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 September 26, 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 November 10, 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)
September 26, December 27,
1999 1998
ASSETS
Current assets -
Cash and cash equivalents $16,474 $9,537
Trade receivables 20,820 11,901
Inventories 21,688 15,439
Note receivable, current portion 960 1,078
Note receivable from affiliate, current portion 1,951 1,923
Prepaid expenses and other current assets 8,652 3,720
Total current assets 70,545 43,598
Property and equipment, net 40,098 33,602
Notes receivable, excluding current portion 1,079 1,386
Notes receivable from affiliates, excluding
current portion 12,201 13,058
Other assets, net 5,632 5,396
Total assets $129,555 $97,040
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -
Current portion of long-term debt $3,804 $1,959
Current portion of long-term debt to affiliate 268 0
Current portion of capital lease obligations 696 401
Accounts payable 24,926 16,254
Money orders payable 13,655 15,190
Accrued expenses and other current liabilities 17,821 14,351
Total current liabilities 61,170 48,155
Long-term debt, excluding current portion 32,473 18,421
Capital lease obligations, excluding current portion 4,710 955
Note payable to affiliate, excluding current portion 2,303 0
Deferred income taxes 5,787 4,913
Other liabilities 2,367 2,824
Total liabilities 108,810 75,268
Stockholders' equity -
Common stock ($0.01 par value) 22,235 22,235
Accumulated deficit (1,490) (463)
Total stockholders' equity 20,745 21,772
Total liabilities and stockholders' equity $129,555 $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 Nine Months Ended
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1999 1998 1999 1998
Revenues -
Motor fuel $101,556 $77,871 $266,766 $239,275
Merchandise 30,023 24,199 85,677 71,680
Miscellaneous 2,540 2,115 7,687 7,042
Total revenues 134,119 104,185 360,130 317,997
Costs and expenses -
Cost of motor fuel 94,656 70,402 246,165 218,803
Cost of merchandise 21,023 16,046 60,224 48,909
Direct store expenses 13,477 11,261 37,749 33,128
General and administrative 3,323 3,824 10,515 11,299
expenses
Depreciation and 1,746 1,518 4,914 4,186
amortization
Total costs and expenses 134,225 103,051 359,567 316,325
Operating income/(loss) (106) 1,134 563 1,672
Interest income 451 393 1,095 566
Interest expense 1,202 490 2,835 983
Income/(loss) before income taxes
and extraordinary items (857) 1,037 (1,177) 1,255
Income tax expense/(benefit) -
Current 0 137 0 234
Deferred (306) 287 (391) 275
Total (306) 424 (391) 509
Income/(loss) before extraordinary
items (551) 613 (786) 746
Extraordinary loss (less applicable
income tax benefit of $134) 241 - 241 -
Net income/(loss) $(792) $813 $(1,027) $746
Income/(loss) before extraordinary items per share -
Basic $(0.14) $0.16 $(0.21) $0.20
Diluted $(0.14) $0.16 $(0.21) $0.19
Extraordinary loss net of tax effect per share -
Basic $(0.06) - $(0.06) -
Diluted $(0.06) - $(0.06) -
Net income/(loss) per share -
Basic $(0.21) $0.16 $(0.27) $0.20
Diluted $(0.21) $0.16 $(0.27) $0.19
Weighted average number of common shares outstanding -
Basic 3,818 3,782 3,818 3,780
Diluted 3,818 3,917 3,818 3,892
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except for supplementary disclosures)
(Unaudited)
Nine Months Ended
Sept. 26 Sept. 27,
1999 1998
Cash Flows from Operating Activities -
Net income/(loss) $(1,027) $746
Adjustments to reconcile net income/(loss) to
cash provided/(used) by operating activities -
Depreciation and amortization 4,914 4,185
Deferred income tax expense/(benefit) (525) 468
Extraordinary loss 375 0
Loss on disposition of property and equipment 159 0
Net change in operating assets and liabilities (4,562) (1,533)
Net cash provided/(used) by operating activities (666) 3,866
Cash Flows from Investing Activities -
Payments on notes receivable from affiliate 829 905
Purchases of property and equipment (9,819) (4,881)
Decrease/(increase) in notes receivable
and other assets 425 (772)
Net cash (used) by investing activities (8,565) (4,748)
Cash Flows from Financing Activities -
Proceeds of long-term debt and capital leases 494,963 362,991
Payments on long-term debt and capital leases (475,236) (361,872)
Refinancing costs and cash held in escrow
from refinancing (3,438) 0
Payments on long-term debt from affiliate (121) 0
Proceeds from exercise of stock options 0 20
Net cash provided by financing activities 16,168 1,139
Net increase/(decrease) in cash and cash equivalents 6,937 257
Cash and cash equivalents at beginning of period 9,537 9,389
Cash and cash equivalents at end of period $16,474 $9,646
Supplemental Disclosure of Cash Flow Information
The Company utilized cash to pay interest of $2,713,000 and $1,027,000 during
the nine months ended September 26, 1999 and September 27, 1998, respectively.
