FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FFP OPERATING PARTNERS, L.P.
(a wholly-owned subsidiary of
FFP Marketing Company, Inc.)
December 26, 1999
(These financial statements are being filed as an
exhibit to facilitate compliance with certain
environmental regulatory requirements.)
Report of Independent Certified Public Accountants
The Partners
FFP Operating Partners, L.P.
We have audited the balance sheet of FFP Operating Partners, L.P. (a Delaware
limited partnership) at December 26, 1999 and the related statements of income,
partners' capital and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FFP Operating Partners, L.P. as
of December 26, 1999, and the results of its operations and its cash flows for
the year then ended, in conformity with accounting principles generally accepted
in the United States.
GRANT THORNTON LLP
Dallas, Texas
March 31, 2000
FFP Operating Partners, L.P.
BALANCE SHEET
December 26, 1999
(In thousands)
ASSETS
Current assets
Cash and cash equivalents $ 21,087
Trade receivables, less allowance for doubtful accounts of $854 13,929
Notes receivable, current portion 1,003
Notes receivable from affiliate 878
Inventories 19,274
Investments in debt securities and certain equity securities 3,355
Prepaid expenses and other current assets 2,567
Total current assets 62,093
Property and equipment, net 33,790
Receivables from affiliated companies 18,932
Other assets, net 5,595
Total assets $120,410
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Current installments of long-term debt $ 1,231
Current installments of obligations under capital leases 250
Accounts payable 21,198
Money orders payable 12,445
Accrued expenses 16,912
Payable to affiliated companies 1,667
Total current liabilities 53,703
Long-term debt, excluding current installments 32,205
Obligations under capital leases, excluding current installments 4,629
Other liabilities 2,042
Total liabilities 92,579
Commitments and contingencies -
Partners' capital
Limited partner's equity 27,553
General partner's equity 278
Total partners' capital 27,831
Total liabilities and partners' capital $120,410
The accompanying notes are an integral part of this statement.
FFP Operating Partners, L.P.
STATEMENT OF INCOME
Year ended December 26, 1999
(In thousands)
Revenues
Motor fuel sales $357,319
Merchandise sales 114,216
Miscellaneous 10,383
Total revenues 481,918
Costs and expenses
Cost of motor fuel 331,175
Cost of merchandise 80,546
Direct store expenses 50,232
General and administrative expenses 11,871
Depreciation and amortization 5,769
Total costs and expenses 479,593
Operating income 2,325
Interest income 1,342
Interest expense 2,793
Income before extraordinary item 874
Extraordinary loss 375
Net income $ 499
Net income allocated to
Limited partner $ 494
General partner $ 5
The accompanying notes are an integral part of this statement.
FFP Operating Partners, L.P.
STATEMENT OF PARTNERS' CAPITAL
Year ended December 26, 1999
(In thousands)
Limited General
Partners Partner Total
Balance, December 27, 1998 $27,059 $273 $27,332
Net income 494 5 499
Balance, December 26, 1999 $27,553 $278 $27,831
The accompanying notes are an integral part of this statement.
FFP Operating Partners, L.P.
STATEMENT OF CASH FLOWS
Year ended December 26, 1999
(In thousands, except supplemental information)
Cash flows from operating activities
Net income 499
Adjustments to reconcile net income to net cash
used in operating activities -
Depreciation and amortization 5,769
Provision for doubtful accounts 583
Loss on sales of property and equipment 238
Gain on sales of convenience store operations (38)
Increase in trading securities (3,355)
Changes in operating assets and liabilities -
Increase in trade receivables (5,272)
Increase in inventories (5,552)
Increase in prepaid expenses and other operating assets (1,209)
Increase in accounts payable 4,923
Decrease in money orders payable (1,496)
Increase in accrued expenses and other liabilities 2,724
Net cash used in operating activities (2,156)
Cash flows from investing activities
Purchases of property and equipment (12,373)
Proceeds from sales of property and equipment 75
Increase in receivables from affiliated companies (5,170)
Decrease in notes receivable from affiliates 14,103
Decrease in notes receivable 402
Investment in joint venture (106)
Net cash used in investing activities (3,069)
Cash flows from financing activities
Proceeds from long-term debt 490,771
Payments on long-term debt (477,715)
Borrowings under capital lease obligations 3,985
Payments on capital lease obligations (462)
Advances to affiliated companies 1,115
Net cash provided by financing activities 17,694
Net increase in cash and cash equivalents 12,439
Cash and cash equivalents at beginning of year 8,648
Cash and cash equivalents at end of year $ 21,087
Supplemental disclosure of cash flow information
Cash paid for interest was $1,862,000.
