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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 September 28,1997
[ ] 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 75-2168773
(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: 69,351,530
(Number of shares outstanding as of October 31, 1997)
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E-Z SERVE CORPORATION AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 28, 1997
TABLE OF CONTENTS
Item
Number Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
September 28, 1997 and December 29, 1996 1-2
Consolidated Statements of Operations for the
Three-months ended September 28, 1997 and
September 29, 1996 3
Consolidated Statements of Operations for the
Nine-months ended September 28, 1997 and
September 29, 1996 4
Consolidated Statements of Stockholders' Equity for
the Year ended December 29, 1996 and Nine-months
ended September 28, 1997 5
Consolidated Statements of Cash Flows for the
Nine-months ended September 28, 1997 and
September 29, 1996 6-7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 2. Changes in Securities 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
SIGNATURES
<PAGE> 1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
--------------------
<TABLE>
<CAPTION>
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)
September 28, December 29,
1997 1996
------------- ------------
ASSETS
- ------
<S> <C> <C>
Current Assets:
Cash and cash equivalents $ 8,982 $ 6,333
Receivables, net of allowance for
doubtful accounts 6,905 8,764
Inventory 33,514 40,070
Environmental receivables 4,881 7,246
Assets held for resale 13,007 --
Prepaid expenses and other current assets 4,437 2,474
-------- --------
Total Current Assets 71,726 64,887
Property and equipment, net of accumulated
depreciation 109,445 137,298
Environmental receivables 17,294 34,305
Other assets 1,135 3,915
-------- --------
$199,600 $240,405
======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE> 2
</TABLE>
<TABLE>
<CAPTION>
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
(Unaudited)
(In thousands)
September 28, December 29,
1997 1996
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
<S> <C> <C>
Current Liabilities:
Trade payables $ 28,487 $ 29,563
Accrued liabilities and other 22,199 26,265
Current portion of environmental liability 4,219 9,017
Current portion of long-term obligations 17,879 14,841
-------- --------
Total Current Liabilities 72,784 79,686
-------- --------
Long-Term Obligations:
Payable to banks, net of current portion 39,220 64,739
Obligations under capital leases 1,030 1,338
Other, net of current portion 175 238
Environmental liability 19,673 32,571
Other liabilities 5,240 6,549
Commitments and contingencies -- --
-------- --------
Total Long-Term Liabilities 65,338 105,435
-------- --------
Redeemable Preferred Stock 13,796 --
-------- --------
Stockholders' Equity:
Preferred stock, $.01 par value; authorized
3,000,000 shares; -0- and 75,656 shares
Series C issued and outstanding at
September 28, 1997 and December 29, 1996,
respectively -- 1
Common stock, $.01 par value; authorized
100,000,000 shares; 69,321,530 and
69,119,530 shares issued and outstanding
at September 28, 1997 and December 29, 1996,
respectively 693 691
Additional paid-in capital 48,809 56,527
Accumulated deficit subsequent to
March 28, 1993, date of quasi-
reorganization (total deficit
eliminated $86,034) (1,820) (1,935)
-------- --------
Total Stockholders' Equity 47,682 55,284
-------- --------
$199,600 $240,405
======== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE> 3
<TABLE>
<CAPTION>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share amounts)
Three-months Ended
-----------------------------
September 28, September 29,
1997 1996
------------- -------------
Revenues:
- --------
<S> <C> <C>
Motor fuels (Includes excise taxes
of approximately $31,900 and
$40,600 for the three-month 1997
and 1996 periods, respectively) $ 107,941 $ 138,146
Convenience store 78,484 83,485
Other income, net 2,677 3,662
---------- ----------
189,102 225,293
---------- ----------
Cost and Expenses:
Cost of sales:
Motor fuels 97,607 123,165
Convenience store 54,228 59,182
Operating expenses 28,248 29,249
Selling, general and
administrative expenses 5,310 5,686
Depreciation and amortization 3,492 3,584
Interest expense 2,071 2,130
---------- ----------
190,956 222,996
---------- ----------
Income (loss) before income taxes (1,854) 2,297
Income tax benefit (246) (63)
Provision (benefit) in lieu of taxes (563) 866
---------- ----------
Net income (loss) (1,045) 1,494
Preferred Stock dividends & accretion (632) (228)
---------- ----------
Net income (loss) attributable to
common stock $ (1,677) $ 1,266
========== ==========
Primary income (loss) per common
and common equivalent share $ (.02) $ .02
========== ==========
Fully diluted income (loss) per
common and common equivalent share $ (.02) $ .02
========== ==========
Weighted average common and common
equivalent shares outstanding:
Primary 69,321,189 79,551,398
========== ==========
Fully diluted 69,321,189 79,551,398
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE> 4
<TABLE>
<CAPTION>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands except for share amounts)
Nine-months Ended
-----------------------------
September 28, September 29,
1997 1996
------------- -------------
Revenues:
- --------
<S> <C> <C>
Motor fuels (Includes excise taxes
of approximately $100,800 and
$118,560 for the nine-month 1997
and 1996 periods, respectively) $ 346,725 $ 400,940
Convenience store 230,842 240,768
Other income, net 13,897 10,814
---------- ----------
591,464 652,522
---------- ----------
Cost and Expenses:
Cost of sales:
