SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 2002, or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _______________
Commission File No. 1-13727
FFP MARKETING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2735779
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2801 Glenda Avenue; Fort Worth, Texas 76117-4391
(Address of principal executive office, including zip code)
817/838-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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
----- ----
Common Shares 3,818,747
(Number of shares outstanding as of May 15, 2002)
INDEX
PAGE
Part I
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 14
Part II
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 15
FFP Marketing Company, Inc. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
MARCH 31, 2002 AND DECEMBER 30, 2001
(In thousands)
(Unaudited)
March 31, December 30,
2002 2001
--------- -----------
ASSETS
Current assets -
Cash and cash equivalents $10,081 $8,406
Marketable securities 4,194 5,203
Trade receivables, net 19,521 15,763
Notes receivable, current portion 2,235 2,156
Receivables from affiliates, current portion 0 722
Inventories 21,463 20,742
Deferred tax asset 846 898
Prepaid expenses and other current assets 1,063 1,147
-------- --------
Total current assets 59,403 55,037
Property and equipment, net 34,961 35,906
Environmental reimbursement claims 2,272 2,237
Notes receivable, excluding current portion 4,200 4,330
Other assets, net 7,382 6,497
-------- --------
Total assets $108,218 $104,007
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -
Current installments of long-term debt $11,847 $7,577
Current installments of capital
lease obligations 245 299
Accounts payable 18,369 14,769
Money orders payable 16,163 16,894
Due to affiliate 0 1,527
Accrued expenses 14,131 13,655
-------- --------
Total current liabilities 60,755 54,721
Long-term debt, excluding current installments 27,069 27,461
Capital lease obligations, excluding
current installments 3,706 3,742
Deferred income taxes 898 898
Other liabilities 2,571 2,571
-------- --------
Total liabilities 94,999 89,393
Commitments and contingencies -- --
Stockholders' equity -
Common stock ($0.01 par value) 22,235 22,235
Accumulated deficit (8,315) (6,819)
Accumulated other comprehensive loss (701) (802)
-------- --------
Total stockholders' equity 13,219 14,614
-------- --------
Total liabilities and stockholders' equity $108,218 $104,007
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2002 AND APRIL 1, 2001
(In thousands, except per share data)
(Unaudited)
March 31, April 1,
2002 2001
---------- -----------
(As Restated-
See Note 6)
------------
Revenues -
Motor fuel sales $101,779 $130,769
Merchandise sales 23,285 24,029
Miscellaneous 3,681 3,495
--------- ---------
Total revenues 128,745 158,293
Costs and expenses -
Cost of motor fuel 96,144 125,912
Cost of merchandise 16,515 17,287
Direct store expenses 10,506 11,901
General and administrative expenses 4,424 4,352
Depreciation and amortization 1,937 1,834
--------- ---------
Total costs and expenses 129,526 161,286
Operating loss (781) (2,993)
Interest income 507 271
Interest expense 1,222 1,134
--------- ---------
Loss before income taxes (1,496) (3,856)
Deferred income tax benefit 0 (1,311)
--------- ---------
Net loss $(1,496) $(2,545)
========= =========
Net loss per share -
Basic $(0.39) $(0.67)
Diluted (0.39) (0.67)
Weighted average number of common
shares outstanding -
Basic 3,819 3,819
Diluted 3,819 3,819
See accompanying Notes to Condensed Consolidated Financial Statements.
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 2002 AND APRIL 1, 2001
(In thousands)
(Unaudited)
March 31, April 1,
2002 2001
---------- -----------
(As Restated-
See Note 6)
------------
Cash Flows from Operating Activities -
Net loss $(1,496) $(2,545)
Adjustments to reconcile net loss to
cash used by operating activities -
Depreciation and amortization 1,937 1,834
Provision for doubtful accounts 0 120
Deferred income tax benefit 0 (1,201)
Marketable securities (1,299) (33)
Gain on sale of convenience stores (315) (467)
Loss on sale of properties 0 161
Net change in operating assets
and liabilities (1,940) 1,641
------- --------
Net cash used by operating activities (3,113) (490)
Cash Flows from Investing Activities -
Additions of property and equipment (783) (1,023)
Proceeds of sale of marketable securities,
net of purchases 1,939 476
Proceeds of sale of properties 0 21
Proceeds of sale of convenience stores 159 127
Payments on note receivable from affiliate 700 57
Receipt of payments on notes receivable 512 11
------- --------
Net cash provided (used) by investing activities 2,527 (331)
CashFlows from Financing Activities -
Net borrowings (repayments) of notes and
capital lease obligations 3,788 (3,457)
Advances from (to) affiliate (1,527) 264
------- --------
Net cash provided (used) by financing activities 2,261 (3,193)
------- --------
Net increase (decrease) in cash and cash equivalents 1,675 (4,014)
Cash and cash equivalents at beginning of period 8,406 14,572
------- --------
Cash and cash equivalents at end of period $10,081 $10,558
======= ========
Supplemental Disclosure of Cash Flow Information (in thousands):
Cash paid for interest $1,222 $1,134
See accompanying Notes to Condensed Consolidated Financial Statements.
