FINANCIAL STATEMENTS AND REPORT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
FFP OPERATING PARTNERS, L.P.
(a wholly-owned subsidiary of
FFP Marketing Company, Inc.)
December 31, 2000 and December 26, 1999
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Partners
FFP Operating Partners, L.P.
We have audited the balance sheets of FFP Operating Partners, L.P. (a
Delaware limited partnership) at December 31, 2000 and December 26, 1999 and the
related statements of income, partners' capital and cash flows for the years
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 audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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 FFP Operating Partners, L.P.
as of December 31, 2000 and December 26, 1999, and the results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
Dallas, Texas
April 5, 2001
FFP OPERATING PARTNERS, L.P.
BALANCE SHEETS
December 31, 2000 and December 26, 1999
(In thousands)
2000 1999
------ ------
ASSETS
Current assets
Cash and cash equivalents .................. $ 15,056 $ 21,087
Trade receivables, less allowance for
doubtful accounts of $851 and $854
at 2000 and 1999, respectively .......... 18,589 13,929
Notes receivable, current portion .......... 1,391 1,003
Notes receivable from affiliate ............ 755 878
Inventories ................................ 18,186 19,274
Investments in available-for-sale securities 2,426 3,355
Prepaid expenses and other current assets .. 441 1,627
--------- ---------
Total current assets .................... 56,844 61,153
Property and equipment, net .................... 31,987 33,790
Receivables from affiliated companies .......... 24,870 18,932
Notes receivable ............................... 3,620 1,059
Other assets, net .............................. 7,543 5,476
--------- ---------
Total assets $ 124,864 $ 120,410
========= =========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Current installments of long-term debt ..... $ 1,642 $ 1,231
Current installments of obligations
under capital leases ................... 437 250
Accounts payable ........................... 19,820 21,198
Money orders payable ....................... 17,110 12,445
Accrued expenses ........................... 11,906 16,912
Payable to affiliated companies ............ 1,927 1,667
--------- ---------
Total current liabilities ............... 52,842 53,703
Long-term debt, excluding current installments . 37,557 32,205
Obligations under capital leases,
excluding current installments ............. 4,042 4,629
Other liabilities .............................. 2,081 2,042
--------- ---------
Total liabilities ....................... 96,522 92,579
Commitments and contingencies .................. -- --
Partners' capital
Limited partner's capital .................. 29,512 27,553
General partner's capital .................. 298 278
Accumulated other comprehensive loss ....... (1,468) --
--------- ---------
Total partners' capital ................. 28,342 27,831
--------- ---------
Total liabilities and partners' capital $ 124,864 $ 120,410
========= =========
The accompanying notes are an integral part of these statements.
FFP OPERATING PARTNERS, L.P.
STATEMENTS OF INCOME
Years ended December 31, 2000 and December 26, 1999
(In thousands)
2000 1999
------ ------
Revenues
Motor fuel sales ........................... $449,284 $357,319
Merchandise sales .......................... 111,522 114,216
Miscellaneous .............................. 12,156 10,383
------- -------
Total revenues .......................... 572,962 481,918
Costs and expenses
Cost of motor fuel ......................... 422,472 331,175
Cost of merchandise ........................ 78,468 80,546
Direct store expenses ...................... 50,050 50,232
General and administrative expenses ........ 12,348 11,871
Depreciation and amortization .............. 6,281 5,769
------- ------
Total costs and expenses ................ 569,619 479,593
------- -------
Operating income ........................ 3,343 2,325
Interest income ................................ 1,300 1,342
Interest expense ............................... (2,664) (2,793)
------- -------
Income before extraordinary item ........ 1,979 874
Extraordinary loss ............................. - 375
------- -------
Net income $ 1,979 $ 499
======= =======
Net income allocated to
Limited partner ............................ $ 1,959 $ 494
General partner ............................ $ 20 $ 5
The accompanying notes are an integral part of this statement.
FFP OPERATING PARTNERS, L.P.
STATEMENT OF PARTNERS' CAPITAL
Years ended December 31, 2000 and December 26, 1999
(In thousands)
Accumulated
other
Limited General comprehensive
Partner Partner loss Total
-------- -------- ----------- -------
Balance, December 27, 1998... $27,059 $ 273 $ - $27,332
Net income................... 494 5 - 499
------ ---- ---- ------
Balance, December 26, 1999... 27,553 278 - 27,831
Net income .................. 1,959 20 - 1,979
Unrealized loss on available-
for-sale securities ...... - - (1,468) (1,468)
------
Comprehensive income ........ 511
------ ----- ------ ------
Balance, December 31, 2000 $29,512 $ 298 $(1,468) $28,342
====== ===== ====== ======
The accompanying notes are an integral part of these statements.
