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UNITED STATES
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 30, 1996
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______.
Commission file number 1-10717
E-Z SERVE CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 72-2168773
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2550 N. Loop West, Suite 600, Houston, TX 77092
Address of principal executive offices, including ZIP code)
713/684-4300
(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, and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
---------------------
Common Stock $.01 par value: 69,077,530
(Number of shares outstanding as of August 9, 1996)
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<PAGE>
PART I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
June 30, 1996 and December 31, 1995 3
Consolidated Statements of Operations for the
Three Months ended June 30, 1996 and June 25, 1995 5
Consolidated Statements of Operations for the
Six Months Ended June 30, 1996 and June 25, 1995 6
Consolidated Statements of Stockholders' Equity for
the Year ended December 31, 1995 and Six Months
ended June 30, 1996 7
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1996 and June 25, 1995 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 2. Changes in Securities 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of
Security Holders 22
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
June 30, December 31,
1996 1995
--------- ------------
ASSETS
- ------
Current Assets:
Cash and temporary investments $ 12,729 $ 15,759
Receivables, net of allomance for
for doubtful accounts 9,039 9,136
Inventory 38,789 37,078
Environmental receivables 14,020 13,828
Prepaid expenses and other current assets 2,465 2,783
--------- ---------
Total Current Assets 77,042 78,584
--------- ---------
Property and equipment, net of accumulated
depreciation 143,532 143,144
Environmental receivables 31,364 32,428
Other assets 5,438 6,419
--------- ---------
$ 257,376 $ 260,575
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
3
<PAGE>
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands)
June 30, December 31,
1996 1995
---------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Trade payables $ 29,532 $ 28,958
Accrued liabilities and other 27,975 28,127
Current portion of environmental liability 13,782 14,057
Current portion of long-term obligations 7,356 5,794
--------- ---------
Total Current Liabilities 78,645 76,936
--------- ---------
Long-Term Obligations:
Payable to banks 72,600 74,450
Payable to related parties 25 25
Obligations under capital leases 1,270 1,389
Other 277 318
Environmental liability 29,060 30,043
Deferred income taxes 3,488 3,661
Other liabilities 2,935 3,593
Commitments and contingencies - -
--------- ---------
Total Long-Term Liabilities 109,655 113,479
--------- ---------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized
3,000,000 shares; 75,656 shares Series C
issued and outstanding at June 30, 1996
and December 31, 1995, respectively 1 1
Common stock, $.01 par value; authorized
100,000,000 shares: 69,077,530 and 67,854,159
shares issued and outstanding at June 30, 1996
and December 31, 1995, respectively 691 679
Additional paid-in capital 56,123 56,340
Retained earnings subsequent to March 28, 1993,
date of quasi-reorganization (total deficit
eliminated $86,034) 12,261 13,140
--------- ---------
Total Stockholders' Equity 69,076 70,160
--------- ---------
$ 257,376 $ 260,575
========= =========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
4
<PAGE>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Three Months Ended
---------------------------
June 30, June 25,
1996 1995
----------- ---------
Revenues:
Motor fuels (Includes excise taxes of
approximately $40,563 and $33,807
for the three month 1996 and 1995
periods, respectively) $ 144,129 $ 112,668
Convenience store 84,482 59,797
Other income, net 3,858 3,525
----------- ----------
232,469 175,990
----------- ----------
Cost and Expenses:
Cost of sales:
Motor fuels 128,375 101,683
Convenience store 58,980 40,377
Operating expenses 30,115 22,238
Selling, general & administrative expenses 6,429 5,536
Depreciation and amortization 3,870 2,556
Interest expense 2,100 1,032
----------- ----------
229,869 173,422
----------- ----------
Income before income taxes 2,600 2,568
Income tax expense (benefit) (60) -
Provision in lieu of taxes 970 873
----------- ----------
Net income $ 1,690 $ 1,695
=========== ==========
Primary earnings per common
and common equivalent share $ .02 $ .02
=========== ==========
Fully diluted earnings per common
and common equivalent share $ .02 $ .02
=========== ==========
Weighted average common and common
equivalent shares outstanding:
Primary 78,845,636 77,169,353
=========== ==========
Fully diluted 79,659,364 77,169,353
=========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements
5
<PAGE>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except per share amounts)
Six Months Ended
--------------------------
June 30, June 25,
1996 1995
---------- ----------
Revenues:
Motor fuels (Includes excise taxes of
approximately $77,902 and $64,546
for the six month 1996 and 1995
periods, respectively) $ 262,794 $ 207,706
Convenience store 157,283 110,756
Other income, net 7,152 5,930
---------- ----------
427,229 324,392
---------- ----------
Cost and Expenses:
Cost of sales:
Motor fuels 235,711 184,747
Convenience store 110,343 75,209
Operating expenses 58,509 42,780
Selling, general & administrative expenses 12,549 11,299
Depreciation and amortization 7,255 4,740
Interest expense 4,215 2,126
---------- ----------
428,582 320,901
---------- ----------
Income (loss) before income taxes (1,353) 3,491
Income tax expense (benefit) (187) -
Provision (benefit) in lieu of taxes (287) 1,187
---------- ----------
Net income (loss) $ (879) $ 2,304
========== ==========
Primary earnings (loss) per common
