<PAGE> 1
==============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
FORM 10-K
--------------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 28, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 number)
2550 North 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)
-----------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock, $0.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
____
The aggregate market value of the Common Stock held by non-affiliates of
the Registrant at March 9, 1998, based upon the closing price of these shares
on the American Stock Exchange, was $7,403,314.
Common Stock 69,351,530
(Number of shares outstanding as of March 9, 1998)
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<PAGE 2>
E-Z SERVE CORPORATION AND SUBSIDIARIES
FORM 10-K
FOR THE YEAR ENDED December 28, 1997
INDEX
<TABLE>
<CAPTION>
Item
Number Page
Part I
<S> <C> <C>
Item 1. Business 3
Item 2. Properties 13
Item 3. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Part II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 15
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 46
Part III
Item 10. Directors and Executive Officers of the Registrant 47
Item 11. Executive Compensation 47
Item 12. Security Ownership of Certain Beneficial Owners and
Management 47
Item 13. Certain Relationships and Related Transactions 47
Part IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 48
Signatures 52
</TABLE>
<PAGE> 3
PART I
ITEM 1. BUSINESS
General Background
- ------------------
E-Z Serve Corporation, through its wholly-owned subsidiary (the "Company"),
operated 494 and franchised 7 convenience stores, mini marts, and gas marts at
December 28, 1997 primarily under the names E-Z Serve and Majik Market. The
Company is engaged in retail merchandising of traditional grocery and non-
grocery lines associated with such stores. The Company also retailed gasoline
at 467 of its convenience stores under its proprietary brand name E-Z Serve
and a number of major brands such as Citgo, Texaco and Amoco.
The Company was organized in 1971 and until 1986 operated a gasoline wholesale
business, a gasoline supply and trading business and approximately 800 non-
company operated retail outlets("Marketers"). In 1992, the Company acquired
Taylor Petroleum, Inc. ("Taylor") and E-Z Serve Convenience Stores, Inc.
("EZCON"), bringing the company operated convenience store total to 523 and
dramatically increasing the Company's presence in metropolitan markets. In
1995, the Company acquired Time Saver Stores, Inc. ("Time Saver"), a chain of
116 convenience stores located primarily in New Orleans, Louisiana, and
Sunshine Jr. Stores, Inc. ("SJS"), a chain of 205 convenience stores with a
strong concentration in the Florida Panhandle.
During 1996, the Company disposed of or closed 45 company operated convenience
stores and 30 Marketers that did not fit its strategic plan or were outside of
its primary market area. In the first quarter of 1997, the Company
implemented a plan to divest itself of its Marketer operations and of various
convenience stores. In April 1997, the Company sold all of the capital stock
of its wholly owned subsidiary, E-Z Serve Petroleum Marketing Company,
("EZPET") thereby divesting itself of its remaining 174 Marketers. Also
during 1997, 201 convenience stores were sold or closed as part of the
divestiture program. The following table shows the states in which the
Company conducted business as of December 28, 1997:
<TABLE>
<CAPTION>
Company
Operated
State Convenience Stores
-------------- -----------------
<S> <C>
Louisiana 129
Florida 125
Georgia 67
Alabama 66
South Carolina 43
Mississippi 42
North Carolina 21
Texas 1
- ---
Total 494
===
</TABLE
E-Z Serve Corporation is incorporated in Delaware and maintains its principal
corporate offices at 2550 North Loop West, Suite 600, Houston, Texas 77092;
its telephone number is (713) 684-4300. Substantially all of the Company's
operations are conducted by its wholly-owned subsidiary, EZCON. Unless the
context indicates otherwise, the term "the Company" as used herein should be
<PAGE> 4
understood to include subsidiaries of E-Z Serve Corporation and predecessor
corporations.
Business Strategy
- -----------------
The Company currently conducts convenience store operations in 7 southeastern
states. One major component of the Company's business strategy is to
concentrate its presence and increase market share in the southeastern region
of the United States. In the first quarter of 1997, the Company implemented a
plan to divest certain convenience stores that did not meet operating
objectives or were outside of this marketing area. In this regard, the
Company discontinued operations at 201 convenience stores located primarily in
Tennessee, Central Florida, Texas, Kansas and Missouri and at all 174 Marketer
locations.
The Company will continue to evaluate acquisition opportunities that exist in
the southeastern region of the United States and that are available at costs
that provide acceptable rates of return. 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.
In addition to the aforementioned growth strategy, the Company is focused on
enhancing current operations by increasing customer traffic, sales and profit
margins. Key elements of the Company's strategy include:
Focus On Proprietary Food Service Offerings: Many stores offer a variety of
prepared and self service fast foods including freshly made sandwiches, hot
dogs, fried chicken, pre-packaged sandwiches and nachos. The Company expects
to expand and to continue to improve its food service programs and develop a
proprietary program under the umbrella name "E-Z Street Cafe".
Offer Additional Traffic Enhancing Services: The Company offers a number of
services at its stores, including the sale of lottery tickets, money orders,
prepaid phone cards and free check cashing. In addition, the Company
currently has 96 stores with automatic teller machines ("ATMs") and plans to
install additional ATMs in 1998. The Company believes that the additional
ATMs will serve to increase merchandise and gasoline sales.
Upgrade Existing Locations: Management has developed a plan to enhance
gasoline facilities and/or remodel store interiors at a significant number of
existing stores. These facility improvements are projected to yield increases
in sales and profit, however, implementation of the plan is dependent on the
availability of capital.
Convenience Store Operations
- ----------------------------
In 1997, convenience store merchandise sales accounted for approximately 40%
of the Company's consolidated operating revenues, and gasoline sales at
company operated convenience stores comprised approximately 56% of
consolidated operating revenues. Average monthly per store merchandise sales
were approximately $37,800, and average monthly convenience store gasoline
sales were approximately 48,700 gallons. At comparable stores, merchandise
sales increased 0.7% and gasoline gallons sold decreased 1.6% in 1997 from
1996 levels.
<PAGE> 5
Configuration and Operations
At December 28, 1997, the Company operated 494 and franchised 7 convenience
stores in 8 states under the names E-Z Serve (366 locations), Majik Market (80
stores) and various other names (55 stores). Of these, 199 are owned in fee
and 302 are operated under long-term operating lease arrangements. Most of
the stores are located in the southern United States, with the largest
concentration in Florida, Louisiana, Georgia and Alabama. The stores operate
seven days a week; 431 are open 24 hours, and the remainder are generally open
from 6 a.m. to 12 a.m. At December 28, 1997, the Company operated 411 full-
size convenience stores (2000-2800 square feet), 69 mini marts (1200-2000
square feet) and 14 gas marts (400-1200 square feet). Convenience to the
customer is emphasized through location of the store, accessible parking,
merchandise selection, and service. The majority of the stores (467) market
self-service gasoline with 66 of the stores featuring "pay at the pump" credit
card readers. The stores do not provide automobile maintenance service, nor
do they sell tires, batteries, or other automotive accessories other than
motor oil, antifreeze, and windshield washer fluid. Of the 467 stores that
retail gasoline, branding arrangements are as follows: Citgo (228); Texaco
(45); Amoco (10); BP (5); Shell (3); Fina (1); Phillips (1) and unbranded
(174).
Merchandising
The products offered for sale in each store are selected to provide sufficient
variety to meet the needs of convenience oriented customers. The full size
stores stock approximately 2,600 items consisting of nationally branded
products and local market preferred items. This product mix consists of
processed food and non-food items including groceries, dairy products, candy,
snacks, bakery goods, alcoholic beverages, tobacco products, health/beauty
items, non-alcoholic beverages, periodicals and other general merchandise.
Most stores also carry immediately consumable products, including fresh brewed
coffee, cappuccino, fountain soft drinks, frozen carbonated beverages, hot
dogs, nachos and a wide variety of packaged pastries and snacks. In addition,
most stores sell lottery tickets, offer money orders, provide pay phones and
sell prepaid phone cards. There are 96 stores that have ATMs and several
stores with branded fast food operations. Promotional activity to increase
store traffic and communicate consumer value is often supported by suppliers
with lower costs to maximize gross profit dollars. These promotions are
communicated in key markets with advertising including television, radio and
billboards as well as in-store point-of-sale signs and displays. Retail
prices, both every day and promotional, are determined by the competitive
environment and the desire to complete a profitable transaction. The
estimated sales percentages by product category are as follows:
</TABLE>
<TABLE>
<Caption)
1997 1996
---- ----
<S> <C> <C>
Gasoline 56% 58%
Tobacco 12 11
Alcoholic Beverages 9 9
Non-Alcoholic Beverages 6 5
Food Service 3 3
Groceries 3 3
Salty Snacks 2 2
Candy 2 2
Publications 1 1
Health/Beauty Care 1 1
Dairy 1 1
Other 4 4
<PAGE> 6
---- ----
100% 100%
==== ====
</TABLE>
The Company utilizes a category management approach using consumer
information, along with purchase and sales data by store to determine product
assortment and services offered. In addition, consumer data and research
provided by key suppliers enhances product mix, presentation and promotions.
Throughout 1998, the Company intends for its merchandising initiatives to
continue to focus on revitalizing the product mix, improving in-store
presentation, leveraging supplier relationships and maximizing sales and gross
profit dollars using the category management process. Category plans have
been developed to support budgeted sales and gross profit dollars. The plans
support an aggressive approach to new item additions and the deletion of slow
sellers to improve inventory turns with the intent to stock only those items
that convenience store consumers want and need. The Company plans to increase
emphasis on higher margin food service items under the new "E-Z Street Cafe'"
family of fresh and fast food snacks and meals, as well as hot and cold
beverages. The Company intends to conduct a continuous verification of store
level execution of merchandising initiatives to insure that sales are
optimized and stores provide the best customer service.
Management and Training
Each store is staffed with a manager who is responsible for ordering, customer
service, recruiting and supervising store employees, store merchandising and
expense control. Supervisors are generally responsible for eight to ten
stores and support the store managers in their responsibilities to the
customers and the Company. In addition to their salaries, the store managers
participate in a cash incentive program based on merchandise sales
improvement, control of key expense items, store profitability, and customer
service.
All newly hired store level employees are given mandatory in-store training by
the store manager. This training includes customer service, safety, alcohol
and tobacco sales awareness, robbery and crime prevention, and on-the-job
operational responsibilities. Employees who demonstrate managerial ability
are offered additional training and become qualified for promotion to store
manager.
Seasonal Trends
- ---------------
Traditionally, gasoline sales volumes are higher between April and September
and peak in July and August. Convenience store merchandise sales follow a
similar pattern, but the swings are not as dramatic. This seasonality at the
Company's stores is diminished somewhat compared to national norms since most
of the Company's stores are located in the southeastern U.S. where the climate
is temperate.
Suppliers
- ---------
During 1997, the Company purchased approximately 50% of its store merchandise
from one large wholesale supplier under a seven-year agreement which expires
in December 2001. This relationship allows the Company to enhance rebate and
purchase discount programs provided by national brand manufacturers.
<PAGE> 7
Additionally, the Company believes the relationship provides excellent
flexibility regarding product quantities and variety. Certain products such
as alcoholic beverages, soft drinks, dairy products, and baked goods are
purchased directly from either local suppliers or from manufacturers'
distribution networks due to legal and trade restrictions and industry
practice. These suppliers typically have their own distribution networks and
quality control systems.
Gasoline supply is obtained from two primary sources. Stores that sell
gasoline under a major brand are supplied through term agreements with major
oil companies. These agreements provide reliable, but not guaranteed, product
supply, competitive pricing (i.e. posted rack which is related to the spot
market), national advertising support, associated brand recognition, and
customer perception of quality. The major oil companies also provide
continuing support for location upgrades and credit card programs which
enhance gasoline sales. Stores that sell gasoline under the Company's trade
names (primarily E-Z Serve and Majik Market) obtain product on a spot basis
based upon the lowest rack price postings at terminals located near these
stores. As of December 28, 1997, approximately 70% of the Company's gasoline
supply requirement was under contract to three branded suppliers, but the
Company has available, and utilizes, 16 suppliers. The Company discontinued
the private transport of gasoline for its own account in May 1995. All
gasoline supply is now transported by contracted common carriers from
refineries or product terminals to the Company's retail stores.
There are alternative wholesale merchandise supply sources available to the
Company and management believes that merchandise supply is stable and that
other sources could be obtained if necessary. Gasoline suppliers in recent
years have had no difficulty meeting the Company's needs; however, national or
international events could cause a supply interruption which, if extended in
duration, could have a material adverse effect on the Company's operations and
earnings.
Competition
- -----------
The Company's business, particularly gasoline sales, is highly competitive.
In the convenience store merchandise market, the primary competitors are
locally operated convenience stores and national or regional chain operators.
Most convenience stores market similar classes of products, typically
stocking over 2,500 items. Competitive factors include location, advertising,
product mix and presentation, promotions, pricing, and customer service. The
Company has established policies and procedures which address each of these
areas, and, as properly implemented by its management team, allow the Company
to effectively compete in its markets.
Gasoline competitors include local dealers and jobbers, independent retailers,
independent and chain convenience stores, and integrated oil companies. The
principal competitive factors affecting the Company's business are location,
product price and quality, facility appearance, equipment and brand
identification. Product differentiation is problematic except in the case of
specific brand preferences. Since most stores offer similar equipment and
service levels, it is difficult to create a perceived value enhancement for
the Company's products. Accordingly, gasoline marketers tend to compete
primarily on the basis of price. Prices are typically advertised on highly
visible signage, thus offering the customer the opportunity to compare and
shop prices at competing stores while still in his or her car. These factors
tend to make gasoline prices much less stable than convenience store
merchandise prices.
