UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 27, 1998, 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)
Securities registered pursuant to Section 12(b) of the Act
Title of Each Class Name of Each Exchange on Which Registered
Common Shares, par value $0.01 American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act
None
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
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of shares held by non-affiliates of the
registrant at March 30, 1999, was $10,592,000. For purposes of this computation,
all officers, directors, and beneficial owners of 10% or more of the common
shares of the registrant are deemed to be affiliates. Such determination should
not be deemed an admission that such officers, directors, and beneficial owners
are affiliates.
Common Shares 3,818,747
(Number of shares outstanding as of March 30, 1999)
INDEX
Page
Part I
Item 1. Business 1
Item 2. Properties 11
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for the Registrant's Stock and Related
Security Holder Matters 14
Item 6. Selected Financial and Operating Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 29
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
29
Part III
Item 10. Directors and Executive Officers of the Registrant 30
Item 11. Executive Compensation 33
Item 12. Security Ownership of Certain Beneficial Owners
and Management 33
Item 13. Certain Relationships and Related Transactions 33
Part IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 34
Signatures 35
PART I
Item 1. BUSINESS.
General Background
FFP Marketing Company, Inc. (the "Company"), was formed as a Texas
corporation in connection with the December 1997 restructuring of FFP Partners,
L.P. ("FFP Partners"), in which all of its assets and businesses were
transferred to the Company, except for the real estate used by FFP Partners in
its former retail operations. Unless the context requires otherwise, references
in this report to "FFP Marketing" or to the "Company" for periods or activities
prior to the completion of the December 1997 restructuring include the
activities of FFP Partners and their respective subsidiaries. Certain members of
the senior management of the Company hold similar management positions with FFP
Partners. As a result of the 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 as of that date.
The Company maintains its principal executive offices at 2801 Glenda Avenue,
Fort Worth, Texas 76117-4391; its telephone number is (817) 838-4700; and its
Internet web site is http://www.ffpmarketing.com.
Operating Segments
The Company and its subsidiaries are principally engaged in two operating
segments: (i) the retail and wholesale sale of motor fuel, merchandise and other
ancillary products and services at over 400 convenience stores, truck stops, and
other gasoline outlets ("Retail and Wholesale"), and (ii) the operation of a
motor fuel terminal and processing facility ("Terminal Operations"). {See Part
II, Item 7 for an analysis of operating results and other financial information
for each of these segments.}
Retail and Wholesale Segment
Description of Operations. The Company commenced operations in May 1987 upon
the purchase of its initial base of retail outlets from companies owned by
members of its senior management and conducts its operations through its
100%-owned subsidiaries, FFP Operating Partners, L.P.; Direct Fuels, L.P; FFP
Financial Services, L.P.; FFP Money Order Company, Inc.; Practical Tank
Management, Inc.; and FFP Transportation, L.L.C.
Convenience Stores. The Company operated an average of 203 convenience stores
during 1998, an increase of 81 stores, or 66%, over the average of 122
convenience stores operated during 1997. The Company's convenience stores
operate under several different trade names. The principal trade names are "Kwik
Pantry," "Nu-Way," "Economy Drive-Ins," and "Taylor Food Mart."
The Company's convenience stores are open seven days a week, offer extended
hours (42 of the stores are open 24 hours a day, the remainder generally are
open from 6:00 am to midnight), and emphasize convenience to the customer
through location, merchandise selection, and service. The convenience stores
sell groceries, tobacco products, take-out foods and beverages (including
alcoholic beverages where local laws permit), dairy products, and non-food
merchandise such as money orders, telephone calling cards, lottery tickets,
health and beauty aids, and magazines and, at all but two of the stores, motor
fuel. Food service in the convenience stores varies from pre-packaged sandwiches
and fountain drinks to full food-service delicatessens (at 62 stores), some with
limited in-store seating.
Since 1993, the Company has owned branded fast food outlets in selected
convenience stores. Ten of its convenience stores had branded food outlets at
the end of 1998, including small "express" franchises of Kentucky Fried
Chicken(R), Subway Sandwiches(R), Baskin Robbins(R), and Blimpie's(R). {See
Store Development; Products, Store Design and Operation.}
At year end 1998, the Company owned and operated 198 convenience stores. The
number of stores operated at the end of 1998 represented a net reduction of 9
stores from the number operated at the prior year end. This net decrease
resulted from the opening of one new convenience store in 1998, the acquisition
of two convenience stores from independent operators previously operated as
gasoline outlets of the Company, the sale of merchandise operations at nine
convenience stores to independent operators and conversion to gasoline outlets
of the Company {see Store Development}, and the temporary or permanent closing
of three convenience stores.
The convenience stores accounted for 48% (36% in 1997) of the Company's
consolidated revenues in 1998. The percentage of revenues from convenience
stores increased because 1998 was the first full year of operation of the 94
additional convenience stores purchased by the Company in late 1997. The
Company's convenience stores had average weekly per store merchandise sales of
$9,095 per store and motor fuel sales of 10,281 gallons per store. In 1997,
their average weekly per store sales were $9,482 of merchandise and 11,409
gallons of fuel.
Truck Stops. At the end of 1998, the Company operated 11 truck stops, the
same as 1997 year end. The truck stops, which operate principally under the
trade name of "Drivers," are located on interstate and other highways and are
similar in their operations to the convenience stores, although the merchandise
mix is directed towards truck drivers and the traveling public. Five of the
truck stops have full service restaurants. The Company operates two of the
restaurants and leases the other three to independent operators. Three of the
other truck stops offer prepared-to-order food service, including two outlets
which have a combination Kentucky Fried Chicken/Taco Bell "express" franchise
and one which has a Pizza Hut franchise within the store. One of the truck stops
does not provide food service. In 1998, the truck stops (including their
associated restaurants and food service facilities) accounted for 11% (13% in
1997) of the Company's consolidated revenues, with average weekly per outlet
merchandise and food sales (including food service sales) of $17,210 ($17,704 in
1997) and fuel sales of 59,858 gallons (68,115 gallons in 1997).
Motor Fuel Concessions at Independently Operated Outlets. The Company
operated the motor fuel concession at 207 independently operated convenience
stores at year end 1998, an increase of two outlets since the prior year end.
This increase was the net result of the routine opening and closing of certain
outlets and the addition of locations due to the sale of the merchandise
operations of convenience stores, referred to above. Although the merchandise
sale portion of the convenience store operations were sold, the Company retained
the motor fuel concession at these locations. The Company owns the motor fuel
inventory and the fuel pumps and underground storage tanks located at these
independently operated convenience stores and provides the motor fuel supply for
them. The actual sale of the motor fuel to the public is conducted by the
operator of the outlet pursuant to contracts that generally obligate the Company
to provide the motor fuel inventory, the fuel storage and dispensing equipment,
and to maintain the fuel equipment while the store operator agrees to collection
and remittance procedures. The convenience store operators are compensated by
commissions based on profits and/or the volume of fuel sold. In those instances
where the operator owns the real estate underlying his store, the contracts
generally grant the Company the right of first refusal to purchase the
operator's convenience store if it is offered for sale. Many of the contracts
have renewal options. Based on past experience, the Company believes that a
significant number of those contracts which do not have renewal options will be
renegotiated and renewed upon expiration. In addition to the contractual
arrangement between the store operator and the Company, many of these operators
either lease or sublease the store building and land from the Company or its
affiliates.
During fiscal 1998, the self-service gasoline outlets had average weekly per
outlet fuel sales of 8,867 gallons as compared to 8,505 gallons in fiscal 1997.
In 1998, the Company's self-service gasoline outlets accounted for 22% (28% in
1997) of the Company's consolidated revenues.
Wholesale Fuel Sales. The Company sells motor fuel on a wholesale basis to
smaller independent and regional chains of fuel retailers and to end users of
fuels, such as contractors, operators of vehicle fleets, and public utilities.
The Company has also been designated a "jobber" for Citgo, Chevron, Fina,
Conoco, Coastal, Diamond Shamrock, and Phillips 66. This designation enables the
Company to qualify independent fuel retailers to operate as a branded outlet for
the large oil company. FFP Marketing then supplies motor fuel to such retailers
on a wholesale basis under contracts ranging from five to ten years. The Company
makes purchases to fill specific orders by its branded wholesale customers.
Management believes the Company's fuel wholesale activities enhance its
relationships with its fuel vendors by increasing the volume of purchases from
such vendors. In addition, the wholesale activities permit the Company to
develop relationships with independent operators of convenience stores that may,
at some future time, be interested in entering into an agreement for FFP
Marketing to take over the fuel concession at their outlets. {See Motor Fuel
Concessions at Independently Operated Outlets.} In 1998, the Company's wholesale
operations contributed 19% of consolidated revenues (23% in 1997).
Market Strategy. The Company's market strategy generally emphasizes the
operation and development of existing stores and retail outlets in small
communities rather than metropolitan markets. In general, the Company believes
stores in communities with populations of 50,000 or less experience a more
favorable operating environment, primarily due to less competition from larger
national or regional chains and access to a higher quality and more stable labor
force. In addition, land costs, reflected in both new store development costs
and acquisition prices for existing stores and retail outlets, are generally
lower in small communities. As a result of these factors, the Company believes
this market strategy enables it to achieve a higher average return on investment
than would be achieved by operating primarily in metropolitan markets.
Store Development. In 1994 the Company began an effort to increase the
productivity and operating efficiency of its existing store base by identifying
non-core convenience stores that could contribute more to its earnings if
operated by independent operators rather than by the Company. Since then, the
Company has engaged in a program of selling the merchandise operations at these
outlets to independent operators. Through the end of 1998 the Company has sold
the merchandise operations at 54 locations. Because of a different overhead
structure, independent operators are often able to operate the stores less
expensively than the Company can. These sales were structured such that the
Company retained the leasehold interest in the property and subleased the land
and building to the operator for a five year period with a five year renewal
option. The Company also entered into an agreement to operate the fuel
concession at these locations. {See Motor Fuel Concessions at Independently
Operated Outlets.} Management believes that the sales of these operations and
the resulting combination of rents, fuel profits, and other ancillary income
enhance the profitability of these outlets to the Company. The Company is
continuing to pursue sales of the merchandise operation of additional stores.
In addition to the sales of the merchandise operations at certain convenience
stores, discussed above, management continues to seek other ways to increase the
productivity of the Company's present base of convenience store and truck stop
outlets. As a part of this endeavor, the Company has installed limited-menu
"express" outlets of national food franchises in some of the Company's outlets.
The Company operates combination Kentucky Fried Chicken/Taco Bell outlets in two
truck stops, a Pizza Hut Express outlet in one truck stop, Kentucky Fried
Chicken outlet in two convenience stores, a Blimpie's Sandwich franchise in two
stores, a Subway Sandwich franchise in one store, a Baskin Robbins ice cream
franchise in one convenience store, and regional fast food franchises in four
convenience stores. The Company's experience with this type of food service
operation indicates that it increases store traffic because it offers the
advantage of national and regional name-brand recognition and advertising. In
addition, the training and operational programs of these franchisors provide a
consistent and high-quality product to customers. Management continues to
evaluate its existing operations to determine if it would be appropriate to
install additional outlets of this type in other locations. It is also
evaluating the relative merits of the various types of franchises.
In addition to working to enhance the performance of its existing outlets,
the Company also seeks opportunities to acquire operating outlets at attractive
prices. In December 1997, the Company completed the purchase of 94 convenience
stores. The stores acquired are all located in states in which the Company had
operations and about 80% of them are in Texas. This acquisition has had a
positive impact on its earnings and cash flow by operating the additional stores
with minimal additional overhead. Although additional field supervisory
personnel have been added, the management, purchasing and accounting for the
stores requires minimal additional administrative staff.
In addition, in February 1999 the Company acquired the operations of an
additional 23 convenience stores plus two truck stops. All of these are located
in Texas. Eleven of them are located in San Antonio, Texas, and the remainder
are in smaller towns in the State of Texas. The Company believes that this
acquisition will also have a positive impact on its future earnings and cash
flow because it will be able to operate the additional stores with minimal
additional overhead. With limited additional field supervisory personnel to be
added, the management, purchasing and accounting for the stores will require
minimal additional administrative staff.
Opportunities to acquire additional convenience stores, truck stops and motor
fuel concessions are limited by competitive factors, available financing, and
competing buyers. The Company continues to pursue the acquisition of motor fuel
concessions principally by the development of relationships through normal
industry channels and through its fuel wholesaling operations.
Products, Store Design, and Operation. The number and type of merchandise
items stocked in the convenience stores varies from one store to another
depending upon the size and location of the store and the type of products
desired by the customer base served by the store. However, the stores generally
carry national or regional brand name merchandise of the type customarily
carried by competing convenience stores. Substantially all the Company's
convenience stores and truck stops offer fountain drinks and fast foods such as
hot dogs, pre-packaged sandwiches and other foods. Sixty-one of the convenience
stores have facilities for daily preparation of fresh food catering to local
tastes, including fried chicken and catfish, tacos, french fries, and
made-to-order sandwiches. Also, as discussed above 10 convenience stores and
three truck stops have small "express" outlets of national or regional fast-food
franchises.
Senior executives and other marketing and operations personnel continually
review and evaluate products and services for possible inclusion in the
Company's retail outlets. Special emphasis is given to those goods or services
that carry a higher gross profit margin than the Company's overall average, will
increase customer traffic within the stores, or complement other items already
carried by the stores. The marketing teams, which include the Company's regional
managers, in conjunction with the Company's vendors, develop and implement
promotional programs and incentives on selected items, such as fountain drinks
and fast food items. In addition, new products and services are reviewed on a
periodic basis to ensure a competitive product selection. Due to the geographic
distribution of the Company's stores and the variety of trade names under which
they are operated, the use of advertising is limited to location signage,
point-of-sale promotional materials, local newspaper and billboard advertising,
and locally distributed flyers.
Over the last several years, the Company has increased the number of its
outlets which are affiliated with a large oil company, referred to as "branded"
outlets. In March 1999, the Company operated 384 branded outlets, as compared to
285 in 1997. By comparison, the Company operated only 65 branded outlets in
1990. The Company's outlets are branded Citgo (68% of those branded), Chevron
(10%), Fina (5%), Conoco (6%), Diamond Shamrock (4%), Texaco (6%), and Coastal
(1%). Branded locations generally have higher fuel sales volumes (in gallons)
than non-branded outlets due to the advertising and promotional activities of
the respective oil company and the acceptance of such oil company's proprietary
credit cards. The increased customer traffic associated with higher fuel sales
tends to increase merchandise sales volumes, as well. The Company continues to
evaluate the desirability of branding additional outlets. In addition to the
Company operated convenience stores, truck stops, and fuel concessions at
independently operated outlets that are branded, the Company also serves as a
wholesale distributor to 200 otherwise unaffiliated branded retail outlets.
Merchandise Supply. Based on competitive bids, the Company has selected a
single company as the primary grocery and merchandise supplier to its
convenience stores and truck stops. However, some merchandise 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 merchandise supplier, with no significant adverse effect
on its operations.
