively.
In May 1996, two warrant holders exercised warrants and purchased a combined
total of 1,210,001 shares of the Company's common stock.
NOTE (9) EMPLOYEE BENEFIT PLAN
The Company does not provide post-retirement benefits for its employees.
The Company has a 401(k) retirement savings plan (the "Plan") covering all
employees meeting minimum age and service requirements. The Company will match
50% of tax deferred employee contributions up to 6% of the employee's
compensation. The Board of Directors of the Company may also elect to make
additional contributions to be allocated among all eligible participants in
accordance with the provisions of the Plan. There were approximately 435, 352
and 310 participants in the Plan at year end 1996, 1995 and 1994, respectively.
Company contributions, which are funded currently, were $229, $96, and $102 for
1996, 1995 and 1994, respectively.
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NOTE (10) STOCK OPTION PLANS
On May 30, 1991, the Board of Directors of the Company adopted the 1991 Stock
Option Plan, which received stockholder approval at a Special Meeting held on
August 9, 1991 (the "1991 Plan"). The 1991 Plan provides for issuance of
options to purchase up to 1,900,000 shares of the Company's common stock to
key employees and directors. The 1991 Plan requires that the purchase price of
each share of stock, subject to an incentive stock option, equals at least 100%
of the fair market value of the stock on the date the option is granted. The
Compensation Committee of the Board, which administers the 1991 Plan, may also
grant non-qualified stock options which are exercisable at a price as low as
50% of the fair market value of the stock on the date the option is granted.
At an October 29, 1993 Special Meeting, the stockholders approved (i) an
amendment to the 1991 Plan to increase the number of shares of common stock
subject to the 1991 Plan from 1,900,000 to 2,500,000; (ii) an amendment to the
1991 Plan that permits the Compensation Committee of the Board of Directors to
authorize periodic exchange programs whereby holders of non-qualified stock
options could exchange their current options for new options which contain
different option prices and new vesting periods; and lastly (iii) a plan of
exchange whereby nonqualified stock options at a price of $1.00 per share of
common stock would be issued in exchange for currently outstanding nonqualified
stock options having an exercise price of $1.50. All of the options having an
exercise price of $1.50 were exchanged for the options that have an exercise
price of $1.00.
The aggregate compensation expense related to the issuance of non-qualified
stock options and the exchange of the $1.50 stock options under the 1991 Plan
is $741, and is being amortized over vesting periods through July 1998. The
Company recognized expense related to stock options of $143, $188, and $189 in
1996, 1995, and 1994, respectively. Information regarding the 1991 Plan is as
follows:
Number of Shares
---------------------------------------------------
1996 1995 1994
----------- ----------- -----------
Outstanding at beginning of period 2,375,000 2,295,000 2,305,000
Granted at $1.00 to $1.50 per share 50,000 135,000 20,000
Exercised at $1.50 per share - - -
Exercised at $1.00 per share (40,000) (5,000) (3,000)
Canceled (95,000) (50,000) (27,000)
--------- --------- ---------
Balance at end of period 2,290,000 2,375,000 2,295,000
========= ========= =========
Exercisable at end of period 2,002,503 1,764,004 1,279,003
========= ========= =========
Available for grant at end of period 152,000 107,000 192,000
========= ========= =========
In March 1997, the 1991 Plan was amended by the Board of Directors, subject to
shareholder approval, to increase the number of shares of Common Stock subject
thereto from 2,500,000 to 3,500,000.
On February 9, 1994, the Board of Directors adopted the 1994 Stock Option Plan
(the "1994 Plan"). The 1994 Plan provides for the issuance of options to
purchase up to 6,750,000 shares of the Company's common stock at an exercise
price of $0.40 per share. The option period is ten years from the date of
grant and options granted under the 1994 Plan vest proportionately, as defined
in the 1994 Plan, but only upon the occurrence of one of the following three
events:
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Upon the consummation of an underwritten public offering of the
Company's common stock, pursuant to a registration statement wherein
the aggregate net proceeds to the Company's stockholders is at least
$10,000;
Upon the transfer in a private transaction which could have the effect
of transferring to the transferee beneficial ownership (as defined) of
a number of shares of common stock that, in the aggregate, is equal to
or greater than 10% of the then outstanding shares of common stock; or
Upon the sale of all or substantially all of the assets of the
Company.
