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 June 25, 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 August 8, 2000)
<PAGE>
FFP MARKETING COMPANY, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except number of shares)
(Unaudited)
JUNE 25, DECEMBER 26,
2000 1999
------- ----------
ASSETS
Current assets -
Cash and cash equivalents $15,401 $20,868
Investments in stocks and bonds 4,234 3,355
Trade receivables 26,924 18,430
Notes receivable, current portion 1,013 1,003
Receivables from affiliates, current portion 742 878
Inventories 26,366 23,825
Prepaid expenses and other current assets 2,284 2,236
----- -----
Total current assets 76,964 70,595
Property and equipment, net 39,269 40,072
Notes receivable, excluding current portion 2,485 1,059
Environmental reimbursement claim 1,243 1,283
Other assets, net 5,397 5,397
----- -----
TOTAL ASSETS $125,358 $118,406
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities -
Current installments of long-term debt $1,244 $1,231
Current installments of capital lease obligations 210 250
Accounts payable 29,332 23,221
Money orders payable 15,225 12,749
Advances from affiliates 1,368 0
Accrued expenses and other current liabilities 17,276 18,747
------ ------
Total current liabilities 64,655 56,198
Long-term debt, excluding current installments 31,549 32,205
Capital lease obligations,
excluding current installments 4,454 4,627
Deferred income taxes 2,157 2,365
Other liabilities 1,729 2,046
----- -----
Total liabilities 104,544 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
Accumulated deficit (1,421) (1,270)
------ ------
Total stockholders' equity 20,814 20,965
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $125,357 $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 per share data)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- ------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
------ ------ ------ ------
REVENUES -
Motor fuel $146,401 $92,523 $269,833 $165,210
Merchandise 29,266 29,896 57,946 55,654
Miscellaneous 2,133 2,563 5,642 5,147
----- ----- ----- -----
Total revenues 177,800 124,982 333,421 226,011
COSTS AND EXPENSES -
Cost of motor fuel 137,401 85,123 254,909 151,509
Cost of merchandise 20,287 21,421 40,483 39,201
Direct store expenses 12,516 12,720 25,393 24,272
General and administrative expenses 4,041 3,418 7,801 7,192
Depreciation and amortization 1,736 1,669 3,460 3,168
----- ----- ----- -----
Total costs and expenses 175,981 124,351 332,046 225,342
------- ------- ------- -------
OPERATING INCOME 1,819 631 1,375 669
Interest income 367 318 717 644
Interest expense 1,139 1,002 2,309 1,633
----- ----- ----- -----
INCOME (LOSS) BEFORE INCOME TAXES 1,047 (53) (217) (320)
Deferred income tax expense (benefit) 315 (8) 65 (85)
--- -- -- ---
NET INCOME (LOSS) $732 $(45) $(152) $(235)
==== ==== ===== =====
NET INCOME (LOSS) PER SHARE -
Basic 0.19 (0.01) (0.04) (0.06)
Diluted 0.18 (0.01) (0.04) (0.06)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING -
Basic 3,819 3,819 3,819 3,819
Diluted 3,985 3,819 3,819 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 for supplementary disclosures)
(Unaudited)
SIX MONTHS ENDED
-------------------
JUNE 25, JUNE 27,
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES -
Net income (loss) $(152) $(235)
Adjustments to reconcile net income (loss) to cash
Provided (used) by operating activities -
Depreciation and amortization 3,460 3,168
Deferred income tax benefit (65) (85)
Gain (loss) on sales of property and equipment (1,251) 77
Increase in stocks and bonds (879) 0
Net change in operating assets and liabilities (4,386) (7,725)
------ ------
Net cash used by operating activities (3,273) (4,800)
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES -
Repayments of advances to affiliate 136 714
Purchases of property and equipment (2,832) (8,917)
Increase (decrease) in notes receivable (10) 311
----- -----
Net cash used by investing activities (2,706) (7,892)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES -
Advances from affiliate 1,368 0
Borrowing (payments) on debt and capital leases, net (856) 39,857
Cash held in escrow for refinancing 0 (23,646)
----- -------
Net cash provided by financing activities 512 16,211
----- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS $(5,467) $3,519
Cash and cash equivalents at beginning of period 20,868 9,537
Cash and cash equivalents at end of period $15,401 $13,056
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest $2,309 $1,711
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
June 25, 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 June 25, 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
June 25, 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 six months ended
June 25, 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. At June
27, 1999, outstanding options to acquire 201,667 common shares were excluded
from the diluted computation because the effect would have been anti-dilutive.