<PAGE> 8
The Company believes that several additional factors allow it to operate
competitively. First, by operating 494 stores, the Company spreads its
corporate overhead over more stores than smaller chains. Secondly, the
Company's size allows it to reduce product cost through discounts and rebates
associated with volume purchasing. Lastly, in areas such as New Orleans and
the Florida Panhandle, where the Company is a market share leader, the Company
can effectively employ media advertising campaigns intended to increase sales.
Sale of the Marketer Business
In 1991, the Company evaluated the strategic importance and profit
contribution potential of each of its Marketers. As a result of this study,
between 1992 and 1996 the Company sold 92 of these Marketers for a combination
of cash and notes totaling approximately $2,960,000 and closed an additional
194 stores. On April 22, 1997, the Company sold all of the outstanding
capital stock of EZPET, its wholly owned subsidiary, to Restructure, Inc. for
$451,000. As a result of the sale, the Company disposed of its 174 remaining
Marketers.
Employees
- ---------
At December 28, 1997, the Company employed 3,551 people (including part-time
employees), of which 3,286 were employees in convenience stores, 107 were in
field supervision, and 158 were in management, administrative, and clerical
positions. The Company is not party to any collective bargaining agreements
and has experienced no work stoppages or strikes as a result of labor
disputes. The Company experiences the high rate of turnover of store
employees that is common in the convenience store industry. The Company
provides competitive wage scales and benefits, and considers relations with
employees to be satisfactory.
Management Information Systems
- ------------------------------
In 1994, the Company implemented a three-phase plan to upgrade its information
systems. Phase I involved the installation of home office hardware and
software to serve as the foundation for the new system. Phase II, which was
completed in early 1996, included the installation of personal computers at
all stores. With personal computers, store managers now input operating
results and transmit daily to the corporate office for processing. Further,
this system allows the Company to control prices electronically at the
corporate level rather than manually at the store level and provides for
quicker dissemination of information to decision-makers. In addition, all
field operating management have laptop computers that can transmit or retrieve
data from the host system in the corporate office. Phase II also provided the
necessary base hardware and software for future implementation of point-of-
sale ("POS") product management.
Phase III will entail the installation of POS hardware (e.g. cash registers
integrated to the personal computers and additional price look up capability
and possibly scanners) and software. When completed, this phase will provide
enhanced product category sales management, significantly enhance inventory
controls and reduce store personnel's clerical requirements thereby allowing
store personnel to direct more attention to sales and profitability. The
Company is currently conducting a point of sale test using the VeriFone Ruby
System in seven of the Atlanta market stores. After a successful test, a roll
out implementation plan will then be developed.
<PAGE> 9
During 1996 and early 1997, the Company also installed software in the
personal computers to print money orders and payroll checks at the stores.
This eliminated the cost of separate money order dispensers and the need to
maintain money order stock at the stores. The printing of weekly payroll
checks at the stores eliminates the cost of overnight mailing from the
corporate office.
The Company has considered the impact of year 2000 issues on its computer
systems and applications. Management believes that all systems that will be
in use in the year 2000 and beyond are year 2000 compliant. No material
future costs are anticipated to be incurred for the year 2000 issues.
Trademarks
- ----------
The trade names "E-Z Serve," "Majik Market", "Taylor Food Marts", "Time
Saver", and "Jr. Food Stores" are registered with the U.S. Patent and
Trademark Office. The name "E-Z Street Cafe'" is in the process of being
trademarked. The Company believes that these service marks are of significant
value in the promotion of the Company's business. However, the Company plans
to convert most of the locations that are not branded E-Z Serve to the E-Z
Serve brand as it remodels stores.
Government Regulation
- ---------------------
Regulation of Underground Storage Tanks
At December 28, 1997, the Company owned approximately 1,422 underground
storage tanks ("USTs") that are used for the storage of refined products at
its retail units. The ownership and/or operation of USTs is subject to
federal, state, and local laws and regulations. Federal regulations issued in
1988 established requirements for (i) maintaining leak detection systems, (ii)
upgrading tank systems, (iii) taking corrective action in response to leakage,
(iv) closing tanks to prevent future leakage, (v) keeping appropriate records,
and (vi) maintaining evidence of financial responsibility for taking
corrective action and compensating third parties for bodily injury and
property damage resulting from leakage. These regulations provide that the
states may take primary responsibility for administering and enforcing
regulatory programs by adopting requirements that are at least as stringent as
the federal standards. Several states in which the Company operates or has
operated (i.e., Florida) have adopted programs that are more stringent than
the federal requirements. Violations of the federal regulations may be
subject to enforcement orders by the Environmental Protection Agency ("EPA")
or the applicable state agency, as the case may be, and owners and operators
of USTs who fail to comply with an EPA order alleging a violation of the
regulations may be subject to a $25,000 per day civil penalty. A civil
penalty of $10,000 per tank per day may also be imposed by the EPA upon any
UST owner who knowingly fails to file any required notification forms or
submits false information with respect thereto or who fails to comply with any
requirements or standards promulgated by the EPA under these federal
regulations. In some situations, the Company can be liable for cleanup costs,
even if the contamination resulted from previous conduct of the Company that
was lawful at the time, or from improper conduct of, or conditions caused by,
previous property owners, lessees or other persons not associated with the
Company. From time to time, claims are made and litigation is brought against
the Company under these and other laws.
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
<PAGE> 10
based on type and age of the individual UST. All new tanks must be corrosion
protected, overfill/spill protected, and have leak detection when installed.
All existing USTs must be upgraded to provide corrosion and overfill/spill
protection by December 22, 1998. The existing USTs can meet corrosion
standards by complying with the standards applicable to new tanks or by being
protected on the interior with an approved coating or a cathodic protection
system. The Company has chosen, in most cases, to meet the leak detection
requirements by utilizing Statistical Inventory Reconciliation with daily
inventory reconciliations. At December 28, 1997, the Company was in complete
compliance with leak detection standards and 75% completed with the tank
upgrade requirements. The Company estimates that it will make capital
expenditures of $1,800,000 in 1998 to be in full compliance with the
regulations by the December 22, 1998 deadline.
Additionally, the Company estimates that the total future cost of performing
remediation on contaminated sites will be approximately $20,698,000, of which
approximately $18,928,000 are probable of reimbursement by state trust funds.
On April 22, 1997, the Company entered into an agreement with Environmental
Corporation of America ("ECA") whereby ECA replaced the Company's previous
environmental consulting firm at all existing contaminated sites with the
exception of approximately 25 sites in Florida. Under this agreement ("Direct
Bill Agreement"), ECA remediates the sites and files for reimbursement from
the applicable states. The Company experiences no cash flows for these sites,
other than the cost of the deductible and the cost to remediate any sites
deemed non-qualified for reimbursement by the state. The agreement poses no
exposure to the Company in the event that payments from the state trust funds
are delayed or denied. With the Direct Bill Agreement, the future cash flows
to the Company for remediating contaminated sites is approximately $1,770,000.
However, the Company is ultimately responsible for the remediation liability,
and accordingly, such liabilities remain recorded on the consolidated balance
sheet.
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.
The Company is required under EPA regulations to maintain evidence of
financial responsibility for taking corrective action and compensating third
parties for bodily injury and property damage resulting from leakage from
USTs. The Company has elected to satisfy this requirement by the authorized
alternative of self-insuring. In addition, the Company must comply with the
necessary Occupational Safety and Health Administration regulations and the
regulations of various state agencies, including air quality control boards.
The Company utilizes an outside environmental consulting firm to assist its
environmental department in its responsibilities for the management and
adherence to local, state, and federal environmental regulations.
Other Regulations
The sale of alcoholic beverages by the Company is subject to the approval of
state and local regulatory agencies, which approval can be revoked if
substantial or persistent non-compliance with regulations governing the sale
of alcoholic beverages occurs. In addition, retailers of alcoholic beverages
may be held liable for damages caused by individuals that become intoxicated
from consuming beverages purchased from the retailer. Although the Company
has experienced no material liability to date, and has installed policies and
procedures to lessen potential exposure, there can be no assurance that any
<PAGE> 11
future liability that may arise will not have a material adverse effect on the
Company's operations and earnings.
The U.S. Food and Drug Administration, along with state and local governments,
has undertaken a high degree of enforcement activity with regard to the sale
of certain tobacco products to under age persons. Although the Company has
experienced no material liability to date, substantial or persistent non-
compliance with regulations concerning such sales could lead to revocation of
tobacco sales licenses. Potential new regulations are not expected to impact
sales in 1998, as the phase-in period for compliance with such regulation is
anticipated to be nine months. There can be no assurance that new regulations
will not have a negative impact on sales beyond 1998.
<PAGE> 12
Executive Officers and Significant Employees
- --------------------------------------------
The following named persons serve as executive officers of the Company as of
March 30, 1998:
<TABLE>
<Caption)
Name Age Position
------------------- --- ---------------------------------
<S> <C> <C>
Neil H. McLaurin 53 Chairman of the Board and
Chief Executive Officer
Kathleen Callahan-Guion 46 President and
Chief Operating Officer
Harold E. Lambert 59 Vice President - Legal and
Assistant Secretary
Elizabeth L. Marshall 37 Controller
Bob E. Bailey 42 Treasurer
</TABLE>
A brief description of each executive officer is provided below:
Neil H. McLaurin has been Chairman of the Board of Directors and Chief
Executive Officer of the Company since October 1990. He also served as
President of the Company from October 1990 until March 1997. From 1989 to
1990, Mr. McLaurin served as a consultant for L. B. Consulting Co., an
investment company in Houston, Texas. From 1966 to 1988, Mr. McLaurin was
employed by Tenneco, Inc., an integrated oil and gas company, in various
positions, including Vice President of Wholesale Marketing from 1987 to 1988,
and Vice President of Retail Marketing from 1983 to 1987.
Kathleen Callahan-Guion has been President and Chief Operating Officer of the
Company since March 1997. From 1979 to 1997 Ms. Callahan-Guion was employed
by The Southland Corporation, a convenience store chain, in various operating
positions of increasing responsibility including her final position of Vice
President, Chesapeake Division.
Harold E. Lambert has been Vice President - Legal, and Assistant Secretary of
the Company since August, 1992. Mr. Lambert's prior experience includes
serving as Vice President and Corporate Counsel of EZCON prior to EZCON's
acquisition by the Company, ten years as General Counsel for Munford, Inc., a
New York Stock Exchange listed company which owned and operated 800
convenience stores.
Elizabeth L. Marshall has been Controller of the Company since July 1996.
From 1990-1996 Ms. Marshall served as Controller of Fiesta Mart, Inc., a
retail grocery store chain. Ms. Marshall's experience prior to that includes
accounting positions with American Stores and The Kroger Company.
Bob E. Bailey has been Treasurer and Assistant Secretary of the Company since
September 1990. Mr. Bailey's previous experience includes positions as
Controller of Harken Hydrocarbon, Inc.'s supply and trading unit, a subsidiary
of Harken, from 1989 to 1990; Controller of Advance Healthcare, Inc., a
marketer of medical equipment and supplies in Abilene, Texas, from 1987
through 1989; and as an accountant for E-Z Serve, Inc. from 1979 through 1987.
<PAGE> 13
ITEM 2. PROPERTIES
Substantially all property and equipment owned by the Company is subject to
liens under various collateral agreements with its lenders.
Convenience Stores
- ------------------
The Company leases the real property and owns the equipment at 302 of its
convenience stores and owns in fee simple the real property, improvements and
equipment at 199 of its convenience stores. Of the 302 leased properties, 295
are company-operated and 7 are subleased to and operated by franchisees. The
leases generally have initial terms of 10 years with two five-year renewals at
the option of the Company. At December 28, 1997, the Company estimates the
average remaining term of its convenience store leases, including option
periods, to be approximately ten years.
Corporate Offices
- -----------------
The Company's corporate offices are located in Houston, Texas where it leases
approximately 39,000 square feet of office space through November 2002. All
of the principal executive, accounting and administrative functions are
conducted at the Houston location.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are involved in various lawsuits incidental
to its businesses. The Company's internal counsel monitors all such claims,
and the Company has made accruals for those which it believes are probable of
payment. In management's opinion, an adverse determination would not have a
material adverse effect on the Company and its subsidiaries, individually or
taken as a whole. In the case of administrative proceedings regarding
environmental matters involving governmental authorities, management does not
believe that any imposition of monetary sanctions would exceed $100,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
quarter ended December 28, 1997.
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Market Information for Common Stock
- -----------------------------------
The Company's common stock, par value $0.01 per share ("Common Stock"), is
traded on the American Stock Exchange (Symbol: EZS). The following table
reflects the range of high and low sales prices by quarter as reported by the
American Stock Exchange from January 1, 1996 through March 29, 1998.
<TABLE>
<CAPTION>
1998
----------------------
High Low
---------------------
(S) <C> <C>
First Quarter $ 9/16 $ 3/8
</TABLE>
<TABLE>
<CAPTION>
1997
- ----------------------
High Low
-------- ---------
<S> <C> <C>
First Quarter $1 1/2 $ 7/8
Second Quarter 7/8 5/8
Third Quarter 7/8 9/16
Fourth Quarter 13/16 3/8
</TABLE>
<TABLE>
<CAPTION>
1996
---------------------
High Low
--------- ---------
<S> <C> <C>
First Quarter $1 7/16 $1 3/16
Second Quarter 2 3/8 1 1/4
Third Quarter 2 11/16 1 11/16
Fourth Quarter 1 7/8 1 1/16
</TABLE>
Holders of Record
- -----------------
At March 26, 1998, there were approximately 210 holders of record of the
Common Stock.
