Financial Statements of
FFP Operating Partners, L.P.,
a wholly owned subsidiary of
FFP Marketing Company, Inc.
(with Independent Auditors' Report thereon)
(These financial Statements are being filed
as an exhibit to facilitate compliance with
certain environmental regulatory requirements.)
INDEX TO FINANCIAL STATEMENTS
Page
Number
Independent Auditors' Report 2
Balance Sheets as of December 27, 1998, and December 28, 1997 3
Statements of Operations for the Years Ended December 27,
1998, December 28, 1997, and December 29, 1996 4
Statements of Partners' Capital for the Years Ended
December 27, 1998, December 28, 1997, and December 29,
1996 5
Statements of Cash Flows for the Years Ended December 27, 1998,
December 28, 1997, and December 29, 1996 6
Notes to Financial Statements 8
INDEPENDENT AUDITORS' REPORT
The Partners
FFP Operating Partners, L.P.:
We have audited the financial statements of FFP Operating Partners,
L.P. (a Delaware limited partnership) as listed in the accompanying index. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of FFP Operating
Partners, L.P. as of December 27, 1998 and December 28, 1997, and the results of
its operations and its 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 OPERATING PARTNERS, L.P.
BALANCE SHEETS
DECEMBER 27, 1998, AND DECEMBER 28, 1997
(In thousands)
1998 1997
ASSETS
Current Assets
Cash and cash equivalents $8,648 $9,044
Trade receivables, less allowance for doubtful
accounts of $668 and $718 in 1998 and 1997,
respectively 9,240 7,906
Notes receivable, current portion 1,078 737
Notes receivable from affiliates, current portion 1,923 426
Inventories 13,722 14,347
Prepaid expenses and other current assets 1,176 586
Total current assets 35,787 33,046
Property and equipment, net 27,064 25,905
Receivables from affiliated companies 13,762 11,193
Notes receivable from affiliate 13,058 0
Other assets, net 6,395 4,594
Total Assets $96,066 $74,738
LIABILITIES AND PARTNERS' CAPITAL
Current Liabilities
Current installments of long-term debt $1,959 $1,208
Current installments of obligations under capital
leases 401 917
Accounts payable 16,275 15,208
Money orders payable 13,941 10,350
Accrued expenses 13,407 8,983
Payable to affiliated companies 552 1,270
Total current liabilities 46,535 37,936
Long-term debt, excluding current installments 18,421 21,465
Obligations under capital leases, excluding current
installments 955 3,110
Other liabilities 2,823 2,866
Total Liabilities 68,734 65,377
Commitments and contingencies
Partners' Capital
Limited partners' equity 27,059 25,046
General partner's equity 273 253
Reduction for joint debt obligations 0 (15,938)
Total Partners' Capital 27,332 9,361
Total Liabilities and Partners' Capital $96,066 $74,738
See accompanying notes to financial statements.
FFP OPERATING PARTNERS, L.P.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997, AND DECEMBER 29, 1996
(In thousands)
1998 1997 1996
Revenues
Motor fuel $298,203 $294,097 $308,205
Merchandise 94,358 61,316 60,089
Miscellaneous 9,207 6,057 7,135
Total Revenues 401,768 361,470 375,429
Costs and Expenses
Cost of motor fuel 272,173 273,367 288,065
Cost of merchandise 64,968 42,987 42,503
Direct store expenses 44,154 27,944 26,710
General and administrative expenses 13,408 10,446 10,712
Depreciation and amortization 4,801 4,999 3,781
Total Costs and Expenses 399,504 359,743 371,771
Operating Income 2,264 1,727 3,658
Interest Income 1,663 706 655
Interest Expense 1,894 1,812 1,326
Net Income $2,033 $621 $2,987
Net income allocated to
Limited partners $2,013 $615 $2,957
General partner 20 6 30
See accompanying notes to financial statements.
FFP OPERATING PARTNERS, L.P.