The accompanying notes are an integral part of this statement.
FFP Operating Partners, L.P.
NOTES TO FINANCIAL STATEMENTS
December 26, 1999
NOTE A - BASIS OF PRESENTATION
Organization of Company
FFP Operating Partners, L.P. (the "Company") is a Delaware limited partnership
that is indirectly wholly-owned by FFP Marketing Company, Inc. ("FFP
Marketing"). FFP Operating LLC, a wholly-owned subsidiary of FFP Marketing, owns
a 1% general partner interest in the Company. FFP Marketing owns a 99% limited
partner interest in the Company. FFP Marketing is a publicly traded Texas
corporation whose common stock is listed on the American Stock Exchange under
the "FMM" trading symbol.
The Company operates convenience stores, truck stops, and motor fuel concessions
at independently-operated convenience stores over an 11 state area. It also
sells money orders through its own outlets, as well as through agents, and sells
motor fuel on a wholesale basis, primarily in Texas.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES
Fiscal Year
The Company prepares its financial statements and reports its results of
operations on the basis of a fiscal year which ends on the last Sunday of
December. Accordingly, the fiscal year ended December 26, 1999, consisted of 52
weeks. Year end data in these notes is as of the respective date above.
Cash Equivalents
The Company considers all highly liquid investments with maturities at date of
purchase of three months or less to be cash equivalents.
Notes Receivable
The Company evaluates the collectibility of notes receivable in accordance with
provisions of Statement of Financial Accounting Standards ("SFAS") No. 114,
"Accounting by Creditors for Impairment of Loans," as amended by SFAS No. 118,
"Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." At year end 1999, no notes receivable were determined to be
impaired.
Inventories
Inventories consist of retail convenience store merchandise and motor fuel
products. Merchandise inventories are stated at the lower of cost or market as
determined by the retail method. Motor fuel inventories are stated at the lower
of cost or market using the first-in, first-out ("FIFO") inventory method.
FFP Operating Partners, L.P.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
December 26, 1999
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company has selected a single company as the primary grocery and merchandise
supplier to its convenience stores and truck stops although certain items, such
as bakery goods, dairy products, soft drinks, beer, and other perishable
products, are generally purchased from local vendors and/or wholesale route
salespeople. The Company believes it could replace any of its merchandise
suppliers, including its primary grocery and merchandise supplier, with no
significant adverse effect on its operations.
The Company does not have long-term contracts with any suppliers of petroleum
products covering more than 10% of its motor fuel supply. Unanticipated national
or international events could result in a curtailment of motor fuel supplies to
the Company, thereby adversely affecting motor fuel sales. In addition,
management believes a significant portion of its merchandise sales are to
customers who also purchase motor fuel. Accordingly, reduced availability of
motor fuel could negatively impact other facets of the Company's operations.
Property and Equipment
Property and equipment are stated at cost. Equipment and buildings acquired
under capital leases are stated at the present value of the initial minimum
lease payments, which is not in excess of the fair value of the respective
assets. Depreciation and amortization of property and equipment are provided on
the straight-line method over the estimated useful lives of the respective
assets, which range from three to 20 years. Leasehold improvements are amortized
on the straight-line method over the shorter of the lease term, including option
periods, or the estimated useful lives of the respective assets.