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements include the assets,
liabilities, and results of operations of FFP Marketing Company, Inc., and its
wholly owned subsidiaries, FFP Operating Partners, L.P., Direct Fuels, L.P., FFP
Financial Services, L.P., Practical Tank Management, Inc., FFP Transportation,
L.L.C., FFP Money Order Company, Inc., FFP Operating LLC, Direct Fuels
Management Company, Inc., and Nu-Way Beverage Company. These companies are
collectively referred to as the "Company."
The condensed consolidated balance sheet as of March 31, 2002, and the
condensed consolidated statements of operations and cash flows for the three
months ended March 31, 2002 and April 1, 2001 have not been audited. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary to fairly present the Company's financial position as of
March 31, 2002, and the results of operations and cash flows for the periods
presented have been made. Interim operating results are not necessarily
indicative of results for the entire year.
The notes to the audited consolidated financial statements that are
included in the Company's Annual Report on Form 10-K for the year ended December
30, 2001, include accounting policies and additional information pertinent to an
understanding of these interim financial statements. That information has not
changed other than as a result of normal transactions in the three months ended
March 31, 2002, and as discussed below.
2. Net Income or Net Loss per Share
Basic net income or basic net loss per share is computed by dividing net
income or net loss for the quarter by the weighted average number of common
shares outstanding for the quarter. Diluted net income or net loss per share is
computed by dividing net income or net loss for the quarter by the weighted
average number of common shares outstanding for the quarter plus potentially
dilutive common shares. Outstanding options to acquire 303,667 and 253,667
common shares at March 31, 2002, and April 1, 2001, respectively, have been
excluded from the diluted computation because the effect would have been
anti-dilutive. A reconciliation of the denominators of the basic and diluted
loss per share calculations for the applicable first quarter periods in 2001 and
2000 follows:
2002 2001
------- ------
(In thousands)
Weighted average number of
common shares outstanding 3,819 3,819
Effect of dilutive options 0 0
----- -----
Weighted average number of
common shares outstanding,
assuming dilution 3,819 3,819
===== =====
3. Operating Segments
The Company and its subsidiaries are principally engaged in two operating
segments: (i) the retail sale of motor fuel, merchandise and other ancillary
products and services at convenience stores, truck stops, and other gasoline
outlets ("Retail Operations"), and (ii) the wholesale sale of motor fuel and the
operation of a motor fuel terminal and processing facility ("Wholesale and
Terminal Operations"). Prior to 2002, the Company identified its wholesale
operations in the same segment with its retail operations, but realigned the
wholesale operations in 2001 to be in the same segment with its terminal
operations in 2001 since both of those operations sell motor fuel to wholesale
customers. The Company has identified such segments based on management
responsibilities. No major distinctions exist regarding geographical areas
served by the Company or customer types. The following table sets forth certain
information about each segment's financial information for the first quarters of
2002 and 2001 (with the results for the first quarter of 2001 restated as
described in Note 6 of the condensed financial statements):
Wholesale
Retail and Terminal Elimin- Consol-
Operations Operations tions dated
---------- ---------- ------ ------
(In thousands)
First Quarter 2002
- ------------------
Revenues from external sources $85,268 $43,477 $0 $128,745
Revenues from other segment 0 9,087 9,087 0
Depreciation and amortization 1,645 292 0 1,937
Loss before income taxes (2,501) 1,005 0 (1,496)
First Quarter 2001 (As restated-see note 6)
- ------------------------------------------
Revenues from external sources $104,098 $54,195 $0 $158,293
Revenues from other segment 0 7,979 7,979 0
Depreciation and amortization 1,657 177 0 1,834
Loss before income taxes (3,549) (307) 0 (3,856)
4. Comprehensive Net Loss
The components of comprehensive net loss for the first quarters of 2002 and
2001 (as restated) are set forth below:
2002 2001
------- ------
(In thousands)
Net loss $(1,496) $ (2,545)
Net unrealized gains on available-
for-sale securities, net of tax 101 293
------- ---------
Comprehensive loss $(1,395) $ (2,252)
======= =========
5. Notes Payable
The monthly payments and the outstanding principal balances at March 31,
2002 and December 30, 2001, under the Company's notes payable are summarized in
the following table:
Outstanding Balance
Monthly -------------------
Payments 2002 2001
-------- -------- --------
(In thousands)
Type of Loan Purpose of Loan
- --------------------- ----------------------------
Sewer financing Truck stop improvements $2 $27 $34