Motor fuels 313,355 358,876
Convenience store 160,152 169,525
Operating expenses 84,076 87,758
Selling, general & administrative
expenses 16,507 18,235
Depreciation and amortization 10,279 10,839
Interest expense 6,779 6,345
---------- ----------
591,148 651,578
---------- ----------
Income before income taxes 316 944
Income tax benefit (169) (250)
Provision in lieu of taxes 370 579
---------- ----------
Net income 115 615
Preferred Stock dividends & accretion (1,600) (683)
---------- ----------
Net loss attributable to common stock $ (1,485) $ (68)
========== ==========
Primary loss per common and common
equivalent share $ (.02) $ --
========== ==========
Fully diluted loss per common and
common equivalent share $ (.02) $ --
========== ==========
Weighted average common and common
equivalent shares outstanding:
Primary 69,266,336 68,540,009
========== ==========
Fully diluted 69,266,336 68,540,009
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE> 5
<TABLE>
<CAPTION>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit) Total
--------- -------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance,
December 31, 1995 $ 1 $ 679 $56,340 $ 13,140 $ 70,160
Net loss -- -- -- (15,075) (15,075)
Exercise of stock
options -- 1 57 -- 58
Exercise of stock
warrants -- 11 (13) -- (2)
Deferred compensation-
stock options -- -- 143 -- 143
------- ------- ------- ------- -------
Balance,
December 29, 1996 $ 1 $ 691 $56,527 $(1,935) $55,284
Net income -- -- -- 115 115
Exercise of
stock options -- 2 79 -- 81
Deferred compensation-
stock options -- -- 49 -- 49
Stock option compensation -- -- 870 -- 870
Retirement of Series
C Preferred Stock (1) -- (7,566) -- (7,567)
Dividends - Series C
Preferred Stock -- -- (792) -- (792)
Common Stock Purchase
Warrants -- -- 872 -- 872
Dividends - Series H
Preferred Stock -- -- (1,282) -- (1,282)
Accretion of Preferred
Stock -- -- (318) -- (318)
Provision in lieu of taxes -- -- 370 -- 370
------- ------- ------- ------- -------
Balance,
September 28, 1997 $ -- $ 693 $48,809 $(1,820) $47,682
======= ======= ======= ======= =======
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE> 6
<TABLE>
<CAPTION>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine-Months Ended
----------------------------
September 28, September 29,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 115 $ 615
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization -
Fixed Assets 10,279 10,839
Amortization - Deferred Financing
Costs 1,350 429
Gain on sale of assets (4,925) (254)
Provision for doubtful accounts 24 --
Payments for environmental
remediation (976) (1,601)
Payments for removal of underground
storage tanks (76) (356)
Provision in lieu of taxes 370 579
Stock option expense 49 108
Changes in assets and liabilities:
(Increase) decrease in accounts and
notes receivable 969 (11)
(Increase) decrease in inventory 3,829 (988)
(Increase) decrease in prepaid
expenses & other (1,181) 934
(Increase) in accounts payable
and accruals (1,998) (7,254)
Other - net 3,300 19
------- -------
Net cash provided by operating
activities 11,129 3,059
------- -------
Cash flows from investing activities:
Proceeds from sale of assets 12,693 776
Capital expenditures and other
asset additions (2,847) (9,527)
------- -------
Net cash provided by (used in)
investing activities 9,846 (8,751)
------- -------
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE> 7
<TABLE>
<CAPTION>
E-Z SERVE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (Continued)
(Unaudited)
(In thousands)
Nine-months Ended
-----------------------------
September 28, September 29,
1997 1996
------------- -------------
<S> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving line
of credit $ (4,700) $ 5,400
Repayment of long-term debt (18,101) (5,744)
Issuance of common stock 81 54
Issuance of Preferred H stock, net 13,440 --
Retirement of Preferred C stock (7,566) --
Dividends on Preferred C stock (792) --
Proceeds from long-term debt 32 --
Payments for deferred financing costs (720) --
-------- --------
Net cash used in financing
activities (18,326) (290)
-------- --------
Net increase (decrease) in cash and
cash equivalents 2,649 (5,982)
Cash and cash equivalents at beginning
of period 6,333 15,759
-------- --------
Cash and cash equivalents at end of
period $ 8,982 $ 9,777
======== ========
Non-cash effect of:
Issuance of Series H Preferred
Stock in lieu of dividends $ 910 --
-------- --------
Supplemental cash flow information:
Net cash paid during the period for:
Interest $ 6,623 $ 7,485
Income taxes 250 --
</TABLE>
The accompanying Notes to Consolidated Financial Statements
are an integral part of these Statements.
<PAGE> 8
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") until its sale on April
22, 1997. 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
for preparing 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 three and
nine-month periods ended September 28, 1997 are not necessarily
indicative of the results that may be expected for the year ended
December 28, 1997. 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 29, 1996.
Certain items in the 1996 consolidated financial statements have been
reclassified to conform with the presentations in the September 28, 1997
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 29, 1996.
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.
The carrying value of the Redeemable Preferred Stock was initially
recorded at the issue price (net of issuance costs and the value of
the associated warrants) and is being increased by monthly accretions
to retained earnings, or paid-in capital in the absence of retained
earnings, of the difference between the issuance price and the
redemption value.
