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 24, 2000, 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 13, 2000)
<PAGE>
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
(Unaudited)
SEPTEMBER 24, DECEMBER 26,
2000 1999
------------ ------------
ASSETS
Current assets -
Cash and cash equivalents $18,550 $20,868
Investments in stocks and bonds 4,169 3,355
Trade receivables 25,603 18,430
Notes receivable, current portion 1,001 1,003
Receivables from affiliates, current portion 726 878
Inventories 24,376 23,825
Prepaid expenses and other current assets 2,404 2,236
------ ------
Total current assets 76,829 70,595
Property and equipment, net 38,462 40,072
Notes receivable, excluding current portion 3,856 1,059
Environmental reimbursement claim 1,255 1,283
Other assets, net 6,054 5,397
------- --------
Total assets $126,456 $118,406
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -
Current installments of long-term debt $1,240 $1,231
Current installments of capital lease obligations 210 250
Accounts payable 25,826 23,221
Money orders payable 16,022 12,749
Advances from affiliates 1,738 0
Accrued expenses and other current liabilities 19,105 18,747
------- -------
Total current liabilities 64,141 56,198
Long-term debt, excluding current installments 31,244 32,205
Capital lease obligations, excluding current installments 4,361 4,627
Deferred income taxes 2,881 2,365
Other liabilities 1,574 2,046
------- ------
Total liabilities 104,201 97,441
Commitments and contingencies - -
Stockholders' equity -
Common stock ($0.01 par value; 9,000,000 common
shares authorized; 3,818,747 common shares
issued and outstanding) 22,235 22,235
Retained earnings (accumulated deficit) 20 (1,270)
------ ------
Total stockholders' equity 22,255 20,965
------ ------
Total liabilities and stockholders' equity $126,456 $118,406
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except number of shares)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
-------------------- -------------------
SEPT. 24, SEPT. 26, SEPT. 24, SEPT. 26,
2000 1999 2000 1999
--------- -------- -------- --------
Revenues -
Motor fuel $150,482 $101,556 $420,316 $266,766
Merchandise 27,892 30,023 85,837 85,677
Miscellaneous 3,672 2,540 9,313 7,687
------- ------- ------- -------
Total revenues 182,046 134,119 515,466 360,130
Costs and expenses -
Cost of motor fuel 141,764 94,656 396,673 246,165
Cost of merchandise 19,786 21,023 60,268 60,224
Direct store expenses 12,499 13,477 37,893 37,749
General and administrative expenses 3,388 3,323 11,190 10,515
Depreciation and amortization 1,937 1,746 5,397 4,914
------- ------- ------- -------
Total costs and expenses 179,374 134,225 511,421 359,567
Operating income 2,672 (106) 4,045 563
Interest income 399 451 1,116 1,095
Interest expense 1,011 1,202 3,318 2,835
----- ----- ----- -----
Income (loss) before income
taxes and extraordinary items 2,060 (857) 1,843 (1,177)
Deferred income tax expense (benefit) 618 (306) 553 (391)
----- ---- ----- -----
Income (loss) before extraordinary items 1,442 (551) 1,290 (786)
Extraordinary loss (less applicable
income tax benefit of $134) 0 241 0 241
------- ------ ------- ------
Net income (loss) $1,442 $(792) $1,290 $(1,027)
===== ==== ===== =====
Net income (loss) per share -
Basic $0.38 $(0.14) $0.34 $(0.21)
Diluted $0.37 $(0.14) $0.34 $(0.21)
Weighted average number of common
shares outstanding -
Basic 3,819 3,819 3,819 3,819
Diluted 3,851 3,819 3,842 3,819
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except number of shares)
(Unaudited)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 24, SEPTEMBER 26,
2000 1999
------------- ------------
Cash Flows from Operating Activities -
Net income (loss) $1,290 $(1,027)
Adjustments to reconcile net income (loss) to cash
Provided (used) by operating activities -
Depreciation and amortization 5,397 4,914
Deferred income taxes 659 (525)
Extraordinary loss 0 375
Gain (loss) on sales of property and equipment 0 159
Unrealized gain (loss) in trading securities (814) 0
Net change in operating assets and liabilities (2,900) (4,562)
----- -----
Net cash used by operating activities 3,632 (666)
Cash Flows from Investing Activities -
Advances from affiliate 152 829
Additions to property and equipment (3,949) (9,819)
(Increase) decrease in notes receivable (2,633) 425
------ -----
Net cash used by investing activities (6,430) (8,565)
Cash Flows from Financing Activities -
Advances from (payments to) affiliate 1,738 (121)
Borrowing (payments) on debt and capital leases, net (1,258) 19,727
Cash held in escrow for refinancing 0 (3,438)
Net cash provided by financing activities 480 16,168
----- ------
Net increase (decrease) in cash and cash equivalents $(2,318) $6,937
====== =====
Cash and cash equivalents at beginning of period 20,868 9,537
Cash and cash equivalents at end of period $18,550 $16,474
Supplemental Disclosure of Cash Flow Information:
------------------------------------------------
Cash paid for interest $3,318 $2,713
Purchase of inventory and equipment with note to affiliate 0 2,692
See accompanying Notes to Condensed Consolidated Financial Statements.