The following table reconciles the denominators of the basic and diluted net
income (loss) per share calculations for the three-month and six-month periods
ended June 25, 2000, and June 27, 1999:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
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 166 0 0 0
Weighted average number of common shares
outstanding, assuming dilution 3,985 3,819 3,819 3,819
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 six-month periods ended
June 25, 2000, and June 27, 1999:
RETAIL AND TERMINAL
WHOLESALE OPERATIONS ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------
(In thousands)
Six Months Ended June 25, 2000
Revenues from external sources $293,704 $39,717 0 $333,421
Revenues from other segment 0 15,780 (15,780) 0
Depreciation and amortization 3,163 297 0 3,460
Income (loss) before income taxes (171) (46) 0 (217)
Six Months Ended June 27, 1999
Revenues from external sources $225,581 $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)
Second Quarter 2000
Revenues from external sources $153,260 $24,540 0 $177,800
Revenues from other segment 0 8,239 (8,239) 0
Depreciation and amortization 1,586 150 0 1,736
Income (loss) before income taxes 1,283 (236) 0 1,047
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)
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 are 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 second 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 $732,000 in the second quarter of 2000, showing
considerable improvement when compared to a net loss of $45,000 in the second
quarter of 1999. The Company's net loss of $152,000 in the first half of 2000
compared favorably to a net loss of $235,000 in first half of 1999.
FUEL SALES AND MARGINS
----------------------
SECOND QUARTER YEAR-TO-DATE
---------------------------- -----------------------------
2000 1999 CHANGE PERCENT 2000 1999 CHANGE PERCENT
---- ---- ------ ------- ---- ---- ------ ------
(In thousands, except average prices and per gallon data)
Fuel sales $146,401 $92,523 $53,878 58% $269,833 $165,210 $104,623 63%
Fuel margin $9,001 $7,400 $1,601 22% $14,925 $13,701 $1,224 9%
Gallons sold
Retail 62,550 68,004 (5,454) (8%) 122,183 130,742 (8,559) (7%)
Wholesale 26,881 23,922 2,959 12% 49,587 46,362 3,225 7%
Terminal 23,181 221 22,960 10389% 37,961 498 37,463 7523%
Total 112,612 92,147 20,465 22% 209,731 177,602 32,129 18%
Average per gallon
sales price $1.30 $1.00 $0.30 30% $1.29 $0.93 $0.36 39%
Margin per gallon (cents)
Retail 11.0 9.6 1.4 15% 10.3 9.4 0.9 10%
Wholesale 1.6 1.7 0.1 (6%) 2.8 1.8 1.0 56%
Terminal 1.7 6.0 (4.3) (72%) 2.6 5.9 (3.3)(56%)
Motor fuel sales, both in dollars of revenue and in gallons sold, greatly
increased in the second quarter and first half of 2000 over its motor fuel sales
in the corresponding periods of 1999. The Company sold 112,612,000 gallons of
motor fuel in the second quarter, a 22% increase over the second quarter of
1999, and sold 209,731,000 gallons of motor fuel in the first half of 2000, an
18% increase over in the comparable 1999 period. Motor fuel sales, in dollars,
increased by $53,878,000 (58%) and $104,623,000 (63%), in the second quarter and
first half 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 30% and 39% 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 half of 2000 as a result of sales from 25
additional convenience stores or truck stops acquired in February 1999.