Motor Fuel Supply. The Company purchases fuel for its branded retail outlets
and branded wholesale customers from the respective oil company which branded
the outlet and for its unbranded outlets from large integrated oil companies and
independent refineries. Fuel is purchased from approximately 40 vendors.
Principal fuel suppliers in 1998 were Citgo Petroleum Corporation, Conoco, Inc.,
Koch Refining Company, L.P., and Chevron U.S.A., Inc. Although the Company's
purchases are concentrated in a few vendors, largely due to the number of
branded outlets, management believes that the competition for retail outlets
among oil companies is such that the Company could find alternative supply
sources if the need to do so arose.
During recent years, the Company has not experienced any difficulties in
obtaining sufficient quantities of motor fuel to satisfy retail sales
requirements. However, 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, as well.
Trademarks and Trade Names. The Company's convenience stores and truck stops
are operated under a variety of trade names, including "Kwik Pantry," "Nu-Way,"
"Economy," "Dynamic Minute Mart," "Taylor's Food Stores," "Drivers," and
"Drivers Diner." New outlets generally use the trade name of the Company's
stores predominant in the geographic area where the new store is located. The
Company sells money orders in its outlets, and through agents, under the service
mark "Financial Express Money Order Company." The money orders are produced
using a computer controlled laser printing system developed by the Company. This
system is also marketed to third parties under the name of "Lazer Wizard."
Eight of the Company's truck stops operate under the trade name of "Drivers".
The three other truck stops use the same trade name as the Company's convenience
stores in the area in which they are located.
The Company has registered the names "Kwik Pantry," "Drivers," "Drivers
Diner," "Financial Express Money Order Company," and "Lazer Wizard" as service
marks or trademarks under federal law.
Terminal Operations Segment
Terminal Operations. The Company's Terminal Operations are relatively new in
comparison to its Retail and Wholesale segment. In June 1997, the Company
completed the renovation of a bulk storage terminal and fuel processing facility
located in Euless, Texas, that it had purchased in 1996. Thus far, the Company
has engaged in two activities at its terminal facility: providing motor fuel
terminalling services (storage and delivery services) for other wholesalers, and
processing transmix, a commingled product of refined gasoline and diesel, into
their component parts for sale. Those sales can be made to retailers (including
third parties and intercompany sales to the Company's Retail and Wholesale
segment) and end users. This Company also owns approximately 20 acres of land at
this industrial, metropolitan location, which is available for possible
expansion.
The terminal facility has gasoline storage capacity for 9,879,000 gallons of
motor fuel. The facility's capacity for processing commingled fuel product is
approximately 63,000 gallons per day. To date, the Company has operated neither
of these activities at near their respective capacity of operation. The motor
fuel obtained by separating commingled products is used by the Company to
satisfy a portion of the fuel supply needs for its own retail outlets and its
wholesale customers. Thus far, the majority of the Company's revenues derived
from the terminal have been intercompany sales to its Retail and Wholesale
segment.
In addition to the storage of motor fuels and the processing of commingled
fuel products, the Company is presently making plans to begin an ethanol
blending process at the terminal in 1999.
Competition
The businesses in which the Company operates are highly competitive. Most
convenience stores and an increasing number of traditional grocery stores and
large discount stores in the Company's market areas sell motor fuel. In
addition, merchandise similar or identical to that sold by the Company's stores
is generally available to competitors. In addition to independently operated and
national and regional chains of convenience stores, the Company also competes
with local and national chains of supermarkets, drug stores, fast-food
operations, and motor fuel retailers. Major oil companies are also becoming a
significant factor in the convenience store industry as they convert outlets
that previously sold only motor fuel to convenience stores; however, major oil
company stores often carry a more limited selection of merchandise than that
carried by the Company's outlets and operate principally in metropolitan areas,
where the Company has few outlets. Some of the Company's competitors have large
sales volumes, benefit from national or regional advertising, and have greater
financial resources than the Company.
The Company believes that each of its retail outlets generally competes with
other retailers that are within a radius of one to two miles of its locations
and that such competition is based on accessibility, the variety of products and
services offered, extended hours of operation, price, and prompt check-out
service.
The Company's wholesale fuel operation is also very competitive. Management
believes this business is highly price sensitive, although the ability to
compete is also dependent upon providing quality products and reliable delivery
schedules. The Company's wholesale fuel operation competes for customers with
large integrated oil companies and smaller, independent refiners, and fuel
jobbers, some of which have greater financial resources than the Company.
Management believes it can compete effectively in this business because of the
Company's purchasing economies, numerous supply sources, including the
commingled fuel processed at its fuel processing plant, and the reluctance of
many larger suppliers to sell to smaller customers.
Employees
At March 15, 1999, the Company employed 1,839 people (including part-time
employees). There are no collective bargaining agreements between the Company
and any of its employees, and management believes the relationship with
employees of the Company is good.
Insurance
The Company carries workers' compensation insurance in all states in which it
operates.
The Company maintains liability coverages for its vehicles which meet or
exceed state requirements but it does not carry automobile physical damage
insurance. Insurance covering physical damage of properties owned by the Company
is generally carried only for selected properties. The Company maintains
property damage coverage on leased properties as required by the terms of the
leases thereon and maintains property damage coverage on other properties as it
deems appropriate.
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 does not maintain any insurance covering
losses due to environmental contamination. {See Government Regulation -
Environmental Regulation.}
The Company monitors the insurance markets and modifies its insurance
coverages from time-to-time, both adding and eliminating coverage, as it
believes appropriate at such time in light of changes in the Company's exposure
to loss and the cost of insurance against such losses.
Government Regulation
Alcoholic Beverage Licenses. The Company's retail outlets sell alcoholic
beverages in areas where such sales are legally permitted. The sale of alcoholic
beverages is generally regulated by state and local laws which grant to various
agencies the authority to approve, revoke, or suspend permits and licenses
relating to the sale of such beverages. In most states, the regulatory agencies
have wide-ranging discretion to determine if a licensee or applicant is
qualified to be licensed. The State of Texas requires that licenses for the sale
of alcoholic beverages be held, directly or indirectly, only by individual
residents of Texas or by companies controlled by such persons. Therefore, the
Company has an agreement with a corporation controlled by John H. Harvison, its
Chairman and Chief Executive Officer, which permits that corporation to sell
alcoholic beverages in the Company's Texas outlets where such sales are legal.
In many states, sellers of alcoholic beverages have been held responsible for
damages caused by persons who purchased alcoholic beverages from them and who
were at the time of the purchase, or subsequently became, intoxicated. Although
the Company's retail operations have adopted procedures which are designed to
minimize such liability, the potential exposure to the Company as a seller of
alcoholic beverages is substantial. The Company's present liability insurance
provides coverage, within its limits and subject to its deductibles, for this
type of liability.
Environmental Regulation. The Company is subject to various federal, state,
and local environmental, health, and safety laws and regulations. Such laws and
regulation affect both of the Company's operating segments. In particular,
federal regulations issued in 1988 regarding underground storage tanks
established requirements for, among other things, underground storage tank leak
detection systems, upgrading of underground tanks with respect to corrosion
resistance, corrective actions in the event of leaks, and the demonstration of
financial responsibility to undertake corrective actions and compensate third
parties for damages in the event of leaks. Certain of these requirements were
effective immediately, and others were phased in over a 10 year period. However,
all underground storage tanks were required to comply with all requirements by
December 22, 1998. The Company implemented a plan several years ago to bring all
of its existing underground storage tanks and related equipment into compliance
with these laws and regulations and successfully reached that deadline.
All states in which the Company has underground storage tanks established
trust funds in prior years for the sharing, recovering, and reimbursing of
certain cleanup costs and liabilities incurred as a result of leaks in such
tanks. Those trust funds, which essentially provide insurance coverage for the
cleanup of environmental damages caused by an underground storage tank leak, are
funded by a tax on underground storage tanks or the levy of a "loading fee" or
other tax on the wholesale purchase of motor fuels 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. Some of the funds require the Company to pay
deductibles up to $25,000 per occurrence.
Although the benefits afforded the Company as a result of the trust funds are
substantial, the Company may not be able to recover through higher retail prices
the costs associated with the fees and taxes which fund the trusts. Effective
December 22, 1998, this trust arrangement terminated with respect to future, but
not past, environmental costs. Accordingly, the Company's environmental
liabilities could increase in the future.
Management believes the Company complies in all material respects with
existing environmental laws and regulations and is not currently aware of any
material capital expenditures, other than as discussed above, that will be
required to further comply with such existing laws and regulations. However, new
laws and regulations could be adopted which could require the Company to incur
significant additional costs.
Forward-Looking Statements
This Annual Report on Form 10-K and the Proxy Statement, incorporated herein
by reference, contain certain "forward looking" statements as such term is
defined in the U.S. Private Securities Litigation Reform Act of 1995, and
information relating to the Company and its subsidiaries that are based on the
beliefs of management and assumptions made by and information currently
available to management. The Company is relying upon the "safe harbor" contained
in Section 27A of such act in making such forward looking statements. 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.
Item 2. PROPERTIES.
The Company currently leases all but one of the real estate properties used
in its retail operations. The following table summarizes the ownership status of
individual properties as of March 31, 1999:
Leased
from
Leased Affiliates Leased
from of from
FFP Harvison Unrelated Total
Partners Family Parties
Number of Locations
Convenience Stores
Land 53 51 114 218
Buildings 104 3 111 218
Truck Stops
Land 4 8 1 13
Buildings 9 3 1 13
Third party
gasoline outlets
Land 19 106 76 201
Buildings 68 57 76 201
Total
Land 76 165 191 432
Buildings 181 63 188 432
The properties in the above table include locations at the end of 1998, as
adjusted by the acquisition or disposition of properties through March 31, 1999.
Geographical Location of Retail Stores. The table below sets forth the states
in which the Company's convenience store, third party gasoline outlets, and
truck stops are located as of December 27, 1998.
Gas
Convenience Stores Truck
Stores Outlets Stops Total Percent
Texas 141 165 7 313 75%
Oklahoma 1 24 1 26 6%
Louisiana 18 3 0 21 5%
Missouri 18 1 0 19 5%
Kansas 6 6 0 12 3%
Mississippi 6 1 0 7 2%
Kentucky 3 1 1 5 1%
New Mexico 1 1 2 4 1%
Arkansas 1 3 0 4 1%
Tennessee 3 1 0 4 1%
Nebraska 0 1 0 1 0%
Totals 198 207 11 416 100%
Leases of Land and Buildings. On 66 retail sites at the end of 1998, the
Company was leasing land and buildings for certain retail sites from FFP
Partners pursuant to lease agreements whose term is currently scheduled to end
in December 2002, plus two five-year renewal options at the sole election of the
Company. Upon each renewal, the rent will be adjusted by the increase in the
consumer price index since January 1, 1998 (the date the leases became
effective). The leases on these properties were entered into in conjunction with
the restructuring of FFP Partners that was completed in December 1997 in which
the non-real estate assets and businesses of FFP Partners were transferred to
the Company while the real estate used in the retail operations was retained by
FFP Partners. The lease rates for the locations were established based on
knowledge of the properties by the management of FFP Partners and the Company
and their general experience in acting as lessor and lessee for similar
properties. The Company's management believes that the lease rates are
comparable to leases that could be entered into with unrelated third parties.
The Company and FFP Partners did not engage any third party advisors or refer to
any third party surveys or analyses of rental rates in making this
determination.
Leases of Buildings Only. On 102 other retail sites at the end of 1998, the
Company was leasing only the buildings from FFP Partners which are located on
lands leased from affiliates of the Harvison Family, or from unrelated parties,
pursuant to lease agreements whose terms are currently scheduled to end
concurrently with underlying ground leases now scheduled to terminate on May
2002, plus one five-year option at the sole election of the Company until May
2007. The monthly rent upon each renewal will be adjusted by the increase in the
consumer price index since the original date of the leases. The building leases
on these properties were entered into in conjunction with the restructuring of
FFP Partners discussed above, and the lease rates on these locations were
established in the same manner as described above for the real estate leased
from FFP Partners. The affiliates of the Harvison Family have indicated their
intention not to extend the ground leases beyond May 2007 but instead will lease
the land and building for those sites directly to the Company under new leases
beginning May 2007 at increased rates considered equal to market rates. The
Company and the affiliates of the Harvison Family do not intend to engage any
third party advisors or refer to any third party surveys or analyses of rental
rates in negotiating the new lease. The new lease rates starting in May 2007
will be established based on knowledge of the properties by the management of
the Company and the affiliates of the Harvison Family based on their general
experience in acting as lessor and lessee for similar properties.
The Company's leases from affiliates of the Harvison Family generally expire
in May 2002 and provide for one or two five-year renewal periods at the sole
option of the Company. The monthly rent upon each renewal will be adjusted by
the increase in the consumer price index since the original date of the leases.
Management believes the terms and conditions of these leases are more favorable
to the Company than could have been obtained from unrelated third parties. The
Company did not engage any third party advisors or refer to any third party
surveys or analyses of rental rates in making this determination.
Other Properties. The Company also owns a 33 acre tract of land in Euless,
Texas, which is the site of its fuel terminal and fuel processing plant.
The executive offices of the Company are located at 2801 Glenda Avenue, Fort
Worth, Texas, where it occupies approximately 15,000 square feet of office space
leased from three affiliates of the Harvison Family.
Item 3. LEGAL PROCEEDINGS.
The Company is periodically involved in routine litigation arising in the
ordinary course of its businesses, particularly personal injury and employment
related claims. Management presently believes none of the pending or threatened
litigation of this nature is material to the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of stockholders during 1998.
PART II
Item 5. MARKET FOR THE REGISTRANT'S UNITS AND RELATED SECURITY HOLDER MATTERS.
The Company's common stock is listed for trading on the American Stock
Exchange ("AMEX") under the trading symbol "FMM". The shares began trading on
the AMEX on a "when issued" basis on December 29, 1997, the day following the
completion of the restructuring of FFP Partners {see Item 1. Business - General
Background} and commenced trading separately on January 14, 1998. The following
table sets forth the high and low last sales prices per share for the Company's
common stock, as reported by AMEX for each quarter that the Company's common has
traded:
High Low
1999
First Quarter 6 15/16 4 3/4
1998
First Quarter 4 3/4 2 1/2
Second Quarter 8 3/4 4 9/16
Third Quarter 8 9/16 4 1/8
Fourth Quarter 6 1/2 3 7/8
On March 30, 1999, the last reported sales price of the Company's common
stock was $4.75 per share. On such date, there were 158 stockholders of record.
{See Item 12. Security Ownership of Certain Beneficial Owners and Management.}
The Company may also issue preferred shares from time to time in one or more
series as authorized by its Board of Directors. There are currently no preferred
shares issued.
The Board of Directors has not established a dividend policy, but management
does not anticipate that dividends will be paid on the Company's common shares
in the foreseeable future. The amount of any dividends that the Company may pay
is subject to limitations in its loan agreements with various lenders, which
generally prohibit the payment of dividends in an amount which would cause the
Company to be unable to meet its financial covenants to such lenders.