On March 25, 1994, grants representing 6,500,000 shares of common stock were
awarded to key officers of the Company. The 1994 Plan was approved at the
Company's 1994 Annual Meeting of Stockholders on June 17, 1994. In September
1996 and March 1997, the 1994 Plan was amended by the Board of Directors,
subject to stockholder approval, (i) to increase the number of shares of Common
Stock subject thereto from 6,750,000 to 8,000,000 and (ii) to avoid certain
detrimental tax consequences to the option holder that could occur if certain
vesting events occur. As of December 29, 1996, grants representing 6,350,000
shares of common stock awarded to key officers of the Company remain
outstanding.
In October 1995 the FASB issued Statement No. 123 "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123, which is effective for fiscal years
beginning after December 15, 1995, allows companies either to continue to
measure compensation cost based on the method prescribed by Accounting
Principles Board Opinion No. 25 ("APB No. 25") or adopt a "fair value" method
of accounting for all employee stock-based compensation. The Company has
elected to continue utilizing the accounting for stock issued to employees
prescribed by APB No. 25. However, proforma disclosures for options granted
after January 1,1995, as if the Company adopted the cost recognition
requirements under SFAS 123 in 1996, are presented below:
1996 1995
--------------------- -------------------
As As
Reported Proforma Reported Proforma
--------- --------- --------- --------
Net income (loss) $(15,075) $(14,964) $ 5,264 $ 5,430
Earnings per share $ (.23) $ (.23) $ (.07) $ (.07)
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were made in
estimating fair value:
ASSUMPTIONS:
Dividend yield 0.00%
Risk-free interest rate 6.11%
Expected volatility 85.79%
Expected life 8 years
NOTE (11) INCOME TAXES
As discussed in Note 1 - Summary of Significant Accounting Policies, the
Company adopted SFAS 109 effective as of December 28, 1992 on a prospective
basis. There was no cumulative effect of this change in accounting principle
as of December 28, 1992.
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As discussed in Note 2 - Quasi-Reorganization, the Company is required to
credit the tax benefits realized from the utilization of net operating loss
carryforwards which arose prior to the quasi-reorganization directly to paid-in
capital. In this regard, the Company recognized a provision in lieu of taxes
and credited paid-in capital for $0, $2,127, and $2,739 during 1996, 1995 and
1994, respectively. This is a non-cash provision and does not represent
deferred taxes.
Total income tax expense (benefit) was allocated as follows:
Years Ended
--------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------ ----------- ------------
Income (loss) from operations $(343) $ 568 $ 231
Stockholders' equity of recognition
of tax benefits of net operating
loss carryforwards - 2,127 2,739
----- ------ ------
$(343) $2,695 $2,970
===== ====== ======
Income tax expense (benefit) attributable to income from operations consists
of:
Years Ended
--------------------------------------------------
December 29, December 31, December 25,
1996 1995 1994
------------ ------------ ------------
U.S. Federal $(343) $ 366 $ 206
State - 202 25
----- ----- -----
$(343) $ 568 $ 231
===== ===== =====
Income tax benefit is related to the reduction of the deferred tax liability
created by the differences between the assigned values for purchase accounting
and tax basis of assets and liabilities acquired in the SJS acquisition.
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities are presented below:
Years Ended
-----------------------------------
December 29, December 31,
1996 1995
------------ ------------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful accounts $ 61 $ 63
Environmental remediation accruals 470 -
Insurance accruals 3,401 3,376
Unearned revenue 79 467
Other accruals 1,014 823
Net operating loss carryforwards 14,669 11,772
Alternative Minimum Tax credit carryforwards 1,114 1,483
------- -------
Total gross deferred tax assets 20,808 17,984
Less valuation allowance (4,480) (2,758)
------- -------
Net deferred tax assets 16,328 15,226
Deferred tax liabilities:
LIFO Reserve 424 565
Environmental Receivable - 524
Plant and equipment, principally due to
differences in depreciation and basis of assets 15,904 14,137
------- -------
Total gross deferred tax liabilities 16,328 15,226
------- -------
Net deferred tax liability $ - $ -
======= =======
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The valuation allowance for the deferred tax assets as of December 25, 1994 was
$12,598. The net change in the total valuation allowance for the fiscal year
ended December 29, 1996 and December 31, 1995 was an increase of $1,722 and a
decrease of $9,840, respectively.
Net Operating Loss Carryforwards
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 is approximately $43,000 at December
29, 1996. The NOL will expire if not utilized between 2005 and 2011.