7 to 15 year financing 1998 refinancing of 44 stores 101 7,718 7,852
7 to 15-year financing 1999 purchase of 4 stores 13 823 841
15-year financing 1999 refinancing of bank debt 256 21,718 21,946
15-year financing Purchase of 3 stores 5 488 493
Bank line of credit Operations 0 8,142 3,872
----- ------- ------
Total notes payable $377 38,916 35,038
=====
Less: current portion 11,847 7,577
------- ------
Long-term notes payable $27,069 $27,461
======= =======
In June 1998 the Company obtained 44 loans in the original aggregate
principal amount of $9,420,000 secured by a lien against the Company's leasehold
improvements, equipment, and inventory at 44 specific convenience stores, truck
stops and gas-only outlets. The loans bear interest at 8.66% per annum, require
the Company to maintain a minimum fixed charge coverage ratio of 1.25 to 1, and
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. At March 31, 2002 and December 30,
2001, the Company was not in compliance with the required fixed charge coverage
ratio under these loans but obtained a waiver of such non-compliance in June
2002 for all of those loans. At March 31, 2002 and December 30, 2001, $7,718,000
and $7,852,000, respectively, remained outstanding on the 44 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 four of the 11 stores with four
fully-amortizing mortgage loans in the aggregate original principal amount of
$1,012,000 secured by a lien against the Company's leasehold improvements,
equipment, and inventory at those four convenience stores. The loans provide for
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 March 31,
2002 and December 30, 2001, the Company was not in compliance with the required
fixed charge coverage ratio under these loans but obtained a waiver of such
non-compliance in June 2002 for all but two of the loans. Accordingly, the
remaining principal balance of $528,000 and $542,000 under those two loans has
been classified as a current liability on the consolidated balance sheets at
March 31, 2002 and December 30, 2001, respectively. At March 31, 2002 and
December 30, 2001, $823,000 and $841,000, respectively, remained outstanding on
the four loans.
In June 1999 the Company refinanced its previous revolving credit facility
and term loan with the proceeds of fixed rate financing from a third party
lender in the form of 49 fully-amortizing loans in the original aggregate
principal amount of $23,800,000. With the net loan proceeds the Company repaid
debts aggregating $19,988,000 and incurred an extraordinary loss of $375,000
($0.10 per share), before applicable income tax benefit, as a result of
prepayment penalties and the write off of previously unamortized loan fees.
These 49 loans are payable in 180 equal, monthly installments with interest at a
fixed rate of 9.9% per annum, maintain a minimum fixed charge coverage ratio of
1.25 to 1, and aggregate monthly payments of principal and interest of $256,000.
These loans are secured by a lien against the Company's leasehold improvements,
equipment, and inventory at 49 specific convenience stores, truck stops and
gas-only outlets. At March 31, 2002 and December 30, 2001, the Company was not
in compliance with the required fixed charge coverage ratio under these loans
but obtained a waiver of such non-compliance in June 2002 for all but five of
the loans. Accordingly, the remaining principal balance of $1,705,000 and
$1,722,000 under those five loans has been classified as a current liability on
the consolidated balance sheets at March 31, 2002 and December 30, 2001,
respectively. At March 31, 2002 and December 30, 2001, $21,718,000 and
$21,946,000, respectively, remained outstanding on the 49 loans.
In August 2001 the Company purchased three convenience store properties
that it previously operated under a lease. The Company financed its purchase
with fully-amortizing mortgage loans in the aggregate original principal amount
of $500,000 over a 15-year term, interest payable at a fixed rate of 8% for the
first five years but variable thereafter at prime plus an index, and aggregate
monthly payments of principal and interest of $5,000. The Company's monthly loan
payments equal its previous monthly rental payments prior to the purchase. At
March 31, 2002 and December 30, 2001, $488,000 and $493,000 remained outstanding
on the loan.
In November 2001 the Company closed a new revolving credit facility with a
third party lender providing for borrowings up to $20,000,000. The amount
available at any time under new revolver is calculated with a borrowing base of
85% of its eligible trade receivables plus 70% of the inventory at its terminal
facility. The new revolver replaced a prior revolving credit facility scheduled
to expire in 2002 that provided for borrowings up to $10,000,000. At March 31,
2002, the Company's borrowing base under its revolving credit facility was
$9,662,000, compared to $5,473,000 at year end 2001. The revolving credit
facility bears interest at the lender's prime rate plus three-fourths of one
percentage point (5.5% at March 31, 2002), payable monthly, and matures in 2005.