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA.
1998 1997 1996 1995 1994
Financial Data (in thousands,
except per unit data):
Revenues and Margins -
Motor fuel sales $311,526 $311,49 $321,814 $296,887 $275,278
Motor fuel margin 26,916 21,702 20,672 22,813 22,332
Merchandise sales 94,629 61,652 60,579 65,512 72,827
Merchandise margin 29,447 18,739 17,821 19,187 20,169
Miscellaneous revenues 9,719 6,267 7,759 7,646 7,408
Total revenues 415,874 379,414 390,152 370,045 355,513
Total margin 66,082 46,708 46,252 49,646 49,909
Direct store expenses 44,154 28,241 27,062 28,496 29,553
General and administrative 15,831 12,113 11,506 11,795 11,056
expenses
Depreciation and amortization 5,636 5,488 3,951 3,769 4,352
Total operating expenses 65,621 45,842 42,519 44,060 44,961
Operating income 461 866 3,733 5,586 4,948
Interest expense, net 1,168 1,642 1,246 1,176 1,173
Income/(loss) before taxes
/other items (707) (776) 2,487 4,410 3,775
Income tax expense/(benefit) (244) (892) 2,646 500 244
Gain on extinguishment of debt 0 0 0 0 200
Net income/(loss) $(463) $116 $(159) $3,910 $3,731
Income/(loss) per share -
Basic (0.12) 0.03 (0.04) 1.06 0.96
Diluted (0.12) 0.03 (0.04) 1.02 0.95
Distributions declared per Unit $0.000 $0.000 $0.415 $0.870 $0.370
Total assets $97,040 $75,330 $78,599 $69,332 $67,978
Long-term obligations 20,380 24,575 9,418 7,100 9,527
Operating Data:
Gallons of motor fuel sold (in thousands)
Retail 237,629 199,310 197,687 193,233 196,246
Wholesale 96,710 83,296 90,704 95,473 81,289
Fuel margin per gallon (in cents)
Retail 10.6 9.8 9.3 10.9 10.1
Wholesale 2.0 2.5 1.9 1.7 1.8
Average weekly merchandise sales (per store)
Convenience stores $9,095 $9,482 $9,454 $9,560 $9,901
Truck stops 17,210 17,704 17,192 17,506 18,160
Merchandise margin 31.1% 30.4% 29.4% 29.3% 27.7%
Number of locations at year end
Convenience stores 198 207 117 127 127
Truck stops 11 11 10 10 10
Fuel concessions at
independent outlets 207 205 206 194 185
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
General
This discussion should be read in conjunction with the selected financial and
operating data, the description of the Company's business operations, and the
financial statements and related notes included elsewhere in this annual report.
Some of the matters discussed in this annual report contain forward-looking
statements regarding the Company's future business which are subject to certain
risks and uncertainties, including competitive pressures, adverse economic
conditions and government regulations. These issues, and other factors, which
may be identified from time to time in the Company's reports filed with the SEC,
could cause actual results to differ materially from those indicated in the
forward-looking statements.
In a restructuring completed on December 28, 1997, the Company acquired all
of the assets and businesses formerly held by FFP Partners, except that the real
estate used in its retail operations was retained by FFP Partners. FFP Partners
also retained certain liabilities, principally bank debt and debt secured by the
retained real estate. All other liabilities (including trade accounts payable,
money orders payable, accrued expenses, deferred income taxes, obligations under
capital leases and other debt secured by various equipment) were transferred to
the Company.
The businesses transferred to the Company include the operation of
convenience stores, truck stops, and self-service motor fuel concessions at
independently operated convenience stores, motor fuel wholesaling activities,
the sale of money orders through the outlets operated by the Company and third
party agents, and the operation of a motor fuel terminal and processing
facility. The real estate retained by FFP Partners is leased to the Company for
use in the conduct of its retail convenience store and motor fuel operations.
The selected financial data that accompanies this discussion reflects the
historical operations of FFP Partners to which the Company succeeded in
connection with the aforementioned restructuring. However, the financial data
for years prior to 1998 is not comparable to prior years in the following
respects: rental expense is included in 1998, but not in prior years, for the
leasing of the real properties retained by FFP Partners in the December
restructuring; depreciation expense related to such real properties is not
included for 1998 (nor will it be incurred in future years), but is included for
prior years; and interest income received by the Company from its note
receivable from FFP Partners is included in 1998 but not in years prior to 1998.
Also in December 1997, the Company initially acquired 107 additional
convenience stores. Ten of the stores acquired were sold to an unrelated party
concurrently with the closing of the purchase, and three other stores were sold
to another unrelated party shortly thereafter, resulting in a net increase from
these transactions of 94 stores. The purchase of the stores was completed on a
store-by-store basis throughout December; therefore, their operations had little
impact on 1997 results. The results from operations from these 94 stores had a
positive impact on results in 1998 and are expected to continue to have a
similar impact in future years.
The Company reports its results of operations using a fiscal year which ends
on the last Sunday in December. Most fiscal years have 52 weeks, but some
consist of 53 weeks. Fiscal years 1998, 1997, 1996, and 1994 were 52-week years,
while fiscal year 1995 was a 53-week year. This variation in time periods most
affects revenues (and related costs of sales) and salary costs, as other
expenses (such as rent and utilities) are usually recorded on a "monthly" basis.
However, differences in the number of weeks in a fiscal year should be
considered in reviewing the financial data.
Business Segments
The Company and its subsidiaries conduct business in two primary business
segments: (i) the operation of retail convenience stores, truck stops, and motor
fuel concessions at independently operated convenience stores, money orders
sales through Company stores and third party agents, underground tank monitoring
and testing, and motor fuel wholesaling activities (the "Retail and Wholesale
Operations"), and (ii) the operation of a motor fuel terminal and processing
facility (the "Terminal Operations"). Each of these business segments is subject
to differing opportunities and challenges. The following table sets forth
certain information about each segment's financial information in 1998, 1997,
and 1996:
Retail and Terminal
Wholesale Operations Eliminations Consolidated
(In thousands)
1998
Revenues from external sources $414,625 $1,249 $0 $415,874
Revenues from other segment 0 3,602 (3,602) 0
Depreciation and amortization 5,125 511 0 5,636
Interest income 1,406 0 (713) 693
Interest expense 1,861 713 (713) 1,861
Income/(loss) before income taxes 1,301 (2,008) 0 (707)
Total assets 89,739 7,301 0 97,040
Capital expenditures 6,605 182 0 6,787
1997
Revenues from external sources $379,064 $350 $0 $379,414
Revenues from other segment 0 2,174 (2,174) 0
Depreciation and amortization 5,194 294 0 5,488
Interest income 427 0 (391) 36
Interest expense 1,678 391 (391) 1,678
Income/(loss) before income taxes 42 (818) 0 (776)
Total assets 67,844 7,486 0 75,330
Capital expenditures 14,247 3,163 0 17,410
1996
Revenues from external sources $390,152 $0 $0 $390,152
Revenues from other segment 0 0 0 0
Depreciation and amortization 3,951 0 0 3,951
Interest income 52 80 (132) 0
Interest expense 1,326 52 (132) 1,246
Income/(loss) before income taxes 2,553 (66) 0 2,487
Total assets 75,104 3,495 0 78,599
Capital expenditures 6,023 3,494 0 9,517
The Company plans to expand its Retail and Wholesale Operations in 1999 by
seeking the acquisition of additional convenience stores if acceptable terms and
properties can be found. One such acquisition has already been made. In February
1999, the Company acquired the operations of 23 additional convenience stores
and two additional truck stops. Eleven of these stores are located in San
Antonio, Texas, and the remainder are located in smaller towns throughout the
State of Texas. Eleven of the 25 stores are third party leasehold locations
where the Company purchased the existing leasehold interest. The Company's
purchase of those leasehold interests was financed with a third party lender
consisting of four fully amortizing loans in the aggregate original principal
amount of $1,012,000, maturity dates ranging from 86 to 180 months, interest
accruing at 9.275% per annum, and aggregate payments of principal and interest
of $13,000 per month. Real estate at 14 stores was purchased by FFP Partners and
immediately leased to the Company under 20-year leases. The Company's rental
payments under those leases equal $99,000 per month. The Company guaranteed the
acquisition indebtedness of FFP Partners of $9,550,000, which amount is no
greater than the Company's aggregate rental payments to FFP Partners over the
initial 15-year period of the leases. The Company expects that its operation of
these additional 25 stores will provide funds to repay its acquisition financing
and also enhance its cash flows from operations, but future results are subject
to risks and are not assured.
The Company plans to expand its activities in 1999 in connection with its
Terminal Operations with the commencement of an ethanol blending process at the
terminal. Although management believes that this new ethanol blending will be
profitable, it is a new processing procedure at the terminal and therefore
subject to economic risks; accordingly, future results are not assured.
1998 Compared with 1997
The Company incurred a net loss of $463,000 in 1998, compared to net income
of $116,000 in 1997. The major reasons for this decline are the following:
additional bad debt losses of $1,500,000 were incurred in 1998 in money order
operations (a substantial portion of which the Company is currently seeking to
recover); rent expense of $2,628,000 was paid in 1998 to FFP Partners in the
leasing of real property for certain of the Company's retail sites, compared to
none in 1997, which was partially offset by an increase in interest income of
$693,000 and a decrease in depreciation of $1,203,000; the Company's Terminal
Operations segment incurred a loss before income taxes of $2,008,000 in 1998,
compared to a 1997 segment loss of $818,000; and an income tax benefit of only
$244,000 was recorded in 1998 compared to an $892,000 income tax benefit in
1997.
The Company's 1998 total revenues increased to $415,874,000, a 9.6% increase
over 1997 total revenues of $379,414,000. This increase resulted primarily from
a $32,977,000 (53.5%) increase in merchandise sales, which was primarily
attributable to merchandise sales at the additional 94 stores acquired in
December 1997.
Retail motor fuel sales increased by 38,319,000 gallons (19.2%) in 1998 over
1997 due to sales from the additional 94 convenience stores acquired in December
1997. In addition, wholesale fuel sales increased by 13,414,000 gallons (16.1%)
over the prior year. Total motor fuel sales, in dollars, were flat in 1998, when
compared to 1997, because motor fuel sales prices were lower in 1998 as compared
to 1997. The Company sold more motor fuel volume in 1998, which offset the price
decline. In addition, the Company's margin on such sales increased by $5,214,000
(24.0%) over 1997 levels. Retail fuel gross profit increased in absolute and per
gallon terms. Retail margins showed a 0.8 cent per gallon (8.2%) increase in
1998 over 1997 and was principally attributable to higher margins in the areas
served by the additional 94 stores acquired by the Company in December 1997. A
0.5 cent per gallon (20.0%) decline in wholesale margins resulted primarily from
competitive pricing pressure from other wholesalers in the Texas wholesale
markets served by the Company.
Merchandise sales improved from $61,652,000 in 1997 to $94,629,000 in 1998.
This large increase resulted principally from an increase of 81 stores in the
average number of convenience stores in 1998, a 66.0% increase over 1997, which
was partially offset by a 4.0% decline in the average weekly merchandise sales
to $9,095 per convenience store. Major categories of merchandise sales in 1998
were grocery sales ($49,022,000), deli and restaurant sales ($7,445,000), soft
drink sales ($6,443,000), beer and wine sales ($8,305,000), cigarette sales
($21,175,000), fast food sales ($1,968,000), and money order equipment and
supplies ($271,000).
The Company's gross profit on merchandise sales increased by $10,708,000
(57.1%) in 1998. This increase came from two sources: the additional merchandise
gross profit realized from the stores acquired in December 1997, and an increase
in gross margin on merchandise sales to 31.1% in 1998, compared to 30.4% in
1997. This increase in merchandise margins follows a five-year trend of
increasing merchandise margins. For example, merchandise margins have increased
from 27.7% in 1994 to 31.1% in 1998, representing a 12.3% overall increase
during that five-year period.
Miscellaneous revenues increased significantly to $9,719,000 in 1998,
representing a $3,452,000 (55.1%) increase in 1998 as compared to 1997,
primarily due to the greater number of stores in operation for the full year.
Miscellaneous revenues is one area of operations that the Company emphasizes in
its efforts to improve profitability. Categories of miscellaneous income include
money order fees, lottery ticket revenue, pay phone and calling card income,
automated teller machine income, gasoline excise tax handling fees, check
cashing fees, game machine income, gain or loss on property sales, interest
income, scale charges and copier income.
Direct store expenses (those costs directly attributable to the operation of
retail outlets, such as salaries and other personnel costs, supplies, utilities,
rent, property taxes, repairs and maintenance, and commissions paid to the
operators of the self-service motor fuel outlets) increased by $15,913,000
(56.3%) in 1998, compared to direct store expenses in 1997. This increase was
primarily attributable to the 94 stores acquired during December 1997. The
remaining increase in these expenses was primarily attributable to increased
wage costs, related to the federally mandated minimum wage increase which took
effect on September 1, 1997. Since the December 1997 restructuring of FFP
Partners, all of the real estate used in the Company's retail operations was
retained by FFP Partners and is now leased to the Company. As a result, rent
expense increased by $2,628,000 in 1998.
General and administrative expenses increased $3,718,000 (30.7%) in 1998 over
1997. Of this amount, $1,500,000 resulted from increased bad debt expense
arising out of the money order operations, a substantial portion of which the
Company is currently seeking to recover. In addition, a full year of costs were
incurred in 1998 for wages and initial operating costs at the Company's fuel
terminal and processing facility opened in mid-1997, and for field supervisory
personnel added in December 1997 to manage the 94 additional stores acquired in
late 1997.
Depreciation and amortization expenses increased by $148,000 (2.7%) in 1998
reflecting the impact of increased charges related to the Company's significant
capital expenditures in the last three years, primarily related to the upgrading
of the Company's underground storage tanks to meet 1998 environmental regulatory
requirements, the start of operations at the Company's fuel terminal in
mid-1997, and depreciation of equipment acquired in the late-1997 acquisition of
94 convenience stores. Offsetting the foregoing was a decline in depreciation
expense of $1,203,000 attributable to buildings that were retained by FFP
Partners in the December 1997 restructuring.
A $474,000 (28.9%) decrease in net interest expense in 1998, as compared to
1997, was the result of lower interest rates during 1998 and the receipt of
interest income of $693,000 from FFP Partners in the second half of 1998.
Partially offsetting that reduction in interest expense was additional interest
incurred as a result of increased borrowings to fund the Company's financing of
its December 1997 purchase of 94 convenience stores, investment in its fuel
terminal and processing facility, and purchase of equipment to upgrade its
underground storage tanks to meet environmental standards that became effective
in December 1998.