<PAGE>
FFP Marketing Company, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 22, 2000
(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 24, 2000, 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 24, 2000, 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
26, 1999, 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 24, 2000, and as discussed below.
2. Income (Loss) per Share
Basic net income (loss) per share is net income (loss) divided by the
weighted average number of common shares outstanding for the year. Diluted net
income per share is net income divided by the weighted average number of common
shares outstanding for the year plus potentially dilutive common shares. The
following table reconciles the denominators of the basic and diluted net income
(loss) per share calculations for the three-month and nine-month periods ended
September 24, 2000, and September 26, 1999:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPT 24, SEPT 26, SEPT 24, SEPT 26,
2000 1999 2000 1999
----- ----- ----- -----
(In thousands)
Weighted average number of common shares
outstanding 3,819 3,819 3,819 3,819
Effect of dilutive options 32 0 23 0
----- ----- ----- -----
Weighted average number of common shares
outstanding, assuming dilution 3,851 3,819 3,842 3,819
===== ===== ===== =====
Outstanding options to acquire 197,000 shares and 205,000 shares were
excluded from the diluted computation for the three and nine months ended
September 24, 2000, respectively, because the effect would have been
anti-dilutive. Outstanding options to acquire 202,000 shares were excluded from
the diluted computation for both the three and nine months ended September 26,
1999, because the effect would have been anti-dilutive.
<PAGE>
3. Operating Segments
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in 1998 for reporting information about its
operating segments. The Company and its subsidiaries principally engage in two
operating segments: (a) 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 (b) 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 24, 2000, and September 26, 1999:
RETAIL AND TERMINAL
WHOLESALE OPERATIONS ELIMINATIONS CONSOLIDATED
---------- ---------- ------------ ------------
(In thousands)
NINE MONTHS ENDED SEPT. 24, 2000
--------------------------------
Revenues from external sources $446,047 $69,419 $0 $515,466
Revenues from other segment 0 26,600 (26,600) 0
Depreciation and amortization 4,959 438 0 5,397
Income (loss) before income taxes 1,650 193 0 1,843
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
and extraordinary items (744) (433) 0 (1,177)
Third Quarter 2000
------------------
Revenues from external sources $152,343 $29,702 $0 $182,045
Revenues from other segment 0 10,820 (10,820) 0
Depreciation and amortization 1,796 141 0 1,937
Income (loss) before income taxes 1,821 239 0 2,060
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
and extraordinary items (810) (47) 0 (857)
4. Commitments and Contingencies
Effective in April 2000, the Company elected to discontinue carrying
workers' compensation insurance in the State of Texas, although it does carry
insurance against losses related to claims for failure to provide a safe work
environment. The Company's liability for claims under this policy is limited to
$100,000 per occurrence. In other states, the Company is covered for workers'
compensation through paid loss retrospective policies. Accruals for estimated
claims have been recorded for the third quarter of 2000.