Fuel margin, in dollars, increased in the second quarter and first half of
2000 by $1,601,000 (22%) and $1,224,000 (9%), compared to fuel margin in the
same periods of the previous year. Sales from the 25 convenience stores or truck
stops acquired in February 1999 contributed to the Company's additional fuel
margin in the first half 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 5,454,000 gallons (8%) in the second quarter
of 2000 and by 8,559,000 gallons (7%) in the first half of 2000. Retail motor
fuel margins, however, improved in the second quarter of 2000 by 1.4 cents per
gallon (15%) and by 0.9 cents per gallon (10%) in the first half 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 second quarter of 2000, in gallons, increased
by 2,959,000 gallons (12%), compared to the second quarter of 1999, while the
per gallon margin on the wholesale sales declined by 0.1 cents per gallon (6%).
In the first half of 2000, wholesale fuel sales increased by 3,225,000 gallons
(7%), compared to the first half of 1999, while the per gallon margin on the
wholesale sales increased by 1.0 cents per gallon (56%).
Terminal fuel sales in the second quarter of 2000, in gallons, increased by
22,960,000 gallons (10389%), compared to the second quarter of 1999, while the
per gallon margin on the terminal fuel sales declined by 4.3 cents per gallon
(72%). In the first half of 2000, terminal fuel sales increased by 37,463,000
gallons (7523%), compared to the first half of 1999, while the per gallon margin
on the terminal fuel sales decreased by 3.3 cents per gallon (56%). 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
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
second quarter of 2000, in gallons, decreased to a retail percentage of 56%,
compared to retail percentage of 74% in the second quarter of 1999. For the
first half of 2000, the retail versus wholesale (including the terminal) sales
mix, in gallons, declined to a 58% retail percentage from a 74% retail
percentage in the first half of 1999. The decreases in the proportion of retail
sales to total sales primarily resulted from increasing wholesale sales instead
of decreasing retail sales.
MERCHANDISE SALES AND MARGINS
-----------------------------
SECOND QUARTER YEAR-TO-DATE
------------------------- ---------------------------
2000 1999 CHANGE PERCENT 2000 1999 CHANGE PERCENT
---- ---- ------ ------- ---- ---- ------ -------
(In thousands, except average weekly sales data)
Merchandise sales $29,267 $29,896 $(629) (2%) $57,946 $55,654 $2,292 4%
Merchandise margin 8,979 8,475 504 6% 17,463 16,453 1,010 6%
Mdse margin percentage,
convenience stores
and truck stops 30.7% 28.3% 2.4% 8% 30.1% 29.6% 0.5% 2%
Average weekly
mdse sales -
Convenience stores $11,488 $11,183 $305 3% $11,081 $10,767 314 3%
Truck stops 17,053 16,834 219 1% 16,251 16,945 (694) (4%)
Merchandise sales decreased by $629,000 in the second quarter of 2000 (2%),
compared to the second quarter of 1999, and increased by $2,292,000 for the
first half of 2000 (4%), compared to the same period of the prior year. A
principal factor for the changes was that the Company operated an average of
11.3 fewer convenience stores in the second quarter of 2000 than in same quarter
of 1999, but operated an average of 2.4 more convenience stores in the first
half of 2000 than in the first half of 1999. The second quarter decline in the
number of convenience stores resulted from the conversion of Company-operated
stores to gas-only outlets during that period.
Merchandise gross profit, or margin, increased by $504,000 (6%) and
$1,010,000 (6%) for the three and six month periods of 2000, respectively, when
compared to the corresponding periods of the prior year. Although merchandise
sales decreased in the second quarter of 2000, the average merchandise margin
increased. In the first half of 2000, merchandise sales and the average
merchandise margin both increased. The Company's average merchandise margin
improvement resulted largely from increased margins on cigarette sales.
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 declined
by $430,000 (17%) in the second quarter of 2000, but improved by $495,000 (10%)
for the first half of 2000, when compared to the corresponding periods of 1999.