As a partnership, the Company paid no federal or state income tax prior to
the December 1997 restructuring of FFP Partners. Rather, the income or loss of
the Company was allocated to its partners to be included in their respective
income tax returns. Because the Company expected to become taxable as a
corporation beginning in 1998, applicable accounting pronouncements required it
to record a tax liability for those taxes it would have to pay on items of
income and expense recognized for financial reporting purposes before 1998 but
which would be recognized for tax reporting purposes in 1998 or later years.
Accordingly, the Company provided for these deferred tax expenses in its
consolidated statements of operations, while the current tax benefit of the
deferral of the recognition of income, or the acceleration of expenses, for tax
purposes was allocated the Company's partners. The primary items giving rise to
differences between financial and tax reporting were differences in the tax
bases and depreciation methods of the Company's fixed assets.
In 1996, the Company was able to substantially shorten the lives over which
certain buildings used in its retail operations were depreciated for tax
purposes. The benefit of this additional tax depreciation was allocated to the
Company's partners while the Company was required to record a deferred tax
expense related to it. In connection with the December 1997 restructuring of FFP
Partners, the ownership of the depreciable real property that gave rise to the
large deferred tax provision in 1996 was retained by FFP Partners, which
continues as a publicly-traded limited partnership, and not distributed to the
Company. Accordingly, the deferred taxes attributable to these buildings were
reversed in 1997.
As a corporation, the Company provides for both current and deferred federal
and state income tax expense on its earnings or benefit on its loss. For 1998
the Company recorded an income tax benefit of $244,000.
1997 Compared with 1996
A $10,738,000 (2.8%) decline in the Company's total revenues in 1997 from the
1996 level was principally due to a $10,319,000 (3.2%) decline in motor fuel
sales. This decline in fuel sales resulted from the absence in 1997 of a large
volume of lower margin wholesale sales to a customer that purchases from the
Company infrequently along with the effect of generally lower fuel sales prices
in 1997 as compared to 1996. The price of motor fuel also dropped steadily
throughout 1997. Wholesale fuel sales declined 7,408,000 gallons (8.2%) due to
the absence of the sales mentioned above, while retail fuel sales increased
1,623,000 (0.8%) over the prior year due to the sales from the 94 convenience
stores acquired in December 1997. Although revenues from fuel sales declined,
the margin on such sales increased $1,030,000 (5.0%) over 1996 levels. Both
retail and wholesale fuel gross profit increased in absolute and per gallon
terms. The 0.5 cent (5.4%) increase in retail margin per gallon in 1997 over
1996 was attributable to the lessening in the fourth quarter of the year of the
competitive pricing pressures that had existed over the prior 18 months. The 0.6
cent per gallon (31.6%) improvement in wholesale margins resulted primarily from
the absence of the low margin sales referred to previously.
Partially offsetting the decline in fuel sales was a $1,073,000 (1.8%)
increase in merchandise sales in 1997. This increase primarily resulted from the
additional merchandise sales of the stores acquired in December 1997. Excluding
the sales from the acquired stores, merchandise sales decreased $1,196,000
reflecting the absence of merchandise sales from the outlets which the Company
sold to independent operators during 1996 and 1997. Excluding the impact of the
stores acquired in December 1997, the Company operated an average of six fewer
stores in 1997 than 1996. Although overall merchandise sales declined, excluding
the impact of the stores acquired in December, average weekly merchandise sales
per store at the Company's convenience stores (excluding the impact of the
stores acquired in December) increased 2.6% to $9,704.
The Company's gross profit on merchandise sales increased by $918,000 (5.2%)
in 1997. About 70% of this increase came from the additional merchandise gross
profit from the stores acquired in December. The remainder is attributable to
the increase in average weekly merchandise sales, mentioned above, and the
increase in gross margin on merchandise sales to 30.4% in 1997 from 29.4% in
1996.
Miscellaneous revenues declined $1,492,000 (19.2%) in 1997, as compared to
1996, primarily due to the lesser amount of gains recognized on sales of
convenience store merchandise operations to independent operators.
Of the $1,179,000 (4.4%) increase in direct store expenses, $851,000 related
to the additional expenses attributable to the 94 stores acquired during
December 1997. The remaining $328,000 increase in these expenses are primarily
attributable to increased wage costs, related to the federally mandated minimum
wage increase which took effect on September 1, 1997.
General and administrative expenses increased $607,000 (5.3%) in 1997 over
1996. Of this amount, $453,000 were legal, accounting, and other expenses
directly attributable to the December 1997 restructuring of FFP Partners.
Excluding those costs, general and administrative expenses increased $154,000
(1.3%) primarily as a result of increased wage costs due to the opening of the
Company's fuel terminal and processing facility in mid-1997 and an increase in
field supervisory personnel added in December 1997 to manage the 94 stores
acquired in December, offset by reductions in bad debt expense and advertising
and promotion costs.
Depreciation and amortization expenses increased $1,537,000 (38.9%) in 1997
reflecting the impact of increased charges related to the Company's significant
capital expenditures in 1996 and 1997, primarily related to the upgrading of the
Company's underground storage tanks to meet 1998 environmental regulatory
requirements, and the start of operations at the Company's fuel terminal in
mid-1997.
The $396,000 (31.8%) increase in interest expense in 1997, as compared to
1996, was the result of the generally higher level of interest rates during the
1997 period and to the Company's higher debt levels. The increased borrowings
funded the Company's investment in its fuel terminal and processing facility and
purchase of equipment to upgrade its underground storage tanks to meet
environmental standards that were effective at the end of 1998.
In 1996, the Company was able to substantially shorten the lives over which
certain buildings used in its retail operations were depreciated for tax
purposes. As discussed above, the benefit of this additional tax depreciation
was allocated to the Company's partners while the Company was required to record
a deferred tax expense related to it. In connection with the December 1997
restructuring of FFP Partners, the ownership of the real estate that gave rise
to the large deferred tax provision in 1996 was retained by FFP Partners.
Accordingly, the deferred taxes attributable to these buildings was reversed in
1997. This reversal of deferred tax expense accounted for the significant change
in the deferred provision between 1996 and 1997.
Liquidity and Capital Resources
The majority of the Company's working capital is provided from two sources:
(i) cash flows generated from its operating activities, and (ii) borrowings
under its revolving credit facility. The Company believes that operating
activities, coupled with available short-term working capital facilities, will
provide sufficient liquidity to fund current commitments for operating and
capital expenditure programs, as well as to service debt requirements. Actual
capital expenditure funding will be dependent on the level of cash flow
generated from operating activities and the funds available from financings.
The Company's notes payable at year end 1998 aggregated $20,380,000. Such
amount was comprised of the following: a bank revolving credit facility
($2,407,000) and term loan ($6,762,000), debt ($9,253,000) incurred in June 1998
to refinance its acquisition financing incurred in purchasing 94 additional
convenience stores in December 1997, an equipment loan ($1,850,000) incurred in
April 1998 to refinance a previous capitalized lease obligation, and other debt
($108,000) to finance the installation of sewer equipment in a prior year. Of
the total notes payable, $1,959,000 is classified as short term, and $18,451,000
is long term debt.
The bank revolving credit line provides for borrowings up to $15,000,000,
with the amount available at any time limited to a borrowing base equal to 85%
of the Company's trade receivables plus 50% of the Company's inventories. On
December 27, 1998, the borrowing base was $12,383,000. The revolving credit
facility and term loan both bear interest at the lender's prime rate, payable
monthly. The term loan requires monthly principal payments of $95,000; and both
loans mature in November 2000. The loans are subject to a Loan and Security
Agreement between the lender, the Company and two subsidiaries of the Company.
The agreement contains numerous, but typical, restrictive covenants including
financial covenants relating to the maintenance of a specified minimum tangible
net worth, a maximum debt to tangible net worth ratio, and a minimum cash flow
coverage ratio, all as defined in the agreement. As of year end 1998, the
Company was not in compliance with certain requirements under the loan agreement
for the principal reason that the assets and operations of FFP Partners are no
longer included in the financial covenant calculations. The lender has waived
declaring a default due to such noncompliance and amended the applicable
restrictive covenants to place the Company in compliance subsequent to December
27, 1998. The loans under the agreement are secured by the Company's trade
accounts receivable, inventories, and its equipment not otherwise encumbered,
and by a negative pledge of its other assets, and a collateral assignment of the
Company's deed of trust lien against the real properties of FFP Partners.
In June 1998, the Company refinanced its December 1997 purchase of 94
convenience stores. That financing consists of 44 fully amortizing loans in the
aggregate original principal amount of $9,420,000, an interest rate of 8.66% per
annum, maturities ranging from 112 to 180 months, and aggregate payments of
principal and interest of $101,000 per month. The proceeds of these loans were
used to repay a bridge loan with an original principal balance of $6,735,000
used to finance the purchase of the outlets and for general corporate purposes.
Effective June 1998, the Company, the Company's primary bank lender and FFP
Partners reached an agreement to restructure the revolving credit facility and
term loan due to the lender. In connection with the restructuring of FFP
Partners in December 1997, both the Company and FFP Partners retained the
liability for this debt as both entities were primary obligors on the loans. In
accordance with the June 1998 agreement, the lender made a loan to the Company,
the Company made a loan to FFP Partners, and FFP Partners repaid the balance of
its debt to the lender, all of which was effective on June 28, 1998. This
transaction included the execution of a promissory note by FFP Partners payable
to the Company in the amount of $14,773,000 (the then current balance on the
debt due to the lender), which was recorded by the Company as a note receivable
from affiliate, and FFP Partners was released by the lender from all obligations
under the Loan and Security Agreement. As a result of the June 1998 transaction,
joint liability no longer exists on the debt obligations to the lender, and the
1997 reduction of $15,938,000 to the Company's stockholders' equity for such
liability was removed. At December 27, 1998, the Company was indebted to the
lender in the amount of $9,169,000, and owned a promissory note from FFP
Partners with an unpaid principal balance of $14,201,000.
The interest rate and repayment terms of the Company's loan to FFP Partners
mirror such terms of the Company's debt to the lender, including a maturity date
of November 2000. The revised agreement with the lender also required that the
loan be secured by real estate owned by FFP Partners, which was pledged to the
Company and then also pledged by the Company to the lender as additional
collateral on the Company's debt to the lender. FFP Partners makes monthly
principal payments to the Company of $95,000 plus accrued interest on the unpaid
balance at a rate equal to the bank's prime rate. All proceeds received by the
Company from its loan to FFP Partners are required to be applied to the balance
of the Company's debt to the lender.
The Company is currently seeking to refinance all or a substantial portion of
its bank revolving credit facility and term loan described above in the second
quarter of 1999. Although the Company executed a letter of intent with a lender
in April 1999 to obtain such refinancing, it has not received a binding
commitment for such refinancing. Accordingly, such refinancing is not assured.
As proposed, such refinancing loan would be fully amortized over 15 years in
equal, monthly installments and be secured by approximately 73 of the Company's
convenience stores and truck stops.
The Company has been advised by FFP Partners that it expects to refinance its
existing indebtedness to the Company during the second quarter of 1999. Although
FFP Partners obtained a favorable response to such refinancing from a lender in
March 1999, it has not received a binding commitment for such refinancing.
Accordingly, the Company's receipt of proceeds from such refinancing is not
assured.
When the Company operated as a publicly-traded limited partnership, it made
cash distributions to its partners from time to time, a portion of which
represented the amount the partners were required to pay in income taxes on the
Company's income that was allocated to them. With the change in the Company's
tax status to a corporation, management does not currently anticipate that any
dividends will be paid on the Company's common stock within the next twelve
months.
The Company's cash flows from operating activities were $12,559,000 in 1998,
an increase of $4,463,000 (55.1%) over 1997. This increase is primarily
attributable to the increase in cash flows as a result of operating an average
of 81 more convenience stores in 1998 than in 1997. The Company's investment in
property and equipment during 1998 was $6,787,000, a decrease of $10,623,000
(61.0%) compared to 1997. The Company's 1998 capital expenditures were
principally to refurbish the Company's stores and to continue the upgrading of
the Company's underground storage tanks to meet the environmental regulations
for underground storage tanks by the December 1998 deadline. Capital
expenditures decreased in 1998 because no major purchase of additional
convenience stores was made in 1998 as were made in 1997, when an 94 convenience
stores were purchased. In addition, the Company reduced its net long term debt
and net capital lease obligations by $4,964,000 (18.6%). The Company paid for
its capital expenditures and reduced its long term debt and capital lease
obligations from operating cash flow.
Subject to obtaining satisfactory deal terms and suitable financing, the
Company intends to purchase additional convenience stores in 1999 and beyond as
the convenience store industry goes through as period of consolidation. Any such
acquisitions will impact the Company's financial results and liquidity. For
example, the Company expects that the operation of the additional 25 stores
acquired in February 1999 will provide funds to repay its acquisition
indebtedness and enhance its cash flow, but future results are not assured.
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 have off-balance sheet
risk as they 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 not
significant at year end 1998. {See Note 11 to the Consolidated Financial
Statements.}
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 $15,190,000 at the end of
fiscal 1998. 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. In 1998 the Company incurred an additional
bad debt loss from its money order operations. The Company is attempting to
recover a substantial portion of these losses that were attributable to two
reasons: bank encoding errors and fraudulent actions by a third party money
order agent. The Company's failure to receive money order payments from an agent
on a timely basis could negatively impact the Company's liquidity.
The Company had negative working capital of $5,339,000 at the end of 1998,
compared to a negative $185,000 at year end 1997. The Company has traditionally
been able to operate its business with minimal or negative working capital,
principally because most sales are for cash and it has received payment terms
from vendors. The change resulted primarily from a $3,891,000 increase (34.4%)
in money order payables, a $4,728,000 (49.1%) increase in accrued expenses and a
$1,169,000 (10.9%) increase in trade receivables. The Company believes that the
availability of funds from its store operations, its revolving line of credit
(as discussed above) and its traditional use of trade credit will permit
operations to be conducted in a customary manner.
"Year 2000" Issues
The Year 2000 issue ("Y2K") is the result of computer software programs being
coded to use two digits rather than four to define the applicable year. Some of
computer programs that have date-sensitive coding may recognize a date using
"00" as the year 1900 rather than the year 2000. This coding could result in
system failures or miscalculations, causing disruptions of operations.
The Company has approached the Y2K issue in phases. A Y2K project office
manager, together with strong support from management, has designed a Y2K work
plan that is currently being implemented. The Y2K work plan includes: (1)
identifying and inventorying all Year 2000 tasks and items; (2) assigning
priorities to all tasks and items; (3) remediation of information systems ("IS")
application code, testing and reintegration to production, as well as testing
all replaced systems software and non-remediated applications; (4) contacting
third-party vendors to verify their compliance and perform selected interface
tests with major vendors; (5) determining the Company's Y2K responsibilities to
its subsidiaries and affiliates; and (6) establishing contingency alternatives
assuming worst-case scenarios.