STATEMENTS OF PARTNERS' CAPITAL
YEARS ENDED DECEMBER 27, 1998, DECEMBER 28, 1997, AND DECEMBER 29, 1996
(In thousands)
Joint
Limited General Debt Treasury
Partners Partner Obligations Units Total
Balance, December 31, 1995 $30,987 $314 $0 $(269) $31,032
Net income 2,957 30 0 0 2,987
Balance, December 29, 1996 33,944 344 0 (269) 34,019
Net income 615 6 0 0 621
Distribution to partners (6,871) (69) 0 0 (6,940)
Net assets distributed in
restructuring transaction (2,642) (28) 0 269 (2,401)
Reduction of capital
attributable to reporting
of joint debt obligations
in restructuring 0 0 (15,938) 0 (15,938)
Balance, December 28, 1997 25,046 253 (15,938) 0 9,361
Increase in capital resulting
from restructuring joint
debt obligations 0 0 15,938 0 15,938
Net Income 2,013 20 0 0 2,033
Balance, December 27, 1998 $27,059 $273 $0 $0 $27,332
See accompanying notes to financial statements.
FFP OPERATING PARTNERS, L.P.
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 $2,033 $621 $2,987
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 4,801 4,999 3,781
Provision for doubtful accounts 1,868 131 326
(Gain)/loss on sales of property and
equipment 96 (254) 19
(Gain) on sales of convenience store
operations (445) (30) (1,778)
Changes in operating assets and liabilities
(Increase)/decrease in trade receivables (3,202) 586 (1,121)
(Increase)/decrease in inventories 625 (2,595) (925)
(Increase)/decrease in prepaid
expenses and other operating assets (590) (184) 230
Increase in accounts payable 1,067 1,784 940
Increase in money orders payable 3,591 2,541 1,897
Increase/(decrease) in accrued
expenses and other liabilities 4,381 2,815 (790)
Net cash provided by operating activities 14,225 10,414 5,566
Cash Flows from Investing Activities
Purchases of property and equipment (5,803) (14,123) (6,205)
Proceeds from sales of property and
equipment 82 1,213 50
Increase in receivables from
affiliated companies (2,569) (5,473) (5,821)
Increase in notes receivable from
affiliates (14,555) 0 0
Decrease in notes receivable 12 846 540
(Increase)/decrease in other assets (2,044) 724 (73)
Net cash (used in) investing activities (24,877) (16,813) (11,509)
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)
Advances (payments to)from affiliated
companies (718) 436 318
Net cash provided by financing activities 10,256 8,186 6,053
Net increase/(decrease) in cash and cash
equivalents (396) 1,787 110
Cash and cash equivalents at beginning of
year 9,044 7,257 7,147
Cash and cash equivalents at end of year $8,648 $9,044 $7,257
Supplemental Disclosure of Cash Flow Information
Cash paid for interest during 1998, 1997, and 1996, was $1,862,000,
$1,910,000, and $1,097,000, respectively.
Supplemental Schedule of Noncash Investing and Financing Activities
During 1997, the Company distributed $6,940,000 to its partners, of
which $6,871,000 was offset against a receivable from an affiliate, FFP
Partners, L.P., the Company's former sole limited partner and former parent.
During 1997 in conjunction with the restructuring of FFP Partners
that resulted in the formation of FFP Marketing Company, Inc., which then became
the new parent of the Company, the Company transferred $196,000 of prepaid
expenses and $18,143,000 of land and buildings to FFP Partners, L.P. Also in
connection with that restructuring, the Company recorded a reduction in
partners' capital related to debt for which it and FFP Partners are jointly
liable. On June 28, 1998, the Company restructured this debt, and the 1997
reduction of $15,938,000 to partners' capital was reversed. (Note 5)
During 1997 and 1996, the Company acquired fixed assets of $200,000
and $598,000, respectively, in exchange for notes payable.
See accompanying notes to financial statements.
FFP OPERATING PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS DECEMBER 27, 1998,
DECEMBER 28, 1997, AND DECEMBER 29, 1996
1. Basis of Presentation
(a) Organization of Company
FFP Operating Partners, L.P. (the "Company") is a Texas limited
partnership that is indirectly wholly-owned by FFP Marketing Company, Inc. ("FFP
Marketing"). FFP Operating LLC, a wholly-owned subsidiary of FFP Marketing, owns
a 1% general partner interest in the Company. FFP Marketing owns a 99% limited
partner interest in the Company. FFP Marketing is a publicly traded Texas
corporation whose common stock is listed on the American Stock Exchange under
the "FMM" trading symbol.
Until December 28, 1997, the Company was a 99%-owned subsidiary of
FFP Partners, L.P. ("FFP Partners"), a Delaware limited partnership. On that
date, FFP Partners completed a restructuring in which the real estate formerly
owned by the Company (and which was used in the Company's former retail
operations) was transferred to FFP Partners, and all former subsidiaries of FFP
Partners, including the Company, became subsidiaries of FFP Marketing. Also on
that date, FFP Operating LLC became the sole general partner of the Company.