Dividends
- ---------
The Company has never declared dividends on its Common Stock. The Company is
restricted from paying dividends by certain of its debt covenants (see Note
6
<PAGE> 15
- - Long-Term Obligations and Credit Arrangements in the Notes to Consolidated
Financial Statements). The Company intends to retain any earnings for
internal investment and debt reduction, and does not intend to declare
dividends on its Common Stock in the foreseeable future.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial information derived from the
audited Consolidated Financial Statements of the Company, and should be read
in conjunction with the Company's Consolidated Financial Statements and notes
thereto (Item 8 herein) and Management's Discussion and Analysis of Financial
Condition and Results of Operations
(Item 7 herein):
<TABLE>
<CAPTION>
Year Ended (a)
--------------------------------------------------------------------------
- ----
December 28, December 29, December 31, December 25,
December
26,
1997 1996 1995 1994 1993
------------- ------------ ------------ ------------ --
- --------
- --
(In thousands, except per share data)
<S> <C> <C>
<C>
<C>
OPERATIONS: (b)(c)
Revenues $744,403 $861,642 $748,152
$563,191
$605,695
Income (loss) from operations $ (9,342) (e) $(15,075) (d) $ 5,264
$ 5,087 $
3,329 (e)
Basic earnings (loss) per common share $ (.21) $ (.23)
$
.07 $ .08 $
.11
Diluted earnings (loss) per common share $ (.21) $ (.23) $
.06
$ .07 $
.06
ASSETS: (b)(c)
Current assets $ 43,440 $ 64,887 $ 81,355 $
55,712
$ 44,112
Current liabilities $ 48,037 $ 79,686 $ 79,707
$
48,138 $ 44,655
-------- -------- -------- --------
--------
Working capital (deficit) $ (4,597) (i) $(14,799) (h) $ 1,648
(g) $ 7,574 (f) $ (543)
======== ======== ======== ========
========
Total assets $171,435 $240,405 $263,346
$150,554
$126,645
======== ======== ======== ========
========
LONG-TERM OBLIGATIONS AND EQUITY: (b)(c)
Long-term obligations:
Long-term debt $ 66,894 $ 66,315 $ 76,157 (j) $
14,627 $ 15,867
Indebtedness to related parties - - 25 25
25
Other long-term obligations 21,915 (k) $ 39,120 $ 37,297
(k) $
25,189 (k) $
11,541 (k)
-------- -------- -------- --------
---------
Total long-term obligations $ 88,809 $105,435 $113,479
$ 39,841 $ 27,433
======== ======== ======== ========
========
Stockholders' equity $ 34,589 (l) $ 55,284 $ 70,160
$
62,575 $ 54,557
======== ======== ======== ========
========
</TABLE>
(a) The Company's fiscal year ends on the last Sunday on or before December
31.
This normally provides a 52-week fiscalyear, but occasionally (e.g. 1995)
provides a 53-week fiscal year.
(b) The increases in 1995 revenues and 1995 assets and liabilities reflect
the
Time Saver (January 1995) and SJS (July 1995) acquisitions. The 1997
revenues, assets and liabilities reflect a decrease due to the divestiture of
EZPET (April 1997) and the divestiture of 201 convenience stores throughout
the year. The 1996 and 1995 assets include SFAS 121 impairment provisions
related to the write-down of EZPET to fair value.
(c) Certain amounts in prior years have been reclassified to conform to the
presentation used in 1997.
(d) The 1996 operating loss includes non-recurring charges against operations
of $10,272.
(e) The 1997 loss from operations excludes an extraordinary item relating to
the loss on early extinguishment of debt of $1,849. The 1993 income from
operations excludes anextraordinary item of $13,552 relating to a gain from
forgiveness of debt.
(f) The increase in working capital reflects a decrease in current portion of
long-term debt due to the January, 1995 refinancing, and an increase in
receivables from settlements reached with certain of the Company's insurance
carriers regarding California environmental claims.
(g) The decrease in working capital in 1995 reflects the increase in current
maturities from the new debt related to the Time Saver and SJS acquisitions.
(h) The decrease in working capital in 1996 primarily reflects principal
payments on the Term Loan and an increase in the current portion of long
term
debt.
(i) The decrease in working capital deficit in 1997 reflects a decrease in the
current portion of long term debt as a result of the December 1997 debt
refinancing.
(j) The increase in long-term debt in 1995 reflects the new debt related to
the
Time Saver and SJS acquisitions.
(k) Prior to 1994, the Company accounted for environmental liabilities net of
state trust fund reimbursement; the increasein 1994 is due to reporting gross
environmental liabilities and receivables, and the increase in 1995 is due
to the Time Saver and SJS acquisitions. The decrease in 1997 reflects the
divestiture of EZPET and 201 company operated stores.
(l) The decrease in stockholders' equity includes $11,533 for retirement of
Series C Preferred Stock and dividends, and dividends and accretion on Series
H Preferred Stock.
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following is Management's discussion and analysis of certain significant
factorswhich have affected the Company's results of operations and balance
sheet during theperiods included in the accompanying consolidated financial
statements:
Results of Operations
(In thousands except store counts, per gallon prices and
margins)
<TABLE>
<CAPTION>
Year Ended
-------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------ ----------- ------------
<S> <C> <C>
<C>
CONVENIENCE STORE OPERATIONS (1)
- ---------------------------------
Merchandise:
Weighted average number of merchandise
stores during the period 651 714 634
Merchandise sales $294,909 $316,318 $267,045
Merchandise sales per store
per month $ 37.8 $ 36.9 $ 35.1
Gross profit $ 90,055 $ 92,704 $ 82,833
Gross profit per store
per month $ 11.5 $ 10.8 $ 10.9
Gross profit percentage 30.54% 29.31% 31.02%
Gasoline:
Weighted average number of gasoline
stores during the period 617 666 578
Gallons sold 360,881 396,568 353,430
Gallons sold per store
per month 48.7 49.6 51.0
Revenues $417,140 $459,705 $382,038
Price per gallon $ 1.156 $ 1.159 $ 1.081
Gross profit $ 41,814 $ 46,302 $ 46,183
Gross profit per gallon $ 0.1159 $ 0.1168 $ 0.1307
Gross profit per store
per month $ 5.6 $ 5.8 $ 6.7
MARKETER OPERATIONS (2)
- -------------------
Average number of marketers
during the period 174 189 228
Gallons sold 16,901 61,748 73,333
Gallons sold per store
per month 24.3 27.2 26.8
Revenues $ 20,590 $ 73,174 $ 82,006
Price per gallon $ 1.218 $ 1.185 $ 1.118
Gross profit (3) $ 1,966 $ 7,329 $ 9,853
Gross profit per gallon $ 0.1163 $ 0.1187 $ 0.1343
Gross profit per store
per month $ 2.8 $ 3.2 $ 3.6
</TABLE>
- --------------------------------------------------------------------------------
- ----
- --------------------
(1) At December 28, 1997, there were 494 company operated convenience stores
(467
of which sold gasoline) and 7 franchised convenience stores.
(2) Represents non-company operated gasoline retail outlets. The 1997 amounts
include four months of data due to the April 1997 sale of EZPET. At December
28, 1997 there were no remaining Marketer stores.
(3) Gross profit is shown before deducting compensation paid to operators of
stores not operated by the Company of $861, $3,336 and $4,579 for the years
1997, 1996 and 1995, respectively.
<PAGE> 17
The following table sets forth the percentage to total revenue of certain
items in the Consolidated Statements of Operations:
Percentage of Total Revenue
<TABLE>
<CAPTION>
Year Ended
------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------ ------------ -----------
<S> <C> <C> <C>
Revenues:
Gasoline 58.8% 61.8% 62.0%
Convenience store 39.6 36.7 35.7
Other income 1.6 1.5 2.3
----- ----- -----
100.0 100.0 100.0
----- ----- -----
Costs and Expenses:
Cost of sales:
Gasoline 52.9 55.6 54.6
Convenience store 27.5 26.0 24.6
Operating expenses 14.9 13.6 13.5
Selling, general, and administrative
expenses 3.0 3.1 3.5
Depreciation, amortization and asset
impairment 1.8 2.5 1.9
Interest expense 1.2 1.0 0.8
----- ----- -----
101.3 101.8 98.9
----- ----- -----
Income (loss) before income taxes (1.3) (1.8) 1.1
Income tax expense - - 0.1
Provision in lieu of taxes - - 0.3
----- ----- -----
Income (loss) before (1.3) (1.8) 0.7
extraordinary item
Extraordinary item -- loss
on early extinguishment of debt (0.2) - -
----- ----- -----
Net income (loss) (1.5) (1.8) 0.7
===== ===== =====
</TABLE>
Overview
- --------
The Company reported a net loss of $11,191,000 and $15,075,000 and
net income of
$5,264,000 for the years ended December 28, 1997, December 29, 1996,
and December
31, 1995, respectively. The 1997 loss includes non-recurring income
of $498,000
related to the gain from the sale of certain stores in connection
with the Company's
divestiture program. The Company also reported a $1,849,000
extraordinary loss in
1997 on the early extinguishment of debt resulting from the December
refinancing.
Included in the net loss for fiscal year 1996, is $10,272,000 of non-
recurring
expense items, $8,870,000 of which were non-cash. These items
include an additional
asset impairment provision pursuant to Statement of Financial
Accounting Standards
No. 121 ("SFAS 121") and other costs of $7,393,000 related to the
write-down of
EZPET to fair value and the accrual of $2,879,000 for severance and
other
restructuring costs. Fiscal 1995 included a non-recurring gain of
$3,614,000 (net
of tax effect) related to insurance settlements in the Company's
favor. In
addition, in the fourth quarter of 1995, the Company adopted SFAS
121; as a result,
1995 included an asset impairment provision of $2,706,000 (net of tax
effect)
related to certain of the Company's fixed asset groups. Without
these non-recurring
items, net income (loss) in 1997, 1996, and 1995 would have been
$(9,840,000),
<PAGE> 18
$(4,803,000) and $4,356,000, respectively. Revenues, operating
expenses and
depreciation expense decreased in 1997, as compared to 1996 due to
the lower number
of operating stores. Interest expense increased in 1997 due to
increased
amortization of debt financing costs caused by the shorter term of
the Company's
bank debt. Revenues, operating expenses and depreciation expenses
increased in 1996
reflecting a full year of operations from the SJS acquisition.
Interest expense
also increased in 1996 resulting from the additional debt associated
with the Time
Saver and SJS acquisitions.
In the first quarter of 1997, the Company implemented a plan to
divest itself of its
Marketer operations and of various convenience stores that did not
fit its strategic
plan, or were outside of its primary market area. As a result of
this program,
during 1997 the Company sold its wholly owned subsidiary, EZPET, and
201 company
operated convenience stores.
Operating Gross Profit
- ----------------------
In 1997, convenience store merchandise sales decreased 6.8% compared
to 1996
primarily due to the decline in the number of convenience stores, as
a result of the
Company's divestiture program. Merchandise sales per store increased
2.4% over
1996. Convenience store merchandise sales increased 18.5% in 1996
compared to 1995
primarily due to the acquisition in July 1995 of SJS. Merchandise
sales per store
increased 5.1% over 1995, principally due to the acquisition of SJS
stores which
have higher per store average merchandise sales, and partially due to
the Company's
on-going program of closing or selling under-performing stores.
Management's goal
has been, since 1992, to increase the revenue contribution from
convenience store
merchandise which has higher and less volatile profit margins than
gasoline. For
1997, merchandise revenue comprised 39.6% of the Company's total
revenue as compared
to 36.7% for 1996 and 35.7% for 1995.
The merchandise gross profit margin increased to 30.54% in 1997 from
29.31% in 1996.
The increase is a result of product remerchandising and reduced
shrinkage. The
merchandise gross profit margin in 1996 decreased to 29.31% from
31.02% in 1995,
reflecting a shift by the Company to a more aggressive pricing
strategy designed to
increase customer traffic count. Merchandise sales at comparable
stores increased
0.7% and 4.6% in 1997 and 1996, respectively.
The gross profit per gallon on gasoline sold at convenience stores
decreased 0.8% in
1997 to 11.59 cents per gallon from 11.68 cents per gallon in 1996
and total gross
profit per store from gasoline sales decreased 3.4%. In 1996, gross
profit per
gallon of gasoline sold at convenience stores decreased 10.6% to
11.68 cents per
gallon from 13.07 cents per gallon in 1995, and total gross profit
per store from
gasoline sales decreased 13.4%. These reductions were due to lower
industry margins
resulting from increased wholesale prices caused by higher crude
costs and lower
than normal gasoline inventories. Due to competitive pressures, the
Company was not
able to fully reflect these increased costs in its selling prices.
The average
number of gallons sold per store decreased 1.8% in 1997 as compared
to 1996 and
decreased 2.7% in 1996 as compared to 1995, primarily due to the
acquisition of Time
Saver and SJS which sell lower volumes per store. However, gasoline
gallons sold at
comparable stores decreased 1.6% and increased 3.9% in 1997 and 1996,
respectively.
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 5.5% in 1997 as compared to 1996,
primarily due to
the decline in number of operating stores in 1997. The 27.1%
decrease in other
income in 1996 as compared to 1995 reflects reduced franchise fee
income and a 1995
non-recurring gain from favorable insurance settlements related to
the Company's
California stores.