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 any such known matters will
not have a materially adverse 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, L.P., December 1986 Operation of convenience stores
a Delaware limited partnership and other retail outlets
Direct Fuels, L.P., a Texas December 1988 Operation of fuel terminal and
limited partnership wholesale fuel
FFP Financial Services, L.P., September 1990 Sale of money order services
a Delaware limited partnership and supplies
Practical Tank Management, September 1993 Underground storage tank
Inc., a Texas corporation monitoring
FFP Transportation, L.L.C., September 1994 Ownership of tank trailers and
a Texas limited liability other
company
FFP Money Order Company, December 1996 Sale of money orders through
Inc., a Nevada agents
corporation
RESULTS OF OPERATIONS
---------------------
The Company earned $1,442,000 in the third quarter of 2000, showing
considerable improvement when compared to a $792,000 net loss in the third
quarter of 1999. The Company's net income of $1,290,000 in the first nine months
of 2000 compared favorably to a net loss of $1,027,000 in first nine months of
1999. Major components comprising the profitability of the Company in the third
quarter and first nine months of 2000 were as follows (adjusted for effects
income tax expense or benefit):
Third Quarter Year-to-Date
------------- ------------
(in thousands)
Results from ongoing operations $882 $837
Lawsuit settlement 485 485
Net loss on equity securities (682) (1,803)
Gain on sale/conversion of convenience stores 757 1,771
---- -----
Net income $1,442 $1,290
===== =====
<PAGE>
FUEL SALES AND MARGINS
----------------------
THIRD QUARTER YEAR-TO-DATE
------------------------------- ----------------------------
2000 1999 CHANGE PERCENT 2000 1999 CHANGE PERCENT
---- ---- ------ ------- ---- ---- ------ -----
(In thousands, except average prices and per gallon data)
Fuel sales $150,482 $101,556 $48,926 48% $420,316 $266,766 $153,550 58%
Fuel margin $8,718 $6,900 $1,818 26% $23,643 $20,601 $3,042 15%
Gallons sold
Retail 62,227 67,168 (4,941) (7%) 185,792 197,910 (12,118)(6%)
Wholesale 25,341 30,511 (5,170) (17%) 73,546 81,753 (8,207)(10%)
Terminal 25,800 613 25,187 4109% 63,761 1,111 62,650 5639%
------ ------ ------ ----- ------ ----- ------ ----
Total 113,368 98,292 15,076 15% 323,099 280,774 42,325 15%
Average per gallon
sales price $1.33 $1.03 $0.30 29% $1.30 $0.95 $0.35 37%
Margin per gallon (cents)
Retail 11.3 8.8 2.5 28% 10.6 9.2 1.4 15%
Wholesale 2.0 1.8 0.2 11% 2.0 1.8 0.2 11%
Terminal 3.0 6.0 (3.0) (50%) 2.8 5.9 (3.1) (53%)
Motor fuel sales, both in dollars of revenue and in gallons sold,
significantly increased in the third quarter and first nine months of 2000 over
motor fuel sales in the corresponding periods of 1999. The Company sold
113,368,000 gallons of motor fuel in the third quarter of 2000, a 15% increase
over the third quarter of 1999, and sold 323,099,000 gallons of motor fuel in
the first nine months of 2000, a 15% increase over the comparable 1999 period.
Motor fuel sales, in dollars, increased by $48,926,000 (48%) and $153,550,000
(58%), in the third quarter and first nine months of 2000, respectively,
compared to sales in the corresponding periods of the prior year. Increases in
the dollar amount of motor fuel sales were impacted by the 29% and 37% rise in
the average sales price of retail motor fuel for the periods presented. Motor
fuel sales, both in dollars and gallons sold, also increased for the first nine
months of 2000, compared to the corresponding period of the prior year, as a
result of sales from 25 additional convenience stores or truck stops acquired in
February 1999.
Fuel margin, in dollars, increased in the third quarter and first nine
months of 2000 by $1,818,000 (26%) and $3,042,000 (15%), compared to fuel margin
in the same periods of the previous year. The increased fuel margin resulted
from higher retail and wholesale margin per gallon and greatly increased volumes
sold at the terminal. Sales from the 25 convenience stores or truck stops
acquired in February 1999 also contributed to the Company's additional fuel
margin in the first nine months of 2000.
Retail motor fuel sales continued to be subject to competitive pressure
from new retail gasoline outlets located in the Company's market areas at
supermarkets, discount stores, and low price gasoline marketers. As a result,
retail motor fuel sales declined by 4,941,000 gallons (7%) in the third quarter
of 2000 and by 12,118,000 gallons (6%) in the first nine months of 2000,
compared to retail motor fuel sales in the comparable periods of the prior year.
Retail motor fuel margins, however, improved in the third quarter of 2000 by 2.5
cents per gallon (28%) and by 1.4 cents per gallon (15%) in the first nine
months of 2000, compared to corresponding periods of 1999. These increases in
retail margin contributed significantly to the improvement in earnings of the
Company for both periods presented.