Approximately $19,000 of the NOL was acquired with the acquisitions of EZCON
and SJS and can only be used to offset future income of EZCON. In addition,
the Company has alternative minimum tax NOL carryforwards of approximately
$43,000, which are available over an indefinite period, that can be utilized
should the Company's alternative minimum tax liability exceed its regular tax
liability.
NOTE (12) UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of operations for
the years ended December 29, 1996 and December 31, 1995:
Quarter Ended
---------------------------------------------------------------------
(In thousands except per share data)
1996 March 31 June 30 September 29 December 29
---------- --------- ------------ -----------
Revenues $194,760 $232,469 $225,293 $209,120
Gross Profit 36,061 45,114 42,946 34,659
Net Income (loss) (2,569) 1,690 1,494 (15,690)
Net Income (loss) Per
Common Share (.04) .02 .02 (.24)
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Quarter Ended
---------------------------------------------------------------------
(In thousands except per share data)
1995 March 26 June 25 September 24 December 31
---------- --------- ------------ -----------
Revenues $148,427 $176,015 $205,346 $218,364
Gross Profit 30,506 33,930 44,793 46,703
Net Income 609 1,695 2,648 312
Net Income Per Common Share .01 .02 .03 .01
NOTE (13) SUBSEQUENT EVENTS
On January 27, 1997 the Company sold 140,000 shares of its newly issued Series
H Redeemable Preferred Stock, ("Series H Preferred Stock") to the same major
stockholder that held substantially all of the Company's Series C Preferred
Stock. The Series H Preferred Stock is entitled to receive semi-annual
dividends at the rate of 13% per annum paid in additional shares of Series H
Preferred Stock. In an event of default, as defined, the dividend rate
increases to 23% and the holders can elect one director. The Series H
Preferred Stock has no voting rights, but ranks senior to any capital stock or
other equity securities of the Company. It can be redeemed by the Company at
any time, but is mandatorily redeemable upon the earlier of (a) the third
anniversary of the date of issuance, (b) the occurrence of a change of
ownership, as defined, or (c) the occurrence of a fundamental change, as
defined. Warrants representing the purchase of 960,000 shares of the Company's
common stock at a nominal exercise price were also issued as part of this
transaction. Additional warrants are issuable on each anniversary that the
Series H Preferred Stock remains outstanding. The liquidation value is
estimated to be approximately $14,000. Net proceeds of $8,359 from the sale of
the Series H Preferred Stock were used by the Company to redeem all of the
83,591 outstanding shares, including shares for unpaid dividends, of the Series
C Preferred Stock, and net proceeds of $5,081 were used for general corporate
purposes, including paying down a portion of amounts outstanding under the
Revolver.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement, pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement, pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement, pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
Registrant's definitive proxy statement, pursuant to Regulation 14A, to be
filed with the Commission not later than 120 days after the close of the
Company's fiscal year.
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PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
Number Description of Exhibit
3.1.1(a) Amended and Restated Certificate of Incorporation of the
Company dated December 6, 1990.
3.1.2(a) Certificate of Amendment of Certificate of Incorporation of
the Company filed July 2, 1992.
3.1.3(a) Certificate of Amendment of Certificate of Incorporation of
the Company filed February 26, 1993.
3.1.4(a) Certificate of Amendment of Certificate of Incorporation of
the Company filed November 1, 1993.
3.1.5 Certificate of Designation, Preferences and Rights of Series H
Preferred Stock filed January 24, 1997 - incorporated by
reference from Exhibit 4.1 of the Company's Current Report on
Form 8-K dated January 27, 1997.
3.2(a) Bylaws of the Company restated as of March 25, 1992.
4.1(a)(b) 1991 Stock Option Plan of the Company, as amended.
4.2(a)(b) Amended and Restated 1994 Stock Option Plan of the Company.
4.3.1(a) Registration Rights Agreement dated March 25, 1992 among the
Company, Phemus Corporation and Intercontinental Mining &
Resources Limited.
4.3.2(a) Amendment to Registration Rights Agreement dated July 31, 1992,
among the Company, Phemus Corporation and Intercontinental
Mining & Resouces Limited.
4.3.3(a) Second Amendment to Registration Rights Agreement dated April
21, 1993, among the Company, Phemus Corporation, Quadrant
Capital Corp. and Intercontinental Mining & Resources
Incorporated.
4.3.4 Third Amendment to Registration Rights Agreement dated as of
January 27, 1997, among the Company, Phemus Corporation and
Intercontinental Mining & Resources Incorporated -
incorporated by reference from Exhibit 4.4 of the Company's
Current Report on Form 8-K dated January 27, 1997.
