SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X| Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 28, 1999, or
|_| Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from _______________ to _______________
Commission File No. 1-13727
FFP MARKETING COMPANY, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2735779
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
2801 Glenda Avenue; Fort Worth, Texas 76117-4391
(Address of principal executive office, including zip code)
817/838-4700
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Common Shares 3,818,747
(Number of shares outstanding as of August 13, 1999)
<PAGE>
INDEX
Page
Part I
Item 1. Financial Statements 1
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About 17
Market Risks
Part II
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
<PAGE>
FFP Marketing Company, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(In thousands)
(Unaudited)
March 28, December 27,
1999 1998
Assets
Current assets -
Cash and cash equivalents $10,353 $9,537
Cash held in escrow for refinancing 23,646 0
Trade receivables 17,482 11,901
Inventories 19,615 15,439
Prepaid expenses and other current assets 8,159 6,781
Total current assets 81,958 43,598
Property and equipment, net 39,098 33,602
Notes receivable from affiliates, excluding
current portion 12,487 13,058
Other assets, net 6,262 6,782
Total assets $139,805 $97,040
Liabilities and Stockholders' Equity
Current liabilities -
Current installments of long-term debt $1,231 $1,959
Debt to be refinanced 19,988 0
Accounts payable 21,667 16,254
Money orders payable 13,859 15,190
Accrued expenses and other current liabilities 13,558 14,752
Total current liabilities 70,303 48,155
Long-term debt, excluding current installments 32,657 18,421
Capital lease obligations, excluding current
installments 4,791 955
Note payable to affiliate, excluding current
installments 2,366 0
Deferred income taxes 5,631 4,913
Other liabilities 2,520 2,824
Total liabilities 70,303 75,268
Stockholders' equity -
Common stock ($0.01 par value) 22,235 22,235
Accumulated deficit (698) (463)
Total stockholders' equity 21,537 21,772
Total liabilities and stockholders' equity $139,805 $97,040
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP Marketing Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)
Three Months Ended Six Months Ended
June 27, 1999 June 28, 1998 June 27, 1999 June 28, 1998
Revenues -
Motor fuel $92,523 $85,059 $165,210 $161,404
Merchandise 29,896 24,902 55,654 47,481
Miscellaneous 2,563 2,608 5,147 4,927
Total revenues 124,982 112,569 226,011 213,812
Costs and expenses -
Cost of motor fuel 85,123 78,535 151,509 148,402
Cost of merchandise 21,421 17,346 39,201 32,862
Direct store expenses 12,720 11,201 24,272 21,867
General and administrative
expenses 3,418 4,355 7,192 7,475
Depreciation and
amortization 1,669 1,348 3,168 2,668
Total costs and expenses 124,351 112,785 225,342 213,274
Operating income/(loss) 631 (216) 669 538
Interest income 318 53 644 173
Interest expense 1,002 172 1,633 493
Income/(loss) before
income taxes (53) (335) (320) 218
Income tax expense/(benefit) -
Current 0 50 0 97
Deferred (8) (182) (85) (12)
Total (8) (132) (85) 85
Net income/(loss) $(45) $(203) $(235) $133
Net income/(loss) per share -
Basic $(0.01) $(0.05) $(0.06) $0.04
Diluted (0.01) (0.05) (0.06) 0.03
Weighted average number of common shares outstanding -
Basic 3,818 3,779 3,818 3,779
Diluted 3,818 3,779 3,818 3,877
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP Marketing Company, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands)
(Unaudited)
Six Months Ended
June 27, June 28,
1999 1998
Cash Flows from Operating Activities -
Net income/(loss) $(235) $133
Adjustments to reconcile net income/(loss) to
to cash provided/(used) by operating activities -
Depreciation and amortization 3,168 2,668
Deferred income tax expense/(benefit) (85) (12)
Gain/(loss) on sales of property and equipment 77 0
Net change in operating assets
and liabilities (7,725) (1,437)
Net cash provided/(used) by operating activities (4,800) 1,352
Cash Flows from Investing Activities -
Repayments of advances to affiliate, net of
reduction for joint debt obligations 714 1,165
Purchases of property and equipment (8,917) (3,449)
Increase/(decrease) in notes receivable
and other assets 311 (133)
Net cash (used) by investing activities (7,892) (2,417)
Cash Flows from Financing Activities -
Proceeds from long-term debt and capital leases 494,657 19,397
Payments on long-term debt and capital leases (454,800) (19,497)
Cash held held in escrow for refinancing (23,646) 0
Net cash provided/(used) by financing activities 16,211 (100)
Net increase in cash and cash equivalents 3,519 (100)
Cash and cash equivalents at beginning of period 9,537 9,389
Cash and cash equivalents at end of period $13,056 $8,224
Supplemental Disclosure of Cash Flow Information
The Company utilized cah to pay interest during the six months ended June 27,
1999 and June 28, 1998, in the amounts of $1,711,000 and $608,000, respectively.