Wholesale fuel sales in the third quarter of 2000, in gallons, decreased by
5,170,000 gallons (17%), compared to the third quarter of 1999, while the per
gallon margin on the wholesale sales improved by 0.2 cents per gallon (11%). In
the first nine months of 2000, wholesale fuel sales decreased by 8,207,000
gallons (10%), compared to the first nine months of 1999, while the per gallon
margin on the wholesale sales increased by 0.2 cents per gallon (11%).
Terminal fuel sales in the third quarter of 2000, in gallons, greatly
increased by 25,187,000 gallons (4109%), compared to the third quarter of 1999,
while the per gallon margin on the terminal fuel sales declined by 3.0 cents per
gallon (50%). In the first nine months of 2000, terminal fuel sales greatly
increased by 62,650,000 gallons (5639%), compared to the first months of 1999,
while the per gallon margin on the terminal fuel sales decreased by 3.1 cents
per gallon (53%). These greatly increased volumes resulted from the Company's
new blending activity at the terminal, which more than made up for the lower
margins per gallon.
In pursuit of alternative strategies for profit improvement, the Company
has expanded both its wholesale sales effort and its processing activities at
the terminal facility. Through its motor fuel blending and transmix processing
at the terminal, the Company sells wholesale motor fuel on a competitive basis
to many well-known marketers. The increased volumes of fuel being processed at
the terminal primarily resulted from a connection made at the terminal late in
1999 to a pipeline transporting fuel from the Texas Gulf Coast.
The retail versus wholesale (including the terminal) sales mix during the
third quarter of 2000, in gallons, decreased to a retail percentage of 55%,
compared to retail percentage of 68% in the same quarter of 1999. For the first
nine months of 2000, the retail versus wholesale (including the terminal) sales
mix, in gallons, declined to a 58% retail percentage from a 70% retail
percentage in the same period in 1999. These decreases in the proportion of
retail sales to total sales primarily resulted from increasing wholesale sales
but were also attributable to declining retail sales.
MERCHANDISE SALES AND MARGINS
-----------------------------
THIRD QUARTER YEAR-TO-DATE
------------------------- ---------------------------
2000 1999 CHANGE PERCENT 2000 1999 CHANGE PERCENT
---- ---- ------ ------- ---- ---- ------ -------
Mdse sales $27,892 $30,023 ($2,131) (7%) $85,837 $85,677 $160 0%
Mdse margin 8,106 9,000 (894) (10%) 25,569 25,453 116 0%
Mdse margin percentage,
convenience stores
and truck stops 27.2% 28.4% (1.2%) (4.2%) 28.2% 28.3% (0.1%)(0.4%)
Average weekly mdse sales -
Convenience stores $10,381 $11,185 ($804) (7%) $11,752 $11,011 $741 7%
Truck stops 17,669 17,284 385 2% 17,533 17,064 469 3%
Merchandise sales decreased by $2,131,000 in the third quarter of 2000
(7%), compared to the third quarter of 1999, and increased by $160,000 for the
first nine months of 2000 (0%), compared to the same period of the prior year. A
principal factor for the third quarter decrease was that the Company operated an
average of 23 fewer convenience stores in the third quarter of 2000 than in same
quarter of 1999 as a result of the sale/conversion of Company-operated stores to
gas-only outlets. Merchandise sales increased for the nine-month period of 2000
because higher cigarette prices offset the less dramatic impact of operating
fewer convenience stores over the longer period.
Merchandise gross profit, or margin, decreased by $894,000 (10%) and
increased by $116,000 (0%) for the third quarter and nine-month periods of 2000,
respectively, when compared to the corresponding periods of the prior year. As
mentioned above, the company operated 23 fewer convenience stores during the
third quarter, which resulted in the margin decline in the third quarter as well
as the merchandise sales decline.
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, gains on asset sales, gains or losses on
investments, and various other types of income. Miscellaneous revenues increased
by $1,132,000 (45%) in the third quarter of 2000, and improved by $1,626,000
(21%) for the first nine months of 2000, when compared to the corresponding
periods of 1999. In order to reduce the risk of motor fuel price increases
during an increasing fuel price environment, the Company engaged in certain
motor fuel financial transactions that resulted in net gains of $243,000 in the
third quarter of 2000 and a year-to-date net loss of $769,000. The Company also
incurred net gains of $1,081,000 in the third quarter of 2000 and $2,531,000 in
the first nine months of 2000 from the sale or conversion of 13 and 30
convenience stores to gas-only outlets, respectively. These gains were offset in
part by net losses of $456,000 and $978,000 in stock and bond investments during
the third quarter and first nine months of 2000, respectively (exclusive of
interest income and discount accretion income of $276,000 and $894,000 for the
three and nine month periods, respectively). The Company did not incur any gains
on sale/conversion of convenience stores or on the sale of stock and bond
investments during the corresponding periods of 1999.