4.4.1(a) Registration Rights Agreement dated July 31, 1992, between the
Company and Tenacqco Bridge Partnership, L.P.
4.4.2(a) Amendment to Registration Rights Agreement dated April 21,
1993, among the Company, Tenacqco Bridge Partnership, L.P. and
DLJ Capital Corporation.
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4.5.1(a) Amended and Restated Stockholders Agreement dated June 1,
1994, among DLJ Capital Corporation, Tenacqco Bridge
Partnership, L.P., Phemus Corporation, Intercontinental Mining
& Resources Incorporated, Quadrant Capital Corp., and the
Company.
4.5.2 Amendment No. 1 to Stockholders Agreement dated as of January
27, 1997, among DLJ Capital Corporation, Tenacqco Bridge
Partnership, L.P., Phemus Corporation, Intercontinental Mining
& Resources Incorporated and the Company - incorporated by
reference from Exhibit 4.3 of the Company's Current Report on
Form 8- K dated January 27, 1997.
4.5.3(a) Revised Schedule 1 to Stockholders Agreement dated as of March
28, 1997.
4.6(a) Stockholders Letter of Understanding dated January 17, 1995,
among the Company, DLJ Capital Corporation, Phemus
Corporation, Tenacqco Bridge Partnership, L.P.,
Intercontinental Mining & Resources Incorporated, Quadrant
Capital Corp. and Societe Generale, as agent.
4.7 Form of Common Stock Purchase Warrant of the Company issued
pursuant to the Securities Purchase Agreement dated January
27, 1997, between the Company and Phemus Corporation -
incorporated by reference from Exhibit 4.5 of the Company's
Current Report on Form 8-K dated January 27, 1997.
10.1(a) Stock Acquisition Agreement dated March 25, 1992, among the
Company, Larry Jack Taylor, April Michele Taylor Trust and
Kerri Denise Taylor Trust.
10.2(a) Form of Lease executed by Taylor Petroleum, Inc. as Tenant.
10.3(a) Agreement Regarding Leases effective as of March 1, 1992,
among the Company, Anadarko Development Company, Dakota Land
Company, Salt Fork Company, Inc., Larry Jack Taylor, and First
National Bank of Boston.
10.4(a) Stock Acquisition Agreement dated March 31, 1994, between the
Company and ESCM & Associates, Inc. regarding the sale of
Amber Refining, Inc. and Amber Pipeline, Inc.
10.5.1(a) Amended and Restated Credit and Guaranty Agreement dated
October 2, 1995, among E-Z Serve Convenience Stores, Inc., the
Company, the lenders party thereto, and Societe Generale, as
agent for the lenders.
10.5.2 Amendment and Waiver No.1 to Amended and Restated Credit and
Guaranty Agreement dated April 30, 1996, among E-Z Serve
Convenience Stores, Inc., the Company, the lenders party
thereto, and Societe Generale, as agent for the lenders -
incorporated by reference from Exhibit 10.1 of the Company's
quarterly report on Form 10-Q for the quarter ended March 31,
1996.
10.5.3(a) Amendment and Waiver No. 2 to Amended and Restated Credit and
Guaranty Agreement dated March 27, 1997, among E-Z Serve
Convenience Stores, Inc., the Company, the lenders party
thereto, and Societe Generale, as agent for the lenders.
10.6.1(a) Agreement Between Dillon Companies, Inc. and E-Z Serve
Convenience Stores, Inc. dated December 2, 1994.
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10.6.2(a) Amendment to Agreement between Dillon Companies, Inc. and E-Z
Serve Convenience Stores, Inc. dated December 28, 1994.
10.6.3(a) Second Amendment to agreement between Dillon Companies, Inc.
and E-Z Serve Convenience Stores, Inc. dated January 17,
1995.
10.7 Agreement and Plan of Merger by and among the Company, EZS
Acquisition Corporation and Sunshine dated June 15, 1995 -
incorporated by reference from Exhibit 99.(c)(1) of the
Company's Tender Offer Statement on Schedule 14D-1 dated June
19, 1995.
10.8 Offer of Purchase by EZS Acquisition Corporation dated June
19, 1995 - incorporated by reference from Exhibit 99.(a)(1) of
the Company's Tender Offer Statement on Schedule 14D-1 dated
June 19, 1995.