The new loan is subject to a Loan and Security Agreement dated November 5, 2001
between the lender and two subsidiaries of the Company, namely FFP Operating
Partners, L.P. and Direct Fuels, L.P. The agreement contains numerous, but
customary, covenants including, but not limited to, a financial covenant
requiring Direct Fuels, L.P. to maintain a specified minimum amount each quarter
of earnings before interest, taxes, depreciation and amortization. At March 31,
2002 and December 30, 2001, the Company met the required fixed charge coverage
ratio under the loan agreement for the new revolver. In the event of a default
under the loan, liens on certain assets of FFP Operating Partners, L.P. also
take effect. At March 31, 2002 and December 30, 2001, the Company was not in
compliance with the terms of its new revolver because it had not met the
required fixed charge coverage ratio under its loan documents with its other
lenders. Accordingly, the principal balance of $8,142,000 and $3,872,000 under
the new revolver has been classified as a current liability on the consolidated
balance sheets at March 31, 2002 and December 30, 2001, respectively. At March
31, 2002 and December 30, 2001, $8,142,000 and $3,872,000, respectively, were
outstanding under the revolving lines of credit. In addition, standby letters of
credit for the benefit of third parties were issued under the revolving line of
credit in the amount of $482,000 at each of March 31, 2002 and December 30,
2001.
6. Restatement
In early 2002, the Company became aware of certain inadvertent bookkeeping
errors made in the accounting records of one of its subsidiaries. A subsequent
analysis determined a charge of $214,000, net of taxes, should be made to the
net income (loss) of the Company in the first quarter of 2001. The adjustment
results from bookkeeping errors regarding credit card accounts receivable and
related fuel payables, and their resulting effect on cost of motor fuel sold,
and then the related effect on income tax expense or benefits. For that reason,
the Company's quarterly results for the first quarter of 2001 have been restated
to correct those errors attributable to that quarter, rather than the amounts
previously reported for the quarter. For further discussion of these matters,
refer to the Company's Form 10-K for the year ended December 30, 2001.
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
FFP Marketing Company, Inc. was formed as a Texas corporation immediately
prior to the December 1997 restructuring of FFP Partners, L.P. ("FFP Partners").
In that restructuring, all of the assets and businesses of FFP Partners was
transferred to the Company, except that FFP Partners retained the improved real
property previously used in its retail operations. Unless the context requires
otherwise, references herein to the "Company" for periods or activities prior to
the December 1997 restructuring include the activities of FFP Partners and its
then subsidiaries, which are now subsidiaries of FFP Marketing Company, Inc.
In the December 1997 restructuring of FFP Partners, the holders of its
limited partnership interests received one share of common stock of the Company
for each limited partnership unit that they owned on December 28, 1997,
resulting in each such person owning the same economic interest in the Company
as they had held in FFP Partners.
The Company conducts its operations through the following subsidiaries:
Entity Date Formed Principal Activity
- ------------------------------ ------------- ---------------------------
FFP Operating Partners, L.P., December 1986 Operation of convenience
a Dalaware limited partnership stores and other retail
outlets and sale of
ancillary products and
services
Direct Fuels, L.P., a Texas December 1988 Operation of fuel terminal
limited partnership and wholesale fuel sales
FFP Financial Services, L.P., a September 1990 Sale of money order services
Delaware limited partnership and supplies
Practical Tank Management, Inc., September 1993 Underground storage tank
a Texas corporation monitoring
FFP Transportation, L.L.C., a September 1994 Ownership of tank trailers
Texas limited liability company and other transportation
equipment
FFP Money Order Company, Inc., December 1996 Sale of money orders through
a Nevada corporation agents
Nu-Way Beverage Company July 1985 Sale of alcoholic beverages
Texas corporation in Texas
The Company and its subsidiaries are principally engaged in two operating
segments: (i) the retail sale of motor fuel, merchandise and other products and
services at Company-operated convenience stores, truck stops, and gas-only
stores, and (ii) the wholesale sale of motor fuel and operation of a motor fuel
terminal and processing facility. (See Note 3 of Notes to Condensed Consolidated
Financial Statements.)