FFP OPERATING PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
Years ended December 31, 2000 and December 26, 1999
(In thousands, except supplemental information)
2000 1999
------ -------
Cash flows from operating activities
Net income ...................................... $ 1,979 $ 499
Adjustments to reconcile net income to net cash
used in operating activities
Depreciation and amortization ................ 6,281 5,769
Provision for doubtful accounts .............. 447 583
Loss on sales of property and equipment ...... (263) 238
Gain on sales of convenience store operations (2,851) (38)
Increase in trading securities ............... (2,104) (3,355)
Changes in operating assets and liabilities
Trade receivables ............................ (5,107) (5,272)
Inventories .................................. (384) (5,552)
Prepaid expenses and other operating assets .. (630) (1,209)
Accounts payable ............................. (1,378) 4,923
Money orders payable ......................... 4,665 (1,496)
Accrued expenses and other liabilities ....... (5,102) 2,724
--------- ---------
Net cash used in operating activities ....... (4,447) (2,186)
Cash flows from investing activities
Purchases of property and equipment ............. (4,759) (12,373)
Proceeds from sales of property and equipment ... 2,103 75
Purchase of available-for-sale securities ....... (538) --
Proceeds from sale of available-for-sale securities 1,453 --
Change in receivables from affiliated companies . 123 (5,170)
Change in notes receivable from affiliates ...... (5,678) 15,218
Decrease in notes receivable .................... 349 402
Investment in joint venture ..................... -- (106)
--------- ---------
Net cash used in investing activities ....... (6,947) (1,954)
Cash flows from financing activities
Proceeds from long-term debt .................... 102,337 490,771
Payments on long-term debt ...................... (96,574) (477,715)
Borrowings under capital lease obligations ...... -- 3,985
Payments on capital lease obligations ........... (400) (462)
--------- ---------
Net cash provided by financing activities ... 5,363 16,579
--------- ---------
Net increase (decrease) in cash and cash equivalents (6,031) 12,439
Cash and cash equivalents at beginning of year ...... 21,087 8,648
--------- ---------
Cash and cash equivalents at end of year ............ $ 15,056 $ 21,087
======== ========
Supplemental disclosure of cash flow information:
- ------------------------------------------------
Cash paid for interest .......................... $ 2,470 $ 1,862
====== ======
The accompanying notes are an integral part of these statements.
FFP OPERATING PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
December 31, 2000 and 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 31, 2000, contained 53
weeks, while the fiscal year ended December 26, 1999 contained 52 weeks. Year
end data in these notes is as of the respective dates 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 December 31, 2000 and December 26, 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.
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 2000 and 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.
Freight Charges and Costs
The Company classifies all amounts billed to its wholesale motor fuel
customers for freight charges as motor fuel sales and includes all related
freight costs in cost of motor fuel.
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
sold Cash receivable proceeds Recognized (at year-end)
------ ------ ---------- -------- ---------- -----------
(In thousands, except number sold)
2000.... 34 $1,160 $3,298 $4,458 $2,851 $135
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 that 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 sheets
(see Note L).
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 $117,522,000 and $136,082,000 in 2000 and 1999,
respectively.
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 J) to
the extent they have been entered into, with any remaining balance valued at
current replacement cost. Exchange balances due from others at year end 2000
were $200,000, while 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 at year end 2000 and 1999 was
$39,199,000 and $33,436,000, respectively. The fair value of such debt at year
end 2000 and 1999 was approximately $41,541,000 and $32,808,000, respectively,
based on the Company's current borrowing rate.
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 2000 and 1999.
Use of Estimates
The Company is required to use estimates in preparing its financial
statements in conformity with accounting principles generally accepted in the
United States of America. 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.
Reclassifications
Certain 1999 amounts have been reclassified to conform to the 2000
presentation.
NOTE C - INVESTMENTS IN MARKETABLE SECURITIES
Through September 24, 2000, the Company classified all of its investments
in marketable securities as "trading securities". Trading securities are
securities that are bought and held principally for the purpose of a resale in
the near term. Effective September 24, 2000, the Company changed its intention
in holding its marketable securities to a longer term outlook. Accordingly,
beginning September 25, 2000, the Company classified all of its marketable
securities as "available-for-sale" securities. FASB No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", provides that net unrealized
and realized gains and losses from trading securities are included in earnings,
while net unrealized gains and losses from available-for-sale securities are
included in the calculation of "comprehensive income or loss" as a separate
component of the partners' capital accounts of the Company, instead of in
earnings. Dividend and interest income from both trading securities and
available-for-sale securities, including the amortization of any premium and
discount arising at acquisition, are also included in earnings.