<PAGE> 19
Expenses
- --------
Operating expenses for 1997 decreased 5.8% as compared to 1996,
primarily due to the
decrease in number of convenience stores. In 1996, operating
expenses increased
16.2% from 1995, due primarily to the increased number of average
operating
convenience stores. Operating expenses, as a percentage of total
revenues, were
14.9% in 1997 as compared to 13.6% in 1996 and 13.5% in 1995. The
1997 increase
over prior years resulted primarily from the minimum wage increase in
early 1997.
Selling, general and administrative expenses decreased $4,235,000, or
16.0%, in 1997
as compared to 1996 and increased $100,000 or 0.4%, in 1996 over
1995. The 1996
amount includes non-recurring expense of $2,029,000 for severance and
other
restructuring costs. Without these non-recurring expenses, S G & A
expenses would
have decreased by 9.0% in 1997 as compared to 1996, and 7% in 1996 as
compared to
1995. The decreases are primarily due to cost reductions associated
with the new
corporate system and lower incentive bonuses.
Depreciation, amortization and asset impairment expenses decreased
36.8% in 1997 as
compared to 1996 and increased $7,101,000 or 48.8% in 1996 from 1995
primarily due
to an additional SFAS 121 impairment provision of $7,146,000 in 1996
resulting from
the write-down of EZPET to fair value. The 1995 amount also includes
a $4,100,000
asset impairment resulting from the adoption of SFAS 121.
Interest expense for 1997 was $8,745,000, a slight increase over the
1996 amount of
$8,630,000. Interest expense in 1996 increased $2,677,000 or 45% as
compared to
1995 due to the increased level of outstanding debt as a result of
the Time Saver
and SJS acquisitions.
Inflation
- ---------
The Company believes inflation has not had a material effect on its
results of
operations for the past three years. The Company does, however,
experience short
term fluctuations in its gasoline 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:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
------------ ------------
<S> <C> <C>
Current assets $43,440,000 $64,887,000
Current liabilities $48,037,000 $79,686,000
Current ratio 0.90:1 0.81:1
Long-term obligations (including
related parties and other) $66,894,000 66,315,000
Stockholders' equity $34,589,000 55,284,000
Debt to equity ratio 1.93:1 1.20:1
Common shares outstanding 69,351,530 69,119,530
</TABLE>
<PAGE> 20
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 $4,597,000 at December 28, 1997, as compared to
$14,799,000 at
year end 1996. The change is primarily due to a reduction in the
current portion of
long-term debt as a result of the December 1997 debt refinancing. As
of December
28, 1997, EZCON had $5,559,000 available on its revolving line of
credit.
During 1997, the Company received the following major non-recurring
cash proceeds:
sale of fixed assets of $29,819,000 and proceeds from legal
settlements of $610,000.
Major expenditures included: $5,053,000 for capital and
environmental equipment;
$995,000 for environmental remediation; and $96,000 for removal of
underground
storage tanks.
Approximately 59% of the Company's revenues are derived from gasoline
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 margins and volumes.
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
line of credit
will provide the Company with sufficient liquidity to conduct its
business in an
ordinary manner. However, unanticipated events or a prolonged
gasoline margin
squeeze could occur which may 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.
Capital Resources
- -----------------
As discussed in Note 6 - 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") including Soci,t, G,n,rale as the 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. On March 27, 1997, as a result of
financial covenant
violations by the Company in 1996, the Credit and Guaranty Agreement
was amended
whereby the maturity date of the Term Loan and the revolving line of
credit were
accelerated to October 1, 1998.
In the first quarter of 1997, the Company implemented a plan to
divest itself of its
Marketer operations and of various convenience stores that did not
fit its strategic
plan, or were outside of its primary market area. As a result of the
plan, during
1997 the Company sold its wholly owned subsidiary, EZPET, 20
convenience stores
located in the Nashville, Tennessee area, 31 stores in Central
Florida and 150
convenience stores located primarily in Texas, Florida, Kansas and
Missouri. These
sales began closing in April 1997 and were completed in January 1998.
Net proceeds
from these sales were mandatorily applied to the Term Loan. The
completion of the
divestiture program enabled the Company to reduce the principal
balance during the
year to levels required by the Amended Credit and Guaranty Agreement
and to
refinance the Term Loan and revolving line of credit by year end.
<PAGE> 21
On December 24, 1997, the Company entered into a term credit facility
with FFCA
Acquisition Corporation ("FFCA"). The FFCA credit facility provided
for a
$51,912,000 mortgage loan (the "Mortgage Loan") and an $8,088,000
equipment loan
(the "Equipment Loan"). The Mortgage Loan is comprised of individual
floating
interest rate mortgages on 100 fee properties and fixed rate
mortgages on 48 fee
properties. The floating interest rate, which was set at 9.46% at
closing, is
adjusted monthly and is equal to LIBOR plus 3.5%. The fixed rate is
9.27%. The
Mortgage Loan is amortized over 20 years. The Equipment Loan is
secured by
equipment located at 104 leasehold sites and mortgages on 49 fee
properties. The
Equipment Loan also has a floating interest rate with the same terms
as the Mortgage
Loan and is amortized over 7 years. The FFCA credit facility requires
monthly
payments on the first day of each month. These monthly payments,
including
interest, currently total approximately $613,000. A commitment fee
of 1% of the
total amount financed was paid at closing. The fee was treated as
deferred
financing costs and is being amortized over the term of the loan.
Also, on December 24, 1997 the Company entered into a credit facility
with Congress
Financial Corporation and Madeleine L.L.C. The facility provides a
$25,000,000
Revolving Line of Credit ("Revolver") for working capital and letters
of credit
subject to a borrowing base limitation. A commitment fee of 1.25%
was paid at
closing. The fee was treated as deferred financing costs and is
being amortized
over the term of the loan. The Revolver is secured by substantially
all of the
Company's inventories and receivables and some store equipment. The
Revolver
matures on December 23, 1999. The Revolver bears interest on
outstanding cash draws
at 2.5% plus the greater of the prime lending rate or 8.5%. At
December 28, 1997,
there were $8,500,000 borrowings under the Revolver and there were
$8,671,000
outstanding letters of credit issued primarily for workers
compensation claims.
Also at December 28, 1997, the Company had $5,559,000 available on
its Revolver.
The credit facilities contain various debt covenants, including a
restriction from
paying dividends.
Proceeds from the credit facilities were used (i) to retire the
$45,600,000 balance
outstanding under the Company's Term Loan, (ii) to retire the
$3,500,000 outstanding
under the Company's revolving line of credit, (iii) to redeem for
approximately
$15,700,000, all of the outstanding shares of the Company's Series H
Preferred Stock
(discussed below) and (iv) to pay costs associated with the financing
transactions.
On March 11, 1998, as a result of financial covenant violations by
the Company at
December 28, 1997, the credit facility with Congress Financial
Corporation and
Madeleine L.L.C. was amended ("Amendment No. 1 to Loan and Security
Agreement").
The Amendment was deemed effective as of December 24, 1997, and as
such, the Company
was in compliance at December 28, 1997.
On January 27, 1997, the Company entered into a Securities Purchase
Agreement,
("Purchase Agreement") whereby the Company issued and sold 140,000
shares of Series
H Preferred Stock to certain of its major stockholders. Net proceeds
of $8,359,000
from the sale were used to redeem all of the Company's 75,656
outstanding shares of
Series C Preferred Stock and net proceeds of $5,081,000 were used for
general
corporate purposes, including paying down a portion of amounts
outstanding under the
Company's revolving line of credit. As discussed above, on December
24, 1997,
$15,700,000, from the Company's new credit facility, was used to
redeem all for the
outstanding shares of the Series H Preferred Stock.
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
$7,768,000, and $10,936,000 in 1996 and 1995, respectively. In 1997,
discretionary
capital expenditures were $1,305,000. However, according to the
terms of the C & G
Agreement, as amended, if projected levels of profitability were not
maintained, the
Company's capital expenditures could be constrained. In this regard,
based on
reduced cash flow in 1996, discretionary capital expenditures were
essentially
halted in mid-year and remained constrained throughout 1997. The
Company is seeking
<PAGE> 22
alternate sources of capital to enhance gasoline facilities and/or
remodel store
interiors at a significant number of existing stores. However, there
can be no
assurance that the Company will be able to obtain such capital.
Management has developed a plan to enhance gasoline facilities and/or
remodel store
interiors at a significant number of existing stores. These facility
improvements
are projected to yield increases in sales and profit, however,
implementation of the
plan is dependent on the availability of capital.
As discussed in Item 1, the Company's business strategy is to
increase its presence
and market share in the southeastern region of the United States.
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 December 22, 1998.
As of
December 28, 1997, the Company was in complete compliance with leak
detection
standards and 75% completed with the corrosion and overfill/spill
requirements. The
Company estimates that additional expenditures of $1,800,000 will be
necessary to
meet these upgrade standards. Additionally, the Company estimates
that expenditures
of approximately $1,770,000 (net of anticipated reimbursements from
state
environmental trust funds) will be necessary to perform remediation
on contaminated
sites. 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 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 carry
forwards ("NOL") are subject to a variety of interpretations and
restrictive tests
under which the utilization of such NOL carry forwards 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 $51,000,000 at December 28, 1997. The
NOL will
expire if not utilized between 2005 and 2012. In addition, the
Company has
alternative minimum tax NOL carry forwards of approximately
$44,000,000 which are
available over an indefinite period and can be utilized should the
Company's
alternative minimum tax liability exceed its regular tax liability.
Other
- -----
The Company has considered the impact of year 2000 issues on its
computer systems
and applications. Management believes that all systems that will be
in use in the
year 2000 and beyond are year 2000 compliant. No material future
costs are
anticipated to be incurred for the year 2000 issues.
<PAGE> 23
Disclosure Regarding Forward Looking Statements
- -----------------------------------------------
Item 7 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 (collectively the "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.
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS
Index to Financial Statements
<TABLE>
<CAPTION>
Page
<S>
<C>
Consolidated Financial Statements of
E-Z Serve Corporation and Subsidiaries
Independent Auditors' Report 25
Consolidated Balance Sheets - December 28, 1997 and December 29,
1996 26
Consolidated Statements of Operations -
Years ended December 28, 1997, December 29, 1996, and December
31, 1995 27
Consolidated Statements of Stockholders' Equity -
Years ended December 28, 1997, December 29, 1996, and December
31, 1995 29
Consolidated Statements of Cash Flows -
Years ended December 28, 1997, December 29, 1996, and December
31, 1995 30
Notes to Consolidated Financial Statements 32
</TABLE>
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
E-Z Serve Corporation
We have audited the consolidated financial statements of E-Z Serve
Corporation and subsidiaries as listed in the accompanying index.
These
consolidated financial statements are the responsibility of the
Company's
management. Our responsibility is to express an opinion on these
consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing
standards. Those standards require that we plan and perform the
audit to
obtain reasonable assurance about whether the financial statements
are free of
material misstatement. An audit includes examining, on a test basis,
evidence
supporting the amounts and disclosures in the financial statements.
An audit
also includes assessing the accounting principles used and
significant
estimates made by management, as well as evaluating the overall
financial
statement presentation. We believe that our audits provide a
reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of E-Z Serve
Corporation and subsidiaries as of December 28, 1997 and December 29,
1996,
and the results of their operations and their cash flows for the
fifty-two
week periods ended December 28, 1997 and December 29, 1996, and the
fifty-
three week period ended December 31, 1995, in conformity with
generally
accepted accounting principles.
KPMG Peat Marwick LLP
Houston, Texas
March 11, 1998
<PAGE> 26
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE
SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
------------ ------------
<S> <C>
<C>
ASSETS
- ------
Current Assets:
Cash and cash equivalents $ 8,093 $ 6,333
Receivables, net of allowance for doubtful
accounts of $32 and $180 as of
December 28, 1997 and December 29, 1996,
respectively 6,195 8,764
Inventory 24,026 40,070
Environmental receivables (Note 7) 3,100 7,246
Prepaid expenses and other current assets 2,026 2,474
-------- --------
Total Current Assets 43,440 64,887
Property and equipment, net of accumulated
depreciation and amortization (Notes 1 and 4) 108,557 137,298
Environmental receivables (Note 7) 16,280 34,305
Other assets 3,158 3,915
-------- --------
$171,435 $240,405
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Current portion of long-term obligations (Note 6) $ 1,881 $
14,841
Trade payables 25,135 29,563
Accrued liabilities and other (Note 5) 17,282 26,265
Current portion of environmental liability (Note 7) 3,739
9,017
-------- --------
Total Current Liabilities 48,037 79,686
-------- --------
Long-term Obligations (Note 6):
Payable to banks, net of current portion 66,719 64,739
Obligations under capital leases 175 1,338
Other, net of current portion - 238
Environmental liability (Note 7) 16,959 32,571
Other liabilities, net of current portion 4,956 6,549
Commitments and contingencies (Note 7)
-------- --------
Total Long-Term Liabilities $ 88,809 $105,435
-------- --------
Stockholders' Equity: (Notes 2 and 8)
Preferred stock, $0.01 par value; authorized
3,000,000 shares; -0- and 75,656 shares Series C
issued and outstanding at December 28, 1997
and December 29, 1996, respectively; - 1
Common stock, $0.01 par value; authorized
100,000,000 shares; 69,351,530 and 69,119,530
shares issued and outstanding at December 28, 1997
and December 29, 1996, respectively 694 691
Additional paid-in capital 47,021 56,527
Accumulated deficit subsequent to March 28, 1993,
date of quasi-reorganization (total deficit
eliminated $86,034) (13,126) (1,935)
-------- --------
Total Stockholders' Equity 34,589 55,284
-------- --------
$171,435 $240,405
======== ========
</TABLE>
The accompanying Notes to Consolidated
Financial Statements
are an integral part of these
Statements.