10.9 Securities Purchase Agreement dated January 27, 1997, between
the Company and Phemus Corporation - incorporated by reference
from Exhibit 99.1 of the Company's Current Report on Form 8-K
dated January 27, 1997.
10.10(a)(b) Employment Agreement dated March 4, 1997, between Kathleen
Callahan-Guion and the Company.
21(a) Subsidiaries of the Registrant.
23(a) Consent of KPMG Peat Marwick LLP to the incorporation of their
report, included in this Form 10-K for the year ended December
29, 1996, into the Company's previously filed Registration
Statements on Forms S-8.
27(a) Financial Data Schedule for the period ended December 29,
1996.
- -------------------
(a) filed herewith
(b) Management contract or compensatory plan or arrangement.
45
48
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
E-Z SERVE CORPORATION
(Registrant)
By: /s/ NEIL H. MCLAURIN
-------------------------
Neil H. McLaurin
Chairman of the Board and
Chief Executive Officer
Date: April 11, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ NEIL H. MCLAURIN Chairman of the Board and Date: April 11, 1997
- ------------------------ Chief Executive Officer -------------------
NEIL H. MCLAURIN
/s/ JOHN T. MILLER Sr. Vice President, Date: April 11, 1997
- ------------------------ Chief Financial Officer and -------------------
JOHN T. MILLER Principal Accounting Officer
/s/ DONALD D. BEANE Director Date: April 11, 1997
- ------------------------ -------------------
DONALD D. BEANE
/s/ SHELBY R. GIBBS Director Date: April 11, 1997
- ------------------------ -------------------
SHELBY R. GIBBS
/s/ JOHN M. SALLAY Director Date: April 11, 1997
- ------------------------ -------------------
JOHN M. SALLAY
/s/ JOHN R. SCHOEMER Director Date: April 11, 1997
- ------------------------ -------------------
JOHN R. SCHOEMER
/s/ LARRY J. TAYLOR Director Date: April 11, 1997
- ------------------------ -------------------
LARRY J. TAYLOR
/s/ PAUL THOMPSON III Director Date: April 11, 1997
- ------------------------- -------------------
PAUL THOMPSON III
46
49
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
3.1.1(a) Amended and Restated Certificate of Incorporation of the
Company dated December 6, 1990.
3.1.2(a) Certificate of Amendment of Certificate of Incorporation of
the Company filed July 2, 1992.
3.1.3(a) Certificate of Amendment of Certificate of Incorporation of
the Company filed February 26, 1993.
3.1.4(a) Certificate of Amendment of Certificate of Incorporation of
the Company filed November 1, 1993.
3.1.5 Certificate of Designation, Preferences and Rights of Series H
Preferred Stock filed January 24, 1997 - incorporated by
reference from Exhibit 4.1 of the Company's Current Report on
Form 8-K dated January 27, 1997.
3.2(a) Bylaws of the Company restated as of March 25, 1992.
4.1(a)(b) 1991 Stock Option Plan of the Company, as amended.
4.2(a)(b) Amended and Restated 1994 Stock Option Plan of the Company.
4.3.1(a) Registration Rights Agreement dated March 25, 1992 among the
Company, Phemus Corporation and Intercontinental Mining &
Resources Limited.
4.3.2(a) Amendment to Registration Rights Agreement dated July 31, 1992,
among the Company, Phemus Corporation and Intercontinental
Mining & Resouces Limited.
4.3.3(a) Second Amendment to Registration Rights Agreement dated April
21, 1993, among the Company, Phemus Corporation, Quadrant
Capital Corp. and Intercontinental Mining & Resources
Incorporated.
4.3.4 Third Amendment to Registration Rights Agreement dated as of
January 27, 1997, among the Company, Phemus Corporation and
Intercontinental Mining & Resources Incorporated -
incorporated by reference from Exhibit 4.4 of the Company's
Current Report on Form 8-K dated January 27, 1997.
4.4.1(a) Registration Rights Agreement dated July 31, 1992, between the
Company and Tenacqco Bridge Partnership, L.P.
4.4.2(a) Amendment to Registration Rights Agreement dated April 21,
1993, among the Company, Tenacqco Bridge Partnership, L.P. and
DLJ Capital Corporation.
50
4.5.1(a) Amended and Restated Stockholders Agreement dated June 1,
1994, among DLJ Capital Corporation, Tenacqco Bridge
Partnership, L.P., Phemus Corporation, Intercontinental Mining
& Resources Incorporated, Quadrant Capital Corp., and the
Company.