The Company purchased inventory and equipment during the nine months ended
September 26, 1999, in exchange for a promissory note payable to an affiliate in
the amount of $2,692,000.
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 26, 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 September 26, 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
September 26, 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 nine months ended
September 26, 1999, and as discussed below.
2. Notes Payable and Long-Term Debt
The Company was in the process of refinancing its long-term indebtedness on
June 27, 1999, the last day of its second fiscal quarter. On June 25, 1999, the
Company obtained a new loan in the original principal amount of $23,800,000 from
a third party lender and utilized the proceeds of that loan to repay debts
aggregating $19,988,000 on June 28, 1999. The financial statements for the third
fiscal quarter reflect the loan repayment, along with an extraordinary loss for
prepayment penalties and previously unamortized loan fees in the aggregate
amount of $375,000. The Company's new long-term debt is payable in 180 equal,
monthly installments with interest at a fixed rate of 9.9% per annum and
aggregate monthly payments of principal and interest of $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 inventory. The Company financed its purchase of those properties
with fully-amortizing mortgage loans in the aggregate original principal amount
of $1,012,000, with maturity dates ranging from 86 to 180 months, interest
payable at a fixed rate of 9.275% per annum, and aggregate monthly payments of
principal and interest of $13,000.
The land and building at the remaining 14 of those 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 consumer
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. In October 1999, the note, which
was payable in monthly installments with interest at the prime rate, was repaid
in full.
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, L.P. will equal the debt service costs
of FFP Partners, L.P. during the initial five years of the leases and will
exceed such debt service costs thereafter to the extent of an increase in the
consumer 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 period.
Diluted net income per share is computed by dividing net income by the weighted
average number of common shares outstanding for the period plus potentially
dilutive common shares. At September 26, 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 nine-month periods ended September 26, 1999, and September 27,
1998, follows:
Three Months Ended Nine Months Ended
Sept. 26, Sept. 27, Sept, 26, Sept. 27,
1999 1998 1998 1998
(In thousands)
Weighted average number of common
shares outstanding 3,818 3,782 3,818 3,780
Effect of dilutive options 0 135 0 112
Weighted average number of
common shares outstanding,
assuming dilution 3,818 3,917 3,818 3,892
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-month and nine-month periods ended
September 26, 1999, and September 27, 1998:
Retail and Terminal
Wholesale Operations Eliminations Consolidated
(In thousands)
NINE MONTHS ENDED SEPT 26, 1999
Revenues from external
sources $359,145 $985 $0 $360,130
Revenues from other segment 0 14,865 (14,865) 0
Depreciation and
amortization 4,515 399 0 4,914
Income/(loss) before income
taxes (1,119) (433) 0 (1,552)
NINE MONTHS ENDED SEPT 27, 1998
Revenues from external
sources $317,074 $923 $0 $317,997
Revenues from other segment 0 2,963 (2,963) 0
Depreciation and
amortization 3,805 381 0 4,186
Income/(loss) before income
taxes 2,573 (1,318) 0 1,255
<PAGE>
THIRD QUARTER 1999
Revenues from external
sources $133,564 $555 $0 $134,119
Revenues from other segment 0 7,320 (7,320) 0
Depreciation and
amortization 1,610 136 0 1,746
Income/(loss) before income
taxes (1,185) (47) 0 (1,232)
THIRD QUARTER 1998
Revenues from external
sources $103,677 $508 $0 $104,185
Revenues from other segment 0 1,098 (1,098) 0
Depreciation and
amortization 1,264 254 0 1,518
Income/(loss) before income
taxes 2,590 (1,553) 0 1,037
The extraordinary loss of $375,000, before income tax effect, in the nine
months ended September 26, 1999, and in the third quarter 1999, is included in
the results of operation for the Retail and Wholesale segment.
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
individuals covered by its employee medical benefit plan for salaried employees
in the field. Any such claims above $45,000 are covered by a stop-loss insurance
policy, subject to a $1,000,000 lifetime limit per employee. The Company and its
employees participating under the plan 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.