The Company continues to progress favorably in its completion of the various
tasks and target dates identified in the Y2K work plan. The Company believes it
has identified and prioritized all major Y2K-related items. In addition, many
non-IS, merchandise, equipment, financial institution, insurance and public
utility vendors are being contacted, inquiring as to their readiness and the
readiness of their respective vendors. The Company will perform follow-up
efforts with the above vendors as required. Testing compliance with major
vendors is now being planned. The following reflects management's assessment of
the Company's Y2K state of readiness on December 27, 1998:
Estimated Estimated
Percentage Completion
Completed Date
Phase
Internal IS and Non-IS systems and equipment:
Awareness 90% Dec 1999
Assessment 80% Jun 1999
Remediation 60% Sep 1999
Testing 20% Oct 1999
Contingency planning 20% Sep 1999
Suppliers, customers and third party providers:
Awareness-identify companies 70% May 1999
Assessment questionnaire completed
by major suppliers 30% Aug 1999
Assessment review with third party
providers 30% Aug 1999
Review contractual commitments 10% Jul 1999
Risk assessment 10% Jun 1999
Contingency planning 10% Sep 1999
Testing as applicable 10% Sep 1999
The Company's estimates are judgmental and subject to error. It believes that
work should be significantly finished at the estimated completion date, but the
Company will continue to reevaluate awareness, send follow-up questionnaires and
update contingency plans as considered necessary.
The Company estimates that the cost of the Y2K project will be approximately
$500,000 to $750,000, of which about one-half will be capital costs. The costs
incurred to date approximate $200,000, with the remaining cost for outside
consultants software and hardware applications to be funded through operating
cash flow. This estimate includes costs related to the upgrade and/or
replacement of computer software and hardware; costs of remediated code testing
and test result verification; and the reintegration to production of all
remediated applications. In addition, the costs include the testing of
applications and software currently certified as Y2K compliant. The Company does
not separately track the internal costs incurred for the Y2K project, which are
primarily the related payroll costs for the IS and various user personnel
participating in the project.
Due to the general uncertainty inherent in the Y2K process, primarily due to
issues surrounding the Y2K readiness of third-party suppliers and vendors, a
reasonable worst-case scenario is difficult to determine at this time. The
Company does not anticipate more than temporary isolated disruptions attributed
to Y2K issues to affect either the Company or its primary vendors. The Company
is concentrating on four critical business areas in order to identify, evaluate
and determine the scenarios requiring the development of contingency plans: (1)
merchandise ordering and receipt, (2) petroleum products ordering and receipt,
(3) disruption of power at retail sites, and (4) cash collection and
disbursement systems. To the extent vendors are unable to deliver products due
to their own Year 2000 issues, the Company believes it will generally have
alternative sources for comparable products and does not expect to experience
any material business disruptions. Although considered unlikely, the failure of
public utility companies to provide telephone and electrical service could have
material consequences. Contingency planning efforts will escalate as the Company
continues to receive and evaluate responses from all of its primary merchandise
vendors and service providers. These contingency plans are scheduled to be
complete by September 1999.
The costs of the Y2K project and the date on which the Company plans to
complete the Y2K modifications are based on management's best estimates, which
were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. As a result, there can be no assurance that these forward-looking
estimates will be achieved and the actual costs. Vendor compliance could differ
materially from the Company's current expectations and result in a material
financial risk. In addition, while the Company is making significant efforts in
addressing all anticipated Y2K risks within its control, this event is
unprecedented. Consequently, there can be no assurance that the Y2K issue will
not have a material adverse impact on the Company's operating results and
financial condition.
Inflation and Seasonality
The Company believes inflation has not had a material effect on operating
results in recent years except for the upward pressure placed on wages,
primarily store wages, by the federal minimum wage increases which took effect
in 1997 and 1996. Operations for the foreseeable future are not expected to be
significantly impacted by inflation. Generally, increased costs of in-store
merchandise can be quickly reflected in higher prices to customers. The price of
motor fuel, adjusted for inflation, has declined over recent years. Significant
increases in the retail price of motor fuels could reduce fuel demand and the
Company's gross profit on fuel sales.
The Company's businesses are subject to seasonal influences, with higher
sales being experienced in the second and third quarters of the year as
customers tend to purchase more motor fuel and convenience items, such as soft
drinks, other beverages, and snack items, during the warmer months.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company is subject to insignificant market risks related to variable
interest rates and commodity prices. Although interest expense on the Company's
bank loan containing the revolving credit facility and term loan is calculated
at the prime rate of interest, which is subject to change, the Company is also
the holder of a note receivable from FFP Partners containing payment terms which
mirror that of the Company's debt. Thus, any increase in interest expense of the
Company attributable to an increase in the prime rate will be offset by an
increase in its interest income.
The Company is also subject to the market risk of increasing commodity prices
and sometimes is a party to commodity futures and forward contracts to hedge
that risk. However, open positions under these futures and forward contracts
were not significant at year end 1998 or 1997. {See Note 11 to the Consolidated
Financial Statements.}
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements filed herewith begin on page F-1.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL ISCLOSURE.
Not applicable.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Certain portions of the information required to be set forth in this item
will be included in the Proxy to be filed by the Company within 120 days of its
1998 fiscal year end regarding its 1999 shareholder meeting. Such information is
incorporated herein by this reference.
The following table sets forth the names, ages, positions, and business
experience of the Company's executive officers and directors at the end of 1998:
Name Age Position
John H. Harvison [1] 65 Chairman of the Board and Chief
Executive Officer
Robert J. Byrnes [1] 58 President, Chief Operating
Officer, and Director
Craig T. Scott 52 Vice President - Finance,
General Counsel, Secretary,
Treasurer, and Chief Financial Officer
J. D. St. Clair 64 Vice President - Fuel Supply
and Distribution and Director
Michael Triantafellou 45 Vice President - Retail
Operations and Director
John W. Hughes [1,2] 57 Director
Garland R. McDonald 61 Director
John D. Harvison 42 Director
E. Michael Gregory [2] 47 Director
- - --------------------------------
[1] Member of Compensation Committee
[2] Member of Audit Committee
John H. Harvison has been Chairman of the Board of the Company and its
predecessor since the commencement of the Company's operations in May 1987. Mr.
Harvison is a founder and an executive officer of each of the companies from
which the Company's initial base of retail outlets was acquired, and has been
active in the retail gasoline business since 1958 and in the convenience store
business since 1973. In addition, he has been involved in oil and gas
exploration and production, the ownership and management of an oil refinery and
other personal investments. In January 1995, Mr. Harvison consented to the entry
of a cease and desist order by the United States Office of Thrift Supervision
that, among other things, prohibits him from participating in any manner in the
conduct of the affairs of federally insured depository institutions. This Order
was issued in connection with Mr. Harvison's ownership in a federal savings bank
and transactions between him (and companies in which he had an ownership
interest) and that institution. In consenting to the issuance of the Order, Mr.
Harvison did not admit any of the allegations against him and consented to the
issuance of the Order solely to avoid the cost and distraction that would be
caused by prolonged litigation to contest the positions taken by the Office of
Thrift Supervision. Mr. Harvison is the father of John D. Harvison, who is also
a director of the Company.
Robert J. Byrnes has been the President of the Company and its predecessor
since April 1989 and has been a Director since May 1987. From May 1987 to April
1989, Mr. Byrnes served as Vice President - Truck Stop Operations for the
Company. Mr. Byrnes has been, since 1985, the President of Swifty Distributors,
Inc., one of the companies from which the Company acquired its initial retail
outlets. From 1975 through 1984, Mr. Byrnes was President of Independent
Enterprises, Inc., which owned and operated convenience stores and a truck stop.
During that period, he was also President of Enterprise Distributing, Inc., a
wholesaler of motor fuels. Prior to 1975, Mr. Byrnes was President of Foremost
Petroleum Corporation (which is now a subsidiary of Citgo Petroleum Corporation)
and was a distribution manager for ARCO Oil & Gas Company. He is currently a
director of Plaid Pantries, Inc., an operator of convenience stores
headquartered in Beaverton, Oregon.
Craig T. Scott has served as Vice President - Finance, General Counsel,
Secretary, and Treasurer of the Company since October 1998. From October 1996
until September 1998, Mr. Scott was an self-employed attorney engaged in the
private practice of law in Dallas and McKinney, Texas. From December 1991 until
October 1996, he was employed by Box Energy Corporation as an attorney and from
July 1993 until October 1996 as its Executive Vice President. Prior to joining
such company, Mr. Scott engaged in the practice of law for seven years with
large law firms in Dallas, Texas; practiced law in McKinney, Texas for four
years; and was the president and co-owner of an oil and gas exploration company
for two years. Mr. Scott was previously employed for six years by Arthur
Andersen & Co., an international public accounting firm. He is a member of both
the American Institute of Certified Public Accountants and the Texas Society of
CPAs.
J. D. St. Clair has been Vice President - Fuel Supply and Distribution and a
Director of the Company and its predecessor since May 1987. Mr. St. Clair is a
founder and an executive officer of several of the companies from which the
Company acquired its initial retail outlets. He has been involved in the retail
gasoline marketing and convenience store business since 1971. Prior to 1971, Mr.
St. Clair performed operations research and system analysis for Bell Helicopter,
Inc., from 1967 to 1971; for the National Aeronautics and Space Administration
from 1962 to 1967; and Western Electric Company from 1957 to 1962.
Michael Triantafellou was elected Vice President - Retail Operations and a
Director of the Company's predecessor in February 1997. He had served as
Director of Truck Stops and Food Service Operations for the Company since
January 1994. Mr. Triantafellou has been engaged in the truck stop and food
service industries since 1976, having held various middle and upper management
positions in the truck stop businesses of Truckstops of America (from 1975 to
1980), Bar-B Management (from 1980 to 1985) Greyhound-Dial Corp. (from 1985 to
1993), and Knox Oil of Texas (from 1993 to 1994). Mr. Triantafellou is a 1975
graduate of the Wharton School of the University of Pennsylvania.
John W. Hughes has been a Director of the Company and its predecessor since
May 1987. Mr. Hughes is an attorney with the law firm of Garrison & Hughes,
L.L.P., in Fort Worth, Texas. From 1991 to 1995 he was an attorney with the firm
of Simon, Anisman, Doby & Wilson, P.C., in Fort Worth, Texas. Since 1963, Mr.
Hughes has been a partner of Hughes Enterprises, which invests in venture
capital opportunities, real estate, and oil and gas.
Garland R. McDonald is employed by the Company to oversee and direct a
variety of special projects. He was elected to the Board of the Company's
predecessor in January 1990 and had previously served as a Director of the
predecessor company from May 1987 through May 1989. He also served as a Vice
President of the Company's predecessor from May 1987 to October 1987. Mr.
McDonald is a founder and the Chief Executive Officer of Hi-Lo Distributors,
Inc., and Gas-Go, Inc., two of companies from which the Company initially
acquired its retail outlets. He has been actively involved in the convenience
store and retail gasoline businesses since 1967.
John D. Harvison was elected a Director of the Company's predecessor in April
1995. Mr. Harvison has been Vice President of Dynamic Production, Inc., an
independent oil and gas exploration and production company since 1977. He
previously served as Operations Manager for Dynamic from 1977 to 1987. He also
serves as an officer of various other companies that are affiliated with Dynamic
that are involved in real estate management and various other investment
activities. Mr. Harvison is the son of John H. Harvison, the Chairman of the
Board of the Company.
E. Michael Gregory was elected to the Board of the Company's predecessor in
September 1995. Mr. Gregory is the founder and President of Gregory Consulting,
Inc., an engineering and consulting firm that is involved in the development of
products related to the distribution and storage of petroleum products and
computer software for a variety of purposes including work on such products and
software for the Company. Prior to founding Gregory Consulting in 1988, Mr.
Gregory was the Chief Electronic Engineer for Tidel Systems (a division of The
Southland Corporation) where he was responsible for new product concept
development and was involved in projects involving the monitoring of fuel levels
in underground storage tanks. He is a Registered Professional Engineer in Texas.
Item 11. EXECUTIVE COMPENSATION.
The information required to be set forth in this item will be included in the
Proxy to be filed by the Company within 120 days of its 1998 fiscal year end
regarding its 1999 shareholder meeting. Such information is incorporated herein
by this reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required to be set forth in this item will be included in the
Proxy to be filed by the Company within 120 days of its 1998 fiscal year end
regarding its 1999 shareholder meeting. Such information is incorporated herein
by this reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required to be set forth in this item will be included in the
Proxy to be filed by the Company within 120 days of its 1998 fiscal year end
regarding its 1999 shareholder meeting. Such information is incorporated herein
by this reference.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this Annual Report on Form
10-K:
(1) Financial Statements. See Index to Financial Statements on page
F-1 hereof.
(2) Financial Statement Schedules. No Financial Statement
Schedules are included because they are either not required,
not applicable, or the required information is included in the
consolidated financial statements or notes thereto.
(3) Exhibits.
3.1 Articles of Incorporation of FFP Marketing Company, Inc. {1}
3.2 Bylaws of FFP Marketing Company, Inc. {1}
10.1 Nonqualified Unit Option Plan of FFP Partners, L.P. {1}
10.2 Form of Ground Lease with affiliated companies. {1}
10.3 Form of Building Lease with affiliated companies. {1}
10.4 Form of Agreement with Product Supply Services, Inc. {1}
10.5 First Amendment to Loan and Security Agreement between FFP
Partners, L.P., FFP Operating Partners, L.P., Direct Fuels,
L.P., FFP Marketing Company, Inc. and HSBC Business Loans,
Inc., dated March 12, 1999, effective as of June 30, 1998 {2}
10.6 FFP Marketing Company. Inc. Stock Option Plan. {2}
10.7 Form of 44 Secured Promissory Notes executed by FFP Operating
Partners, L.P. payable to Franchise Mortgage Acceptance Company,
dated June 30, 1998, related to refinancing of 44 convenience
stores. {2}
21.1 Subsidiaries of the Registrant. {2}
23.1 Consent of Independent Auditor. {2}
27 Financial Data Schedule. {2}
- - ---------------
Notes {1} Incorporated by reference to the Company's Form 10-K (file
number 1-13727) filed with Commission and effective on or
about April 13, 1998.
{2} Included herewith.
(b) No reports on Form 8-K were filed during the last quarter of the
period covered by this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities and Exchange Act of 1934, the Registrant has duly caused this Annual
Report on Form 10-K to be signed on its behalf by the undersigned, thereunto
duly authorized.
Dated: April 12, 1999 FFP MARKETING COMPANY, INC.
(Registrant)
- - --------------------------------- By: /s/ John H. Harvison
John H. Harvison
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Annual Report has been signed below by the following persons on behalf of
the Registrant in the capacities indicated as of April 12, 1999.