Miscellaneous revenues for the second quarter decreased partly as a result of
the Company's operation of 11.3 fewer convenience stores, on average, than in
the second quarter in 1999 and from losses on stock and bond investments. In
order to reduce the risk of motor fuel price increases during an increasing fuel
price environment, the Company engaged in certain financial transactions which
resulted in exchange and motor fuel trading losses of $171,000 and $1,012,000 in
the second quarter and in the first half of 2000, respectively. The decline was
offset in part by gains of $1,240,000 in the second quarter of 2000 from the
conversion of 13 convenience stores to gas-only outlets. The increase in
miscellaneous revenues in the first half of 2000 was largely attributable to
gains of $1,450,000 recognized on the conversion of 17 convenience stores to gas
only outlets. These gains were partially offset by losses in stock and bond
investments.
Direct store expenses in the second quarter of 2000 decreased by $204,000
(2%), compared to the same quarter in 1999, largely as a result of operating
fewer convenience stores in the second quarter of 2000. Direct store expenses
for the six-month period increased by $1,121,000 (5%), primarily as a result of
the 25 additional stores acquired in February 1999.
General and administrative expenses increased by $623,000 (18%) and
$609,000 (8%) in the three and six month periods of 2000, respectively, compared
to the corresponding periods of 1999. These increases resulted largely from
increased activity in fuel transportation and the terminal.
Depreciation and amortization increased by $67,000 (4%) in the second
quarter of 2000, compared to the corresponding quarter of 1999. For the
six-month period in 2000, compared to the corresponding period in 1999,
depreciation and amortization increased by $292,000 (9%). This increase resulted
from depreciation of property and equipment additions during 1999. Those
additions were primarily comprised of 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 rose from $318,000 in the second quarter of 1999 to
$367,000 in the second quarter of 2000 (15%), and from $644,000 in the first
half of 1999 to $717,000 in the first half of 2000 (11%). The increases were due
to interest income from stock and bond investments held by the Company in 2000,
but not in 1999, and more than made up for the loss of interest income received
in 1999, but not in 2000, from FFP Partners under its note to the Company that
was paid off in October 1999.
Interest expense increased by $137,000 (14%) and $676,000 (41%) during the
second quarter and first half of 2000, respectively, when compared to
corresponding periods of 1999. This increase resulted from higher debt levels in
the first half of 2000 than in 1999. Although interest expense has increased as
a result of the new debt, the Company did obtain fixed interest rates for its
long-term debt, which could 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 provided 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 new
revolving line of credit facility. 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; provided, however, that any amounts
which would cause outstanding borrowings under the facility to exceed $5,000,000
are limited to 140% of the net value of stock and bond investments in the
Company's trading account at a brokerage firm. At June 25, 2000, the borrowing
base was $9,800,000, and the net value of the Company's securities at that
particular brokerage firm on that date was $873,000. The Company's borrowings
under the revolving credit facility on that date were $595,000. 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. It has identified
numerous Company-operated convenience stores that it is attempting to convert to
gas-only stores in such a manner. In the second quarter and first half of 2000,
the Company closed on the sale of four and 13 of those stores, respectively.
Those sales generated gains on sale of $1,240,000 and $1,450,000 in the second
quarter and first half 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 several other convenience stores
were under contract at the end of the second quarter and are expected to close
in the third quarter. The anticipated benefits of making such conversions to
gas-only outlets are not only to obtain gains on such sales, but also to improve
earnings on an ongoing basis from reduced general and administrative 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. Any
such dispositions or acquisitions will impact 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 $15,225,000 at June 25,
2000. Money order payables represent those sales of money orders for which the
payee of the money order has not yet requested payment. Although the Company
collects money order receipts on a daily basis on sales of money orders made by
its own stores, the Company relies on receiving timely payment from its 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 $12,309,000 at June 25, 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. The Company is now engaged in what has typically been its strongest
period of the year, when revenues and cash flows generally increase.
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
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The Company is subject to market risks related to variable interest rates
and commodity prices. The interest rate calculated under the Company's new 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 half 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 mitigate 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 June 25, 2000.
LEGAL PROCEEDINGS
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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.
SIGNATURES
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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 9, 2000 By: /s/John H. Harvison
---------------------------------
John H. Harvison
Chairman and
Chief Executive Officer
Date: August 9, 2000 By: /s/Craig T. Scott
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Craig T. Scott
Vice President - Finance and
Chief Financial Officer