The Company recorded expense related to this plan of $226,000 for the first nine
months of 1999 and $222,000 for the corresponding period of 1998.
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 September 26, 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. The Company recorded $918,000 in other liabilities at both
September 26, 1999, and December 27, 1998, as its estimated future environmental
remediation costs related to known leaking underground storage tanks.
Corresponding claims for reimbursement of environmental remediation costs were
also recorded as a long-term receivable, and included in other assets, 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.
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. Due to the uncertainty of the timing of the receipt of the
reimbursements, the claims for reimbursement of environmental remediation costs,
totaling $1,306,000 and $1,297,000 at September 26, 1999, and 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.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
September 26, 1999
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 and wholesale fuel sales
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
The Company incurred a net loss of $792,000 for the third quarter of 1999,
compared to a net income of $613,000 for the third quarter of 1998. The Company
incurred a net loss of $1,027,000 for the first nine months of 1999, compared to
net income of $746,000 for the corresponding period in 1998. Principal reasons
for the 1999 third quarter loss include a 24.8% lower fuel margin per gallon
from retail sales, an extraordinary loss of $375,000 associated with the
Company's refinancing of long-term debt in the third quarter, including
prepayment penalties and previously unamortized loan fees, and additional
interest expense of $712,000.
<PAGE>
FUEL SALES AND MARGINS
THIRD QUARTER YEAR-TO-DATE
Change Change
1999 1998 Amount Percent 1999 1998 Amount Percent
(In thousands, except per gallon data)
Fuel sales $101,556 $77,871 $23,685 30.4% $266,766 $239,275 $27,491 11.5%
Fuel margin 6,900 7,469 (569) (7.6%) 20,601 20,472 129 0.6%
Gallons sold
Retail 67,168 59,070 8,098 13.7% 197,910 178,329 19,581 11.0%
Wholesale 31,124 26,062 5,062 19.4% 82,864 73,278 9,586 13.1%
Total 98,292 85,132 13,160 15.5% 280,774 251,607 29,167 11.6%
Average per gallon
sales price $1.03 $0.91 $0.12 13.2% $0.95 $0.95 $0.00 0.0%
Margin per gallon (cents)
Retail 8.8 11.7 (2.9)(24.8%) 9.2 10.6 (1.4)(13.2%)
Wholesale 1.8 1.8 0.0 0.0% 1.8 1.9 (0.1) (5.3%)
Total motor fuel sales of 98,292,000 and 280,774,000 gallons in the third
quarter and first nine months of 1999, respectively, reflected increases of
15.5% and 11.6%, respectively, over motor fuel sales in the comparable 1998
periods. Motor fuel dollar revenues in the third quarter and first nine months
of 1999 increased by $23,685,000 and $27,491,000, respectively, showing
improvements of 30.4% and 11.5%, respectively, compared to the corresponding
periods of the prior year. Gross profit margin on motor fuel sales decreased by
$569,000 in the third quarter of 1999, when compared to the third quarter of
1998, or 7.6%, and increased by $129,000, or 0.6%, in the first nine months of
1999, compared to the same period in the previous year. These results were
favorably impacted primarily by sales at 25 additional convenience stores or
truck stops acquired on February 26, 1999, but were offset by a 24.8% decline in
per gallon retail profit margin during the third quarter of 1999. The retail
fuel margin in the third quarter of 1999 was 8.8 cents per gallon as compared to
11.7 cents per gallon in the third quarter of 1998. At many of its locations,
the Company continues to face increased competition from traditional retail
motor fuel marketers, as well as new retail gasoline outlets being installed at
supermarkets, discount stores and other businesses not previously engaged in
retail gasoline marketing.
Wholesale fuel sales increased by 5,062,000 gallons, or 19.4%, in the third
quarter of 1999 compared to 1998, while the per gallon margin on the sales
remained constant at 1.8 cents per gallon. For the year-to-date period,
wholesale fuel sales increased in 1999 by 9,586,000 gallons, or 13.1%, when
compared to 1998. This increase in wholesale fuel margin, in dollars, did not
offset the decline or flat results from retail fuel margin dollars in the
periods presented.
The mix, in gallons, during the third quarter of 1999 between retail sales
versus wholesale sales declined slightly to a retail sales percentage of 68.3%,
compared to 69.4% for the same period of the prior year. This decreased retail
percentage resulted in a reduction in gross fuel profit because the retail per
gallon margin is higher than wholesale per gallon margin. The retail versus
wholesale sales mix, in gallons, for the year-to-date period in 1999 remained
relatively constant at 70.5% retail, when compared to 70.9% retail in the
corresponding period in 1998.