/s/ John H. Harvison Chairman of the Board of Directors
- - --------------------------------- and Chief Executive Officer
John H. Harvison (Principal executive officer)
/s/ Robert J. Byrnes President, Chief Operating Officer,
- - --------------------------------- and Director (Principal operating
Robert J. Byrnes officer)
/s/ Craig T. Scott Vice President-Finance, Secretary,
- - --------------------------------- Treasurer, and General Counsel
Craig T. Scott (Principal financial and
accounting officer)
/s/ J. D. St. Clair Director
- - ---------------------------------
J. D. St. Clair
/s/ Michael Triantafellou Director
- - ---------------------------------
Michael Triantafellou
Director
- - ---------------------------------
John W. Hughes
Director
- - ---------------------------------
Garland R. McDonald
/s/ John D. Harvison Director
- - ---------------------------------
John D. Harvison
Director
- - ---------------------------------
E. Michael Gregory
Item 8. Index to Financial Statements.
Page
Number
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 27, 1998 and F-3
December 28, 1997
Consolidated Statements of Operations for the Years Ended F-4
December 27, 1998, December 28, 1997, and December 29,
1996
Consolidated Statements of Stockholders' Equity/Partners' F-5
Capital for the Years Ended December 27, 1998, December
28, 1997, and December 29, 1996
Consolidated Statements of Cash Flows for the Years Ended F-6
December 27, 1998, December 28, 1997, and December 29,
1996
Notes to Consolidated Financial Statements F-8
Independent Auditors' Report
The Stockholders of
FFP Marketing Company, Inc.:
We have audited the consolidated financial statements of FFP Marketing
Company, Inc. (successor in interest to FFP Partners, L.P., a Delaware limited
partnership) and its subsidiaries as listed in the accompanying index. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of FFP
Marketing Company, Inc. and its subsidiaries as of December 27, 1998, and
December 28, 1997, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 27, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
Fort Worth, Texas
March 30, 1999, except as to
the third paragraph of Note 5,
which is as of April 12, 1999
FFP Marketing Company, Inc. and Subsidiaries
Consolidated Balance Sheets
December 27, 1998, and December 28, 1997
(In thousands, except share information)
1998 1997
ASSETS
Current assets
Cash and cash equivalents $9,537 $9,389
Trade receivables, less allowance for doubtful
accounts of $758 and $809 in 1998 and 1997,
respectively 11,901 10,732
Notes receivable, current portion 1,078 737
Notes receivable from affiliates, current portion 1,923 426
Inventories 15,439 15,820
Deferred tax asset, net 2,334 370
Prepaid expenses and other current assets 1,386 707
Total current assets 43,598 38,181
Property and equipment, net 33,602 32,095
Notes receivable from affiliates, excluding current
portion 13,058 0
Other assets, net 6,782 5,054
Total assets $97,040 $75,330
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Current installments of long-term debt $1,959 $1,208
Current installments of obligations under capital
leases 401 917
Accounts payable 16,254 15,319
Money orders payable 15,190 11,299
Accrued expenses 14,351 9,623
Total current liabilities 48,155 38,366
Long-term debt, excluding current installments 18,421 21,465
Obligations under capital leases, excluding current
installments 955 3,110
Deferred income taxes 4,913 3,259
Other liabilities 2,824 2,866
Total liabilities 75,268 69,066
Commitments and contingencies
Stockholders' equity
Preferred stock ($0.01 par value; 1,000,000
shares authorized; no shares issued and outstanding) 0 0
Common stock ($0.01 par value; 9,000,000 shares
authorized; 3,818,747 and 3,779,415 shares
issued and outstanding in 1998 and 1997,
respectively) 22,235 22,202
Accumulated deficit (463) 0
Reduction in equity for joint debt obligations 0 (15,938)
Total stockholders' equity 21,772 6,264
Total liabilities and stockholders' equity $97,040 $75,330
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries
Consolidated Statements of Operations
Years Ended December 27, 1998, December 28, 1997 and December 29, 1996
(In thousands, except per share information)
1998 1997 1996
Revenues
Motor fuel $311,526 $311,495 $321,814
Merchandise 94,629 61,652 60,579
Miscellaneous 9,719 6,267 7,759
Total revenues 415,874 379,414 390,152
Costs and expenses
Cost of motor fuel 284,610 289,793 301,142
Cost of merchandise 65,182 42,913 42,758
Direct store expenses 44,154 28,241 27,062
General and administrative expenses 15,831 12,113 11,506
Depreciation and amortization 5,636 5,488 3,951
Total costs and expenses 415,413 378,548 386,419
Operating income 461 866 3,733
Interest income 693 36 0
Interest expense 1,861 1,678 1,246
Income/(loss) before income taxes (707) (776) 2,487
Income tax expense/(benefit) (244) (892) 2,646
Net income/(loss) $(463) $116 $(159)
Net income/(loss) per share
Basic $(0.12) $0.03 $(0.04)
Diluted (0.12) 0.03 (0.04)
Weighted average number of common shares outstanding
Basic 3,784 3,779 3,759
Diluted 3,784 3,802 3,759
Pro forma information (unaudited) (note 10)
Historical income/(loss) before taxes - $(776) $2,487
Pro forma income tax expense/(benefit) - (287) 920
Pro forma net income/(loss) - $(489) $1,567
Pro forma net income/(loss) per share -
Basic - $(0.13) $0.42
Diluted (0.13) 0.41
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity/Partners' Capital
Years Ended December 27, 1998, December 28, 1997, and December 29, 1996
(In thousands, except share/unit information)
Joint
Common Accum. Debt Limited General Treasury
Stock Deficit Oblig. Partners Partner Units Total
Balance, December 31, $0 $0 $0 $25,713 $257 $(269) $25,701
1995
Exercise of unit 0 0 0 139 2 0 141
options
Distributions to partners
($0.415 per Class A and
Class B Unit) 0 0 0 (1,530) (15) 0 (1,545)
Net income/(loss) 0 0 0 (157) (2) 0 (159)
Balance, December 29,
1996 0 0 0 24,165 242 (269) 24,138
Net income/(loss) 0 0 0 115 1 0 116
Net assets distributed
in restructuring
transaction 22,202 0 0 (24,280) (243) 269 (2,052)
Reduction of equity
resulting from
reporting of joint
debt obligations
in restructuring 0 0 (15,938) 0 0 0 (15,938)
Balance, December 28,
1997 22,202 0 (15,938) 0 0 0 6,264
Net income/(loss) 0 (463) 0 0 0 0 (463)
Distribution of amount
owed for prior year (70) 0 0 0 0 0 (70)
Increase in equity
resulting from
restructuring joint
debt obligations 0 0 15,938 0 0 0 15,938
Exercise of stock 103 0 0 0 0 0 103
options
Balance, December 27,
1998 $22,235 $(463) $0 $0 $0 $0 $21,772
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Years Ended December 27, 1998, December 28, 1997, and December 29, 1996
(In thousands, except supplemental information)
1998 1997 1996
Cash Flows from Operating Activities
Net income/(loss) $(463) $116 $(159)
Adjustments to reconcile net
income/(loss) to net cash
provided by operating activities
Depreciation and amortization 5,636 5,488 3,950
Provision for doubtful accounts 1,916 199 327
Provision/(benefit)for deferred
income taxes (310) (892) 2,466
(Gain)/loss on sales of property and
equipment 96 (254) (21)
Gain on sales of convenience store
operations (445) (30) (1,778)
Minority interest in net income of
subsidiaries 0 0 32
Changes in operating assets and liabilities
Increase in trade receivables (3,085) (628) (1,190)
(Increase)/decrease in inventories 381 (3,331) (1,229)
(Increase)/decrease in prepaid expenses and
other operating assets (679) (298) 223
Increase in accounts payable 935 1,169 1,120
Increase in money orders payable 3,891 3,490 1,891
Increase/(decrease) in accrued expenses
and other liabilities 4,686 3,067 (794)
Net cash provided by operating activities 12,559 8,096 5,018
Cash Flows from Investing Activities
Purchases of property and equipment (6,787) (17,410) (9,517)
Proceeds from sales of property and
equipment 82 1,289 98
Increase in notes receivables from
affiliates (14,555) 0 0
Decrease in notes receivable 12 846 540
(Increase)/decrease in other assets (2,170) 574 (332)
Net cash (used in) investing activities (23,418) (14,701) (9,211)
Cash Flows from Financing Activities
Borrowings/(payments) on revolving
credit line, net 0 (6,823) 2,820
Proceeds from long-term debt 589,841 122,884 4,000
Payments on long-term debt (576,196)(109,563) (2,033)
Borrowings under capital lease obligations 311 2,522 1,923
Payments on capital lease obligations (2,982) (1,270) (975)
Proceeds from exercise of stock or unit
options 103 0 141
Distributions (70) 0 (1,545)
Net cash provided by financing activities 11,007 7,750 4,331
Net increase in cash and cash equivalents 148 1,145 138
Cash and cash equivalents at beginning of
year 9,389 8,244 8,106
Cash and cash equivalents at end of year $9,537 $9,389 $8,244
Supplemental Disclosure of Cash Flow Information
The Company paid cash for interest during 1998, 1997, and 1996 in the amount
of $1,862,000, $1,917,000, and $1,097,000, respectively. Purchases of property
and equipment in 1997 include capitalized interest of $148,000.
The Company paid estimated quarterly federal income taxes of $125,000 in
1998. In prior years the Company was a partnership and paid no income taxes.
Supplemental Schedule of Noncash Investing and Financing Activities
On December 28, 1997, in conjunction with the organizational restructuring of
FFP Partners that included the formation of the Company, $196,000 of prepaid
expenses and $18,143,000 of land and buildings were retained by FFP Partners,
and $349,000 of common stock was issued to the general partner of FFP Partners.
Also in connection with that 1997 restructuring, the Company recorded a
reduction in stockholders' equity of $15,938,000 related to debt for which the
Company and FFP Partners were jointly liable. On June 28, 1998, the Company
restructured this debt, and the 1997 reduction of $15,938,000 to stockholders'
equity was reversed. (Note 5)
During 1996, the Company acquired fixed assets of $200,000 in exchange for
notes payable.
See accompanying Notes to Consolidated Financial Statements.
FFP Marketing Company, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 27, 1998, December 28, 1997, and December 29, 1996
1. Basis of Presentation
(a) Organization of Company
FFP Marketing Company, Inc., a Texas corporation (the "Company"), was formed
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
real estate previously used in its retail operations. Unless the context
requires otherwise, references in these consolidated financial statements to the
"Company" for periods or activities prior to the December 1997 restructuring
include the activities of FFP Partners. The net book value of the assets and
liabilities retained by FFP Partners has been reflected as a distribution to FFP
Partners in the accompanying consolidated statements of stockholders'
equity/partners' capital. Accordingly, no gain or loss was recognized as a
result of the restructuring.
In the 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 and its subsidiaries are principally engaged in two operating
segments: (i) the retail and wholesale sale of motor fuel, merchandise and other
products and services at over 400 convenience stores, truck stops, and other
gasoline outlets ("Retail and Wholesale"), and (ii) the operation of a motor
fuel terminal and processing facility ("Terminal Operations"). (See Note 16.)
The Company conducts its operations through the following subsidiaries:
Entity Date Formed Principal Activity
FFP Operating Partners, December 1986 Operation of convenience
L.P., a Delaware stores and other retail
limited partnership outlets
Direct Fuels, L.P., a December 1988 Operation of fuel terminal and
Texas limited wholesale fuel sales
partnership
FFP Financial Services, September Sale of money order services
L.P., a Delaware 1990 and supplies
limited partnership
Practical Tank September Underground storage tank
Management, Inc., a 1993 monitoring
Texas corporation
FFP Transportation, September Ownership of tank trailers and
L.L.C., a Texas limited 1994 other transportation
liability company equipment
FFP Money Order Company, December 1996 Sale of money orders through
Inc., a Nevada agents
corporation
(b) Consolidation
The consolidated financial statements include the accounts of the Company and
its majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in the consolidated financial statements.
(c) Reclassifications
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
2. Significant Accounting Policies
(a) Fiscal Years
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 years ended December 27, 1998, December 28,
1997, and December 29, 1996, each consisted of 52 weeks. Year end data in these
notes is as of the respective dates above.
(b) Cash Equivalents
The Company considers all highly liquid investments with maturities at date
of purchase of three months or less to be cash equivalents.
(c) Notes Receivable
The Company evaluates the collectibility of notes receivable in accordance
with the provisions of Statement of Financial Accounting Standards ("SFAS") No.
114, "Accounting by Creditors for Impairment of Loans," as amended by SFAS No.
118, "Accounting by Creditors for Impairment of a Loan -- Income Recognition and
Disclosures." At year end 1998 and 1997, no notes receivable were determined to
be impaired.
(d) 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.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment acquired under capital
leases is stated at the present value of the initial minimum lease payments,
which is not in excess of the fair value of the equipment. 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.
(f) Investments
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 consolidated balance sheets.
(g) 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 1998 and 1997, goodwill of $1,524,000 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.
(h) Sales of Convenience Store Operations
In 1998 and in past years 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)
1998 9 $312 $683 $995 $445 $265
1997 2 66 201 267 30 50
1996 18 816 1,561 2,377 1,778 250
Gains on sales which meet specified criteria, including receipt of a
significant cash down payment and projected cash flow from store operations
sufficient to adequately service the debt, are recognized upon closing of the
sale. Gains on sales which do not meet the specified criteria are recognized
under the installment method as cash payments are received. Gains being
recognized under the installment method are evaluated periodically to determine
if full recognition of the gain is appropriate.
Under these sales, the Company generally retains the real estate or leasehold
interests and leases or subleases the store facilities (including the store
equipment) to the purchaser under five-year renewable operating lease
agreements. The Company usually retains ownership of the motor fuel operations
and pays the purchaser of the store commissions based on motor fuel sales. In
addition, the new store operators may purchase merchandise under the Company's
established buying arrangements.
(i) 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
consolidated balance sheets (see Note 13b).
In October 1996, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 96-1, Environmental Remediation
Liabilities. SOP 96-1, was adopted by the Company on December 29, 1997, and
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. Such accounting was consistent with the Company's prior
method of accounting for environmental remediation costs; therefore, adoption of
SOP 96-1 in 1997 did not have a material impact on the Company's consolidated
financial position, results of operations, or liquidity.
(j) Motor Fuel Taxes
In 1998, 1997, and 1996, motor fuel revenues and related cost of motor fuel
include federal and state excise taxes of $116,880,000, $99,911,000, and
$105,718,000, respectively.
(k) Exchanges
The Company uses the exchange method of accounting 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 11) to
the extent they have been entered into, with any remaining balance valued at
current replacement cost. Exchange balances due to others at year end 1998 and
1997 were $375,000 and $994,000, respectively.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the estimated future tax
consequences attributable to existing differences between financial statement
carrying amounts of assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to be in effect when such amounts are realized or settled. The effect
of a change in tax rates is recognized in income in the period that includes the
enactment date.
Under the Revenue Act of 1987, the Company qualified as a publicly-traded
partnership until the end of its 1997 fiscal year. Accordingly, the taxable
income or loss of the Company was includable in the income tax returns of the
individual partners, and no provision for income taxes was made in the
accompanying consolidated financial statements, except for applying the
provisions of SFAS No. 109 "Accounting for Income Taxes."