and common equivalent share $ (.01) $ .03
========== ==========
Fully diluted earnings (loss) per
common and common equivalent share $ (.01) $ .03
========== ==========
Weighted average common and common
equivalent shares outstanding:
Primary 78,551,148 77,058,550
========== ==========
Fully diluted 79,038,899 77,648,069
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements
6
<PAGE>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit) Total
--------- -------- ---------- --------- --------
Balance, December 25, 1994 $ 1 $ 673 $ 52,932 $ 8,969 $ 62,575
Net income - - - 5,264 5,264
Exercise of stock options - 1 5 - 6
Deferred compensation-
stock options - - 188 - 188
Conversion of Series C
Preferred Stock to
Common Stock - 5 (5) - -
Series C Preferred Stock
Dividend - - 1,093 (1,093) -
Provision in lieu of taxes - - 2,127 - 2,127
-------- -------- --------- --------- --------
Balance, December 31, 1995 1 679 56,340 13,140 70,160
Net loss - - - (879) (879)
Exercise of stock options - - 10 - 10
Exercise of stock warrants - 12 (12) - -
Deferred compensation -
stock options - - 72 - 72
Provision in lieu of taxes - - (287) - (287)
-------- -------- --------- --------- --------
Balance, June 30, 1996 $ 1 $ 691 $ 56,123 $ 12,261 $ 69,076
======== ======== ========= ========= ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
7
<PAGE>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Six Months Ended
--------------------
June 30, June 25,
1996 1995
--------- --------
Cash flows from operating activities:
Net income (loss) $ (879) $ 2,304
Adjustments to reconcile net income (loss)to net
cash used in operating activities:
Depreciation and amortization 7,541 4,740
(Gain) loss on sale of assets (129) 4
Payments for environmental remediation (1,123) (448)
Payments for removal of underground storage tanks (209) (166)
Provision (benefit) in lieu of taxes (287) 1,187
Stock option expense 72 94
Changes in assets and liabilities:
Increase in accounts and notes receivable (95) (2,501)
(Increase) decrease in inventory (1,711) 1,754
Decrease in prepaid expenses and other 318 687
Increase in accounts payable and accruals 147 2,110
Proceeds from environmental settlement - 4,850
Other - net 1,277 124
------- --------
Net cash provided by operating activities 4,922 14,739
------- --------
Cash flows from investing activities:
Proceeds from sale of assets 390 433
Payment for purchase of companies,
net of cash acquired - (34,574)
Capital expenditures and other asset additions (7,904) (4,565)
------- --------
Net cash used by investing activities (7,514) (38,706)
------- --------
Cash flows from financing activities:
Net borrowings under revolving line of credit 1,700 45,181
Repayment of long-term debt (2,148) (13,916)
Issuance of Common Stock 10 -
Payments for deferred financing costs - (1,603)
------- --------
Net cash provided (used) by financing activities (438) 29,662
------- --------
Net increase (decrease) in cash and
temporary investments (3,030) 5,695
Cash and temporary investments at beginning of period 15,759 12,963
------- --------
Cash and temporary investments at end of period $12,729 $ 18,658
======= ========
Supplement cash flow information:
Net cash paid during the period for:
Interest $ 5,365 $ 1,298
Income taxes - -
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
8
<PAGE>
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands)
NOTE (1) BASIS OF PRESENTATION
- ------------------------------
The consolidated financial statements presented herein include the accounts of
E-Z Serve Corporation and its wholly-owned operating subsidiaries, E-Z Serve
Convenience Stores, Inc. ("EZCON") and E-Z Serve Petroleum Marketing Company
("EZPET"). The Statements of Operations include the results of Time Saver
Stores, Inc. ("Time Saver")since January 17, 1995 and Sunshine-Jr. Stores Inc.
("SJS") since July 20, 1995. On March 31, 1995, Time Saver was merged into
EZCON and on October 2, 1995 SJS was merged into EZCON. Unless the context
indicates to the contrary, the term of "Company" as used herein should be
understood to include subsidiaries of E-Z Serve Corporation and predecessor
corporations.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
only of normal recurring accruals) considered necessary for a fair presentation
have been included. Operating results for the six month period ended June 30,
1996 are not necessarily indicative of the results that may be expected for the
year ended December 29, 1996. It is suggested that these condensed consolidated
financial statements be read in conjunction with the consolidated financial
statements and the notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1995.
Certain items in the June 25, 1995 consolidated financial statements have been
reclassified to conform with the presentations in the June 30, 1996 consolidated
financial statements.
NOTE (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
Reference is made to the Notes to Consolidated Financial Statements included in
the Company's annual report on Form 10-K for the year ended December 31, 1995.
The computation of earnings per common share is based upon the weighted average
number of common shares outstanding during the period plus (in periods in which
they have a dilutive effect) the effect of common equivalent shares arising from
convertible preferred stock using the if-converted method and dilutive stock
options and warrants using the treasury stock method. During the six month
periods ended June 30, 1996 and June 25, 1995, the Company had average
outstanding Common Stock Equivalents of 10,282,196 and 9,315,939 respectively,
for primary earnings per share and 10,769,947 and 9,905,458 respectively, for
fully diluted earnings per share which relate to its Series C Convertible
Preferred Stock, its 1991 Stock Option Plan, its 1994 Stock Option Plan and
warrants issued as part of the April, 1993 debt restructuring.