Investments in Joint Ventures and Other Entities
Investments in joint ventures and other entities that are 50% or less owned are
accounted for by the equity method and are included in other assets, on a net
basis, in the accompanying balance sheet.
Intangible Assets
In connection with the allocation of the purchase price of the assets acquired
in 1987 upon the commencement of the Company's operations, $1,093,000 was
allocated as the future benefit of real estate leased from affiliates of its
former general partner. The future benefit of these leases is being amortized
using the straight-line method over 20 years, the term including option periods
of such leases.
At year end 1999, goodwill of $1,445,000 is being amortized using the
straight-line method over 20 years. The Company assesses the recoverability of
goodwill by determining whether the amortization of the balance over the
remaining amortization period can be recovered through undiscounted future
operating cash flows of the acquired operations. The amount of goodwill
impairment, if any, is measured based on projected discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds.
The assessment of the recoverability of goodwill would be impacted if
anticipated future operating cash flows are not achieved.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
Sales of Convenience Store Operations
The Company sold the merchandise operations and related inventories of certain
convenience store locations to various third parties in exchange for cash and
notes receivable. The notes receivable generally are for terms of five years,
require monthly payments of principal and interest, and bear interest at rates
ranging from 8% to 11%. Summary information about these sales is as follows:
Gains
Number Notes Total Deferred (at
sold Cash receivable proceeds Recognized year-end)
(In thousands, except number sold)
1999 3 $31 $110 $141 $38 $42
Gains on sales which meet specified criteria, including receipt of a significant
cash down payment and projected cash flow from store operations sufficient to
adequately service the debt, are recognized upon closing of the sale. Gains on
sales which do not meet the specified criteria are recognized under the
installment method as cash payments are received. Gains being recognized under
the installment method are evaluated periodically to determine if full
recognition of the gain is appropriate.
Under these sales, the Company generally retains the real estate or leasehold
interests, and leases or subleases the store facilities (including the store
equipment) to the purchaser under five-year renewable operating lease
agreements. The Company usually retains ownership of the motor fuel operations
and pays the purchaser of the store commissions based on motor fuel sales.
In addition, the new store operators may purchase merchandise under the
Company's established buying arrangements.
Environmental Costs
Environmental remediation costs are expensed. Related environmental expenditures
that extend the life, increase the capacity, or improve the safety or efficiency
of existing assets are capitalized. Liabilities for environmental remediation
costs are recorded when environmental assessment and/or remediation is probable
and the amounts can be reasonably estimated. Environmental liabilities are
evaluated independently from potential claims for recovery. Accordingly, the
gross estimated liabilities and estimated claims for reimbursement have been
presented separately in the accompanying balance sheet (see Note K).
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
The Company accounts for environmental remediation liabilities in accordance
with the American Institute of Certified Public Accountants Statement of
Position ("SOP") 96-1 which requires, among other things, environmental
remediation liabilities to be accrued when the criteria of SFAS No. 5,
"Accounting for Contingencies," have been met. The SOP also provides guidance
with respect to the measurement of remediation liabilities.
Motor Fuel Taxes
Motor fuel revenues and related cost of motor fuel include federal and state
excise taxes of $136,082,000 for 1999.
Exchanges
The exchange method of accounting is utilized for motor fuel exchange
transactions. Under this method, such transactions are considered as exchanges
of assets with deliveries being offset against receipts, or vice versa. Exchange
balances due from others are valued at current replacement costs. Exchange
balances due to others are valued at the cost of forward contracts (Note I) to
the extent they have been entered into, with any remaining balance valued at
current replacement cost. Exchange balances due to others at year end 1999 were
$311,000.
Income Taxes
Taxable income or loss of the Company is includable in the income tax returns of
its partners; therefore, no provision for income taxes has been made in the
accompanying financial statements.
The Company's parent is a corporation and accounts for income taxes under the
asset and liability method. The parent recognizes deferred tax assets and
liabilities for the estimated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, as recorded on the books and records
of its subsidiaries, that are expected to reverse in future years.