<PAGE> 27
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share
amounts)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C>
<C>
<C>
Revenues:
Gasoline
(includes excise taxes of approximately
$128,489, $156,081 and $145,551
for years 1997, 1996 and 1995,
respectively) $ 437,730 $ 532,879 $ 464,044
Convenience store 294,909 316,318 267,045
Other income (Note 7) 11,764 12,445 17,063
---------- ----------- ----------
744,403 861,642 748,152
---------- ----------- ----------
Costs and Expenses:
Cost of sales:
Gasoline 393,950 479,248 408,008
Convenience store 204,854 223,614 184,212
Operating expenses 110,602 117,434 101,087
Selling, general and administrative
expenses 22,239 26,474 26,374
Depreciation, amortization and
asset impairment (Notes 1 and 4) 13,701 21,660 14,559
Interest expense 8,745 8,630 5,953
---------- ----------- ----------
754,091 877,060 740,193
---------- ----------- ----------
Income (loss) before income taxes (9,688) (15,418) 7,959
Income tax expense (benefit) (346) (343) 568
Provision in lieu of taxes
(Notes 2 and 11) - - 2,127
---------- ----------- ----------
Income (loss) before extraordinary item (9,342) (15,075)
5,264
Extraordinary item - loss on early extinguishment
of debt (1,849) - -
--------- ---------- ----------
Net income (loss) (11,191) (15,075) 5,264
Preferred Stock dividends and accretion (3,176) (757) (228)
--------- ---------- ----------
Income (loss) attributable to
Common Stock $ (14,367) $ (15,832) $ 5,036
========= ========== ==========
Basic earnings (loss) per common share (Note 1):
Income (loss) attributable to Common
Stock before extraordinary item $ (0.18) $ (0.23) $
0.07
Extraordinary item (0.03) - -
========== =========== ==========
Income (loss) attributable to Common
Stock $ (0.21) $ (0.23) $ 0.07
========== =========== ==========
<PAGE> 28
Diluted earnings (loss) per common share (Note 1):
Income (loss) attributable to Common
Stock before extraordinary item $ (0.18) $ (0.23) $
0.06
Extraordinary item $ (0.03) $ - $ -
---------- ----------- ----------
Income (loss) attributable to Common Stock $ (0.21) $
(0.23) $ 0.06
========== =========== ==========
</TABLE>
The accompanying Notes to Consolidated
Financial Statements
are an integral part of these
Statements.
<PAGE> 29
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Additional Retained
Preferred Common Paid-In Earnings
Stock Stock Capital (Deficit) Total
------------- ----------- --------- -------- --------
<S> <C> <C> <C>
<C> <C> <C>
<C>
Shrs $ Shrs $
---- ---- ----- ---
Balance, December 25, 1994 76 $ 1 67,320 $673 $52,932
$ 8,969 $62,575
Net income - - - - - 5,264 5,264
Exercise of stock options - - 8 1 5 - 6
Deferred compensation - stock options - - - 188
- 188
Conversion of Series C Preferred Stock
to Common Stock - - 526 5 (5) -- -
Series C Preferred Stock Dividend - - - - 1,093
(1,093) -
Provision in lieu of taxes - - - - 2,127
- - 2,127
---- ---- ------ ---- ------- ------- -------
Balance, December 31, 1995 76 $ 1 67,854 $679 $56,340
$ 13,140 $70,160
Net loss - - - - - (15,075) (15,075)
Exercise of stock options - - 56 1 57 - 58
Exercise of stock warrants - - 1,210 11 (13) - (2)
Deferred compensation - stock options - - - -
143 -
143
---- ---- ------ ---- ------- -------- -------
Balance, December 29, 1996 76 $ 1 69,120 $691 $56,527
$ (1,935) $55,284
Net loss - - - - - (11,191) (11,191)
Exercise of stock options - - 232 3 91 - 94
Deferred compensation - stock options - - - - 65
- 65
Retirement of Series C Preferred Stock (76) (1) - -
(7,566) -
(7,567)
Dividends Series C Preferred Stock - - - - (792) -
(792)
Common Stock Purchase Warrants - - - - 872 -
872
Dividends - Series H Preferred Stock - - - -
(1,743) - (1,743)
Accretion of Series H Preferred Stock - - - -
(1,431) -
(1,431)
Other - - - - 998 - 998
---- ---- ------ ---- ------- ------- -------
Balance, December 28, 1997 - $ - 69,352 $694 $47,021
$(13,126) $34,589
==== ==== ====== ==== ====== ======= ======
</TABLE>
The accompanying Notes to Consolidated
Financial Statements
are an integral part of these
Statements.
<PAGE> 30
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C>
<C>
Cash flows from operating activities:
Net income (loss) $(11,191) $(15,075) $ 5,264
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization - Fixed Assets 13,701 14,513
10,459
Amortization - Deferred Financing Costs 1,896 1,082 317
Provision for asset impairment 165 7,146 4,100
Payments for environmental remediation (995) (2,512) (2,716)
Payments for removal of underground
storage tanks (96) (808) (463)
Provision for doubtful accounts 24 (5) 50
Stock option expense 65 143 188
Provision in lieu of taxes - - 2,127
(Gain) loss on sales of assets (965) 1,022 (99)
Loss on early extinguishment of debt 1,849 - -
Change in current assets and liabilities:
(Increase) decrease in receivables 3,429 377 (1,846)
(Increase) decrease in inventory 7,286 (221) (439)
(Increase) decrease in prepaid expenses and other 355 309
(408)
Decrease in trade payables and accruals (12,806) (4,028)
(1,150)
Proceeds from environmental settlement - - 5,740
Other - net 105 728 (1,326)
-------- -------- -------
Net cash provided by operating activities 2,822 2,671
19,798
-------- -------- -------
Cash flows from investing activities:
Net proceeds from sale of assets 29,819 1,146 2,309
Payments for purchase of companies, net of
cash acquired - - (46,361)
Capital expenditures and other asset additions (5,053) (12,083)
(16,124)
-------- -------- -------
Net cash provided by (used in)
investing activities 24,766 (10,937) (60,176)
-------- -------- -------
Cash flows from financing activities:
Net borrowing under revolving line of credit 3,300 5,200
-
Issuance of common stock 94 56 6
Proceeds from long-term debt 60,000 363 80,181
Payments of long-term debt (74,609) (6,383) (33,218)
Retirement of Preferred C stock (7,567) - -
Dividends on Preferred C stock (792) - -
Issuance of Preferred H stock, net 13,440 - -
Redemption of Preferred H stock (15,743) -
Payments of deferred financing costs (3,951) (396) (3,795)
-------- -------- -------
Net cash provided by (used in) financing
activities (25,828) (1,160) 43,174
-------- -------- -------
Net increase (decrease)in cash & cash equivalents 1,760
(9,426) 2,796
Cash and cash equivalents at beginning of period 6,333
15,759 12,963
-------- -------- -------
Cash and cash equivalents at end of period 8,093 $ 6,333
$15,759
======== ======== =======
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are
an
integral part of these Statements
<PAGE> 31
E-Z SERVE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(In thousands)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------
December 28, December 29, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C>
<C>
Noncash investing and financing activities:
Dividends on Series H Preferred Stock $ 910 $ - $
- -
Conversion of Series C Preferred Stock
to Common Stock - - (5)
Issuance of Series C Preferred Stock - - 1,093
Dividends on Series C Preferred Stock - - (1,093)
Issuance of Common Stock - - 5
------ ------ ------
$ 910 $ $ -
====== ====== ======
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes 250 $ - $ 511
Interest 6,257 8,821 4,529
</TABLE>
The accompanying Notes to Consolidated Financial
Statements are an
integral part of these Statements.
<PAGE> 32
E-Z SERVE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands)
NOTE (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
- ---------------------------
The consolidated financial statements 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. The Statement of Operations for
1995
includes the results of Time Saver Stores, Inc. ("Time Saver") since
January
17, 1995, and Sunshine-Jr. Stores, Inc. ("SJS") since July 20, 1995.
Unless
the context indicates to the contrary, the term the "Company" as used
herein
should be understood to include subsidiaries of E-Z Serve Corporation
and
predecessor corporations. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
- -------------------------
For purposes of the Consolidated Statements of Cash Flows, all highly
liquid
investments with original maturities of less than 90 days are
considered to be
cash equivalents.
Off Balance Sheet Risk
- ----------------------
The Company has not entered into any contracts or obligations that
expose the
Company to off balance sheet risk.
Accounts Receivable
- -------------------
The Company maintains an allowance for potential losses in collection
of its
receivables.
Inventory
- ---------
Refined product inventory of $5,655 and $10,041 as of December 28,
1997 and
December 29, 1996, respectively, and convenience store merchandise
inventories
of $18,371 and $30,029 as of December 28, 1997 and December 29, 1996,
respectively, are stated principally at average cost which
approximates market
value.
Fair Value of Financial Instruments
- -----------------------------------
The carrying values of cash and cash equivalents, receivables and
trade
payables are considered to approximate fair value due to the short
term nature
of these instruments. The carrying value of long term debt is
estimated to
approximate fair value based on the Company's incremental borrowing
rate for
similar types of borrowing arrangements. (See Note 6 - Long-Term
Obligations
and Credit Agreements)
<PAGE> 33
Property and Equipment
- ----------------------
Property and equipment are carried at cost. Retail station
equipment,
convenience store buildings and equipment, and other property are
depreciated
on the straight-line method over their estimated useful lives,
ranging from
five to twenty years.
Asset Impairment
- ----------------
Statement of Financial Accounting Standards No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets To Be
Disposed Of"
("SFAS 121") requires that long-lived assets held and used by an
entity be
reviewed for impairment whenever events or changes in circumstances
indicate
that the carrying amount of an asset may not be recoverable. As a
result of
the adoption of SFAS 121, in 1995, the Company recorded an asset
impairment
write-down of $4,100 related to the Marketer business fixed asset
groups.
Additionally, in 1996, a further impairment provision of $7,146
($4,013 for
Property and Equipment and $3,133 for Environmental Receivables) was
recorded
for certain long-lived assets. (See Note 4 - Property and Equipment)
Environmental Costs
- -------------------
Costs incurred to comply with federal and state environmental
regulations are
accounted for as follows:
- - Annual fees for tank registration and environmental compliance
testing are expensed as incurred.
- - Expenditures for upgrading and corrosion protection for tank
systems and installation of leak detectors and overfill/spill
devices are capitalized and depreciated over the remaining life
of the store lease term or the expected useful life of the
equipment, whichever is less.
- - The tank removal costs associated with retail stores which
provide no significant growth potential and that the Company plans
to sell or dispose of in the near future have been estimated and a
liability established through a charge to
expense. The costs to remove tanks at all other retail stores are
expensed
as incurred.
- - Future remediation costs of contaminated sites related to
gasoline
underground storage tanks are estimated and a liability is
established. Amounts reimbursable from the state trust funds are
recognized as a receivable. The adequacy of the liability is
evaluated at least annually and adjustments are made based on
updated experience and changes in government policy.
Income Taxes
- ------------
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS
109"). Under the asset and liability method of SFAS 109, deferred
tax assets
and liabilities are recognized for the future tax consequences
attributable to
differences between the financial statement carrying amounts of
existing
assets and liabilities and their respective tax bases. Deferred tax
assets
and liabilities are measured using enacted tax rates expected to be
applied to
taxable income in the years in which those temporary differences are
expected
<PAGE> 34
to be recovered or settled. Under SFAS 109, the effect on deferred
tax assets
and liabilities of a change in tax rates is recognized in income in
the period
that includes the enactment date.
Stock-Based Compensation
- ------------------------
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-
Based Compensation" ("SFAS 123") was issued in October 1995. SFAS
123, which
is effective for fiscal years beginning after December 15, 1995,
prescribes
the "fair value" method of measuring compensation expense for stock-
based
compensation plans. However, SFAS 123 allows for the continuation of
the
measurement method as defined by Accounting Principles Board Opinion
No. 25
("APB No. 25") with pro forma disclosures of the effect on net income
(loss)
and earnings (loss) per share as if the fair value-based method had
been
applied in measuring compensation expense. The Company has decided
to
continue to apply the provisions of APB No. 25 and provide the
required pro
forma disclosure. Under APB No. 25, compensation expense is recorded
on the
date of grant only if the current market price of the underlying
stock exceeds
the exercise price. (See Note 10 - Stock Option Plans)
Earnings per Share
- ------------------
In February 1997, the FASB issued Statement of Financial Accounting
Standards
No. 128 ("SFAS 128") "Earning Per Share". SFAS 128 specifies new
measurement,
presentation and disclosure requirements for earnings per share and
is
required to be applied retroactively upon initial adoption. The
Company has
adopted SFAS No. 128 effective with the release of December 28, 1997
earnings
data, and accordingly, has restated herein all previously reported
earnings
per share data. Basic earnings (loss) per share is based on the
weighted
average shares outstanding without any dilutive effects considered.