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP Marketing Company, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
June 27, 1999
(Unaudited)
1. Basis of Presentation
The condensed consolidated financial statements include the assets,
liabilities, and results of operations of FFP Marketing Company, Inc., and its
wholly owned subsidiaries, FFP Operating Partners, L.P., Direct Fuels, L.P., FFP
Financial Services, L.P., Practical Tank Management, Inc., FFP Transportation,
L.L.C., FFP Money Order Company, Inc., FFP Operating LLC, and Direct Fuels
Management Company, Inc. These companies are collectively referred to as the
"Company."
The condensed consolidated balance sheet as of June 27, 1999, and the
condensed consolidated statements of operations and the condensed consolidated
statements of cash flows for the periods presented have not been audited. In the
opinion of management, all adjustments, consisting only of normal recurring
adjustments, necessary to fairly present the Company's financial position as of
June 27, 1999, and the results of operations and cash flows for the periods
presented have been made. Interim operating results are not necessarily
indicative of results for the entire year.
The notes to the audited consolidated financial statements which are included
in the Company's Annual Report on Form 10-K for the year ended December 27,
1998, include accounting policies and additional information pertinent to an
understanding of these interim financial statements. That information has not
changed other than as a result of normal transactions in the six months ended
June 27, 1999, and as discussed below.
2. Notes payable and Long-Term Debt
On June 27, 1999, the Company was in the process of refinancing a major
portion of its indebtedness. A new loan of $23,800,000 was funded on June 25,
1999, but the loan proceeds were then held in escrow at a title company pending
the receipt of confirmation of filing of lien documents for the new loan. Debts
aggregating $19,988,000 were repaid in full on June 28, 1999, the first day of
the third quarter, with funds from the new loan. The old debts (as short-term)
and the new loan (as long-term) are both included as liabilities on the
Company's balance sheet at June 27, 1999, with an asset entitled "cash held in
escrow for refinancing" also being recorded at that time. Such loan repayment,
along with and extraordinary loss for prepayment penalties and various other
prepaid loan expenses of $375,000, will be reflected in the financial statements
for the third quarter of 1999.
The Company's new long-term debt is payable to a third party lender in 180
equal monthly installments and consists of 49 fully-amortizing mortgage loans in
the aggregate original principal amount of $23,800,000. Interest is payable at a
fixed rate of 9.9% per annum, and aggregate monthly payments of principal and
interest are $256,000. This new loan is secured by a lien against the Company's
leasehold, equipment, and inventory at 49 specific convenience stores, truck
stops and gas-only outlets.