Fair Value of Financial Instruments
The carrying amounts of cash, receivables, investments in debt securities and
certain equity securities, amounts due under revolving credit line, and money
orders payable approximate fair value because of the short maturity of those
instruments. The carrying amount of notes receivable and notes receivable from
affiliates approximates fair value, which is determined by discounting expected
future cash flows at current rates.
The carrying amount of long-term debt was $33,436,000. The fair value of such
debt was $32,808,000 based on the Company's current borrowing rate.
NOTE B - SIGNIFICANT ACCOUNTING POLICIES - Continued
Allocation of Net Income or Loss and Cash Distributions
The Partnership Agreement of the Company provides that net income or loss and
cash distributions are to be allocated 99% to its limited partner and 1% to its
general partner.
Employee Benefit Plan
The Company has a 401(k) profit sharing plan covering all employees who meet age
and tenure requirements. Participants may contribute to the plan a portion,
within specified limits, of their compensation under a salary reduction
arrangement. The Company may make discretionary matching or additional
contributions to the plan. The Company did not make any contributions to the
plan in 1999.
Use of Estimates
The Company is required to use estimates in preparing its financial statements
in conformity with generally accepted accounting principles. Although management
believes that such estimates are reasonable, actual results could differ from
the estimates.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
Long-lived assets and certain identifiable intangibles are reviewed for
impairment whenever events or changes in circumstances indicate that the related
carrying amount may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of such assets to future
net cash flows expected to be generated by the assets. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceeds the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
Revenue Recognition
The Company recognizes revenue related to motor fuel and merchandise sales at
the time of the sale.
NOTE C - PROPERTY AND EQUIPMENT
Property and equipment at December 26, 1999 consists of the following:
(in thousands)
Land $ 239
Buildings and leasehold improvements 14,787
Fixtures and equipment 56,141
Construction in progress 123
71,290
Accumulated depreciation and amortization (37,500)
$ 33,790
NOTE D - OTHER ASSETS
Other assets at December 26, 1999 consists of the following:
(in thousands)
Intangible assets (Note B)
Ground leases $ 1,093
Goodwill 1,445
Other 2,644
5,182
Accumulated amortization (2,961)
2,221
Notes receivable 1,059
Environmental remediation reimbursement claims 1,283
Investment in joint ventures and other entities 316
Other 716
$ 5,595
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT
In June 1998, the Company refinanced a loan with an original principal amount of
$6,735,000 incurred in connection with its December 1997 acquisition of 94
convenience stores. The refinancing is comprised of 44 loans in the original
principal amount of $9,420,000 and bears interest at 8.66% per annum. The loans
will be fully amortized at various maturity dates ranging from October 2007 to
July 2013 by making principal and interest payments in equal monthly
installments over their respective terms. The loans are collateralized by the
Company's assets at 44 of the 94 convenience stores acquired in 1997. At
December 26, 1999, $8,825,000 remained outstanding on these loans.
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT - Continued
In February 1999, the Company acquired 23 convenience stores and two truck
stops. Eleven of the 25 stores are third party leasehold locations where the
Company purchased the existing leasehold interest, equipment, and inventory. The
Company financed its purchase of those properties with fully-amortizing mortgage
loans in the aggregate original principal amount of $1,012,000, with maturity
dates ranging from 86 to 180 months, interest payable at a fixed rate of 9.275%
per annum, a minimum fixed charge coverage ratio of 1.25 to 1, and aggregate
monthly payments of principal and interest of $13,000. At year end 1999,
$970,000 remained outstanding on these loans.
The land and building at the remaining 14 of those 25 stores were purchased on
the same date by FFP Partners L.P. (FFP Partners), an affiliate, and immediately
leased to the Company under real estate leases with a 15-year term. The real
estate leases negotiated between FFP Partners and the Company require a total
monthly rent payment of $99,000 with a rate of return of approximately 14%.