4.5.2 Amendment No. 1 to Stockholders Agreement dated as of January
27, 1997, among DLJ Capital Corporation, Tenacqco Bridge
Partnership, L.P., Phemus Corporation, Intercontinental Mining
& Resources Incorporated and the Company - incorporated by
reference from Exhibit 4.3 of the Company's Current Report on
Form 8- K dated January 27, 1997.
4.5.3(a) Revised Schedule 1 to Stockholders Agreement dated as of March
28, 1997.
4.6(a) Stockholders Letter of Understanding dated January 17, 1995,
among the Company, DLJ Capital Corporation, Phemus
Corporation, Tenacqco Bridge Partnership, L.P.,
Intercontinental Mining & Resources Incorporated, Quadrant
Capital Corp. and Societe Generale, as agent.
4.7 Form of Common Stock Purchase Warrant of the Company issued
pursuant to the Securities Purchase Agreement dated January
27, 1997, between the Company and Phemus Corporation -
incorporated by reference from Exhibit 4.5 of the Company's
Current Report on Form 8-K dated January 27, 1997.
10.1(a) Stock Acquisition Agreement dated March 25, 1992, among the
Company, Larry Jack Taylor, April Michele Taylor Trust and
Kerri Denise Taylor Trust.
10.2(a) Form of Lease executed by Taylor Petroleum, Inc. as Tenant.
10.3(a) Agreement Regarding Leases effective as of March 1, 1992,
among the Company, Anadarko Development Company, Dakota Land
Company, Salt Fork Company, Inc., Larry Jack Taylor, and First
National Bank of Boston.
10.4(a) Stock Acquisition Agreement dated March 31, 1994, between the
Company and ESCM & Associates, Inc. regarding the sale of
Amber Refining, Inc. and Amber Pipeline, Inc.
10.5.1(a) Amended and Restated Credit and Guaranty Agreement dated
October 2, 1995, among E-Z Serve Convenience Stores, Inc., the
Company, the lenders party thereto, and Societe Generale, as
agent for the lenders.
10.5.2 Amendment and Waiver No.1 to Amended and Restated Credit and
Guaranty Agreement dated April 30, 1996, among E-Z Serve
Convenience Stores, Inc., the Company, the lenders party
thereto, and Societe Generale, as agent for the lenders -
incorporated by reference from Exhibit 10.1 of the Company's
quarterly report on Form 10-Q for the quarter ended March 31,
1996.
10.5.3(a) Amendment and Waiver No. 2 to Amended and Restated Credit and
Guaranty Agreement dated March 27, 1997, among E-Z Serve
Convenience Stores, Inc., the Company, the lenders party
thereto, and Societe Generale, as agent for the lenders.
10.6.1(a) Agreement Between Dillon Companies, Inc. and E-Z Serve
Convenience Stores, Inc. dated December 2, 1994.
51
10.6.2(a) Amendment to Agreement between Dillon Companies, Inc. and E-Z
Serve Convenience Stores, Inc. dated December 28, 1994.
10.6.3(a) Second Amendment to agreement between Dillon Companies, Inc.
and E-Z Serve Convenience Stores, Inc. dated January 17,
1995.
10.7 Agreement and Plan of Merger by and among the Company, EZS
Acquisition Corporation and Sunshine dated June 15, 1995 -
incorporated by reference from Exhibit 99.(c)(1) of the
Company's Tender Offer Statement on Schedule 14D-1 dated June
19, 1995.
10.8 Offer of Purchase by EZS Acquisition Corporation dated June
19, 1995 - incorporated by reference from Exhibit 99.(a)(1) of
the Company's Tender Offer Statement on Schedule 14D-1 dated
June 19, 1995.
10.9 Securities Purchase Agreement dated January 27, 1997, between
the Company and Phemus Corporation - incorporated by reference
from Exhibit 99.1 of the Company's Current Report on Form 8-K
dated January 27, 1997.
10.10(a)(b) Employment Agreement dated March 4, 1997, between Kathleen
Callahan-Guion and the Company.
21(a) Subsidiaries of the Registrant.
23(a) Consent of KPMG Peat Marwick LLP to the incorporation of their
report, included in this Form 10-K for the year ended December
29, 1996, into the Company's previously filed Registration
Statements on Forms S-8.
27(a) Financial Data Schedule for the period ended December 29,
1996.
- -------------------
(a) filed herewith
(b) Management contract or compensatory plan or arrangement.