On February 26, 1999, the Company acquired the operations of an additional 23
convenience stores and two truck stops. Eleven of the 25 stores are third party
leasehold locations where the Company purchased the existing leasehold interest,
equipment, and inventories. The Company's purchase of those properties was
financed with a third party lender consisting of four fully amortizing mortgage
loans in the aggregate original principal amount of $1,012,000, with maturity
dates ranging from 86 to 180 months, interest payable at a fixed rate of 9.275%
per annum, and aggregate monthly payments of principal and interest of $13,000.
The land and building at the remaining 14 of the 25 stores were purchased on
the same date by FFP Partners, L.P. and immediately leased to the Company under
real estate leases with a 15-year term. The real estate leases negotiated
between FFP Partners and the Company require a total monthly rent payment
resulting in a rate of return of approximately 14%. Under generally accepted
accounting principles, each real estate lease is treated as two leases: a land
lease and a building lease. Each land lease is classified as an operating lease,
with monthly payments for all such land leases aggregating $28,000. Each
building lease is classified as a capital lease, with monthly payments for all
such building leases aggregating $71,000. Under generally accepted accounting
principles, the amount of rent allocated to the capital lease obligation for the
buildings of $3,932,000 results in an implicit rate of approximately 20%. The
real estate leases require the Company to pay all taxes, insurance, operating,
and capital costs and provide for increased rent payments after each five-year
period during the term of the leases based upon any increase in the consumers
price index.
In addition, in February 1999 the Company purchased inventory and equipment
from FFP Partners at the 14 fee locations at a price of $2,692,000 and executed
a note payable to FFP Partners for such amount. The note bears interest at the
prime rate and is payable in monthly installments over 8 years.
As a condition to the Company's acquisition of store operations at those 14
fee locations, the Company was required to guarantee the acquisition
indebtedness of $9,550,000 incurred by FFP Partners in its purchase of the 14
fee locations, including land, building, equipment and inventory. The Company's
projected lease payments to FFP Partners will equal the debt service costs of
FFP Partners during the initial five years of the leases and will exceed such
debt service costs thereafter to the extent of an increase in the consumers
price index.
3. 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 per share is computed by dividing net income by the weighted
average number of common shares outstanding for the year plus potentially
dilutive common shares. At June 27, 1999, outstanding options to acquire 201,667
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 calculations for the three-month and
six-month periods ended June 27, 1999, and June 28, 1998, follows:
Three Months Ended Six Months Ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
(In thousands)
Weighted average number of common
shares outstanding 3,818 3,779 3,818 3,779
Effect of dilutive options 0 0 0 98
Weighted average number of common
shares outstanding, assuming
dilution 3,818 3,779 3,818 3,877
<PAGE>
4. Operating Segments
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," was adopted by the Company in 1998 for reporting information about
its 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 responsibilities. No major
distinctions exist regarding geographical areas served by the Company or
customer types. The following table sets forth certain information about each
segment's financial information for the three and six month periods ended June
27, 1999, and June 28, 1998:
Retail
and Terminal
Wholesale Operations Eliminations Consolidated
(In thousands)
Six Months Ended June 27, 1999
Revenues from external sources $255,581 $430 $0 $226,011
Revenues from other segment 0 7,545 (7,545) 0
Depreciation and amortization 2,905 263 0 3,168
Income/(loss) before income taxes 65 (385) 0 (320)
Six Months Ended June 28, 1998
Revenues from external sources $213,812 $0 $0 $213,812
Revenues from other segment 0 2,280 (2,280) 0
Depreciation and amortization 2,414 254 0 2,668
ncome/(loss) before income taxes 1,065 (847) 0 218
Second Quarter 1999
Revenues from external sources $124,714 $268 $0 $124,982
Revenues from other segment 0 4,778 (4,778) 0
Depreciation and amortization 1,537 132 0 1,669
Income/(loss) before income taxes 53 (106) 0 (53)
Second Quarter 1998
Revenues from external sources $112,569 $0 $0 $112,569
Revenues from other segment 0 1,417 (1,417) 0
Depreciation and amortization 1,221 127 0 1,348
ncome/(loss) before income taxes 114 (449) 0 (335)
5. 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 period-end, including claims incurred but
not yet reported. The Company recorded expense related to these plans of
$70,000 for the first half of 1999 and $284,000 for 1998, 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 June 27, 1999, and 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 were recorded at both June 27, 1999, and December 27, 1998, 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 $1,425,000 and $1,297,000 at June 27, 1999, and at year end 1998,
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.