Under generally accepted accounting principles, each real estate lease is
treated as two leases: a land lease and a building lease. Each land lease is
classified as an operating lease, with monthly payments for all such land leases
aggregating $28,000. Each building lease is classified as a capital lease, with
monthly payments for all such building leases aggregating $71,000. The amount of
rent allocated to the capital lease obligation for the buildings in the original
amount of $3,932,000 results in an implicit rate of approximately 20%. As a
condition to the Company's acquisition of store operations at those 14 fee
locations, the Company was required to guarantee the acquisition indebtedness of
$9,550,000 incurred by FFP Partners in its purchase of those stores, including
land, building, equipment and inventory. At year end 1999, $9,327,000 remained
outstanding on those loans of FFP Partners that were guaranteed by the Company.
The Company's scheduled real estate lease payments to FFP Partners will equal or
exceed the debt service costs of FFP Partners during the term of the leases.
In February 1999, the Company also purchased inventory and equipment from FFP
Partners at those 14 fee locations at a price of $2,692,000 and executed a note
payable to FFP Partners for such amount. This note, which was payable in monthly
installments with interest at the prime rate, was repaid in full by the Company
in October 1999.
In June 1999, the Company refinanced its previous long-term revolving credit
facility and term loan with the proceeds of fixed rate financing from a third
party lender in the original principal amount of $23,800,000. With the net loan
proceeds the Company repaid debts aggregating $19,988,000 and incurred an
extraordinary loss of $375,000, as a result of prepayment penalties and the
write off of previously unamortized loan fees. This new long-term debt is
payable in 180 equal, monthly installments with interest at a fixed rate of 9.9%
per annum, a minimum fixed charge coverage ratio of 1.25 to 1, and aggregate
monthly payments of principal and interest of $256,000. This loan is
collateralized by a lien against the Company's leasehold, equipment, and
inventory at 49 specific convenience stores, truck stops and gas-only outlets.
At year end 1999, $23,515,000 remained outstanding on these loans.
NOTE E - NOTES PAYABLE AND LONG-TERM DEBT - Continued
In December 1999, the Company closed a new revolving credit facility with a
third party lender providing for borrowings up to $10,000,000. The amount
available at any time under the loan is equal to a borrowing base of 80% of
certain trade receivables plus 60% of the inventory at the terminal facility of
another subsidiary of FFP Marketing; provided, however, that any draw which
would cause outstanding borrowings under the facility to exceed $5,000,000 is
limited to 140% of net value of debt and equity securities in the Company's
trading account at a brokerage firm. At year end 1999, the Company's borrowing
base was approximately $9,800,000, and the net value at the brokerage firm was
approximately $5,181,000. The revolving credit facility bears interest at the
lender's prime rate plus one percentage point, payable monthly, and matures in
December 2002. At year end 1999, no amount was outstanding under the revolving
line of credit. The loan is subject to a Loan Agreement and a Security Agreement
dated in December 1999 between the lender, FFP Marketing, the Company and the
other subsidiary of FFP Marketing. The agreement contains numerous restrictive
covenants including, but not limited to, a financial covenant requiring the
Company to maintain a minimum fixed charge coverage ratio of 1.25 to 1. Loans
under the agreement are collateralized by all of the Company's trade accounts
receivable, and the other subsidiary's inventories at the terminal.
In June 1999, the Company repaid in full a loan that the Company had acquired in
April 1998 in the original principal amount of $2,076,000. The note had been
incurred to refinance a prior capital lease obligation, bore interest at 8.93%
per annum, and matured in April 2003. The debt required monthly principal and
interest payments of $43,000 and was collateralized by various equipment.