Results of Operations for First Quarter 2002 compared
with First Quarter 2001 (as restated-see note 6)
- ------------------------------------------------------
In early 2002, the Company became aware of certain inadvertent bookkeeping
errors made in the accounting records of one of its subsidiaries. A subsequent
analysis determined a charge of $214,000, net of taxes, should be made to the
net loss of the Company in the first quarter of 2001. The adjustment results
from bookkeeping errors regarding credit card accounts receivable and related
fuel payables, and their resulting effect on cost of motor fuel sold, and then
the related effect on income tax expense or benefits. For that reason, the
Company's quarterly results for the first quarter of 2001 have been restated to
correctly state the results for that quarter, rather than the amounts previously
reported for the quarter.
The Company is in the process of reviewing the administrative, accounting
and operational policies, procedures and personnel relating to its recording and
reconciliation of credit card receivables, fuel receivables and payables, and
compliance with those policies and procedures, to identify potential areas where
improvements and increased efficiencies may be implemented. Improvements to
previous policies, procedures and personnel have been, and will continue to be,
implemented as quickly as practicable.
The Company's net loss before tax in the first quarter of 2002 was
$1,496,000, reflecting a strong improvement of $2,360,000 (61.2%), compared to
its net loss before tax of $3,856,000 in the first quarter of 2001. Primary
factors for the improvement were additional motor fuel gross margins ($778,000
improvement), and reduced direct store expenses ($1,395,000 reduction). The
Company did not record an income tax benefit in the first quarter of 2002,
compared to an income tax benefit of $1,311,000 in the first quarter of 2001, a
100% change.
Fuel Sales and Margins
- ----------------------
First Quarter
-------------------------------------------------
Change
-----------------------
2002 2001 Amount Percent
--------- ------- --------- ----------
(In thousands, except per gallon data)
Fuel sales $101,779 $130,769 $(28,990) (22.2%)
Fuel margin $5,635 $4,857 $778 16.0%
Gallons sold -
Retail 52,419 56,543 (4,124) (7.3%)
Wholesale 48,838 48,190 648 1.3%
Total 101,257 104,733 (3,476) (3.3%)
Margin per gallon (cents) -
Retail 6.3 7.0 (0.7) (10.0%)
Wholesale 4.8 1.2 3.6 300.0%
The Company sold less motor fuel in the first quarter of 2002 than in the
first quarter of 2001. Motor fuel sales was $101,779,000 in the first quarter of
2002, a 22.2% decrease compared to motor fuel sales of $130,769,000 in the first
quarter of 2001, primarily as a result of a decline in the average price of
motor fuel sold, but also as a result of a 3.3% decline in gallons sold. For
example, the Company's average price for retail motor fuel sold in the first
quarter of 2002 was $1.12 per gallon, a $0.24 per gallon decrease (17.6 %) from
an average price for retail motor fuel sold of $1.36 in the first quarter of
2001.
The Company sold 101,257,000 gallons of motor fuel in the first quarter of
2002, a 3,476,000 gallon decrease (3.3%) from 104,733,000 gallons of motor fuel
sold in the comparable 2001 period. This decrease was primarily attributable to
a decrease of 4,124,000 gallons (7.3%) sold at retail, offset in part by
additional wholesale fuel sales of 648,000 gallons (1.3%). The primary factors
for the reduction on motor fuel gallons sold was attributed to increased retail
competition and a change in the Company's market pricing in an effort to obtain
an improvement in the gross margin per gallon sold.
The Company's overall gross profit margin on motor fuel sales was
$5,635,000 in the first quarter of 2002, a $778,000 (16.0%) improvement over
gross profit margin on motor fuel sales of $4,857,000 in the first quarter of
2001. Fuel margin increased principally as a result of favorable market
conditions on wholesale sales at the terminal. On a per gallon basis, retail
motor fuel margins decreased per gallon during the first quarter of 2002, when
compared to the initial quarter of 2001, by 10.0%, while wholesale motor fuel
margin per gallon increased by 298.3%.
Merchandise Sales and Margins
- -----------------------------
First Quarter
-------------------------------------------------
Change
-----------------------
2002 2001 Amount Percent
--------- ------- --------- ----------
(In thousands, except average weekly sales data)
Merchandise sales $23,285 $24,029 $(744) (3.1%)
Merchandise margin $6,770 $6,742 $28 0.4%
Margin percentage,
convenience stores
and truck stops 27.7% 26.9% 0.8% 3.0%
Average weekly merchandise
sales per store -
Convenience stores $11,028 $10,470 $558 5.3%
Truck stops $15,643 $15,361 $282 1.8%
Merchandise sales decreased by $744,000 (3.1%) in the first quarter of
2002, compared to the first quarter of 2001. The primary factor for that decline
was the lesser number of Company-operated convenience stores after the
sale/conversion of certain Company-operated convenience stores to gas-only
stores. For example, the Company operated only 169 convenience stores at the end
of the first quarter of 2002 compared to operating 184 convenience stores at the
end of the first quarter of 2001, an 8.2% reduction. Average weekly merchandise
sales per convenience store improved by $558 (5.3%), as shown in the above
table.