The businesses and activities retained by FFP Partners in connection with its
December 1997 restructuring permit it to continue to be treated as a partnership
for income tax purposes. However, in connection with the restructuring, FFP
Marketing Company, Inc. was organized as a corporation. Accordingly, income tax
expense or benefit is recorded in its consolidated financial statements for
1998.
(m) Fair Value of Financial Instruments
The carrying amounts of cash, receivables, 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 approximates fair value because the
interest rate on $9,169,000 of such obligations varies with the prime rate and
the fixed rate on the remainder of the long-term obligations, all of which were
incurred in 1998, is not materially different from the current rates available
to the Company.
(n) Common Stock
Prior to the December 1997 restructuring of FFP Partners, the capital of the
Company consisted of partnership interests. These interests were converted into
common stock in connection with the restructuring. The average number of shares
shown as outstanding on the statement of operations have been adjusted to
reflect the number of common shares that would have been outstanding had the
restructuring occurred at the beginning of the earliest year presented giving
effect to the shares that would have been issued to the general partner.
Treasury units (64,778 units, at cost) previously held by the Company were
retired in 1997 in conjunction with the restructuring.
(o) Income/(Loss) per Share
Basic net income/(loss) per share is computed by dividing net income/(loss)
by the weighted average number of common shares outstanding for the year.
Diluted net income/(loss) per share is computed by dividing net income/(loss) by
the weighted average number of common shares outstanding for the year plus
potentially dilutive common shares. At December 27, 1998, outstanding options to
acquire 231,667 common shares 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 net income/(loss) per share computations
for 1998, 1997, and 1996 follows:
1998 1997 1996
(In thousands)
Weighted average number of common shares
outstanding 3,784 3,779 3,759
Effect of dilutive options 0 23 0
Weighted average number of common shares
outstanding, assuming dilution 3,784 3,802 3,759
(p) Dividends/Distributions to Partners
Prior to the December 1997 restructuring of FFP Partners, distributions to
partners represented a return of capital and were allocated pro rata to the
general partner and holders of the Company's limited partnership interests.
Because the Company is now a corporation, distributions to shareholders that may
be made in the future, if any, will usually be dividends.
(q) 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 1998, 1997, or 1996.
(r) Use of Estimates
The use of estimates is required to prepare the Company's consolidated
financial statements in conformity with generally accepted accounting
principles. Although management believes that such estimates are reasonable,
actual results could differ from the estimates.
(s) Stock Option Plan
The Company accounts for its outstanding stock options in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. As such,
compensation expense is recorded only if the current market price of the
underlying stock on the date of grant of the option exceeds the exercise price
of the option. On January 1, 1996, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation," which permits entities either to (i) recognize as
expense over the vesting period the fair value of all stock-based awards on the
date of grant or (ii) continue to apply the provisions of APB Opinion No. 25 and
provide pro forma net income and earnings per share disclosures for employee
option grants made in 1995 and future years as if the fair-value-based method
defined in SFAS No. 123 had been applied. The Company elected the second
alternative (see Note 9).
(t) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to Be Disposed Of," requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset 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.
(u) Revenue Recognition
The Company recognizes revenue related to motor fuel and merchandise sales at
the time of the sale.
(j) Reporting of Comprehensive Income
As of December 29, 1997, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," which
requires the presentation of "comprehensive income" in financial statements.
Comprehensive income includes net income/(loss) and all revenues, expenses,
gains, and losses that are recorded directly to equity. Because the Company does
not have any such items that are recorded directly to equity, comprehensive
income/(loss) and net income/(loss) are identical. Accordingly, the adoption of
SFAS No. 130 has no effect on the Company's consolidated financial statements.
3. Property and Equipment
Property and equipment consists of the following:
1998 1997
(In thousands)
Land $1,376 $1,224
Buildings and leasehold improvements 9,462 7,992
Machinery and equipment 56,051 51,209
Construction in progress 292 286
67,181 60,711
Accumulated depreciation and amortization (33,579) (28,616)
$33,602 $32,095
In connection with the December 1997 restructuring of FFP Partners, all of
the land and buildings previously used in the Company's retail operations were
retained by FFP Partners. At December 27, 1998, the Company had a carrying value
of $7,301,000 in a motor fuel terminal and processing facility. The
recoverability of this carrying value is dependent on the Company's
implementation of a new business plan for this operation. The inability of the
Company to execute its business plan, some aspects of which are beyond its
control, could change the Company's estimate that it will recover the carrying
value of these fixed assets in the near future.
4. Other Assets
Other assets consist of the following:
1998 1997
(In thousands)
Intangible Assets (Note 2g)
Ground leases $1,093 $1,093
Goodwill 1,524 1,524
Other 3,558 2,284
6,175 4,901
Accumulated amortization (3,341) (2,570)
2,834 2,331
Notes receivable 1,386 1,294
Environmental remediation reimbursement
claims 1,297 1,052
Investments in joint ventures and
other entities 210 0
Other 1,055 377
$6,782 $5,054
5. Notes Payable and Long-Term Debt
Effective June 1998, the Company, the Company's primary bank lender and FFP
Partners reached an agreement to restructure the revolving credit facility and
term loan due to the lender. In connection with the restructuring of FFP
Partners in December 1997, both the Company and FFP Partners retained the
liability for this debt as both entities were primary obligors on the loans. In
accordance with the June 1998 agreement, the lender made a loan to the Company,
the Company made a loan to FFP Partners, and FFP Partners repaid the balance of
its debt to the lender, all of which was done effective on June 28, 1998. This
transaction included the execution of a promissory note by FFP Partners payable
to the Company in the amount of $14,773,000 (the then current balance on the
debt due to the lender), which was recorded by the Company as a note receivable
from affiliate, and FFP Partners was released by the lender from all obligations
under the Loan and Security Agreement. As a result of the June 1998 transaction,
joint liability no longer exists on the debt obligations to the lender, and the
1997 reduction of $15,938,000 to the Company's stockholders' equity for such
liability was removed. At December 27, 1998, the Company was indebted to the
lender in the amount of $9,169,000, and owned a promissory note from FFP
Partners with an unpaid principal balance of $14,201,000.
The interest rate and repayment terms of the Company's loan to FFP Partners
mirror such terms of the Company's debt to the lender, including a maturity date
of November 2000. The revised agreement with the lender also required that the
loan be secured by real estate owned by FFP Partners, which was pledged to the
Company and then also pledged by the Company to the lender as additional
collateral on the Company's debt to the lender. FFP Partners make monthly
principal payments to the Company of $95,000 plus accrued interest on the unpaid
balance at a rate equal to the bank's prime rate. All proceeds received by the
Company from its loan to FFP Partners are required to be applied to the balance
of the Company's debt to the lender.
The Company's bank revolving credit line provides for borrowings up to
$15,000,000, with the amount available at any time limited to a borrowing base
equal to 85% of the Company's trade receivables plus 50% of the Company's
inventories. On December 27, 1998, the Company's borrowing base was $12,383,000.
The revolving credit facility and a term loan in the original principal amount
of $8,000,000 executed in October 1997 both bear interest at the lender's prime
rate (7.75% at the end of 1998), payable monthly. The term loan requires monthly
principal payments of $95,000; and both loans mature in November 2000. At
December 27, 1998, the total amount outstanding under the revolving line was
$2,407,000, and the term loan had an outstanding balance of $6,762,000. The
loans are subject to a Loan and Security Agreement dated in October 1997, and
amended as of June 1998, between the lender, the Company and two subsidiaries of
the Company. The agreement contains numerous restrictive covenants including,
but not limited to, financial covenants relating to the maintenance of a
specified minimum tangible net worth, a maximum debt to tangible net worth
ratio, and a minimum cash flow coverage ratio, all as defined in the agreement.
As of year end 1998, the Company was not in compliance with certain requirements
under the loan agreement for the principal reason that the assets and operations
of FFP Partners are no longer included in the financial covenant calculations.
The lender has waived declaring a default due to such noncompliance and amended
the applicable restrictive covenants to place the Company in compliance
subsequent to December 27, 1998. The loans under the agreement are secured by
the Company's trade accounts receivable, its inventories and equipment not
otherwise encumbered, a negative pledge of its other assets, and a collateral
assignment of the Company's note receivable and deed of trust lien against the
real properties of FFP Partners.
In April 1998 the Company executed a note in the original principal amount of
$2,076,000 to refinance a prior capital lease obligation. The note bears
interest at 8.93% per annum and has a maturity date in April 2003. The debt
requires monthly principal and interest payments of $43,000 and is secured by
various equipment acquired through the original capital lease obligation. At
December 27, 1998, $1,850,000 remained outstanding on the loan.
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 secured by the Company's
assets at 44 of the 94 convenience stores acquired in 1997. At December 27,
1998, $9,253,000 remained outstanding on these loans.
The aggregate fixed maturities of long-term debt for each of the five years
subsequent to 1998 are as follows:
(In thousands)
1999 $1,959
2000 8,916
2001 971
2002 1,061
2003 777
Thereafter 6,696
$20,380
6. Capital Leases
The Company is obligated under noncancelable capital leases beginning to
expire in 1999. The gross amount of the assets covered by these capital leases
that are included in property and equipment in the accompanying consolidated
balance sheets is as follows:
1998 1997
(In thousands)
Fixtures and equipment $2,001 $6,565
Accumulated amortization (363) (1,641)
$1,638 $4,924
In 1998 the Company replaced a prior capital lease obligation with financing
from a lending institution in the original principal amount of $2,076,000. The
assets related to those capital leases had a net book value of $1,509,000 at the
time of the refinancing (see Note 5).
The amortization of assets held under capital leases is included in
depreciation and amortization expense in the accompanying consolidated
statements of operations. Future minimum lease payments under the noncancelable
capital leases for years subsequent to 1998 are:
(In thousands)
1999 $501
2000 426
2001 376
2002 237
2003 32
Thereafter 0
Total minimum lease payments 1,572
Amount representing interest (216)
Present value of future minimum lease payments 1,356
Current installments (401)
Obligations under capital leases, excluding
current installments $955
7. Operating Leases
The Company operates all of its convenience stores and truck stops under
long-term operating leases. A significant portion of those leases 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 1998 are as follows:
Future Rental Payments Future
Related Sublease
Parties Others Total Receipts
(In thousands)
1999 $3,490 $3,074 $6,564 $1,193
2000 3,406 2,996 6,402 862
2001 3,323 2,862 6,185 517
2002 2,455 2,750 5,205 279
2003 395 2,552 2,947 105
Thereafter 1,334 25,708 27,042 17
$14,403 $39,942 $54,345 $2,973
Total rental expense and sublease income in 1998, 1997, and 1996 were as
follows:
Rent Expense
-----------------------
Related Sublease
Parties Others Total Income
(In thousands)
1998 $3,566 $3,231 $6,797 $1,521
1997 915 922 1,837 1,370
1996 727 742 1,469 1,154
8. Accrued Expenses
Accrued expenses in 1998 and 1997 consist of the following:
1998 1997
(In thousands)
Motor fuel taxes payable $9,688 $5,979
Accrued payroll and related expenses 1,084 964
Other 3,579 2,680
$14,351 $9,623
9. Stock Option Plan and Nonqualified Unit Option Plan
The Company's Board of Directors adopted a Stock Option Plan in 1998 to
provide an incentive for its employees to remain in the service of the Company
and to encourage them to apply their best efforts for the benefit of the
Company. The plan will become null and void if it is not approved by a majority
of the Company's shareholders at a meeting held on or before July 16, 1999. The
plan provides for the granting of stock options to employees for the purchase of
shares of the Company's common stock, but subject to a maximum of 1,000,000
shares under the plan for all employees. The exercise price of options is
determined by the Board of Directors but may not be less than the fair market
value of the shares, defined as 100% of the last reported sales price of the
Company's common stock on the last business day prior to the date of the grant,
except for employees owning more than 10% of the common stock, for whom the
exercise price may not be less than 110% of the fair market value. The plan
provides that a stock option agreement shall be entered into between the Company
and any employee granted options, which shall set forth a vesting schedule, time
period for exercising options, and other provisions regarding the grant of
options under the plan.
Prior to 1998, FFP Partners maintained a Nonqualified Unit Option Plan and a
Nonqualified Unit Option Plan for Nonexecutive Employees that authorized the
grant of options to purchase up to 450,000 and 100,000 Class A Units of FFP
Partners, respectively.
The exercise price of each option granted under the unit option plans was
determined by the Board of Directors but could not be less than the fair market
value of the underlying units on the date of grant. All options to acquire Class
A Units of FFP Partners that were outstanding at the completion of the December
1997 restructuring were divided into separate options to purchase Class A Units
of FFP Partners and a like number of the Company's common shares, and the
exercise price for the existing FFP Partners unit options was allocated among
the two new options in proportion to the closing prices on the American Stock
Exchange of FFP Partners Class A Units and the Company's common shares. The
original and adjusted exercise prices of the options outstanding at year end
1998 under the Non-Qualified Plans ("NQ") and the Stock Option Plan ("ISO") are
as follows:
Original Adjusted
Issue Exercise Exercise Options Options
Date Type Price Price Outstanding Exercisable
Price
November 1992 NQ $3.7500 $2.5388 138,333 138,333
April 1995 NQ 4.3130 4.0620 25,000 25,000
September 1995 NQ 6.0000 4.7390 25,000 25,000
February 1997 NQ 7.0000 2.9196 13,334 0
July 1998 ISO 4.5000 4.5000 30,000 0
231,667 188,333
All outstanding options at year end 1998 were granted to be exercisable with
respect to one-third of the shares covered thereby on each of the anniversary
dates of their respective grants and will expire ten years from the date of
grant. In the event of a change in control of the Company, any unexercisable
portion of the options will become immediately exercisable.
A summary of activity under the stock option plan and the unit option plans
for 1998, 1997, and 1996 follows:
Weighted
Exercise Average
Class A Price Exercise
Units Range Price
Non-Qualified Plan Before Restructuring
Options outstanding, December 31, 1995 260,664 $3.75-7.00 $4.28
Options granted during year 0
Options expired or terminated
during year (1,333) 3.75 3.75
Options exercised during year (37,332) 3.75 3.75
Options outstanding, December 29, 1996 221,999 $3.75-7.00 $4.37
Options granted during year 20,000 4.31 4.31
Options expired or terminated
during year 0
Options exercised during year 0
Options exercisable, December 28, 1997 241,999 $3.75-7.00 $4.37
Stock Option Plan and Non-Qualified Plan After Restructuring
Options outstanding, December 28, 1997 241,999 $2.54-4.74 $2.92
Options granted during year 30,000 4.50 4.50
Options expired or terminated
during year (1,000) 2.54 2.54
Options exercised during year (39,332) 2.54-2.92 2.62
Options outstanding, December 27, 1998 231,667 $2.54-4.74 $3.22
Options exercisable, December 27, 1998 188,333 $2.54-4.74 $3.03
All outstanding options at year end 1998 were originally issued with a 10
year life and have a weighted-average remaining contractual life of 4.8 years.