The amount of long-term debt payments for the next five years and thereafter is
as follows:
(in thousands)
2000 $ 1,231
2001 1,506
2002 1,580
2003 1,709
2004 1,868
Thereafter 25,542
$33,436
NOTE F - CAPITAL LEASES
The Company is obligated under noncancellable capital leases for computers and
convenience store equipment that begin to expire in 2000. Beginning February
1999, the Company also leases buildings at 14 convenience stores that are
classified for accounting purposes as capitalized leases. The building capital
lease obligations had an initial obligation of $3,932,000 in February 1999,
which had been reduced to $3,897,000 at year end 1999. The gross amount of the
assets covered by capital leases and included in property and equipment in the
accompanying balance sheet is as follows:
(in thousands)
Buildings $3,932
Fixtures and equipment 1,980
Accumulated depreciation and amortization (815)
$5,097
The amortization of assets held under capital leases is included in depreciation
and amortization expense in the accompanying statement of income. Future minimum
lease payments under the noncancellable capital leases for years subsequent to
1999 are:
(in thousands)
2000 $ 1,244
2001 1,225
2002 1,083
2003 885
2004 853
Thereafter 7,819
Total minimum lease payments 13,109
Amount representing interest (8,230)
Present value of future minimum lease payments 4,879
Current installments (250)
Obligations under capital leases,
excluding current installments $ 4,629
NOTE G - OPERATING LEASES
The Company primarily conducts its operations pursuant to noncancellable,
long-term operating leases on its locations, a significant portion of which are
with related parties. Certain of the leases have contingent rentals based on
sales levels of the locations and/or have escalation clauses tied to the
consumer price index. Minimum future rental payments (including bargain renewal
periods) and sublease receipts for years after 1999 are as follows (in
thousands):
Future rental payments Future
Related sublease
parties Other Total receipts
2000 $ 3,689 $ 3,022 $ 6,711 $1,160
2001 3,607 2,860 6,467 846
2002 3,091 2,751 5,842 615
2003 2,550 2,532 5,082 425
2004 2,550 2,465 5,015 182
Thereafter 32,729 22,743 55,472 5
$48,216 $36,373 $84,589 $3,233
Total rental expense and sublease income were as follows (in thousands):
Future rental payments
Related Sublease
parties Other Total income
1999 $3,745 $3,247 $6,992 $1,683
NOTE H - ACCRUED EXPENSES
Accrued expenses at December 26, 1999 consist of the following:
(in thousands)
Motor fuel taxes payable $10,602
Accrued payroll and related expenses 1,209
Other 5,101
$16,912
NOTE I - FUTURES AND FORWARD CONTRACTS
The Company is party to commodity futures contracts with off-balance sheet risk.
Changes in the market value of open futures contracts are recognized as gains or
losses in the period of change. These investments involve the risk of dealing
with others and their ability to meet the terms of the contracts and the risk
associated with unmatched positions and market fluctuations. Contract amounts
are often used to express the volume of these transactions, but the amounts
potentially subject to risk are much smaller.
From time-to-time the Company enters into forward contracts to buy and sell
fuel, principally to satisfy balances owed on exchange agreements (Note B).
These transactions, which together with futures contracts are classified as
operating activities for purposes of the statement of cash flows, are included
in motor fuel sales and related cost of sales, and resulted in net gains of
$74,000 in 1999. Open positions under futures and forward contracts were not
significant at year end.
NOTE J - RELATED PARTY TRANSACTIONS
The Company and FFP Partners are parties to a reimbursement agreement pursuant
to which FFP Partners reimburses the Company for all direct costs of FFP
Partners (such as costs to prepare FFP Partners' annual partnership tax returns,
annual audit fees, and etc.) and an agreed upon lump sum amount for indirect
overhead costs allocable to FFP Partners. The reimbursement for officers'
compensation costs incurred by the Company in connection with FFP Partners'
activities is determined by the amount of time management and other personnel
spend on activities of FFP Partners compared to the amount of time they spend on
activities of the Company. The indirect cost allocation paid by FFP Partners to
the Company for 1999 was $200,000.