Direct store expenses in the third quarter of 2000 decreased by $978,000
(7%), compared to the same quarter in 1999, largely as a result of operating 23
fewer convenience stores in the third quarter of 2000. Direct store expenses for
the nine-month period increased by $144,000 (0%), primarily as a result of
additional payroll costs during that period.
General and administrative expenses increased by $65,000 (2%) and $675,000
(6%) in the three and nine month periods of 2000, respectively, compared to the
corresponding periods of 1999. These increases resulted largely from increased
fuel transportation and terminal activity and additional legal expenses, which
were offset by settlement proceeds received to settle litigation won by the
Company at trial in the third quarter of 2000 in a suit to recover bad debt
losses related to money order receivables from a third party money order agent
that had been expensed in 1998. The Company received total settlement proceeds
of $833,000, and $693,000 of that amount was recorded in income in the third
quarter of 2000 because $140,000 of that amount had been previously recorded as
income in 1999.
Depreciation and amortization increased by $191,000 (11%) in the third
quarter of 2000, compared to the corresponding quarter of 1999. For the
nine-month period in 2000, compared to the corresponding period in 1999,
depreciation and amortization increased by $483,000 (10%). Two factors caused
these increases: (a) additional depreciation expense attributable to 1999
property and equipment additions, and (b) a third quarter of 2000
reclassification of $128,000 from interest expense to amortization expense
regarding previously capitalized loan fees. This amortization expense had been
recorded as interest expense in previous quarters. The above mentioned 1999
property and equipment additions were primarily 14 convenience store buildings
subject to capital leases entered into in February 1999 and fixtures and
equipment at 25 stores acquired at the same time.
Interest income decreased from $451,000 in the third quarter of 1999 to
$399,000 in the third quarter of 2000 (12%) but increased from $1,095,000 in the
first nine months of 1999 to $1,116,000 in the first nine months of 2000 (2%).
The repayment in October 1999 by FFP Partners of all indebtedness it owed to the
Company resulted in the decrease in the Company's interest income in the third
quarter of 2000. The slight year-to-date increase in interest income was due to
interest income earned on the Company's bond investments and interest income
earned on new notes receivable generated from the sale/conversion of convenience
stores to gas-only operators. Purchasers of these businesses are generally
required to make a down payment of 25% of the total sales price, with the
balance of the sales price being payable pursuant to an interest-bearing
promissory note. Interest income is expected to increase in the future as more
stores are converted to gas-only stores with financing provided by the Company.
Interest expense decreased by $191,000 (16%) and increased by $483,000
(17%) during the third quarter and first nine months of 2000, respectively, when
compared to corresponding periods of 1999. This third quarter decrease was
caused by the above-mentioned reclassification of the amortization of loan fees
from interest expense to amortization expense. The year-to-date increase
resulted from higher debt levels in the first nine months of 2000 than in 1999.
Although interest expense has increased as a result of additional indebtedness
incurred in 1999, the Company did obtain fixed interest rates for its long-term
debt, which will be beneficial in the future if interest rates continue to rise
as they have since the loans were closed. In future years, these loan payments
will also convert slowly towards a higher percentage of principal payments and a
lower percentage of interest payments.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The majority of the Company's working capital is provided from three
sources: (a) liquid, short-term investments from funds generated by the
repayment in October 1999 by FFP Partners of its note to the Company, (b) cash
flows generated from its operating activities, and (c) borrowings under its
revolving line of credit. The Company believes that these investments, operating
activities, and short-term working capital facilities will provide sufficient
liquidity to fund its operations, capital expenditures, and service debt
requirements, although the rise in motor fuel prices in the last year has
impacted the Company's available liquidity. Actual capital expenditure funding
will be dependent on the level of cash flow generated from operating activities
and the funds available from financings.