Dividend and interest income from trading securities and from
available-for-sale securities, including the amortization of premium or
accretion of discount arising at acquisition, unrealized gains and losses from
trading securities, and realized gains and losses from trading securities and
available-for-sale securities were included in earnings in 2000 and 1999 in the
following amounts:
2000 1999
------ -----
(in thousands)
Dividend and interest income
from marketable securities, net ........... $ 891 $ 58
Net unrealized gains (losses)
from trading securities ................... (2,221) 133
Net realized gains from trading
and available-for-sale securities ......... 1,395 79
------ ------
$ 65 $ 270
====== =====
NOTE D - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
2000 1999
-------- --------
(in thousands)
Land .......................................... $ 414 $ 239
Buildings and leasehold improvements .......... 15,443 14,787
Fixtures and equipment ........................ 58,761 56,141
Construction in progress ...................... 4 123
-------- --------
74,622 71,290
Accumulated depreciation and amortization ..... (42,635) (37,500)
-------- --------
$ 31,987 $ 33,790
======== ========
NOTE E - OTHER ASSETS
Other assets consists of the following:
2000 1999
------ ------
(in thousands)
Intangible assets (Note B)
Ground leases .............................. $ 1,093 $ 1,093
Goodwill ................................... 1,445 1,445
Other ...................................... 2,947 2,644
------- -------
5,485 5,182
Accumulated amortization ................... (3,317) (2,961)
------- -------
2,168 2,221
Environmental remediation reimbursement claims 1,557 1,283
Loan origination fees ......................... 1,553 940
Investment in joint ventures and other entities 210 316
Other ......................................... 2,055 716
------- -------
$ 7,543 $ 5,476
======= =======
NOTE F - 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 year
end 2000 and 1999, $8,359,000 and $8,825,000, respectively remained outstanding
on these loans.
In February 1999, the Company acquired 23 convenience stores and two truck
stops. Eleven of the 25 stores are third party leasehold locations where the
Company purchased the existing leasehold interest, equipment, and inventory. The
Company financed its purchase of those properties with fully-amortizing mortgage
loans in the aggregate original principal amount of $1,012,000, with maturity
dates ranging from 86 to 180 months, interest payable at a fixed rate of 9.275%
per annum, a minimum fixed charge coverage ratio of 1.25 to 1, and aggregate
monthly payments of principal and interest of $13,000. At year end 2000 and
1999, $908,000 and $970,000, respectively 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 accounting principles generally accepted in the United States of
America, 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 2000 and 1999, $9,000,000 and $9,327,000,
respectively, 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 2000 and 1999, $22,773,000 and $23,515,000, respectively remained
outstanding on these loans.
In December 1999, the Company closed a new revolving credit facility with a
third party lender providing for borrowings up to $10,000,000. The amount
available at any time under the loan is equal to a borrowing base of 80% of
certain trade receivables plus 60% of the 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 2000 and 1999, the Company's
borrowing base was $9,800,000, and the net value at the brokerage firm was
$2,711,000 and $5,181,000 at year end 2000 and 1999, respectively. 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 2000 and 1999,
$6,858,000 and $0, respectively, had been drawn by the affiliate and recorded as
a liability on the affiliate's books. 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)
2001 ........................... $ 1,642
2002 ........................... 8,436
2003 ........................... 1,709
2004 ........................... 1,868
2005 ........................... 2,049
Thereafter ..................... 23,495
-------
$39,199
=======
NOTE G - 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 $3,845,000 and $3,897,000 at year end 2000 and 1999,
respectively. The gross amount of the assets covered by capital leases and
included in property and equipment in the accompanying balance sheets is as
follows:
2000 1999
------ ------
(in thousands)
Buildings ....................................... $ 3,932 $3,932
Fixtures and equipment .......................... 1,555 1,980
Less accumulated depreciation and amortization... (1,106) (815)
------ -----
$ 4,381 $5,097
====== =====
The amortization of assets held under capital leases is included in
depreciation and amortization expense in the accompanying statements of income.