MERCHANDISE SALES AND MARGINS
THIRD QUARTER YEAR-TO-DATE
Change Change
1999 1998 Amount Percent 1999 1998 Amount Percent
(In thousands, except average weekly sales data)
Mdse sales $30,023 $24,199 $5,824 24.1% $85,677 $71,680 $13,997 19.5%
Mdse margin 9,000 8,153 847 10.4% 25,453 22,771 2,682 11.8%
Margin percentage, convenience stores
and truck stops 28.4% 31.8% (3.4%)(10.7%) 28.3% 30.4% (2.1%) (6.9%)
Average weekly mdse sales -
Convenience
stores $11,185 $9,465 $1,720 18.2% $11,011 $9,122 $1,889 20.7%
Truck stops 17,284 18,014 (730) (4.1%) 17,064 17,305 (241) (1.4%)
Merchandise sales increased by $5,824,000 (24.1%) in the third quarter of
1999 and by almost $14 million (19.5%) for the first nine months 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 $847,000 (10.4%) and $2,682,000 (11.8%) for the three and nine
month periods of 1999, respectively, when compared to the corresponding periods
of the prior year. Merchandise margins decreased by 10.7% and 6.9% for the three
and nine month periods of 1999, respectively, compared to the corresponding
periods of the previous year. Although merchandise gross profit increased, in
dollars, for the three and nine months periods of 1999, overall merchandise
margin percentages decreased for such periods because the Company's increased
sales of cigarettes and beer during those periods were greater than its
increased sales of higher margin products.
OTHER INCOME AND EXPENSES
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. Miscellaneous
revenues increased by $425,000 and $645,000, or 20.1% and 9.2%, respectively,
for the three and nine month periods in 1999, respectively, when compared to the
corresponding periods in 1998. Miscellaneous revenues for the three and nine
month periods rose because the Company operated additional stores in 1999,
offset in part by a reduction in money order fee income.
Direct store expenses increased in the third quarter and first nine months of
1999 by $2,216,000 (19.7%) and $4,621,000 (13.9%), respectively, compared to
corresponding periods in the prior year. The primary reason was attributable to
operating the 25 additional stores acquired in February 1999, repair and
maintenance expense, and increased store-level payroll and related costs.
General and administrative expenses decreased by $501,000 (13.1%) and by
$784,000 (6.9%) in the three and nine 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 certain bad debt expenses in 1998 from the Company's money order
activities were not incurred in 1999.
Depreciation and amortization increased by $228,000 (15.1%) in the current
quarter, when compared to the corresponding quarter in 1998. 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. Depreciation and
amortization increased in the year-to-date period by a similar percentage,
17.4%, for the same reason.
Interest income rose from $393,000 in the third quarter of 1998 to $451,000
in the third quarter of 1999, a 14.8% increase, and from $566,000 in the first
nine months of 1998 to $1,095,000 in the first nine months of 1999, a 93.5%
increase. These increases principally resulted from interest income received on
Company's note receivable from FFP Partners. After the close of the third
quarter of 1999, the Company received full repayment for this note. Interest
income should decline in subsequent quarters because such funds are expected to
be invested in assets that will not earn interest income.
Interest expense increased by $712,000 (145.3%) and by $1,852,000 (188.4%)
during the third quarter and first nine months of 1999, when compared to
corresponding periods of 1998. Interest expense increased for several reasons: a
higher level of debt in the first six months of 1999 than in the first six
months of 1998 under the Company's revolving line of credit, interest expense on
the capitalized leases of buildings acquired in the February 1999 acquisition of
stores, indebtedness of $3,812,000 incurred at the end of the second quarter of
1999 in excess of the revolving line of credit paid off at that time, and a
higher interest rate, although fixed, of 9.9% per annum payable on the new debt
instead of a variable prime rate payable on the debt refinanced. The increased
interest expense is expected to continue in the foreseeable future. See
"Liquidity and Capital Resources", below.
As a result of its refinancing of long-term indebtedness in the third
quarter, the Company incurred an extraordinary loss of $375,000, comprised of
various prepayment penalties incurred for the new financing and an expensing
previously unamortized loan costs associated with the debt that was repaid.
LIQUIDITY AND CAPITAL RESOURCES
In October 1999, the Company received payment in full from FFP Partners on a
note payable to the Company in the amount of $13,334,000. At the same time, the
Company repaid a note payable to FFP Partners in the amount of $2,572,000. Net
proceeds in the amount of approximately $10,700,000 were received at that time
by the Company and are providing additional liquidity for the Company. In
connection with that new financing obtained by FFP Partners, the Company amended
its lease agreement for 35 properties by executing a master lease agreement with
a 20-year term and exercised options to extend the term of its existing leases
for another 28 properties for a full 20-year term.