9
<PAGE>
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (3) BUSINESS ACQUISITIONS
- ------------------------------
Time Saver - On January 17, 1995, the Company, through its wholly-owned
subsidiary EZCON, acquired all of the capital stock of Time Saver from Dillon
Companies, Inc. At the date of acquisition, Time Saver operated 102 and
franchised 14 convenience stores in the New Orleans, Louisiana area, and was the
dominant independent convenience store chain in New Orleans. Under the terms of
the agreement with the seller, EZCON made a payment at closing of $29,960 for
the properties and, based on Time Saver's closing balance sheet, made an
additional payment of $7,000 on February 28, 1995 for the nonproperty net
assets. The Company financed the transaction through a new Credit and Guaranty
Agreement with a group of banks (See Note 5 - Long Term Obligations and Credit
Arrangements). On March 31, 1995, Time Saver was merged into EZCON.
SJS - On June 15, 1995, the Company, its wholly-owned subsidiary EZS Acquisition
Corporation ("EZS") and SJS entered into an Agreement and Plan of Merger whereby
EZS agreed to make a tender offer for all 1,701,650 outstanding shares of common
stock of SJS at $12.00 per share net to the sellers in cash for an aggregate
purchase price of $20,420. The tender offer expired on July 20, 1995, which was
the effective date of the acquisition. Effective July 21, 1995, EZS merged
with and into SJS thereby converting all shares of SJS not tendered into the
right to receive $12.00 per share, net in cash. At such time, SJS became a
wholly-owned subsidiary of the Company. At the date of acquisition, SJS
operated 205 convenience stores in five states with 120 of the stores in
Florida, 52 stores in Alabama, 27 stores in Mississippi, 5 stores in Georgia,
and 1 store in Louisiana. EZS obtained the funds necessary for the
acquisition from a capital contribution by the Company. The Company, through
its subsidiary EZCON, obtained $15,400 of the acquisition price pursuant to an
amendment to its Credit and Guaranty Agreement (See Note 5 - Long-Term
Obligations and Credit Arrangements) with the remainder coming from funds
generated internally by the Company and its subsidiaries. On October 2, 1995,
SJS was merged into EZCON.
NOTE (4) QUASI-REORGANIZATION
- -----------------------------
With the acquisitions of Taylor Petroleum, Inc. and EZCON in 1992, and with
the April 21, 1993 debt restructuring, the Company was recapitalized and its
primary business changed from that of a gasoline marketer to a convenience
store operator. Accordingly, effective March 28, 1993, the Company's Board
of Directors authorized management to effect a quasi-reorganization. In this
regard, the Company recognized a write down of $12,997 in the value of
management information systems, convenience stores assets, securities of
related parties, and the future liabilities associated with the Marketer
locations.
As part of the quasi-reorganization, the deficit in retained earnings was
eliminated against additional paid-in capital. Retained earnings in the future
will be dated to reflect only the results of operations subsequent to March 28,
1993. Any future tax benefits of operating loss and tax credit carryforward
items which arose prior to the quasi-reorganization will be reported as a
direct credit to paid-in capital. During the first two quarters of 1996 the
Company recorded a benefit for these carryforward items since the Company
anticipates a net profit position for fiscal 1996.
10
<PAGE>
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (5) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
- ------------------------------------------------------
Long-term obligations consist of the following:
June 30, December 31,
1996 1995
--------- ------------
Revolving lines of credit payable to banks $ 1,700 $ -
Term notes payable to banks 78,000 80,000
Current portion (7,100) (5,550)
-------- --------
72,600 74,450
-------- --------
Note payable to major stockholder 25 25
Current portion - -
-------- --------
25 25
-------- --------
Capital lease obligations 1,445 1,557
Current portion (175) (168)
-------- --------
1,270 1,389
-------- --------
Long-term obligation - other 358 394
Current portion (81) (76)
-------- --------
277 318
-------- --------
Total long-term obligations $ 74,172 $ 76,182
======== ========
On January 17, 1995, EZCON entered into a Credit and Guaranty Agreement ("C & G
Agreement") with a group of banks (the "Lenders") with Societe Generale as
Agent. The C & G Agreement replaced the credit facilities previously utilized
by the Company. The C & G Agreement provided for a term loan of $45,000 ("Term
Loan") and a $15,000 revolving line of credit ("Revolver"). At closing, the
Term Loan was fully drawn and the proceeds were used (a) to repay in full the
outstanding amounts owed under the previous credit agreement, (b) to finance
the initial payment for the Time Saver acquisition, and (c) for working
capital purposes. On July 21, 1995 the C & G Agreement was amended whereby the
Lenders increased the Term Loan available to the Company to $60,400. The
Company fully drew the additional $15,400 and the proceeds were used for the
acquisition of SJS.
11
<PAGE>
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (5) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS (Continued)
- ------------------------------------------------------------------
With the acquisition of SJS, the Company assumed the indebtedness of SJS which,
at July 21, 1995, consisted of (as defined by the SJS Plan of Reorganization)
notes payable to holders of Class 7 General Unsecured Claims of $13,962, notes
payable to holders of Class 2 Priority Tax Claims of $2,789 and notes payable
for the purchase of 10 previously leased stores of $2,409. On October 2, 1995,
EZCON entered into an Amended and Restated Credit and Guaranty Agreement
("Amended C & G Agreement") whereby the Term Loan limit was increased to
$80,000, the Revolver limit was increased to $25,000 and the letter of credit
sublimit was increased to $15,000. The Company fully drew the additional
$19,600 available on the Term Loan and used the proceeds to retire all of
the outstanding debt of SJS. Concurrently with the signing of the Amended C & G
Agreement SJS was merged into EZCON.