Diluted
earnings per share reflects dilution from all contingently issuable
shares,
including options, warrants and convertible preferred stock. Income
(loss)
attributable to common stock is the numerator for the basic earnings
(loss)
per share computation, and income (loss) attributable to common
stock,
adjusted for assumed conversions of preferred stock and reduction of
preferred
dividends, is the numerator for the diluted earnings per share
computation. A
reconciliation of the weighted average common shares outstanding on a
basic
and diluted basis is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- -------------- -------------
- --
Common Per Common Per
Common
Per
Shares Share Shares Share
Shares
Share
------ ----- ------ ----- -
- ----- -
- ----
<S> <C> <C> <C> <C>
<C>
<C>
Weighted average common shares
outstanding - Basic 69,285,656 $(0.21) 68,684,760 $(0.23)
67,797,515 $0.07
Effect of dilutive securities:
Options and warrants - - - -
5,807,086
Series C Preferred Stock - - - -
3,884,492
--------- --------- ------
- ---
Weighted average common shares
outstanding - Diluted 69,285,656 $(0.21) 68,684,760 $(0.23)
77,489,093 $0.06
========== ==========
==========
</TABLE>
Securities that could potentially dilute basic earnings per share in
the
future that were not included in the computation of diluted earnings
per share
because to do so would have been antidilutive are as follows:
<PAGE> 35
<TABLE>
<CAPTION>
1997 1996 1995
----------- ---------- ---
- -------
<S> <C> <C> <C>
Options and warrants 9,806,500 9,443,892
- -
Series C Preferred Stock - 3,981,895
- -
--------- ---------- ---
- -------
9,806,500 13,425,787
- -
========= ==========
==========
</TABLE>
Use of Estimates
- ----------------
The preparation of financial statements in conformity with generally
accepted
accounting principles requires management to make estimates and
assumptions
that affect the reported amounts of assets and liabilities and the
disclosure
of contingent assets and liabilities at the date of the financial
statements,
and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Recent Accounting Pronouncements
- --------------------------------
In June 1997, the FASB issued Statement of Financial Accounting
Standards No.
130, Reporting Comprehensive Income ("SFAS 130"), which establishes
standards
for reporting and display of comprehensive income and its components.
The
components of comprehensive income refer to revenues, expenses, gains
and
losses that are excluded from net income under current accounting
standards,
including foreign currency translation items, minimum pension
liability
adjustments and unrealized gains and losses on certain investments in
debt and
equity securities. SFAS 130 requires that all items that are
recognized under
accounting standards as components of comprehensive income be
reported in a
financial statement displayed in equal prominence with other
financial
statements; the total of other comprehensive income for a period is
required
to be transferred to a component of equity that is separately
displayed in a
statement of financial position at the end of an accounting period.
SFAS 130
is effective for both interim and annual periods beginning after
December 15,
1997. The Company does not expect the adoption of SFAS 130 to
significantly
impact its consolidated financial statements.
Basis of Presentation
- ---------------------
Certain reclassifications have been made in the 1996 and 1995
financial
statements to conform with the 1997 presentation. The Company's
fiscal year
ends on the last Sunday on or before December 31. This normally
provides a 52
week fiscal year, but occasionally (e.g., 1995) provides a 53 week
fiscal
year.
NOTE (2) QUASI-REORGANIZATION
With the acquisitions of Taylor and EZCON in 1992, the Company's
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. 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
<PAGE> 36
which arose prior to the quasi-reorganization will be reported as a
direct
credit to paid-in capital. (See Note 11 - Income Taxes)
NOTE (3) ACQUISITIONS AND DIVESTITURES
Time Saver / SJS Acquisitions
- -----------------------------
In January 1995, the Company, through its wholly-owned subsidiary
EZCON,
acquired all of the capital stock of Time Saver from Dillon
Companies, Inc.
The Company paid $36,960 for the 102 convenience stores and 14
franchised
stores located in the New Orleans, Louisiana area.
In July 1995, the Company acquired all of the outstanding shares of
common
stock of SJS for $20,420. The Company also assumed $19,600 of SJS's
outstanding debt. At the date of acquisition, SJS operated 205
convenience
stores in five states.
The acquisitions were accounted for using the purchase method.
EZPET
- -----
In April 1997, the Company entered into a series of agreements with
Environmental Corporation of America, Inc. ("ECA") and Restructure,
Inc., an
affiliate of ECA, ("Restructure") to sell for $451 all of the capital
stock of
EZPET ("EZPET Stock Purchase Agreement"), to sell all claims for
reimbursement
that EZCON had from state trust funds for environmental remediation
work
completed to date, and to enter into a new environmental remediation
services
agreement for the clean up of all remaining contaminated sites of
EZCON.
Under the terms of the EZPET Stock Purchase Agreement, Restructure
agreed to
indemnify the Company against any and all actions, suits and losses,
damages,
deficiencies, and obligations suffered by the Company as a result of
its
ownership, operation, or conduct of EZPET's business. ECA guaranteed
the
obligations of Restructure under the EZPET Stock Purchase Agreement.
With the environmental remediation services agreement, ECA is
responsible for
remediating the EZCON sites at its cash cost and then filing for
reimbursement
from the relevant state trust funds. Under the new agreement,
however, the
Company is not liable for any delay in payment that ECA may
experience with
any state trust fund. Additionally, the Company received proceeds of
$1,599
from the sale to ECA of existing claims for reimbursement from state
environmental trust funds. These proceeds were used to pay down
amounts
outstanding under the revolving line of credit. (See Note 7 -
Commitments and
Contingencies.)
Other Divestitures
- ------------------
In the first quarter of 1997 the Company implemented a plan to divest
itself
of various convenience stores that did not fit its strategic plan, or
were
outside of its primary market area. In May 1997, the Company sold 20
convenience stores in the Nashville area for net proceeds of $11,334.
In the
fourth quarter of 1997, 31 Central Florida convenience stores were
sold for
net proceeds of $3,465. Additionally, in the fourth quarter of 1997,
139
convenience stores located primarily in Texas, Florida, Kansas and
Missouri
were sold for net proceeds of $9,358. Proceeds from these sales were
applied
to the Company's Term Loan. (See Note 6 - Long Term Obligations and
Credit
Arrangements)
<PAGE> 37
NOTE (4) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
------------ -----------
<S>
<C>
<C>
Land and Buildings 57,391 $ 62,424
Assets under capital leases 17,810 22,677
Equipment and Fixtures 61,998 64,522
Other property 4,523 15,817
Less accumulated depreciation and
amortization (33,165) (28,142)
-------- --------
108,557 $137,298
======== ========
</TABLE>
In the fourth quarter of 1995, the Company adopted SFAS 121. In
applying the
provisions of SFAS 121, the Company determined that it had 27
convenience
store asset groupings and an additional Marketer group. The future
cash flows
from each asset grouping, except the Marketer group, exceeded the
carrying
value of the respective asset groupings; consequently, the Company
recognized
an impairment provision of $4,100 to reduce the carrying value of the
Marketer
group to the amount of its estimated discounted future cash flows.
The $4,100
impairment provision was calculated using discounted future cash
flows, less
cash out flows necessary to maintain or abandon the assets and is
included
with the caption "Depreciation, amortization and asset impairment" on
the
Consolidated Statements of Operations.
In December 1996, the Company, in conjunction with its effort to sell
EZPET,
recognized an additional SFAS 121 asset impairment of $4,013 for
property and
equipment. The impairment decreases the carrying value to estimated
fair
value. The fair value was determined by bids received by the
Company.
There have been no other circumstances, as defined by SFAS 121, that
would
cause the recoverability of the carrying value of any other long-
lived assets
to be in question.
NOTE (5) ACCRUED LIABILITIES AND OTHER CURRENT LIABILITIES
Accrued liabilities and other current liabilities consist of the
following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
------------ ------------
<S> <C>
<C>
Insurance accruals $ 5,781 $ 7,387
Accrued taxes due to local and federal governments 4,924
9,543
Accrued salary and benefits 2,706 2,638
Accrued interest 25 1,589
Other accrued liabilities 3,846 5,108
------- -------
17,282 $26,265
======= =======
</TABLE>
NOTE (6) LONG-TERM OBLIGATIONS AND CREDIT ARRANGEMENTS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
December 28, December 29,
1997 1996
------------ ------------
<S> <C>
<C>
Notes payable to bank under revolving
<PAGE> 38
lines of credit. . . . . . . . . . . . . . . . $ 8,500 $ 5,200
Notes payable. . . . . . 60,000 73,989
Current portion (1,781) (14,450)
------- -------
66,719 64,739
------- -------
Notes payable to major stockholders - 25
Current portion - (25)
------- -------
- -
------- -------
Capital lease obligations 275 1,624
Current portion (100) (286)
------- -------
175 1,338
------- -------
Long-term debt - other - 318
Current portion - (80)
------- -------
- 238
------- -------
Total long-term debt obligations 66,894 $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 Soci,t,
G,n,rale
as the agent (the "Agent"). The C & G Agreement provided for a term
loan of
$45,000 ("Term Loan") and a $15,000 revolving line of credit. On
March 27,
1997 as a result of financial covenant violations by the Company in
1996, the
Credit and Guaranty Agreement was amended, whereby the maturity date
of the
Term Loan and the revolving line of credit were accelerated to
October 1,
1998.
In the first quarter of 1997, the Company implemented a plan to
divest itself
of its Marketer operations and of various convenience stores that did
not fit
its strategic plan, or were outside of its primary market area. As a
result
of the plan, during 1997 the Company sold its wholly owned
subsidiary, EZPET,
20 convenience stores in the Nashville, Tennessee area, 31 stores in
Central
Florida and 150 convenience stores located primarily in Texas,
Florida, Kansas
and Missouri. These sales began closing in April 1997 and were
completed in
January 1998. Net proceeds from these sales were mandatorily applied
to the
Term Loan. The completion of the divestiture program enabled the
Company to
reduce the principal balance during the year to levels required by
the Amended
Credit and Guaranty Agreement and to refinance the Term Loan and
Revolver by
year end.
On December 24, 1997, the Company entered into a term credit facility
with
FFCA Acquisition Corporation ("FFCA"). The FFCA credit facility
provided for
a $51,912 mortgage loan (the "Mortgage Loan") and an $8,088 equipment
loan
(the "Equipment Loan"). The Mortgage Loan is comprised of individual
floating
interest rate mortgages on 100 fee properties and fixed rate
mortgages on 48
fee properties. The floating interest rate, which was set at 9.46%
at
closing, is adjusted monthly and is equal to LIBOR plus 3.5%. The
fixed rate
is 9.27%. The Mortgage Loan is amortized over 20 years. The
Equipment Loan
is secured by equipment located at 104 leasehold sites and mortgages
on 49 fee
properties. The Equipment Loan also has a floating interest rate
with the
same terms as the Mortgage Loan and is amortized over 7 years. The
FFCA credit
facility requires monthly payments on the first day of each month.
These
monthly payments, including interest, currently total approximately
$613. A
commitment fee of 1% of the total amount financed was paid at
closing. The
fee was treated as deferred financing costs and is being amortized
over the
term of the loan.
<PAGE> 39
Also, on December 24, 1997 the Company entered into a credit facility
with
Congress Financial Corporation and Madeleine L.L.C. The facility
provides a
$25,000 Revolving Line of Credit ("Revolver") for working capital and
letters
of credit subject to a borrowing base limitation. A commitment fee
of 1.25%
was paid at closing. The fee was treated as deferred financing costs
and is
being amortized over the term of the loan. The Revolver is secured
by
substantially all of the Company's inventories and receivables and
some store
equipment. The Revolver matures on December 23, 1999. The Revolver
bears
interest on outstanding cash draws at 2.5% plus the greater of the
prime
lending rate or 8.5%. At December 28, 1997, there were $8,500
outstanding
borrowings under the Revolver and there were $8,671 outstanding
letters of
credit issued primarily for workers compensation claims. Also, at
December
28, 1997 the Company had $5,559 available on its Revolver. The
credit
facilities contain various debt covenants, including a restriction
from paying
dividends.
Proceeds from the credit facilities were used (i) to retire the
$45,600
balance outstanding under the Company's Term Loan, (ii) to retire the
$3,500
outstanding under the Company's revolving line of credit, (iii) to
redeem for
approximately $15,700, all of the outstanding shares of the Company's
Series H
Preferred Stock and (iv) to pay costs associated with the financing
transactions.
On March 11, 1998, as a result of financial covenant violations by
the Company
at December 28, 1997, the credit facility with Congress Financial
Corporation
and Madeleine L.L.C. was amended ("Amendment No. 1 to Loan and
Security
Agreement"). The amendment was deemed effective as of December 24,
1997, and
as such, the Company was in compliance at December 28, 1997.
At December 28, 1997 maturities of outstanding long-term debt and
capital
lease obligations over the next five years and thereafter are as
follows:
<TABLE>
<CAPTION>
Year Total
- ----------- ----------
<S> <C>
1998 $ 1,913
1999 10,560
2000 2,228
2001 2,373
2002 2,594
Thereafter 49,163
-------
Total 68,831
Less interest related
to capital leases 56
-------
$68,775
=======
</TABLE>
NOTE (7) 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.
<PAGE> 40
By December 22, 1998, all USTs must be corrosion protected,
overfill/spill
protected. As of December 28, 1997, the Company was in complete
compliance
with leak detection standards and 75% completed with the corrosion
and
overfill/spill requirements. The Company estimates that it will make
additional capital expenditures of $1,800 in 1998 to be in full
compliance
with the regulations by the December 22, 1998 deadline.
Additionally, the Company estimates that the total future cost of
performing
remediation on contaminated sites will be approximately $20,698, of
which
approximately $18,928 are probable of reimbursement by state trust
funds.
On April 22, 1997, the Company entered into an agreement with 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 agreement ("Direct Bill Agreement"), ECA remediates the
sites and
files for reimbursement from the applicable state. The Company
experiences no
cash flows for these sites, other than the cost of the deductible and
the cost
to remediate any sites deemed non-qualified for reimbursement by the
state.