<PAGE> 9
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (3) 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 store 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
after the quasi-reorganization are dated to reflect only the results of
operations subsequent to March 28, 1993. Any 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.
<PAGE> 10
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
NOTE (4) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
- ------------------------------------------------------
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
September 28, December 29,
1997 1996
------------- ------------
<S> <C> <C>
Revolving lines of credit payable
to banks $ 500 $ 5,200
Term notes payable to banks 56,123 73,989
Current portion (17,403) (14,450)
------- -------
39,220 64,739
------- -------
Note payable to major stockholder -- 25
Current portion -- (25)
------- -------
-- --
------- -------
Capital lease obligations 1,423 1,624
Current portion (393) (286)
------- -------
1,030 1,338
------- -------
Long-term obligation - other 258 318
Current portion (83) (80)
------- -------
175 238
------- -------
Total long-term obligations $40,425 $66,315
======= =======
</TABLE>
On January 17, 1995, EZCON entered into a Credit and Guaranty
Agreement ("C & G Agreement") with a group of banks (the "Lenders")
including Societe Generale as Agent. 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 acquisition of Time Saver Stores, Inc., 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
Sunshine Jr. Stores, Inc. ("SJS"). With the acquisition of SJS, the
Company assumed the indebtedness of SJS. On October 2, 1995, the
Amended and Restated Credit and Guaranty Agreement ("Amended C & G
<PAGE> 11
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
Agreement") was entered into and the Term Loan was increased to
$80,000, the Revolver was increased to $25,000 and the letter of
credit sub-limit 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.
As a result of financial covenant violations incurred by the Company
in 1996, an amendment to the Amended C & G Agreement ("C & G
Agreement -- Amendment No. 2") was entered into on March 27, 1997.
Under the terms of the C & G Agreement -- Amendment No. 2, the Term
Loan and the Revolver mature on October 1, 1998. Both loans bear
interest at the prime rate plus 1.75%, and, with proper notice to the
Agent, both can be converted to LIBOR loans at LIBOR plus 3.0%.
The Term Loan requires principal payments of $5,780 on January 24,
1998 and $6,280 on July 24, 1998. Also, the C & G Agreement --
Amendment No. 2 requires that 100% of certain transaction proceeds,
as defined, be immediately applied as a mandatory prepayment of the
Term Loan in the inverse order of maturity. However, 50% of the
first $10,600 of any asset sale can be applied pro rata to the
scheduled Term Loan principal payment due January 1998. Further, in
accordance with the C & G Agreement -- Amendment No. 2, the aggregate
outstanding principal amount of the Term Loan must be reduced to
$55,000 by December 31, 1997 and $45,000 by February 28, 1998.
In order to facilitate these reductions, the Company is divesting
certain assets that do not fit its strategic plan or are outside of
its primary market area. The net book values of these assets have
been classified as current on the Balance Sheet. In April 1997, net
proceeds of $479 from certain transactions related to the sale of
EZPET were applied against the outstanding Term Loan balance.
Additionally, in May 1997, the Company sold 20 locations in the
Nashville area and net proceeds of approximately $11,334 were applied
to the Term Loan. As discussed above, 50% of the proceeds from these
sales were applied to reduce the scheduled principal payments due on
July 24, 1997 to $2,410 and on January 24, 1998 to $2,890. On July
24, 1997 the $2,410 scheduled principal payment was made from the
Company's operating funds. Through October 31, 1997, proceeds from
additional asset sales reduced the Term Debt balance to $54,003,
thereby allowing the Company to be in compliance with the debt level
reductions described above until February 28, 1998. The Company is
actively pursuing other potential buyers for the remaining
divestiture locations. Management believes, but can provide no
assurance, that the remaining divestiture transactions will close,
thereby permitting the Company to fully comply with the debt level
reductions required by the C & G Agreement - Amendment No. 2.
Additionally, management is considering various alternatives in the
market for refinancing the debt before the October 1, 1998 maturity
date.
<PAGE> 12
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(Unaudited)
(Dollars in Thousands)
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, under the C & G Agreement --
Amendment No. 2, during a five consecutive calendar day period of
each calendar month, the aggregate outstanding borrowings cannot
exceed certain defined levels. At September 28, 1997, there were
$500 of outstanding borrowings under the Revolver and there were
$8,184 of outstanding letters of credit issued primarily for workers
compensation claims. In accordance with the C & G Agreement --
Amendment No. 2, the revolver limit of $25,000 is reduced by a
percentage of the dollar value of any current asset sold in
conjunction with a divestiture. As of September 28, 1997, the
revolver commitment was reduced to approximately $23,000. Further,
the C & G Agreement -- Amendment No. 2 grants the Lenders, among
other things, a security interest in substantially all of the
Company's real property, buildings and improvements, fixtures,
equipment, inventories, and receivables. Provisions of the C & G
Agreement -- Amendment No. 2 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. Due to the
impact of asset sales on financial covenant levels, on November 10,
1997, the Company and the Lenders agreed to covenant revisions.