<PAGE>
FFP Marketing Company, Inc. and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
FFP Marketing Company, Inc. was formed as a Texas corporation immediately
prior to the December 1997 restructuring of FFP Partners, L.P. ("FFP Partners").
In that restructuring, all of the assets and businesses of FFP Partners was
transferred to the Company, except that FFP Partners retained the improved real
property previously used in its retail operations. Unless the context requires
otherwise, references herein to the "Company" for periods or activities prior to
the December 1997 restructuring include the activities of FFP Partners and its
then subsidiaries, which are now subsidiaries of FFP Marketing Company, Inc.
In the December 1997 restructuring of FFP Partners, the holders of its
limited partnership interests received one share of common stock of the Company
for each limited partnership unit that they owned on December 28, 1997,
resulting in each such person owning the same economic interest in the Company
as they had held in FFP Partners.
The Company conducts its operations through the following subsidiaries:
Entity Date Formed Principal Activity
FFP Operating Partners, December 1986 Operation of convenience
L.P., a Delaware limited stores and other retail outlets
partnership
Direct Fuels, L.P., a Texas December 1988 Operation of fuel terminal and
limited partnership wholesale fuel sales
FFP Financial Services, September Sale of money order services
L.P., a Delaware limited 1990 and supplies
partnership
Practical Tank Management, September Underground storage tank
Inc., a Texas corporation 1993 monitoring
FFP Transportation, L.L.C., September Ownership of tank trailers and
a Texas limited liability 1994 other transportation equipment
company
FFP Money Order Company, December 1996 Sale of money orders through
Inc., a Nevada corporation agents
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").
Results of Operations
Fuel Sales and Margins
Second Quarter Year-to-Date
Change Change
1999 1998 Amount % 1999 1998 Amount %
(In thousands, except per gallon data)
Fuel sales $92,523 $85,059 $7,464 8.7% $165,210 $161,404 $3,806 2.3%
Fuel margin 7,400 6,524 876 13.3% 13,701 13,002 699 5.4%
Gallons sold
Retail 68,004 61,764 6,240 10.1% 130,742 119,259 11,483 9.6%
Wholesale 24,143 27,373 (3,230)(11.8%) 46,860 47,216 (356)(0.8%)
Total 92,147 89,137 3,010 3.4% 177,602 166,475 11,127 6.7%
Average per gallon
sales price $1.00 $0.95 $0.05 5.3% $0.93 $0.93 $0.00 0.0%
Margin per gallon (cents)
Retail 9.6 9.7 (0.1) (1.0%) 9.4 10.1 (0.7) (6.9%)
Wholesale 1.7 1.7 0 0.0% 1.8 2.0 (0.2)(10.0%)
Total motor fuel sales of 92,147,000 and 177,602,000 gallons in the second
quarter and first half of 1999, respectively, constituted a 3,010,000 and
11,127,000 gallon increase, respectively (3.4% and 6.7%, respectively), over
motor fuel sales in the comparable 1998 periods. Motor fuel dollar revenues in
the second quarter and first half of 1999 increased by $7,464,000 and
$3,806,000, respectively (8.7% and 2.3%, respectively), compared to the
corresponding periods of the prior year. Gross profit on motor fuel sales
increased by $876,000 and $699,000, respectively (13.3% and 5.4%, respectively),
compared to the same periods in the previous year. All of these increases
resulted primarily from sales at 25 additional convenience stores or truck stops
acquired on February 26, 1999. The retail fuel margin in the second quarter of
1999 was 9.6 cents per gallon as compared to 9.7 cents per gallon in the second
quarter of 1998.