The Term Loan matures on January 24, 2002, and the Revolver matures on January
24, 1998. Both loans bear interest, payable quarterly at the prime rate plus
1.25%, and, with proper notice to the Agent, both can be converted to LIBOR
loans at LIBOR plus 2.5%. During the first six months of 1996, the Term Loan
was converted to a LIBOR loan at the average interest rate of 8.03%.
The Amended C & G Agreement requires that a notional amount of at least $20,000
of the Term Loan be rate protected, as defined, through January 17, 1998. In
this regard, the Company entered into a three-year interest rate swap in the
notional amount of $20,000. The swap agreement is a contract to exchange
floating interest rate payments for fixed rate payments without the exchange of
the underlying notional amount. The notional amount is used to measure
interest to be paid or received and does not represent an exposure to credit
loss. The swap agreement effectively changes $20,000 of the Company's Term
Loan to a fixed rate of 9.345% through April, 1998.
The Company made a $3,550 principal payment in July 1996 and the Term Loan
requires additional semi-annual principal payments each January 24 and July 24,
as follows: $3,550 in January 1997; $4,820 in July 1997; $5,780 in January 1998;
$6,280 in July 1998; $6,670 in January 1999; $6,920 in July 1999; $7,110 in
January and July 2000 and January 2001; $7,600 in July 2001; with a final
payment of $11,500 in January 2002. The Amended C & G Agreement further
states that 100% of certain transaction proceeds, as defined, shall be
immediately applied as a mandatory prepayment of the Term Loan in the inverse
order of maturity, and further, that 75% of excess cash flow, as defined,
shall be applied 90 days after the end of each fiscal year as a mandatory
prepayment of the Term Loan in the inverse order of maturity.
The Revolver can be used for working capital purposes and for issuance of a
maximum of $15,000 of letters of credit. The Revolver has a "clean-down"
provision whereby, during a five consecutive calendar day period of each
calendar month, the aggregate outstanding borrowing cannot exceed $4,000.
At June 30, 1996, there were $1,700 of outstanding borrowings under the
Revolver and there was $8,824 of outstanding letters of credit issued as
collateral for disputed unsecured bankruptcy-related claims and workers
compensation claims.
12
<PAGE>
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (5) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS (Continued)
- ------------------------------------------------------------------
The Term Loan and Revolver are secured by the Company's pledge of all of the
capital stock of its subsidiaries and by guaranties from EZPET. Further, the
Amended C & G Agreement grants the Lenders, among other things, a security
interest in all of the Company's equipment, inventories and receivables, and a
right to instigate a springing lien, as defined, on all of the Company's real
property, fixtures, buildings and improvements, if certain events, including
any event of default, should occur. Provisions of the Amended C & G Agreement
require the Company to remain within the limits of certain defined financial
covenants, and impose various restrictions on distributions, business
transactions, contractual obligations, capital expenditures and lease
obligations.
On March 31, 1996, the Company was required to make an excess cash flow payment
of $1,619 based on cash flow for the year ended December 31, 1995. The Company
requested from the bank group, and was granted, a waiver of this payment. In
addition, due to lower than anticipated gross profit margins on motor fuel
sales during the first quarter of 1996, the Company was not, as of March 31,
1996, in compliance with certain financial covenants of the Amended C & G
Agreement and the "clean-down" provision. On May 6, 1996 an amendment to the
Amended C & G Agreement was signed whereby various financial covenants for all
reporting periods were revised through the term of the loan
except for the fixed charge coverage ratio which was revised through fiscal
1996. The Company currently is and expects to remain in compliance with these
revised financial covenants.
NOTE (6) COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Environmental Protection Agency issued regulations in 1988 that established
requirements for underground storage tanks that affect various aspects of the
Company's retail motor fuel operations. The regulations require assurances of
insurance or financial responsibility and will require the Company to upgrade
or replace a certain number of its underground storage tanks. The Company has
elected to self-insure under these regulations. The Company currently
estimates that the future cost of complying with these regulations and
performing remediation on contaminated sites will be approximately $53,737.
The $53,737 consists of $42,842 for anticipated remediation costs; $9,234 for
environmental capital improvements, and $1,661 for tank removal costs. At
June 30, 1996 the Company had completed the necessary remediation and had
filed claims totaling $8,165 with the various states in which it operates.
Of the $42,842 gross remediation liability, the Company expects additional
future reimbursements from state trust funds of $37,219.
Such estimates are based on current regulations, historical results,
assumptions as to the number of tanks to be replaced and certain other
factors. The actual cost of remediating contaminated sites and removing
tanks may be substantially lower or higher than reserved due to the
difficulty in estimating such costs and due to potential changes in
regulations or state reimbursement programs.
13
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations.