NOTE (5) COMMITMENTS AND CONTINGENCIES
- --------------------------------------
The Environmental Protection Agency issued regulations in 1988 that
established certain requirements for underground storage tanks
("USTs") that affect various aspects of the Company's retail gasoline
operations. The regulations require assurances of insurance or
financial responsibility and will require the Company to replace or
upgrade a certain number of its USTs with systems to protect against
corrosion and overfill/spills and to detect leaks. The Company has
elected to self-insure to meet the financial responsibility aspects
of these regulations.
By December 22, 1998, all USTs must be corrosion protected and
overfill/spill protected. As of September 28, 1997, the Company was
approximately 70% completed with the corrosion and overfill/spill
requirements. The Company estimates that it will make additional
capital expenditures of $563 and $3,144 in 1997 and 1998
respectively, to be in full compliance with the regulations by the
1998 deadline.
Additionally, the Company estimates that the total future cost of
performing remediation on contaminated sites will be approximately
$23,892, of which approximately $22,175 is expected to be reimbursed
by state trust funds. Also, the Company anticipates incurring
approximately $510 for the cost of removing USTs at abandoned
locations.
<PAGE> 13
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands)
During 1995, the Company entered into an agreement with an
environmental consulting firm whereby the consulting firm assumes
responsibility for the clean up of contaminated sites at
approximately 80% of the Company's locations. Under this agreement
("Direct Bill Agreement"), the consulting firm remediates the sites
at its cost and files for reimbursement from the state. On April 22,
1997, the Company entered into a new agreement with Environmental
Corporation of America ("ECA") whereby ECA replaced the previous
environmental consulting firm at all existing contaminated sites with
the exception of approximately 25 sites in Florida. Under this new
agreement, ECA remediates the sites at its cost and files for
reimbursement from the applicable state. The Company incurs no cash
costs for these sites, other than the cost of the deductible and the
cost to remediate any locations deemed non-qualified for
reimbursement by the state. The agreement imposes no liability on
the Company in the event that payments from the state trust funds are
delayed or denied.
With the Direct Bill Agreement, assuming full reimbursement by the
states to the consulting firm, the future cash cost to the Company
for remediating contaminated sites drops to approximately $1,800. At
September 28, 1997, for work largely completed prior to the Direct
Bill Agreement, the Company had completed the necessary remediation
and has reimbursement claims totaling approximately $451 with the
various states in which it operates.
The above 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
the amount reserved due to the difficulty in estimating such costs
and due to potential changes in regulations or state reimbursement
programs.
NOTE (6) REDEEMABLE PREFERRED STOCK
- ------------------------------------
On January 27, 1997 the Company sold 140,000 shares of its newly
issued Series H Preferred Stock, ("Series H Preferred Stock") to the
same major stockholder that held substantially all of the Company's
$6.00 Convertible Preferred Stock, Series C ("Series C Preferred
Stock"). The Series H Preferred Stock is entitled to receive semi-
annual dividends at the rate of 13% per annum paid in additional
shares of Series H Preferred Stock payable on January 20 and July 20
of each year beginning July 20, 1997. As such, on July 20, 1997, the
Company issued to the existing Series H Preferred Stock Shareholders,
9,100 shares as dividends. The Series H Preferred Stock has no
voting rights, but ranks senior to any capital stock or other equity
securities of the Company. It can be redeemed
<PAGE> 14
E-Z SERVE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in Thousands)
by the Company at any time, but is mandatorily redeemable upon the
earlier of (a) the third anniversary of the date of issuance, (b) the
occurrence of a change of ownership, as defined, or (c) the
occurrence of a fundamental change, as defined. In an event of
default, as defined, the dividend rate increases to 23% and the
holders can elect one director to a separate class of directors who
shall have a majority of the votes on the Board of Directors.
Warrants representing the purchase of 960,000 shares of the Company's
common stock at a nominal exercise price were also issued as part of
this transaction. Additional warrants are issuable on each
anniversary that the Series H Preferred Stock remains outstanding.
The Series H Preferred Stock has a liquidation value of $14,000, and
was recorded at a net amount of $12,568 after deducting issuance fees
of $560 and the value of the 960,000 warrants of $872. The excess of
the liquidation value over the carrying value is being accreted
monthly over the three-year mandatory redemption period. Net
proceeds of $13,440 from the sale of the Series H Preferred Stock
were used by the Company in the following manner: $8,359 to redeem
all of the 75,656 outstanding shares, plus all accrued but unpaid
dividends, of the Company's Series C Preferred Stock; and $5,081 for
general corporate purposes, including paying down a portion of
amounts outstanding under the Revolver.