Wholesale fuel sales, in gallons, decreased by 11.8% in the second quarter of
1999 compared to 1998, but the per gallon margin on the sales remained constant
at 1.7 cents per gallon. For the year-to-date period, wholesale fuel sales
decreased in 1999 by only 356,000 gallons, or 0.8%, when compared to 1998.
The mix, in gallons, during the second quarter of 1999 between retail sales
versus wholesale sales improved to a retail sales percentage of 74%, compared to
69% for the same period of the prior year. This increased retail percentage
resulted in additional gross profit because the retail per gallon margin is
higher than wholesale per gallon margin. The retail versus wholesale sales mix,
in gallons, of 74% retail and 26% wholesale for the year-to-date period in 1999
remained relatively constant when compared to the corresponding period in 1998.
Merchandise Sales and Margins
Second Quarter Year-to-Date
Change Change
1999 1998 Amount % 1999 1998 Amount %
(In thousands, except average weekly sales data)
Mdse sales $29,89 $24,902 $4,994 20.1% $55,654 $47,481 $8,173 17.2%
Mdse margin 8,475 7,556 919 12.1% 16,453 14,619 1,834 12.5%
Margin percentage,
convenience stores
and truck stops 28.3% 30.3% (2.0%) (6.6%) 29.6% 30.8% (1.2%) (3.9%)
Average weekly mdse sales -
Convenience
stores $11,183 $9,624 $1,559 16.2% 10,767 8,936 1,831 20.5%
Truck stops 16,834 17,685 (851) (0.1%) 16,945 16,951 (6) (0.0%)
Merchandise sales increased by almost $5 million (20.1%) in the second
quarter of 1999 and by over $8 million (17.2%) for the first half of 1999, when
compared to the corresponding periods of 1998. A principal factor for the
increase was an increase in the sales price of tobacco products and additional
sales from the stores purchased on February 26, 1999. Merchandise gross profit
increased by $919,000 (12.1%) and $1,834,000 (12.5%) for the three and six month
periods of 1999, respectively, when compared to the corresponding periods of the
prior year. Merchandise margins decreased by 6.6% and 3.9% for the three and six
month periods of 1999, respectively, compared to the corresponding periods of
the previous year. Although merchandise margins increased, in dollars, for the
three and six month periods of 1999, overall merchandise margin percentages
decreased for such periods because the Company's incresaed sales of cigarettes
and beer during those periods were greater than its increased sales of higher
margin products.
Other Income and Expenses
Miscellaneous revenues, other than interest income, declined by $45,000
(1.7%), but improved by $220,000 (4.5%), for the three and six month periods in
1999, respectively, when compared to the same periods in 1998. Miscellaneous
revenues for the second quarter decreased because of a reduction in money order
fee income and in gain on sales of convenience stores, when compared to sales in
the second quarter of 1998. Miscellaneous revenues increased for the six month
period because additional stores were being operated in 1999. Miscellaneous
revenues include lottery ticket sales income, money order sales income,
commissions received on alcohol beverage sales, check cashing fees, state excise
tax handling fees and various other types of income.
Direct store expenses increased in the second quarter and first half of 1999
by $1,519,000 (13.6%) and $2,405,000 (11.0%), respectively, compared to
corresponding periods in the prior year. The primary reason was attributable to
operating the 25 additional stores acquired in February 1999.
General and administrative expenses decreased by $937,000 (21.5%) and by
$283,000 (3.8%) in the three and six month periods of 1999, respectively,
compared to the same periods of 1998. General and administrative expenses
declined in 1999, in spite of operating a greater number of stores than in 1998,
because of bad debt expenses during the second quarter of 1998 related to the
Company's money order activities.