Other Income and Expenses
- -------------------------
Miscellaneous income was $3,681,000 in the first quarter of 2002, a
$186,000 (5.3%) improvement over miscellaneous income of $3,495,000 in the first
quarter of 2001. Miscellaneous income includes management fees, lottery ticket
sales income, money order sales income, commissions received on alcohol beverage
sales, check cashing fees, state excise tax handling fees, gain on
sale/conversion of convenience stores, gain or loss on exchange and hedging
transactions, and various other types of income. Material reasons for the
increase were additional income from management fees and from investments in
marketable securities. Partially offsetting the improvements in miscellaneous
income were lesser gains from exchange and motor fuel hedging transactions and
from the sale/conversion of Company-operated convenience stores to gas-only
stores, when comparing to such items for the first quarter of 2002 to the
comparable quarter of 2001.
Direct store expenses were $10,506,000 in the first quarter of 2002, a
$1,395,000 (11.7%) decline compared to direct store expenses of $11,901,000 in
the same quarter of the prior year, as a result of fewer Company-operated
convenience stores in the first quarter of 2001. The Company operated 169
convenience stores on March 31, 2002, compared to 184 convenience stores on
April 1, 2001.
General and administrative expenses increased by $72,000 (1.7%) to
$4,424,000 in the first quarter of 2002, compared to $4,352,000 in the
comparable period of the prior year. The primary reason to this increase was
additional legal and professional expenses, which was offset in part by a
reduction in bad debt expense.
Depreciation and amortization was $1,937,000 in the first quarter of 2002,
a $103,000 (5.6%) increase compared to depreciation and amortization expense of
$1,834,000 in the first quarter of the previous year. This increase resulted
primarily as a result of additional amortization of previously capitalized loan
costs.
Interest income of $507,000 in the first quarter of 2002 represented a
$236,000 (87.1%) increased from interest income of $271,000 in the initial
quarter of the prior year. Interest income increased primarily as a result of
additional earning from the Company's investments in marketable securities.
Interest expense of $1,222,000 reflected an increase of $88,000 (7.8%), compared
to interest expense of $1,134,000 in the corresponding quarter of 2001. Interest
expense increased primarily because of additional borrowings under the Company's
revolving credit facility.
Liquidity and Capital Resources
- -------------------------------
The Company's working capital is provided by several sources, including
short-term investments, cash flows generated from operating activities,
borrowings under a revolving line of credit facility, short-term vendor credit,
and the availability of funds provided by the sale of money orders prior to the
payment of those money order obligations. The Company believes, but cannot be
certain, that its future sources of capital will provide sufficient liquidity to
fund its future operating costs, debt service requirements, and capital
expenditures. Risk factors involved in determining the adequacy of liquidity and
capital resources include, but are not limited to, the insufficiency of cash
flows from operations for any reason, such as, for example, in the event that of
poor retail fuel margins, such as that incurred in the fourth quarter of 2001
and the first two months of 2002 (although the Company has experienced improved
retail fuel margins since then); the inability of the Company to meet its goals
of increasing store revenues and decreasing direct store expense and general and
administrative expense; bad debts or uncollectible accounts; possible actions of
the Company's long-term lenders and revolving credit lender in accelerating such
indebtedness and charging additional interest and loan fees; possible
restrictions on the availability of credit from vendors; and a possible loss of
the Company's money order sales license. The Company believes it will be able to
adjust its actual capital expenditures based on the level of cash flow generated
from operating activities and funds available from financings.
The Company's notes payable at March 31, 2002, and December 30, 2001, is
summarized in the notes to the condensed financial statements. (See Note 5 of
Notes to Condensed Consolidated Financial Statements.) In November 2001 the
Company closed a new revolving credit facility with a third party lender
providing for borrowings up to $20,000,000. The amount available at any time
under revolver is calculated with a borrowing base of 85% of its eligible trade
receivables plus 70% of the inventory at its terminal facility. The new revolver
replaced a prior revolving credit facility scheduled to expire in 2002 that
provided for borrowings up to $10,000,000. At March 31, 2002, the Company's
borrowing base under its revolving credit facility was $9,662,000, compared to
$5,473,000 at year end 2001. The revolving credit facility bears interest at the
lender's prime rate plus three-fourths of one percentage point (5.5% at March
31, 2002), payable monthly, and matures in 2005. The revolver is subject to a
Loan and Security Agreement between the lender and two subsidiaries of the
Company, namely FFP Operating Partners, L.P. and Direct Fuels, L.P. The loan
agreement provides that the obligations to the lender are secured by the
receivables, terminal inventory, and terminal facility of Direct fuels, L.P.,
and that liens against FFP Operating Partners, L.P. will take effect upon in the
event of a default under the loan agreement. The loan agreement contains
numerous, but customary, covenants including, but not limited to, a financial
covenant requiring Direct Fuels, L.P. to maintain a specified minimum amount
each quarter of earnings before interest, taxes, depreciation and amortization.