In December 1999, the Company obtained a revolving line of credit providing
for borrowings of up to $10,000,000, with the amount available at any time
limited to a borrowing base equal to 80% of certain of its trade receivables
plus 60% of its inventory at the terminal. The portion of any borrowings under
the facility exceeding $5,000,000 is limited to 140% of the net value of stock
and bond investments in the Company's trading account at a brokerage firm. At
September 24, 2000, the borrowing base was $13,917,000, and the net value of the
Company's securities at that particular brokerage firm on that date was
$5,713,000. The Company's borrowings under the revolving credit facility on that
date were $0. The revolving credit facility bears interest at the lender's prime
rate plus one percentage point, payable monthly on amounts borrowed, and matures
in December 2002. The loans are subject to a Loan Agreement and a Security
Agreement between the lender, the Company and two of its subsidiaries. The
agreement contains numerous, but typical, restrictive covenants including a
financial covenant relating to the maintenance of a specified fixed charge
coverage ratio of 1.25 to 1, all as defined in the agreement. The loan is
secured by all of the Company's trade accounts receivables and its inventory at
the terminal.
Subject to obtaining satisfactory deal terms, the Company in 2000 intends
to increase its sales of convenience store operations to independent operators
while retaining a motor fuel concession at those locations. The Company refers
to such retail operations as its "gas-only" stores. It has identified numerous
Company-operated convenience stores that it is attempting to convert to gas-only
stores in such a manner. In the third quarter and first nine months of 2000, the
Company closed on the sale or conversion of 13 and 30 of those stores,
respectively. Those sales generated gains on sale of $1,081,000 and $2,531,000
in the third quarter and first nine months of 2000, respectively. Typically, the
sales are made with the buyer providing 25% of the sales price in cash and
paying the remainder over 60 months with interest. In addition, sales of other
convenience stores were under contract at the end of the third quarter and are
expected to close in the fourth quarter. The anticipated benefits of making such
conversions to gas-only outlets are not only to obtain one-time gains on such
sales, but also, more importantly, to improve net earnings of the Company on an
ongoing basis from reduced general and administration expenses, lower theft
losses, reduced merchandise inventory financing costs, lesser legal expenses
related to store operations, and lower store-level salaries and other direct
store expenses.
In addition, the Company may consider the outright sale of certain
convenience stores and truck stops. The Company may or may not purchase
additional convenience stores in 2000 and beyond as the convenience store
industry goes through as period of greater competition and consolidation. Of
course, any such dispositions or acquisitions could result in a material impact
upon the Company's financial results and liquidity.
Over the last few years, the Company's money order sales have increased
significantly. For example, money order payables at the end of fiscal year 1996
were $7,809,000, compared to money order payables of $16,022,000 at September
24, 2000. Money order payables represent those sales of money orders for which
the payee of the money order has not yet requested payment. The Company collects
money order receipts on a daily basis on sales of money orders made by its own
stores, and the Company relies on receiving timely payment from its money order
sales agents at stores not operated by the Company. The Company is subject to
the risk of not receiving money order payments on a timely basis from such third
party money order agents, although the Company believes that it has sufficiently
strong controls in its money order operations.
The Company had positive working capital of $12,687,000 at September 24,
2000, compared to $14,397,000 at the end of 1999. In past years, the Company has
operated its business with minimal or even negative working capital, principally
because most of its sales are cash sales and it receives payment terms from
vendors. Consequently, management believes that its current liquidity,
internally generated funds, use of trade credit, and available line of credit
will allow its operations to be conducted in a customary manner.
YEAR "2000 " ISSUES
-------------------
Over the past several years, the Company has prepared for the possible
disruptions that might have resulted from the date change to year 2000 ("Y2K").
No significant Y2K problems have been experienced to date, and the Company
believes that no material exposure to Y2K issues exists. Total Y2K expenditures
were $700,000, of which $350,000 was capitalized.
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 is subject to market risks related to variable interest rates
and commodity prices. The interest rate calculated under the Company's line of
credit facility is based on the prime rate of interest, which is subject to
change and exposes the Company to the possibility of increasing interest rates.
However, the Company did not borrow under that facility during the first nine
months of 2000 in amounts that would have made a material interest rate risk.
Such borrowings in the future could increase, however, in which case the Company
could be subject to a greater risk of increasing interest rates.
The Company is also subject to market risks related to increasing fuel
prices and sometimes attempts to reduce that risk by purchasing commodity
futures and forward contracts. Such attempts to reduce commodity risk are also
subject to risk because the commodities under the financial contracts are
normally not of the same grade or location of fuel as that owned by the Company
in its business. Open positions under these futures and forward contracts were
not significant at September 24, 2000.