The net book value of the assets and liabilities transferred to FFP
Partners in the December 1997 restructuring of FFP Partners has been reflected
as a distribution in the accompanying statements of partners' capital.
Accordingly, no gain or loss was recognized by the Company as a result of the
restructuring.
The Company operates convenience stores, truck stops, and motor fuel
concessions at independently-operated convenience stores over an 11 state area.
It also sells money orders, through its own outlets as well as through agents,
and sells motor fuel on a wholesale basis, primarily in Texas.
(b) 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, 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 options, 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 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
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 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 balance sheets
(see Note 12b).
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, and therefore,
adoption of SOP 96-1 in 1997 did not have a material impact on the Company's
financial position, results of operations, or liquidity.
(j) Motor Fuel Taxes
Motor fuel revenues and related cost of motor fuel include federal
and state excise taxes of $111,939,000, $94,241,000, and $100,771,000, for 1998,
1997, and 1996, respectively.
(k) Exchanges
The exchange method of accounting is utilized for motor fuel
exchange transactions. Under this method, such transactions are considered as
exchanges of assets with deliveries being offset against receipts, or vice
versa. Exchange balances due from others are valued at current replacement
costs. Exchange balances due to others are valued at the cost of forward
contracts (Note 10) 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
Taxable income or loss of the Company is includable in the income
tax returns of its partners; therefore, no provision for income taxes has been
made in the accompanying financial statements.
The Company's parent is a corporation and accounts for income taxes
under the asset and liability method. The parent recognizes deferred tax assets
and liabilities for the estimated future tax consequences attributable to
differences between financial statement carrying amounts of assets and
liabilities and their respective tax bases, as recorded on the books and records
of its subsidiaries, that are expected to reverse in future years.
(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) Allocation of Net Income or Loss and Cash Distributions
The Partnership Agreement of the Company provides that net income or
loss and cash distributions are to be allocated 99% to its limited partner and
1% to its general partner.
The treasury units of the Company's former parent (64,778 units, at
cost) which were being held by the Company were retired in conjunction with the
December 1997 restructuring.
(o) 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.
(p) Use of Estimates
The Company is required to use estimates in preparing its financial
statements in conformity with generally accepted accounting principles. Although
management believes that such estimates are reasonable, actual results could
differ from the estimates.
(q) 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.
(r) Revenue Recognition
The Company recognizes revenue related to motor fuel and merchandise
sales at the time of the sale.
(s) Reporting of Comprehensive Income
As of December 29, 1997, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income," which requires the presentation of
"comprehensive income" in financial statements. Comprehensive income includes
net income and all revenues, expenses, gains, and losses that are recorded
directly to partners' capital. Because the Company does not have any such items
that are recorded directly to partners' capital, comprehensive income and
net income are identical. Accordingly, the adoption of SFAS No. 130 has no
effect on the Company's financial statements.
3. Property and Equipment
Property and equipment consists of the following:
1998 1997
(In thousands)
Land $20 $0
Buildings and leasehold improvements 9,382 7,923
Fixtures and equipment 50,151 46,137
Construction in progress 114 121
59,667 54,181
Accumulated depreciation and
amortization (32,603) (28,276)
$27,064 $25,905
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 2,447 1,528
5,064 4,145
Accumulated amortization (2,609) (2,274)
2,455 1,871
Notes receivable 1,386 1,294
Environmental remediation
reimbursement claims 1,297 1,052
Investments in joint ventures and
other entities 210 0
Other 1,047 377
$6,395 $4,594
5. Notes Payable and Long-Term Debt
Effective June 1998, the Company, FFP Marketing, 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 partners' 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 FFP Marketing, and
another subsidiary of FFP Marketing. 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, FFP Marketing, and therefore the Company
as well, were 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 FFP Marketing and 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
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 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 conducts its operations pursuant to noncancelable,
long-term operating leases on its locations, a significant portion of which are
with related parties. Certain of the leases have contingent rentals based on
sales levels of the locations and/or have escalation clauses tied to the
consumer price index. Minimum future rental payments (including bargain renewal
periods) and sublease receipts for years after 1998 are as follows:
Future Rental Payments Future
---------------------------- Sublease
Related Receipts
Parties Others Total
(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 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 consist of the following:
1998 1997
(In thousands)
Motor fuel taxes payable $9,358 $5,655
Accrued payroll and related expenses 1,032 927
Other 3,017 2,401
$13,407 $8,983
9. Stock Option Plan and Nonqualified Unit Option Plan
FFP Marketing's Board of Directors adopted a Stock Option Plan in 1998 to
provide an incentive for its employees to remain in the service of FFP Marketing
and to encourage them to apply their best efforts for the benefit of FFP
Marketing. The plan will become null and void if it is not approved by a
majority of FFP Marketing'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 FFP Marketing'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 FFP
Marketing'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 FFP
Marketing 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 employees of the Company are eligible to participate in these option
plans. 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
FFP Marketing and the Company apply APB Opinion No. 25 in accounting for such
option plans. Accordingly, no compensation cost related to the plans has been
recognized in the financial statements. Had the Company determined compensation
under SFAS No. 123, the Company's net income would have been reduced to the pro
forma amounts indicated below:
1998 1997 1996
(In thousands)
Net income
As reported $2,033 $621 $2,987
Pro forma 1,986 558 2,943
Pro forma net income 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 amounts
presented above because compensation cost for options granted prior to 1995 is
not considered.