The agreement poses no exposure to the Company in the event that
payments from
the state trust funds are delayed or denied. With the Direct Bill
Agreement,
the future cash flows to the Company for remediating contaminated
sites is
approximately $1,770. However, the Company is ultimately responsible
for the
remediation liability, and accordingly, such liabilities remain
recorded on
the consolidated balance sheet.
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.
In connection with environmental conditions at certain of the
Company's
California stores, legal proceedings have been brought by third
parties
against the Company generally alleging that releases of refined
products at
these stores have caused damages to the third parties. The Company's
position
has been that its general liability insurance policies cover legal
defense
costs and damages related to these claims, but the Company's
insurance
carriers have generally argued that the policies do not provide for
such
coverage. After several years of legal actions, the Company began
settlement
discussions with certain of the insurance carriers and, in 1994, the
Company
agreed to accept cash payments totaling $5,050 ($2,525 recognized in
earnings
in 1994) in settlement of all outstanding disputes with five of the
carriers.
During 1995, the Company accepted $3,650 ($700 recognized in earnings
in 1994
and $1,375 recognized in earnings in 1995) in settlement of
outstanding
disputes with three additional carriers. The Company had reserved a
total of
$4,100 of these receipts to cover any future environmental or other
contingencies related to claims made by the State of California Water
Resources Control Board. During the fourth quarter of 1995, the
Company
received notification from the Water Resources Control Board that the
Board
relinquished any claim to the settlement funds. Accordingly, in
December,
1995, the Company recognized the $4,100 as other income. In March
1997, the
Company received a cash settlement of $610 for another claim; one
unsettled
claim remains.
The Company leases office space in various locations and has
operating leases
on certain retail outlets and computer equipment. Total operating
lease
expense for the Company during 1997, 1996, and 1995 was approximately
$12,954,
$13,878 and $12,413, respectively. Future minimum rental payments
required
under all leases which have primary or remaining noncancellable terms
in
excess of one year as of December 28, 1997 are as follows:
<PAGE> 41
<TABLE>
<S> <C>
1998 7,482
1999 6,589
2000 5,307
2001 4,089
2002 2,887
Thereafter 4,479
------
Total 30,833
======
</TABLE>
The Company and its subsidiaries are involved in various lawsuits
incidental
to its businesses. The Company's internal counsel monitors all such
claims
and the Company has made accruals for those which it believes are
probable of
payment. In management's opinion, an adverse determination would not
have a
material effect on the Company and its subsidiaries, individually or
taken as
a whole. In the case of administrative proceedings regarding
environmental
matters involving governmental authorities, management does not
believe that
any imposition of monetary sanctions would exceed $100.
NOTE (8) STOCKHOLDERS' EQUITY
On February 28, 1995, Harken Energy Company ("Harken"), the Company's
former
parent, entered into an agreement with certain of the Company's major
stockholders whereby Harken sold 63,937 shares of the Company's $6.00
Convertible Preferred Stock, Series C ("Series C Preferred Stock"),
along with
the right to all accrued but unpaid dividends thereon, to such
stockholders.
In addition, Harken sold its remaining 817 shares of the Series C
Preferred
Stock, along with the right to all accrued but unpaid dividends
thereon, to a
director of the Company. On April 1, 1995, the Company issued an
additional
10,902 shares of its Series C Preferred Stock to the holders of the
Series C
Preferred Stock in payment of all cumulative but unpaid dividends
through
March 31, 1995. The Series C Preferred Stock ranked senior to the
common
stock or any other capital stock in right of payment of dividends or
distributions. It was also exempt from anti-dilution provisions from
the sale
or conversion of certain previously issued preferred stock or
warrants to
purchase common stock or preferred stock. As of December 29, 1996,
the
Company had cumulative but unpaid dividends on the Series C Preferred
Stock of
$757.
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
stockholders that held substantially all of the Company's Series C
Preferred
Stock. The Series H Preferred Stock was entitled to receive semi-
annual
dividends at the rate of 13% per annum paid in additional shares of
Series H
Preferred Stock 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 had no voting rights, but ranked senior to any
capital stock
or other equity securities of the Company. The Series H Preferred
Stock had 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
was to be
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 corporation
purposes,
including paying down a portion of amounts outstanding under the
revolving
line of credit.
<PAGE> 42
On December 24, 1997, the Company refinanced its Term Loan, and a
portion of
the proceeds were used to redeem all of the outstanding shares of
Series H
Preferred Stock. The remaining $995 of liquidation value over the
carrying
value of the Preferred Stock was charged to additional paid in
capital at such
time. Dividends of $834 were also paid to the stockholders at the
time of
redemption.
NOTE (9) EMPLOYEE BENEFIT PLAN
The Company does not provide post-retirement benefits for its
employees.
The Company has a 401(k) retirement savings plan (the "Plan")
covering all
employees meeting minimum age and service requirements. The Company
will
match 50% of tax deferred employee contributions up to 6% of the
employee's
compensation. The Board of Directors of the Company may also elect
to make
additional contributions to be allocated among all eligible
participants in
accordance with the provisions of the Plan. There were approximately
425, 435
and 352 participants in the Plan at year end 1997, 1996 and 1995,
respectively. Company contributions, which are funded currently,
were $236,
$229 and $96 for 1997, 1996 and 1995, respectively.
NOTE (10) STOCK OPTION PLANS
On May 30, 1991, the Board of Directors of the Company adopted the
1991 Stock
Option Plan, which received stockholder approval at a Special Meeting
held on
August 9, 1991 (the "1991 Plan"). The 1991 Plan, as amended (latest
amendment in 1997), provides for issuance of options to purchase up
to
3,500,000 shares of the Company's common stock to key employees and
directors. In October 1993, all of the options having an exercise
price of
$1.50 were exchanged for the options that have an exercise price of
$1.00.
The aggregate compensation expense related to the issuance of non-
qualified
stock options and the exchange of the $1.50 stock options under the
1991 Plan
is $741, and is being amortized over vesting periods through July
1998. The
Company recognized expense related to these stock options of $65,
$143 and
$188 in 1997, 1996 and 1995, respectively. The average remaining
life of the
outstanding options under the 1991 Plan is five and one-half years.
Information regarding the 1991 Plan is as follows:
<TABLE>
<CAPTION>
Number of Shares
----------------------------------
- ---------
1997 1996 1995
----------- ----------- -----------
<S> <C>
<C>
<C>
Outstanding at beginning of period
(weighted average $1.00) 2,290,000 2,375,000 2,295,000
Granted at $1.00 to $1.25 per share 500,000 50,000 135,000
Granted at $0.8125 per share 200,000 - -
Exercised at $1.00 per share - (40,000) (5,000)
Canceled (10,000) (95,000) (50,000)
--------- --------- ---------
Balance at end of period 2,980,000 2,290,000 2,375,000
========= ========= =========
Weighted average exercise price at
end of period 1.00 1.00 1.00
========== ========== ==========
Exercisable at end of period 2,217,500 2,002,503 1,764,004
========= ========= =========
Weighted average exercise price at
end of period 1.00 1.00 1.00
========== ========= =========
Available for grant at end of period 452,000 152,000
107,000
========= ========= =========
</TABLE>
<PAGE> 43
On February 9, 1994, the Board of Directors adopted the 1994 Stock
Option Plan
(the "1994 Plan"). The 1994 Plan provides for the issuance of
options to
purchase up to 6,750,000 shares of the Company's common stock at an
exercise
price of $0.40 per share. The option period is ten years from the
date of
grant and options granted under the 1994 Plan vest proportionately,
as defined
in the 1994 Plan, but only upon the occurrence of one of the
following three
events:
Upon the consummation of an underwritten public offering of the
Company's common stock, pursuant to a registration statement
wherein
the aggregate net proceeds to the Company's stockholders is at
least
$10,000;
Upon the transfer in a private transaction which could have the
effect
of transferring to the transferee beneficial ownership (as
defined) of a
number of shares of common stock that, in the aggregate, is
equal to or
greater than 10% of the then outstanding shares of common
stock; or
Upon the sale of all or substantially all of the assets of the
Company.
On March 25, 1994, grants representing 6,500,000 shares of common
stock were
awarded to key officers of the Company. The 1994 Plan was approved
at the
Company's 1994 Annual Meeting of Stockholders on June 17, 1994. In
September
1996 and March 1997, the 1994 Plan was amended by the Board of
Directors, and
approved by stockholders of the Company on June 27, 1997, (i) to
increase the
number of shares of Common Stock subject thereto from 6,750,000 to
8,000,000
and (ii) to avoid certain detrimental tax consequences to the option
holder
that could occur if certain vesting events occur. As of December 28,
1997,
grants representing 7,843,000 shares of common stock awarded to key
officers
of the Company remain outstanding. The average remaining life of the
outstanding options under the 1994 Plan is eight and one-half years.
Proforma disclosures for options granted after January 1,1995, as if
the
Company adopted the cost recognition requirements under SFAS 123 in
1996, are
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------ ----------------- -----------------
As As As
Reported Proforma Reported Proforma Reported
Proforma
--------- ---------- --------- -------- -------- ---
- -----
<S> <C> <C> <C> <C>
<C> <C>
Net income (loss) $(11,191) $(11,221) $(15,075) $(15,107) $
5,264 $ 5,242
Diluted income (loss)
per common share $ (.21) $ (.21) $ (.23) $ (.23) $
.06 $ .06
</TABLE>
The fair value of each option granted is estimated on the grant date
using the Black-Scholes Model. The following assumptions were
made in
estimating fair value:
ASSUMPTIONS:
<TABLE>
<Caption)
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.11% 6.11% 6.11%
Expected volatility 118.59% 85.79% 85.79%
Expected life 8 years 8 years 8 years
</TABLE>
NOTE (11) INCOME TAXES
<PAGE> 44
As discussed in Note 2 - Quasi-Reorganization, the Company is
required to
credit the tax benefits realized from the utilization of net
operating loss
carryforwards which arose prior to the quasi-reorganization directly
to paid-
in capital. In this regard, the Company recognized a provision in
lieu of
taxes and credited paid-in capital for $-0-, $-0-, and $2,127 during
1997,
1996 and 1995, respectively. This is a non-cash provision and does
not
represent deferred taxes.
Total income tax expense (benefit) was allocated as follows:
<TABLE>
<CAPTION>
Years Ended
------------------------------------
- ---------
December 28, December 29, December 31,
1997 1996 1995
------------ ----------- ------------
<S> <C> <C>
<C>
Income (loss) from operations $(346) $(343) $ 568
Stockholders' equity of recognition of tax
benefits of net operating loss carry forwards - -
2,127
----- ------ ------
$(346) $(343) $2,695
===== ====== ======
</TABLE>
Income tax expense (benefit) attributable to income from operations
consists of:
<TABLE>
<CAPTION>
Years Ended
------------------------------------
- ---------
December 28, December 29, December 31,
1997 1996 1995
------------ ------------ ------------
<S> <C>
<C>
<C>
U.S. Federal $(346) $(343) $ 366
State - - 202
------ ------ -----
$(346) $(343) $ 568
====== ====== =====
</TABLE>
Income tax benefit is related to the reduction of the deferred tax
liability
created by the differences between the assigned values for purchase
accounting
and tax basis of assets and liabilities acquired in the SJS
acquisition.
The tax effects of temporary differences that give rise to
significant
portions of the deferred tax assets and deferred tax liabilities are
presented
below:
<TABLE>
<CAPTION>
As of
---------------------------------
December 28, December 29,
1997 1996
------------ ------------
<S>
<C>
<C>
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful accounts $ 11 $ 61
Environmental remediation accruals 449 470
Insurance accruals 2,949 3,401
Unearned revenue - 79
Other accruals 1,223 1,014
Net operating loss carry forwards 17,389 14,669
Alternative Minimum Tax credit carry forwards 1,114 1,114
------- -------
Total gross deferred tax assets 23,135 20,808
Less valuation allowance (11,608) (4,480)
------- -------
Net deferred tax assets 11,527 16,328
Deferred tax liabilities:
LIFO Reserve 283 424
Plant and equipment, principally due to
differences in depreciation and basis of assets 11,244
15,904
------- -------
Total gross deferred tax liabilities 11,527 16,328
<PAGE> 45 ------- ------
- -
Net deferred tax liability $ _ $ -
======= =======
</TABLE>
The valuation allowance for the deferred tax assets as of December
31, 1995
was $2,758. The net change in the total valuation allowance for the
fiscal
year ended December 28, 1997 and December 29, 1996 was an increase of
$7,128
and $1,722, respectively. For 1997 and 1996, the difference between
the
expected tax benefit based on the statutory tax rate and the actual
income tax
benefit is the result of the changes in the valuation allowance
during such
years.
Net Operating Loss Carry forwards
- --------------------------------
Under federal tax law, the amount and availability of net operating
loss carry
forwards ("NOL") are subject to a variety of interpretations and
restrictive
tests under which the utilization of such NOL carry forwards 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 is approximately $51,000
at
December 28, 1997. The NOL will expire if not utilized between 2005
and 2012.
In addition, the Company has alternative minimum tax NOL carry
forwards of
approximately $44,000, which are available over an indefinite period,
that can
be utilized should the Company's alternative minimum tax liability
exceed its
regular tax liability.