From time to time, the Company makes advances to and receives advances from FFP
Marketing and its subsidiaries. Such advances are reflected in receivables from
or payables to affiliated companies in the accompanying balance sheet. Interest
has been charged or paid on such balances at a rate equal to the prime rate of
interest. In 1999, interest income includes interest income on advances to
affiliates of $1,259,000 and interest expense includes interest expense on
advances from affiliates of $105,000.
The Company is not licensed to sell alcoholic beverages in Texas. In July 1991,
the Company entered into an agreement with an affiliated company whereby the
affiliated company sells alcoholic beverages at the Company's stores in Texas.
The agreement provides that the Company will receive rent and a management fee
based on the gross receipts from sales of alcoholic beverages at its stores. In
July 1997, the agreement was amended to extend the term for five years
commencing on the date of amendment. The sales recorded by the affiliated
company under this agreement were $17,596,000. The Company received $3,036,000
in rent, management fees, and interest, and such amounts are included in
miscellaneous revenues in the statement of income. After deducting cost of sales
and other expenses related to these sales, including the amounts paid to the
Company, the affiliated company had earnings of $172,000, as a result of these
alcoholic beverage sales. Under a revolving note executed in connection with
this agreement, the Company advances funds to the affiliated company to pay for
the purchases of alcoholic beverages. Receipts from the sales of such beverages
are credited against the note balance. The revolving note provides for interest
at 0.5% above the prime rate charged by a major financial institution and had a
balance of $878,000 at year end.
NOTE J - RELATED PARTY TRANSACTIONS - Continued
The Company purchases certain goods and services (including fuel supply
consulting and procurement services) from related entities. Purchases of these
services from related entities was $68,000. The Company purchased $24,564,000 of
motor fuel from another subsidiary of FFP Marketing. The Company believes all
such purchases and sales were made on terms and at prices at least as favorable
as could have been obtained from unrelated third parties.
The Company leases real property for some of its retail outlets from FFP
Partners. The Company paid $2,952,000 in lease payments to FFP Partners for
these properties during 1999.
The Company also leases real property for some of its retail outlets and some
administrative and executive office facilities from various other entities
affiliated with the senior management of FFP Marketing. The Company paid
$944,000, to such entities with respect to these leases. The Company's
management believes the leases with these affiliates are on terms that are more
favorable to the Company than terms that could have been obtained from
unaffiliated third parties for similar properties.
In 1980 and 1982, certain companies from which the Company acquired its initial
base of retail outlets granted to a third party the right to sell motor fuel at
retail for a period of 10 years at self-serve gasoline stations owned or leased
by the affiliated companies or their affiliates. All rights to commissions under
these agreements and the right to sell motor fuel at wholesale to the third
party at such locations were assigned to the Company in May 1987 in connection
with the acquisition of its initial base of retail operations. In December 1990,
in connection with the expiration or termination of the agreements with the
third party, the Company entered into agreements with a company owned and
controlled by an affiliated party and members of his immediate family, which
grant to the Company the exclusive right to sell motor fuel at retail at these
locations. The terms of these agreements are comparable to agreements that the
Company has made with other unrelated parties. The Company paid commissions
related to the motor fuel sales at these locations of $239,000, to this
affiliated company.
NOTE K - COMMITMENTS AND CONTINGENCIES
Uninsured Liabilities
The Company maintains general liability insurance with limits and deductibles
management believes prudent in light of the exposure of the Company to loss and
the cost of the insurance.
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
The Company self-insures claims up to $45,000 per year for each individual
covered by its employee medical benefit plan for supervisory and administrative
employees; claims above $45,000 are covered by a stop-loss insurance policy. The
Company also self-insures medical claims for its eligible store employees.
However, claims under the plan for store employees are subject to a $1,000,000
lifetime limit per employee, and the Company does not maintain stop-loss
coverage for these claims. The Company and its covered employees contribute to
pay the self-insured claims and stop-loss insurance premiums. Accrued
liabilities include amounts management believes adequate to cover the estimated
claims arising prior to a year-end, including claims incurred but not yet
reported. The Company recorded expense related to these plans of $193,000.