<PAGE> 15
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:
<TABLE>
<CAPTION>
Results of Operations
-----------------------------
(In thousands except store counts, per gallon prices and margins)
Three-months Ended Nine-month Ended
-------------------- --------------------
Sept. 28, Sept. 29, Sept. 28, Sept. 29,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CONVENIENCE STORE OPERATIONS (1)
- --------------------------------
Merchandise:
Average number of merchandise stores
during the period 655 714 669 725
Merchandise sales $ 78,484 $ 83,485 $230,842 $240,768
Merch. sales per loc. per month $ 39.9 $ 39.0 $ 38.3 $ 36.9
Gross profit $ 24,256 $ 24,303 $ 70,690 $ 71,243
Gross profit per loc. per month $ 12.3 $ 11.3 $ 11.7 $ 10.9
Gross profit percentage 30.91% 29.11% 30.62% 29.59%
Motor Fuels:
Average number of motor fuel stores
during the period 623 677 638 683
Gallons sold 93,873 103,750 279,475 300,474
Gallons sold per loc. per month 50.2 51.1 48.7 48.9
Revenues $107,941 $119,710 $326,135 $345,043
Price per gallon $ 1.15 $ 1.15 $ 1.17 $ 1.15
Gross profit $ 10,334 $ 12,937 $ 31,404 $ 36,328
Gross profit per loc. per month $ 5.5 $ 6.4 $ 5.5 $ 5.9
Gross profit per gallon $ 0.1101 $ 0.1247 $ 0.1124 $ 0.1209
MARKETER OPERATIONS (2)
- -----------------------
Average number of operating locations
during the period -- 187 174 193
Gallons sold -- 15,655 16,901 47,654
Gallons sold per location per month -- 27.9 24.3 27.4
Revenues $ -- $ 18,437 $ 20,590 $ 55,898
Price per gallon $ -- $ 1.18 $ 1.22 $ 1.17
Gross profit (3) $ -- $ 2,044 $ 1,966 $ 5,736
Gross profit per loc. per month $ -- $ 3.6 $ 2.8 $ 3.3
Gross profit per gallon $ -- $ 0.1306 $ 0.1163 $ 0.1204
</TABLE>
(1) At September 28, 1997, there were 645 Company operated convenience stores
(623 of which sold motor fuels) and 7 franchised convenience stores.
(2) Represents non-company operated motor fuel retail outlets ("Marketers").
The three-month and nine-month 1997 amounts include zero and four months of
data, respectively, due to the April 1997 sale of EZPET. At September 28,
1997 there were no remaining Marketer locations.
(3) Gross profit is shown before deducting compensation paid to operators of
locations not operated by the Company of $0 and $881,000 for the three-months
ended September 28, 1997 and September 29, 1996, respectively and $861,000 and
$2,640,000 for the nine-months ended September 28, 1997 and September 29, 1996,
respectively.
<PAGE> 16
Overview
- --------
The Company reported a net loss of $1,045,000 and net income of
$1,494,000 for the three-month periods ended September 28, 1997 and
September 29, 1996, respectively. Net income of $115,000 and $615,000
was reported for the nine-months ended September 28, 1997 and September
29, 1996, respectively. The first nine months of 1997 included a non-
recurring gain of $397,000 (net of tax) related to an insurance
settlement in the Company's favor and non-recurring income of $2,902,000
(net of tax) related to the sale of 20 locations in the Nashville area.
The first nine months of 1996 included non-recurring income of $392,000
(net of tax) related to a legal decision in the Company's favor.
Without these gains, the Company would have reported a net loss of
$3,184,000 for the first nine months of 1997 and net income of $223,000
for the first nine months of 1996.
Operating Gross Profit
- ----------------------
Convenience store ("C-Store") merchandise sales decreased 6.0% and 4.1%
in the three and nine-month periods ended September 28, 1997,
respectively, as compared to the same periods of 1996. This decline
reflects the Company's ongoing divestiture program. Merchandise sales
per location for the three-months ended September 28, 1997 increased
2.3% as compared to the same period in 1996; and increased 3.8% in the
nine-months ended September 28, 1997 as compared to the same period in
1996. For the first nine-months of 1997, merchandise revenue comprised
39.0% of the Company's total revenue as compared to 36.9% for the first
nine-months of 1996.
The average merchandise gross profit margin of 30.91% and 30.62% for the
three and nine-month periods ended September 28, 1997, respectively,
increased from the 29.11% and 29.59% reported for the same periods of
1996, respectively. These increases largely reflect product
remerchandising and reduced shrinkage. Merchandise sales at comparable
stores decreased 0.4% in the quarter ended September 28, 1997 and
increased 1.2% in the nine-months ended September 28, 1997 as compared
to the same 1996 periods. However, merchandise gross profit at
comparable stores increased by 4.0% and 3.9% in the third quarter and
nine months of 1997, respectively.
Average C-Store gross profit per gallon decreased 1.46 cents to 11.01
cents per gallon in the third quarter of 1997 as compared to the third
quarter of 1996, and decreased .85 cents per gallon in the first nine
months of 1997 as compared to the first nine months of 1996. Sales
volumes at comparable locations declined 3.6% and 2.5% in the three and
nine-month periods of 1997, respectively, as compared to the same
periods of 1996.
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) decreased 26.9% and
increased 28.5% in the three and nine-months ended September 28, 1997,
<PAGE> 17
respectively, as compared to the same periods of 1996. Other income for
1997 included $610,000, of non-recurring insurance settlements in the
Company's favor in the first quarter and a second quarter gain of
$4,465,000 from the divestiture of the Company's convenience store
locations in Nashville, Tennessee. The second quarter of 1996 included
non-recurring income of $603,000 relating to a legal settlement in the
Company's favor. Exclusive of these non-recurring items, the decline in
other income in the first nine months of 1997 from the comparable 1996
period would have been 13.6% and was primarily due to the decline in
number of operating locations in 1997.