------------------------------------
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's results of operations and balance
sheet during the period included in the accompanying consolidated financial
statements. Operating data is presented below:
Results of Operations
-------------------------------------
(In thousands except store counts, per gallon prices and margins)
Three Months Ended Six Months Ended
---------------------- ---------------------
June 30, June 25, June 30, June 25,
1996 1995 1996 1995
---------- ---------- --------- ---------
CONVENIENCE STORE OPERATIONS (1)
- -------------------------------
Merchandise:
Average number of merchandise
stores during the period 722 542 730 527
Merchandise sales $ 84,482 $ 59,797 $ 157,283 $ 110,756
Merchandise sales per
location per month $ 39.0 $ 36.8 $ 35.9 $ 35.0
Gross profit $ 25,502 $ 19,420 $ 46,940 $ 35,547
Gross profit per location
per month $ 11.8 $ 11.9 $ 10.7 $ 11.2
Gross profit percentage 30.19% 32.48% 29.84% 32.09%
Motor Fuels:
Average number of motor fuel
stores during the period 679 502 686 486
Gallons sold 102,771 79,503 196,724 152,018
Gallons sold per location
per month 50.5 52.8 47.8 52.1
Revenues $ 123,971 $ 89,879 $ 225,333 $ 165,869
Price per gallon $ 1.206 $ 1.131 $ 1.145 $ 1.091
Gross profit $ 13,741 $ 8,799 $ 23,391 $ 18,370
Gross profit per gallon $ 0.1337 $ 0.1107 $ 0.1189 $ 0.1208
Gross profit per location
per month $ 6.7 $ 5.8 $ 5.7 $ 6.3
14
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Results of Operations (Continued)
-------------------------------------
(In thousands except store counts, per gallon prices and margins)
Three Months Ended Six Months Ended
----------------------- ----------------------
June 30, June 25, June 30, June 25,
1996 1995 1996 1995
----------- ---------- ---------- ----------
MARKETER OPERATIONS (2)
- -----------------------
Average number of operating
locations during the period 192 231 196 234
Gallons sold 16,339 19,670 31,999 37,032
Gallons sold per location
per month 28.4 28.4 27.2 26.4
Revenues $ 20,158 $ 22,789 $ 37,461 $ 41,837
Price per gallon $ 1.234 $ 1.159 $ 1.171 $ 1.130
Gross profit (3) $ 2,013 $ 2,186 $ 3,692 $ 4,589
Gross profit per gallon $ 0.1232 $ 0.1111 $ 0.1154 $ 0.1239
Gross profit per location
per month $ 3.5 $ 3.2 $ 3.1 $ 3.3
(1) At June 30, 1996, there were 706 Company operated convenience stores
(660 of which sold motor fuels) and 11 franchised convenience stores.
(2) Represents non-company operated motor fuel retail outlets ("Marketers").
At June 30, 1996 there were 189 Marketers.
(3) Gross profit is shown before deducting compensation paid to operators of
locations not operated by the Company of $995,000, $1,025,000, $1,861,000
and $2,074,000 for the three months and six months ended June 30, 1996 and
June 25, 1995, respectively.
15
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Overview
- --------
The Company reported net income of $1,690,000 and a net loss of $879,000 for the
three and six month periods ended June 30, 1996, respectively as compared to net
income of $1,695,000 and $2,304,000 for the comparable periods of 1995. The
second quarter of 1996 included $392,000, net of tax, from a lawsuit settlement
in the Company's favor and the second quarter of 1995 included $569,000, net of
tax, of insurance settlements in the Company's favor. All major components of
income, including revenues, gross profit and operating expenses, increased in
the 1996 period due to the acquisitions of Time Saver on January 17, 1995 and
SJS on July 20, 1995.
Operating Gross Profit
- ----------------------
Convenience store merchandise sales increased 41.3% in the second quarter of
1996 compared to the second quarter of 1995 and increased 42.0% for the six
months ended June 30, 1996 compared to the same period of 1995. The 1996
merchandise sales per location increased 6.0% and 2.6% for the three and six
month periods of 1996, respectively, as compared to the same periods of 1995.
These increases are largely due to the 1995 additions of the Time Saver and
SJS stores which have a higher proportion of merchandise sales. For the
first half of 1996, merchandise revenue comprised 36.8% of the Company's
total revenue as compared to 34.1% for the first half of 1995.
The average merchandise gross profit margin of 30.19% and 29.84% for the three
month and six month periods of 1996, respectively, is below the 32.48% and
32.09% for the comparable three and six month periods of 1995, respectively.
These margin decreases reflect a shift by the Company to a more aggressive
pricing strategy to increase customer traffic and sales.
Motor fuels gallons sold per location were down 4.4% for the second quarter of
1996 versus the second quarter of 1995 and were down 8.3% for the first half of
1996 compared to the first half of 1995 largely because Time Saver and SJS
motor fuels sales per location are lower than the Company's previous average.
Average gross profit per gallon increased 2.30 cents to 13.37 cents per gallon
in the second quarter of 1996 as compared to the second quarter of 1995 as
unseasonably high first quarter 1996 purchase costs declined faster than
retail prices in the second quarter. However, even with the improved margin
in the second quarter, the motor fuel margin for the first six months of 1996
of 11.89 cents per gallon was 1.6% below the 12.08 cents per gallon for the
comparable period of 1995.