NOTE (12) UNAUDITED QUARTERLY FINANCIAL INFORMATION
The following is a summary of the unaudited quarterly results of
operations
for the years ended December 28, 1997 and December 29, 1996:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------------
(In thousands except per share data)
1997 March 30 June 29 September 28 December 28
---------- --------- ------------ -----------
<S> <C> <C> <C>
<C>
Revenues $201,760 $200,602 $189,102 $152,939
Gross Profit 37,730 42,960 37,267 27,642
Net Income (loss) (1,139) 2,299 (a) (1,045) (11,306) (b)
Basic earnings (loss) Per
Common Share (.02) .02 (.02) (.19)
Diluted earnings (loss) Per
Common Share (.02) .02 (.02) (.19)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------
- ---------------
(In thousands except per share data)
1996 March 31 June 30 September 29 December 29
---------- --------- ------------ -----------
<S> <C> <C> <C>
<C>
Revenues $194,760 $232,469 $225,293 $209,120
Gross Profit 36,061 45,114 42,946 34,659
Net Income (loss) (2,569) 1,690 1,494 (15,690) (c)
Basic earnings (loss) Per
Common Share (.04) .02 .02 (.24)
Diluted earnings (loss) Per
Common Share (.04) .02 .02 (.24)
</TABLE>
<PAGE> 46
(a) The second quarter 1997 net income includes a non-recurring
gain of $4,465
on the sale of the Tennessee stores.
(b) The fourth quarter 1997 net loss includes an extraordinary loss
of $1,849
on early extinguishment of debt and a non-recurring loss of $3,967 on
the sale of convenience stores located primarily in Texas, Florida,
Kansas and Missouri.
(c) The fourth quarter 1996 net loss includes non-recurring charges
against
operations of $10,272 primarily related to the write-down of EZPET.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
<PAGE> 47
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference
from the
Registrant's definitive proxy statement, pursuant to Regulation 14A,
to be
filed with the Commission not later than 120 days after the close of
the
Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference
from the
Registrant's definitive proxy statement, pursuant to Regulation 14A,
to be
filed with the Commission not later than 120 days after the close of
the
Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference
from the
Registrant's definitive proxy statement, pursuant to Regulation 14A,
to be
filed with the Commission not later than 120 days after the close of
the
Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference
from the
Registrant's definitive proxy statement, pursuant to Regulation 14A,
to be
filed with the Commission not later than 120 days after the close of
the
Company's fiscal year.
<PAGE> 48
PART IV
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit
Number Description of Exhibit
3.1.1 Amended and Restated Certificate of Incorporation of the Company
dated December 6, 1990 - incorporated by reference from Exhibit
3.1.1 of the Company's Annual Report on Form 10-K as of December
29, 1996.
3.1.2 Certificate of Amendment of Certificate of Incorporation of the
Company filed July 2, 1992 - incorporated by reference from
Exhibit 3.1.2 of the Company's Annual Report on Form 10-K as of
December 29, 1996.
3.1.3 Certificate of Amendment of Certificate of Incorporation of the
Company filed February 26, 1993 - incorporated by reference from
Exhibit 3.1.3 of the Company's Annual Report on Form 10-K as of
December 29, 1996.
3.1.4 Certificate of Amendment of Certificate of Incorporation of the
Company filed November 1, 1993 - incorporated by reference from
Exhibit 3.1.4 of the Company's Annual Report on Form 10-K as of
December 29, 1996.
3.2 Bylaws of the Company restated as of March 25, 1992 - incorporated
by reference from Exhibit 3.2 of the Company's Annual Report on
Form 10-K as of December 29, 1996.
4.1(b) 1991 Stock Option Plan of the Company, as amended - incorporated
by reference from Exhibit 4.1 of the Company's Annual Report on
Form 10-K as of December 29, 1996.
4.2(b) Amended and Restated 1994 Stock Option Plan of the Company -
incorporated by reference from Exhibit 4.2 of the Company's
Annual Report on Form 10-K as of December 29, 1996.
4.3.1 Registration Rights Agreement dated March 25, 1992 among the
Company, Phemus Corporation and Intercontinental Mining &
Resources Limited - incorporated by reference from Exhibit 4.3.1
of the Company's Annual Report on Form 10-K as of December 29,
1996.
4.3.2 Amendment to Registration Rights Agreement dated July 31, 1992,
among the Company, Phemus Corporation and Intercontinental Mining
& Resources Limited - incorporated by reference from Exhibit
4.3.2 of the Company's Annual Report on Form 10-K as of December
29, 1996.
4.3.3 Second Amendment to Registration Rights Agreement dated April 21,
1993, among the Company, Phemus Corporation, Quadrant Capital
Corp. and Intercontinental Mining & Resources Incorporated -
incorporated by reference from Exhibit 4.3.3 of the Company's
Annual Report on Form 10-K as of December 29, 1996.
4.3.4 Third Amendment to Registration Rights Agreement dated as of
January 27, 1997, among the Company, Phemus Corporation and
Intercontinental Mining & Resources Incorporated - incorporated by
reference from Exhibit 4.4 of the Company's Current Report on Form
8-K dated January 27, 1997.
<PAGE> 49
4.4.1 Registration Rights Agreement dated July 31, 1992, between the
Company and Tenacqco Bridge Partnership, L.P. - incorporated by
reference from Exhibit 4.4.1 of the Company's Annual Report on
Form 10-K as of December 29, 1996.
4.4.2 Amendment to Registration Rights Agreement dated April 21, 1993,
among the Company, Tenacqco Bridge Partnership, L.P. and DLJ
Capital Corporation - incorporated by reference from Exhibit 4.4.2
of the Company's Annual Report on Form 10-K as of December 29,
1996.
4.5.1 Amended and Restated Stockholders Agreement dated June 1, 1994,
among DLJ Capital Corporation, Tenacqco Bridge Partnership, L.P.,
Phemus Corporation, Intercontinental Mining & Resources
Incorporated, Quadrant Capital Corp., and the Company -
incorporated by reference from Exhibit 4.5.1 of the Company's
Annual Report on Form 10-K as of December 29, 1996.
4.5.2 Amendment No. 1 to Stockholders Agreement dated as of January 27,
1997, among DLJ Capital Corporation, Tenacqco Bridge Partnership,
L.P., Phemus Corporation, Intercontinental Mining & Resources
Incorporated and the Company - incorporated by reference from
Exhibit 4.3 of the Company's Current Report on Form 8-K dated
January 27, 1997.
4.5.3 Revised Schedule 1 to Stockholders Agreement dated as of March 28,
1997 - incorporated by reference from Exhibit 4.5.3 of the
Company's Annual Report on Form 10-K as of December 29, 1996.
4.6 Form of Common Stock Purchase Warrant of the Company issued
pursuant to the Securities Purchase Agreement dated January 27,
1997, between the Company and Phemus Corporation - incorporated
by reference from Exhibit 4.5 of the Company's Current Report on
Form 8-K dated January 27, 1997.
10.1 Form of Lease executed by Taylor Petroleum, Inc. as Tenant agent -
incorporated by reference from Exhibit 10.2 of the Company's
Annual Report on Form 10-K as of December 29, 1996.
10.2 Agreement Regarding Leases effective as of March 1, 1992, among
the Company, Anadarko Development Company, Dakota Land Company,
Salt Fork Company, Inc., Larry Jack Taylor, and First National
Bank of Boston agent - incorporated by reference from Exhibit 10.3
of the Company's Annual Report on Form 10-K as of December 29,
1996.
10.3 Stock Acquisition Agreement dated March 31, 1994, between the
Company and ESCM & Associates, Inc. regarding the sale of Amber
Refining, Inc. and Amber Pipeline, Inc. agent - incorporated by
reference from Exhibit 10.4 of the Company's Annual Report on Form
10-K as of December 29, 1996.
10.4 Equipment Loan Agreement dated December 24, 1997 between E-Z Serve
Corporation and FFCA Acquisition Corporation - incorporated by
reference from Exhibit 99.1 of the Company's Current Report on
Form 8-K dated March 4, 1998.
10.5 Unconditional Guaranty of Payment and Performance dated December
24, 1997 between E-Serve Corporation and FFCA Corporation -
incorporated by reference from Exhibit 99.2 of the Company's
Current Report on Form 8-K dated March 4, 1998.
<PAGE> 50
10.6 Unconditional Guaranty of Payment and Performance dated December
24, 1997 between E-Z Serve Corporation and FFCA Corporation -
incorporated by reference from Exhibit 99.3 of the Company's
Current Report on Form 8-K dated March 4, 1998.
10.7 Loan Agreement dated December 24, 1997 between E-Z Serve
Corporation and FFCA Acquisition Corporation - incorporated by
reference from Exhibit 99.4 of the Company's Current Report on
Form 8-K dated March 4, 1998.
10.8 Guarantee Agreement dated December 24, 1997 between E-Z Serve
Corporation and Congress Financial Corporation and Madeleine
L.L.C. - incorporated by reference from Exhibit 99.5 of the
Company's Current Report on Form 8-K dated March 4, 1998.
10.9 Loan and Security Agreement dated December 24, 1997 between E-Z
Serve Corporation and Madeleiine L.L.C. and Congress Financial
Corporation (Southwest) - incorporated by reference from Exhibit
99.1 of the Company's Current Report on Form 8-K dated March 4,
1998.
10.10 Securities Purchase Agreement dated January 27, 1997, between the
Company and Phemus Corporation - incorporated by reference from
Exhibit 99.1 of the Company's Current Report on Form 8-K dated
January 27, 1997.
10.11 Guaranty Agreement dated April 22, 1997 between E-Z Serve
Corporation and Environmental Corporation of America -
incorporated by reference from Exhibit 10.1 of the Company's
Quarterly Report on Form 10-Q as of March 30, 1997.
10.12 Stock Purchase Agreement dated April 22, 1997 between E-Z Serve
Corporation and Restructure, Inc. - incorporated by reference from
Exhibit 10.2 of the Company's Quarterly Report on Form 10-Q as of
March 30, 1997.
10 13 Agreement to Perform Financed Site Assessment and Remediation
Services dated April 22, 1997 between E-Z Serve Convenience
Stores, Inc. and Environmental Corporation of America, Inc. -
incorporated by reference from Exhibit 10.3 of the Company's
Quarterly Report on Form 10-Q as of March 30, 1997.
10.14 Asset Sale and Purchase Agreement dated April 30, 1997 between E-Z
Serve Convenience Stores, Inc. and MAPCO Petroleum, Inc. -
incorporated by reference from Exhibit 10.4 of the Company's
Quarterly Report on Form 10-Q as of March 30, 1997.
10.15 Purchase and Sale Agreement dated May 2 1997 between E-Z Serve
Convenience Stores, Inc. and Island Holdings, Ltd. - incorporated
by reference from Exhibit 10.1 of the Company's Quarterly Report
on Form 10-Q as of March 30, 1997.
10.16(a) Purchase and Sale Agreement dated November 11, 1997 between the
Company and FFP Partners, L.P.
10.17(a) Purchase and Sale Agreement dated November 12, 1997 between the
Company and Automated Petroleum and Energy Co., Inc.
10.18(b) Employment Agreement dated March 4, 1997, between Kathleen
Callahan-Guion and the Company - incorporated by reference from
Exhibit 10.3 of the Company's Annual Report on Form 10-K as of
December 29, 1996.
21(a) Subsidiaries of the Registrant.
<PAGE> 51
23 Consent of KPMG Peat Marwick LLP to the incorporation of their
report, included in this Form 10-K for the year ended December 28,
1997, into the Company's previously filed Registration Statements
on Forms S-8.
27 Financial Data Schedule for the period ended December 28, 1997.
________________
(a) filed herewith
(b) Management contract or compensatory plan or arrangement.
(b) The Company did not file any reports on Form 8-K during the three
months ended December 28, 1997.
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
E-Z
SERVE CORPORATION
(Registrant)
By:
/s/ NEIL H. MCLAURIN
-----------------------
Neil H. McLaurin
Chairman of the Board and
Chief Executive Officer
Date: March 30, 1998
- -----------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ NEIL H. MCLAURIN Chairman of the Board Date: March 30, 1998
- --------------------------- and Chief Executive Officer -------------------
NEIL H. MCLAURIN
/s/ ELIZABETH L. MARSHALL Controller Date: March 30, 1998
- --------------------------- -------------------
ELIZABETH L. MARSHALL
Director Date:
- --------------------------- -------------------
DONALD D. BEANE
/s/ JOHN M. SALLAY Director Date: March 30, 1998
- --------------------------- -------------------
JOHN M. SALLAY
/s/ JOHN R. SCHOEMER Director Date: March 30, 1998
- --------------------------- -------------------
JOHN R. SCHOEMER
/s/ LARRY J. TAYLOR Director Date: March 30, 1998
- --------------------------- -------------------
LARRY J. TAYLOR
Director Date:
- --------------------------- -------------------
PAUL THOMPSON III
</TABLE>
<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-K FOR THE PERIOD ENDED December 28, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-END> DEC-28-1997
<CASH> 8,093
<SECURITIES> 0
<RECEIVABLES> 6,227
<ALLOWANCES> 32
<INVENTORY> 24,026
<CURRENT-ASSETS> 43,440
<PP&E> 141,722
<DEPRECIATION> 33,165
<TOTAL-ASSETS> 171,435
<CURRENT-LIABILITIES> 48,037
<BONDS> 66,894
0
0
<COMMON> 694
<OTHER-SE> 33,895
<TOTAL-LIABILITY-AND-EQUITY> 171,435
<SALES> 732,639
<TOTAL-REVENUES> 744,403
<CGS> 598,804
<TOTAL-COSTS> 709,406
<OTHER-EXPENSES> 35,940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,745
<INCOME-PRETAX> (9,688)
<INCOME-TAX> (346)
<INCOME-CONTINUING> (9,342)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,849)
<CHANGES> 0
<NET-INCOME> (11,191)
<EPS-PRIMARY> ( .21)
<EPS-DILUTED> ( .21)
</TABLE>