In the event of a default under the loan, liens on certain assets of FFP
Operating Partners, L.P. also take effect. At March 31, 2002, the Company was in
compliance with its financial covenant for its revolver but was not in
compliance with the terms of the loan agreement because one subsidiary had not
met the required fixed charge coverage ratio under loan documents with other
lenders. A waiver of that loan covenant violation was obtained in June 2002,
which is expected to cure the event of default under the revolving credit
facility. Nevertheless, the principal balance of $3,872,000 and $8,142,000 under
the revolver has been classified as a current liability on the condensed balance
sheets at March 31, 2002 and December 31, 2001, respectively.
Management considers the losses in the fourth quarter of 2001 and the first
quarter of 2001 to be unacceptable. The Company has begun a focused effort
designed to improve bottom-line results and liquidity, although no assurance is
given that its strategies will prove to increase profitability. Several of these
strategies are summarized below:
1. Strengthen Core Businesses. The Company intends to strengthen its
core businesses by examining, and renegotiating contracts wherever
possible, in order to increase its revenues and decrease its cost and
expenses. This analysis and resulting action may include the sale of assets
or components of its businesses, the closing of certain stores, or other
actions considered necessary to increase net profitability. The Company has
experienced decreasing retail motor fuel margins per gallon at its stores,
not unlike other convenience store operators in the industry, especially in
the fourth quarter of 2001. The Company has already implemented in 2002, or
plans to implement later in 2002, a pricing structure designed to increase
its retail motor fuel margins and merchandise margins. Management believes
that an increase in retail motor fuel and merchandise margins will be a key
component of future increases in profitability for the Company. The
Company's fuel margins began to improve during the month of March 2002 but
no assurance that those margins will remain at such levels. For that
reason, the Company intends to aggressively reassess its store operations,
not only to cut store operating and inventory costs but also to find new
sources of additional store income, described below. In addition, a
thorough study and reorganization of the Company's fuel payable procedures
and policies has already begun. Although the Company has experienced an
increase its general and administrative expenses in recent years,
management believes that its efforts to cut those costs, if successful,
will be an important factor in increasing future profitability. In that
regard, management is currently analyzing a reorganization of certain
departments in order to streamline their function and improve their
performance.
2. Seek Additional Fee Income. Further, the Company will seek other
sources of revenue to obtain additional profit in 2002 from its own retail
stores, as well as from third party locations that sell its money orders
across the country. In so doing, the Company will attempt to capitalize on
its network of retail locations serving customers in small towns and larger
cities in several states.
Areas of possible sources for expanded fee income under consideration
include the following activities:
o selling additional financial products and services,
o selling additional telephone products and services,
o collecting utility payments at the Company's stores for a fee,
o expanding the Company's check cashing services, and
o expanding the Company's ATM network.
3. Manage Convenience Stores for Third Parties. In the first quarter
of 2002, the Company entered into management and fuel supply contracts for
114 convenience stores on behalf of two different lenders that acquired
those stores through foreclosures from other convenience store operators.
In addition to receiving monthly management fees, the Company may sell
motor fuel to those locations and has contracted to sell its money orders
at those stores under money order agency agreements. In addition, stores
currently closed may be added to the number of stores managed by the
Company under those two contracts. The owners of those stores have reserved
the right to sell those stores in the future, at which time the management
contract would end for the sold stores. In late May 2002, one of those
owners sold 40 of the stores under its management contract. The management
contract is expected to terminate in late July 2002 for 57 stores,
resulting in 17 convenience stores being subject to management contracts
thereafter. The Comapny intends to attempt to expand its management
services for these and other lenders in need of experienced convenience
store operations.
4. Convert Company-Operated Stores to Gas-Only Stores. In situations
where management believes that profitable will be improved, the Company
intends to continue implementing its strategy of selling/converting certain
of its Company-operated convenience stores to independent third party
operators and continuing such outlets as Gas-Only Stores. The Company has
converted 26 stores in 2001 and 34 stores in 2000 in that manner and has
targeted an additional 50 Company-operated stores as suitable candidates
for future conversions and will continue to search for qualified purchasers
for these locations.