Expenses
- --------
Total operating expenses decreased by 3.4% and 4.2% for the three and
nine-months ended September 28, 1997, respectively, as compared to the
same periods of 1996 due largely to the decrease in the number of
operating locations. Operating expenses as a percentage of total
revenues, were 14.9% and 14.2% for the third quarter and the first nine-
months of 1997, respectively, as compared to 13.0% and 13.4%,
respectively, for the same periods in 1996. SG&A expenses, as a percent
of total revenue, increased to 2.8% in the third quarter 1997 from 2.5%
in the third quarter 1996 and remained constant at 2.8% in the first
nine-months of 1997 and 1996. These increases primarily reflect the
sale of the Marketer business which had high revenues and lower
operating and SG&A expenses.
Depreciation and amortization expense decreased 2.6% and 5.2% in the
three and nine-months ended September 28, 1997, respectively, as
compared to the same periods in 1996 due to the lower number of
operating locations.
Interest expense decreased slightly in the three months ended September
28, 1997 as compared to the same period of 1996 as a result of lower
debt levels. Interest expense increased $434,000 for the nine-month
period ended September 28, 1997 as compared to the same period in 1996
due to increased amortization of debt financing costs caused by the
shorter tenor of the Company's bank debt.
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:
<PAGE> 18
<TABLE>
<CAPTION>
September 28, December 29,
1997 1996
------------- ------------
<S> <C> <C>
Current assets $71,726,000 $64,887,000
Current liabilities $72,784,000 $79,686,000
Current ratio 0.99:1 0.81:1
Long-term debt (including related
parties, capital leases and other) $40,425,000 $66,315,000
Stockholders' equity $47,682,000 $55,284,000
Long-term debt to equity ratio 0.85:1 1.20:1
Common shares outstanding 69,321,530 69,119,530
Liquidity
- ---------
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 credit card sales, lottery and
lotto redemptions, manufacturer rebates, and other receivables. In
addition, the Company finances its inventory requirements primarily
through normal trade credit terms. This condition allows the Company
to operate with a low level of cash and working capital. The Company
had a working capital deficit of $1,058,000 at September 28, 1997 as
compared to a working capital deficit of $14,799,000 at year end
1996. The change is due to the reclassification to current assets of
approximately $13,007,000 of the carrying value of certain non-core
locations that the Company plans to sell in 1997 in order to satisfy
the debt level reductions required by the C & G Agreement --
Amendment No. 2. As of September 28,1997, the Company had
$11,326,000 available on its revolving line of credit.
During the first nine-months of 1997, the Company received the
following major non-recurring cash proceeds: sale of the Nashville
locations and other fixed assets of $12,693,000 and proceeds from
insurance settlements of $610,000.
Major non-recurring expenditures included: $624,000 for capital and
environmental equipment; $976,000 for environmental remediation; and
$76,000 for removal of underground storage tanks.
Approximately 59% of the Company's revenues are derived from motor
fuel sales and, because the Company acquires 100% of its product on a
virtual 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.
In addition, attempts by major oil companies and others, including
the Company, to gain market share have placed added pressure on
margin and volume. Without stability in the marketplace, the Company
may temporarily experience operating results that are unprofitable
before considering depreciation and debt service.
The Company believes that cash flow from operations and available
working capital will provide the Company with sufficient liquidity to
<PAGE> 19
conduct its business in an ordinary manner. However, the occurrence
of unanticipated events or a prolonged motor fuel margin squeeze
could cause cash shortfalls to exist and require the Company to
borrow on its revolving line of credit to a greater extent than
currently anticipated, to seek additional debt financing or to seek
additional equity capital which may or may not be available. In
addition, in accordance with the terms of the C & G Agreement --
Amendment No. 2 (see Capital Resources), the Company has the option
to apply a portion of the proceeds received from sales of assets to
the January 1998 scheduled principal payment.
Capital Resources
- -----------------
On January 17, 1995, EZCON entered into a Credit and Guaranty
Agreement ("C & G Agreement") with a group of banks (the "Lenders")
including Societe Generale as 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 previous credit agreement, (b) to
finance the initial payment for the acquisition of Time Saver Stores,
Inc., 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 Sunshine Jr. Stores, Inc. ("SJS"). With the acquisition of SJS,
the Company assumed the indebtedness of SJS. On October 2, 1995, the
Amended and Restated Credit and Guaranty Agreement ("Amended C & G
Agreement") was entered into and the Term Loan was increased to
$80,000,000, the Revolver was increased to $25,000,000 and the letter
of credit sub-limit was increased to $15,000,000. The Company fully
drew the additional $19,600,000 available on the Term Loan and used
the proceeds to retire all of the outstanding debt of SJS.
As a result of financial covenant violations incurred by the Company
in 1996, an amendment to the Amended C & G Agreement ("C & G
Agreement -- Amendment No. 2") was entered into on March 27, 1997.
Under the terms of the C & G Agreement -- Amendment No. 2, the Term
Loan and the Revolver mature on October 1, 1998. Both loans bear
interest at the prime rate plus 1.75%, and, with proper notice to the
Agent, both can be converted to LIBOR loans at LIBOR plus 3.0%.
The Term Loan requires principal payments of $5,780,000 on January
24, 1998 and $6,280,000 on July 24, 1998. Also, the C & G Agreement
- -- Amendment No. 2 requires that 100% of certain transaction
proceeds, as defined, be immediately applied as a mandatory
prepayment of the Term Loan in the inverse order of maturity.