Total gallons sold by non-company operated motor fuel retail outlets
("Marketers") decreased 16.9% in the second quarter and 13.6% for the six
months ended June 30, 1996 versus the same periods of 1995. The volume
decline is principally due to a 16.2% decrease in the average number of
operating locations during 1996 as the Company continues to dispose of or
close locations. The second quarter 1996 Marketer average gross profit was
1.21 cents per gallon above the second quarter of 1995 but the first six
months of 1996 were still 0.85 cents per gallon below the first six months
of 1995.
16
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Other Income
- ------------
Other income (which includes money order sales income, gross profit from the
sale of lottery tickets, telephone commissions, rental income, interest income,
franchise fee income and other) increased 20.6% in the six months ended June
30, 1996 as compared to the first six months of 1995 and increased 9.4% in the
second quarter of 1996 compared to the second quarter of 1995. The second
quarter of 1996 included $603,000 from a lawsuit settlement in the Company's
favor and the second quarter of 1995 included $875,000 of insurance
settlements in the Company's favor. Exclusive of these non-recurring items,
the 1996 increase in other income over the comparable periods of 1995 would
have been 22.8% and 29.6% for the second quarter and first six
months, respectively, and is primarily due to the Time Saver and SJS
acquisitions. The increase is consistent with the increased number of
locations operated during 1996.
Expenses
- --------
Total operating expenses increased by 35.4% percent for the second quarter of
1996 as compared to the same period in 1995 and increased 36.8% for the first
six months of 1996 compared to the first six months of 1995 which is again due
to the increase in the number of operating locations. Operating expenses, as
a percent of total revenues, were slightly above the second quarter and first
half of 1995 due to the increased proportion of revenues from merchandise
sales at company operated convenience stores. However, operating expenses, as
a percent of merchandise revenue, were 35.6% and 37.2% for the second quarters
of 1996 and 1995, respectively and were 37.2% and 38.6% for the first six
months of 1996 and 1995, respectively.
Although Selling, General and Administrative, ("S,G&A") expenses for the second
quarter and first six months of 1996 increased $893,000 and $1,250,000
compared to the second quarter and first six months of 1995, S,G&A expenses,
as a percent of total revenue, decreased from 3.1% in the second quarter of
1995 to 2.8% in the second quarter of 1996 and decreased from 3.5% in the
first six months of 1995 to 2.9% in the first six months of 1996. These
decreases are due to overhead economies of scale as the Company increased its
number of operating locations through the Time Saver and SJS acquisitions.
Depreciation and amortization expense increased for the three and six month
periods of 1996 versus 1995 by 51.4% and 53.0% respectively due to the Time
Saver and SJS acquisitions and, to a lesser extent, to the capital additions
made during 1996.
Interest expense increased $1,068,000 and $2,089,000 for the three month and
six month periods ended June 30, 1996, as compared to the same 1995 periods,
due to the increased level of borrowings as the Company increased its bank
debt in 1995 to acquire Time Saver and SJS.
17
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Inflation
- ---------
The Company believes inflation has not had a material effect on its results of
operations. The Company does, however, experience short term fluctuations in
its motor fuel gross profit margins as a result of changing market conditions
for the supply and demand of gasoline.
Liquidity and Capital Resources
- -------------------------------
The following table sets forth key balance sheet amounts and corresponding
ratios for periods included in the accompanying consolidated financial
statements:
June 30, December 31,
1996 1995
----------- ------------
Current assets $77,042,000 $78,584,000
Current liabilities $78,645,000 $76,936,000
Current ratio 0.98:1 1.02:1
Total debt (including related
parties, capital leases and other) $81,528,000 $81,976,000
Stockholders' equity $69,076,000 $70,160,000
Total debt to total capitalization 0.54:1 0.54:1
Common shares outstanding 69,077,530 67,854,159
Liquidity
- ---------
As of June 30,1996, EZCON had $12,083,000 available on its bank line of credit.
Due to the nature of the Company's business, most sales are for cash, and cash
provided by operations is the Company's primary source of liquidity.
Receivables relate to undeposited sales by Marketers, credit card and lottery
sales, manufacturer rebates and other receivables. In addition, the Company
finances its inventory requirements primarily though normal trade credit
terms. This condition allows the Company to operate with a low level of cash
and working capital. The Company's working capital decreased $3,251,000
during the first six months of 1996 primarily due to a $2,000,000 principal
payment on the Term Loan and an increase in the current portion of long-term
debt.
18
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Liquidity (Continued)
- ---------------------
During the first six months of 1996, the Company's major non-operational cash
proceeds were $1,700,000 net proceeds from temporary borrowings on the Revolver
and $390,000 from disposals of fixed assets. Major non-operational expenditures
included: $2,148,000 for the repayment of long-term debt; $7,904,000 for
capital and environmental upgrade expenditures; $1,123,000 for environmental
remediation and $209,000 for removal of underground storage tanks.
Approximately 61% of the Company's revenues are derived from motor fuel sales
and, because the Company acquires approximately 35% of its product on a spot
basis, gross margins are subject to sudden changes whenever a disproportionate
movement between purchase costs and retail selling prices occurs. Frequently,
these movements are not in line with each other which leads to unusually wide
or narrow margins.
Without stability in the marketplace, the Company may temporarily experience
operating results that are unprofitable.
The Company believes that cash flow from operations and available working
capital will provide the Company with sufficient liquidity to conduct its
business in an ordinary manner. However, unanticipated events or a prolonged
motor fuel margin squeeze could occur which may cause cash shortfalls to exist
and require the Company to increase its borrowing on the revolving line of
credit.