The Company closed a loan to refinance long-term debt of $19,988,000 on the
last business day of its second fiscal quarter of 1999. The new loan of
$23,800,000 was funded at that time, and the loan proceeds were escrowed that
weekend at a title company pending the receipt of confirmation of filing of lien
documents for the new loan. On June 28, 1999, the first day of the third fiscal
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 previously unamortized loan fees
of $375,000, is reflected in the financial statements for the third quarter.
This new loan is expected to provide additional liquid resources in the
fourth 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 is held in escrow until a new line of credit for $10,000,000 is
put into place, which is a requirement made by that lender. The lender has
extended the date for the Company's acquisition of the line of credit until
December 15, 1999, and the Company expects to acquire the line of credit by that
time. 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 are expected bear interest at 1% over
prime with monthly payments of accrued interest.
The Company's working capital at the end of the third quarter of 1999 was
$9,375,000 as compared to a negative $4,557,000 at the end of 1998. The
improvement resulted from several factors: an increase in cash and cash
equivalents of $6,937,000 (72.7%); a $8,919,000 increase (74.9%) in trade
receivables, a $6,249,000 increase (40.5%) in inventories, and a $1,535,000
reduction (10.1%) in money order payables, offset in part by a $8,672,000
increase (53.4%) in accounts payable. These working capital increases resulted
primarily from increased fuel and merchandise prices being reflected in trade
receivables and inventories, 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 third quarter of 1999
of $13,655,000. 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" ISSUE
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
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 is continuing to follow-up
with the above vendors as required. Testing compliance with major vendors is
planned for the remainder of the year. The following reflects management's
assessment of the Company's Y2K state of readiness on September 26, 1999:
Estimated Estimated
Percentage Completion
Completed Date
Phase
Internal IS and Non-IS systems and equipment:
Awareness 96% Dec 1999
Assessment 93% Dec 1999
Remediation 93% Dec 1999
Testing 90% Dec 1999
Contingency planning 85% Dec 1999
Suppliers, customers and third party providers:
Awareness-identify companies 100% n/a
Assessment questionnaire completed by
major suppliers 70% Nov 1999
Assessment review with third party
providers 70% Dec 1999
Review contractual commitments 10% Dec 1999
Risk assessment 90% Dec 1999
Contingency planning 85% Dec 1999
Testing as applicable 90% Dec 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
$650,000 to $750,000, of which about one-half will be capital costs.
Approximately $650,000 of these costs have been incurred to date, and any
remaining costs will be funded through operating cash flow. These costs include
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 the end of the year.
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
Some 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 pressures such as changes in the locations, merchandise offered,
pricing, and other aspects of competitors' operations; increases in cost of fuel
and merchandise sold or reductions in the gross profit realized from such sales;
available product for processing and processing efficiencies at the Company's
fuel terminal; expense pressures relating to operating costs, including labor,
repair and maintenance, and supplies; unexpected outcome of litigation; adverse
liquidity situations; unanticipated general and administrative expenses,
including employee, taxes, insurance, expansion and financing costs; and
unexpected liabilities.
Should one or more of these risks or uncertainties materialize, or should any
underlying assumptions prove incorrect, actual results or outcomes may vary
materially from those described herein as anticipated, believed, estimated,
expected, or intended.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company believes that its operations are subject to insignificant market
risks related to variable interest rates and commodity prices. On the first day
of the third quarter, the Company repaid its primary bank debt in full with the
proceeds of new fixed rate financing. However, the Company is currently pursuing
a new line of credit with interest expense to be calculated according to the
prime rate of interest, which is subject to change. Thus, if that new debt is
put into place, an increase in the prime rate would result in an increase in its
interest expense.
The Company is subject to the market risk of increasing commodity prices and
sometimes is a party to commodity futures and forward contracts to hedge that
risk. Open positions under commodity futures and forward contracts were not
significant at the end of the third quarter of 1999.
EXHIBITS AND REPORTS ON FOR 8-K
Exhibits
27 Financial Data Schedule.
Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FFP Marketing Company, Inc.
Registrant
Date: November 15, 1999 By: /s/John H. Harvison
---------------------------------
John H. Harvison
Chairman and
Chief Executive Officer
Date: November 15, 1999 By: /s/Craig T. Scott
---------------------------------
Craig T. Scott
Vice President - Finance and
Chief Financial Officer
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