The Company is covered for worker's compensation in all states through incurred
loss retrospective policies. Accruals for estimated claims (including claims
incurred but not reported) have been recorded at year end, including the effects
of any retroactive premium adjustments.
Environmental Matters
The operations of the Company are subject to a number of federal, state, and
local environmental laws and regulations, which govern the storage and sale of
motor fuels, including those regulating underground storage tanks. In September
1988, the Environmental Protection Agency ("EPA") issued regulations that
require all newly installed underground storage tanks be protected from
corrosion, be equipped with devices to prevent spills and overfills, and have a
leak detection method that meets certain minimum requirements. The effective
commencement date for newly installed tanks was December 22, 1988. Underground
storage tanks in place prior to December 22, 1988, had to conform to the new
standards by December 1998. The Company brought all of its existing underground
storage tanks and related equipment into compliance with these laws and
regulations. At year end, the Company recorded liabilities for future estimated
environmental remediation costs related to known leaking underground storage
tanks of $918,000 in other liabilities. Corresponding claims for reimbursement
of environmental remediation costs of $918,000 were also recorded, as the
Company expects that such costs will be reimbursed by various environmental
agencies. In 1995, the Company contracted with a third party to perform site
assessments and remediation activities on 35 sites located in Texas that are
known or thought to have leaking underground storage tanks. Under the contract,
the third party coordinates with the state regulatory authority the work to be
performed and bills the state directly for such, work. The Company is liable for
the $10,000 per occurrence deductible and for any costs in excess of the
$1,000,000 limit provided for by the state environmental trust fund. The Company
does not expect that the costs of remediation of any of these 35 sites will
exceed the $1,000,000 limit. The assumptions on which the foregoing estimates
are based may change and unanticipated events and circumstances may occur which
may cause the actual cost of complying with the above requirements to vary
significantly from these estimates.
During 1999, environmental expenditures were $2,459,000 (including capital
expenditures of $1,943,000), in complying with environmental laws and
regulations.
NOTE K - COMMITMENTS AND CONTINGENCIES - Continued
The Company does not maintain insurance covering losses associated with
environmental contamination. However, all the states in which the Company owns
or operates underground storage tanks have state operated funds which reimburse
the Company for certain cleanup costs and liabilities incurred as a result of
leaks in underground storage tanks. These funds, which essentially provide
insurance coverage for certain environmental liabilities, are funded by taxes on
underground storage tanks or on motor fuels purchased within each respective
state. The coverages afforded by each state vary but generally provide up to
$1,000,000 for the cleanup of environmental contamination and most provide
coverage for third-party liability as well. The funds require the Company to pay
deductibles ranging from $5,000 to $25,000 per occurrence. The majority of the
Company's environmental contamination cleanup activities relate to underground
storage tanks located in Texas. Due to an increase in claims throughout the
state, the Texas state environmental trust fund has significantly delayed
reimbursement payments for certain cleanup costs after September 30, 1992. In
1993, the Texas state fund issued guidelines that, among other things,
prioritize the timing of future reimbursements based upon the total number of
tanks operated by and the financial net worth of each applicant. The Company has
been classified in the category with the lowest priority. Because the state and
federal governments have the right, by law, to levy additional fees on fuel
purchases, the Company believes these clean up costs will ultimately be
reimbursed. However, due to the uncertainty of the timing of the receipt of the
reimbursements, the claims for reimbursement of environmental remediation costs,
totaling $1,283,000 at year end have been classified as long-term receivables
and are included in other assets in the accompanying balance sheet. Effective
December 22, 1998, this trust arrangement was terminated with respect to future,
but not past, environmental costs. Therefore, the Company's environmental costs
in the future could increase.
Other
The Company is subject to various claims and litigation arising in the ordinary
course of business, particularly personal injury and employment related claims.
In the opinion of management, the outcome of such matters will not have a
material effect on the financial position or results of operations of the
Company.