However, 50% of the first $10,600,000 of any asset sale can be
applied pro rata to the scheduled Term Loan principal payment due
January 1998. Further, in accordance with the C & G Agreement --
Amendment No. 2, the aggregate outstanding principal amount of the
Term Loan must be reduced to $55,000,000 by December 31, 1997 and
$45,000,000 by February 28, 1998.
In order to facilitate these reductions, the Company is divesting
certain assets that do not fit its strategic plan or are outside of
its primary market area. The net book values of these assets have
<PAGE> 20
been classified as a current asset. In April 1997, net proceeds of
$479,000 from certain transactions related to the sale of EZPET were
applied against the outstanding Term Loan balance. Additionally, in
May 1997, the Company sold 20 locations in the Nashville area and net
proceeds of approximately $11,334,000 were applied to the Term Loan.
As discussed above, 50% of the proceeds from these sales were applied
to reduce the scheduled principal payments due on July 24, 1997 to
$2,410,000 and on January 24, 1998 to $2,890,000. On July 24, 1997
the $2,410,000 scheduled principal payment was made from the
Company's operating funds. Through October 31, 1997, proceeds from
additional asset sales reduced the Term Debt balance to $54,003,000,
thereby allowing the Company to be in compliance with the debt level
reductions described above until February 28, 1998. The Company is
actively pursuing other potential buyers for the remaining
divestiture locations. Management believes, but can provide no
assurance, that these transactions will close, thereby permitting the
Company to fully comply with the debt level reductions required by
the C & G Agreement - Amendment No. 2. Additionally, management is
considering various options in the market for refinancing the debt
before the October 1, 1998 maturity date.
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, under the C & G
Agreement -- Amendment No. 2, during a five consecutive calendar day
period of each calendar month, the aggregate outstanding borrowings
cannot exceed certain defined levels. At September 28, 1997, there
were $500,000 of outstanding borrowings under the Revolver and there
were $8,184,000 of outstanding letters of credit issued primarily for
workers compensation claims. In accordance with the C & G Agreement
- -- Amendment No. 2, the revolver limit of $25,000,000 is reduced by a
percentage of the dollar of any current asset sold in conjunction
with a divestiture. As of the September 28, 1997, the revolver
commitment was reduced to approximately $23,000,000. Further, the C
& G Agreement -- Amendment No. 2 grants the Lenders, among other
things, a security interest in substantially all of the Company's
real property, buildings and improvements, fixtures, equipment,
inventories, and receivables. Provisions of the C & G Agreement --
Amendment No. 2 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. Due to the impact of
asset sales on financial covenant levels, on November 10, 1997, the
Company and the Lenders agreed to covenant revisions.
On January 27, 1997 the Company sold 140,000 shares of its newly
issued Series H Preferred Stock, ("Series H Preferred Stock") to the
same major stockholder that held substantially all of the Company's
Series C Preferred Stock. The Series H Preferred Stock is entitled
to receive semi-annual dividends at the rate of 13% per annum paid in
additional shares of Series H Preferred Stock. As such, on July 20,
1997, the Company issued to the existing Series H Preferred Stock
Shareholders, 9,100 shares as dividends. The Series H Preferred
Stock has no voting rights, but ranks senior to any capital stock or
other equity securities of the Company. It can be redeemed by the
Company at any time, but is mandatorily redeemable upon the earlier
of (a) the third anniversary of the date of issuance, (b) the
<PAGE> 21
occurrence of a change of ownership, as defined, or (c) the
occurrence of a fundamental change, as defined. In an event of
default, as defined, the dividend rate increases to 23% and the
holders can elect one director to a separate class of directors who
shall have a majority of the votes on the Board of Directors.
Warrants representing the purchase of 960,000 shares of the Company's
common stock at a nominal exercise price were also issued as part of
this transaction. Additional warrants are issuable on each
anniversary that the Series H Preferred Stock remains outstanding.
The Series H Preferred Stock has a liquidation value of $14,000,000,
and was recorded at a net amount of $12,568,000 after deducting
issuance fees of $560,000 and the value of the 960,000 warrants of
$872,000. The excess of the liquidation value over the carrying
value is being accreted monthly over the three-year mandatory
redemption period. Net proceeds of $13,440,000 from the sale of the
Series H Preferred Stock were used by the Company in the following
manner: $8,359,000 to redeem all of the 75,656 outstanding shares,
plus all accrued but unpaid dividends, of the Company's $6.00
Convertible Preferred Stock, Series C; and $5,081,000 for general
corporate purposes, including paying down a portion of amounts
outstanding under the Revolver.
Due to capital constraints brought about largely by operating losses
and by the environmental expenditure requirements discussed below,
the Company was unable to properly upgrade its facilities prior to
1994. However, as a result of improved operating results, the
Company made discretionary capital expenditures of $23,300,000
between 1994 and 1996. 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, discretionary capital
expenditures were essentially halted in mid-year 1996 and remain
constrained. Although this curtailment will significantly reduce the
intended level of higher return discretionary expenditures in 1997,
the Company believes that it will be able to generate sufficient cash
flow to meet its obligations. However, the Company must seek
alternate sources of capital if it is to remain competitive in the
marketplace in the future.