Capital Resources
- -----------------
As discussed in Note 5 - Long-Term Obligations and Credit Arrangements in the
Notes to Consolidated Financial Statements, on January 17, 1995, EZCON entered
into a Credit and Guaranty Agreement ("C & G Agreement") with a group of banks
(the "Lenders") with Societe Generale as agent (the "Agent"). The C & G
Agreement provided for a term loan of $45,000,000 ("Term Loan") and a
$15,000,000 revolving line of credit ("Revolver"). At closing, the Term Loan
was fully drawn and the proceeds were used (a) to repay in full the outstanding
amounts owed under the Company's previous credit agreement, (b) to finance the
initial payment for the Time Saver acquisition and (c) for working capital
purposes. On July 21, 1995, the C & G Agreement was amended whereby the
Lenders increased the Term Loan available to the Company to $60,400,000. The
Company fully drew the additional $15,400,000 and the proceeds were used for the
acquisition of SJS. With the acquisition of SJS, the Company assumed the
indebtedness of SJS. On October 2, 1995, the C & G Agreement was amended and
restated ("Amended C & G Agreement"). The Term Loan limit was increased to
$80,000,000 and the Revolver limit was increased to $25,000,000. The
Company drew the additional $19,600,000 available on the Term Loan and used
the proceeds to retire the outstanding debt of SJS.
The Company made a $3,550,000 principal payment in July 1996 and the Term Loan
requires additional semiannual payments each January 24 and July 24, as follows:
$3,550,000 in January 1997; $4,820,000 in July 1997; $5,780,000 in January 1998;
$6,280,000 in July 1998; $6,670,000 in January 1999; $6,920,000 in July 1999;
$7,110,000 in January and July 2000 and January 2001; $7,600,000 in July 2001;
with a final payment of $11,500,000 in January 2002. The Amended C & G
Agreement further
19
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Capital Resources (Continued)
- -----------------------------
states that 100% of certain transaction proceeds, as defined, shall be
immediately applied as a mandatory prepayment of the Term Loan in the inverse
order of maturity, and further, that 75% of excess cash flow, as defined, shall
be applied 90 days after the end of each fiscal year as a mandatory prepayment
of the Term Loan in the inverse order of maturity.
The Revolver can be used for working capital purposes and for issuance of a
maximum of $15,000,000 of letters of credit. The Revolver has a "clean-down"
provision whereby, during a five consecutive calendar day period of each
calendar month, the aggregate outstanding borrowing cannot exceed $4,000,000.
On March 31, 1996, the Company was required to make an excess cash flow payment
of $1,619,000 based on cash flow for the year ended December 31, 1995. The
Company requested from the bank group, and was granted, a waiver of this
payment. In addition, due to lower than anticipated gross profit margins on
motor fuel sales during the first quarter of 1996, the Company was not, as of
March 31, 1996, in compliance with certain financial covenants of the Amended
C & G Agreement and the "clean-down" provision. On May 6, 1996 an amendment to
the Amended C & G Agreement was signed whereby various financial covenants for
all reporting periods were revised through the term of the loan except for the
fixed charge coverage ratio which was revised through fiscal 1996. The Company
currently is and expects to remain in compliance with theses revised financial
covenants.
The Environmental Protection Agency requires that facility owners test
underground tanks for leaks and repair or replace leaking tanks with new or
upgraded corrosion protected tanks. The Company currently estimates that
complying with these regulations will cost an additional $15,646,000 (net of
anticipated reimbursements from state environmental trust funds), through 1998.
This estimate is based upon assumptions as to the number of tanks to be replaced
and certain other factors. The assumptions on which the cost estimates are
based may not materialize, and unanti-cipated events and circumstances may
occur. As a result, the actual cost of complying with these requirements may
be substantially lower or higher than the estimated costs. The Company
anticipates that required expenditures relating to compliance with these
regulations will be funded from cash flow from its current operations.
Due to capital constraints brought about largely by operating losses and by the
environmental expenditure requirements discussed above, the Company was unable
to properly upgrade its facilities prior to 1994. However, as a result of
improved operating results, during 1994 the Company began to make capital
expenditures and improvements beyond maintenance capital requirements. During
the first six months of 1996 the Company made capital expenditures and
improvements of $7,561,000 (exclusive of environmental requirements). However,
according to the terms of the Amended C & G Agreement, if projected levels of
profitability are not maintained, the Company's capital expenditures can be
constrained. In this regard, based on reduced cash flow projections for 1996,
the Amendment to the Amended C & G Agreement signed on May 6, 1996 reduced the
level of allowed capital expenditures for 1996 from $18,800,000 to $11,400,000.
Although this curtailment will reduce the intended level of higher return
discretionary expenditures in 1996, the Company does not believe this to be a
significant impairment to its future earnings potential unless the restrictions
are imposed in future periods.