The per share weighted-average fair value of options granted in 1998, 1997,
and 1996, estimated using the Black Scholes option-pricing model, and the
underlying assumptions used are:
Underlying Assumptions
----------------------------------------------------------
Estimated Risk-Free Expected
Year Fair Dividend Interest Expected Option
Granted Value Yield Rate Volatility Life
1998 $3.82 0.0% 6.00% 68% 7 years
1997 2.81 0.0% 6.40% 58% 7 years
1996 0.00 0.0% 0.00% 0% 0
The Company applies APB Opinion No. 25 in accounting for its option plans.
Accordingly, no compensation cost related to the plans has been recognized in
the consolidated financial statements. Had the Company determined compensation
under SFAS No. 123, the Company's net income (loss) would have been reduced to
the pro forma amounts indicated below:
1998 1997 1996
(In thousands, except per share or per unit information)
Net income/(loss)
As reported $(463) $116 $(159)
Pro forma (510) 53 (203)
Net income/(loss) per share
As reported
Basic $(0.12) $0.03 $(0.04)
Diluted (0.12) 0.03 (0.04)
Pro forma
Basic (0.13) 0.01 (0.05)
Diluted (0.13) 0.01 (0.05)
Pro forma net income/(loss) reflects only options granted subsequent to 1994.
Therefore, the full impact of calculating compensation cost for stock options
under SFAS No. 123 is not reflected in the pro forma net income/(loss) amounts
presented above because compensation cost for options granted prior to 1995 is
not considered.
10. Income Taxes
Congress passed legislation in 1996 clarifying that certain buildings used in
connection with the retail sale of motor fuel qualified for a substantially
shorter depreciable life for tax purposes than was previously being utilized by
the Company. In January 1997, the Internal Revenue Service issued a notice
explaining how the tax deduction related to the change in the depreciable lives
on these assets should be determined. As a result, the Company deducted in 1996
the difference between the tax depreciation previously recorded and the
depreciation available using the shorter life and recognized an additional
deferred income tax provision of $2,089,000 in the fourth quarter 1996 related
to this temporary difference. The current tax benefit of this deduction was
allocated to the Company's unitholders, but the deferred tax expense associated
with the acceleration of this deduction for tax purposes was reflected in the
Company's 1996 consolidated statement of operations. In connection with the
December 1997 restructuring of FFP Partners, the buildings which gave rise to
this additional deferred income tax provision were retained by FFP Partners. As
a result, ownership of the buildings was continued in a partnership format, and
the deferred taxes attributable to the real estate assets were reversed in the
fourth quarter 1997.
At December 27, 1998, the Company has a net operating loss carryforward for
income tax purposes 0f $5,449,000, which will expire in 2018 if not used.
The Company's income tax expense/(benefit) for 1998, 1997, and 1996 consists
of the following:
1998 1997 1996
(in thousands)
Current federal income tax expense $0 $0 $0
Current state income tax expense 66 0 0
66 0 0
Deferred income tax expense/(benefit) (310) (892) 2,646
Income tax expense/(benefit) $(244) $(892) $2,646
The Company's income tax expense/(benefit) is different from the amount
computed by applying the federal income tax rate of 34% to the Company's loss
before income taxes for 1998. The reasons for the difference are illustrated in
the following table:
1998
(in thousands)
Income tax expense/(benefit) at statutory rate $(240)
State income tax, net of federal benefit 44
Amortization of goodwill 25
Meals and entertainment 22
State tax rate change at beginning of year (66)
Other, net (29)
Total income tax expense/(benefit) $(244)
Effective tax rate for 1998 34.5%
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at year end 1998 and 1997
are presented below.
1998 1997
(In thousands)
Deferred tax assets:
Accounts receivable, principally due to allowance
for doubtful accounts $280 $308
Accrued expenses, principally due to accruals for
financial reporting purposes 244 238
Net operating loss carryforward 2,016 0
Other, net 82 (176)
Total deferred tax assets, net $2,622 $370
Deferred tax liabilities:
Property and equipment, principally due to basis
differences and differences in
depreciation $(3,956) $(2,763)
Notes receivable, principally due to basis
differences (681) 0
Other, net (564) (496)
Total deferred tax liabilities $(5,201) $(3,259)
In assessing the ability to realize a deferred tax asset, management
considers whether it is more likely than not that some portion or all of the
deferred tax asset will not be realized. The ultimate realization of a deferred
tax asset is dependent upon the generation of future taxable income during the
period in which those temporary differences become deductible. Management
considers the scheduled reversal of deferred tax liabilities, projected future
taxable income, and tax planning strategies in making this assessment. Based
upon the scheduled reversal of deferred tax liabilities over the period in which
the deferred tax assets are deductible, management believes that it is more
likely than not that the Company will realize the benefits of these deductible
differences.
The Company has provided unaudited pro forma information for 1997 and 1996 in
the consolidated statement of operations as if the Company had been a taxable
corporation for those periods. The unaudited pro forma income tax
expense/(benefit) includes the actual deferred income tax expense/(benefit)
recorded by the Company in 1997 and 1996 of $(892,000) and $2,646,000,
respectively. This pro forma information has been prepared for comparative
purposes only and does not purport to be indicative of results if the Company
had been a taxable entity in prior years or of future results of operation.
11. 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 2k).
These transactions, which together with futures contracts are classified as
operating activities for purposes of the consolidated statements of cash flows,
are included in motor fuel sales and related cost of sales and resulted in net
gains as follows:
(In thousands)
1998 $169
1997 430
1996 363
Open positions under futures and forward contracts were not significant at
year end 1998 and 1997.
12. Related Party Transactions
The Company's chief executive officer, vice president-finance, secretary,
treasurer, general counsel and chief financial officer hold similar positions
with the sole general partner of FFP Partners. In addition, entities owned
directly or indirectly by the Company's chief executive officer, members of his
immediate family, and other members of the senior management of the Company have
in the past, and intend to do so in the future, engaged in transactions with the
Company. Such related parties believe that such transactions have been fair and
reasonable to the Company and on terms no less favorable to the Company than
could be obtained from an unaffiliated party in an arms' length transaction.
The Company leases real property for some of its retail outlets from FFP
Partners. The Company's management believes that the lease rates are comparable
to leases that could be entered into with unrelated third parties. Since these
leases became effective concurrently with the close of 1997, no lease payments
were made by the Company during its 1997 year. The Company paid $2,628,000 in
lease payments to FFP Partners for these properties during 1998.
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 the Company. During 1998, 1997, and
1996, the Company paid $959,000, $915,000, and $727,000, respectively, to such
entities with respect to these leases. The Company's management believes the
leases with these affiliates are on terms that are more favorable to the Company
than terms that could have been obtained from unaffiliated third parties for
similar properties.
Prior to the December 1997 restructuring of FFP Partners, the Company
reimbursed the general partner and its affiliates for salaries and related costs
of executive officers and others and for expenses incurred by them in connection
with the management of the Company. These expenses were $763,000 and $745,000 in
1997 and 1996, 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 1992, the agreement was amended to extend the term for five
years commencing on the date of amendment. In 1998, 1997 and 1996, the sales
recorded by the affiliated company under this agreement were $12,143,000,
$8,330,000, and $8,240,000, respectively. The Company received $2,117,000,
$1,355,000, and $1,265,000 in 1998, 1997, and 1996, respectively, in rent,
management fees, and interest, and such amounts are included in miscellaneous
revenues in the consolidated statements of operations. 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 $121,000, $83,000, and
$82,000 in 1998, 1997, and 1996, 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 $780,000 and $426,000 at year end 1998 and 1997, respectively.
The Company purchases certain goods and services (including automobiles,
office supplies, computer software and consulting services, and fuel supply
consulting and procurement services) from related entities. Amounts incurred for
these products and services were $563,000, $471,000, and $359,000 for 1998,
1997, and 1996, respectively.
As a part of its merchandise sales activities, the Company supplies its
private label cigarettes on a wholesale basis to other retailers who do not
operate outlets in its trade areas and pays them rebates based on the volume of
cigarettes purchased. In 1996, the Company paid rebates of $14,000 to a company
on whose board of directors one of the Company's executive officers serves. The
amount of rebates paid to this company was calculated in the same manner as the
rebates paid to non-related companies.
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 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 maintains with other unrelated parties. In 1998, 1997, and 1996, the
Company paid commissions to this affiliated company related to the sale of motor
fuel at these locations of $318,000, $323,000, and $277,000, respectively.
During 1996, the Company charged to expense $611,000 to reimburse various
related companies for legal fees that benefited the Company. The Company paid
$225,000 of this amount in 1996 and the remaining $386,000 in 1997.
13. Commitments and Contingencies
(a) 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 medical claims up to $45,000 per year for each
individual covered by its employee medical benefit plan for supervisory and
administrative employees. Such 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. 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 $284,000,
$295,000, and $271,000 in 1998, 1997, and 1996, 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 1998 and 1997,
including the effects of any retroactive premium adjustments.
(b) 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, must have conformed to the
new standards by December 1998. The Company brought all of its existing
underground storage tanks and related equipment into compliance with these laws
and regulations. At year end 1998 and 1997, the Company recorded liabilities for
future estimated environmental remediation costs related to known leaking
underground storage tanks of $918,000 and $644,000, respectively, in other
liabilities. Corresponding claims for reimbursement of environmental remediation
costs of and $918,000 and $644,000 were recorded in 1998 and 1997, 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 will coordinate with the state regulatory authority
the work to be performed and bill the state directly for such work. The Company
is liable for the $10,000 per occurrence deductible and for any costs in excess
of the $1,000,000 limit provided for by the state environmental trust fund. The
Company does not expect that the costs of remediation of any of these 35 sites
will exceed the $1,000,000 limit. The assumptions on which the foregoing
estimates are based may change and unanticipated events and circumstances may
occur which may cause the actual cost of complying with the above requirements
to vary significantly from these estimates.
During 1998, 1997, and 1996, environmental expenditures were $2,849,000,
$1,665,000, and $2,019,000, respectively (including capital expenditures of
$2,418,000, $1,267,000, and $1,456,000), 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 $1,297,000 and $1,052,000 at year end 1998 and 1997, respectively, have
been classified as long-term receivables and are included in other assets in the
accompanying consolidated balance sheets. 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.
(c) 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 consolidated financial position or results of
operations of the Company.
14. Quarterly Operating Results (Unaudited)
Quarterly results of operations for 1998, 1997, and 1996 were as follows:
First Second Third Fourth Full
Quarter Quarter Quarter Quarter Year
(In thousands, except per unit data)
1998
Total revenues 101,243 112,569 104,437 97,625 415,874
Total margin 15,860 16,688 17,989 15,545 66,082
Net income/(loss) 336 (203) 613 (1,209) (463)
Net income/(loss)per share
Basic $0.09 $(0.05) $0.16 $(0.32) $(0.12)
Diluted $0.09 $(0.05) $0.16 $(o.32) $(0.12)
1997
Total revenues $92,682 $99,332 $96,059 $91,341 379,414
Total margin 9,979 11,951 11,734 13,044 46,708
Net income/(loss) (1,262) 340 (375) 1,413 116
Net income/(loss) per share
Basic $(0.33) $0.09 $(0.10) $0.38 $0.03
Diluted (0.33) 0.09 (0.10) 0.38 0.03
1996
Total revenues $94,391 $105,092 $94,298 $96,371 $390,152
Total margin 10,989 13,473 11,407 10,383 46,252
Net income/(loss) (169) 2,030 564 (2,584) (159)
Net income/(loss)per share
Basic $(0.05) $0.54 $0.15 $(0.68) $(0.04)
Diluted (0.05) 0.53 0.15 (0.68) (0.04)
15. Valuation and Qualifying Accounts
The table below sets forth the beginning and ending balances, with additions
and deductions, for the Company's allowance for doubtful trade receivables for
year end 1998, 1997, and 1996:
Balance Additions Charge Balance
at offs, at End
Beginning Charged net of of
of Period Expense recoveries Period
(in thousands)
Allowances for doubtful accounts
for trade receivables
1998 $809 $1,916 $1,967 $758
1997 $883 $199 $273 $809
1996 $1,045 $327 $489 $883
16. Financial Information by Segment
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was adopted by the Company in the current year for reporting
information about the Company's operating segments. The Company and its
subsidiaries are principally engaged in two operating segments: (i) the retail
and wholesale sale of motor fuel, merchandise and other products and services at
convenience stores, truck stops, and other gasoline outlets ("Retail and
Wholesale"), and (ii) the operation of a motor fuel terminal and processing
facility ("Terminal Operations"). The Company has identified such segments based
on management responsibility. There are no major distinctions in geographical
areas served or customer types. The following table sets forth certain
information about each segment's financial information in 1998, 1997, and 1996:
Retail and Terminal
Wholesale Operations Eliminations Consolidated
(In thousands)
1998
Revenues from external sources $414,625 $1,249 $0 $415,874
Revenues from other segment 0 3,602 (3,602) 0
Depreciation and amortization 5,125 511 0 5,636
Interest income 1,406 0 (713) 693
Interest expense 1,861 713 (713) 1,861
Income/(loss) before income taxes 1,301 (2,008) 0 (707)
Total assets 89,739 7,301 0 97,040
Capital expenditures 6,605 182 0 6,787
1997
Revenues from external sources $379,064 $350 $0 $379,414
Revenues from other segment 0 2,174 (2,174) 0
Depreciation and amortization 5,194 294 0 5,488
Interest income 427 0 (391) 36
Interest expense 1,678 391 (391) 1,678
Income/(loss) before income taxes 42 (818) 0 (776)
Total assets 67,844 7,486 0 75,330
Capital expenditures 14,247 3,163 0 17,410
1996
Revenues from external sources $390,152 $0 $0 $390,152
Revenues from other segment 0 0 0 0
Depreciation and amortization 3,951 0 0 3,951
Interest income 52 80 (132) 0
Interest expense 1,326 52 (132) 1,246
Income/(loss) before income taxes 2,553 (66) 0 2,487
Total assets 75,104 3,495 0 78,599
Capital expenditures 6,023 3,494 0 9,517
17. Subsequent Event
In February 1999, the Company acquired the operations of 23 additional
convenience stores and two additional truck stops. Eleven of these stores are
located in San Antonio, Texas, and the remainder are located in smaller towns
throughout the State of Texas. Eleven of the 25 stores are third party leasehold
locations where the Company purchased the existing leasehold interest. The
Company's purchase of those leasehold interests was financed with a third party
lender consisting of four fully amortizing mortgage loans in the aggregate
original principal amount of $1,012,000, maturity dates ranging from 86 to 180
months, interest accruing at 9.275% per annum, and aggregate payments of
principal and interest of $13,000 per month. The real estate at 14 of the stores
was purchased by FFP Partners and immediately leased to the Company under
20-year leases. The Company's rental payments under those leases equal $99,000
per month. The Company guaranteed the acquisition indebtedness of FFP Partners
of $9,550,000, which amount is no greater than the Company's aggregate rental
payments to FFP Partners over the initial 15-year period of the leases.