10. 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 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.
11. Related Party Transactions
Prior to completion of the December 1997 restructuring of FFP
Partners, the Company reimbursed its 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 for 1997 and 1996, respectively.
The Company and FFP Partners are parties to a reimbursement
agreement pursuant to which FFP Partners reimburses the Company for all direct
costs of FFP Partners (such as costs to prepare FFP Partners' annual partnership
tax returns, annual audit fees, etc.) and an agreed upon lump sum amount for
indirect overhead costs allocable to FFP Partners. The reimbursement for
officers' compensation costs incurred by the Company in connection with FFP
Partners' activities is determined by the amount of time management and other
personnel spend on activities of FFP Partners compared to the amount of time
they spend on activities of the Company. The indirect cost allocation paid by
FFP Partners to the Company for 1998 was $200,000.
From time to time, the Company makes advances to and receives
advances from FFP Marketing and its other subsidiaries. Such advances are
reflected in receivables from or payables to affiliated companies in the
accompanying balance sheets. Prior to 1996, the Company did not charge or pay
interest on these advances. Beginning in 1996, interest has been charged or paid
on such balances at a rate equal to the interest rate on the Company's bank
debt. Interest income in 1998, 1997 and 1996 includes interest income on
advances to affiliates of $970,000, $706,000 and $655,000, respectively. The
remainder of interest income in 1998 was earned on the Company's note receivable
from FFP Partners.
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 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.
Purchases of these products and services from other subsidiaries of FFP
Marketing were $226,000, $434,000, and $614,000 and from other related entities
were $272,000, $206,000, and $113,000 in 1998, 1997, and 1996, respectively.
The Company purchased $3,602,000, $2,224,000 and $-0- of motor fuel from
another subsidiary of FFP Marketing and sold $1,427,000, $498,000, and
$1,822,000 of motor fuel to this same subsidiary in 1998, 1997 and 1996,
respectively. The Company believes all such purchases and sales were made on
terms and at prices at least as favorable as could have been obtained from
unrelated third parties.
The Company leases real property for some of its retail outlets from
FFP Partners. The Company'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 FFP Marketing. 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.
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 $14,000 of such rebates to a
company on whose Board 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 immediate
family, which grant to the Company the exclusive right to sell motor fuel at
retail at these locations. The terms of these agreements are comparable to
agreements that the Company has made with other unrelated parties. The Company
paid commissions related to the sale of motor fuel at these locations of
$318,000, $323,000, and $277,000, to this affiliated company in 1998, 1997,
and 1996, 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.
12. 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 claims up to $45,000 per year for each
individual covered by its employee medical benefit plan for supervisory and
administrative employees; claims above $45,000 are covered by a stop-loss
insurance policy. The Company also self-insures medical claims for its eligible
store employees. However, claims under the plan for store employees are subject
to a $1,000,000 lifetime limit per employee, and the Company does not maintain
stop-loss coverage for these claims. The Company and its covered employees
contribute to pay the self-insured claims and stop-loss insurance premiums.
Accrued liabilities include amounts management believes adequate to cover the
estimated claims arising prior to a year-end, including claims incurred but not
yet reported. The Company recorded expense related to these plans of $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 $918,000 and $644,000 were
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 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 financial position or results of operations of
the Company.
13. 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.