20
<PAGE>
E-Z SERVE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Capital Resources (Continued)
- -----------------------------
Under federal tax law, the amount and availability of net operating loss
carryforwards ("NOL") are subject to a variety of interpretations and
restrictive tests, under which the utilization of such NOL carryforwards could
be limited or effectively lost upon certain changes in ownership. After an
ownership change, utilization of a loss corporation's NOL was limited annually
to a prescribed rate times the value of a loss corporation's stock immediately
before the ownership change. During 1992, the Company experienced an "ownership
change" as defined by the Internal Revenue Code of 1986. The Company's NOL
available under the ownership change rules was approximately $34,000,000 at
December 31, 1995. The NOL will expire if not utilized by 2006. Approximately
$17,000,000 of the NOL was acquired with the acquisition of EZCON and can only
be used to offset future income of EZCON. In addition, the Company has
alternative minimum tax NOL carry-forwards of approximately $34,000,000, which
are available over an indefinite period, that can be utilized should the
Company's alternative minimum tax liability exceed its regular tax liability.
The Company's ability to expand further is dependent upon several factors,
including adequacy of acquisition opportunities and sufficient capital
resources. The Company believes that possible acquisition candidates will
continue to exist as the major oil companies reevaluate and reduce their company
operated presence, as the conven-ience store industry continues to contract due
to competitive pressures and the financial difficulties experienced by some of
its members, and as small independent operators have difficulty meeting growing
environmental requirements. While cash flow and capital availability are
currently sufficient to fund operations, it will be necessary for the Company to
fund any identified acquisitions with new capital which may not be available on
terms acceptable to the Company. Although it is the Company's intention to grow
through strategic acquisitions, recent acquisitions in the convenience store
industry have caused the Company to evaluate, preliminarily, various
alternatives to maximize stockholder value. In connection therewith, the
Company has engaged Donaldson, Lufkin & Jenrette Securities Corporation to act
as the Company's exclusive financial advisor in connection with such efforts for
which it shall be compensated based on a percentage of the dollar value of a
chosen alternative, if any, and shall be reimbursed for out-of-pocket expenses.
Disclosure Regarding Forward Looking Statements
- -----------------------------------------------
Item 2 of this document includes forward looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Although the Company believes that
the expectations reflected in such forward looking statements are based upon
reasonable assumptions, the Company can give no assurance that these
expectations will be achieved. Important factors that could cause actual
results to differ materially from the Company's expectations are disclosed in
conjunction with the forward looking statements included herein ("Cautionary
Disclosures"). Subsequent written and oral forward looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by the Cautionary Disclosures.
21
<PAGE>
E-Z SERVE CORPORATION
PART II - OTHER INFORMATION
- ---------------------------
Item 1 - Legal Proceedings
- --------------------------
The Company and its subsidiaries are involved in various lawsuits incidental to
its business. The Company's internal legal counsel monitors all such claims
and the Company has accrued for those which it believes are probable of payment.
In management's opinion, an adverse determination against the Company or any of
its subsidiaries relating to these suits would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole. In the case of
administrative proceedings related to environmental matters involving
governmental authorities, management does not believe that any imposition of
monetary sanctions would exceed $100,000.
Item 2 - Changes in Securities
- ------------------------------
None.
Item 3 - Defaults Upon Senior Securities
- ----------------------------------------
(b) Arrearage in the Payment of Dividends
During the six months ended June 30, 1996, the Company had outstanding 75,656
shares of its $6.00 Convertible Preferred Stock, Series C ("Series C Preferred
Stock"). As of April 1, 1996, which is the last dividend cumulation date, the
Company had cumulative but unpaid dividends on the Series C Preferred Stock of
$455,000.
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On June 28, 1996 the Annual Meeting of Stockholders of the Company was held.
The stockholders approved the following items with the following voting
tabulations:
1. Elected the seven nominees for director to hold office until the next
annual election of directors or until their respective successors shall
have been duly elected and shall have qualified.
Nominee Votes For Against
------------------- ----------- ---------
Donald D. Beane 68,498,613 28,084
Shelby R. Gibbs 68,496,113 30,584
Neil H. McLaurin 68,498,613 28,084
John R. Schoemer 68,498,613 28,084
John M. Sallay 68,508,113 18,584
Larry J. Taylor 68,508,723 17,974
Paul Thompson, III 68,498,617 28,080
22
<PAGE>
E-Z SERVE CORPORATION
Item 4 - Submission of Matters to a Vote of Security Holders (Continued)
- -----------------------------------------------------------------------
2. Ratified and approved the Board of Directors appointment of KPMG Peat
Marwick LLP as independent auditors of the Company.
For Against Abstain
------------ ---------- ----------
68,494,811 27,616 4,270
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
27 Financial Data Schedule for the period ending June 30, 1996.
(b) The Company did not file any reports on Form 8-K during the three months
ended June 30, 1996.
23
<PAGE>
E-Z SERVE CORPORATION
SIGNATURES
--------------
Pursuant to the requirements 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.
E-Z SERVE CORPORATION
---------------------
(Registrant)
Date: August 14, 1996 /John T. Miller
--------------- -------------------------------
John T. Miller
Senior Vice President
Chief Financial Officer
24
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FROM
THE COMPANY'S REPORT ON FORM 10-Q FOR THE PERIOD ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-29-1996
<PERIOD-END> JUN-30-1996
<CASH> 12,729
<SECURITIES> 0
<RECEIVABLES> 9,039
<ALLOWANCES> 0
<INVENTORY> 38,789
<CURRENT-ASSETS> 77,042
<PP&E> 169,909
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<TOTAL-ASSETS> 257,376
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<BONDS> 74,172
0
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<COMMON> 691
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<TOTAL-LIABILITY-AND-EQUITY> 257,376
<SALES> 420,077
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