LEGAL PROCEEDINGS
-----------------
A trial in the case of Xavier Duenez, et al., v. FFP Operating Partners,
L.P, d/b/a Mr. Cut Rate #602, et al., began in May 2000 in the County Court of
Law No. 1, Calhoun County, Texas. In the case, members of the Duenez family sued
the Company and the driver of a pickup truck who had purchased beer from a
Company convenience store just prior to causing an accident, which injured
members of the Duenez family. The trial court dismissed the pickup truck driver
from the case, and the Company remained as the sole defendant in the trial. The
Company was alleged to have caused the damages to the family as a result of
certain alleged violations of liquor sales laws. After a jury verdict, the court
issued a judgment against the Company in the amount of $35 million. The case is
now being appealed to the Corpus Christi Court of Appeals in the State of Texas.
The Company expects to be fully covered by insurance for any liabilities that
exceed its deductible, which has already been paid.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Company held its 2000 annual shareholder meeting in Fort Worth, Texas,
on August 3, 2000. J.D. St. Clair and John D. Harvison were re-elected, and Tom
Coleman was elected, to the Company's Board of Directors at that meeting. The
voting results by persons present at the meeting in person or by proxy were as
follows:
NOMINEES
-----------------------------------------------------------
ROBERT J. BYRNES MICHAEL TRIANTAFELLOU TOM M. COLEMAN
---------------- --------------------- --------------
Votes Percent Votes Percent Votes Percent
----- ------- ----- ------- ----- -------
For 3,567,838 95.2% 3,567,938 95.2% 3,556,138 94.9%
Withheld 180,461 4.8% 180,361 4.8% 192,161 5.1%
Abstain 0 0.0% 0 0.0% 0 0.0%
Broker non-votes 0 0.0% 0 0.0% 0 0.0%
--------- ----- --------- ----- --------- ------
Totals 3,818,747 100.0% 3,818,747 100.0% 3,818,747 100.0%
========= ====== ========= ===== ========= ======
The other directors, whose terms of office as a director continued after
the August 3, 2000 meeting, were John H. Harvison, J.D. St. Clair, John D.
Harvison, Garland McDonald, and E. Michael Gregory.
In addition, the shareholders at the August 3, 2000 meeting approved the
Company's Stock Option Plan previously adopted by the Board of Directors and
described in the Proxy Statement for that meeting. The voting results for the
proposition by persons present at the meeting in person or by proxy were as
follows:
Votes Percent
--------- -------
(in thousands)
For 1,878,107 50.1%
Against 213,824 5.7%
Abstain 5,171 0.1%
Broker non-votes 1,721,645 44.1%
--------- -----
Total 3,748,299 100.0%
========= ======
OTHER INFORMATION
-----------------
On November 10, 2000, the Board of Directors elected Joseph F. Leonardo as
a new director of the Company to fill the vacancy on the Board created by the
resignation of Tom M. Coleman. Mr. Leonardo was also then selected by the Board
to serve on its audit committee. Mr. Coleman tendered his resignation earlier in
November 2000, when he advised the Board that he had taken an executive position
at Vista Stores L.L.C., a privately held convenience store chain headquartered
in Dallas, Texas.
Joseph F. Leonardo was selected in 1999 as one of the convenience store
industry's "30 Most Influential People" by the Convenience Store News magazine.
The 1994 Chairman of the National Association of Convenience Stores, Mr.
Leonardo now serves as President and Chief Executive Officer of Leonardo
Management Corporation provides strategic planning, market positioning, and
other sales and marketing consulting services. Mr. Leonardo also operates
Convenience Directions, which publishes Info Marketing, a convenience store
industry newsletter distributed to 10,000 convenience store executives. He also
serves as executive vice president, marketing, for the National Advisory Group,
Convenience/Petroleum Marketers Association. Prior to forming Leonardo
Management in 1992, Mr. Leonardo had served for over 20 years in various
executive positions with several large, well-known convenience store chains.
Joseph F. Leonardo has also been a Trust Manager of FFP Real Estate Trust since
December 1997.
<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: November 13, 2000 By: /s/John H. Harvison
---------------------------------
John H. Harvison
Chairman and
Chief Executive Officer
Date: November 13, 2000 By: /s/Craig T. Scott
---------------------------------
Craig T. Scott
Vice President - Finance and
Chief Financial Officer