At December 31, 2000, future minimum lease payments under the noncancellable
capital leases for years subsequent to 2000 are:
(in thousands)
2001 ........................................ $ 1,269
2002 ........................................ 1,083
2003 ........................................ 885
2004 ........................................ 853
2005 ........................................ 853
Thereafter .................................. 6,966
------
Total minimum lease payments ................ 11,909
Amount representing interest ............ (7,430)
------
Present value of future minimum lease payments 4,479
Current installments .................... (437)
-----
Obligations under capital leases,
excluding current installments $ 4,042
======
NOTE H - 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 2000 are as follows (in
thousands):
Future rental payments
---------------------------------- Future
Related sublease
parties Other Total receipts
2001 ............... $ 3,114 $ 2,862 $ 5,976 $1,128
2002 ............... 2,614 2,661 5,275 900
2003 ............... 2,614 2,602 5,216 711
2004 ............... 2,564 2,484 5,048 468
2005 ............... 2,528 2,321 4,849 157
Thereafter ......... 27,070 17,604 44,674 118
------ ------ ------ ----
$40,504 $30,534 $71,038 $3,482
====== ====== ====== =====
Total rental expense and sublease income in 2000 and 1999 were as follows
(in thousands):
Related Sublease
parties Other Total income
--------- ------- ------- --------
2000 ................... $3,758 $3,261 $7,019 $2,358
1999 ................... $3,745 $3,247 $6,992 $1,683
NOTE I - ACCRUED EXPENSES
Accrued expenses at year end 2000 and 1999 consist of the following:
2000 1999
------ ------
(in thousands)
Motor fuel taxes payable ...................... $ 6,254 $10,602
Accrued payroll and related expense ........... 1,313 1,615
Other ......................................... 4,339 4,695
------ ------
$11,906 $16,912
====== ======
NOTE J - 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 statements of cash flows, are included
in miscellaneous income in 2000 and 1999, and resulted in net losses of $699,000
and $74,000 in 2000 and 1999, respectively. Open positions under futures and
forward contracts were not significant at year end.
NOTE K - 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 both 2000 and 1999 was $200,000.
From time to time, the Company makes advances to and receives advances from
FFP Marketing and its subsidiaries and to FFP Partners and its subsidiary. 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 2000 and 1999,
interest income includes interest income on advances to affiliates of $2,046,000
and $1,259,000, respectively, and interest expense includes interest expense on
advances from affiliates of $266,000 and $105,000, respectively.
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 $17,414,000 and $17,596,000 in 2000 and 1999,
respectively. The Company received $2,853,000 and $3,036,000 in rent, management
fees, and interest, and such amounts are included in miscellaneous revenues in
the statement of income in 2000 and 1999, respectively. 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 $158,000 and $172,000 in
2000 and 1999, respectively, as a result of these alcoholic beverage sales.
Under a revolving note executed in connection with this agreement, the Company
advances funds to the affiliated company to pay for the purchases of alcoholic
beverages. Receipts from the sales of such beverages are credited against the
note balance. The revolving note provides for interest at 0.5% above the prime
rate charged by a major financial institution and had a balance of $755,000 and
$878,000 at year end 2000 and 1999, respectively.
The Company purchases certain goods and services (including fuel supply
consulting and procurement services) from related entities. Purchases of these
services from related entities were $68,000 in 2000 and 1999. The Company
purchased $39,927,000 and $24,564,000 in 2000 and 1999, respectively, of motor
fuel from another subsidiary of FFP Marketing.
The Company leases real property for some of its retail outlets from FFP
Partners. The Company paid $2,951,000 and $2,952,000 in lease payments to FFP
Partners for these properties during 2000 and 1999, respectively.
The Company also leases real property for some of its retail outlets and
some administrative and executive office facilities from various other entities
affiliated with the senior management of FFP Marketing. The Company paid
$947,000 and $944,000 to such entities with respect to these leases in 2000 and
1999, respectively. 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 to this affiliated company related to the motor fuel sales at
these locations of $259,000 and $239,000 in 2000 and 1999, respectively.
NOTE L - 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.
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 $517,000 and
$193,000 in 2000 and 1999, respectively.
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. The Company recorded liabilities for future estimated environmental
remediation costs related to known leaking underground storage tanks of
$1,521,000 and $918,000 at year end 2000 and 1999, respectively, in other
liabilities. Corresponding claims for reimbursement of environmental remediation
costs of $1,521,000 and $918,000 were also recorded in 2000 and 1999,
respectively, 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.
Environmental expenditures were $1,778,000 and $2,459,000 in 2000 and 1999,
respectively, (including capital expenditures of $793,000 and $1,943,000,
respectively), in complying with environmental laws and regulations.
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 $1,750,000 and $1,283,000 at year end 2000 and 1999, respectively, 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.