Depreciation and amortization increased by $321,000 (23.8%) in the current
quarter. This increase resulted from depreciation of property and equipment
additions during 1999, primarily comprised of the buildings capitalized under
the 14 capital leases of buildings acquired in the February 1999 acquisition of
stores and the fixtures and equipment at 25 stores acquired at the same time.
Interest income rose from $53,000 in the second quarter of 1998 to $318,000
in the second quarter of 1999, a 500.0% increase, and from $173,000 in the first
half of 1998 to $644,000 in the first half of 1999, a 272.3% increase. These
increases principally resulted from interest income received on Company's note
receivable from FFP Partners. The Company currently anticipates, but gives no
assurance, that it will receive full repayments of this note in the third
quarter of 1999, which would provide additional liquidity for the Company in the
amount of approximately $11,000,000. Interest income should decline in the third
quarter because such funds are not expected to be invested in interest earning
assets.
Interest expense increased by $830,000 (482.6%) and by $1,140,000 (231.2%)
during the second quarter and first half of 1999, when compared to corresponding
periods of 1998. Increased interest expense resulted from the higher level of
debt in 1999 than 1998 under the Company's revolving line of credit and interest
expense on the capitalized leases of buildings acquired in the February 1999
acquisition of stores. Interest expense is expected to increase in the future
because the indebtedness of $23,800,000 incurred at the end of the second
quarter of 1999 exceeds the debt paid off with such proceeds by $3,812,000 and
such new debt bears a fixed interest rate of 9.9% per annum instead of a
variable rate, presently at 8.0% per annum, payable on the debt refinanced. See
"Liquidity and Capital Resources", below.
Liquidity and Capital Resources
On the last day of the second quarter of 1999, the Company was in the process
of closing a refinancing of debt of $19,988,000. The new loan of $23,800,000 had
been funded, but the loan proceeds were being held in escrow over that weekend
at a title company pending the receipt of confirmation of filing of lien
documents for the new loan. Because the old loans were not repaid until the
first day of the third quarter of 1999, the old debt and the new loan are both
included as liabilities on the Company's balance sheet at June 27, 1999, with an
asset entitled "cash held in escrow for refinancing" also being recorded at that
time. On July 28, 1999, the first day of the third quarter, the old debt was
repaid in full with the funds from the new loan being held in escrow for such
purpose. Such loan repayment, along with an extraordinary loss for prepayment
penalties and various other prepaid loan expenses of $375,000, will be reflected
in the financial statements for the third quarter of 1999.
This new loan is expected to provide additional liquid resources in the third
quarter as the amount of such new debt exceeds the debt paid off. After payment
of loan costs and expenses, this additional liquidity is approximately
$2,600,000, and will be held in escrow until a new line of credit for
$10,000,000 is put into place. In August 1999, the Company secured a commitment
from a lender for such new line of credit and expects to acquire the line of
credit in the third quarter. The terms of that line of credit are expected to
allow for credit extension up to a borrowing base equal to 80% of the Company's
eligible accounts receivable and 60% of the eligible inventory at its terminal
facility in Euless, Texas. Amounts borrowed under the revolver will bear
interest at 1% over prime with monthly payments of accrued interest.
The Company currently anticipates, but can give no assurance, that in the
third quarter of 1999 it will receive approximately $11,000,000 in funds from
FFP Partners in repayment of its note payable to the Company. These funds would
provide additional liquidity for the Company at such time.
The Company's working capital at the end of the second quarter of 1999 was
$11,655,000 as compared to a negative $4,557,000 at the end of 1998. The
improvement resulted from several factors: cash held in escrow for refinancing
exceeds the debt to be repaid with such funds by $3,812,000, a $5,581,000
increase (46.9%) in trade receivables, a $4,176,000 increase (27.0%) in
inventories, and a $1,331,000 reduction (8.8%) in money order payables, offset
in part by a $5,413,000 increase (33.3%) in accounts payable. These working
capital increases resulted primarily from the Company's acquisition of
operations of 25 convenience stores and truck stops on February 26, 1999, and
offset the loss of a significant third party money order agent during the second
quarter of 1999.