5. Growth of Wholesale Business. Utilizing its new $20 million
revolving credit facility obtained in November 2001, the Company believes
it will be able to expand its Wholesale and Terminal Operations in 2002.
The Company believes that its wholesale business in the last few years was
curtailed by its lack of a larger line of credit, and the increase in
availability from its new line of credit is expected to facilitate the
profitable expansion of this growing segment.
6. Possible Expansion at the Terminal. The Company continues to
investigate potential new sources of profits at its terminal located in the
growing Dallas/Fort Worth Metroplex. The Company's current operations at
the terminal only comprise 13 acres of land, and its remaining 20 acres are
available for expansion.
The Company is party to commodity futures contracts and forward contracts
to buy and sell fuel, both of which are used principally to satisfy balances
owed on exchange agreements. Both of these types of contracts involve the risk
of dealing with others and their ability to meet the terms of the contracts and
the risk associated with unmatched positions and market fluctuations. The open
positions under these contracts were insignificant at the end of the first
quarter of 2002.
Over the last few years, the Company's money order sales have increased
significantly. For example, money order payables at the end of fiscal year 1996
were $7,809,000, compared to money order payables of $16,163,000 at the end of
the first quarter of 2002. Money order payables represent those sales of money
orders for which the payee of the money order has not yet requested payment.
Although the Company collects money order receipts on a daily basis on sales of
money orders made by its own stores, the Company relies on receiving timely
payment from its third party money order sales agents.
The Company had negative working capital of $1,352,000 at the end of the
first quarter of 2002. In past years, the Company has operated its business with
minimal or even negative working capital, principally because most of its sales
are cash sales and it has received payment terms from vendors. Consequently,
management believes, but can give no assurance, that its current liquidity,
internally generated funds, use of trade credit, and available line of credit
will allow its operations to be conducted in a customary manner.
Forward-Looking Statements
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Certain of the statements made in this report are "forward-looking"
statements that involve inherent risks and uncertainties. As defined by the U.S.
Private Securities Litigation Reform Act of 1995, "forward-looking" statements
include information about the Company that is based on the beliefs of management
and the assumptions made by, and information currently available to, management.
In making such forward-looking statements, the Company is relying upon the
"statutory safe harbors" contained in the applicable statutes and the rules,
regulations and releases of the Securities and Exchange Commission. Statements
that should generally be considered forward-looking include, but are not limited
to, those that contain the words "estimate," "anticipate," "in the opinion of
management," "expects," "believes," and similar phrases. Among the factors that
could cause actual results to differ materially from the statements made are the
following: general business conditions in the local markets served by the
Company's convenience stores, truck stops, and other retail outlets, and its
wholesale fuel markets; the weather in the local markets served by the Company;
competitive factors such as changes in the locations, merchandise offered,
pricing, and other aspects of competitors' operations; increases in cost of fuel
and merchandise sold or reductions in the gross profit realized from such sales;
available product for processing and processing efficiencies at the Company's
fuel terminal; expense pressures relating to operating costs, including labor,
repair and maintenance, and supplies; unexpected outcome of litigation; adverse
liquidity situations; unanticipated general and administrative expenses,
including employee, taxes, insurance, expansion and financing costs; and
unexpected liabilities.
Should one or more of these risks or uncertainties materialize, or should
any underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected, or intended.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company is subject to market risks related to variable interest rates
and commodity prices. The interest rate calculated under the Company's line of
credit facility is based on the prime rate of interest, which is subject to
change and exposes the Company to the possibility of increasing interest rates
on borrowing under that facility. Approximately 11% of the Company's note
payable obligations at the end of the first quarter of 2002 was subject to
variable interest rates. The remainder of the Company's notes payable is not
subject to interest rate risk because it is fixed rate financing.
The Company is also subject to the market risk of increasing commodity
prices and sometimes attempts to hedge that risk by purchasing commodity futures
and forward contracts. An attempt to hedge that risk is subject to risk because
the commodities subject to the hedging contract are not the same commodities as
those owned by the Company in its business. Open positions under these futures
and forward contracts were insignificant at the end of the first quarter of
2002.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
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None.
Reports on Form 8-K
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None.
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.
FFP MARKETING COMPANY, INC.
Registrant
Date: June 24, 2002 By: /s/ John H. Harvison
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John H. Harvison
Chairman and Chief Executive Officer
Date: June 24, 2002 By: /s/ Craig T. Scott
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Craig T. Scott
Vice President - Finance and
Chief Financial Officer