The Company's business strategy is to grow through acquisitions. 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 industry
continues to consolidate to reduce costs, and as small independent
operators have difficulty meeting environmental deadlines. 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.
Current federal law mandates that, by December 22, 1998, all USTs
must be corrosion protected, overfill/spill protected, and have a
method of leak detection installed. Each UST is governed by
different sections of the regulations, which allow for implementation
of these requirements during varying periods of up to ten years based
on type and age of the individual UST. All existing USTs must be
upgraded to provide corrosion and overfill/spill protection by
<PAGE> 22
December 22, 1998. As of September 28, 1997, the Company was
approximately 70% completed with the corrosion and overfill/spill
requirements. The Company estimates that additional expenditures of
$3,707,000 will be necessary to meet these upgrade standards.
Additionally, the Company estimates that the total future cost of
performing remediation on contaminated sites will be approximately
$23,892,000, of which approximately $22,175,000 is expected to be
reimbursed by state trust funds. Also, the Company anticipates
incurring approximately $510,000 for the cost of removing USTs at
abandoned locations.
During 1995, the Company entered into an agreement with an
environmental consulting firm whereby the consulting firm assumes
responsibility for the cleanup of contaminated sites at approximately
80% of the Company's locations. Under this agreement ("Direct Bill
Agreement"), the consulting firm remediates the sites at its cost and
files for reimbursement from the state. On April 22, 1997, the
Company entered into a new agreement with Environmental Corporation
of America ("ECA") whereby ECA replaced the previous environmental
consulting firm at all existing contaminated sites with the exception
of approximately 25 sites in Florida. Under this new agreement, ECA
remediates the sites at its cost and files for reimbursement from the
applicable state. The Company incurs no cash costs for these sites,
other than the cost of the deductible and the cost to remediate any
locations deemed non-qualified for reimbursement by the state. The
agreement imposes no liability on the Company in the event that
payments from the state trust funds are delayed or denied.
With the Direct Bill Agreement, assuming full reimbursement by the
states to the consulting firm, the future cash cost to the Company
for remediating contaminated sites decreases to approximately
$1,800,000. At September 28, 1997, for work largely completed prior
to the Direct Bill Agreement, the Company had completed the necessary
remediation and has reimbursement claims totaling approximately
$451,000 with the various states in which it operates.
The assumptions on which the above cost estimates are based may not
materialize, and unanticipated 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.
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 is 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 $47,000,000 at December 29, 1996. The NOL will expire
if not utilized between 2005 and 2011. In addition, the Company has
alternative minimum tax NOL carryforwards of approximately
<PAGE> 23
$39,000,000 which are available over an indefinite period and can be
utilized should the Company's alternative minimum tax liability
exceed its regular tax liability.
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 include general
economic, business and market conditions, the volatility of the price
of oil, competition, development and operating costs, and the factors
that are disclosed in conjunction with the forward looking statements
included herein and in the Company's most recent Annual Report on
Form 10-K filed with the Securities and Exchange Commission
("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.
Adoption of New Accounting Standard
- -----------------------------------
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128")
"Earnings Per Share". SFAS 128 establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with
publicly held common stock or potential common stock. This statement
simplifies the standards for computing EPS previously found in
Accounting Principles Board Opinion No. 15, "Earnings Per Share", and
makes them comparable to international EPS standards. This statement is
effective for financial statements issued for periods ending after
December 15, 1997, including interim periods; earlier application is not
permitted. This statement requires restatement of all prior-period EPS
data presented. Considering the guidelines as prescribed by SFAS 128,
management believes that the adoption of this statement will not have a
material effect on EPS and thus pro forma EPS, as suggested for all
interim and annual periods prior to required adoption, have been
omitted.
<PAGE> 24
PART II - OTHER
- ---------------
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
- ----------------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None.
Item 6. Exhibits and Reports on form 8-K
- -----------------------------------------
(a) Exhibits:
27 Financial Data Schedule for the period ended September 28, 1997.
(b) The Company did not file any reports on Form 8-K during the three-months
ended September 28, 1997.
<PAGE> 25
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: November 12, 1997 /s/ John T. Miller
----------------- --------------------------
John T. Miller
Senior Vice President
Chief Financial Officer
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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 September 28, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> SEP-28-1997
<CASH> 8,982
<SECURITIES> 0
<RECEIVABLES> 6,905
<ALLOWANCES> 0
<INVENTORY> 33,514
<CURRENT-ASSETS> 72,726
<PP&E> 109,445
<DEPRECIATION>
<TOTAL-ASSETS> 199,600
<CURRENT-LIABILITIES> 72,784
<BONDS> 40,425
14
0
<COMMON> 693
<OTHER-SE> 46,989
<TOTAL-LIABILITY-AND-EQUITY> 199,600
<SALES> 577,567
<TOTAL-REVENUES> 591,464
<CGS> 473,507
<TOTAL-COSTS> 557,583
<OTHER-EXPENSES> 26,786
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,779
<INCOME-PRETAX> 316
<INCOME-TAX> 201
<INCOME-CONTINUING> 115
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 115
<EPS-PRIMARY> ( .02)
<EPS-DILUTED> ( .02)
</TABLE>