Summer is typically the Company's strongest period of the year when revenues
and cash flows generally increase. Consequently, although the Company's working
capital is affected by the seasons of the year, management believes that its
internally generated funds and use of trade credit, along with a new bank line
of credit currently being pursued, will allow its operations to be conducted in
a customary manner.
The Company's money order sales have increased significantly over the last
few years. For example, money order payables at the end of fiscal year 1996 were
$7,809,000, compared to money order payables at the end of second quarter of
1999 of $13,859,000. 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 at its own stores, the Company relies on receiving timely payment
from its third party money order sales agents. The Company's failure to receive
money order payments from an agent on a timely basis or to continue
relationships with its money order agents could negatively impact the Company's
liquidity.
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 being planned for the remainder of the year. The following reflects
management's assesment of the Company's Y2K state of readiness on June 27, 1999:
Estimated Estimated
Percentage Completion
Completed Date
Phase
Internal IS and Non-IS systems and
equipment:
Awareness 95% December 1999
Assessment 90% October 1999
Remediation 80% October 1999
Testing 50% November 1999
Contingency planning 30% October 1999
Suppliers, customers and third party
providers:
Awareness-identify companies 70% September 1999
Assessment questionnaire completed
by major suppliers 30% October 1999
Assessment review with third party
providers 30% November 1999
Review contractual commitments 10% September 1999
Risk assessment 50% August 1999
Contingency planning 40% September 1999
Testing as applicable 40% October 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 $400,000, 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.
Forward-Looking Statements
Certain of the matters discussed in this quarterly report contain
"forward-looking" statements regarding the Company's future business which are
subject to inherent risks and uncertainties. As defined by the U.S. Private
Securities Litigation Reform Act of 1995, "forward-looking" statements include
information about the Company that is based on the beliefs of management and the
assumptions made by, and information currently available to, management. In
making such forward-looking statements, the Company is relying upon the
"statutory safe harbors" contained in the applicable statutes and the rules,
regulations and releases of the Securities and Exchange Commission. Statements
that should generally be considered forward-looking include, but are not limited
to, those that contain the words "estimate," "anticipate," "in the opinion of
management," "expects," "believes," and similar phrases. Among the factors that
could cause actual results to differ materially from the statements made are the
following: general business conditions in the local markets served by the
Company's convenience stores, truck stops, and other retail outlets, and its
wholesale fuel markets; the weather in the local markets served by the Company;
competitive factors such as changes in the locations, merchandise offered,
pricing, and other aspects of competitors' operations; increases in cost of fuel
and merchandise sold or reductions in the gross profit realized from such sales;
available product for processing and processing efficiencies at the Company's
fuel terminal; expense pressures relating to operating costs, including labor,
repair and maintenance, and supplies; unexpected outcome of litigation; adverse
liquidity situations; unanticipated general and administrative expenses,
including employee, taxes, insurance, expansion and financing costs; and
unexpected liabilities.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected, or intended.
<PAGE>
Quantitative and Qualitative Disclosures About Market Risks
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 during the second quarter of 1999 was 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 bank debt. Thus, any increase in interest expense of the Company
attributable to an increase in the prime rate will be substantially offset by an
increase in its interest income. Such bank debt was repaid in full on the first
day of the third quarter and replaced with fixed rate financing.
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 the end of the first quarter of 1999.
EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27 Financial Data Schedule.
Reports on Form 8-K
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FFP Marketing Company, Inc.
Registrant
Date: August 16, 1999 By: /s/John H. Harvison
---------------------------------
John H. Harvison
Chairman and
Chief Executive Officer
Date: August 16, 1999 By: /s/Craig T. Scott
---------------------------------
Craig T. Scott
Vice President - Finance and
Chief Financial Officer
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